Inequality: What’s the policy narrative?

by | Dec 10, 2011

Inequality has got much more on the radar of policy wonks over the last year (see for example the usual inequality interest at UNICEF and UNDP but also the World Economic Forum and the International Monetary Fund).

This week’s OECD report on ‘Divided we stand: Why inequality keeps rising’ is only likely to added to this.

So, one seminar next week, ‘Growth first, equality later: Is it time to redress the balance?’, (see here) has plenty to discuss.

Part of the story is government can reduce inequality and isn’t so hard as some countries in Latin America have shown (see here).

Another part of the story is the top 10 countries where 80% the world’s extreme poor live, inequality has been rising in almost all. The data on inequality (see here) shows that inequality is rising in Bangladesh, China, India, Indonesia, Pakistan, the Philippines, and Tanzania. Only in Ethiopia and Nigeria is there a reduction in the gini measure. And trends show a middle class squeeze in Bangladesh, India, Indonesia, Pakistan, and the share of GNI of the poorest 40% is falling in all countries other than Ethiopia (DRC has no data).

So what’s the policy narrative here? What’s the ‘inequality’ problem exactly and what to do about it?

First, why does inequality matter at all?

I noted in an earlier blog (here): inequality matters because high inequality can inhibit growth, discourage institutional development towards accountable government and undermine civic and social life leading to conflict especially in multi-ethnic settings (See also here). So, there’s an ethical/moral/justice type argument; but also a practical or ‘bad stuff happens when inequality gets too high’ type argument.

It made me think what’s the actual policy narrative here?

Inequality in itself at certain levels isn’t a problem per se. So when people say reduce inequality, what does that mean – reduce inequality of what exactly, for who (relative to who) and by how much?

Is it about opportunity or outcome? Individual or group (‘horizontal inequalities’) inequalities? Structural/historic or market-based inequalities?

Or more convincingly, is it ‘top-end inequality’ between the ‘top-end’ – meaning the ultra-rich, 1% or 0.1% or 0.01% (see here and here all the data you would ever need on the ultra-rich) and the poorest (bottom 20% or 40%); or the ultra-rich vs ‘the rest’ (the 99%) and what is the policy ‘ask’ of any government?

Here’s my 2 cents worth:

1. The ‘inequality’ policy narrative could be defined more precisely as:  extremities of inequality (however measured) lead to bad outcomes that no one wants (slower growth; slower poverty reduction; possibly conflict) so here’s the policy narrative: lowering inequality makes poverty reduction faster and cheaper.

The impact of inequalities on growth has received considerable attention. For example, Berg and Ostry in a recent IMF paper (yes, an  IMF paper) note that high inequality impedes the sustainability of growth spells. This resonates with the earlier work of Cornia and others that identified a negative effect of inequality on growth as the gini inequality measure rises above 0.45 to higher levels.

2. What’s the policy ‘ask’? We know what to ask governments to do as Brazil and others countries have done it: cash transfers to the poorest (funded in the poorest countries by donors?); minimum wage legislation; public expenditure focused on marginalized groups and regions; building cross-societal and especially middle class support for redistributive fiscal policy as someone has to fund it and cross-societal coalitions can build the political case for fairer tax and spending (eg Lula’s social contract – of ‘redistribution with growth’ or ‘redistribution with macro-economic stability’).



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