Inequality hurts economic growth while equality helps it, IMF study finds

The finding is somewhat at odds with some of the IMF's policy proscriptions

Jon Stone
Tuesday 16 June 2015 14:58 BST

Higher inequality hurts economic growth while reducing the gap between the rich and poor helps economies grow, an IMF study has found.

Researchers from the International Monetary Fund studied various economies around the world and found that countries where the richest took a disproportionately high share of income tended to grow slower than comparable states.

“If the income share of the top 20 per cent increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down,” the study’s authors found.

“In contrast, an increase in the income share of the bottom 20 per cent is associated with higher GDP growth.”

By contrast, the economists say that raising the income share of the poorest 20 per cent of the population actually helped growth.

“Raising the income share of the poor, and ensuring that there is no hollowing-out of the middle class, is actually good for growth, they noted.

The research looked at a variety of economies ranging from less economically developed economies through emerging economies and advanced western economies. They found similar results in each case.

The report’s authors said public policies enacted since 1970s that included globalisation, reducing top tax rates and undermining trade union rights had disproportionately benefited the richest.

They also said technological change had driven more power in the hands of those who were already wealthy.

The study's findings were originally reported by the Guardian newspaper.

Last year the IMF’s head Christine Lagarde said rising inequality was creating an unhealthy economic atmosphere.

The organisation has also warned that the global economy could be entering a period of "secular stagnation" where the living standards of future generations could be lower than those of the past.

“In far too many countries the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability,” she told the Financial Times at the time.

The IMF’s findings on inequality has sometimes been at odds with its real-life policy prescriptions, however. The organisation is part of the ‘Trokia’ of international institutional creditors insisting that the Greek government impose harsh austerity measures.

Such policies have been blamed for depressed growth and rising poverty in the Mediterranean country.

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