IMF's win-win scenario: when re-distribution equals growth

Posted on Tuesday 11th March 2014

Professor Karen Rowlingson, Director of the Centre on Household Assets and Savings Management (CHASM), writes for 'The Conversation':

Karen RowlingsonSince the 1970s, economic orthodoxy has suggested that inequality might be the price worth paying for economic growth. Following a new report from the International Monetary Fund (IMF), the evidence is mounting to the contrary.

Previous studies have found that inequality is linked to lower levels of growth, but the argument has been that the treatment, rather than the disease, was to blame. In other words, countries suffering social inequity are more likely to follow redistributive policies and these policies are more harmful to growth than inequality itself.

It remains a persuasive argument. The coalition government in 2013 cut taxes on income over £150,000 from 50% to 45% following claims that this might create disincentives for entrepreneurs to create wealth.

However, Joseph Stiglitz, among others, has argued that inequality may cause greater economic volatility and, in fact, drag down economic growth. The IMF report provides further evidence to support the Stiglitz view while also providing a clear guide to the complex relationships between inequality, redistribution and growth.

One of the key points is that not all redistributive policies were created equal. They vary in type and effectiveness, and some prove very positive, directly, for economic growth. For example, taxes on activities which have negative consequences – such as excessive financial risk-taking by the rich – can prove very beneficial, as can measures such as cash transfers which support social investment.

Read the full article in 'The Conversation' 

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