Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey : Inequality Seriously Damages Growth, IMF Seminar Hears

IMF Survey

April 12, 2014

  • Growing consensus creates unprecedented opportunity to act on inequality
  • Macroeconomic policies can mitigate inequality
  • Remedies include targeted health, education spending, more progressive taxes

Growth and inequality are mutually incompatible, participants agreed at a high level seminar held during the IMF-World Bank meetings, but they differed sharply about the priorities to address the rise in inequality over recent decades.

Winnie Byanyima of Oxfam, Guy Ryder of the ILO. “If we all agree this [inequality] is a problem, what are we going to do about it? Asked Ryder (photo: IMF)

Winnie Byanyima of Oxfam, Guy Ryder of the ILO. “If we all agree this [inequality] is a problem, what are we going to do about it? Asked Ryder (photo: IMF)

INEQUALITY AND GROWTH

Income inequality has risen throughout the world. According to Oxfam, the top 85 richest people now own half the world’s wealth, the audience at the IMF seminar on “The Macroeconomics of Income Inequality,” was told.

Guy Ryder, Director General of the International Labor Organization, said a growing consensus about its damaging effects was creating an unprecedented opportunity to act on reducing inequality.

Previously, inequality was thought to be the price for a functioning global economy, “but now the IMF and other organizations say there is an alignment of getting the global economy working better, creating jobs that we need, and dealing with inequality,” said Ryder.

“If this is a problem, if we all agree this is a problem, what are we going to do about it?” he said.

Inequality “morally wrong”

Inequality is not only bad for growth, and a threat to democracy, but it is also “morally wrong” suggested Winnie Byanyima, Executive Director of the charity, Oxfam.

“It just cannot be right that millions are living in abject poverty while others—these 85 we’ve heard about—if they had one thousand life times, could not spend it [their wealth] all,” she said.

Jeffrey Sachs, head of the Earth Institute at Columbia University, identified many different types of inequality including inequality of income, wealth, power, and well being. He was scathing about the significant growth in inequality in the United States which, he said, had allowed the richest to hijack the political process for their own gain.

IMF publishes on inequality

Over the last year, the IMF has published two major papers on inequality which explain its effect on growth, and how tax and spending policies can be designed to help achieve redistribution at a minimal cost to economic efficiency.

A number of participants welcomed the publication of the IMF research which have contributed to the growing consensus on the need to address inequality.

The Deputy Managing Director of the IMF, Min Zhu, said inequality could be addressed through government policies. “Macroeconomic policies matter,” he said. It was a recognition which was now routinely integrated into the Fund’s work.

“When we advise authorities in our country work, we always put jobs, and growth, and employment into policy formation,” he told the audience.

He said it was critical that the Fund understand the impact of macroeconomics and to devise policy accordingly. “Think about it, if income is concentrated in a small group of people it will change consumption because the capacity for consumption is different at different income levels,” he said.

Proposals to address inequality

Tyler Cowen, a professor at George Mason University, suggested some additional measures which could help reduce global inequality, including encouraging immigration, conditional cash transfers, and investing in public health and agriculture.

“I think inequality is a symptom of an underlying problem which is not enough opportunities,” Cowen said, adding that his proposals would create openings for poor people.

“If we are concerned with inequality, I would say let’s focus on it with a problem-solving mentality,” he said.

A number of the participants attacked tax evasion and illicit financial flows by corporations, which Byanyima said was money that could be spent on public services “a real income for the poor”.

Inequality’s impact on “the guy on the street”

Ryder said there was no need to look at the “extreme” examples of tax avoidance and aggressive evasion. “Let’s look at the middle,” he said. “How are we going to put money back in people’s pockets?...Let’s look at what’s happening right here, right now, at the guy on the street,” he said.

Sachs said that inequality was often passed on and exacerbated through generations; that the rich could make higher “investments in human capital” such as education and health, than the poor.

“Taxing the rich to enable everyone to have an opportunity is one piece of this puzzle. It’s not a conflict between fairness and growth, but puts the two together,” said Sachs.