IMF on global inequality

A key chapter (PDF) in the latest World Economic Outlook from the International Monetary Fund (IMF) looks at globalisation and inequality. The chapter concedes that inequality has generally widened over the past 20 years although it also makes the point that living standards have generally risen. In other words the poor are better off in absolute terms but the gap between rich and poor has widened at the same time.

The chapter also uses an econometric model to try to identify the sources of inequality. Contrary to common belief it concludes that increased trade does not lead to wider inequalities. Instead inequality is associated with financial openness – particularly foreign direct investment – and most of all to technology. The reasoning behind the latter is that skilled workers are better able to make use of technology.

I am sceptical about the use of such models. They may help identify correlations – for example, one variable is associated with another – but that is not the same as explaining relationships. To be fair to the IMF it is also cautious about the conclusions that can be drawn from the model.