Long periods of slow economic growth can cause a jump in inequality. But a balanced set of policies can stave off that outcome.
The global economy is stuck in low gear, which could deal a major blow to the fight against poverty and inequality.
Group of Twenty finance ministers and central-bank governors gathered in Rio de Janeiro for a sobering outlook.
As the IMF’s latest World Economic Outlook update shows, global growth is expected to reach 3.2 percent this year and 3.3 percent in 2025, well below the 3.8 percent average from the turn of the century until the pandemic.
Meanwhile, the medium-term growth projections continue to languish at their lowest in decades.
The global economy has shown encouraging resilience to a succession of shocks. The world didn’t slip into recession, as some predicted when central banks around the world raised interest rates to contain inflation.
However, moving beyond the crisis years of the pandemic, we need to prevent the world from falling into a prolonged period of anemic growth that entrenches poverty and inequality.
Extreme poverty increased after decades of decline, while global hunger surged and the long-term decline in inequality across countries stalled.
New IMF analysis suggests periods of stagnation lasting four years or more tend to push up income inequality within countries by almost 20 percent—considerably higher than the increase due to outright recession.
During periods of stagnation, sluggish job creation and wage growth increase structural unemployment and reduce the share of a country’s income flowing to workers. Together with limited fiscal space, these forces tend to widen the gap between those at the top and bottom of the income ladder.
In other words, the longer we’re stuck in a world of low growth, the more unequal that world would become. That in itself would be a setback to the progress we’ve made in recent decades. And rising inequality can foster discontent with economic integration and technological advancements.
With the right policies, we can still escape a low-growth, rising-inequality trap, while working to reduce poverty and hunger. Let me highlight three priority policy areas.
The world now need to address the underlying problem of slow growth. Most of the decline in growth in recent decades has been driven by a slump in productivity. A big reason for the slump is that labor and capital aren’t flowing to the most dynamic firms.
But a smart mix of reforms could jumpstart medium-term growth. Measures to promote competition and improve access to finance could get resources flowing more efficiently, boosting productivity. Meanwhile, bringing more people into the labor force, such as women, could counter the drag on growth from aging populations.
We must also not forget the role that open trade has played as an engine of growth and jobs. In the last 40 years, real income per capita has doubled globally, while more than a billion emerged from extreme poverty.
Over that same period, trade as a share of gross domestic product increased by half. It’s true that not everyone benefited from trade, which is why we must do more to ensure the gains are shared fairly. But to close off our economies would be a mistake.
Secondly, we (the world) must do more to ensure that fiscal policies support the most vulnerable members of society.
The challenge is that many economies are facing severe fiscal pressures. In developing countries, debt-servicing costs are taking up a bigger share of tax revenue at a time when they are tackling a growing list of spending demands, from investments in infrastructure to the cost of adapting to climate change.
A gradual and people-focused fiscal effort can alleviate fiscal risks while limiting any negative impact on growth and inequality, including by raising revenue, improving governance, and protecting social programs.
There is much scope for developing countries to raise more revenue through tax reforms—as much as 9 percent of GDP, according to our research. Yet it is crucial to take a progressive approach, which means making sure those who can afford to pay more taxes contribute their fair share. Taxing capital income and property, for example, offer a relatively progressive way to raise more tax revenue.
Regardless of the strategy, people need to have confidence that the taxes they pay will be used to deliver public services—not enrich those in power. Governance improvements, such as to increase transparency and reduce corruption, must also be part of the equation.
At the same time, social-spending programs can make a big difference to inequality, including through school meals, unemployment insurance, and pensions. These should be protected. Well-targeted cash-transfer programs—such as Brazil’s Bolsa Familia—can support the vulnerable.
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IMF’s research shows that strong redistributive policies in a growing G20 economy—such as social-spending programs and public investment in education—can reduce inequality between 1.5 and 5 times more than weaker policies.
To strengthen the global backstop, the world needs a strong global financial safety net for countries that need support. With that goal in mind, the IMF is working on a package of reforms to our lending framework.
The IMF is reviewing their concessional lending instrument for low-income countries, the Poverty Reduction and Growth Trust. With demand expected to exceed pre-pandemic levels, it is vital that their membership comes together to ensure the PRGT is adequately resourced and its long-term finances are put on a sustainable footing.
Meanwhile, the IMF is also taking a close look at their surcharge policy for the first time in nearly a decade. The review aims to ensure they can continue to provide financing at affordable rates to members who need their support.
The funding institution has had strong vote of confidence by agreeing to increase their permanent quota resources, allowing them to maintain their lending capacity.
source: International Monetary Fund
