Tapu Misa: IMF at last sees perils of inequality

Have the high priests of neo-liberalism finally woken up to the dangers of inequality? The signs are promising.

Up until now, defenders of the free market and the privileged elite have dismissed rising inequality as anything to get worked up about.

Inequality might matter, some say, but not as much as poverty - a view that makes them look as if they care but turns a blind eye to the link between the two.

Others argue that inequality doesn't matter because it's an inevitable, even desirable, feature of a dynamic, free market economy in which the super-talented "wealth creators" among us are rightly rewarded for their brilliance - an argument which conveniently ignores the stratospheric bonuses paid to the financial speculators who pushed their companies and the global economy towards financial disaster.

Oh sure, a former World Bank head economist and Nobel Prize-winner such as Joseph Stiglitz might go on about the evils of inequality, as he does in a just-out Vanity Fair article, "Of the 1 per cent, by the 1 per cent, for the 1 per cent", but what would he know? The man is clearly an incorrigible lefty.

Stiglitz warns that while Americans have been watching protests against oppressive regimes in the Middle East that concentrate huge wealth in the hands of an elite few, they seem not to have noticed similar concentrations of wealth and power in their own democracy, where 1 per cent of Americans take nearly a quarter of the nation's income, and use their money in profoundly anti-democratic ways, buying a more plutocrat-friendly political environment in which lower taxes and under-regulation are the order of the day.

"Wealth begets power, which begets more wealth," writes Stiglitz.

Or, as the noted United States Supreme Court jurist Louis Brandeis wrote a long time ago: "We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both." The perils of extreme inequality have always seemed like a no-brainer to me. But when economists at that bastion of neo-liberal economics, the IMF, start taking inequality seriously and talking about social inclusion, I get hopeful.

In a just-released analysis, staffers Andrew Berg and Jonathan Ostry suggest inequality is hazardous to economic growth and may have contributed to the global financial crisis.

"Some dismiss inequality and focus instead on overall growth - arguing, in effect, that a rising tide lifts all boats. But ... [when] a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss."

They say it's a mistake to separate analyses of growth from income distribution, and sustainable economic reform and growth is possible only when the benefits are widely shared. "Helping to raise the lowest boats may actually help to keep the tide rising."

Last week, IMF boss Dominique Strauss-Kahn echoed their findings. Globalisation, while it had lifted hundreds of millions out of poverty, "had a dark side - a large and growing chasm between rich and poor".

Inequality, he said, might have been one of the "silent" causes of the economic crisis.

"On the eve of the crisis, inequality in the United States was back to its pre-Great Depression levels. Like the Great Depression before it, the Great Recession was preceded by an increase in the income share of the rich and a growing financial sector. In these circumstances, borrowing could have acted as a safety valve for ordinary people to increase living standards - but on borrowed time."

As Joseph Stiglitz writes, trickle-down economics may be a chimera, but trickle-down behaviourism is very real.

Strauss-Kahn, who favours more financial sector reform and a tax on financial activities, calls for more attention to be paid to inequality and social cohesion.

He says the recent unrest in the Middle East has highlighted the need to look at the distribution of income rather than just overall growth. In Egypt and Tunisia, for example, strong growth had masked the serious inequality within those economies.

"The tendency was to downplay inequality, to see it as a necessary evil on the road to riches. But the crisis and aftermath [has] fundamentally altered our perceptions".

Strauss-Kahn said the "Washington Consensus", preaching that privatisation and deregulation "would unleash growth and prosperity", "is now behind us".

Strauss-Kahn notes that the IMF has been here before. As one of its founders John Maynard Keynes wrote in 1933: "The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success.

"It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn't deliver the goods. In short we dislike it, and we are beginning to despise it."