In early October, President Jim Kim of the World Bank rejected “trickle-down” economics and called out the injustice of economic growth being captured by the few. Later, in Lima, at the World Bank/IMF Annual Meetings, International Monetary Fund (IMF) Managing Director Christine Lagarde delivered a strong message to finance ministers across the world: Addressing inequality is a necessity for both economic growth and reducing poverty.
Inequality is not just a problem for rich countries, as the IMF will testify. Africa is a telling example of why relying on growth alone to “trickle down” to the poorest is a mistake: Africa’s growth rate has actually been buoyant in recent years, last year averaging 5 percent. In fact, in its recent regional economic outlook, Sub-Saharan Africa: Dealing with the Gathering Clouds, the IMF shows that sub-Saharan African countries have some of the highest levels of income inequality in the world despite that growth.
Ordinary Africans are evidently not benefiting enough from the spoils of this growth: Fewer than a dozen people on the continent have the same wealth as the poorest 50 percent. Future poverty trends are similarly worrying: The absolute number of people living in extreme poverty in sub-Saharan Africa could increase by over 50 million between 2011 and 2030 to 470 million people, according to the Overseas Development Institute.
Gathering Clouds also signals a pessimistic economic forecast for Africa, in that growth is expected to drop to 3.75 percent this year and 4.25 percent in 2016. In the context of a waning economy, addressing inequality is even more important. In fact, the IMF finds “that progress toward reducing income and gender inequality could generate significant growth dividends, by close to one percentage point annually if inequality was reduced to levels observed in fast-growing Asian emerging countries.”
Many of the policy prescriptions in Gathering Clouds warrant being taken seriously by African governments—and indeed by the IMF itself.
African governments must give special attention to fiscal policies that redistribute income and opportunity
Tax systems in Africa are some of the most regressive in the world, often unfairly penalizing the poorest individuals while effectively subsidizing the wealthiest, as well as multinational companies. For example, indirect taxes such as value-added tax (VAT), which fall disproportionately on poor people, make up on average 67 percent of tax revenues in sub-Saharan Africa.
Governments and the IMF have to avoid the temptation to rapidly increase revenue from regressive forms of taxation, or to prioritize the efficiency of the tax system over its progressiveness. It should not be seen as a choice of one or the other: Governments can both raise and spend more progressively.
Moreover, the IMF should make progressivity more central in its decision-making, articulating policy that raises more from the wealthiest individuals and capital including multinational companies. An upcoming report by Oxfam shows that the IMF still gives too much importance to efficiency.
Equally necessary for addressing inequality in Africa is the question of how the money is spent
Gathering Clouds rightly highlights the decisive role that redistributive expenditures such as investing in health and education systems has in promoting inclusive growth. While the IMF emphasizes efficiency and targeting of investments in social sectors, I would emphasize that equity is paramount in the design of social investments.
This equitable approach requires that health, education, and social protection systems be universal in coverage, free at the point of use, and public—all without compromise for efficiency considerations. Crucially, these steps are proven means by which to liberate women and girls from the gender inequality that keeps them out of the classroom and prevents them from learning to read and write.
A redistributive fiscal policy package is not all that is required to address inequality. Many governments must restructure their economies, particularly those that are highly dependent on natural resources and raw materials, to fuel growth. Governments must diversify their economies, create jobs, transfer the high productivity of the extractive sectors to low productivity sectors (industry, agriculture and services), and vary the sources of its fiscal resources.
Large-scale investment in infrastructure should play a role in such an economic restructuring, such as roads, railways, power, and telecommunications. The IMF repeatedly points to both the infrastructure and human capital gaps as a burden to growth in a number of African countries.
Increased public revenue from domestic resource mobilization will not be sufficient and must be used judiciously to both ensure that the basic needs of citizens are met, and to safeguard debt sustainability. Additional private finance will therefore be inevitable. But private finance cannot be a blank check; it needs regulating to offer guarantees on delivering sustainable and equitable development, as well as poverty reduction. It must lead to job creation for local communities, enabling people to learn new skills and generate the wages communities desperately need to prosper. Private finance and the private sector should not be considered a substitute for public finance, particularly in the provision of essential services, like health and education.
To reduce corruption, bribery, and the undue leverage that the private sector has on government policies, contracts with the private sector should be fully transparent to allow accountability and citizens’ participation. They should also be driven by national development strategies, and ensure equitable risk and benefit sharing between governments and the private investors. These are provisions the IMF could promote in its advisory role with governments.
The IMF’s paper offers commendable policy solutions to inequality in Africa, and I believe it represents a step in the right direction. We could see a difference to income and gender inequality in Africa —and the sustainability of economic growth—if these solutions are promoted by IMF country missions when negotiating loan conditions with African governments, analyzing their economies, producing Article IV reports and providing technical advice.
However, in the development community we know too well that words are easier than policy change. We are watching closely to see if the IMF will put its own advice into action.