Fair Share

AuthorFrancesca Bastagli, David Coady, <br />and Sanjeev Gupta
Positiona Research Fellow at the London School of Economics; is a Deputy Division Chief and is a Deputy Director, both in the IMF's Fiscal Affairs Department.

Rising income inequality is at the forefront of public debate both in advanced and in developing economies. Globalization, labor market reforms, and technological advances—all of which tend to favor higher-skilled workers—are important drivers of this divergence of fortunes.

Policymakers and commentators alike have expressed deep concern about the economic and social consequences of the persistent, and often sharp, increase in the share of income captured by higher-income groups. Many think reducing income inequality is crucial to promoting more widespread access to economic, social, and political opportunities.

Some inequality is necessary as an incentive for investment and growth, but there is evidence that when the disparity is too great it can stymie growth (see “Equality and Efficiency,” F&D, September 2011). Recently, a number of prominent experts have argued that rising income inequality was an important driver of the financial crisis.

How can public policy address high inequality? In a recent IMF study, we examined global trends in income inequality and the role fiscal—government spending and taxation—policies can play in reducing it.

In advanced economies, fiscal policy has done much to reduce inequality, but protecting its redistributive role is likely to become harder with prolonged fiscal adjustment over the coming decades as many countries try to reduce public debt to sustainable levels.

On the other hand, fiscal policy has done little to redistribute income in developing economies, which do not have the resources to finance redistributive public spending. To reduce inequality, governments in these economies must raise more revenue and develop more redistributive spending instruments, such as public pensions and targeted transfers.

The path of income inequality

To study global trends in income inequality we assembled a comprehensive database on disposable income (that is, how much people have to spend, including social benefits and minus income taxes) in 150 advanced and developing economies between 1980 and 2010. We used the most common indicator of income inequality, the Gini coefficient, to assess changes in income distribution. (The Gini coefficient ranges from zero, when everyone has the same income, to 1, when a single individual receives all the income.)

We found that inequality in disposable income increased in most advanced and many developing economies over recent decades (Chart 1) and that inequality is substantially higher in developing than in advanced economies.

Data are available for a large sample of advanced and developing economies for 1990 to 2005. During this period, inequality increased in 15 of 22 advanced economies and in 20 of 22 emerging...

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