From the TUC

Lagarde’s critique of inequality ignores union role in restoring fairness

05 Feb 2014, By

I am indebted to the ITUC’s Washington office director, Peter Bakvis, for this analysis of Christine Lagarde’s Dimbleby lecture, being broadcast as I write.

During her speech, delivered in London on Monday and broadcast on Tuesday, IMF managing director Christine Lagarde stated that economists, presumably including the several hundred who work at the IMF, have finally recognized the importance of income and wealth inequality:

“Today, we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential.”

Among other data, she cited figures from a recent Oxfam report about the 85 richest people in the world owning the same amount of wealth as the bottom half of the world’s population. But she ignored Oxfam’s analysis and also most of its recommendations, including the role of strengthened wage floors and worker rights.

There may be limits to Lagarde’s willingness to engage in self-criticism. Oxfam’s report, Working for the Few: Political Capture and Economic Inequality, blames some of the policies that the IMF has supported as being among the leading causes of increased income inequality. These include financial deregulation, which the IMF supported until the 2007-2008 financial crisis; and austerity economics, which the IMF has frequently promoted, including in countries most affected by the post-2008 economic crisis.

Lagarde’s suggested solutions to the increase in inequality were progressive taxation, better access to health and education, targeted social programmes and increased labour force participation of women. Nothing wrong with any of that, but they’re all statist solutions.

Oxfam’s report concludes that “strengthening wage floors and worker rights” are among the six most important measures that countries wishing to reduce inequality must adopt. In several countries, particularly in Europe, recent IMF programmes have actually reduced minimum wages and other wage floors and undermined workers’ rights by requiring the dismantling collective bargaining institutions. When trade unionists challenged her at Davos last month, she said that it wasn’t up to her to do the trade unions’ job for them: we think that, faced with the current levels of inequality, anyone concerned about the problem has a duty to promote collective bargaining and a stronger role for unions in setting wages.

Lagarde’s speech, A New Multilateralism for the 21st Century, made no mention of the declining labour share in national income and the failure of wages to keep up with productivity as causes of increased inequality, nor did she refer to the strengthening of workers’ rights as a key instrument for reversing the trend. Her only reference to labour market issues was the proposal to increase women’s participation in the labour force, where she cited ILO figures showing that 865 million women around the world are being held back (but she was better at analysis than solutions when talking about gender inequality, too.)

Nevertheless, let’s welcome some of what she said – here are what I think were the best bits of what she said about inequality:

“We are all keenly aware that income inequality has been rising in most countries. Seven out of ten people in the world today live in countries where inequality has increased over the past three decades. …

“In the US, inequality is back to where it was before the Great Depression, and the richest 1 percent captured 95 percent of all income gains since 2009, while the bottom 90 percent got poorer. In India, the net worth of the billionaire community increased twelvefold in 15 years, enough to eliminate absolute poverty in this country twice over.

“With facts like these, it is not surprising that inequality is increasingly on the global community’s radar screen. It is not surprising that everyone from the Confederation of British Industry to Pope Francis is speaking out about it—because it can tear the precious fabric that holds our society together.

“Let me be frank: in the past, economists have underestimated the importance of inequality. They have focused on economic growth, on the size of the pie rather than its distribution. Today, we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential.”