Many structural reforms are increasing economic inequality

Generally there is a high consensus that structural reforms boost growth and, after the economic crisis that hit many advanced economies, many governments have been implementing these reforms to accelerate the growth.

In Europe the need for structural reforms is particularly stressed by Germany, which reminds often they are necessary to achieve a strong Europe. European creditors imposed a reform agenda to all peripheral countries – Greece,Italy, Portugal and Spain – and the respect of the terms are mandatory to extend bailouts by the European Union and European Central Bank (ECB), and most of all to avoid higher yields, which equates to higher borrowing costs for the country in crisis.

The correlation between structural reforms and GDP growth is well documented, however few analyzed the effects on wealth distribution. A recent paper published by the International Monetary Fund (IMF) shows evidence of a growth-equity tradeoff for some important reforms. The authors (Jonathan D. Ostry, Andrew Berg, and Siddharth Kothari) collected data across countries to find a relation among growth, inequality, and reforms, using panel regressions and an event-study approach.

IMF’s researchers assembled a comprehensive dataset of reform indices, including financial and real reforms, updating a dataset made by Ostry in 2009, while for inequality they used data from the Standardized World Income Inequality Database developed by Solt.

They find the the growth-equity tradeoffs varies across reforms and the effects are not homogeneous across the countries, however in most cases the structural reforms increase the inequality.

Financial reforms and capital account liberalization lead to both growth and inequality increase, but the effects on inequality are greater. In particular, the growth benefit from liberalizing capital account restrictions seems to very limited, but there is a clear increase in inequality.

Network reforms don’t increase growth and in countries with a high level of corruption they lead extractive monopolies. In general, the effects of network reforms are negative for wealth distribution and they increase inequality.

Institutional reforms, aimed at strengthening the impartiality of and
adherence to the legal system, don’t have any tradeoff effects and they are good for both growth and distribution.

The overall result of the paper is in favour of structural reforms, as the net value of their implementation is positive, but the results need to be interpreted with caution. The authors stressed that “specific reform packages, in order to gain support and deliver enduring broad-based benefits, need to be designed with distributional consequences in mind”. The paper wants to serve as a warning for the policy makers to design the reforms with distributional effects in mind, especially in those countries where inequality is already high.

About Raffaele Del Gatto

Former HR manager and World Editor of International Business Times Italy (Newsweek media group). Now CEO and Founder of The Business Globalist and Jobs Into Media.

Raffaele Del Gatto is a geek person obsessed by innovation, interested in geopolitics, economics and management, passionate about trading and video games.

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