Causes and consequences of income inequality: A global perspective

16 April 2015 | Minutes


Peter Bakvis, International Trade Union Confederation, (US)


Caroline Gibu Gibu; Ciudadanos al Día (Peru)

Nicholas Galasso, Oxfam America

Erica Tsounta, IMF (Senior Economist, SPR)


Discussion of upcoming Staff Discussion Note (to be published summer 2015) on inequality – sneak preview!


Erica Tsounta, IMF (Senior Economist, SPR)

  • Importance of equality: as intrinsically valuable, but also impact on growth
  • Possible role in provoking global financial crisis – via inequality incentivizing investment in sub-prime, while wealth concentration led to poor investment decisions
  • Role in poverty reduction; exacerbated by inequality

Q – it makes economic sense to focus on the poor and middle class due to growth benefit

  • Findings show 1% higher income of poorest share increases GDP by 4%
  • Raising income for every consecutive income group improves GDP except if its given to the rich.
  • So focus on poor/middle class to boost growth, reduce income instability
  • Can provoke social instability

Q – What lies behind rising inequality in advanced, emerging and developing countries

  • Labour market flexibility, globalization, and technological advances
  • Advanced countries: skill premium
  • In emerging economies, financial deepening has increased inequality
    • When deepening is not inclusive, but is accessible only to the richest, it widens inequality

Stylised Facts

  • Inequality of outcomes (income)
  • Inequality of opportunities
  • Countries with rising inequality have been driven by rising incomes of the richest
  • Countries showing declining inequality (Peru, Brazil, Mexico) benefitted due to the benefits accruing to the poor and middle class
  • Middle Class Squeeze
    • In all types of economics the top groups by income have benefitted – this has been driven by factors such as executive pay and bonuses, etc, but the middle class which relies on wages has not seen wages rise with productivity

Key thematics

  • Focus on access to health services in developing countries (DCs)
    • In DCs, this is overwhelmingly determined by whether you ar e poor or rich (in DCs only a third of the poor have access to basic healthcare services)
  • Focus on education access
    • Inequality has been declining but remains high
  • Focus on financial inclusion in emerging and developing countries
    • If you are rich the disparity of access is very significant
  • Focus on labour market flexibility – did reducing unionization affect pay and inequality
    • Data shows that membership of trade unions has declined
    • Models analysed Advanced, emerging and developing states

Analysis of which of the above was major driver of increasing inequality – in DCs

  1. Labour market flexibility has largest contributing factor
  2. Next: Financial deepening has favoured the few, and has thus also contributed
  3. Technology and globalization have also done so, in terms of de-skilling

Analysis of which of the above was major driver of increasing inequality – in Emerging and Developing Countries

  1. The same factors are significant. Only in Advanced Economies financial deepening has a pro-equality benefit

Using the income distribution lens:

  • Labour market flexibility –

How to lower inequality?

  • There is no one-size-fits-all regardless of advanced, emerging, or developing countries
  • Redistributive polices are significant and legitimate even though in the view of the IMF the flexibilisation of labour, globalization and technology are all pro-growth
    • Therefore redistribution, as it is not growth-negative, should be used to assuage the impacts of pro-growth policies which nevertheless are bad for inequality
  • Education access need to be increased, but also in advanced countries the quality of education should be improved to improve inequality
  • Labour flexibilisation should be embraced to a certain extent, but used redistribution and active labour market policies (enhanced training) to protect those who lose their job to improve educational outcomes and their ability to move elsewhere
  • Foster financial inclusion

IMF work going forward

  • Interest in piloting the issue in direct discussions with states
  • The management is supporting this, but also staff needs time to learn about how to develop this work, but it is now something we really wish to mainstream and treat as macro-relevant and therefore in the view of staff and is therefore part of the Fund’s core mandate

Nicholas Galasso, Oxfam America

What do we know?

  • Helpful paper and takes much of the debate forward

Some stylized facts to emphasize

  • Global inequality remains high – but paper tends to focus on in-country inequality
    • Between-country inequality dwarfs in-country inequality – this should be the lens which we apply as much as in-country inequality
  • Rising inequality has been driven by the unequal growth of the richest 10 percent
    • Challenges World Bank’s shared prosperity measure
    • These findings show that the best measure to assess is like the Palma index, by comparing the top to the bottom
  • Inequality is more extreme in wealth than in income
    • This brings in a necessary debate on the massive significance to poorer countries of illicit flows
  • Declining education inequality in emerging markets
    • The paper’s strong empirical case on equality benefits of access – recent UNESCO report backs these findings, including that the poorest children are 5x less likely to complete primary school than the richest

Policy recommendations

  • Adding to Erica’s suggestions, then the key becomes getting the mix of policies right – e.g. the work done by Nora Lustig shows that policies – such as transfers – are very important, but especially things like indirect taxes (VAT) continue to have negative impacts
  • We still need to improve regional inequalities within countries which can be highly important determinants of inequality
  • The key challenge remains political capture
    • How do we get good governance and empower citizens – as these are the necessary preconditions
    • The paper does discuss how to curb handouts to the rich, which is welcome, but this points to the prevalence of political systems captured by oligarchies and economic elites
  • Hence the major challenge is to establish incentives to governments to act in pro-poor manner and put barriers up to the entry of corrupt or rent-seeking groups
    • Political capture enhance inequality – from protection of monopolies, policy reforms which shift revenue generation onto poorest, deregulation of financial sectors
  • Let’s pull back the curtain and focus on power inequities that has pushed labour market flexibility, unequal financial deepening and other policies identified by the paper

Carolina Gibu-Gibu  Ciudadanos al Día

Focus on Peru experience regarding inequality

  • 15 years of high & continuous growth
  • Regional disparities
  • Peruvian government has sought to improve services and expand access
  • Key challenge is to maintain growth and to reduce income inequality
  • Peru’s economy is highly sensitive to external shocks as it depends significantly on commodity and extractive export industries, as well as being sensitive to environmental shocks such as the El Nino phenomenon related to ocean surface temperature impacts on climate
  • Nicholas’ points regarding institutional challenges, in terms of reduced inequality of opportunities, are linked to civil rights, are valid, therefore we need to enhance the empowerment of societies