Journal Issue
Share
Article

Research Summaries: Macroeconomic Policies and Income Distribution

Author(s):
International Monetary Fund. Research Dept.
Published Date:
March 2002
Share
  • ShareShare
Show Summary Details

Aleš Bulíř

The relationship between income inequality and economic policies is of considerable interest to both academics and policymakers. It is also a complex one: macroeconomic policies, structural changes, and redistributive interventions affect income distribution, while income inequality considerations can influence the selection of policies and reforms as well as their implementation and degree of success. The increasing focus on poverty alleviation in IMF-supported programs has further highlighted the need for a better understanding of the nexus between macroeconomic policies and income distribution. This article provides an overview of IMF research in this area.

The relationship between macroeconomic stabilization and inequality is of keen interest to the IMF’s member countries. Stabilization policies can contribute to reductions in inequality by, for example, lowering inflation and reducing the volatility of the exchange rate and other macroeconomic variables. However, a highly unequal income distribution could vitiate the ability of countries to institute sustainable stabilization programs. For instance, rising inequality in some transition economies may have undermined the necessary consensus required to implement market-oriented reforms. Dolinskaya (forthcoming) arrives at this conclusion for Russia, especially given that the redistribution system seems to amplify regional inequality. In contrast, redistributive policies that mitigated the early-transition increase in inequality may have been crucial for the success of Poland’s “big bang” reform strategy (Keane and Prasad, forthcoming).1 Research is under way to analyze in more detail the relationship between inequality and the durability and success of IMF-supported stabilization programs.2

IMF staff have made significant contributions to the literature linking various economic and structural policies with income distribution. While some papers have developed theoretical models, the bulk of IMF research in this area has been empirical in nature, emphasizing both cross-country and country-specific studies.3

Given the core areas of IMF policy advice, of particular interest have been variables measuring inflation and the volatility of financial variables. Inflation is often regarded as a regressive tax that disproportionately affects the poor. The panel data evidence suggests that inflation indeed worsens income inequality, but inflation variability appears to have an even stronger impact than the level of inflation (Bulíř and Gulde, 2000).4 Modeling nonlinearities in this relationship differently, Bulíř (2001) finds inflation to be significant for income inequality in cross-country regressions: bringing inflation down from a hyperinflationary level reduces inequality significantly, while further declines bring negligible reductions.5

Evidence from a growing body of IMF research suggests that only well-targeted fiscal policies can affect income inequality (and poverty) and that, in the absence of such a targeted mechanism, it may be better to rely on the trickle-down effect of economic growth on inequality.6 In addition, the success in affecting inequality depends on the scope of redistribution policies and their execution. Tanzi (1998) argues that the primary avenue for government to affect income inequality is through its contribution to human capital creation.7 Schwartz and Ter-Minassian (1995) claim that there is not necessarily a trade-off between redistributive and efficiency goals of expenditure policies in developing countries, especially over the medium term.8 Unfortunately, in most of these countries, tax and transfer policies have often not been used effectively to reduce income inequality, in part owing to difficulties associated with the introduction of progressive taxation and targeted redistribution.9

IMF Staff Papers

Volume 49, Issue 1

Symposium on Forecasting Performance

  • Introduction
  • Francis X. Diebold
  • Copycats and Common Swings:
  • The Impact of the Use of Forecasts in Information Sets
  • Giampiero M. Gallo, Clive W.J.
  • Granger, and Yongil Jeon
  • Comparing Projections and
  • Outcomes of IMF-Supported
  • Programs
  • Alberto Musso and Steven Phillips
  • Further Cross-Country Evidence
  • on the Accuracy of the Private
  • Sector’s Output Forecasts
  • Grace Juhn and Prakash Loungani

Purchasing Power Parity and the Real Exchange Rate

Luciano Sarno and Mark P. Taylor

Tax Policy, the Macroeconomy, and Intergenerational Distribution

Ben J. Heijdra and Jenny E. Ligthart

Money Demand in Mongolia: A Panel

Data Analysis

Torsten Sløk

The Distribution of Fixed Capital in the Multinational Firm

Alexander Lehmann

IMF Staff Papers, the IMF’s scholarly journal, edited by Robert Flood, publishes selected high-quality research produced by IMF staff and invited guests on a variety of topics of interest to a broad audience, including academics and policymakers in IMF member countries. The papers selected for publication in the journal are subject to a rigorous review process using both internal and external referees. The journal and its contents (including an archive of articles from past issues) are available online at the Research at the IMF website at http://www.imf.org/research

The country-specific character of redistribution is difficult to capture in cross-country studies. Individual country case studies are particularly relevant for economies that have undergone severe crises, transition economies, and other economies with pronounced economic changes. Clements (1997) finds that Brazil has been one of the most unequal societies—in part owing to its history of hyperinflation—and income distribution remained unequal after the Real Plan of July 1994, because social expenditures primarily benefit upper-income groups.10 Baldacci, De Mello, and Inchauste (2002) provide evidence of the impact of the Tequila crisis on Mexico’s income distribution.11 Several papers have addressed the distributional impact of the profound socioeconomic changes undergone by transition economies.12 Most authors agree that, while labor earnings disparities widened in the initial stages of transition, consumption and income inequality remained subdued in countries with well-targeted redistribution policies (Keane and Prasad, 2001). In contrast, those countries that failed to establish a system of targeted transfers have seen a significant widening of consumption and income inequality.

Finally, case studies of countries with pronounced economic changes, for example, China, the Philippines, and Uganda, support the notion that redistribution policies and their impact are country specific. China’s case is particularly interesting: although regional inequality has widened, the urban-rural income distribution appears to be more equal in fast-growing, coastal regions than in those with little or no trade, and these changes are reinforced by China’s redistribution policies.13 In contrast, income distribution in Philippines has been remarkably stable over the last two decades and little of the “trickle-down” effect of economic growth has been observed.14 In Uganda, income inequality increased during the 1989–95 period of structural adjustment, owing to a lack of a formal social safety net benefiting the poor.15

In research on the OECD countries, Vanhoudt (1997) reports that economic fundamentals explain three-quarters of inequality variation across countries and over time. Cole and Towe (1996) find that the dynamics of the U.S. distribution of income is dominated by cyclical income fluctuations. Decressin (1999) analyzes the Italian redistribution system and concludes that it is not an efficient redistributive and risk-sharing mechanism.16

The debate on income inequality in low-income countries is generally overshadowed by concerns about the dynamics of poverty: unlike income inequality, poverty reduction is considered to be a desirable goal of government policies.17 IMF research on this topic has focused on the linkages between macroeconomic policies, market-oriented reforms, and poverty. On the one hand, there appears to be no medium-term trade-off between stabilization and poverty; that is, fiscal expansion financed with more inflation today does not permanently lower poverty.18 On the other hand, the evidence suggests that fiscal tightening in the context of IMF-supported structural adjustment programs is associated with increased social spending and less poverty (Gupta, Dicks-Mireaux, Khemani, McDonald, and Verhoeven, 2000).19

Books from the IMF

Silent Revolution: The International Monetary Fund,1979–89

James M. Boughton

This volume—fourth in a series of histories of the institution—covers a decade when the IMF came of age as a participant in global financial markets and as a development partner for emerging economies. Part One of the book describes how the IMF conducted surveillance of macroeconomic and exchange rate policies, how the annual World Economic Outlook became a major tool for analyzing policy effects, and how the IMF supported policy coordination efforts of the major industrial countries. Part Two analyzes the debt crisis and explains how the IMF worked with indebted countries and their creditors to develop a strategy for resolving the crisis. Part Three examines IMF lending to developing countries, including how several countries fell into arrears to the IMF and how the tactics for dealing with the problem progressed. Part Four examines how the institution evolved throughout the 1980s and how it raised the financial resources to do its work.

Full-text versions (or, in some cases, detailed summaries) of books published by the IMF are available online at the Research at the IMF website at http://www.imf.org/research. Follow the link to IMF Publications.

1Irina Dolinskaya, “Transition and Regional Inequality in Russia: Reorganization or Procrastination?” forthcoming IMF Working Paper; Michael Keane and Eswar Prasad, “Inequality, Transfers, and Growth: New Evidence from the Economic Transition in Poland,” forthcoming in Review of Economics and Statistics.
2Anna Ivanova, Wolfgang Mayer, Alexandros Mourmouras, and George Anayiotos, “What Determines the Success or Failure of Fund-Supported Programs?” forthcoming IMF Working Paper.
3Theoretical papers include: Sanjeev Gupta, Hamid Davoodi, and Rosa Alonso-Terme, “Does Corruption Affect Income Inequality and Poverty?” IMF Working Paper 98/76, 1998, and also forthcoming in Economics of Governance; Antonio Spilimbergo, Juan Luis Londono, Miguel Szekely, “Income Distribution, Factor Endowments, and Trade Openness,” Journal of Development Economics (June 1999); Giacomo Corneo, Olivier Jeanne, “Pecuniary Emulation, Inequality and Growth,” European Economic Review (October 1999); Arye L. Hillman, “Poverty, Inequality, and Unethical Behavior of the Strong,” IMF Working Paper 00/187, 2000; Li Hongyi, Danyang Xie, Heng-fu Zou, “Dynamics of Income Distribution,” Canadian Journal of Economics (November 2000); Era Dabla-Norris and Paul Wade, “Rent Seeking and Endogenous Income Inequality,” IMF Working Paper 01/15, 2001; Stefania Scandizzo, “Counterfeit Goods and Income Inequality,” IMF Working Paper 01/13, 2001; Robert M. Townsend and Kenichi Ueda, “Transitional Growth with Increasing Inequality and Financial Deepening,” IMF Working Paper 01/108, 2001.
4See Aleš Bulíř and Anne-Marie Gulde, “Inflation and Income Inequality: Further Evidence on Empirical Links,” IMF Working Paper 95/86, 1995, and also published in Finance a úvěr Vol. 50 (April), 2000.
5Aleš Bulíř, “Income Inequality: Does Inflation Matter?” IMF Staff Papers, Vol. 48, No. 1, 2001.
6Michael Sarel, “How Macroeconomic Factors Affect Income Distribution: The Cross-Country Evidence,” IMF Working Paper 97/152, 1997; Gary G. Moser, “Economic Growth and Poverty Reduction in Sub-Saharan Africa,” IMF Working Paper 01/112, 2001; Aleš Bulíř, “The Impact of Macroeconomic Policies on the Distribution of Income,” Annals of Public and Cooperative Economics, Vol. 72 (June), 2001
7Vito Tanzi, “Fundamental Determinants of Inequality and the Role of Government,” IMF Working Paper 98/178, 1998. See also Hong-Sang Jung and Erick Thorbecke, “The Impact of Public Education Expenditure on Human Capital, Growth, and Poverty in Tanzania and Zambia: A General Equilibrium Approach,” IMF Working Paper 01/106, 2001.
8Gerd Schwartz and Teresa Ter-Minassian, “The Distributional Effects of Public Expenditure—Update and Overview,” IMF Working Paper 95/84, 1995, and also published in Journal of Economic Surveys, Vol. 14 (July) 2000. See also Vito Tanzi, Ke-young Chu, and Sanjeev Gupta, eds., Economic Policy and Equity (Washington, DC: International Monetary Fund,1999).
9Ke-young Chu, Hamid Davoodi, and Sanjeev Gupta, “Income Distribution and Tax and Government Social Spending Policies in Developing Countries,” IMF Working Paper 00/62, 2000; Howell H. Zee, “Inequality and Optimal Redistributive Tax and Transfer Policies,” IMF Working Paper 99/60, 1999.
10Benedict Clements, “Income Distribution and Social Expenditure in Brazil,” IMF Working Paper 97/120, 1997.
11Emanuele Baldacci, Luiz R. De Mello, and Gabriela Inchauste, “Financial Crises, Poverty, and Income Distribution,” IMF Working Paper 02/4, 2002. See also Benedikt Braumann, “High Inflation and Real Wages,” IMF Working Paper 01/50, 2001 for a model description of the nexus between high inflation and poverty.
12Caroline van Rijckeghem, “Albania’s Early Transition, 1991–93: What Administrative Data Tell Us About Income Distribution and Poverty,” Economic Systems, Vol. 22 (December), 1998; Peter K. Cornelius and Beatrice S. Weder, “Economic Transformation and Income Distribution: Some Evidence from the Baltic Countries,” IMF Working Paper 96/14, 1996; Michael Keane and Eswar Prasad, “Consumption and Inequality During the Transition to a Market Economy: Poland, 1985-92,” IMF Staff Papers, Vol. 48 (Special Issue), 2001; Vincent R. Koen and Steven Phillips, “Price Liberalization in Russia: The Early Record,” IMF Working Paper 92/92, 1992; Sanjeev Gupta, Christian Schiller, and Henry Ma, “Privatization, Social Impact, and Social Safety Nets,” IMF Working Paper 99/68, 1999.
13Anuradha Dayal-Gulati and Aasim M. Husain, “Centripetal Forces in China’s Economic Takeoff,” IMF Working Paper 00/86, 2000, and also forthcoming in IMF Staff Papers; Jahangir Aziz and Christoph Duenwald, “China’s Provincial Growth Dynamics,” IMF Working Paper 01/3, 2001; Shang-Jin Wei and Yi Wu, “Globalization and Inequality: Evidence from Within China,” forthcoming IMF Working Paper.
14Philip R. Gerson, “Poverty, Income Distribution, and Economic Policy in the Philippines,” IMF Working Paper 98/20, 1998.
15Calvin McDonald, Christian Schiller, and Kenichi Ueda, “Income Distribution, Informal Safety Nets, and Social Expenditures in Uganda,” IMF Working Paper 99/163, 1999.
16Patrick Vanhoudt, “Do Labor Market Policies and Growth Fundamentals Matter for Income Inequality in OECD Countries? Some Empirical Evidence,” IMF Staff Papers, Vol. 44 (September), 1997; Jeffrey Cole and Christopher M. Towe, “Income Distribution and Macroeconomic Performance in the United States, IMF Working Paper 96/97, 1996; Jörg Decressin, “Regional Income Redistribution and Risk Sharing: How Does Italy Compare in Europe?” IMF Working Paper 99/123, 1999.
17See IMF Staff, “Should Equity Be a Goal of Economic Policy?” Finance and Development, Vol.35 (September), 1998; Paul Cashin, Paolo Mauro, Catherine Pattillo, and Ratna Sahay, “Macroeconomic Policies and Poverty Reduction: Stylized Facts and an Overview of Research,” IMF Working Paper 01/135, 2001.
18Mahmood H. Khan, “Rural Poverty in Developing Countries—Issues and Policies,” IMF Working Paper 00/78, 2000; Geoffrey Bannister and Kamau Thugge, “International Trade and Povery Alleviation,” IMF Working Paper 01/54, 2001; Zuzana Brixiová, Aleš Bulíř, and Joshua Comenetz, “The Gender Gap in Education in Eritrea in 1991-98: A Missed Opportunity?” IMF Working Paper 01/94, 2001; Prakash Chander, “Subsidy Reforms and Poverty Alleviation,” IMF Working Paper 01/126, 2001; Paul R. Masson, “Migration, Human Capital, and Poverty in a Dual-Economy of a Developing Country,” IMF Working Paper 01/128, 2001; Paul Holden and Vassili Prokopenko, “Financial Development and Poverty Alleviation: Issues and Policy Implications for Development and Transition Countries,” IMF Working Paper 01/160, 2001; Alfredo Cuevas, “Short- and Long-Term Poverty and Social Policy in a ‘Snakes and Ladders’ Model of Growth,” IMF Working Paper 01/172, 2001; Ana Corbacho and Gerd J. Schwartz, “Mexico: Experience with Pro-Poor Expenditure Policies,” IMF Working Paper 02/12, 2002.
19Sanjeev Gupta, Louis Dicks-Mireaux, Ritha Khemani, Calvin McDonald, and Marijn Verhoeven, Social Issues in IMF-Supported Programs, IMF Occasional Paper No.191, 2000. See also Sanjeev Gupta, Benedict Clements, and Erwin Tiongson, “Public Spending on Human Development,” Finance and Development, Vol. 35 (September), 1998.

Books from the IMF

The Modern VAT

Liam Ebrill, Michael Keen, Jean-Paul Bodin, and Victoria Summers

Probably the most important tax development of recent years has been the remarkable rise of the value-added tax (VAT), now a central component of the tax systems of over 120 countries. In particular, the VAT has recently become a key component of tax reform in many developing countries. The IMF Fiscal Affairs Department has played a major role in this process, and this book—the first comprehensive treatment of the tax for over a decade—sets out the lessons of its unique experiences.

The book is aimed at academics, policymakers, practitioners, and others with an interest in this increasingly important tax. Starting with an assessment of the key principles of the VAT, and new evidence on its effectiveness, the book covers the central issues in both policy design (such as the optimal rate structure, treatment of financial services and other problem areas) and administration (including audit, refund processing, and organizational structures).

Full-text versions (or, in some cases, detailed summaries) of books published by the IMF are available online at the Research at the IMF website at http://www.imf.org/research. Follow the link to IMF Publications.

Other Resources Citing This Publication