Outgoing US President Barack Obama has named the reduction of economic inequality as the “defining challenge of our time”. This is true not only for the United States – the richest country and, at the same time, the one with the highest wealth inequality – but also for a large number of countries around the world, independent of their level of economic development. So, for instance, the average Gini coefficient of disposable household income across OECD countries reached its highest level since the mid-1980s, from 0.315 in 2010 to 0.318 in 2014 (OECD 2016).
Extreme economic inequality is undesirable for many reasons.
First and foremost, extreme income and wealth inequality is likely to jeopardize moral equality (“all people are created equal”), undermining the very basis of democratic societies. When a large share of wealth is in the hands of a few privileged people, equal access to nominally public goods such as education or an independent judicial system may not be guaranteed. As economic inequality may exacerbate inequality of opportunity, it is likely to solidify the social stratification and divisions in a country, making its society more prone to extremist political movements, as the recent US elections and other global political developments have shown.
And second, pronounced economic inequality may contribute to the instability of the global macroeconomic system through the buildup of large imbalances either through excessively credit-financed consumption, as in the US, or through deficient domestic aggregate demand and oversized net exports, as in China and Germany.
For a long period, however, and partly due to the emergence of a large affluent middle class in the US and most industrialized countries, economic inequality was a second order issue in them. The emergence of the neoliberal era with Ronald Reagan and Margaret Thatcher, however, not only eroded many social institutions such as trade unions demanding a more equal distribution of income in those countries but significantly influenced the IMF’s perspective of the IMF from then on.
The poor performance of the IMF’s Washington Consensus policy prescriptions during that era is nowadays widely acknowledged.