Proven Policies to Reduce Inequality

This chapter spells out concrete policies that emerging market economies (EMEs) will need to use to reduce existing inequality and prevent future increases in income and wealth inequality, if such policies are sustained by policy makers, regardless of who is in power. These policy proposals are derived from the proven experience with policies for fast-growing Asian economies in the post–World War II period, as well as over a 100 year period of the now industrialized countries, especially but not only of Europe. One strategy that is overarching is that, they must adopt growth oriented policies, which involve structural change, so that workers are absorbed in non-agricultural work (construction, manufacturing, modern services), and pulled out dependence on agriculture. In this process, policy-makers should ensure the growth strategy is labor-intensive and involves the growth of formal jobs, thus reducing informality and vulnerability of workers by ensuring a social protection system. However, formal work requires that workers are well prepared in terms of education and skills to take advantage of labor-intensive growth, in formal economic activities. These actions may improve the primary distribution of income. However, to improve the secondary distribution of income EMEs need to adopt progressive income taxes, wealth tax, property tax, and an effective and optimal corporate income tax on large companies. These will need to be combined with transfers, through effective public expenditure, focused on universalizing publicly funded primary, preventive, and basic curative healthcare, and nutrition-related interventions. In addition, the now industrialized countries had focused their public expenditures on school education, and only later on higher education. They also used public expenditures to universalize social security for all workers. Finally, evidence is presented on how inequalities based on ascribed identities (caste, tribe, race, and gender) can be addressed.