Should Equity Be a Goal of Economic Policy?

• Author: IMF Staff
• Position: This article was prepared by staff of the IMF's Fiscal Affairs Department

During periods of economic expansion, people see their incomes rise and living standards improve. Even in good times, however, an unfortunate few may be left behind. When and how should governments intervene to ensure not only that the size of the pie increases, but that everybody gets a fair share?

SINCE the beginning of the 1990s, global output has risen by more than 3 percent annually, and inflation has slowed in most regions. Some groups and individuals have done better than others, however, and income disparities have grown in many countries, developed as well as developing. If economic growth and equity do not always go hand in hand, how should policymakers respond? This is one of the most pressing issues facing policymakers today.

The importance of equity

Different societies have different perceptions of what is equitable, and these social and cultural norms shape the policies they will adopt to promote equity. Although there is a consensus that extreme inequality of income, wealth, or opportunity is unfair and that efforts should be made to raise the incomes of the poorest members of society, there is little agreement on the desirability of greater income equality for its own sake or on what constitutes a fair distribution of income. Equity issues are especially complex because they are inextricably intertwined with social values, but economic policymakers need to devote greater attention to them, for a number of reasons:

* Some societies may view equity as a worthy goal in and of itself because of its moral implications and its intimate link with fairness and social justice.

* Policies that promote equity can help, directly and indirectly, to reduce poverty. When incomes are more evenly distributed, the number of individuals below the poverty line decreases. Equity-enhancing policies, particularly investment in human capital, can, in the long run, boost economic growth, which, in turn, has been shown to alleviate poverty.

* Increased awareness of the discrimination suffered by certain groups because of their gender, race, or ethnic origin has focused attention on the need to ensure that these groups have adequate access to government services and receive fair treatment in the labor market.

* Many of today's policies will have an impact on the welfare of future generations, which raises the issue of intergenerational equity. For instance, the provision of very generous pension benefits to current retirees could be at the expense of tomorrow's retirees-an important issue in many transition and industrial countries.

* Policies that promote equity can increase social cohesion and reduce political conflicts. To be effective, most policies require broad political support, which is more likely to be forthcoming when the distribution of income is seen as fair. However, macroeconomic adjustment that entails growth-enhancing structural reforms may increase unemployment and worsen inequality in the short run. In such circumstances, it is critically important to have well-targeted social safety nets to shelter the consumption levels of the poor.

Growing inequality

The degree of income inequality varies greatly from region to region. It is greatest in Latin America and sub-Saharan Africa, and lowest in Eastern Europe; other regions fall between these two extremes. In Latin America, the average Gini coefficient-the most commonly used measure of inequality, with 0 representing perfect equality and 1 representing total inequality-is almost 0.5. The average Gini coefficient in sub-Saharan Africa is slightly lower, but there is considerable variation among countries. Income inequality has a regional dimension in both Africa and Latin America-average incomes are significantly higher in urban areas than in rural areas.

In recent years, income inequality has been increasing in a large number of countries. This increase has been most striking in the transition economies, where the average Gini coefficient had been around 0.25 until the late 1980s; by the mid-1990s, it had risen to more than 0.30. While this may not appear to be a large increase, it is quite significant for the short period being assessed. Gini coefficients...