IMF raps inequality in low income countries  

Source: IMF raps inequality in low income countries   | The Financial Gazette January 31, 2017

INCOME inequality in low-income developing countries (LIDCs) has remained stubbornly high over the past two decades despite sustained growth and declines in poverty levels, notes a report published by the International Monetary Fund (IMF).
The report, tilted Macro-Structural Policies and Income Inequality in LIDSs, which was released last week on Wednesday says that widening inequality can also weaken support for growth-enhancing reforms and may spur governments to adopt populist policies, threatening economic and political stability.
The report mirrors a lot of realities in Zimbabwe, which has been facing increasing levels of inequality, even during episodes of double digit growth experienced between 2010 and 2012.
The Poverty and Poverty Datum Analysis in Zimbabwe report, which was conducted in 2012 by the Zimbabwe national statistics agency (Zimstat), established that Zimbabwe’s Gini coefficient was “within the range of countries considered to be highly unequal” and that the majority of the population is living in poverty.

Gini coefficient is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents, and is the most commonly used measure of inequality.

At 0,423, Zimstat said that Zimbabwe’s Gini coefficient shows “relative inequality in well-being”. A Gini coefficient of 1 is an indication of complete income inequality, with one person having all the income, while a Gini coefficient of zero is indicative of complete equality with everybody earning an equal income.
The IMF staff report also notes that the impact on inequality can also be affected by the presence of a large informal sector.

“The larger the informal sector is, the smaller is the tax base, which means that tax rates have to be higher in order to attain revenue targets. Higher rates result in greater efficiency losses, through the impact on work and investment incentives,” says the report.

It also highlights that structures that can sustain a large informal sector may lead to tax avoidance in the form of a shift to the informal sector, motivating the use of indirect taxes in these economies.
Zimbabwe’s informal sector has been growing over the past few years and now employs an estimated 95 percent of the country’s productive age group. Tax authorities have been trying to come up with cost effective measures of widening the tax base by including players in the informal sector in the tax net. In the recently released revenue collection results, the Zimbabwe Revenue Authority (ZIMRA) said “unwillingness to meet tax obligations by economic agents” was one of the reasons why the authority failed to meet its revenue targets.

“If Zimbabwe is to develop, there is need for a paradigm shift in the way we view this obligation across the board,” said ZIMRA.
The IMF staff paper also said that reforms that increase access to financial services may lower inequality while boosting growth.

“Greater financial access can help people build buffers for smoothing out income fluctuations, reducing both income and consumption inequality. In addition, higher savings result in higher resources that can be channelled to private investment with a positive effect on growth.”

Zimbabwe currently has domestic savings of -11 percent of GDP.
While noting that the complex nature of the distributional impact of macro-structural policies and reforms in LIDCs, the report says the impact depends on the policy and reform design and the interplay with country-specific economic characteristics.
The report advised that pro-growth reforms that create distributional trade-offs can be complemented by policies that limit the adverse distributional effects of these reforms.

“While there is no one-size-fits-all recipe, governments concerned about the likely distributional impact of reforms can adjust specific features of reform design or introduce targeted accompanying measures to make pro-growth reforms more inclusive,” it added. FinX