In December 2010, Tunisia erupted in popular protests that brought a swift end to its political regime. This came as a surprise to many, including at the IMF, given the country’s sound macroeconomic indicators and the progress it had made in its reform agenda. The events in Tunisia fueled the “Arab Spring,” a demand across the region for greater economic equity. In September 2011, the protest against inequality jumped shores with the launch of the Occupy Wall Street movement—their slogan was “We are the 99 percent.”
In Washington, in meetings with top staff, the IMF managing director asked in essence: “Why did no one see this coming?” And, more challengingly, management asked how the IMF could be part of the conversation on issues that were rapidly becoming front-page news. The IMF—as an international financial institution with a mandate to promote growth and greater global integration—was not obviously equipped to take on issues such as rising inequality and the demands of the 99 percent.
But our reading of the newspaper headlines reminded us of research we had done on how inequality can be a trigger for derailing a country’s growth. Our response to the managing director was to suggest that we draw implications from this research to help IMF country teams better assess a country’s growth performance, particularly the sustainability of that performance. Management’s encouragement led to the first in the series of papers that underpin the research described in this book. Our finding that inequality leads to fragile growth brought the study of inequality squarely into the domain of the IMF’s mandate to promote sustained growth in its member countries.
After that first paper, we branched out on two research fronts. If inequality was detrimental to growth, it was important to figure out both what causes inequality and what could be done to redress it. Surprises awaited us on each front.
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.”
We are grateful to many who have helped us in undertaking the research that underlies the book: our coauthors—Laurence Ball, Edward F. Buffie, Davide Furceri, Siddharth Kothari, Daniel Leigh, Charalambos Tsangarides, Yorbol Yakhshilikov, Luis-Felipe Zanna, and Aleksandra Zdzienicka; our research assistants—Hites Ahir, Zidong An, Jun Ge, and Suhaib Kebhaj; and colleagues at many institutions who commented on drafts on the key papers— Kaushik Basu, Olivier Blanchard, Sam Bazzi, François Bourguignon, Jamie Galbraith, Doug Gollin, Stephen Jenkins, Aart Kraay, Paul Krugman, Andy Levin, Branko Milanovic, Martin Ravallion, Dani Rodrik, Mark Shaffer, Frederick Solt, Joe Stiglitz, and Larry Summers. While the research was carried out as part of our day jobs, the task of putting together the book took up evenings and weekends: we conclude by thanking our families for putting up with the loss of time together.