Nancy Gucker Birdsall

Many industrialized countries, developing countries, and countries that have recently made the transition from communism to market-oriented economies are characterized by high and increasing income inequality. Trends in income inequality have been understood to have ethical significance for different reasons. Some have argued that lessening income inequality is a valuable goal in itself. This essay, on the other hand, focuses on three instrumental reasons for pursuing economic policies that engender less income inequality, particularly in developing countries.• Inequality can inhibit growth and slow poverty reduction.• Inequality often undermines the political process: that may lead to an inadequate social contract and may trigger bad economic policies-with ill effects on growth, human development, and poverty reduction.• Inequality may undermine civic and social as well as political life, and inhibit certain kinds of collective decision-making; at the societal level it may also generate its own self-justifying tolerance, perpetuating a high inequality equilibrium despite the potential economic and political costs.The author concludes that while societies with relatively high income inequality can, in principle, be equitable, it is more likely that income differentials will compound and aggravate unfairness in the allocation of opportunities, the functioning of the political process, and efforts to improve the well-being of the least advantaged.

Does openness in trade and the free flow of capital promote growth for the poor? In this Working Paper, Nancy Birdsall discusses the inherent asymmetries in globalization, and the implications those inequalities have for poverty reduction. She suggests that global trading rules work less well for the people and households within poor countries. While modern capitalist and rich societies have mechanisms to manage their markets so that free trade and commerce more equally benefit all, poor countries cannot benefit from effective social contracts, progressive tax systems, and laws and regulations to manage asymmetries and market failures. This is also true at the global level, where poor countries are especially susceptible to the risks of free trade, and the vagaries of volatile capital flows. This paper is updated from a paper presented at the 2002 G-20 Workshop on Globalization, Living Standards, and Inequality in Sydney, Australia. It is also forthcoming in a Jubilee Conference Volume of the World Institute for Development Economics Research.

This paper proposes the creation of a "Stability and Social Investment Facility" (SSF) to be housed either at the IMF or the World Bank. It would be a long-term facility to help high-debt emerging market countries cope with and ultimately overcome what will otherwise remain a chronic structural weakness. The SSF would be an instrument providing a steady and predictable source of long-term funds as well as a strong policy signal to help high-debt emerging-market economies reduce their debt burden without having to forego vital pro-poor social expenditures and growth programs. For the facility to have a significant impact on debt and income dynamics in the eligible countries, the authors estimate it would need to lend $10-20 billion a year. The financial cost to the donor community would be the interest subsidy built into the SSF; were the subsidy 200 basis points, the cost in the first year would be $20 million for every $1 billion of lending. The rationale for the subsidy element is its catalytic role in facilitating a strong commitment to both prudent macroeconomic policies and pro-poor growth policies. The lower interest cost of the SSF, even if modest, would make it financially and politically easier for governments in eligible countries to address their long-term social (MDG) objectives, while maintaining a sound fiscal stance.