Policy is key to curbing the forces driving inequality

Outlook

An IMF paper this month exploring 147 countries finds that from 1970-2014 the income gains from globalisation were concentrated at the top of national income distributions, adding to research showing that technological advances have widened inequality in recent decades.

Net wealth is a broader measure of household finances, and policy is crucial; 1% of US households hold 39% of the wealth, compared with 30% in China and 24% in France. By 2012, US wealth held by the top 0.1% equalled that of the bottom 90%. Nonetheless, countering suspicions that inequality drives populism, there was no correlation across US states between income held by top 1% and the share voting for Donald Trump.

Impacts

• Curbing executive pay and bonuses is key; caps on bonuses as a share of pay will increase but there are worries about stifling innovation.
• Political support concerns can deter efforts to tax these individuals more, but for major tech firms the EU is planning a 3% turnover tax.
• Political stability matters -- Europe is the most equal continent but redistribution will come under pressure amid rising fragmentation.
• Diversification is key -- Middle East inequality fell up to 2010, aided by the oil boom, but rose when prices fell.
• Growth prospects matter -- Latin America is the most unequal continent but will struggle to fund redistribution and reforms on low growth.