Smart Fiscal Policies Key to More Equitable Societies

The Third World Bank Group’s Conference on Equity, held this week in Washington, focuses on fiscal policies, a topic that may not seem to be directly related to the organization’s mission to end poverty.

This is, however, the time to be considering innovative policy choices as Bank economists and their country clients look for tools needed to meet two important goals set by the Bank this year – reducing extreme poverty to less than 3 percent by 2030 and promoting shared prosperity to reduce inequality in the developing world.

“There’s no doubt that fiscal policies – the structure of taxes and transfers – can be a powerful mechanism to change the distribution of well-being in society,” Jaime Saavedra, the Bank’s acting vice president of Poverty Reduction and Economic Management, told conference participants June 10. “As such, it’s critical to have a better understanding of how taxes and spending can be shaped to improve the distribution of incomes and, through that, increase living standards.”

The essence of the Bank’s shared prosperity goal is to increase the income of the bottom 40 percent in each country. One important way to do that, Saavedra noted, is for states with growing economies to boost tax collections and put in place systems that will help pay for basic services that give all citizens a good start in life.

“It’s not just a matter of transferring income from one segment of society to another, at one point in time, but critical for investing in people to promote equity and growth over time and across generations,” Saavedra said. “In that regard, the structural taxes and transfers are one of the key elements of a social contract in a country.”

This social contract, he said, should create an “opportunity society” where human potential is maximized.

The one day conference, co-sponsered by Tulane University, invited fiscal policy experts from all over the world who met to share methodologies and findings, all in an effort to make the quest for shared prosperity a little less daunting.

There were also speakers from think tanks such as the Brookings Institution in Washington and Centro de Investigación y Docencia Económicas in Mexico City who focused on topics such as pensions and cash transfers and the role these play in reducing inequality.

World Bank Chief Economist Kaushik Basu noted in his keynote address that while the world has managed to globalize its economy, financial and monetary policies remain fragmented. This, he said, is putting a strain on countries – many of which are in a race to the bottom to cut corporate taxes while losing out on much-needed revenue.

“If you have no coordination of policy you run into problems,” Basu said.

In an effort to move the conversation forward, he has been promoting the idea of getting central banks to coordinate their policies as a critical first step. A cluster of major economies such as India and South Africa could coordinate their central bank policies to promote economic stability and growth, Basu said.