Christine Lagarde. Photo: Moritz Hager/World Economic Forum

What will the IMF do to reduce inequality?

09 Mar 2014, by Owen Tudor in Society & Welfare

Ever since the post-war Keynesian consensus was reversed in the 1970s, unions and other social justice advocates have been lectured by mainstream economists – especially at the IMF – that economic inequality is either inevitable, or good for growth, or both. Over the last few years, inequality has grown so much while growth has petered out that a new consensus has begun to emerge: that inequality is not only bad for the less well-off, but also bad for growth.

Mainstream economics was left with the argument that the cures advanced for inequality were worse than the disease. Now a new report from the IMF called Redistribution, inequality & growth suggests that even that argument needs to be abandoned. Income inequality hurts growth, but redistribution doesn’t, as the AFLCIO puts it. And that leaves one question left: not whether, but how, should we tackle inequality?

Oxfam, the international development group, has long argued that organizations like the IMF need to address rising gaps between the rich and poor, and stop encouraging low public spending. The head of their Washington office, Nicolas Mombrial, said:

“In the bad old days, the IMF asked governments to cut public spending and taxes. We hope this research and Christine Lagarde’s recent statements are a sign that they are changing their tune.”

We understand that the IMF’s board of executive directors held a discussion earlier this month to develop an ‘institutional view’ on income inequality, using the new report as background. They are likely to focus more on fiscal policies (eg tax transfers) than on tackling the underlying causes of income and wealth inequality such as privatisation, liberalisation and weakened labour market institutions like collective bargaining. Indeed the IMF’s political ideology still leads to attacks on collective bargaining, for example in Eastern Europe.

Unions now need to ensure that campaigners, opinion-formers and politicians are aware of the evidence that inequality needs to be reduced, and get the debate shifted onto what we need to do to tackle that inequality. Rebuilding collective bargaining, which played a key role in establishing the more egalitarian economies of the post-war world, is a vital element of that process and will be the top priority for trade unions.

UNI General Secretary Phil Jennings said:

“The only way out of this crisis is inclusive, sustainable economic growth with a living wage for all. That means a stronger labour movement and a seat at the table for working people. ”

This latest paper from the IMF starts from what it calls:

“the tentative consensus in the literature that inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of shocks, and thus that it tends to reduce the pace and durability of growth.”

It examines the evidence regarding the growth impact of redistributive policies themselves, notably the theory postulated by US economist Arthur Okun in the 1970s that redistribution necessarily hampers growth. But the IMF authors conclude:

“…there is surprisingly little evidence for the growth-destroying effects of fiscal redistribution at a macroeconomic level. We do find some mixed evidence that very large redistributions may have direct negative effects on growth duration… [but] On average, across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes, unless they were extreme. And the resulting narrowing of inequality helped support faster and more durable growth, apart from ethical, political, or broader social considerations.”