A large body of evidence shows that fiscal policy has a large impact on in-country income inequality in low and middle income countries, while trade policy generally has a smaller impact. However, the impact of other types of policies and reforms on income inequality is much less researched and understood.
The reviewers find evidence that government spending can have a negative impact on income inequality, but only when considering certain types of spending. The largest reductions in income inequality appear to be the result of cash transfer programmes, particularly in Eastern Europe. However, the redistributive effect of cash transfers in other regions of the world, particularly in Latin America, has been limited by their smaller size as a share of national income.
The reviewers find some evidence that taxation reduces income inequality, but the size of the effect is significant only for a limited number of middle-income countries. More generally, the redistributive effect of taxation in low- and middle-income countries has been limited, for reasons such as the smaller share of direct income tax in total tax revenue. We find very little evidence of an association between trade policy and income inequality, either positive or negative, despite a large number of studies on this issue. For other sorts of government policies, such as labour market reforms, pension reforms, privatisation, and land reforms, there has been much less research, which suggests priorities for further work.
Anderson, E.; Jalles d’Orey M. A.; Duvendack, M.; Esposito, L. What policies and interventions have been strongly associated with changes in in-country income inequality? EPPI-Centre, Social Science Research Unit, Institute of Education, University of London (2016), 166p