The International Monetary Fund is known for its multi-billion dollar bailouts of struggling countries, but the watchdog for global economic stability now says narrowing the income gap between the very poor and the very rich is a key tenet of its mission.
The United Nations warned in its 2013 report on the World Social Situation that the gulf between rich and poor destabilized economies tore at social order and undermined political stability. The world’s poor live the harsh consequences of this destabilization: Smallholder farmers in Bolivia often lack the rights to their land; illiteracy in Nigeria, particularly among young girls, denies opportunity to rise out of poverty; Guatemalan children struggle with the consequences of malnutrition throughout their lives.
“The problem is that opportunities are not equal,” argues IMF Director Christine Lagarde, who asserts that government policy reform will help bring opportunity within the grasp of the poor. “Money will always buy better quality education and health care, for example."
“But due to current levels of inequality, too many people in too many countries have only the most basic access to these services, if at all.”
Lagarde and her organization recently began highlighting the issue and have hinted at action in policy papers on the issue. However, the IMF’s loan recipients have yet to see what, if any, effect the organization’s stance will have on policy or if it will simply wash out as political posturing.
The IMF leverages large amounts of cash so it can attach strings to aid for countries that need financial help. Often this means loan recipients agree to policy changes in order to receive the needed cash. How income inequality fits into aid packages is yet to be seen, but it is beginning to enter into the equation.
“When a country member asks for help and we design together with that country a program, we have [income inequality] in mind,” said Lagarde, who became the first woman to lead the IMF when she was elected director three years ago. “When we redesign energy subsidies with that country, we have that in mind. When we try to put in place a social safety net for the poor, we have that in mind. When we recommend better financing of pension schemes, we have that in mind.”
The IMF’s research suggests that when economic reforms allow a broad base of people to make more money, growth has a better chance to stick. The IMF paper points to Cameroon as a example. It blames Cameroon's underlying inequality as a key factor for the disintegration of its oil-fueled growth from 1978-85. A decade of decline followed in which the political elite were insulated from much of the pain felt by most citizens as government and business cut back spending.
Improving a country’s economy as a whole should not leave out its poorest citizens, Lagarde says. And evaluating income inequality aids the IMF as it grades the effectiveness of its programs.
Income inequality has become a piece in the complicated international political and financial puzzle, but Lagarde has yet to prove how her organization’s new focus will make a difference in the lives of the poor.