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IMF highlights need to combat inequality

The latest International Monetary Fund’s Fiscal Monitor report has focused on inequality and ways of reducing both its causes and effects. Among several fascinating ideas it discusses, universal basic income stands out.

Although increased global integration and technological progress have generated economic growth and falling global inequality and poverty, rising inequality in advanced economies, in conjunction with job insecurity and stagnating real incomes for a segment of the population, have led to growing public backlash against globalization — that is the verdict of the IMF in its latest Fiscal Monitor report.

The new report focuses on how fiscal policy can help governments address high inequality while minimizing potential trade-offs between efficiency and equity.

Good Fences Make Good Neighbors an installation by Ai Weiwei at Washington Square Arch in New York City

"Good Fences Make Good Neighbors" an installation by Ai Weiwei at Washington Square Arch in New York City

"While some inequality is inevitable in a market-based economic system as a result of differences in talent, effort and luck, excessive inequality could erode social cohesion, lead to political polarization, and  ultimately, lower economic growth. But when is inequality excessive?" the report asks.

In advanced economies, direct taxes and transfers reduce income inequality on average by about one-third, with three-quarters of this reduction achieved through transfers, it states.

In developing economies, fiscal redistribution is much more limited, reflecting lower and less progressive taxation and spending and greater reliance on regressive indirect taxes.

Taxes and death: life's only certainties

The report notes that progressive taxation and transfers are key components of efficient fiscal redistribution. "At the top of the income distribution, marginal income tax rates that increase with income levels can achieve greater progressivity," adding that while various instruments can enhance progressivity at the bottom of the income distribution.

Advanced economies with relatively low levels of progressivity in their personal income tax (PIT) may have scope for raising the top marginal tax rates without hampering economic growth, the report notes.

Demonstrators at an American Family Association event to protest taxes in Santa Monica, California

Demonstrators at an American Family Association event to protest taxes in Santa Monica, California

"Different types of wealth taxes can also be considered. Emerging markets and low income developing countries should focus on gradually expanding the coverage of the PIT and raising indirect taxes — including excise taxes on luxury goods and consumption items that generate negative externalities, such as fossil-fuel-based energy, alcohol, and tobacco — to generate funding for progressive spending."

Meanwhile, capital income is distributed more unequally than labor income and its share in total income has risen over recent decades, the report notes, adding that it is also often taxed at a lower (and declining) rate.

Universal basic income

The idea of a universal basic income (UBI) has received growing attention in academic, policy, and public discourse, and several countries are experimenting with different forms.

While some countries already have some components of a UBI in place (such as universal child benefits and social pensions), no country has yet adopted a UBI that covers its entire population.

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Finland: Testing the universal basic income

Proponents argue that a UBI can address poverty and inequality more effectively than means-tested programs in the presence of information constraints, high administrative costs, and other obstacles (including social stigma) that limit the take-up of benefits.

Opponents highlight that universality implies an unnecessary leakage of benefits to higher-income groups and a decline in labor force participation.

In developing economies, adoption of a UBI may be an option for governments wishing to strengthen their safety nets in the short term, the IMF argues.

"However, to be effective and preserve fiscal sustainability, such an expansion would need to be financed through efficient and equitable increases in taxes or cuts in spending, such as eliminating universal price subsidies or broadening the consumption tax base, including through taxes on consumption with negative externalities."

The fiscal cost of a UBI would depend on the level at which it is set. If it were set at 25 percent of median per capita income, the fiscal cost would be about 6-7 percent of GDP in advanced economies and 3-4 percent in emerging markets and developing economies, the report notes.

Getting down to the basics

Investments in education and health can help reduce income inequality over the medium term, address the persistence of poverty across generations, enhance social mobility, and ultimately promote sustained inclusive growth, the report states.

Yet despite progress over the past decades, education enrollment gaps remain for certain groups in the population in many countries. 

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Africa needs stability and growth

"Socioeconomic status is still a main determinant of access to education, especially in emerging market and developing economies. Sizable gaps among socioeconomic groups in attending early childhood, secondary, and tertiary education remain in almost the entire developing world.

Primary education gaps have mostly narrowed, but children from families with a disadvantaged socioeconomic status continue to suffer from low access in sub-Saharan Africa and the Middle East and North Africa, and to a lesser extent in emerging and developing Asia and in Latin America and the Caribbean.

Looking after the weakest

In advanced economies, the gap in life expectancy between males with tertiary education and those with secondary education or less ranges from about four to 14 years and has even widened in some countries.

While progress in health coverage has contributed to improvements in health outcomes, significant gaps remain in some emerging market economies and many low-income countries. Increasingly, health outcomes are determined by factors other than health care, including nutrition, education, and healthy behaviors,  particularly in advanced economies.

 The IMF report noted that public health spending can also have a distributional impact by providing financial protection and increasing household consumption.

"Many households fall into poverty because of high out-of-pocket  spending. Public health coverage can help limit out-of-pocket spending and reduce financial exposure to adverse health-related events, which can also free up households from the need to accumulate unproductive precautionary savings."

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India's uneven growth

Gender Inequality

Despite notable advances, gender disparities persist worldwide and are still particularly large in some regions. When indicators like education, health, financial access, and legal rights are taken into account, Europe appears to be the most gender-equal region. Asia and Pacific region and the Western Hemisphere follow, and sub-Saharan Africa and the Middle East remain the regions with the highest gender inequality

"For instance, maternal death and adolescent fertility rates remain particularly high in sub-Saharan Africa. In low-income developing countries, only 9 girls are enrolled in secondary education for every10 boys. With regard to financial services, in South  Asia, only 37 percent of women have an account at a financial institution versus 54 percent of men, and in the Middle East and North Africa, men are twice as likely as women to have an account."

Gender-based legal restrictions that constrain women's economic opportunities are widespread. For example, women are barred by law from specific professions in 79 countries, and in some countries, restrictions impede women's property rights.

In addition to the unequal opportunities, labor market disparities are striking. Women's labor force participation varies from a low of 21 percent in the Middle East and North Africa to more than 63 percent in East Asia and the Pacific and sub-Saharan Africa.

Across OECD countries, the average gender wage gap — calculated as the difference between male and female median wages divided by male median wages — is estimated to be about 15 percent. Among emerging markets, wage gaps vary considerably: and are relatively high in China, Indonesia, and South Africa. Comparatively narrow wage gaps in the Middle East and North Africa are explained by the small share of women in employment.

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