Tuesday, March 4, 2014

The IMF on the growth-inequality nexus

On Thursday I will be teaching a lecture on inequality and growth in the MPhil in Development Studies.  The same lecture a few years ago should have emphasized the IMF´s lack of concern for income inequality and its consequences--lack of concern that influenced the shape of its stabilization programs.  Yet this is no longer the case: income distribution and its costs is one of the areas where the IMF has experienced a more significant change (following the leadership of the World Bank a few years back).  In a recent working paper, the IMF´s deputy director for research, Jonathan Ostry and co-authors use cross-country regression analysis to show the negative impact of inequality on economic growth in developed and developing countries.  As stated in a FT column, he published yesterday:

"Taking into account the direct effect of redistribution, and the indirect effect that operates through reduced inequality, we find that average levels of redistribution are associated with higher and more durable growth."

This is welcome news and could gradually shift debates on stabilization and social policy.  Yet we need to follow insights like this with more attention to the broad causes of inequality and with the fact that a large share of inequality in the distribution of income can be explained by the resources of the very rich.

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