I attended some meetings in the IMF in Washington recently to discuss the impact the economic crisis is having on fairness within societies, and in particular the impact of the type of measures the IMF recommends to countries to help them get, or keep, their finances in order. In the past the IMF has been criticised for imposing programmes that focussed simply on balancing a country’s books, and ignoring the impact on jobs, equality or growth.
Everyone understands, of course, that the poorer people are, the more they depend on the Government to pay for their basic health, educational and other needs. So the poorer people are, the more it is in their interests that Governments are, and remain, solvent, because insolvent Governments cannot help anybody. An insolvent Government cannot provide any healthcare, education , or unemployment assistance.
But the IMF is increasingly coming to realise that, in helping countries back to solvency, it also has to take account of the social impacts of the inevitable austerity measures it proposes.
Badly designed programmes, that cause undue social hardship, undermine essential political support. If some groups suffer much more than others, or if inequality is increased, that makes it harder to restore financial health quickly. The IMF has to design its proposals so that they allow the economy to return to growth as soon as possible because growth increases tax revenues, and that helps balance the books.
I was told that the IMF has recently set up a “Jobs and Inclusive growth” working group to work out how best to ensure that fairness and growth are incorporated into austerity programmes.
A PARADOX…..INEQUALITY HAS BOTH REDUCED, AND INCREASED
Inequality WITHIN most countries has increased in recent years, although inequality BETWEEN countries has dramatically reduced .
Inequality between countries has become less because emerging economies are catching up, and economic growth has at last returned to Africa .
In some senses, growth in poor countries has contributed to inequality in richer countries because has led to additional demand for the limited amount of food and fuel available in the world This has driven up prices, which in turn has added to problems for less well off consumers in traditionally better off countries .
There are some exceptions. In Brazil, inequality has reduced because the Government has transferred cash direct to families on condition that they send their children to school. This has reduced poverty, and dramatically increased duration of school attendance from an average of four, to an average of nine, years by each Brazilian child.
In contrast, despite the enormous strides forward by everybody, inequality has greatly increased in China. Other developing countries spend more on indiscriminate fuel subsidies that are enjoyed by rich and poor alike than they spend on health services.
Income inequality has many causes.
There is a “celebrity “effect. A firm will pay extra to recruit a high flyer from a rival firm, and that adds to inequality.
Certain specialised skills can command premium pay rates.
Incentive schemes boost production, but they also add to inequality.
But too much inequality undermines the consensus on which a successful capitalist economy rests. These are issues that the IMF understands and this should help countries find the right balance for their own countries.