IMF urges developing nations to control widening gap between rich and poor

Governments need to take active control of the widening divide between the rich and the poor in developing Asian economies, the International Monetary Fund (IMF) said.

With the growing possibility of rising poverty as economies expand, the IMF said policies should actively address the income disparity through progressive taxation and allow governments to facilitate better income distribution.

The IMF said income inequality and polarization have increased dramatically across Asia over the last decade, in contrast with the region’s past record of rapid growth and equity levels that were "the envy of many industrialized countries."

In its Regional Economic Outlook (REO) report, the IMF said measures of inequality fell in countries like Indonesia, Malaysia, the Philippines and Thailand.

Interestingly, the IMF observed that based on its studies, the income disparity was being driven by the "rich getting richer rather than the poor getting poorer."

Economists have observed long before that inequality increases in the early stages of economic development and falls in the later stages. As people move from the traditionally dominant agriculture sector to the modern industrial sector, inequality increases and eventually declines as people find employment in the higher-income sectors.

Before moving closer together, however, the IMF said the income divide could grow even wider unless economic growth rate accelerates fast enough to prevent rising inequality.

"For a given growth rate of per capita income, rising inequality typically means less poverty reduction," the IMF said. "If the increase in inequality is large relative to growth, poverty could even rise."

According to IMF senior adviser Masahiko Takeda, policy actions should direct these movements in income distribution rather than waiting for the economy to sort itself out.

One possibility was to make income taxation more progressive so that richer people would pay higher taxes and poorer people would pay lower taxes.

"It’s one way of taking control of the inequality," Takeda said.

Takeda said public spending would also be critical in ensuring that opportunities would be available to people moving up the income ladder.

The IMF report said the increase in government revenues coming from increased economic activity should be spent on education and infrastructure, literally to facilitate the spread of prosperity from the centers of growth to the periphery.

The IMF said labor policies, in particular, needed to be geared towards influencing income distribution. The Fund said that the use of non-regular labor, for example, should be curbed.

Finally, the IMF said offering fiscal incentives to attract industries have proven ineffective and should be stopped. "Such interventions are unlikely to be successful at reducing inequality if the underlying elements of the regional investment climate remained week," the IMF said.