Refers to socioeconomic policies aimed at affecting the way in which the nation’s wealth and income are divided among its population; can also be applied at the global level with respect to distribution of wealth and income among nations.
Redistribution has a positive impact on aggregate output and economics growth. Income concentration at the high end is associated with a low marginal propensity to consume (MPC). Since wealthier people save a high proportion of their income and since saving is the equivalent of production not purchased, wealth and income inequality has a negative effect on aggregate output and growth. An economy with a good redistribution policy would have a higher MPC and higher growth than one without such policies. John Maynard Keynes was one of the main proponents of this idea. From an economic point of view, greater equity as a result of redistribution policies is not a moral objective, rather it is a necessity. Hence, redistribution not only directly helps the low-income groups, but also secures long-term economic growth and development for the economy as a whole.
Since wealth is an accumulated store of possessions and financial claims, it is also considered to include claims on entitlement to resources for livelihood. Amartya Sen identifies the availability approach to provisioning, which focuses on the problem from the production side, and the entitlement approach, which analyses the malfunction distribution that became responsible for the inadequacy of purchasing means. Sen advocates a shift in the entitlement system, both in the form of social security programs and through systems of guaranteed employment at adequate wages.
Access to well-paying jobs is not only a function of the aggregate level of output and employment, but is also the product of education and opportunity. In 1944, Gunnar Myrdal presented his theory of cumulative causation and his theory of poverty enforcing poverty, in which he argued that it is probable that children will tend to retain the status of their parents. Thus, without redistribution policies, inequalities are expected to persist and have negative effects on aggregate output, employment, and growth.
The idea of cumulative causation became the basis of Myrdal’s writings on international development economics. He argued that instead of convergence between rich and poor countries, there might rather be divergence in terms of economic development. Because of cumulative causation processes, poor countries are more likely to become poorer as they heavily rely on exports of primary products with deteriorating terms of trade, while rich countries enjoy economies of scale.
In addition, balance-of-payment disequilibrium between rich and poor countries generates debt crisis and further international inequality, thus undermining output and employment at the global level. To offset these imbalances between debtor and creditor nations, there have been several proposals for reform of the international financial structure. After World War II, there were two plans: one by Keynes and the other by Harry D. White. Both were based on a multilateral payment system that permitted the balance-of-payment disequilibrium to be offset by short-term funding. Even though Keynes’s proposal was oriented toward achieving global full employment, it was not implemented. Instead, the White plan was adopted and served as the basis for the creation of the International Monetary Fund.
Paul Davidson’s International Monetary Clearing Unit (IMCU) proposal is also based on Keynes’s plan. It features an international unit of account and ultimate reserve asset for international liquidity. The IMCU plan ensures that the burden of current-account adjustment does not fall on the debtor, which avoids impoverishing indebtedness and depressions. This plan is a form of redistribution at the global level that guarantees liquidity and stability to the international community through an international lender of a last-resort institution. Although redistribution is socially and economically desirable, it remains politically challenging at both the domestic and global levels.
Zdravka Todorova and Fadhel Kaboub
See also: Keynes, John Maynard.
Davidson, Paul. International Money and the Real World. 2nd ed. New York: St. Martin’s Press, 1992.
Keynes, John Maynard. The General Theory of Employment, Interest, and Money. New York: Harcourt, Brace, 1936.
Myrdal, Gunnar. An American Dilemma: The Negro Problem and Modern Democrary. Twentieth Anniversary Edition. New York: Harper & Row, 1962/1944.
Sen, Amartya. Poverty and Famines: As Essay on Entitlements and Deprivation. Oxford: Clarendon, 1980.