Lagarde: Traditional arguments about inequality are wrong

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From Christine Lagarde's op-ed in the Boston Globe today:

The traditional argument has been that income inequality is a necessary by-product of growth, that redistributive policies to mitigate excessive inequality hinder growth, or that inequality will solve itself if you sustain growth at any cost.

Based upon world-wide research, the IMF has challenged these notions. In fact, we have found that countries that have managed to reduce excessive inequality have enjoyed both faster and more sustainable growth. In addition, our research shows that when redistributive policies have been well designed and implemented, there has been little adverse effect on growth.

Indeed, low growth and high inequality are two sides of the same coin: Economic policies need to pay attention to both prosperity and equity.

The referenced paper is: Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides. Redistribution, Inequality, and Growth. IMF Working Paper. 2014.

Other recent work on the subject

In an earlier speech, Lagarde's growth recommendations were:

  1. Macroeconomic stability
  2. Smarter fiscal policy: "clamping down on tax evasion, removing unfair tax relief, reducing high labor taxes, relying more on conditional cash transfers, and freeing up resources by reducing energy subsidies"
  • Policies that "strike a balance between promoting greater equality and preserving strong incentives to compete, innovate, and invest"
  • Reforms in education, health care, labor markets, infrastructure, and financial inclusion.

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