Tackling inequality and inclusive growth is an economic necessity for the country
After Pope Francis, it is now the turn of the International Monetary Fund (IMF) to raise concerns about high income inequality. Dubbed as “Francis the Marxist”, for his tweet “Inequality is the root of social evil”, the Pope has been raising issues of inequality and its consequences. The latest discussion paper by IMF not only supports the ethical and moral concerns of high inequality, but also goes on to give economic evidence that high inequality may actually be hurting growth. Coming from an institution which not so long ago projected the virtues of market and “trickle down” theory, the latest report has brought the issue of inequality back on its agenda.
In a nutshell, the report shows that an increase in the income share of the poor and middle classes by 1 percentage point raises growth by 0.38 percentage points in a country over five years. On the other hand, an increase in the income share of the rich by 1 percentage point reduces growth by 0.08 percentage points. These may be small numbers for a country growing at more than 7%, but they strike at the heart of the economic wisdom perpetuated by IMF about trickle-down theory, which argues that the benefits of growth trickle down to the poor. If at all, the evidence suggests a trickle-up rather than trickle-down effect.
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