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IMF: Deficit reduction policies increase inequality

by Peter Bakvis

IMF: Deficit reduction policies increase inequality

 

New research produced by the IMF confirms that "fiscal consolidation" (i.e. deficit reduction) policies of the sort currently applied by several European governments at the behest of the IMF and EU increase inequality and unemployment.

IMF researchers have also determined that capital account liberalization, which the IMF pressed its members countries to carry out until it changed its policy last year, has been associated with increased inequality.

The results of the IMF research department’s new papers on inequality were presented in Washington on Friday.

One of the papers, "The Distributional Effects of Fiscal Consolidation", has been posted on the IMF’s web site.

The results of the research on the distributional effects of austerity, which studied the impact of 173 episodes of fiscal consolidation in 17 OECD countries during 1978-2009, are unsurprising and confirm other studies.

But the finding that spending-based consolidation has a stronger inequality-inducing effect than tax-based consolidation is particularly ironic since the IMF has insisted that European countries should achieve deficit reduction overwhelmingly or exclusively through spending cuts. (See for example the IMF’s recommendations to France in early June).

The paper found that fiscal consolidation resulted in higher Gini coefficients and a lower wage share in national income as well as higher unemployment in the long run.

The report includes the usual provison that "the views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy".

That may be obvious in this case, although some might argue from available evidence of the Fund’s lending conditions and country-level policy advice, as opposed to rhetorical pronouncements about inclusive growth, that it pursues increased inequality as a policy objective.

The IMF’s yet-to-be-released research paper on the distributional effects of capital account liberalization examined 224 reforms in 182 countries during 1970-2010.

According to Friday’s presentation, the authors found that "significant increases in capital account openness are associated with increases of inequality as measured by the Gini coefficient and with declines in the labour share of income".

The authors explained that the association could arise through an increased likelihood of financial crisis in countries that liberalized capital accounts, and because freer capital flows could put downward pressure on wages.

The IMF has modified its attitude to capital account liberalization over the past several years and published a "new institutional view" on capital controls late last year (see the IMF’s policy change).

The new approach supports capital controls in some circumstances and represents an evolution from the Fund’s earlier policy that all countries should fully and unconditionally liberalize their capital accounts without delay.

 

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