Inequality and Fiscal Policy
Chapter

Chapter 2. The IMF and Income Distribution

Author(s):
Benedict Clements, Ruud Mooij, Sanjeev Gupta, and Michael Keen
Published Date:
September 2015
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Author(s)
Benedict Clements, Vitor Gaspar, Sanjeev Gupta and Tidiane Kinda 

Introduction

Rising income inequality is front and center in the economic policy debate across the globe. Policymakers can hardly ignore trends in distribution of income and wealth across countries and among world citizens. However, they can even less afford to undervalue the importance of income distribution in their own countries. A fair and equitable distribution of income is a fundamental element of the social contract. What is the role of macroeconomic policies in this debate and how is this relevant to the work of the IMF? This chapter argues that inequality is an important issue for the IMF in all three of its core activities—lending to support macroeconomic adjustment programs; macroeconomic surveillance, including related policy analysis; and technical assistance to build capacity, especially on government taxation and spending.

Although distributive issues have been an important part of the IMF’s dialogue with member countries, work on them has intensified in the wake of the global financial crisis. Observers in the field of development economics increasingly recognize that macroeconomic policies (including government tax and spending policies) have significant effects on income distribution and that inequality can have adverse political and social consequences, with the potential to undermine macroeconomic stability and sustainable growth. The chapters in this book are a testament to the rising importance of this issue in the IMF’s work as we further explore the linkages between income distribution and macroeconomics.

Income distribution is a complex issue. Many different measures can be used to characterize it. Relevant questions include whether income distribution should be captured on a market basis or after adjustments for taxes and transfers, and how to analyze income distribution across and within countries. This complexity is illustrated in the discussion below.

The remainder of this chapter is structured as follows: First, to set the context for the discussion, the distribution of income across countries is briefly examined. Trends in income distribution for both the world as a whole and within countries are reviewed. The evolution of the IMF’s work on distributional issues is described. Next, the focus turns to work since 2008, highlighting the deepening of the IMF’s analytical and policy work on various aspects of income inequality to better serve our member countries. A final section concludes and discusses the next steps in the IMF’s work on inequality.

Global Trends: Distribution Across and Within Countries

When the IMF started, in the mid-twentieth century, “Europe and European offshoots,” in the words of Angus Maddison, accounted for almost 60 percent of world GDP and close to 20 percent of world population (Figures 2.1 and 2.2). From that point onward, their share in world production declined steadily. The waning of their share in world population had started earlier. The postwar period registered some remarkable cases of convergence in GDP per capita. In Asia, the so-called Asian Tigers (Hong Kong SAR, Korea, Singapore, and Taiwan Province of China) led the way. They were joined by China and later by India. These two economies doubled their shares in world production between 1950 and 2008 and reduced their gaps with Europe and European offshoots. As a consequence of strong economic growth in China and India, and also in major transition economies, millions of people were lifted out of poverty. More generally, extreme poverty rates declined, particularly in Asia (Figure 2.3). In East Asia and South Asia, for example, extreme poverty fell from about 80 percent and 60 percent of the population in 1981, respectively, to less than 10 percent and 25 percent by 2011.

Figure 2.1Shares of Advanced Economies (excluding Japan), China, and India in World Production, 1700–2008

Source: The Maddison Project, http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.

Note: Advanced economies (excluding Japan) refers to Europe and European offshoots. This group comprises Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

Figure 2.2Shares of Advanced Economies (excluding Japan), China, and India in World Population, 1700–2008

Source: The Maddison Project, http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.

Note: Advanced economies (excluding Japan) refers to Europe and European offshoots. This group comprises Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

Figure 2.3Extreme Poverty Rates by Region, 1981–2011

(Percent)

Sources: World Bank World Development Indicators; and IMF staff estimates.

Note: Poverty rate is defined as the fraction of the population living with less than $1.25 a day (in purchasing power parity terms).

Not all regions experienced income convergence vis-à-vis Europe and European offshoots. In sub-Saharan Africa, for instance, income growth was more modest, on average, than in Asia. This hides substantial cross-country variation since a number of countries in Africa experienced periods of zero or even negative growth. The reduction in poverty rates has also been less marked in this region. In more recent years, a large share of sub-Saharan African countries have been experiencing high rates of growth, which should lead to a more rapid decline in poverty than in the past.

One striking aspect of the overall pattern of convergence in the global economy is the dominant role played by China and India—two very populous nations (Figure 2.4). After widening during a period of a hundred years, between 1850 and 1950, the income gap between China and India on one hand and Europe and European offshoots on the other has been narrowing quickly. Demographic developments suggest that Europe and European offshoots will account for a smaller share of output in the future. One reason is their lower rate of population and labor force growth (Lagarde and Gaspar 2014), which is contributing to a slower rate of growth of potential output (IMF 2015b).1

Figure 2.4Global Convergence: GDP per Capita, 1850–2020

Sources: The Maddison Project for years before 2000; April 2015 World Economic Outlook and IMF staff estimates for 2020.

Note: GDP per capita in constant purchasing power parity.

This convergence of income across economies (when using population weights) is mirrored in the decline in global inequality since the early 1990s (Bourguignon 2015; and Figure 2.5).2 Both the Gini coefficient and the relative income gap between the top and bottom 10 percent decreased notably between 1990 and 2010.3 Although recent revisions to the purchasing power parities highlighted complexities in measuring inequality and inherent measurement issues, related studies have confirmed a rapid decline in worldwide poverty and income inequality (Deaton and Aten 2014; Chandy and Kharas 2014).

Figure 2.5Evolution of World Inequality, 1820–2010

Source: Bourguignon (2015), Figure 1.

Note: Historical data prior to 1990 have 1990 as the base year. The data for the recent period (since 1990) have 2005 as the base year. This difference in the base year between historical and more recent periods explains much of the discontinuity between the two series in 1990.

The sharp decline of income inequality on a global scale contrasts with developments within countries. Indeed, between the 1980s and the most recent observation in the 2000s, within-country income inequality increased in three-quarters of advanced economies while it declined in the remaining advanced economies such as France, the Netherlands, and Switzerland (Figure 2.6 and Chapter 3). The dynamics of income inequality are more mixed in the developing world, where inequality increased in about half of countries, particularly in fast-growing countries such as China and India, while it declined in others (Figure 2.7 and Chapter 4).4 The increase in inequality reflects an array of factors, including the globalization and liberalization of factor and product markets, skill-biased technological change, increases in labor force participation by low-skilled workers, increasing bargaining power of high earners, and the growing share of high-income couples and single-parent households (Bastagli, Coady, and Gupta 2012; Alvaredo and others 2013; Hoeller, Joumard, and Koske 2014; Piketty 2014; Dabla-Norris and others 2015; Bourguignon 2015; Atkinson 2015). In advanced economies, another important factor has been changes in tax and spending policies, which are less redistributive than in the past (Chapter 3). However, there is nothing unavoidable in the play of these factors, considering that between the 1980s and the 2000s income inequality increased in many countries but declined in others.

Figure 2.6Advanced Economies: Income Inequality in the 1980s and 2000s

(Latest observation)

Sources: European Union; Luxembourg Income Study; Organisation for Economic Co-operation and Development; World Bank; and authors’ estimates.

Note: Data for the 1980s correspond to the average of the Gini index in 1980 and 1985. Latest observation corresponds to the most recent available data during the 2000s.

Figure 2.7Developing Countries: Income Inequality in the 1980s and 2000s

(Latest observation)

Sources: European Union; Luxembourg Income Study; Organisation for Economic Co-operation and Development; World Bank; and authors’ estimates.

Note: Data for the 1980s correspond to the average of the Gini index in 1980 and 1985. Latest observation corresponds to the most recent available data during the 2000s.

The global financial crisis—and countries’ fiscal responses to the crisis—have further heightened the focus of policymakers and the public on inequality. After the initial easing of fiscal policy in 2009, many economies have been undertaking fiscal consolidation to reduce macroeconomic risks and bring public debt ratios back to more prudent levels. These consolidation efforts have brought to the fore the importance of distribution in designing adjustment packages. Since the crisis, public support for redistribution has increased, especially in advanced economies where the crisis hit harder (Figure 2.8).

Figure 2.8Public Support for Redistribution

(Percent)

Source: Authors’ estimates based on Integrated Values Survey data.

Note: These surveys, which include the World Values Surveys (WVS), Regional Barometers, and International Social Surveys, ask citizens whether they favor more or less redistribution. In the WVS, respondents are asked to indicate, on a scale from 1 to 10, whether “incomes should be made more equal” (1) or whether the country “needs larger income differences as incentive” (10). For the purposes of this chapter, these responses are divided into two categories: answers 1 through 5 indicate that the respondents prefer more redistribution, and answers 6 through 10 indicate a preference for less redistribution. A similar approach is applied to other surveys to find the share of the population that supports more redistribution. The most recent year refers to 2008–13, with about 60 percent of the observations corresponding to 2011–13.

Before the Global Crisis: IMF Activities and Income Distribution

Early Focus: IMF-Supported Programs and Income Distribution

Distributional concerns first began to crop up in discussions on policy design in IMF-supported adjustment programs in the late 1980s. In particular, equity issues gained prominence with the growing awareness of the links between inequality and the economic and political sustainability of adjustment programs, particularly in developing countries. This led to the need to use social safety nets to protect vulnerable groups during structural and fiscal adjustment and to safeguard access to basic public services such as health and education during the reform process. This theme was especially relevant for transition economies, given that many of them confronted the challenge of protecting the poor while output and government revenues declined sharply in the early phases of the shift to more market-based economies.

The deepening of the IMF’s engagement on structural issues in low-income countries, especially those with programs supported by the Extended Structural Adjustment Facility (ESAF), further led to greater attention to social spending during the 1990s. These programs often sought to raise both revenues and expenditures, allowing countries to achieve higher levels of social spending while maintaining macroeconomic stability (Gupta and others 2000). The Heavily Indebted Poor Countries initiative, launched in 1996 by the IMF and the World Bank, emphasized that resources from debt relief should be used to increase pro-poor spending, including on the social sectors. In IMF-supported programs, the broadening of the focus to distributional issues was reflected in the creation of the Poverty Reduction and Growth Facility in 1999 (replacing the Extended Structural Adjustment Facility), with the objectives of poverty reduction and growth figuring prominently in its lending operations for low-income economies. Education and health outlays rose more in economies with IMF-supported programs than those without. After controlling for macroeconomic conditions, the impact of IMF-supported programs, over a five-year period, is to raise education and health spending by ¾ and 1 percentage point of GDP, respectively, in low-income developing countries (Clements, Gupta, and Nozaki 2013). Protecting social spending remains a high priority for programs (Independent Evaluation Office 2014), as reflected in the rising share of programs supported by the Poverty Reduction and Growth Trust and the Extended Credit Facility; where social and other priority spending floors rose from less than 50 percent to 100 percent in 2011–13. The continued emphasis on social sectors is reflected in recent trends in spending. Take, for example, developments in health spending since 2008 in sub-Saharan African countries supported by IMF programs (Figure 2.9, panel 2). In these countries, spending has risen by an average of about 0.1 percentage point of GDP each year. This translates into a real spending increase per capita of about 6 percent (Figure 2.9, panel 4). Figure 2.9 also demonstrates that spending has been rising at a brisker pace in countries with IMF-supported programs than in nonprogram countries.

Figure 2.9Median Annual Change in Public Health Spending

Sources: World Health Organization; IMF, Monitoring of Fund Arrangements (MONA) database; and authors’ estimates.

The IMF’s early work on income distribution emphasized that there need not be a trade-off between growth and distributional objectives (Tanzi and Chu 1998; Tanzi, Chu, and Gupta 1999). Rather, sound macroeconomic and structural policies were consistent with sustainable economic growth and declining poverty, and in some circumstances could contribute to reducing inequality. For instance, sound macroeconomic policies could help reduce inflation, which at high levels increases income inequality. Social spending, if well targeted, could be kept at levels consistent with fiscal sustainability and also achieve distributional objectives. Redistributive policies focusing on public expenditure can protect the poor better than tax instruments without impinging on growth. Reducing unproductive spending (such as generalized subsidies) and replacing it with targeted transfers to the poor can release resources for productive outlays on infrastructure and human capital. Enhancing the efficiency of spending on social sectors would not only improve education and health outcomes but also generate fiscal space for additional productive spending. Finally, the quality of public institutions can influence the effectiveness of distributional policies. High and rising corruption, for example, has been found to increase income inequality and poverty (Gupta, Davoodi, and Alonso-Terme 2002), and social spending can more effectively raise health and educational attainment when governance is strong.

Building institutions thus becomes important for policy formulation and implementation. For example, strengthened revenue administration can help countries ensure that taxes—including those with important distributional objectives, such as income taxes—are paid and collected as intended by governments. Improving tax administration also helps countries raise the revenues needed to finance higher levels of redistributive spending.

The IMF has been helping countries build these strong fiscal institutions through its technical assistance on revenue administration and public financial management. It also has been providing assistance on tax and expenditure policies, which often involves the analysis of policy options with important implications for income distribution. For example, any discussion of the appropriate design of an income tax system must inevitably address the distributional effects of different options for tax rates and the tax base. With respect to expenditure policies, technical assistance on energy subsidies, pension reform, and short-term spending rationalization also has important distributional consequences that are important to country authorities. A core component of much of the IMF’s assistance in these areas has been to provide options on how to undertake fiscal reforms in a way that protects low-income groups. For instance, building on the IMF’s technical assistance to Jordan, the country implemented a gradual and sequenced reform to contain the budgetary cost of fuel subsidies while simultaneously enhancing the government’s capacity to target social assistance (Coady and others 2006).

Deepening of Work Since the Global Financial Crisis

Following the global crisis, the IMF has further deepened its analytical work on inequality issues to better inform its policy advice.

Income Inequality and Economic Growth

IMF research in recent years has taken a new perspective on this issue by examining how inequality itself—rather than the policies that redistribute income—can be harmful to growth. Berg and Ostry (2011), for example, find that countries with more unequal distributions of income experience shorter growth spells. Ostry, Berg, and Tsangarides (2014) further find that redistributive policies themselves need not have adverse effects on growth. Their analysis shows that only in extreme cases is there some evidence that redistribution may have negative effects on growth. The combined direct and indirect effects of redistribution—including the growth effects of the resulting lower inequality—are, on average, pro-growth. This result is confirmed by Dabla-Norris and others (2015). For example, increases in the income share of the bottom 20 percent are associated with higher GDP growth, while a rising share of the top 20 percent dampens growth.5

Many IMF member countries are now seeking to ensure that economic growth is more inclusive than in the past, that is, growth should create a high number of jobs and not lead to rising inequality.6 Reflecting the growing interest in the theme of inclusive growth, a number of country and regional studies have been undertaken by IMF staff in this area. For instance Lee, Syed, and Wang (2013) highlight a range of policies that could help broaden the benefits of growth in China. These policies include a more progressive fiscal tax and expenditure system, higher public spending on health and education, and measures to raise labor incomes and assist vulnerable workers. Aoyagi and Ganelli (2015) highlight for Japan that full implementation of structural reforms—especially labor market reforms—is necessary to both foster growth and increase equality. Kireyev (2013) shows that better-targeted social policies and more attention to the regional distribution of spending would help reduce poverty and improve inclusiveness in Senegal.

Fiscal Policy and Income Inequality

Fiscal Policy Options to Reduce Inequality

Fiscal policy is the most potent instrument governments have to reduce income inequality.7 At the same time, government tax and spending policies can also have powerful effects on economic incentives that can either promote efficiency and growth or diminish them. At the aggregate level, the total amount of fiscal redistribution that governments do—for example, through progressive income taxes and social welfare payments—does not appear to have an adverse effect on growth. But the design of specific tax and expenditure instruments matters, both for their effects on inequality and for their impact on economic efficiency. Good examples of efficient redistribution include a greater role for recurrent property taxes, more progressive personal income taxes, better taxation of multinational corporations, the revival of inheritance and gift taxes, expansion of low-income families’ access to education and health, better targeting of social benefits, strengthened incentives to work, and the safeguarding of pensions (IMF 2014).

Fiscal Consolidation and Inequality

As noted earlier, the need for fiscal consolidation in many economies, in conjunction with rising concerns about inequality, poses a difficult challenge for policymakers. Although fiscal consolidation can help correct macroeconomic imbalances and lay the foundation for sustainable growth in the medium term, it is still likely to decrease growth in the short term and raise unemployment. Fiscal adjustments are also associated with a decline in the wage share of income, and may lead to greater wage dispersion because firms tend to lay off their less skilled workers first. All these factors contribute to an increase in the inequality of market income during fiscal consolidations. Fiscal consolidation can also affect households’ disposable income through increases in taxes and cuts in government transfers, such as social benefits.

In this light, an important question is whether adjustments that are mostly based on tax increases, or those that rely primarily on spending cuts, are more likely to lead to an increase in inequality. Most studies covering both advanced and developing countries suggest that fiscal consolidations based on spending cuts have stronger adverse effects on income distribution; one of the reasons for this result is that spending cuts are associated with larger increases in unemployment (Woo and others 2013). Tax-based adjustments are no panacea, however, because both spending- and revenue-based consolidations are, in most cases, associated with persistent increases in inequality. This outcome, however, is not unavoidable.

Most empirical studies on fiscal consolidation and inequality have focused on the impact of adjustment episodes from the past 20 to 30 years, largely covering the period before the global financial crisis. The more recent experience with fiscal adjustments is less bleak, and underscores an important message coming from research both inside and outside the IMF: design matters. Fiscal adjustment need not lead to increases in inequality if it is based on measures that deliberately place a smaller share of the burden on lower-income groups. While this cannot completely offset the effects of fiscal adjustment on inequality, in many cases it can largely neutralize it.

The evidence from 27 recent fiscal consolidation episodes in advanced and emerging economies in Europe in the aftermath of the global financial crisis sheds light on this issue (see also Chapter 9).8 In more than half of the cases, fiscal adjustments were associated with higher inequality in market incomes. This can be seen in Figure 2.10 for the countries that are above the 45 degree line. But this does not tell the whole story—in many cases, fiscal policy helped offset increases in market inequality (Figure 2.11). For instance, in Ireland, the increase in market-income inequality between 2007 and 2013 was fully offset by fiscal policy, as illustrated by the constant Gini index for disposable income. In a number of countries, such as France and Hungary, fiscal policy worsened inequality.

Figure 2.10Gini Index for Market Income, 2007–2013

Source: EUROMOD statistics on Distribution and Decomposition of Disposable Income, accessed at http://www.iser.essex.ac.uk/euromod/statistics/ using EUROMOD version no. G2.0.

Figure 2.11Gini Index for Disposable Income, 2007–13

Source: EUROMOD statistics on Distribution and Decomposition of Disposable Income, accessed at http://www.iser.essex.ac.uk/euromod/statistics/ using EUROMOD version no. G2.0.

This is further illustrated in Figure 2.12, which shows that in two-thirds of the countries, fiscal policies were progressive and helped move Gini coefficients in a downward direction. In another one-third of cases, fiscal policies tended to raise inequality.

Figure 2.12Redistributive Effect of Fiscal Policy, 2007–13

Source: EUROMOD statistics on Distribution and Decomposition of Disposable Income, accessed at https://www.iser.essex.ac.uk/files/euromod/Statistics/WebStatistics_July1_2014_Gini_Datasets_Population_Exchangerates.xlsx using EUROMOD version No. G2.0.

Note: A negative number indicates a decline in income inequality (the Gini coefficient) due to fiscal policy. The figure measures the change in disposable income (which reflects government tax and transfer programs) minus the change in market incomes. See Chapter 9 for details of the estimates.

More detailed studies of tax and spending measures implemented during recent fiscal adjustment episodes also find that it is possible to achieve fiscal consolidation without increasing inequality.

For example, Avram and others (2013) show that in five of the nine countries they examined, adjustment measures were progressive, with upper-income groups bearing a proportionately larger share of the burden (see also Chapter 9). The different outcomes reflected the composition of the measures implemented, as well as how they were designed. Reductions in the public sector wage bill, for instance, tended to be progressive because public sector employees are often skilled and educated workers from middle- and upper-income households. In addition, some countries implemented proportionately higher cuts for higher-paid workers. These factors played a role in the progressive incidence of wage bill reductions in Greece, Portugal, Latvia, and Romania. For instance in Greece, public sector wages were capped, special allowances for civil servants reduced, and the 13th and 14th salaries abolished for high-earning workers. In Portugal, public sector pay cuts increased with wages to a maximum of 10 percent. In a similar vein, cuts in pensions in some countries were more heavily targeted to those receiving high pensions, as in Greece and Portugal. In cases in which pension cuts or freezes were more across the board, as in Estonia, they tended to aggravate inequality. Measures to raise revenues from income taxes and social security contributions tended to reduce inequality, including in Latvia, Portugal, Spain, and the United Kingdom; in the latter two countries, the effects were particularly large. But for these measures as well, design mattered. For example, reductions in the threshold for filing tax returns—which brought a larger share of workers into the tax base—tended to blunt the redistributive effect of the income tax. Increases in value-added taxes also tended to increase inequality, with the strength of the redistributive effect depending on the structure of consumption. In Spain, the poorest 10 percent of households were affected relatively more by the 5 percentage point cumulative VAT increases imposed over 2010 and 2012.

In many developing countries, reforms to reduce costly fuel subsidies while limiting their distributional impact have been a long-lasting concern. An IMF technical assistance mission to Angola suggested that a gradual and sequenced reform be implemented to contain the budgetary cost of fuel subsidies while limiting the negative impact of the reform on the welfare of lower-income groups (IMF 2015a). The reforms included a frontloaded reduction of subsidies for gasoline, which is a costly product mostly consumed by well-off households, while reduction of the subsidies for kerosene would be delayed.

In sum, recent experience suggests that a variety of distributive outcomes from fiscal consolidation measures are possible. With the right combination of measures, countries can avoid a widening of inequality while undertaking fiscal adjustment.

Labor Market Institutions, Income Inequality, and Gender Gaps

Other factors can affect inequality, such as labor market institutions. Changes in minimum wages can affect the bottom and middle of the income distribution through various channels, including their effects on the wages and employment of low-skilled workers.

Gender inequality can also have adverse macroeconomic consequences. Differences between male and female participation rates have been narrowing since 1990, but remain high in most regions (Elborgh-Woytek and others 2013). In rapidly aging economies, higher female labor force participation could boost growth by mitigating the impact of a shrinking workforce. A number of IMF country studies have highlighted sizable macroeconomic gains that could result from raising female labor force participation rates and called for policies to support female employment (for example, Loko and Diouf 2009; IMF 2012; Steinberg and Nakane 2012; Lagarde 2013; Elborgh-Woytek and others 2013; IMF 2013b). Recent country case studies also stress that enhanced social spending can help boost female labor force participation in India, Japan, and Korea (Das and others 2015; Kinoshita and Guo 2015). Rectifying the unequal legal rights of women could also boost female labor force participation rates (Gonzales and others 2015).

Conclusion and Next Steps

The IMF’s work on income inequality has evolved in response to economic developments and the needs of its member countries. In this respect, two important developments stand out. First, developing economies’ share in global economic output has risen. Second, inequality has risen in many countries. To better serve its member countries, the IMF has increased the attention it pays to distributive issues, including government tax and expenditure policies that have macroeconomic effects and influence income distribution.

IMF work on income inequality before the global crisis that began in 2008 was particularly influenced by the experience gained from IMF-supported programs. In practice, this experience led to greater attention to integrating social safety nets into adjustment programs and safeguarding access to basic public services in health and education. Other initiatives, such as the introduction of the Poverty Reduction and Growth Facility in 1999, brought growth and poverty reduction objectives to the center of program design in low-income countries, as did the Heavily Indebted Poor Countries debt-relief initiative. IMF-supported programs were successful in raising social spending, including in comparison with similar countries without programs.

The IMF has further deepened its work on inequality issues in the years since the beginning of the global financial crisis. This effort has encompassed an expansion of both cross-country analytical studies and country-level assessments of fiscal consolidation and inequality, a variety of fiscal policy instruments to achieve equity goals in an efficient manner, and the macroeconomic gains from strengthening gender equity. An important lesson is that with the right design, government tax and spending policies can help achieve both stronger growth and greater equality of outcomes and opportunities. For example, boosting access to basic health and education services and reducing barriers to female labor market participation can help raise growth and meet equity objectives. Even in the design of fiscal consolidation, a number of options can help reduce budget deficits without aggravating inequality. These include measures to raise revenues from income taxes and targeted (rather than across-the-board) reductions in social benefits. Measures that are good for both equity and efficiency—for example, an increase in revenues from recurrent property taxation—should also be given strong consideration when designing fiscal consolidation packages.

The IMF will continue to strengthen its analytical work on income distribution issues. These efforts will involve further cross-country analysis of the type carried out in this book on different aspects of macroeconomic policies and how they affect income distribution. Work at the country level on income distribution issues, including gender equity, will also be deepened. The approach will be selective, and will be concentrated on countries where these issues are critical. We expect considerable synergies between country-level and cross-country analysis, and we will continue to draw on the profession’s work in these areas. In sum, we will continue to deepen our understanding of the nexus between income distribution and macroeconomics, with the goal of providing relevant policy advice.

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The authors wish to thank Martin Muhleisen and Christoph Rosenberg for their helpful comments and suggestions. Haoyu Wang provided excellent research assistance.

One interesting remark to make, when contrasting Figures 2.1 and 2.2, is that the sharp decline in the population share of China and India is not mimicked by their share in production. These countries experienced GDP per capita growth faster, on average, than the rest of the world.

The convergence of income has led to calls for governance reforms of international financial institutions.

Milanovic (2013) confirms a decline in global inequality, although only since the early 2000s. He attributes the falling global inequality to the fast-growing China, India, and other high-population economies.

In this chapter, developing countries refers to both middle-income and low-income countries.

One mechanism through which inequality can affect growth is through its effects on the financial system. Rising inequality can generate political pressure for more housing credit, which distorts lending in the financial sector (Rajan 2010).

See IMF 2013a for an overview of issues related to inclusive growth and their implications for the IMF.

For evidence on the effects of fiscal policies on inequality in advanced and developing economies, see also Bastagli, Coady, and Gupta (2012).

To assess how inequality evolved during fiscal adjustments undertaken in the aftermath of the crisis, the chapter compares the dynamic of inequality between the period before the crisis (2007) and the period after (2013). This captures most consolidation episodes, which took place from 2010, after temporary fiscal stimulus in 2008 and 2009.

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