Tag Archives: inequality

What’s Going on at the IMF?

International Monetary Fund Headquarters, Washington DC

International Monetary Fund Headquarters, Washington DC

Once the unabashed advocate for cutting government regulation and liberalizing economies worldwide, there have been recent murmurings from the International Monetary Fund moving in a dramatically different direction. This is not to suggest that critics of the IMF—most notably Joseph Stiglitz—have run out of ammunition. Rather, as Duncan Green has been reporting on his Oxfam blog, the IMF appears to be opening up to new proposals. For most, the concession that the state may have a role to play in development is hardly a dramatic finding. But from the organization that promoted cuts in government spending and liberalization of capitalism markets as the solution to nearly every economic and financial crisis from Asia to the United Kingdom, from Russia to Brazil, it’s quite a concession.

We’re specially looking at three developments, all covered by Duncan. First, in early February, the IMF began to rethink its traditional focus on inflation. In a paper co-authored by the IMF’s chief economist, Olivier Blanchard, the organization conceded that it had become too focused on inflation at expense of other goals, like fiscal policy, interest rate stability, and—wait for it—preventing global financial crises like the one that rocked the world beginning in 2008.

Later the same month, responding to increasing pressure from countries like Brazil, the IMF began to rethink its traditional opposition to capital controls.  For years, the IMF had promoted open financial markets as a central component of development strategies. But such openness carried significant risk of fostering financial instability. We saw this, for example, during the 1997 Asian financial crisis. In 1997, the IMF prescribed cutting capital flows as part of its reform package. But in 2010, it reversed course, conceding that capital controls, under certain circumstances,  may be an effective part of the policy toolkit to manage capital flows.

In April, the IMF announced its most dramatic change to date, announcing its support for establishing a “Robin Hood Tax” intended to force banks to pay for the direct and indirect costs associated with government interventions to bail out the banking sector following the global financial meltdown. While this initiative has stalled amid strong divisions between major players—particularly between the United States and France—the willingness with which the IMF embraced the proposal stood in stark contrast to its earlier positions on financial deregulation and lowering tax rates.

Now, in a new working paper published this month, two IMF economists draw a connection between inequality and the outbreak of financial crises, concluding that higher levels of inequality make an economy more prone to the kinds of crises that have rocked the global economy in recent years. They conclude that preventing future economic crises may depend on reducing the total level of inequality in any given society.

Duncan Green is right. They must be putting something in the water at IMF headquarters. How else do we explain the dramatic shifts taking place there?

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Smaller Government, Bigger Government: The Grass is Always Greener

James Kwak at The Baseline Scenario has a great discussion of income inequality in the United States today.  Citing a short paper by Michael Norton and Dan Ariely, Kwak breaks down the actual, estimated, and preferred income distribution as stated by respondents to the survey conducted by Norton and Ariely. According to the results, Americans perceive income inequality in the United States to be far more equal than it actually is, and desire it to be more equal still (see figure below). As Kwak summarizes, Americans want to be more like Sweden.

Actual, Perceived, and Preferred Level of Wealth Distribution inthe United States.

Actual, Perceived, and Preferred Level of Wealth Distribution inthe United States.

Ironically, however, developing the level of distributional equality that exists in Sweden is predicated on paying higher marginal taxes and accepting a much greater level of government involvement in the economy, two things that recent developments in American politics suggest are not on the front burner.

There’s another irony, however; one captured by Jon Stewart’s “Mob Swap” proposal last week. Across Europe, governments have been engaged in efforts to reign in the welfare state, to introduce a greater efficiency and reduce government debt burdens. These moves have provoked protests across Europe. Last week alone, 100,000 people took to the streets of Belgium to protest cuts in government spending, millions took part in protests in France challenging a proposal to increase the retirement age, and workers shut down the London underground. Meanwhile, Americans are protesting against expanded government programs, including the Troubled Asset Recovery Program (TARP) and the Obama health insurance reforms. The grass, it appears, is always greener!

Towards Third World America

Arianna Huffington’s most recent book, Third World America, is generating some waves in the blogosphere. In her book, Huffington highlights the many challenges facing the United States, from crumbling infrastructure to rising inequality and declining social mobility, and argues that the global recession is not an one-off event but part of a general trend of increasing poverty and inequality in the country. As Simon Johnson argues at Baseline Scenario, this is also the theme other well-received books, including one by former IMF Chief Economist Raghu Rajan and former U.S. Labor Secretary Robert Reich. James Kwak contends that increasing inequality undermines the political institutions and social structure of the United States, effectively weakening the institutions de Tocqueville viewed as central to democracy in American.

A home in Arizona.

A home in Arizona.

Indeed, by nearly any measure, inequality in the United States is higher today than it has ever been; more unequal than even the days of the robber barons or the Great Depression. The average worker has seen their wages stagnate since the late 1970s, while the proportion of wealth controlled by the top 1 percent has increased dramatically. But does this make the United States a third world country?

A home in Burkina Faso.

A home in Burkina Faso.

The term “third world” came into popular usage during the Cold War. As originally articulated by the Non-Aligned Movement, it was intended to highlight a “third way,” an alternative to both the system of free market capitalism espoused by the United States and the socialism of the Soviet Union. Over time, the term took on additional meaning, implying a specific (low-tier) position in the global economic order. The category of “Fourth World” was also added to encompass countries like Somalia, Bangladesh, or Malawi—countries at the bottom of the global distribution of wealth.

The defining features of the third world were not just the existence of high levels of inequality, though this was certainly one feature. In addition, the term third world also implied a history of colonization and a heavy reliance on extractive industries and raw commodity exports for foreign exchange earnings.  As outlined at the 1955 Bandung Conference, the term “Third World” also implied a commitment to non-alignment, anti-imperialism, regionalism, and support for a new international economic order.

During the Cold War, the world divided into three groups. The United States and its allies were collectively referred to as the First World; the Soviet Union and its allies become the Second World. The remainder became the Third World. The end of the Cold War suggested that the categories were no longer relevant, and many scholars abandoned the term Third World in favor of new language: the global south, the developing world, the less developed world, and so on. But none of these categories accurately captured the common political agenda implied by the concept “Third World.”

The use of Third World to describe the United States today similarly ignores that history. The United States certainly faces many challenges today, including all those outlined by Huffington. The implications of these challenges are certainly dire, culminating, perhaps, with the collapse of American democracy as Kwak argues. But using the term “Third World” to describe the United States strips the countries which rightly belong to the “Third World” of their common sense of history. Perhaps we should avoid its use in this context.

Five Stories You Might Have Missed

Over the past week we’ve seen a lot of news from the domestic U.S. political front: Obama’s speech at the Democratic National Convention, McCain’s pick of Sarah Palin for his Vice Presidential candidate.  What’s been going on in the rest of the world?  Here are five important stories from the past week.

1. The worldwide economic downturn continued last week.  On Friday, the Japanese government announced a new economic stimulus package.  Analysts are holding out little hope that it will make much of a difference.  In the United Kingdom, Chancellor Alistair Darling conceded that the current crisis will likely be “profound and longlasting.”  He forecasted that it might be the worst economic crisis faced by the United Kingdom in the past 60 years.  Similarly, figures released by the Canadian government last week show that the country is on the brink of recession, with gross domestic product growing by  a mere 0.1% in the second quarter.  All of this suggests that the current economic crisis is global in scope and potentially long in duration.

2. Ongoing political violence in Thailand last week culminated in the closure of three major international airports and blockades of the country’s rail, road, and port infrastructure.   Earlier in the week, protestors had laid siege to state buildings.  The protestors—a loose coalition of business, royalists, and activists under the banner of the People’s Alliance for Democracy—are demanding the resignation of Prime Minister Samak Sundaravej and his government.  So far, the military has refused to become involved in the political crisis.

3. In an interview on Tuesday, Zwelinazima Vavi, leader of the Congress of South African Trade Unions, declared that South Africa would need to radically change its economic policies to avoid the “ticking bomb” of poverty, unemployment and crime.  Vavi is a close ally of Jacob Zuma, the leader of the African National Congress and the person mostly likely to become president of South Africa after Thabo Mbeki’s term expires next year.  Many analysts believe Vavi’s views reflect the policies favored by Zuma.  Many South Africans believe the economic policies pursued by Mbeki have not improved the quality of life for ordinary people.  His complete interview is available through the Financial Times website.

4. The North Korean government announced on Tuesday that it would suspend the processing of disabling its nuclear facilities and was considering reactivating the Yongbyon reactor.  The announcement, which North Korea maintains is a response to the failure of the United States to make good on promises made during the six party talks, raises new concerns about the effectiveness of the talks and the progress made there.  On Thursday, South Korea announced that it would drop the label “main enemy” when referring to North Korea in its biannual defense white paper.  According to Major Seo Young-suk, the decision to drop the term “does not mean that we have changed our stance.  North Korea is still a substantial and present threat.”

5. In a report issued Thursday, the World Health Organization (WHO) condemned health inequalities between rich and poor around the world, describing them as “unfair, unjust, and avoidable.”  According to the WHO “a toxic combination of bad policies, economics, and policies [was] killing people on a grand scale.”  The complete report, entitled Social Determinants of Health, is available through the WHO website.