IMF raises tempo in inequality debate

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When the rich get richer, a country’s economic health can suffer. But if the poorest members of a society start climbing the wealth ladder, then national growth can receive a boost.

That was the message on Monday from economists at the International Monetary Fund who have raised the tempo in the debate on global inequality.

 Previous IMF research has pointed to redistributive policies having benign effects on countries’ coffers. Work produced by the fund, as well as by others including French economist Thomas Piketty, has prompted vigorous debate in economic circles.

But a new research paper, based on data from 159 advanced and developing economies for the period 1980 to 2012, goes further, and establishes a direct link between how income is distributed and national growth.

The IMF economists found that when the income share of the richest 20 per cent of the populations of these countries increased by one percentage point, gross domestic product growth ended up 0.08 percentage points lower in the following five years, “suggesting that the benefits do not trickle down”.

The same one percentage point increase in income share for the poorest 20 per cent in these economies was associated with a 0.38 per cent increase in growth. That positive relationship also held true for the middle class, the economists found.

The research was hailed on Monday by poverty campaigners, who said it marked the death of “trickle-down economics”.

Why those patterns held true, the authors said, was not wholly clear. Among the possible theories was that higher inequality can lead to under-investment in the education of poor children and lower labour productivity as a result. “Increasing concentration of incomes could also reduce aggregate demand and undermine growth, because the wealthy spend a lower fraction of their incomes than middle- and lower-income groups,” they wrote.

Change in GDP growth rate if income share changes by one percentage point

But the findings, which are likely to resonate with those pushing for governments to do more to address inequality, were unequivocal on the economic impact of wider inequality, the authors said.

“Widening inequality has significant implications for growth and macroeconomic stability,” they wrote. It can concentrate political and decision-making power in the hands of a few, “lead to a suboptimal use of human resources, cause investment-reducing political and economic instability, and raise crisis risk”.

Nicolas Mombrial, head of Oxfam International’s office in Washington DC, said: “The IMF proves that making the rich richer does not work for growth, while focusing on the poor and the middle class does.

“By releasing this report, the IMF has shown that ‘trickle down’ economics is dead; you cannot rely on the spoils of the extremely wealthy to benefit the rest of us.”

He added: “The IMF has set off the alarm for governments to wake up and start actively closing the inequality gap. The message to them is pretty clear: if you want growth, you’d better invest in the poor, invest in essential services and promote redistributive tax policies.”

Source: Financial Times