IMF study: “Income inequality is stunting economic growth”

For many years there has been a small portion of the rich and powerful that has been telling us that income inequality is a good thing, with one particular journalist suggesting that arguments against it are simply a ‘jealousy trope’ from the left-wing. However, a recent IMF study has shown that if governments want to increase growth, than they should concentrate on helping the poorest 20% of its population.

Income inequality has been labelled by some as ‘the defining challenge of our time’ and many factors have aided its rapid rise to the forefront of the public consciousness. And yet, despite the rising coverage the subject has received over the past years, the gap is ever growing.

In January, an Oxfam report claimed that 1% of the world population held half the global wealth - the irony of this revelation coming at the World Economic Forum at Davos, is not lost on most. More recent figures - just 5 months later - claim that, in Great Britain alone, the ‘top 1%’ now control closer to 55% of the country’s wealth.

Quantifying wealth is not always an easy thing but there are several sources citing that income inequality between the rich and poor is becoming more extreme by the day. Although many economist have supported the idea that income inequality has caused certain developed economies to stagnate, none have been taken seriously.

So, the news that the International Monetary Fund, arguably the world’s largest global monetary corporation, has carried out a report to support a more balanced and egalitarian approach to the economy, could be a significant step forward.

The IMF study was carried out over a range of advanced, emerging and developing countries and showed that “if the income share of the top 20% increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20% is associated with higher GDP growth”.

This dismissal of the model of ‘trickle-down’ economics that has been so popular with western government regimes of the past few decades is also significant and, given enough support, could force world leaders to change their approach to stimulating growth - one that has been largely focused on leniency towards the financial sector and multi-national corporations.

Although the IMF report does mirror the opinion shared by many, including the Fund’s managing director, Christine Lagarde, that income inequality must be tackled, the study fly’s in the face of some of the IMF’s recent actions. Most notably is the stance that has been taken on Greece and their recent negotiations for a bail-out fund.

The IMF have been notoriously hard-lined about the economic reforms that Athens must take to access the loan that could prevent Greece from falling into default, and perhaps falling out of the Eurozone. More bizarrely still is the fact that Lagarde herself said that there will be ‘no period of grace’ should the Greek government be unable to honour it €1.6 billion loan repayment at the end of this month.

In summary, as encouraging as it is to see one of the world’s most influential global organisations fight for increased income equality, the report must be taken with a pinch of salt. For many years some of economics brightest minds have been demanding a fairer economy for all and for many years their warnings have been ignored.

The current political and economic climate is regrettably built to support the wealthiest in our society and it will take a lot more than a scathing report to bring around real change.