IMF: The making of inequality

If they are to be believed.

Last month the IMF did a strange thing. It published a report, Botswana: Selected Issues, that looked at income distribution in the five Southern African Customs Union countries. Such a warm and fuzzy subject seems entirely out of character for the IMF, better known for its ruthless adjustment programmes for countries unfortunate or profligate enough to come cap in hand asking for a loan when bond markets have started to shun them as being just too risky.

The IMF, despite the pin stripes and pretension, is the "repo" man or bailiff of the international community. Borrow too much money and the repo man will come to take back your car, flatscreen TV or your house if you cannot repay your loans. In the case of countries, the IMF takes away the pensions, food support programmes, fuel subsidies and other measures that stand between a debtor government and its ability to repay its loans. It is normally known for its insensitivity to the low-income victims of its programmes.

So, does its study of income distribution signal a change in policy similar to that of its twin, the World Bank, in the 1990s when United States president Bill Clinton named James Wolfensohn as director?

Has the IMF become a softer, warmer and kinder institution under its European-nominated director, Christine Lagarde? Despite her recent calls for a more lenient pace of implementation for the Greek austerity programmes, the IMF is unlikely to get in touch with its feminine side any time soon. It will remain the European-controlled bastion of hard money and ruthless orthodox policy until the Brics (Brazil, Russia, India, China and South Africa) are rich enough to say they have had enough. By then, of course, the Brics will have become as ruthless as the Europeans.

Sustained economic growth
The IMF's concern about income distribution in Africa comes from its old orthodoxy. Income distribution in Southern Africa has become a major issue for those concerned with sustained economic growth, which is no longer up to sub-Saharan African averages. For the IMF, economic growth is central to its work and hence an important issue.

Southern African growth performance has been relatively poor and the region's distribution of income is among the world's most inequitable.

The reason for the IMF's interest is fairly straightforward. It has been observed that periods of high economic growth are longer in countries where the distribution is more even. Hence the IMF has suddenly shown an interest in an area where it has rarely ventured thus far.

The Gini coefficient is the standard measure economists use to measure income inequality in countries. Higher values indicate a more unequal distribution of income.

What is truly scary about the IMF income distribution figures is that Botswana now has a more unequal distribution of income than South Africa. Botswana, which has never had an apartheid system and made laudable attempts to reduce poverty, generated results more unequal than post-apartheid South Africa.

Equally important, the CIA's ranking of countries is the exact opposite of the IMF's, but the agency's results are older.  

But the IMF figures about income distribution in the customs union must be treated with caution; statistics put in the hands of economists, it is often said, are like terrorism suspects – if you torture them long enough they will give you whatever answers you want.

International comparisons
The IMF does not explain this very unexpected and sensitive result. Most international comparisons usually put South Africa with a more unequal distribution of income than Botswana and not far from that of  Namibia.

Although the IMF at best is good with statistics, it is really bad at incorporating history and other inconvenient facts that might explain why Botswana and the other customs union countries have a more unequal distribution of income than almost any other country.

Namibia has the world's worst distribution of income, much worse than countries in its peer group. It was a colony of apartheid South Africa, which has left its mark.

It would be comforting to explain this chart simply as the effects of apartheid, but Botswana creates a real problem for this assumption.

The second explanation commonly given by academics for an unfair distribution of income is the presence of a large number of whites who, unsurprisingly, like to live according to European standards and require salaries that reflect their origin and history, irrespective of the income being earned by locals. Thus countries in which there are large numbers of Europeans tend to have more unequal distributions of income. The country with the worst distribution of income in Asia is Papua New Guinea, which also has a large number of expensive expatriates and very low-income locals.

Another very important reason given for an unequal distribution of income is the presence of large mining and mineral deposits. This seems to be common to many countries that have high degrees of inequality because the income from mining and petroleum goes to the governments, which, although they can build infrastructure, are generally less good at developing programmes that redistribute income to the poor.

Distribution of income
But the IMF is less interested in explaining why the customs union countries got into the situation they find themselves in than in how to get out of it.

It is generally understood that as incomes rise to the levels of rich countries, the distribution of income tends to become more equal. The countries with the most equal distribution are the high-income Nordic countries. They can afford expensive welfare programmes that redistribute income from the rich to the poor.

For the IMF the solution to an unequal distribution remains rapid job-creating economic growth.

It is hard to disagree with the diagnosis, although some of the policy prescription is simple, old-style IMF.

The second part of the IMF report looks at the causes of unemployment growth and begins with bashing the unions – "more unions means higher unemployment". Unionisation has in turn led to wage growth outstripping the growth of productivity.

The skills mismatch between education and what business needs is correctly cited as a serious constraint to employment and growth.

But some of the results are surprising. The fund sees no apparent connection between welfare payments and unemployment, although it thinks Botswana's programme needs to be made more effective. It also sees minimum wages as a percentage of average wages as being relatively low compared to other countries. It concludes that there is no evidence that labour law restrictions are the cause of high unemployment rates.

The journey of Botswana and other customs union countries to becoming high-income countries will solve many of these distribution of income issues, but not without policies that both promote growth and effectively protect the poor and vulnerable.

These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed


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