This webinar, organized jointly by the Fiscal Affairs Department of the IMF and the JVI, featured the presentation of the book “How to Achieve Inclusive Growth” co-edited by Valerie Cerra, Barry Eichengreen, Asmaa El-Ganainy and Martin Schindler and recently published by the Oxford University Press and the IMF. 

This book is highly topical given the recent rise in concerns about inclusive growth, or the lack thereof. Income inequality within many countries (especially advanced and emerging economies) has risen steadily since the 1990s. These trends appear to have been reinforced by increased macroeconomic volatility. The world economy has suffered consecutive shocks over the past 15 years, and the buffers that may have protected the poor in the past may have shrunk significantly, allowing new shocks to have a more severe impact on the vulnerable. The COVID-19 pandemic has already disproportionately affected the most vulnerable, especially women and children. The climate crisis also hits the poor disproportionately, since they suffer comparatively more from natural disasters, for example, because they have fewer means to adapt. The most recent shock – the war in Ukraine – has had an immediate negative economic impact at a broader regional and global level, particularly affecting the poor due to lower economic growth and higher inflation, including commodity and food prices. What might make the situation even more challenging this time, e.g. in contrast to the outbreak of the COVID-19 pandemic, is that macroeconomic policies are increasingly facing constraints. As a result, fewer policy options are likely to be available to achieve more inclusive growth – precisely at a time when more inclusiveness would actually be needed to improve a country’s resilience to the various shocks in rapid succession. 

Against this background, Valerie Cerra, Assistant Director in the IMF’s Fiscal Affairs Department, presented the latest thinking on the topic during this webinar. She laid out a comprehensive and integrated framework for designing policies that could make growth more inclusive and sustainable under current circumstances. The key takeaways from Valerie’s presentation and the ensuing discussion can be summarized as follows. First, the existence of sound public institutions serves as a first principle for implementing well-functioning macroeconomic policies to avoid fragility and reduce inequality. Second, despite shrunken fiscal policy space post-Covid, funds could be generated for pro-inclusion structural measures by improving revenue mobilization (e.g., through enhancing tax capacities) and spending efficiency (e.g., through better governance). Tax and expenditure policies can also help improve inclusive growth. For example, progressive income taxes and value-added-taxes are options but need to balance impacts on equity versus growth, whereas measures such as broadening the tax base, reducing tax evasion, and taxing economic rents and market externalities can potentially improve both equity and growth.  Third, strategies to tackle the climate crisis are fundamental to inclusive growth and environmental sustainability. Adequate carbon pricing and the removal of subsidies for 'brown' energy could be beneficial in setting the right incentives for green transition, creating new job opportunities, and expanding fiscal space to be used for inclusion policies. Fourth, monetary policy is seen less as a direct tool to improve inclusiveness, but is key to overall macroeconomic stabilization, which is also important for containing inequality given the scarring effects typically observed after crises. Fifth, a stronger focus on financial inclusion (including access to finance and financial literacy) could also improve a country's resilience to economic shocks by easing financial constraints on productive firms and improving households’ risk management. Sixth and finally, international integration can contribute labor, capital, and technology transfers as input factors. While trade is identified in the book as beneficial for both increasing growth and reducing inequality and poverty, the corresponding effects of financial globalization appear to be less clear for inequality, depending on the nature and riskiness of the financial flows examined.

Markus Eller, Senior Economist, JVI