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Inequality is bad for economic growth, says IMF

February 27, 2014

Phillip Inman Economics correspondent



The International Monetary Fund has backed economists who argue that inequality is a drag on growth, in a discussion paper that has also dismissed rightwing theories that efforts to redistribute incomes are self-defeating.

The Washington-based organisation, which advises governments on sustainable growth, said countries with high levels of inequality suffered lower growth than nations that distributed incomes more evenly.

Backing analysis by the Keynesian economist and Nobel prizewinner Joseph Stiglitz, it warned that inequality could also make growth more volatile and create the unstable conditions for a sudden slowdown in GDP growth.

In what is likely to be viewed as its most controversial conclusion, the IMF said analysis of various efforts to redistribute incomes showed they had a neutral effect on GDP growth. This last point is expected to dismay rightwing politicians who argue that overcoming inequality robs the rich of incentives to invest and the poor of incentives to work and is counter-productive.

The paper, written by Jonathan Ostry, deputy head of the IMF's research department, and economists Andrew Berg and Charalambos Tsangarides, comes after several years of heated debate over the path that developed and developing countries' economies have taken since the financial crash and whether their recoveries are sustainable.

Anti-poverty charity Oxfam welcomed the report, saying it shows "extreme inequality is damaging not only because it is morally unacceptable, but it's bad economics".

It added: "The IMF has debunked the old myth that redistribution is bad for growth and demolished the case for austerity."

It is 18 months since the IMF published its controversial view that government cuts to public-sector spending were having a larger detrimental effect than previously thought. The paper, written by its chief economist, Olivier Blanchard, sparked denials in London and Brussels where calls for austerity were strongest.

The IMF's report supported analysis by Keynesian economists such

as the Nobel

prizewinner Joseph Stiglitz



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Source: Guardian (UK)


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