Is the IMF getting serious about inequality? Looks like it

November 4, 2010

     By Duncan Green     

Is the IMF going socialist? Hardly, but on Monday Dominique Strauss-Kahn, its Managing Director, gave a pretty extraordinary (and welcome) speech, entitled “Human Development and Wealth Distribution”. Here are a few excerpts:

“Adam Smith—one of the founders of modern economics—recognized clearly that a poor distribution of wealth could DSKundermine the free market system, noting that: “The disposition to admire, and almost to worship, the rich and the powerful and…neglect persons of poor and mean condition…is the great and most universal cause of the corruption of our moral sentiments.”

This was over 250 years ago. In today’s world, these problems are magnified under the lens of globalization….. Globalization had a dark side. Lurking behind it was a large and growing chasm between rich and poor—especially within countries. An inequitable distribution of wealth can wear down the social fabric. More unequal countries have worse social indicators, a poorer human development record, and higher degrees of economic insecurity and anxiety. In too many countries, inequality increased and real wages stagnated—failing to keep up with productivity—over the past few decades. Ominously, inequality in the United States was back at its pre-Great Depression levels on the eve of the crisis.

Inequality may have actually stoked this unsustainable model. In countries like the United States, borrowing seemed to allow ordinary people to share in the rising prosperity. Like the Great Depression before it, the Great Recession was preceded by an increase in the income share of the rich, a growing financial sector, and a major rise in debt. Inequality could also be behind the Chinese export-oriented model, since solid domestic demand needs a healthy middle class, while a low exchange rate goes hand-in-hand with a low real wage. Of course, the unbalanced pattern of growth had a variety of causes, but we would be foolish to ignore the distribution of wealth.

Inequality goes against notions of fairness and solidarity, but it also threatens economic and social stability. This is especially true in poorer countries. Inequality can dampen economic opportunity, by preventing the poor from accessing the financing needed to pursue profitable investments. It can divert people toward unproductive activities. It can make countries more prone to adverse shocks—with fewer people able to dip into savings during bad times, the decline in growth is larger.

The invisible hand must not become the invisible fist.

An immediate task is to end the scourge of unemployment. The crisis threw over 30 million people out of work, and in the coming decade, more than 400 million young people will be looking for their first job. So clearly—growth is not enough, we need growth for jobs. And jobs are not enough, we need decent jobs—so that all can benefit from the rising tide.

We need labor market policies to focus on job creation. We need opportunities for all to prosper, through better education and training, as well as help for small businesses.

Tax and expenditure policies can support fairness and economic stability. Adequate social safety nets are essential, including decent unemployment benefits. We should also make sure that workers have adequate bargaining power, especially if this lies at the root of rising wage inequality. Collective bargaining is important. But we must avoid dual labor markets that create stark divisions between protected insiders and excluded outsiders.

The last great period of globalization—in the decades leading up to the First World War—held a lot of promise, but it ultimately came crashing down with thirty years of brutal war and economic devastation. It happened once, and it can happen again. The recent crisis was a wake-up call. We avoided a second Great Depression, and we learned many lessons. But we still have a long way to go.”

This comes on top of other interesting signs of a changing culture at the Fund, e.g. its relatively progressive stance on international financial taxes. Anyone would think DSK wanted to be President of France or something…….

[h/t Steve Price-Thomas]