How to tackle rising inequality in G20 countries

Income inequality has been rising in a majority of G20 economies, in some of them significantly. This rising trend in inequality has more recently started to focus attention on policies to promote a more inclusive pattern of growth. This shift in attention has also been motivated by increasing evidence from recent research that rising inequality may be harmful to economic stability and growth. Not only can rising inequality undermine longer-term growth prospects, but it can also hurt growth in the short to medium term by weakening aggregate demand.

A key element of the current G20 agenda is the strengthening of policies to boost economic growth. All G20 countries prepared, and peer reviewed, growth strategies last year, which were finalized and released at the G20 summit in Brisbane. These strategies contained specific macroeconomic policy and structural reform commitments to lift growth. These strategies did not pay any explicit attention to the inequality issue. However, this year, this issue is getting attention. The G20 countries are reviewing the growth strategies prepared last year to make adjustments in response to changes in the economic outlook and to address the policy gaps that remain. One area that is receiving particular attention in this context is the strengthening of policies to foster more inclusive growth. Countries have been asked to include in their review of growth strategies an assessment of how the Brisbane growth strategies would affect inequality and what more needs to be done in terms of additional policy actions to promote inclusive growth. This process is underway, and is being supported by technical inputs from international organizations, including the World Bank. The revised growth strategies will be finalized in time for submission to the next G20 summit in Antalya in November this year.

Preliminary analysis shows that the major policy actions that the G20 countries committed to in their Brisbane growth strategies, overall, may have the effect of helping to reduce inequality. However, the inequality-reducing impact is likely to be limited, especially compared to the scale of the increase in inequality and the challenges it poses. There is a clear need to strengthen the policy framework to foster more inclusive growth.

Discussions of the policy agenda to reduce inequality often quickly and reflexively turn to redistributive fiscal policies, which in most cases can be controversial. However, there is a substantial outstanding reform agenda that should be less controversial, as it comprises policies that can simultaneously promote growth and reduce inequality. Such synergistic, win-win policies address inequality of opportunity and help broaden participation in the process of growth, such as those that improve access to markets, level the playing field for firms large and small, build human capabilities, and remove barriers to job creation. The table below provides some examples of such policies that countries can consider as they review the agenda for promoting strong and inclusive growth. Specific policy needs and priorities of course differ across countries.

Redistributive policies have an important role to play as well. These can pose trade-offs between growth and equity. However, “efficient redistribution” is possible. Well-designed tax and transfer policies may not be harmful for growth—or at least can minimize the efficiency cost of redistribution. The key lies in making sound policy choices. Fiscal policies can be designed to promote equity and growth while ensuring fiscal sustainability. Again, while the specific policy contexts differ across countries, the table below provides some examples of policy actions that countries can consider.

The promotion of inclusive growth and shared prosperity is a central element of the analytical work and policy dialogue conducted by the World Bank country teams in partner countries. In the context of the ongoing G20 work on growth strategies and inclusive growth, we asked the Bank country teams working on the G20 emerging economies the following question: what are the three key policy actions the country can consider to reduce inequality and foster inclusive growth? The policy priorities identified by the Bank country teams fell predominantly in the category of synergistic policies that can be simultaneously pro-growth and pro-equity. These included business environment reforms, infrastructure development, improvement of access to education and training, labor market reforms, and enhancement of women’ participation in the labor force. Tax and transfer measures were identified as well, with a particular focus on well-targeted safety nets.

Note: This simple schematic and the examples shown are meant to be illustrative rather than exhaustive.

There is also a role for international policy coordination. This is clearly needed to maintain and enhance progress on openness. Rising inequality can produce a backlash against globalization and technological change. This has to be addressed in a careful and imaginative way. The response should not be to constrain globalization and technological change, as these are among the fundamental drivers of economic growth. Rather, policy should seek to address some of the effects of these forces, such as through education and retraining programs and more flexible labor markets to enable workers to adjust, coupled with well-designed safety nets to support workers during the adjustment process. International cooperation is also needed on tax matters, especially taxes relating to capital, given the mobility of capital and capital income.

This article is published in collaboration with The World Bank’s Let’s Talk Development Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Zia Qureshi is currently Director of Strategy and Operations in the Office of the Senior Vice President and Chief Economist of the World Bank.

Image: A boy touches a 45-metre long wall lighted by colour rays. REUTERS/China Daily.