Programs to redistribute income good for growth: IMF

Income inequality can fuel economic and political instability, said economists

The International Monetary Fund has come out in support of the fight against income inequality, with Fund economists saying income redistribution efforts can strengthen economic growth.

Plunging into a debate over the gap between rich and poor that is fuelling political battles from the United States to Brazil to Thailand, economists from the Fund yesterday said there is already general agreement that inequality can fuel economic and political instability.

But do policies to redistribute income help or hurt growth? asked economists Jonathan Ostry, Andrew Berg and Charalambos Tsangarides.

The answer, they said, is a net gain, even if there is an initial cost to an economy from taxes and transfers which aim to close an income gap.

"While considerable controversy surrounds these issues, we should not jump to the conclusion that the treatment for inequality may be worse for growth than the disease itself," they said in a research paper, "Redistribution, Inequality, and Growth", and an accompanying blog comment.

"Equality-enhancing interventions could actually help growth."

The trio cited the benefits of taxes on activities of the wealthy that could hurt an economy, like excessive financial speculation, and payments to the poor to support their children going to school.

Much of the thinking has been that, even if a large wealth gap is bad, that the cures of taxes and wealth transfers to correct the problem usually hamper growth.

"Many argue that redistribution undermines growth, and even that efforts to redistribute to address high inequality are the source of the correlation between inequality and low growth," they said.

"If this is right, then taxes and transfers may be precisely the wrong remedy: a cure that may be worse than the disease itself."

But the authors said that experience across a number of countries has provided "remarkably little evidence" for that conclusion.

Indeed, they said, "faster and more durable growth seems to have followed the associated reduction in inequality."

"The average redistribution, and the associated reduction in inequality, seem to be robustly associated with higher and more durable growth."

The authors are cautious to avoid saying the effects of redistribution are positive in every case or situation, and note that extreme efforts can have a bad outcome.