Income inequality is hurting the potential for growth worldwide, and the best way to tackle that is through helping the poor and the middle class, according to a new study by the International Monetary Fund (IMF).
“Widening inequality is hardly a debated issue,” Kalpana Kochhar, Deputy Director of Strategy, Policy and Review Department at IMF said on Monday.
“The gap between the rich and the poor is at the highest level in decades in advanced countries, and inequality is also rising in major emerging markets,” she added.
In releasing the report, titled Causes and Consequences of Income Inequality: A Global Perspective, Kochhar said inequality trends have been more mixed in emerging markets and developing countries, with some countries experiencing declining inequality, but pervasive inequities in access to education, health care, and finance remain in areas such as Latin America, Middle East and Sub-Saharan Africa.
The report suggested that policymakers focus on the poor and the middle class because they are the major driving force of GDP growth.
The authors of the study refuted the main idea of "trickle down" economic theory, that economic benefits provided to those at upper income levels will indirectly benefit those at lower income levels as resources inevitably "trickle down" to them. According to the IMF study, a one percent increase in the income of the richest 20 percent corresponded to a nearly one percent decline in GDP growth over a five year period. In contrast, an increase in the income share of the poorest 20 percent corresponded to a more than one-third percent increase in GDP growth.
“The bottom line is that focusing on the poor and the middle class is actually good for growth, and this means ending poverty could also boost growth prospects for all,” Kochhar said.
She said that is “a fairly powerful message” for policymakers and researchers around the world.
“There is no one-size-fits-all approach to tackling inequality,” the report said. It urged governments to make appropriate policies based on the underlying drivers and country-specific policy and institutional settings.