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Income Inequality and Keys to Overcome It

International Monetary Fund (IMF) has published a report over causes and consequences of income inequality, which is about the widening gap between the rich and the poor in the same society. According to the report the gap reaches its highest level in the last decades especially among emerging markets and developing countries.

IMF highlighted the issue of income inequality in order to help policy makers to focus on the poor and the middle class, because inequality matters for economic growth and sustainability. According to IMF analysis, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, in contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with the higher GDP growth. If the income shares of the top 20 percent increases by 1 percentage point, the GDP growth for that society is about 0.08 percent lower for the next five years, so the benefits do not trickle down. On the other hand, if the income share of the bottom 20 percent increases by 1 percentage point the growth is higher by 0.38 percentage point in the same society.

Inequality can bring many problems to the country such as financial crises, global imbalances and conflicts, which can also happen between countries belonging to the same economic zone. Finally inequality bans the economic growth in any country, where there is a big gap.

So, the key to improve inequality inside any society is to reduce the number of law income and poor class people. It can be done through investment in education, technology and by improved job offers. The most effective way to reduce the inequality is a shift in the allocation of labor income towards the higher and lower classes. The enlargement of the middle-class households in the society is the important issue to overcome the inequality gap.

 So, well designed fiscal policy, education policies, labor market polices and institutions are the keys to reduce inequality. But for each country there is a need for special policy approach.

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