By A.D. McKenzie
Civil society organizations have been arguing in vain for years that combating inequity is not just an ideological position but a practical policy option, and not to adopt it would be fatal for the world economy and for human development. And now at last inequity is becoming a key subject for concern in international financial institutions and among the academics whose theories underpin their operations.
The most recent example of this turnaround is the September issue of the quarterly International Monetary Fund (IMF) journal Finance & Development, whose front cover and 25 of the 56 pages are devoted to a special feature entitled “All for one: Why inequality throws us off balance”.
Jeremy Clift, the director of the journal and head of communications at the IMF, said in his introduction, “We used to think that overall economic growth would pull everyone up. While the rich might be getting richer, everyone would benefit and would see higher living standards. That was the unspoken bargain of the market system.”
Clift, who has a degree from the London School of Economics, added, "But now research is showing that, in many countries, inequality is on the rise and the gap between the rich and the poor is widening, particularly over the past quarter-century”.
Countries that were given IMF loans to solve their liquidity problems had to comply with demands for fiscal adjustments, and this was very often used to justify cuts in social spending, a measure that led to greater inequality.
But as Clift noted in his article, the Organization for Economic Cooperation and Development (OECD), whose 34 members include all the countries of the industrialized North, is now warning that “growing inequality breeds social resentment and generates political instability”.
As long ago as 1998, Social Watch published a special report on the question of equity based on its years of experience researching civil society concerns, and concluded that “Economic inequality erodes social, political and legal” equality, so it is “the most objectionable of all the forms of inequality”. According to the report, “Political equality may […] foster […] economic equality. But it is more probable that the opposite will occur, that economic inequalities will translate into political influence” in the hands of the rich.
This change in the posture of international financial institutions and the experts whose theories underlie their policies coincides with the findings of a study published this year by three psychologists, Shigehiro Oishi, Selin Kesebir and Ed Diener. They reported that although family income in the United States has doubled since 1962, people are no happier because the unequal distribution of wealth has acted as a counterweight.
According to this study, “On average, the people of the United States have been happier in years of greater equity” and less happy in years of greater inequity. The authors say this is because the poor “perceive the world as unfair if only the rich get richer”, and this reduces their confidence in other people.
In an article for Finance & Development by Branco Milanovic, head of the World Bank research group, “Economists are more critical of inequity now than they were before”.
Milanovic asserted that “The view that income inequality harms growth—or that improved equality can help sustain growth—has become more widely held in recent years”.
Milanovic, who has studied economic inequality and poverty since the 1980s, added, “Historically, the reverse position—that inequality is good for growth—held sway among economists.”
In another article in Finance & Development, two experts from the IMF Department of Research, Daniel Leigh and Prakash Loungani, rejected the argument the institution used in the past to justify its austerity measures, namely that “cutting the budget deficit can spur growth in the short term”.
They go on to say that these policies “raise both short and long term unemployment” and this in turn “threatens social cohesion”.
The economist Facundo Alvaredo, of the National Science and Technology Institute of Argentina, went even further in his article when he concluded that “The new data call into question the standard relationship between economic development and income distribution—that growth and inequality reduction go hand in hand”.
