Written by Nick Fillmore   

In what could hopefully lead to a significant change in the nature of Third World development financing, a new research paper from the International Monetary Fund (IMF) admits that the strong pro-capitalist policies at the centre of its development support activities do not work.

Since the 1980s, the IMF has bailed out countries during financial crises. In return, poor countries receiving loans have had to follow strict rules, such as privatizing government resources, deregulating controls to open markets to foreign investment, and restricting what they can spend in areas such as education and health care.

Now the paper, Causes and Consequences of Income Inequality: A Global Perspective, says there needs to be a shift and that greater income equality should become a priority.

“We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the top 20 percent results in lower growth – that is, when the rich get richer, benefits do not trickle down,” says the report.

“To tackle inequality, financial inclusion is imperative in emerging and developing countries, while in advanced economies, policies should focus on raising human capital and skills and making tax systems more progressive,” concludes the report. Wages and living standards for the bottom 20 per cent should be raised, worker protections improved, and environmental standards implemented.

Critics welcome new report

The document was enthusiastically received by critics of the IMF, who have accused the world body of hindering – not helping – development in several poor countries over the years.

The report’s critical analysis also applies to neo-liberal economic policies practiced by most Western governments, including the United States, Canada and several European countries.

"Fighting inequality is not just an issue of fairness but an economic necessity," said Nicholas Mombrial of Oxfam International in response to the report. "And that’s not Oxfam speaking, but the International Monetary Fund."

“By releasing this report, the IMF has shown that 'trickle-down' economics is dead; you cannot rely on the spoils of the extremely wealthy to benefit the rest of us. Governments must urgently refocus their policies to close the gap between the richest and the rest if economies and societies are to grow," said Mombrial.

The practices and policies of the IMF have been controversial for many years.

First of all, critics point to what they consider the undemocratic nature of the IMF. With the United States controlling 16.7 per cent of the votes and Europe and Japan another 25 per cent , developed countries control the body with about 42 per cent of the voting shares.

The rich and powerful countries have used the IMF to force their preferred economic policies on poor countries, even though rich countries themselves did not employ the same strict measures on themselves when they were developing.

Critics strongly object to austerity measures that have been forced upon most of the 60 countries where the IMF has been providing loans.

“Such belt-tightening measures increase poverty, reduce countries' ability to develop strong domestic economies and allow multinational corporations to exploit workers and the environment,” argues Global Exchange, an international human rights organization.

Global Exchange charges that the IMF contributes to poverty instead of alleviating it: “Nearly 80 percent of all malnourished children in the developing world live in countries where farmers have been forced to shift from food production for local consumption to the production of export crops destined for wealthy countries.”

The IMF report bolsters the spectacular research carried out by Thomas Piketty who, in his book Capital in the 21st Century, conducted an analysis of capital going back to the start of the Industrial Revolution. Piketty's key point is that, in an economy where the rate of return on capital outstrips the rate of growth, inherited wealth will always grow faster than earned wealth.
This means that the much-discussed rise of the wealth of the one per cent is not a blip and not an accident.

Change can take a long time

Together, the IMF and Piketty research should influence governments to begin closing the inequality gap between the rich and the rest of society, but policy changes are likely to take some time.

Traditional economists and journalists either picked fights with Piketty over minor points in his best-selling book or ignored him entirely.

While his research didn’t result in any immediate change in economic policies, the findings will likely, in the long term, be a key resource demanding change.

This is not the first time research of this nature has been produced at the IMF. According to the International Business Times the new analysis on inequality "echoes previous IMF research that show that redistributive policies have a positive effect on countries’ economic output."

It’s very likely that the IMF will eventually change some of its policies concerning developing countries. However, change may be slow. The IMF is a huge and complex organization where the wheels grind slowly. Secondly, the Western countries that control the organization tend to be strongly influenced by powerful and wealthy people who benefit from “trickle down” economics. The one per cent will no doubt oppose some changes.
Contact: This e-mail address is being protected from spambots. You need JavaScript enabled to view it