Recent statements about inequality by the IMF have attracted media interest, but are they saying anything new?
Last week saw the International Monetary Fund (IMF) and World Bank hold their annual autumn meetings at which they discuss big strategic issues facing the global economy. One strand in these discussions related to the publication of the IMF’s Fiscal Monitor which contained analysis of the relationship of fiscal and social policy to inequality.
Media coverage of this in the UK focussed on the IMF’s finding that taxing high earners could help deal with growing levels of inequality inside some of the richest countries, while not damaging growth. This is seen as a major diversion from standard economic orthodoxy that high taxes harm growth by providing the rich with a disincentive to work hard and invest. The UK media latched on to it in the context of UK party political debates and particularly Jeremy Corbyn’s focus on increasing taxes for top earners. It is also seen as a side-swipe at Donald Trump’s plans to give significant tax cuts to the very wealthy in the US.
What does the IMF actually say about inequality?
The Fiscal Monitor and the associated blog post considered three sets of policy responses to inequality. The first was modestly increasing the progressivity of income taxes in countries where there is scope for this, but the other two were a muted but favourable consideration of Universal Basic Income (UBI) and the familiar promotion of carefully designed public spending on health and education.
Despite the headlines the Fiscal Monitor was hardly replete with radical policy suggestions. Moreover, the IMF has been focussing – at least discursively – on the importance of tackling high levels of in-country inequality for some time now. It is almost an annual fixture at January’s Davos meeting of the World Economic Forum for Christine Lagarde – the IMF’s Managing Director – to give a speech on the matter. The Fund has also published several reports over the last few years on the potential to engage in greater redistribution without harming growth, on the relationship between fiscal (and other) policy and inequality and on the causes and consequences of greater income inequality.
In short: keen IMF watchers will not be surprised by anything in the Fiscal Monitor, regardless of the media fanfare.
Rhetoric and action?
In the same week, Oxfam launched a report considering IMF policy advice in selected member states. The report looks at IMF policy advice to a range of ‘pilot’ countries that the IMF suggests are the main focus for its innovative work on inequality. The report suggests that while there is movement in the right direction, there is a gap between the IMF’s rhetoric and the detailed content of its policy advice to member states.
These findings echo our own research, which suggests that IMF policy advice to member states is not yet so focussed on reducing inequality as the high level policy rhetoric would suggest. We concluded that the IMF may be serious, at least at a senior level, about reducing inequality, but that there may be a series of institutional and political reasons that explain the gap between rhetoric and practice. Indeed, in response to commentary about our findings, the IMF re-stated its commitment to reducing inequality and the steps it was taking to realise this.
Given the evolving agenda at the IMF, ongoing research is needed to track the progress being made by the Fund on this issue. For example, this might be explored in the Fund’s Independent Evaluation Office work programme.
The importance of a longer and wider view
However, in our view, investigating the extent to which the IMF is implementing its own policy rhetoric is only one issue of importance thrown up by this discussion. A range of others are also important.
One of these is a wider discussion about how and why some policy ideas and designs get taken up by the IMF and other international organisations, while others do not. It begs a focus on the political economy of international policy discourse and a better understanding of how material interests shape the success of some policy ideas relative to others. For example, might the deeply held beliefs, values and technical knowledge of professional economists be one potential drag on the swifter adoption of policy ideas to reduce inequality inside the IMF? Christine Lagarde has previously hinted as such when she said that “I got a strong backlash from economists” about her promotion of inequality as a strategic theme for IMF work. But of course, resistance may also come from member states themselves, both on the Board of Governors and as recipients of policy advice. Research by Jacqueline Best, Alex Kentikelenis, and Catherine Weaver, among others, helps to illuminate these issues.
Second, why is the Fund interested in inequality now? We suggested that this is the result of the present state of world market integration. Simply put; world market expansion has created a series of feedback effects – inequality being one of them – that are seen by international organisations like the IMF as potentially destabilising. This might explain why several international organisations have become more interested in systemic risk management in recent years. Inequality is one driver of the risk of political and social destabilisation; climate change is another. The World Economic Forum’s annual risk report is illustrative of these concerns. Financial Times commentator Martin Wolf drew attention to the same concerns this week.
This raises a third set of issues. Do the policies that feature in the high-level rhetoric – such as those discussed in the Fiscal Monitor – really add up to an inequality reducing package of measures? ‘Pro-poor’ spending on health and education is straight out of the ‘neo-liberal play-book’; spending designed to improve the capacity of the poor to contribute to productivity growth. UBI and limited changes in taxation might be thought of more as limiting the further growth of inequality, rather than reducing existing levels. More research is needed to scrutinise the policies promoted by the Fund in its high level rhetoric for their inequality-reducing potential.
A new politics of inequality?
So, taking all this together, to what extent is the IMF’s interest in inequality reflective of a change in underlying organisational purpose?
If one of the central functions of the IMF is to stabilise an expanding global economy, then it should be no surprise that it adopts a relatively conservative approach to containing or reducing inequality. None of this is to say that those individuals that are promoting the inequality agenda in domestic politics or international organisations are not genuine in their concerns. Rather, these concerns are gaining organisational prominence because inequality, like climate change, threatens to undermine continued stable expansion of the world market.