23 January 2018

Africa: Five Things You Need to Know About Inequality

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Tackling inequality is not only a moral imperative. It is critical for sustaining growth.

Global income inequality has declined in recent years, with the Gini index--a statistical measure of income distribution with a value of zero indicating perfect equality--dropping from 68 in 1988 to 62 in 2013, reflecting relatively strong growth in many emerging and developing economies, particularly in China and India.

However, inequality has increased within many countries, including in many advanced economies.

At the IMF, we have studied the economic impact of inequality since the late 1980s, when there was growing recognition that some policies intended to kick start growth had negative consequences for poverty and inequality.

Analysis of the relationship between inequality and growth, and inequality and fiscal policy, continued to evolve in the following years. In 2015, as part of its commitment to help deliver the 2030 United Nations Sustainable Development Goals and help countries achieve strong, sustainable, and inclusive economic growth, the IMF pledged to further its analysis on inequality issues, and to use this work in the development of its policy advice.

Since then, the IMF has conducted two waves of pilot studies on inequality topics in 27 countries around the world. A third wave of a further 16 countries is currently underway.

Here are five ways the IMF is helping countries assess and adapt their policies:

Calibrating Fiscal Policies. As a government's primary mechanism for redistributing income across populations, fiscal policies are key to addressing inequality issues. Recent work in Costa Rica, Guatemala, Honduras, and Togo focused on related topics. The 2017 Fiscal Monitor focuses on how governments can use tax and transfer policies, as well as education and health policies, to address inequality concerns.

Protecting Social Spending and Increasing its Effectiveness. Reallocating resources away from ineffective spending programs, such as on fossil fuel subsidies, to effective social spending programs such as cash transfers, can strengthen social assistance, and help counteract the negative impact sometimes associated with needed economic reforms. In Brazil, an IMF study of regional inequality documented the positive contribution of redistributive policies, namely the Bolsa Família program, to the decline in inequality. In Pakistan, IMF policy recommendations included increasing safety-net spending and consolidating some of the smaller, less efficient safety net programs into the well-performing Benazir Income Support Program. The IMF has also been working with countries to protect social spending--especially in health and education--and since 2010, minimum social spending levels have been included in virtually all low-income country programs.

Balancing Labor Market Policies. Work by the IMF staff reveals how differences between formal and informal workers in Colombia, ethnic and religious communities in Israel, regions in Brazil and Slovakia, and between workers in the United States, all contribute to income inequalities. In Poland, IMF staff advocated for policies that support structural transformation in the less developed eastern regions to reduce regional disparities and promote inclusive growth. A further study in 2015 focused on the relationship between labor market institutions and the distribution of incomes in advanced economies.

Managing Commodity Boom and Bust Cycles. Lower commodity prices threaten to reverse reductions in inequality and poverty in Bolivia, following a period of increased public spending funded by the last commodity boom. IMF staff developed a model to help the authorities analyze the driving forces behind the reduction of inequality and poverty, and determine which policies would best help retain these gains, while conducting needed fiscal consolidation.

Promoting Financial Inclusion. Limited access to financial services in rural areas of Ethiopia and Myanmar compounded issues of inequality following financial sector reforms. A recent IMF study looked at how countries can deploy complementary policies to offset any unfavorable consequences for inequality of pro-growth reforms in low-income developing countries.

As well as discussing these issues with governments, many IMF staff also exchange views with other partners such as civil society organizations and labor unions. For instance, recent inequality pilots in countries such as Brazil, Korea, and Kosovo included discussions with national International Trade Union Confederation-affiliated labor unions. Further engagement is planned for other selected inequality pilot projects, as well as for some gender and climate pilot projects.

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