Inequality and Economic Growth: Why the IMF and OECD Are Wrong

In rich countries income inequality goes hand in hand with economic growth. A negative correlation between inequality and growth can only be seen in particularly poor countries, according to EconPol’s latest Policy Brief by network members at the ifo Institute. “The sweeping assertion that an unequal distribution of net income entails low economic growth is untenable, despite the fact that it was recently made by the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD),” notes ifo President Clemens Fuest, one of the authors of the Policy Brief. "The frequently measured correlations between inequality and growth are not causal", he adds. "Both growth and inequality are outcomes influenced by a multitude of factors, and especially politically-determined factors. There may be conditions under which well-designed reforms can lead to higher growth and a more equal distribution of resources. But from both a theoretical and an empirical viewpoint it is naïve/misleading to assume an almost mechanical relationship between inequality and growth. This cannot be used as a guideline for economic policy,” warns Fuest.

Clemens Fuest, Florian Neumeier and Daniel Stöhlker, "Why the IMF and OECD are Wrong about Inequality and Growth", EconPol Policy Brief 7, May 2018.