Inequality and the pandemic

Creon Butler

Well, hello, everyone. My name is Creon Butler and I’m the Director of the Global Economy and Finance Programme at Chatham House, and it’s my really great pleasure to welcome you to today’s panel discussion, which we’ve organised in collaboration with the Fiscal Affairs Department at the IMF, to discuss their work on the relationship between the pandemic and inequality and the policy implications that follow from this. Rising inequality is clearly a critical issue for public policy and is high on the political agenda in both developed and developing countries, but the causes are far from straightforward, and the solutions are also complex.

I’m therefore delighted that Vitor Gaspar and David Amaglobeli are with us to present the IMF’s research and policy conclusions. Vitor has been a Director of the Fund’s Fiscal Affairs Department since 2014. Prior to joining the IMF, he was Special Advisor at the Bank of Portugal and served as Minister of State and Finance for Portugal during the period 2011 to 2013. He’s also served as Director-General of Research at the European Central Bank, from 1998 to 2004. David is Deputy Division Chief in the Fund’s Fiscal Affairs Department. He has worked on the design and review of IMF supported programmes in several crisis countries, including most recently the Ukraine. Prior to joining the IMF, David served as Acting Governor for the National Bank of Georgia and Deputy Minister of Finance.

I’m also most grateful to Megan Greene and Francisco Ferreira, who have kindly agreed to provide initial comments on the Fund’s presentation. Megan is the Dame DeAnne Julius Senior Academy Fellow in International Economics at Chatham House, where she is working on a book, examining the gaps between theory and reality in economics and how they prevent us from addressing inequality. She’s also served as a Senior Fellow at the Harvard Kennedy School and writes a biweekly column in the Financial Times. And Francisco is the Amartya Sen Professor of Inequality Studies and Director of the International Inequalities Institute at the London School of Economics. He’s worked extensively on the measurement, causes and consequences of inequality and poverty, with an emphasis on developing countries in general, and Latin America in particular. Prior to joining the LSE, he had a long career at the World Bank, most of which was spent in the Research Department.

Before I hand over to Vitor for some introductory comments, the presentation, a few quick housekeeping points. Firstly, this session is on the record. We are recording it, so that we can make it available after the event. And after the presentation comments, we’re very keen to take questions from the audience, so please post these, using the Q&A function, rather than the chat box, and I will certainly do my best to cover them. We may actually open up and ask people to put their questions where I can read them out, depending on how much time we have available. So with that, Vitor, over to you.

Vitor Gaspar

Thanks, Creon, and thanks to Chatham House for the opportunity to come and present our work on A Fair Shot, that looks at inequality in the context of the ongoing pandemic. This is the second time that the Fiscal Monitor looks at inequality. Four years ago, we published an issue called, Tackling Inequality, and if you would be able to see the slide, you would see that we, in the context of the earlier Fiscal Monitor, very much emphasised a measure that puts together average income and distribution, that is Tony Atkinson’s measure of equally distributed equivalent income. And that, in the extreme case of no aversion to inequality has a utilitarian form, in case of extreme aversion to inequality has a Rawlsian form. In the middle, we can consider intermediate degrees of aversion to inequality, but the crucial thing of the Atkinson measure is that we’re able to put it in money metric form, we’re able to measure it in a money unit.

If we move now to how the measure of equally distributed equivalent income relates to mean income, we actually see that even for a relatively high degree of inequality aversion here, we illustrate with two, the correlation is very strong in the numerical example that we present, the correlation is above .95. So clearly, mean income matters a lot, growth helps a lot in pushing welfare up, but we also see that countries, with different means income, can rank above others simply because they have a better distribution of income.

And how do countries go about redistributing welfare across the population? One way to do it is through taxes and transfers, and when that is the approach used, we can continue our analysis in a money metric form. We can look at variations measured in monetary units. And the – that leads us back to a approach that I associate with Arthur Pigou, who said that “The one obvious instrument of measurement available in social life is money.” And the range of our enquiry is talking about the economics of welfare, becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money. And that is, to a very large extent, what we did four years ago. But at this point in time, in times of COVID, it is necessary to go further and consider other very relevant aspects of equity and distribution. And that is precisely what was done in the April Fiscal Monitor: A Fair Shot, and David Amaglobeli was the Team Leader. David, to you, please.

David Amaglobeli

Thank you, Vitor, and good afternoon to all. So this chapter was prepared by a group of Economists at the IMF, and I have all the pleasure, as the Team Leader, to present it today. The title of the chapter of the A Fair Shot conveniently refers to both to fairness, to a lifetime, in access to lifetime opportunities and also, to vaccines. So this presentation is basically organised in four parts. First, I’ll start talking about COVID and inequality, then I’ll move to our policies to tackle these inequalities. In the third section, I’ll speak about how to muster support to – for policies that lead to more fair societies, and finally, I conclude.

So now on COVID and inequality, our main message here is that inequality was a pre-existing condition that has made COVID’s impact worse. But in turn, COVID has escalated inequalities. So first looking at the health outcomes, our cross-country alliances, which is summarised on the left hand side figure, shows that after controlling for age, the number of cases, and tests, countries with inadequate access to healthcare had higher death rates. And we measure access to healthcare, in terms of number of hospital beds or number of Doctors. And we also find that higher relative poverty, which is defined as the share of population who live below 50% of the median income, is associated with higher death rates and in countries with higher relative poverty in urban areas, the death rates were even higher. And these findings, as I mentioned, are based on cross-country analysis, but there are a number of single country studies where the findings are similar.

Now, how COVID has affected or is affecting inequality, we don’t show this on the slide, but it is generally accepted that inequality has gone up, and we see significant impact on the labour markets, with more severe effects on low skilled and informal workers, youth and the women. COVID will also affect future inequality, as it will be – it’s leaving permanent scars on the rising generation, and the figure on the right hand side shows estimated effects of lengths of school closures and parental education on learning outcomes. And learning losses, as you can see, are higher in emerging and low income developing countries, and especially in poor families, where parents tend to have lower education.

Now, turning to policies. So given this adverse effect on poverty and inequality, it is important to remind ourselves that inequality was already a major concern before the pandemic. Another point we emphasise in the chapter is that different aspects of inequality, such as disparities in access to basic services, inequalities of opportunity or indigentation mobility, wealth inequality, income inequality, are all closely related and mutually reinforcing. So, to break this vicious circle of inequality, a more comprehensive, a holistic approach is needed. So, therefore, we emphasise the role of pre-distributive policies as much as redistribution. And pre-distributive policies reduce market income inequality before taxes and transfers, and redistributive policies in turn can reduce poverty and disposable income inequality after taxes and transfers.

So let’s focus on three areas: education on a pre-distribution side, and social assistance and income wealth taxation on the redistribution side. So, on education, our message is simple. Spend more and better. First, it’s important to recognise that despite some progress, over the last few decades, enrolment gaps between the children in the poorest and the richest households is still very large, and sometimes these gaps can reach 25/30% points, on average, as you can see on the left hand side figure. And this figure plots average enrolment gaps by region in emerging and low income developing economies. And our analysis show that higher spending on education increases enrolment for all, but especially for children in the poorest families, and this is what you see on the right hand side figure. And more specifically, an increase in government spending on primary education of 1% of GDP could reduce the gap in enrolment rates between the highest and lowest income quintiles by nearly 3% points. But of course, it’s not just the level of spending, but also the quality of spending that matters, and we have very much emphasised this point in our analysis.

Now, moving to social assistance. So COVID has clearly demonstrated how crucial it is to have a good social safety net. And two features define a good social safety net. High coverage of the population, the bottom quintile of distribution, and high adequacy. And as the left hand side figure shows, high spending on social assistance is not always associated with good outcomes, in terms of poverty reduction. And you see social assistance spending on the horizontal axis and the poverty reduction on the vertical axis. However, countries which are denoted here by green dots that have high coverage and high adequacy are actually the most effective in reducing poverty. So when it comes to specific social assistance programmes, our analysis shows that income transfers and fee waivers are not effective in reducing poverty. This is not shown on the slide, but what we show on the right hand side is a level of spending by different types of social assistance programmes, and what you can see is that spending on those types of programmes, which don’t have a meaningful impact on poverty, are – is actually quite high.

Now, switching to taxes. So over the last three decades, tax policy has become less progressive. In part, this is due to a decline in top marginal tax rates, and this is what you see on the figure. So, therefore, in terms of policies, which are summarised on the right hand side, we recommend raising tax progressivity and strengthening overall tax capacity. But it’s important to emphasise here, that what and how it should be done will depend on country specific circumstances.

For example, some advanced economies have room to increase top marginal tax rates. Others can achieve progressivity by addressing loopholes in the taxation of capital income. We also recommend temporarily COVID recovery contributions. In the chapter we also discuss wealth taxation. We note some of its benefits, in terms of its effect on inequality and also present some revenue estimates for the group of OECD countries. We also discuss trade-offs. So, on balance, we recommend that before turning to new instruments such as wealth tax, countries should resort to more progressive income taxation. In emerging and developing economies where tax systems are less robust, the immediate focus should be on consumption taxes. And more generally, these countries should aim to gradually build up their tax administration’s capacity by strengthening governance, and also taking advantage of the opportunities to leapfrog, provided by digitalisation.

So the result presented on the next three slides are based on cross-country and single country surveys, while being high quality and vetted by Researchers, some caution is warranted while interpreting the results of these surveys, because they may not necessarily represent people’s views. So, first, looking at preferences for public services and taxation. So these results are based on surveys conducted in 2016 in 35 advanced and emerging market economies by the International Social Survey Programme. So, as you can see on the left hand side figure, most respondents, particularly in the emerging economies, prefer more spending on education, health and pensions. And it is important to note here that when answering to this question, respondents are reminded that if they opt for more spending, higher taxes may be required to pay for it. The right hand side figure shows preferences for progressive taxation. So through this – in this survey, people are asked a question, which is, “Do you believe that taxes are too high for low income and high income households?” As you can see, in most countries, there’s a preference for more progressive taxation.

So another aspect that we explore, with the help of the surveys, is the trust in government. And the left hand side figure presents the estimated effects of one standard deviation decline in trust, based on individual level data for 23 advanced and 12 emerging market economies. The figure shows that higher is the mistrust in governance, the higher is the demand for spending cuts. And interestingly, when the distrust is high, respondents prefer reallocation of spending, and also, shift in spending towards more education and health spending. Higher mistrust is also associated with the demand for more progressive taxation. This may suggest that respondents think of taxing the rich as means to correct for ill received gains. And when it comes to factors associated with trust in government, we find that both measures of integrity and government capacity matter, and this is what you see on the right hand side, where we measure integrity by perceived corruption of public officials and Politicians and the capacity, in terms of percept effectiveness of public health, provision of public health, provision of – for elderly, and for the, also, tax collection.

So the next question is how COVID is affecting or has affected already people’s preferences. So the findings presented on this slide are from a survey, which was conducted in October 2020 in the US. So those who had personally experienced the impact of COVID, either through illness or unemployment, or personally know someone who has suffered from COVID, have a stronger preference for more progressive taxation. And this is true for both universalists and communitarians, and in short, universalists are equally altruistic towards people outside their immediate community, whereas communitarians mostly care about people from their own community.

So now let me conclude. So, COVID has escalated pre-existing inequalities. In turn, high inequality worsened COVID’s impact, and these widening gaps could persist as the pandemic has made the vicious circle of inequality stronger. And both pre and redistributive policies can break this vicious circle, and there is demand for more government action. Preferences for access to basic services and for progressive taxation has been significant, and these are likely rising after the pandemic. And governments need to strengthen transparency, accountability and efficiency to help raise trust, and they also need to provide better access to basic services and better social safety nets. And failure to do so could erode trust and lead to more divided societies. So thank you very much, and I’ll stop sharing.

Creon Butler

Thank you very much, David. It’s a very, you know, a very rich set of findings, and I think there’s some really interesting interactions between, if you like, the public expenditure side and the tax side, as well as the perceptions the public have on this. But for our first comment, let me hand over to Megan Greene, so Megan, over to you.

Megan Greene

Yeah, thanks. Just to respond to a few of the points that David made, and then I’ll talk about some of the other drivers of inequality that I think need addressing. It seems like the two major ways to address inequality are pre-distributive, so providing public services universally to everyone, and then also redistributive with taxes and transfers. I couldn’t agree with that more. I have to say, on the pre-distributive side, it seems like education is something that all Economists can agree on will help address this issue, and yet I feel like every conference I go to now, virtually, ends with, “We should all work more on education,” but it never happens, because it falls outside of Politicians’ electoral cycles. So I’m curious how we, kind of, crack that nut.

Also, a piece of education is reskilling and retooling, particularly off the back of this COVID crisis, and you know, as some industries just are never coming back, or some companies are just never coming back, and you have to shift parts of the labour force, there’s bound to be friction there, and that’s even, you know, that’s the case in the US, it’s even more so the case in Europe, for example, and I’m curious, genuinely curious if anyone’s actually done a good job on this. ‘Cause I know in the US, to get job training, there are, I think, 15 different government agencies you might go to. I have no idea how I would ever navigate that. So I’m not sure how the average person does.

One thing I might offer, in terms of, you know, immediate support, beefing up the safety net in the face of a crisis like COVID, would be automatic stabilisers, which is something that we don’t use very much in the US, but I think we would benefit a lot from, and other countries do a much job on that front. So that’s something that might help address inequality in the face – in the exacerbation of inequality in the face of a crisis like the one where we’ve just faced.

And then there are a bunch of other factors that I think are fundamental drivers of inequality, some of which have just gotten worse, as a result of the pandemic, and some of which have actually abated a little bit. So I’ll start briefly with the ones that have gotten worse and have been turbocharged by this pandemic. One is an increase in market concentration, and this admittedly affects the US more than any other economy, but it’s still an issue across other developed economies as well, where you end up with a few superstar firms that emerge in an industry in the US, and, you know, obvious examples are tech, healthcare, retail, the Amazon effect, where these firms have gained market share. And so, if you’re a worker in one of those sectors and you want to change jobs, you just don’t have that many possible employers to choose from, and so if you get a job offer from a competitor of one of these superstar firms, first of all, these superstar firms know what one another’s offering, in terms of salary and benefits, and secondly, you just – there aren’t many alternatives for you as a worker. So you’re not in a great position to negotiate for better terms of your contract. So, that generates monopsonies and reduced worker power. So market concentration is something we have to address, I think, and there are a few ways to do it.

One is beefing up anti – beefing up, sorry, competition rules, antitrust rules, also addressing lobbying, possibly putting limits on it, and dealing with campaign finance. Secondly, technological innovation has been turbocharged. We’ve seen a lot of firms automate over the course of this pandemic and we – none of us, I don’t think, can argue that that’s a bad thing, that we should reverse this technological innovation. It could result in productivity growth, so that’s a good thing. Nevertheless, it certainly creates winners and losers, and we need to figure out how to compensate some of those losers.

Third, and I might be a little pie in the sky with my thinking here, but a shift from shareholderism towards stakeholderism, it does seem like the issue of inequality has finally reached most people’s radars off the back of this crisis, as you know, we were watching low wage, low hour workers hold our economy together, trash collectors, grocery delivery people, people like that, and recognising that, and Teachers, and recognising that they’re probably not remunerated appropriately. So that may have driven a slight shift towards stakeholderism, which is, you know, going to benefit companies’ bottom lines anyhow, so that could be positive.

One other thing that’s been turbocharged is, sort of, new market factors, I like to call it. If you were sitting on assets at the beginning of this crisis, and central banks stepped in to say that they’ll backstop pretty much most of the markets, as they tried to return the markets to normal functioning, you won if – most people aren’t sitting on assets, actually. Most people aren’t invested, and so, although I guess, it’s slightly more now than before the pandemic, and so that certainly increases inequality within economies too. So we need to do something about that. You can’t argue that central banks should have behaved differently, because they didn’t restore normal market functioning, but I do think redistribution could be a solution here.

Worker power has generally been a driver of inequality. It’s actually fallen a little bit, I think, particularly in the US, where job openings are plentiful, and yet unemployment is still pretty high. The quits rate is really high. We haven’t seen workers go back to those low hour, low wage hourly service jobs in restaurants and bars, for example, possibly because they’re holding out for higher wage, higher hour jobs. And they might not be able to forever, but for now, we’re seeing this dislocation in the labour market, and that suggests that workers are actually trying to fight for better wages. And also, you’re seeing this – it’s anecdata, but in all of the union strike news that you’re seeing in the US. So, worker power may have improved a little bit, over the course of the pandemic, but there’s a ways to go. You could encourage unionisation, you could penalise companies that are just blatantly breaking the law when it comes to not allowing employees to unionise. You can also – there’s, sort of, regulatory action you can implement when it comes to non-disclosure and non-compete agreements. I mean, no one at McDonald’s should have to sign a non-compete agreement, that’s just one example, but there are many.

And then, finally, globalisation, again, is something that has driven inequality, to some degree. I think it’s a bit of a red herring. The Economists have generally let this narrative hang, that globalisation has receded over the course of the pandemic, but it’s not clear that it actually has. If you look at South Korean trade data, which is a good bell weather of globalisation, it actually has been really high. So, I think we’re probably going sideways on that, but again, we need to figure out how to compensate some of the losers. And to add to this, there does seem to be this connection between inequality and climate change. So as people’s – as people have become aware of the issue of inequality, they’ve also become more impassioned about the issue of climate change. And I just mention that because the green transition too will create winners and losers, particularly the longer we wait to really start it in earnest, the bigger the supply shock will be and the bigger the difference between winners and losers. So we’re going to need to think about how to compensate those losers.

And finally, just one final point. In terms of tools that we could use to try to address inequality, I wonder if central bank digital currencies might be one, depending on how they’re designed, it could be used to offer transfer payments to the losers, so that might be a possible solution. I’ll leave my comments there.

Creon Butler

Megan, thank you very much, and quite a radical thought at the end there, but we’ll come back, hopefully, to some of these points, I think also on the green transition, and this is something that I’d like to pick up on, in terms of the – how you integrate the response to climate change with this goal of addressing inequality. Francisco, over to you.

Professor Francisco Ferreira

Thanks very much, Creon. I wonder if you can see the slide, can you? Great, thank you.

Creon Butler

Yeah, we can see it.

Professor Francisco Ferreira

Very good, very good. Well, thanks a lot, Creon, and to the Chatham House group for inviting me, and congratulations to Vitor and David on a very nice presentation, and Megan’s comments are an offer us to have, you know, about ten conferences, just one per each of her comments. So quite a lot. Let me just say a few words on what I think we know and don’t know about the effect of the pandemic on inequality. Let me start with global inequality and work back to within country inequality.

On, you know, you’ve heard David say that the pandemic was both exacerbated, so negative effects were exacerbated by high inequality, inequality was a pre-existing condition, but also that, you know, inequality probably rose as a result of the pandemic. Well, yeah, I also would like to say, inequality is a really tricky thing. It really depends on what, you know, concepts you’re using. So for global inequality, you know, people use, typically, three different concepts. One of them is inequality between countries. State the country as a unit, GDP per capita.

Now, what you’ve got here on this – on this graph, which you can see here is from some work by Angus Deaton, which was published in this LSE Public Policy Review recently, he’s got here an estimate of the predicted impacts of the pandemic on growth. So this is a, you know, the difference between an IMF forecast for growth towards the very end of 2020, the difference between that and the IMF forecast for growth in January 2020, when we all thought the pandemic was some small news item about Wuhan in China.

So this has meant, you know, you could think of this as a pretty good proxy for the impact of the pandemic on growth, and the point is there’s this, kind of, downward sloping line here. It suggests that the effects were stronger, the negative effects were stronger on richer countries and that would suggest that GDP per capita and inequality in GDP per capita actually fell. And indeed, although, you know, from a regression like this you can’t actually conclude that, it turns out, if you use standard measures of inequality that Angus presents in this paper, that it did. It did actually fall.

Now, it had already been falling since around, you know, the late 90s and 2000 and it continued to fall and the pandemic if anything made it fall by more. However, if we weigh the countries by population, the same paper shows, there is a reverse. So population weighted between country inequality, which had also been falling since around 2000, actually increased in the pandemic. And this is due, and maybe you can see my laser pointer here, this is due almost entirely to India. India had – and this was before the major pandemic crisis that India suffered in 2021, but in 2020 the recession was already so big that India alone, kind of, made inequality in the world increase when you weigh by population. You might say, “Well, didn’t China offset that?” Here’s China doing relatively well. It didn’t offset it because, as people have been predicting for a while, China’s now so close to the mean of the world economy, that it doing well no longer reduces global inequality the way it used to, okay?

Now, what about global inequality, the third concept, which is when you don’t look at countries either unweighted or weighted by population, but you look at people, you look at individuals? And I’ll stop sharing there. You look at individuals across the world. Well, for the best measures, inequality in that is just a sum of this population weighted between group inequality, which we’ve seen is going up, and inequality within countries.

So, sort of, an average of inequality within countries. So the answer will depend to some extent on whether inequality within countries really had gone up or not. And about that, I just want to say four things. I mean, Megan’s already raised a number of issues and the IMF presentation had a number of issues. I want to say four things that I think we’re beginning to learn, although the data, you know, household survey data and administrative data on this is still not all out. It’s – we’re talking now – we’re still not out of the pandemic, and even 2020, we don’t have all the data yet. So, four things very quickly.

One, the labour market effects. These tended to be unequalising. Why? Basically because the ability to work from home and keep your earnings correlated with education, and therefore it’s correlated with pre-existing income. The people who had higher incomes before were better able to do what we’re doing now, which is working from home or comfortable offices on Zoom, rather than having to go out and sell vegetables in the street. So that’s, you know, it’s a complicated picture obviously, and labour markets differ dramatically between Sweden and Malawi, but nonetheless, at a first order of generalisation, there was this impact.

On capital markets, an interesting thing, some people talk about this, but not as much as I’d like, and I’d love to hear from our IMF colleagues on this, is that I actually think that the monetary policy response to the pandemic, which was a massive monetary stimulus, which was very well intentioned, and it was meant to be part of a macroeconomic stimulus to reduce those recessions that we just saw. But what it did do is it led to asset price inflation. It’s even now leading a little bit to goods price inflation, but it’s certainly led to asset price inflation and assets are held mostly by rich people. So after an initial collapse in stock prices, stock prices actually rebounded massively, and it wasn’t only Zoom and Amazon. It was much more widespread, and house prices have not fallen, and so on and so forth. There are a couple of papers on this. I think the jury’s still out. I don’t know the full evidence, but I suspect there’s a capital market effect there.

Third, there is the effect that David mentioned on future generations through the impact on schooling, of school closures, but also, the impact on nutrition in poorer countries. You know, poverty increased a lot in poorer countries. Poverty means children go hungry. If children and mothers go hungry when they’re very young, there is an impact on cognitive capacity that we’ll feel later on. So through nutrition and education both, there is an impact.

And my final point, so I talk about labour market, capital markets, education and nutrition, the final point is on policy responses. And here, the only thing I want to say is policy responses mattered. There are at least five countries where the evidence suggests inequality fell between March and September 2020, and those are very different countries. Four are European countries, France, Italy, Germany and Spain. There’s a paper that’s just come out by Andrew Clark and co-authors on that. And Brazil, where there are two papers, which are still working papers, suggesting that in Brazil, which had a terrible public policy response, in terms of the health side, actually the benefits, the [inaudible – 40:44] was so generous that inequality actually fell, at least until September 2020 as well.

Now, this contrast is with Mexico, for example, or Ecuador, where there will be much smaller policy responses and inequality is thought to have risen quite a bit. So what the governments did mattered enormously. I’ll leave it there, thanks very much.

Creon Butler

Francisco, thank you very much. So we have an enormous amount of comments there. What I’d like to do, coming back to Vito and David, I mean, we – most of the discussion is around inequality within countries, and I wondered if we could just focus on that initially. I mean, there’s – you’ve presented particular issues of public sector services, which are very important, but Megan and Francisco have put forward a whole range of other things. You know, and just to take one example, the issue of access to – for poorer people to stock market investments. I mean, in the UK, as you may know, we have a stakeholder pension scheme, which actually does now increasingly give poorer people access to those investments, and there is a question about whether they have – it’s broad enough, in terms of the type of capital market investments and so on. But what would be really interesting from both of you, is of all those things that have been put forward by Megan and Francisco, I mean, what would you put alongside the public services issues that you’ve flagged as being important and necessary – necessarily needing a, kind of, policy response? Either Vitor or David, over to you.

Vitor Gaspar

Creon, if you allow me, I will start, and then David will complete. I want to react to two things that Francisco put forward. The first one has to do with the study from Angus Deaton, and that is very relevant and very important. But it is a study that dates from the beginning of the year. One of the themes that we very much pushed for in the context of the annual meetings is this idea of a great finance divide across countries in the world. It’s also relevant for populations within countries, but let me focus on the across countries in the world.

We do see now, in our projections, that advanced economies who were able to respond quite forcefully to the pandemic with a persistent, for example, fiscal policy response, are now projected to be back to their pre-COVID-19 growth path over the medium-term. So, in terms of aggregate economic activity, there is no gap to be filled. Unfortunately, if you go to the lower income developing countries, you see that the fiscal policy response was much smaller. These countries did suffer, in terms of revenue falls, but they were not in a position to increase their primary spending in a significant way. They did enable their health system, they did extend support to vulnerable households and firms, but had to make dramatic choices, in terms of their spending priorities, to fit within their very constrained finessing envelope. That, in our projections, leads to a situation where even over the medium-term, there is quite a significant gap relative to the pre-COVID-19 growth path, and also a fall in the ability of these countries to collect revenue. So, a great finance divide. Now, that qualifies the point that was making by Francisco, concerning convergence versus divergence across countries, and that is something that we believe is a cause for concern at the global level.

The other point that I want to comment on, what Francisco was saying, has to do with the monetary policy. If we go back to March 2020, financial developments around the world were falling off a cliff, and it took quite decisive action, on the part of fiscal policy and monetary policy working in tandem, in particular from the major money centre countries of the world, to stop that destructive dynamic from taking hold. If we look at what might have happened, in the absence of such intervention, we cannot but realise that the intervention was absolutely key to limit the impacts of COVID-19 on economic activity, on employment, on economic, social and financial indicators more broadly.

That being said, the point that Francisco was making is absolutely spot on, that one of the side effects of this intervention was an increase in asset prices, and that increase in asset prices does benefit the better off disproportionately, and I stop here and pass onto David. David, please.

David Amaglobeli

Yes, thank you, Vitor. Maybe I’ll pick up on a couple of things that Megan has touched upon. So one is education, given that it’s long-term impact of investing in education, how do we make it happen? And as I discuss in the chapter, we look at the political economy of pre-distributive and redistributive policies, and one thing that we find is that actually, there is a strong preference, even before the pandemic, there is a strong preference for people to have this type of good access to education, to healthcare, to basic infrastructure. The pandemic has actually shown us that there is – how important it is, especially, like, education, in terms of the digital connectivity, for instance, that allowed people to access education, or social safety nets and how crucial it was during the pandemic. So all this has demonstrated even more how important the access is.

So, therefore, policymakers can take this into account when they form their policies, they can focus on the medium-term, and focus on better service delivery on one hand and on the financing on the other hand, and the financing should be by strengthening their tax capacity. And this should be combined with efforts to strengthen transparency and accountability and efficiency, so spending, which then help – has a feedback effect on the trust, the public trust in government. And this kind of comprehensive approach incurred in medium-term fiscal policies is something that can deliver, ultimately, better public service delivery and lower inequality in the future.

So another aspect is – that Megan touched upon is CBDCs and the role it can play. CBDCs alone, most likely, will not revolutionise, but they can amplify the trends which are already in train, which is the access, people’s access to financial services. And we have seen, again, during the pandemic, that in countries where financial inclusion was very low, the activation of digital payment platforms, use of such platforms, has allowed many governments to scale up the support, the lifelines, to vulnerable households very quickly, to outreach to many people, to better target these services, and provide this support in a very timely and safe fashion. So CBDCs clearly can help amplify these trends and bringing more people into financial nets, so that more people have access, can have of access to government services

Creon Butler

Okay, thanks. Thank you very much. I mean, I think – I mean, this is highlighting the question of, you know, how far one should actually do things to prepare for shocks of this kind in the future. And, you know, we just talked about examples where we’re going to have to use certain instruments to respond to shocks, and you can do things that make sure that when you use those instruments, they have a less – less of an impact on inequality.

I’m really pleased that actually we’re getting a number of questions, and I’d like to ask if we could actually just open up Stephen Pickford’s? He’s got one question, which is very topical at the moment. So, Tom, if you could open up Stephen to put his question. Stephen, can you speak, or…?

Stephen Pickford

I can. Yes, yes, I can.

Creon Butler

Go ahead, Stephen, yeah.

Stephen Pickford

Thanks very much for the discussion so far. I mean, a very, very rich amount of issues covered. I wanted to focus on one in particular, which both the – both Vitor and David and Francisco focused on, which is asset markets. If, to the extent that a lot of the increase in inequality is driven by asset markets, share prices and the like, and indeed, to the extent that the top end of the distribution is likely to have very strong interactions between assets, wealth, rather than, sort of, rather than wages, is it right then to focus on making personal income tax systems more progressive, or do you need also to bring in the wealth and capital aspects? And indeed, is it possible too, that the agreement, which hopefully is going to be finally ratified on minimum corporate tax regimes, is that going to be a powerful driver, in terms of offsetting some of the increases in inequality? Thank you.

Creon Butler

Thanks, Stephen, thanks very much, and I wonder if I could – going back to Vitor and David, just add in, and what if, you know, beyond the OECD deal, we actually got to where I think the IMF would like us to be, in having a minimum carbon tax? You know, how would that also – how relevant would that be in the space?

Vitor Gaspar

Thanks, Creon. Let me try to address the two questions, the one about progressivity and income taxes, and the question on carbon pricing and carbon taxation. We, at the Fund, have been pushing for a systemic approach to tax, and when we look at income taxation, taking into account personal income taxes, corporate income taxes, asset taxes and how they fit together, is extremely important. One of the features that reduces progressivity of the income tax system dramatically is tax avoidance and tax evasion. And so, it is crucial to take those aspects into account and the administrative capacity of actually following through the tax law in its application to taxpayers.

One of the motivations for the effort that now is leading to this agreement on international corporate taxation is the motivation of avoiding base erosion and profit shifting, that is combatting tax evasion and legal tax avoidance. Those aspects in practice are extremely important, and they have to be taken into account. There is a lot of room to improve personal income taxation, asset income taxation, corporate income taxation, and the way they fit together, in order to affect the distribution of income, especially the distribution of income at the top.

Creon, I’m really grateful for your question on carbon taxation. We have made the point that it’s necessary, it is urgent to make a transition to climate action. So, move from repeated statements on the urgency of the problem, and actually go on and do something effective about it. We have been emphasising that complementarity between regulatory approaches and market approaches is necessary, in order to make use of the market mechanism, carbon pricing is a very powerful way forward. And we argue that a agreement by large emitters on a minimum carbon tax would be a very important way forward and could offer promise of allowing the global co-operation in the area of climate change to reach a completely different level. And I’m quite happy to go through further details, but I believe we’re running out of time.

Creon Butler

Yeah, and maybe – I want to come to Francisco and Megan in a second, but thank you very much for that. I mean, my question, and maybe either you or David would want to take it, is in promoting that idea, to what extent are you taking onboard the inequality implications of a minimum carbon tax? I mean, obviously it’s a very, very broad economic measure across entire economies. You know, do you have, if you like, alongside that proposal, an implementation strategy, which would deal with any potential inequalities? I mean, it either could be Vitor or David.

Vitor Gaspar

So Creon, we did publish a Fiscal Monitor on climate almost exactly two years ago. And in that context, we did discuss the use of carbon taxation and the use of the revenues from carbon taxation to manage the distribution in impacts of the measure in a way that could improve simultaneously efficiency and equity. So we have the examples of that in the Fiscal Monitor from two years ago.

Creon Butler

Right, great. I wonder if I could come back to Megan, basically, on the, kind of – you raised a whole set of other inequality factors. And to some extent, the response you got from Vitor and David was, well, actually, public expenditure is a good way of dealing with many if not all of these. Obviously there are other things one could do, like giving people rights, which then, sort of, change the balance. But I just wondered to what extent you think that’s a – you’re satisfied with that, or you think, “No, actually, there’s a whole bunch of things here that aren’t going to be tackled by good quality public services.”

Megan Greene

Yeah, I think that’s why I highlighted these other things that aren’t obvious public services. I don’t think they can be obviously directly addressed with good public services. Redistribution helps, certainly, but I also think there’s a limit politically to how much redistribution can be done in many economies, and so, given that we can all agree this is a huge problem, I think we should probably have all hands on deck and try to address all the different drivers of inequality in whatever way we can, and some of them are more politically easy to include than, for example, hiking property taxes or making your tax system more progressive, which I agree we need to do, but I don’t think we can fix everything with that.

Creon Butler

Francisco, did you want to comment on any of the points that either Megan’s – I mean, Megan’s response there or the ones that Vitor and David made?

Professor Francisco Ferreira

Yeah, just three very quick points, thanks, Creon. On Vitor’s responses to my points, they were very well taken. I mean, first of all, you’re, you know, absolutely right that the picture I showed of continuing decline in inequality between countries, so that convergence idea, it was 2020, and what’s happening now may well reverse that. So that’s a very well taken point. On the monetary policy thing, you know, the analogy that comes to mind is, you know, a house on fire, and some true gigantic hoses, you know, fiscal policy and monetary policy. And it may be that monetary policy destroys all your books, you know, because they all get wet and everything is soaked and washed, and so inequality has gone up, it’s a bad thing, but it doesn’t mean the hose shouldn’t have been there, ‘cause you know, the house would have burned down otherwise, so that’s well taken too.

Then, my last point is on this issue of – that was just being discussed again about using the revenues from carbon taxes. Yeah, Megan is absolutely right that there are all kinds of perverse interactions between climate change and inequality where one, you know, climate change basically can cause growing inequality, including between countries, in various serious ways. So the way to use the policy, to also, to offset that, is to say, “Okay, well, we’re going tax on efficiency grounds,” set the [inaudible – 61:14] tax right, is taxing a massive externality, but then use the revenue in an equitable way. The issue is that that effectively is going to be charging the most – you know, taxing the most powerful countries in the world: the US, China, a number of others, Europe, and redistributing it to countries that have very little voice. And what we know about the global political economy is that that’s going to be extremely hard to do. But yes, we need everybody out there, from the IMF to Megan and the FT, to our friends in the NGOs, saying, “We need to spend that money on the poorer countries.”

Creon Butler

Right, well, unfortunately, we’ve come out of time now, but I really do appreciate everybody’s contributions. Vitor and David, thanks very much for your presentations, Megan and Francisco, thanks for your great comments and for responding to my questions, and thanks also for our audience. But I think this is obviously going to be an issue that will run and run, and much of this is going to be picked up and developed further in the future. But at the point, may I thank you all for joining us. Thank you very much.