The IMF has attracted plenty of favourable attention from unfamiliar places with two ‘staff papers’ (we’re enjoined to consider them as the personal opinions of the authors, not the IMF itself, an injunction that we all merrily ignore). The first argues that inequality reduces growth, while redistribution is an effective tool for reducing it; the second explains how governments should use taxes and public expenditure to achieve this goal.
Inequality campaigners are over-the-moon to have the IMF on their side. Oxfam International hails the IMF for “mashing myths and debunking dogma in economic policy,” while the Oxfam inequality guru, Nick Galasso, is fulsome in his praise of an “ideological sea change” at the Fund (“if If it sounds like I have a crush on the IMF’s Managing Director, Christian Lagarde…”).
But what tools does the IMF think we should use to shrink inequality? Oxfam’s tweet leads to a Reuters article covering a speech by IMF deputy managing director, David Lipton. The speech is definitely worth reading in full – it’s a digestible summary of emerging IMF thinking, while the table on page 43 of the IMF report provides an overview of its suite of policy prescriptions.
Key recommendations for developed countries include substituting means-tested benefits for universal ones; raising the retirement age and making the rich work longer than the poor; charging more for university education in order to spend more on schools; and making income tax more progressive, while eliminating tax breaks.
Many of these are good policies, but let’s not pretend they’re all politically palatable. Take the last one as an example. In the United States, President Obama and the Republicans are locked into fruitless combat on eliminating a few of the most egregious pro-rich tax breaks. A recent revenue-neutral tax reform plan from a Republican has provoked a blizzard of protest from Wall Street and has been roundly condemned by his colleagues.
But the IMF is not interested in these small-bore controversies, it has the big one in its sights: the 37 million Americans who benefit to the tune of $70bn or so from tax relief on their mortgages. And that’s a political live wire. I’d speculate that any presidential candidate – Republican or Democrat – who ran for 2016 on a “tax the homeowners” platform would have as much chance of winning the nomination as I do.
This is not just an American problem. Look at the IMF’s core policy prescription for the United Kingdom – one good enough that it makes it into Lipton’s speech as well as into the report. The UK should move to a flat rate of VAT on all goods and services, Lipton argues, and use the money to increase benefits.
That would mean imposing a 20% tax on food (raising £16bn or so), and on rent and house construction (another £13bn), while increasing tax on household electricity and gas from 5% to 20% (£5bn). Tax would also go up on books, children’s clothing, tampons, condoms, stamps, charities like Oxfam, and… funerals. Yep – the IMF is proposing a burial tax.
All in all, this would give George Osborne £60bn to play with (table 4), more if he axes universal benefits in favour of greater means-testing (goodbye child benefit, winter fuel allowance etc). This would be enough to double benefits for working-age low earners and the unemployed (table 8.2).
Good news for inequality, maybe, but an act of political insanity. In the UK, we once had a manifesto that was derided as ‘the longest suicide note in history’. Flat rate VAT (for all its merits) would be the shortest. VAT on food? On books? On coffins? Just look at the disaster that befell the British government when it tried to tax Cornish pasties to see how badly this would go wrong.
There are equally obvious political bear traps when you look at the problem from the point of view of low and middle income countries. And the task ahead of them is daunting, given that inequality levels are higher in Asia and the Middle East than in the West, and much higher again in Africa and Latin America. A European minister told me that he was hoping for a post-2015 goal that would inspire the whole world to be as equal as his country by 2030. I shudder to think of the collective apoplexy this prospect would cause in the G77.
No-one is pretending that IMF-branded policies represent the final word on inequality. Oxfam issued a media brief this week, which proposes the UK tackles inequality by cracking down on tax dodgers, implementing a Tobin tax and a tax on land, and increasing the minimum wage.
But what the Fund’s excellent report does is underline the importance of going from high-level aspirations to detailed scrutiny of the policies we want governments to implement to bring inequality down. Only then can we understand how today’s high level debate on inequality will play out in the bruising world of retail politics. It would be good to see Oxfam’s proposals costed and their likely impact on inequality audited, so we can see what they’ll deliver and who’d foot the bill. Without that the politics remain hard to read.
A greater focus on policies and implementation, and the politics of both, is especially important for those arguing that we should stop being “belligerent” about the “unrealistic goal” of ending sub-$1.25 a day poverty and instead build a post-2015 agenda on the the more sustainable political foundations that inequality offers.
Sure, we have an ‘emerging consensus’ that something needs to be done to bring inequality down. But will that consensus hold when publics around the world, and assorted lobbyists, get a better sense of what that something looks like?
Last week saw Oxfam’s big new report on inequality, timed to coincide with WEF in Davos, garnering a huge amount of attention in the media – even attaining a rebuttal from the American Enterprise Institute.
The report was also the subject of Tim Harford’s column in the FT’s weekend edition. Tim takes a somewhat sceptical view, observing that while “the thrust of Oxfam’s argument is that in a lot of countries, the gap between the incomes of the rich and poor is widening” – which he accepts – the report underplays the wider context: for the world as a whole, income inequality appears to be falling (“which is why it’s so baffling that Oxfam has jumped in here feet first”).
I agree with Tim that the data show incomes rising a lot for most people in developing countries from the late 1980s onwards, whereas they’ve remained stagnant for middle classes in developed countries – c.f. this superb graph from Branko Milanovic (posted here a couple of months back), which shows relative change in incomes for each percentile over the period 1988-2008.
But I have to admit I’m befuddled as to why Tim should be baffled on why Oxfam’s taking a strong position on inequality. Here are four reasons why.
First, while it’s true that many people in developing countries have been catching up in relative terms, let’s not lose sight of just how far they have to go in absolute terms. For all the focus on the travails of the ‘squeezed middle’ in the North and for all the breathless commentary about emerging economy rates of growth, China’s GDP per capita is still only $6,091 – compared to $38,514 in the UK, $41,514 in Germany, and $49,965 in the US. It’s a little early to be hailing a new global age of egalitarianism just yet.
Second, Milanovic’s graph also shows that the incomes of the very poorest didn’t rise at all over the period 1988-2008. That’s not to denigrate the real achievements of the MDG period: halving poverty seven years ahead of the MDG deadline was no small feat. But as David Steven and I noted in our paper on the ‘business as usual’ outlook on poverty to 2030 for the Post-2015 UN High Level Panel, the people still remaining in poverty will be much harder to reach than those who escaped poverty in the MDG era.
They’ll be increasingly concentrated in fragile states (or parts of them), often in the absence of a functioning government, and frequently at risk of violence or displacement. They’ll tend to be in geographically or politically marginalised communities – the places, ethnicities, or castes that are at best neglected, at worst actively discriminated against or repressed. “Getting to zero” on poverty by 2030 – the likely headline target of the post-2015 development goal framework – will be much harder than halving it by 2015.
Third, while the incomes of developing country middle classes are catching up in relative terms with developed country middle class incomes, the incomes of the global rich are powering ahead – and that’s before we even consider wealth, which is where inequalities get really spectacular.
Tim raises an eyebrow about Oxfam’s headline stat, that the richest 85 people on Earth control the same amount as the poorest half of the global population, accusing Oxfam of “sophistry” given that the poorest people have less wealth than his toddler son: he has zero wealth whereas poor people have negative wealth, i.e. their debts outweigh their assets. But, he goes on, that argument takes no account of e.g. earning potential. Which is a fair point in one sense: I and most readers of this blog have mortgages and hence negative wealth, but it’s manifestly absurd to bracket us in with people who live on less than a dollar a day.
Fair enough. But it’s still the case that the global distribution of wealth is utterly skewed. So it’s a bit of a stretch to call Oxfam, or Credit Suisse (from where Oxfam’s, and my, data comes) of “distortion” on the basis of his toddler argument – I defy anyone to come up with data showing that the global distribution of wealth between rich and poor people (as opposed to countries) is becoming more equal.
Finally, we ought also to consider the global distribution of risk, as well as income and wealth. You might reasonably expect that as emerging middle classes in developing countries have become better off, they’ve also become more secure. But not necessarily.
True, more people have escaped poverty since 2000 than ever before. Yet the members of this ‘breakout generation’, whom you can find in large numbers in any of the rapidly expanding cities of the global South, are increasingly finding themselves playing a high stakes game of snakes and ladders: while they are finding new opportunities to improve their lot, they are also encountering all kinds of new risks that could halt their progress – or push them back into poverty.
To start with, they’re particularly vulnerable to any slowdown in national growth rates – something that now appears to be happening in many emerging economies that initially proved largely immune to the effects of the financial crisis and Great Recession. They’re also much more likely to be working in insecure, informal, or low-paid employment, all of which affect young people in particular.
On top of that, they rely on urban infrastructures that risk buckling under the strain of rocketing demand: you don’t have to spend long in a city like Addis Ababa or Karachi to see how overstretched systems for providing water, sanitation, electricity, or transport are. They’re also in the front line of the impacts of growing resource scarcity, particularly in the form of price spikes or inflation in the cost of fuel and food. They’re heavily exposed to the social strains of high rates of inequality, and usually lack access to safety nets or social protection systems. And increasingly, they also face the rise of trans-boundary shocks ranging from financial and economic crises through to accelerating climate change impacts.