WASHINGTON, DC – Income inequality has been increasing in most major economies – and in many of them, it has been increasing significantly. This is a cause for growing concern, and rightly so: inequality not only can undermine an economy’s long-term growth prospects; it can restrain growth in the short term by depressing aggregate demand.
The typical approach to tackling inequality – redistributive tax-and-transfer fiscal policies – can be controversial and divisive, owing to perceived tradeoffs between economic growth and greater equality. The result is usually heated debate and passionate rhetoric, but little concrete action. Politicians are especially prone to this dynamic – as evidenced by much of the conversation about inequality in the ongoing presidential election campaign in the United States.
There is a better way, one that is less controversial and politically more amenable to action: putting in place reforms that promote strong, inclusive growth that by its nature reduces inequality. This approach focuses on reducing inequalities of opportunity and broadening the base of participants in the growth process, thereby ensuring that more people benefit from it. Politicians who champion this approach may find it easier to build winning coalitions to enact it.
The range of policies that can stimulate inclusive growth is broad. It includes improving access to markets, leveling the playing field for large and small firms, investing in human capital, and promoting job creation. Regulatory and institutional reforms that strengthen the rule of law and promote open, competitive, and fair business environments are one example. This agenda also features the development of infrastructure that expands economic opportunities and policies that make it easier to access finance.