Saturday, September 17, 2011

The IMF Comes to Its Senses - Income Inequality is Ruinous

It's about time.   The International Monetary Fund, it seems, has opened its eyes and discovered that income inequality, the growing gap between rich and poor, is ruinous to modern economies.

IMF researchers Andrew Berg and Jonathon Ostry ask,  "Do societies inevitably face an invidious choice between efficient production and equitable wealth and income distribution? Are social justice and social product at war with one another?
In a word, no."

No?  Really?   Equitable wealth and income distribution actually facilitate efficient production?  Say it ain't so, Joe.   Except that it is.

"...we discovered that when growth is looked at over the long term, the trade-off between efficiency and equality may not exist. In fact equality appears to be an important ingredient in promoting and sustaining growth. The difference between countries that can sustain rapid growth for many years or even decades and the many others that see growth spurts fade quickly may be the level of inequality. Countries may find that improving equality may also improve efficiency, understood as more sustainable long-run growth."

"... the increase in U.S. income inequality in recent decades is strikingly similar to the increase that occurred in the 1920s. In both cases there was a boom in the financial sector, poor people borrowed a lot, and a huge financial crisis ensued (see “Leveraging Inequality,” F&D, December 2010 and “Inequality = Indebted” in this issue of F&D). The recent global economic crisis, with its roots in U.S. financial markets, may have resulted, in part at least, from the increase in inequality. With inequality growing in the United States and other important economies, the relationship between inequality and growth takes on more significance."

But it's not just economies that benefit from shrinking the wealth and income distribution gap.   As revealed so clearly in books such as The Spirit Level, societies with the narrowest wealth gap also have better outcomes on such things as crime and imprisonment, health and longevity, mental health and substance abuse, even teen pregnancy and divorce rates.  In other words, it's a no brainer.


Purple library guy said...

Not that it'll change what they actually do. The IMF is always coming out with reports saying very sensible-sounding things completely at odds with the policy prescriptions they have forced on debtors in the past. Sometimes they even acknowledge the discrepancy.

Then they go into the next debtor country and force them to ruin their economy and increase inequality, with all the exact same bad policy as they've always pushed.

Beijing York said...

I was just going to say the same, Purple. The World Bank always talks all visionary with poverty reduction and gender equity goals and demands for more thorough environmental impact assessments, but in practice it operates hand in hand with the IMF and WTO in ensuring free markets, open for foreign investment, for their client states.

Anyong said...

It was interesting to listen to a United Church Minister talk about a living wage or equality for people in the working world. There were a number of business people who hire people to work for $9.00 minimum right here in Alberta, sitting in the choir very annoyed by what he was saying.