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Poverty & SDGs

IMF Urges Redistribution to Tackle Growing Inequality

Biomass is the basic source of fuel for many in the southern Mexican state of Chiapas. Credit: Mauricio Ramos/IPS

WASHINGTON, Mar 13 2014 (IPS) - The International Monetary Fund (IMF) is wading strongly into the global debate over the impact of growing income inequality, offering a series of controversial findings that push back on long-held economic orthodoxy – of which the fund itself has long been a key proponent.

The IMF, arguably the world’s premiere financial institution, is stating unequivocally that income inequality “tends to reduce the pace and durability” of economic growth. In a paper released Thursday, the fund also suggests that a spectrum of approaches to “progressive” redistribution – national tax and spending policies that are purposefully tilted in favour of the poor – would decrease inequality and hence “is overall pro-growth”.

“This is the final judgment on inequality being bad for growth.” -- Nicolas Mombrial

“This is the final judgment on inequality being bad for growth,” Nicolas Mombrial, a spokesperson for Oxfam, a humanitarian group, told IPS in a statement.

“The IMF’s evidence is clear: The solutions to fighting inequality are investing in health care and education, and progressive taxation. Austerity policies do the opposite, they worsen inequality … We hope this signals a long-term change in IMF policy advice to countries – to invest in health and education and more progressive fiscal policies.”

For the past half-century, the Washington-based IMF has operated as the world’s “lender of last resort” for failing economies. In return for offering short-term loans to governments in economic crisis, the fund typically demands the imposition of a range of often stringent austerity measures aimed at solidifying the country’s finances.

After years of frustration over these conditions by anti-poverty campaigners, the IMF has recently engaged in a broad reappraisal of this approach. In November, the fund proposed an overhaul of its debt-restructuring guidance, though formal introduction of this proposal has now been pushed back to June, following pushback.

“Although the main points are not new, the IMF paper is nonetheless significant because the organisation has typically been at the more conservative end in its policy advice – from being seen to restrict measures that would ameliorate the worst impacts of crises on those in deepest poverty, for example, to promoting quite damagingly regressive changes to tax systems in their country advice,” Alex Cobham, a research fellow with the London office of the Center for Global Development (CGD), a think tank based here, told IPS.

“Nonetheless, we should not expect massive or immediate changes in IMF policy. The situation of tax policy demonstrates very well how the organisation can continue to promote in-country the same approaches that their own research has discredited.”

Hot subject

The new advice on income inequality will likely be received sceptically in many corners, though the fund is giving the findings its full backing. While Thursday’s release came in the form of a staff paper, the report was given a high-profile rollout here, including an introduction from the fund’s second-highest official, David Lipton.

“Some may be surprised that the fund is engaging in this debate on the design of redistributive policies … [but] one reason why we are discussing this issue today is it’s becoming a hot subject,” Lipton, the fund’s first deputy managing director, said Thursday at the report’s unveiling.

“The interest in redistribution, as reflected in public surveys and our discussions with our members, shows that interest is higher than in the past. Our members want to explore with us how they can pursue distributive policies in an efficient manner.”

The IMF is quick to note that the new paper, which builds on a research note released last month, constitutes not recommendations but rather advice to its 188-country membership, while country-specific design for any redistributive mechanism remains of paramount importance. Nonetheless, the “efficient” options it is offering to both developing and developed governments consider are striking.

These include placing higher taxes on the rich than on other segments of society, as well as strengthening property taxes, potential for which the fund says is particularly significant in developing countries. It also suggests considering increasing the age at which citizens become eligible for pensions and other state old-age programmes.

Many of these suggestions have long been pushed by development advocates as well as global labour-rights activists.

“We’re pleased that the IMF has finally caught up with what the global union movement has been saying for years – that inequality is the number one threat to the economic recovery,” Philip Jennings, the general secretary of UNI Global Union, said in a statement. “The only way out of this crisis is inclusive, sustainable economic growth with a living wage for all.”

CGD’s Cobham says the paper will give support to policymakers who want to tackle inequality, and could serve as the basis for a broader global agreement on the issue.

“It may in fact mark an important moment in establishing the breadth of the consensus that reducing income inequality should be one of the targets of the post-2015 framework that will succeed the Millennium Development Goals,” he says.

Greatest risk

A half-decade since the start of the global economic crisis, inequality has risen to the top of global agendas.

In January, the World Economic Forum warned that the growing gap between rich and poor, brought about by globalisation, constituted “the most likely risk to cause an impact on a global scale in the next decade”. The previous month, President Barack Obama likewise stated that income inequality is “the defining challenge of our time”.

Much of this new focus is because the global concentration of wealth that has taken place over the past three decades has increased in recent years, and today stands at modern record levels. According to analysis by Credit Suisse, just one percent of the global population owns around half of the world’s wealth.

According to the new IMF paper, this trend is particularly pronounced in the West, especially in the United States. In developing countries, income inequality has been growing in the Middle East and North Africa, though recently it has begun to decrease in sub-Saharan Africa and, particularly, in Latin America.

Despite this recent downward trend, however, Latin America retains one of the highest levels of inequality of any region.

While the fund points to a variety of social spending as a key way to reduce these levels, the IMF’s Lipton warns that such spending needs to be better designed or risk increasing inequality.

“Fiscal policy has played a major role in reducing inequality in the past and is the primary tool available for governments to affect income distribution,” he said Thursday. “Whether these policies help, or hurt growth, is all a matter of design.”

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  • John N

    It is truly sad when one percent of the population constols over fifty percent of the wealth. Something is wrong with that. Having a progressive income tax or a tax on real property is definitely not Marxist. It is a conscious way of allowing those who make a much above average income to share it with those less fortunate. Most of those making huge incomes choose not to share it with others with the exception of people like Bill Gates and others. The people making less than $50,000 share a larger percentage of their income with charities.

  • William C Crain

    Tax their Holdings & Transactions to the max and no chrisbieber taxing speculators isn’t robbing… none of the monied class got their capital by sweat blood or tears. Amerca was built on the back of slaves today the Working Class are wage slaves, just think of this Distribution as where the funds belong and we distribute the funds ~ and lastly only a narcissistic authoritarian would be in favor of Capitalism.

  • Vestias

    erradicar as desigualdades Globais

  • bubba2001

    I don’t want to give *ANY* foreign country my tax dollars!

  • Not Axe

    Leave the higher tax from the rich for the time being and control or do not cooperate to tax evaders. Do something about the Switzerland bankers not to provide deposit services to foreigners who may evade taxes, unless the latter have the consent of respective country Governments. And put in place regulatory measures to break up monopolies before they establish themselves legally.
    For me higher tax is disincentive to property making. Of course they have to pay the peace and security dividends as per their share of the property. I do not see any wrongs on technology inventors wealth. The problem is how the riches manipulate markets and media to a mass wealth. Control those who purchase media out lets with the aim of silencing any voice contrary to them. At the end how to break marriage between the riches and authorities is very important.Do IMF members really agree to design some thing about it.


  • Cathy

    The very best wealth distribution is through jobs. Having a fair wage job is a basic need in life. If policies will encourage investment into new companies by the wealthiest companies and individuals, that promotes the healthiest growth financially and psychologically. Redistributing without work ultimately diminishes initiative. I am not talking about welfare work programs. Real companies offering real jobs need to be created. There is an immense amount of capital sitting in investment accounts that can be put to work. Additionally the wage gap between the top and lowest level (for lack of a better word) employee needs to be addressed. Fifty years ago the average CEO in America made 40x what the average American worker was paid. Now is it 475x what the average American worker is paid. Nothing justifies that difference and that gap is one of the things creating the huge gap in wealth equality.

  • marvin nubwaxer

    ” The solutions to fighting inequality are investing in health care and education, and progressive taxation.”
    there we have the basis for our next civil war if it is not already underway.

  • Kwast

    Perfectly said. I have been saying this for years and finally i found someone with the same train of thought.

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