The share in total income of the wealthiest 1% grew from 10.7% in the United States in 1980 to 20.2% in 2014 according to the World Wealth and Income Database, while the share of the middle class fell significantly during the same period, from 19.9% to 12.5%. It is noteworthy that increasing inequality in the US began during the “neoliberal wave” in 1980s. Given the IMF and the OECD’s strong support for neoliberal policies during that period, the sincerity of these institutions’ recent fears about rising inequality could be questioned. Are they really ready to “tackle inequality”?
Evolution of share of 1% highest- and 50% lowest-income in total national income in United States between 1980 and 2014
Source: World Wealth and Income Database
“God laughs at men who deplore the effects of which they cherish the causes.” (Bossuet, 1688)
As underlined by Sergei Guriev, Danny Leipziger and Jonathan D.Ostry in a recent article, “Some reforms – such as those promoting impartiality and efficiency of legal institutions – are good for growth and equity (in this case, equality of opportunity)”. But “incidence results for deregulation of product and labor markets are more mixed” and “when it comes to financial deregulation and the liberalization of international capital flows, there are clear equity-efficiency trade-offs: they boost growth, but they also tend to increase inequality.” In an earlier paper, Ostry & al. (2016) concluded that “Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion”. The article focused on two main policies: capital account liberalization and “fiscal consolidation” (austerity), which are proved to:
- Have no clear benefits in terms of increased growth;
- Have large costs in terms of increased inequality;
- Hurt the level and sustainability of growth.
Thus, the policy agenda defined in IMF structural adjustment programmes during the past decades, OECD policy recommendations, and WEF calls for liberalization have encouraged economic policies that have reinforced inequality and then weakened growth. While recognizing its past errors can be considered virtuous, we are still waiting for a systematic approach to inequality when these institutions build policy agenda in the future.
How to tackle inequality? Take the ESG route!
Evolution of average distance to best in class* relative to Beyond Ratings’ Inequality score by financial peers group
*distance to best in class: best country is at 100%, worst at 0%.
Source: Beyond Ratings
Along this path, part of the financial sector could serve as inspiration. Indeed, for several years already, a considerable amount of research has been conducted through the construction and use of “ESG” performance indicators (Environmental, Social and Governance). Taking a closer look at these ESG indicators could allow these institutions to have objective measures of trends in terms of inequality, but also of adaptation to climate change. For example, the chart above indicates the continuous decreasing performance of the United States in terms of equality, measured by distance to the best-in-class in Beyond Ratings’ inequality score (considering GINI Index, poverty rate and share of 10% highest income in total national income) between 1999 and 2017.
Regarding the evolution of ratings of financial peers, it seems evident that “AAA” countries have a higher and improving performance to tackle inequality than other groups. Thus, far from leading to exclude best countries in terms of creditworthiness, inequality performance can be used as an advanced indicator of financial performance.
So, in the next few years, will ESG performance improvement become a condition for IMF structural adjustment programs?
Thomas Lorans, Economist