On the first question—the causes of inequality—we were expecting that, as conventional wisdom had it, the main underlying causes would be trade and technology. Indeed, these two forces do contribute to inequality. But the research showed that inequality is due as well to the choice of macroeconomic policies and structural reforms, on which the IMF itself provides advice to countries. When governments tighten their belts, for instance, through spending cuts or tax increases, inequality goes up. The message is not that such policies should be abandoned, but that countries and the IMF should be aware of these distributional impacts and design their policies to lower such impacts.
On the second question—what to do about inequality—conventional wisdom again led us to expect that steps to redress inequality would end up hurting growth. But we found that redistribution, unless extreme, does not hurt growth. It is good to try to address some of the root causes of excessive inequality, for instance through more equal access to health care and quality education. But these policies cannot work overnight and, even in the longer run, may still not reduce inequality as much as countries may desire. Hence governments should be more open to the use of redistribution as a cure for excessive inequality.
We are gratified that our research findings have made a difference in how the IMF views inequality and in how many people outside the IMF now view the institution. Far from thinking of inequality as removed from the IMF’s concerns, our colleagues are now being encouraged to mainstream it in their work—and there is much greater emphasis today in the day-to-day work of the IMF on confronting excessive inequality and protecting vulnerable groups. And many outside the IMF are starting to see what was previously concealed—the human face of the institution. As Christine Lagarde recently remarked: “Reducing high inequality is not just morally and politically correct, it is good economics.”