Rights

Background

Are governments and the Bretton Woods Institutions fighting inequality?

21 April 2017 | Minutes

Panelists:

  • Susanna Gable, SIDA
  • Jonathan Ostry, IMF
  • Carolina Sanchez, World Bank Group
  • Jose Antonio Ocampo, Columbia University
  • Winnie Byanyima, Oxfam International
  • Nora Lustig, Tulane University
  • Luise Rürup, Friedrich-Ebert-Stiftung

Winnie Byanyima:

Oxfam is producing a new global index of 150 countries; the commitment to reduce inequality index. The intention is to produce it twice this year and then annually. It ranks countries in three areas, tax, spending and rights of workers and uses a new data set.

Why is Oxfam doing this?

  1. We know that inequality has grown rapidly. It is reaching dangerous levels. As the World Bank president has made clear, there will be no end to poverty unless inequality is reduced.
  1. Through SDG 10 governments have committed to reducing inequality. Governments need to be held to account on this.
  1. Data on inequality is patchy and poor. We urgently need ways to measure inequality. So we will publish the first iteration in June and it will be a work in progress to continue to develop, to get the world talking more about tackling inequality.

The index’s most important aim is to demonstrate that government action to tackle inequality matters. Inequality is not something inevitable. Commitments and actions of governments show there is considerable space for governments to act to reduce the divide. We hope it will help to build pressure to act on behalf of the majority, not the minority at the top.

Jose Antonio Ocampo:

The new report by New Rules for Global Finance assesses six global institutions (IMF, World Bank, FSB, OECD, G20 and UN) for their impact on inequality. SDG 10 lies at the heart of this report and it serves to raise the profile of inequality debates, inside the UN and now in other spaces as well.

Inequality has been on top of the agenda for developing countries for a long time. And of course it is core to the work of the Bank and Fund. The work of the Bretton Wood Institutions (BWIs) in this field has been extremely productive, in particular that of the IMF, in showing policies that promote equality do not harm economic growth. The Bank’s focus on the lower 40% is also a major step forward in this debate.

Let me focus on few particular important issues for BWIs. One major issue is how we connect the very good research with programmes. The programmes lag behind the knowledge of the institutions. At the IMF, its central role lies in fiscal policies, spending and taxation. In relation to taxation, the most important issue is international tax cooperation, because the OECD is not a global organisation. Although we lost the debate in Addis to upgrade the UN Tax Committee to an intergovernmental institution, I was happy to see this come back in the 2017 Spring Meetings G24 communique.

At the World Bank, moving towards the mainstreaming of the welfare state idea rather than targeted social policies is the most important way forward. The Bank has made some advances with targeting, but in the end my belief is that it should be about universal policies, based on the principle these are rights and rights are universal.

Finally, just to mention one criticism, the Doing Business Rankings have always been controversial. We have had long discussions with the ILO on its labour indicators for example. Now we are fighting against its tax indicators. I just wrote an op-ed on this and continue to think that having no corporate tax is not a good indicator for doing business. Research has shown corporate taxation is the most progressive form of taxation. So that should be revised and there should be a broader discussion on its indicators in general.

Susana Gable

3 aspects I want to highlight:

  1. General point, as a Swedish American I am taking the freedom to simplify the American vs Swedish model. You have the US model of how you promote innovation and business, where it is very expensive but you get very high returns if you succeed. In Sweden, you do not get those returns. For Americans it is a mystery how there is any innovation in Sweden. So in Sweden you work on the cost and risk side. These are two different models. It is also reflected in education, high tuition with high wages versus free education with lower returns. Per capita, Sweden and the US create equally as much innovation. They are both doing well in this aspect but in different ways. This demonstrates it is a choice. The Swedish model also demonstrates that taking care of inequality and ensuring equal opportunities does not have to impact on growth.
  1. Connected to the data gap and what type of inequality we are looking at. How do we define inequality? At SIDA we just came up with a new definition of poverty, looking at (1) everything you can possess as person, land, income etc., but that is just one element. We also look at (2) opportunity and choice and what you can do with your resources. (3) Power and voice, interesting to see how the Bank’s WDR report is now entering this area. And (4) human security, not just at country level but also human security in the home, so including domestic violence etc. If you really want to understand inequality you have to look at all these dimensions.
  2. Finally, I want to highlight the social contract and need for social dialogue. The working name of this initiative is the Global Deal.

Jonathan Ostry

It was mentioned the Fund is in a very different place from 1990s. Actually we do not have to go back that far. Less than 10 years ago, we wrote a paper on structural reform and economic performance in advanced and developing countries, and economic performance was just about economic growth. It did not occur to the researchers that performance was a broader concept and included wat has been talked about here today, distributional effects.

The punchline is that operationalisation is proceeding very well. We do not speak of pilots anymore, we speak of 1st and 2nd wave countries.

Why is it that we have come to make distributional concerns a first order importance in our work?

Starting with the research, distributional issues did not seem to be at the core of the Fund’s mandate. The challenge was to link this to its core mandate. So we looked at the extent to which high or rising levels of inequality was a precursor to either, low, or more fragile economic growth and financial crises, because one of the core IMF functions is to warn countries about vulnerabilities. So we were looking at whether it would short-circuit periods of growth. This was relevant in particular for developing countries, where those periods are key. It is actually fairly easy to ignite growth, it is far more difficult to sustain it. We found a pantheon of factors that economists like to point to from data analysis to what leads to more sustainable growth and stability. One thing was that inequality was a very powerful predictor of fragility in growth performance. That was the first finding. Subsequent research showed the connection not just with duration of growth or fragility, but also with the average level of growth that can be achieved.

The 2nd point to come out of research and is still emerging, is that the levels of inequality are not predestined. This is where policies and policy design come in. I am talking about causes of inequality. It is perhaps tempting to say that the most important of these causes are exogenous to policy makers and relate to technology and progress, trade etc. While those are important, many of the bread and butter policies we recommend have distributional effects, like tax, monetary policy, structural policies and domestic financial liberalisation. There is growing evidence of the distributional effects of these policies. Given the influence of the IMF in its surveillance work, we need to pay more attention to these policies’ distributional impacts. That means that when we consider making a policy recommendation, we look at this. We have to measure impacts but also look at the whole policy package, to look for ways to offset these negative policy impacts.

The third point relates to our work focusing on redistribution. The fact that high and rising inequality is problematic from the perspective of sustaining economic growth does not automatically point to the desirability of redistribution. Many have suggested redistribution is worse than the cure. The IMF is asking whether that is really the case and whether redistribution policies have harmed growth. Our answer is generally no. On average, governmental policies to undo some negative distributional effects have not come at a cost to economic growth. There is a much greater silver lining. These policies have actually been highly protective of growth. Therefore it can often be a win-win in many circumstances.

Now, are we operationalising this? Are we walking the talk? I take issue with idea this is a two-step process, research then implementation. That is not the way. I believe implementation at country level is extremely important to learn new lessons from. I am heartened by the progress that has been made in the 1st wave of Article IV reports, where we did 9 on inequality. In the second wave 19 included inequality analysis. I am further heartened that country teams are not following a cookie cutter approach. There will be a symbiotic relationship between research and implementation to interact with one another. The three elements that are important for this are (1) ongoing research, (2) learning from the operationalisation process, and (3) that the management of the Fund keeps up the pressure to be doing this work.

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