In an IMF blog on 23 July 2024 the IMF Director General noted that long periods of slow growth can increase inequality, but this outcome can be avoided if the correct policies are pursued.

Referring to the upcoming meeting of the G20 finance ministers and central-bank governors, the blog notes that the governments are facing a sobering outlook. The latest update to the IMF’s World Economic Outlook indicates that global growth is forecast to reach 3.2% in 2024 and 3.3% in 2025, but this is still below the 3.8% average global growth from the year 2000 up to the pandemic years. The medium-term growth projections remain low.

The world economy has been resilient while subjected to a succession of shocks including the pandemic and the current geopolitical situation. However, the task now is to ensure that the world does not fall into a long period of low growth which would increase poverty and inequality. Extreme poverty already increased as a result of the pandemic, and the long-term decline in global inequality has halted.

An IMF background note on the effects of slow growth on inequality, compiled for the G20, indicates that periods of economic stagnation that continue for four years or more tend to increase income inequality within countries by almost 20%, which is much higher than the increase caused by a recession. In periods of slow growth, the decrease in job creation and sluggish wage growth increase structural unemployment. The share of national income flowing to workers decreases. Governments are operating within restricted fiscal space and have only limited scope to reduce the inequality. One result can be public discontent with economic integration and technological progress. The correct policies therefore need to be pursued to escape the trap of low growth and make progress in reducing inequality.

The decline in economic growth has in recent decades been driven by lower productivity, an important reason for which is that labour and capital are not flowing to the most dynamic businesses. Measures are required to promote competition and improve access to finance, boosting productivity. Bringing more people into the labour force can counter the negative effects from aging populations.

Open trade has proved to be an engine of growth and employment. Over the past forty years, real per capita income has doubled globally, and more than a billion people have emerged from extreme poverty. In the same period trade as a share of gross domestic product increased by half. Governments should therefore avoid closing off their economies.

Fiscal policies support the most vulnerable members of society. In developing countries, a significant part of tax revenue collected is paid out in debt-servicing costs, and the countries also face a growing list of spending demands. A people-focused fiscal policy can reduce fiscal risks while limiting the negative impact on growth and inequality, Countries need to focus on raising revenue, improving governance, and protecting social programs.

IMF research indicates that developing countries could raise additional tax revenue up to 9% of GDP. To do this they must take a progressive approach to taxation, ensuring that people who can afford to pay more taxes contribute their fair share. One way of achieving this is through more taxation of capital income and property. Also improvements in governance, increasing transparency and reducing corruption, are necessary for trust in the system.

Social spending programs can reduce inequality, through measures such as school meals, unemployment insurance, and pensions. Targeted cash-transfer programs can support vulnerable groups. IMF research indicates that strong redistributive policies in a growing G20 economy would reduce inequality by between 1.5 and 5 times more than weaker policies.

The IMF is working on a package of reforms to its lending framework. These include changes to the Poverty Reduction and Growth Trust, the concessional lending instrument for low-income countries. Also the surcharge policy is being reviewed to ensure that financing can be provided to members at affordable rates.