The gap between the rich and the poor has been widening in most countries. Economists are analyzing the potential consequences, among them pundits at the IMF which is holding its spring meeting in Washington this week.
Economists don’t have a reputation for being compassionate. They focus on numbers, not human fortune. Most have no problem with wealth or income inequality. Quite the contrary: People work harder if they want to move up. Redistribution of wealth and social programs are costly and dampen motivation, the argument goes.
But for some years now, there have been signs of a change of heart. The International Monetary Fund (IMF), not exactly known for leftist leanings, is now warning that inequality is hurting growth. The OECD, a club of mostly rich countries, agrees.
Hurting growth
“When income inequality rises, economic growth falls,” writes Federico Cingano in his study for the OECD. Researchers at the IMF came to similar conclusions: “If the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term.”
For OECD countries, the loss in growth had amounted to a whopping 8.5 percent of GDP over the last 25 years, the study found. For Germany, Berlin-based research institute DIW calculated a yearly loss of €40 billion ($49.5 billion), in a study commissioned by the Friedrich Ebert Foundation, which is affiliated to the Social Democratic Party.
The findings pleased those in favor of redistribution of wealth, welfare programs and higher taxes for the rich. Finally, it seemed, there was scientific proof that the fight against inequality was a worthy cause — not just for moral or political, but also financial reasons.
Too good to be true
“If that was true, all rational people would have to be in favor of redistribution of wealth,” Holger Stichnoth tells DW. He’s the head of distribution studies at the Center for European Economic Research (ZEW) in Mannheim. “But this is too good to be true.”
Stichnoth says the studies failed to prove a causal relationship between inequality and lower growth. Other economists had similar qualms, criticized the studies’ methodology and use of data, and came up with different results.
“It’s still unclear whether the link [between inequality and growth] is positive, negative or not there at all,” says Stichnoth.
“That’s the dilemma of the social sciences,” he adds. “It’s just very hard to prove a causal relationship.”
Researchers at the IMF recently published new findings, trying to determine the exact point where inequality starts to hurt growth. The debate is not over yet.
For more read the full of article at The Dw
