Introduction to Inequality - International Monetary Fund

Inequality can be viewed from different perspectives, all of which are related. Most common metric is Income Inequality, which refers to the extent to which ... 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BacktoTop HowisIncomeInequalitymeasured Ginicoefficientisatypicalmeasureofincomeinequality.Thecoefficientvariesbetween0and1,with0representingperfectequalityand1perfectinequality.MostoftheanalysisiscenteredontheconceptofincomeinequalityascapturedbytheGinicoefficient,whichisavailableforalargenumberofcountriesandrelativelylongperiods.Unlessspecifiedotherwise,Giniincomeinequalityreferstodisposableincomeorconsumptionandthusalreadyreflectsanyredistributionthroughtaxesandtransfers. Figure.GiniCoefficientofInequality   BacktoTop WhatCausesInequality Arangeofglobalanddomesticfactors—whichmayreinforceeachother—havebeenproposedinthetheoryandempiricalliteraturetoaccountfortheincomeinequalitytrends.Thekeyforcesincludethefollowing: Globalfactors,suchastechnologicalprogress,globalization,andcommoditypricecycles,playanimportantrole.Forinstance,technologicaladvancementhascontributedtotheskillpremium,becauseindividualswithhighereducationhaveacomparativeadvantageinusingnewtechnologies(CardandDiNardo,2002).InWesternEuropeandtheUnitedStates,technologicalprogresshasalsotranslatedintoahollowingoutofmiddle-classjobs,aphenomenonknownasjobpolarization(GoosandManning,2007). Country-specificfactors,suchasthoserelatedtoeconomicdevelopmentsandeconomicstabilityaswellastodomesticpolicies—includingfinancialintegration,redistributivefiscalpolicies,andliberalizationandderegulationoflaborandproductmarkets—alsoplayanimportantroleinexplaininginequalitytrendswithincountries. BacktoTop WhatareConsequencesofInequality Whilesomeinequalityisinevitableinamarket-basedeconomicsystemasaresultofdifferencesintalent,effort,andluck,excessiveinequalitycoulderodesocialcohesion,leadtopoliticalpolarization,andultimatelylowereconomicgrowth(BergandOstry,2011;Rodrik1999).Butwhenisinequalityexcessive?Thereisnoeasyanswer,butitwilldependonseveralcountry-specificfactors,includingthegrowthcontextinwhichinequalityarises,alongwithsocietalpreferences. BacktoTop BasicFactsAboutIncomeInequality Globalinequalityhasbeendecliningfastsince1990s.Duringthenineteenthandmostofthetwentiethcenturies,globalinequalityincreaseddramatically,reflectingwideningdisparitiesbetweencountries’percapitaincomeasadvancedeconomiestookoffsharplycomparedwiththerestoftheworld.Therevivalinglobaleconomiccooperationinthemiddletwentiethcenturyusheredinaneraofgrowthanddevelopment.Subsequently,percapitaGDPgrowthratesacceleratedinlessdevelopedcountries,particularlyinAsia,resultinginconvergenceinincomelevelsacrosscountries(Bourguignon,2015).Millionsofhouseholdswereliftedoutofpoverty.Asaresult,theglobalincomeinequalityfirststabilizedandthenstartedtorapidlydeclineoverthelastthreedecades.However,itshouldbenotedthatnotallregionsoftheworldexperienceincomeconvergenceswithmoredevelopedcountries.InSub-SaharanAfrica,forinstance,incomegrowthonaveragewasmoremodestthaninAsia.SomegainsinthereductionofglobalinequalityarelikelytobereversedasaresultoftheCOVID-19crisis.Itwilllikelydeteriorateglobalinequalitybecauseadvancedeconomies,ingeneral,havemoreresourcestodealwiththefalloutfromthepandemicandtheensuingrecoveryeffort. Figure.GlobalIncomeInequality(Ginicoefficient) Sources:HistoricalseriesarefromVanZadenandothers(2014),whobuildonBourgui-gnonandMorrisson(2002).RecentdataisfromLaknerandMilanovich(2013). Within-countryinequalityhasriseninmostcountries.Whiletheprogressinthereductionofglobalinequalityoverthelastthirtyyearshasbeenremarkable,withincountryinequalitieshaveincreased,especiallyinadvancedeconomies.Overthepastthreedecades,morethanhalfofthecountriesandcloseto90percentofadvancedeconomieshaveseenanincreaseinincomeinequality,withsomecountriesrecordinganincreaseintheirGinicoefficientsexceedingtwopoints.Someofkeyfactorsbehindtheincreaseinwithin-countryincomeinequalitynotedintheliteratureincludetechnologicalprogress,globalization,commoditypricecycles,anddomesticeconomicpoliciessuchasredistributivefiscalpolicies,laborandproductmarketpolicies. Figure.ChangeinIncomeInequality,1985-2015(percentofcountries) Source:IMF,FiscalMonitor,October2017 Risingsocialspendinghasbeenusedtocombatinequality.Fiscalpolicyisakeypolicyinstrumentavailabletogovernmentstoachievetheirdistributionalobjectives.Inadvancedeconomies,taxesandtransfersdecreaseincomeinequalitybyone-third,withmostofthisbeingachievedviapublicsocialspending(suchaspensionsandfamilybenefits)(Immervollandrel="noopenernoreferrer"others2005;Paulusandothers2009).Theextentoffiscalredistributionisevenhigheriftheredistributiveimpactofin-kindspendingrel="noopenernoreferrer"(suchaseducationrel="noopenernoreferrer"andhealth)isincluded(Paulus,Sutherland,andTsakloglou,2009).Thus,itisimportanttoensurethatsocialspendingisadequate,effectiveandsustainable.Progressiveincometaxesalsoplayanimportantredistributivefunctioninsomecountries.Thelowerredistributiveimpactoffiscalpolicyindevelopingeconomiesisalsoakeyfactorbehindtheirhighlevelsofinequality. Figure.RedistributiveImpactofIncomeTaxesandTransfers,2015orLatestYear Source:IMFFiscalMonitor,October2017. BacktoTop IMFandIncomeInequality Inequalityisatthecenterstageofeconomicpolicydebateacrosstheglobe.Afairandequitabledistributionofincomeisafundamentalelementofthesocialcontract.Macroeconomicpolicies(includinggovernmenttaxandspendingpolicies)havesignificanteffectsonincomedistributionandthatinequalitycanhaveadversepoliticalandsocialconsequences,withthepotentialtounderminemacroeconomicstabilityandsustainablegrowth. Inequalityisthus,withoutanysurprise,animportantissuefortheIMFinallthreeofitscoreactivities: (1)lendingtosupportmacroeconomicadjustmentprograms; (2)macroeconomicsurveillance,includingrelatedpolicyanalysis;and (3)technicalassistancetobuildcapacity,especiallyongovernmenttaxationandspending. Historically,distributiveissueshavebeenanimportantpartoftheIMF’sdialoguewithmembercountries.Workonthemhasespeciallyintensifiedinthewakeoftheglobalfinancialcrisisthatbeganin2008. IMFworkonincomeinequalitybeforetheglobalfinancialcrisisthatbeganin2008wasparticularlyinfluencedbytheexperiencegainedfromIMF-supportedprograms.Inpractice,thisexperienceledtogreaterattentiontointegratingsocialsafetynetsintoadjustmentprogramsandsafeguardingaccesstobasicpublicservicesinhealthandeducation.Otherinitiatives,suchastheintroductionofthePovertyReductionandGrowthFacilityin1999,broughtgrowthandpovertyreductionobjectivestothecenterofprogramdesigninlow-incomecountries,asdidtheHeavilyIndebtedPoorCountriesdebt-reliefinitiative.IMF-supportedprogramsweresuccessfulinraisingsocialspending,includingincomparisonwithsimilarcountrieswithoutprograms. TheIMFhasfurtherdeepeneditsworkoninequalityissuesintheyearssincethebeginningoftheglobalfinancialcrisis.Thisefforthasencompassedanexpansionofbothcross-countryanalyticalstudiesandcountry-levelassessmentsoffiscalconsolidationandinequality,avarietyoffiscalpolicyinstrumentstoachieveequitygoalsinanefficientmanner,andthemacroeconomicgainsfromstrengtheninggenderequity.Animportantlessonisthatwiththerightdesign,governmenttaxandspendingpoliciescanhelpachievebothstrongergrowthandgreaterequalityofoutcomesandopportunities.Forexample,boostingaccesstobasichealthandeducationservicesandreducingbarrierstofemalelabormarketparticipationcanhelpraisegrowthandmeetequityobjectives.Eveninthedesignoffiscalconsolidation,anumberofoptionscanhelpreducebudgetdeficitswithoutaggravatinginequality.Theseincludemeasurestoraiserevenuesfromincometaxesandtargeted(ratherthanacross-the-board)reductionsinsocialbenefits.Measuresthataregoodforbothequityandefficiency—forexample,anincreaseinrevenuesfromrecurrentpropertytaxation—shouldalsobegivenstrongconsiderationwhendesigningfiscalconsolidationpackages. TheIMFwillcontinuetostrengthenitsanalyticalworkonincomedistributionissues.Theseeffortswillinvolvefurthercross-countryanalysisondifferentaspectsofmacroeconomicpoliciesandhowtheyaffectincomedistribution.Workatthecountrylevelonincomedistributionissueswillalsobedeepened.Theapproachwillbeselective,anditwillbeconcentratedoncountrieswheretheseissuesarecritical.TheIMFexpectsconsiderablesynergiesbetweencountry-levelandcross-countryanalysis,andtheIMFwillcontinuetodrawontheprofession’sworkintheseareas.Insum,theIMFwillcontinuetodeepenunderstandingofthenexusbetweenincomedistributionandmacroeconomics,withthegoalofprovidingrelevantpolicyadvice. WiththeexpectedincreaseinincomeinequalityasaresultoftheCOVID-19pandemictheIMF’sworkoninequalityissuesisexpectedtobecomeevenmoreintense.