How reducing inequality boosts economic growth

Global inequality - World Economic Forum infographic
From the World Economic Forum website by a deputy director at the IMF, no less:

Over the long haul, countries that have managed to limit excessive inequality are countries that enjoy both faster growth and more sustainable growth. The latter is particularly important: what enables poorer countries to close the frontier with industrialized nations is not the ability to initiate growth, but rather the ability to sustain reasonably high growth over periods of many years, or even decades. Many things can help here – openness to trade, openness to foreign direct investment, political stability, and macroeconomic stability (keeping inflation and fiscal deficits moderate, and avoiding boom-bust credit cycles) – but what we are learning is that one critical ingredient in this mix, a key part of the pantheon as it were, is keeping inequality under control…

On average – over many countries and across many time periods – the redistributive fiscal (tax and transfer) policies that (advanced and developing) countries have pursued have not been harmful. A key objection to redistributive policies is that they damage economic efficiency – but the damage on average appears to be small unless redistribution is extreme. And the resulting increase in equality has a remarkably robust protective effect on both the level and the sustainability of economic growth.

Redistributive policies, unless they are extreme, seem not to carry the disincentive effects that have worried some people. And, by improving equality, they actually help sustain growth and support other policies and self help – allowing the less well off to get a better education or better access to health and proper nutrition. Indeed, in a number of advanced countries that have successfully kept net (post tax and transfer) inequality at relatively low levels, both redistribution and policies aimed at promoting inclusion and reducing market (pre-tax and transfer) inequality have played a salient role.


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