Buy
Aleš Bulíř
The relationship between income inequality and economic policies is of considerable interest to both academics and policymakers. It is also a complex one: macroeconomic policies, structural changes, and redistributive interventions affect income distribution, while income inequality considerations can influence the selection of policies and reforms as well as their implementation and degree of success. The increasing focus on poverty alleviation in IMF-supported programs has further highlighted the need for a better understanding of the nexus between macroeconomic policies and income distribution. This article provides an overview of IMF research in this area.
The relationship between macroeconomic stabilization and inequality is of keen interest to the IMF’s member countries. Stabilization policies can contribute to reductions in inequality by, for example, lowering inflation and reducing the volatility of the exchange rate and other macroeconomic variables. However, a highly unequal income distribution could vitiate the ability of countries to institute sustainable stabilization programs. For instance, rising inequality in some transition economies may have undermined the necessary consensus required to implement market-oriented reforms. Dolinskaya (forthcoming) arrives at this conclusion for Russia, especially given that the redistribution system seems to amplify regional inequality. In contrast, redistributive policies that mitigated the early-transition increase in inequality may have been crucial for the success of Poland’s “big bang” reform strategy (Keane and Prasad, forthcoming).1 Research is under way to analyze in more detail the relationship between inequality and the durability and success of IMF-supported stabilization programs.2
IMF staff have made significant contributions to the literature linking various economic and structural policies with income distribution. While some papers have developed theoretical models, the bulk of IMF research in this area has been empirical in nature, emphasizing both cross-country and country-specific studies.3
Given the core areas of IMF policy advice, of particular interest have been variables measuring inflation and the volatility of financial variables. Inflation is often regarded as a regressive tax that disproportionately affects the poor. The panel data evidence suggests that inflation indeed worsens income inequality, but inflation variability appears to have an even stronger impact than the level of inflation (Bulíř and Gulde, 2000).4 Modeling nonlinearities in this relationship differently, Bulíř (2001) finds inflation to be significant for income inequality in cross-country regressions: bringing inflation down from a hyperinflationary level reduces inequality significantly, while further declines bring negligible reductions.5
Evidence from a growing body of IMF research suggests that only well-targeted fiscal policies can affect income inequality (and poverty) and that, in the absence of such a targeted mechanism, it may be better to rely on the trickle-down effect of economic growth on inequality.6 In addition, the success in affecting inequality depends on the scope of redistribution policies and their execution. Tanzi (1998) argues that the primary avenue for government to affect income inequality is through its contribution to human capital creation.7 Schwartz and Ter-Minassian (1995) claim that there is not necessarily a trade-off between redistributive and efficiency goals of expenditure policies in developing countries, especially over the medium term.8 Unfortunately, in most of these countries, tax and transfer policies have often not been used effectively to reduce income inequality, in part owing to difficulties associated with the introduction of progressive taxation and targeted redistribution.9
IMF Staff Papers
Volume 49, Issue 1
Symposium on Forecasting Performance
- Introduction
- Francis X. Diebold
- Copycats and Common Swings:
- The Impact of the Use of Forecasts in Information Sets
- Giampiero M. Gallo, Clive W.J.
- Granger, and Yongil Jeon
- Comparing Projections and
- Outcomes of IMF-Supported
- Programs
- Alberto Musso and Steven Phillips
- Further Cross-Country Evidence
- on the Accuracy of the Private
- Sector’s Output Forecasts
- Grace Juhn and Prakash Loungani
Purchasing Power Parity and the Real Exchange Rate
Luciano Sarno and Mark P. Taylor
Tax Policy, the Macroeconomy, and Intergenerational Distribution
Ben J. Heijdra and Jenny E. Ligthart
Money Demand in Mongolia: A Panel
Data Analysis
Torsten Sløk
The Distribution of Fixed Capital in the Multinational Firm
Alexander Lehmann
IMF Staff Papers, the IMF’s scholarly journal, edited by Robert Flood, publishes selected high-quality research produced by IMF staff and invited guests on a variety of topics of interest to a broad audience, including academics and policymakers in IMF member countries. The papers selected for publication in the journal are subject to a rigorous review process using both internal and external referees. The journal and its contents (including an archive of articles from past issues) are available online at the Research at the IMF website at http://www.imf.org/research
The country-specific character of redistribution is difficult to capture in cross-country studies. Individual country case studies are particularly relevant for economies that have undergone severe crises, transition economies, and other economies with pronounced economic changes. Clements (1997) finds that Brazil has been one of the most unequal societies—in part owing to its history of hyperinflation—and income distribution remained unequal after the Real Plan of July 1994, because social expenditures primarily benefit upper-income groups.10 Baldacci, De Mello, and Inchauste (2002) provide evidence of the impact of the Tequila crisis on Mexico’s income distribution.11 Several papers have addressed the distributional impact of the profound socioeconomic changes undergone by transition economies.12 Most authors agree that, while labor earnings disparities widened in the initial stages of transition, consumption and income inequality remained subdued in countries with well-targeted redistribution policies (Keane and Prasad, 2001). In contrast, those countries that failed to establish a system of targeted transfers have seen a significant widening of consumption and income inequality.
Finally, case studies of countries with pronounced economic changes, for example, China, the Philippines, and Uganda, support the notion that redistribution policies and their impact are country specific. China’s case is particularly interesting: although regional inequality has widened, the urban-rural income distribution appears to be more equal in fast-growing, coastal regions than in those with little or no trade, and these changes are reinforced by China’s redistribution policies.13 In contrast, income distribution in Philippines has been remarkably stable over the last two decades and little of the “trickle-down” effect of economic growth has been observed.14 In Uganda, income inequality increased during the 1989–95 period of structural adjustment, owing to a lack of a formal social safety net benefiting the poor.15
In research on the OECD countries, Vanhoudt (1997) reports that economic fundamentals explain three-quarters of inequality variation across countries and over time. Cole and Towe (1996) find that the dynamics of the U.S. distribution of income is dominated by cyclical income fluctuations. Decressin (1999) analyzes the Italian redistribution system and concludes that it is not an efficient redistributive and risk-sharing mechanism.16
The debate on income inequality in low-income countries is generally overshadowed by concerns about the dynamics of poverty: unlike income inequality, poverty reduction is considered to be a desirable goal of government policies.17 IMF research on this topic has focused on the linkages between macroeconomic policies, market-oriented reforms, and poverty. On the one hand, there appears to be no medium-term trade-off between stabilization and poverty; that is, fiscal expansion financed with more inflation today does not permanently lower poverty.18 On the other hand, the evidence suggests that fiscal tightening in the context of IMF-supported structural adjustment programs is associated with increased social spending and less poverty (Gupta, Dicks-Mireaux, Khemani, McDonald, and Verhoeven, 2000).19
Books from the IMF
Silent Revolution: The International Monetary Fund,1979–89
James M. Boughton
This volume—fourth in a series of histories of the institution—covers a decade when the IMF came of age as a participant in global financial markets and as a development partner for emerging economies. Part One of the book describes how the IMF conducted surveillance of macroeconomic and exchange rate policies, how the annual World Economic Outlook became a major tool for analyzing policy effects, and how the IMF supported policy coordination efforts of the major industrial countries. Part Two analyzes the debt crisis and explains how the IMF worked with indebted countries and their creditors to develop a strategy for resolving the crisis. Part Three examines IMF lending to developing countries, including how several countries fell into arrears to the IMF and how the tactics for dealing with the problem progressed. Part Four examines how the institution evolved throughout the 1980s and how it raised the financial resources to do its work.
Full-text versions (or, in some cases, detailed summaries) of books published by the IMF are available online at the Research at the IMF website at http://www.imf.org/research. Follow the link to IMF Publications.
Books from the IMF
The Modern VAT
Liam Ebrill, Michael Keen, Jean-Paul Bodin, and Victoria Summers
Probably the most important tax development of recent years has been the remarkable rise of the value-added tax (VAT), now a central component of the tax systems of over 120 countries. In particular, the VAT has recently become a key component of tax reform in many developing countries. The IMF Fiscal Affairs Department has played a major role in this process, and this book—the first comprehensive treatment of the tax for over a decade—sets out the lessons of its unique experiences.
The book is aimed at academics, policymakers, practitioners, and others with an interest in this increasingly important tax. Starting with an assessment of the key principles of the VAT, and new evidence on its effectiveness, the book covers the central issues in both policy design (such as the optimal rate structure, treatment of financial services and other problem areas) and administration (including audit, refund processing, and organizational structures).
Full-text versions (or, in some cases, detailed summaries) of books published by the IMF are available online at the Research at the IMF website at http://www.imf.org/research. Follow the link to IMF Publications.
