Redistributive policy

Inequality and macro politics

Inequality and macro politics

Opening remarks at the 2022 Global Empowerment Meeting by Deputy Director General Antoinette M. Sayeh
At the Harvard Kennedy School Center for International Development

April 28, 2022

As prepared for delivery

Thank you very much David. It is a pleasure to participate in this event with such distinguished panelists.

Current situation of inequalities

As you noted, rising inequality had already been a concern for some time. And sadly, the pandemic has exacerbated pre-existing inequalities both within countries – with young informal workers and women most affected – and between countries – with low-income and fragile countries lagging even further behind than others. previously. Russia’s invasion of Ukraine has placed another crisis upon a crisis. Beyond the appalling humanitarian impact, it is also a massive setback for the global economy.

Rising food and energy prices affect poor households more because they spend more of their income on these two items. Low-income developing countries have less room to react – the pandemic has already reduced their fiscal space and they now face high debt levels and tighter financial conditions.

Just last week, at our spring meetings, we discussed these issues with economic policymakers around the world. Indeed, concerns about the amplification of inequalities and social tensions were at the heart of our discussions.

Immediate policy priorities

So what should countries do?

In the short term, policymakers face two complicated trade-offs: First, reducing inflation is key—it is after all a tax on the poor. Central banks need to take decisive action to get there, but they have to while also safeguarding the recovery, a difficult balancing act.

The second trade-off concerns fiscal policy. Like policymakers begin to replenish fiscal reserves it is essential to do so during also ensure continued support for vulnerable people, particularly in the context of rising food and energy prices.

Governments can square this circle by designing policies anchored in credible medium-term fiscal strategies. They need to mobilize additional revenue, while taking due account of the distributional consequences of tax reforms. And they must streamline and reprioritize spending, while providing well-targeted support to vulnerable people.

Of course, many countries may not be able to do this on their own. In cases where the current environment creates large fiscal and external financing needs, where the room for maneuver is limited, in particular due to unsustainable indebtedness, and where a rapid adjustment would be too costly, the international community will have to intervene , helping to restructure debt, maintain access to liquidity and provide financing and grants.

Long-term policy priorities

In the longer term, it will be important to implement reforms and build strong institutions that increase the resilience of countries shock and tackling the underlying drivers of inequality. There are, of course, various aspects of inequality – income, gender, health, economic opportunity – all of which are intertwined and mutually reinforcing. Decision makers will therefore need a comprehensive approach.

First, let’s look tax policy which requires focusing on both pre-distributive and redistributive policies. Pre-distribution policies can help level the playing field before people enter the labor market, thanks to the provision of public education, health services and basic infrastructure. And redistributive policies helping to correct inequalities, for example, through progressive income taxes and social assistance to help people cope with life’s events.

Second, the fight against inequality must also focus on gender inclusive policies, because closing gender gaps can boost overall growth and reduce income inequality. In advanced economies, this means helping women balance work and family through parental leave, affordable childcare, and tax systems that don’t penalize second earners. In low-income countries, the focus should be on improving access to health, education, finance and investing in infrastructure such as clean water and transport .

Third, kiss digitization and tackle climate cash can also offer opportunities to reduce inequalities. Digitization can indeed facilitate access to finance, social support and provide income support. And shifting to climate-resilient infrastructure is critical because the poor are often more vulnerable to extreme weather events.

Of course, policies must also guarantee worker support as they move from shrinking to expanding sectors. Investing in high-quality training, reskilling and education will be key to unlocking the potential of green and digital economies and spreading their benefits more widely, including to vulnerable segments of our society.

These are all critical areas for enabling economic stability and inclusive growth and therefore central to IMF surveillance, lending and capacity building activities.

Allow me to stop here.