Speech

95/9 Opening Remarks by Michel Camdessus
Managing Director of the International Monetary Fund
June 1, 1995

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Good morning, ladies and gentlemen. I am pleased to welcome you to this conference on Income Distribution and Sustainable Growth. As you know, we shall until next July be continuing to celebrate our 50th anniversary--the achievements of our first 50 years and the challenges of the next. I will not mention the achievements, great as they may be. Let us rather concentrate on the opportunities and risks the world economy now faces.

While the closer integration of markets across countries promises an unprecedented opportunity to achieve greater efficiency and higher economic growth worldwide, it is also clear that we face a much more volatile global market environment--a place where risks are higher than before and where the best way for countries to avoid a Mexico-like crisis, as stated by the Interim Committee in April 1995, is to adopt "strict policy discipline to guard against adverse market reaction." Our own in-house reflections have already suggested to us several avenues for renewed efforts to avoid "Mexico-like" adverse market reactions in this evolving global environment:

• we have to strengthen our surveillance to help member countries prevent economic crises, especially those that could involve risks to the international monetary system;

• we have to find ways to help member countries deal with crises more effectively when they do occur;

• we have to help member countries achieve conditions for "high-quality growth," by which I mean growth that is sustainable, that respects the environment, that brings lasting full employment and poverty reduction, and that fosters greater equity through increased equality of opportunity. In this regard, our experience in working with member countries for half a century has provided valuable lessons: in particular, that the pursuit of these goals requires a sound mix of policies, with attention given to the distributional implications of these policies, for example, through cost-effective social safety nets aimed at helping the poor during periods of reform and adjustment.

But in this approach, we face an old issue--how income distribution is related to economic growth--and more particularly, we face three related questions that are likely to stay with us into the next century and on which I am certain this gathering of distinguished economists and policymakers will shed new light:

• First, why is income distribution an important policy issue?

• Second, what are the implications of income distribution for economic growth?

• And finally, what are the implications of our concern about income distribution for IMF operations?

Let me say a few words about each of these questions.

1. Why is income distribution an important policy issue?

Well, first, because of its relevance to efforts to reduce poverty. There is no question that sustained economic growth is a crucial condition for reducing poverty. However, would growth alone necessarily reduce poverty? It may not always be the case. Poverty reduction achieved only through growth may not be fast enough, particularly when the initial distribution of wealth, including land, is highly uneven. Therefore, shouldn't a strategy for the alleviation of poverty focus on both growth and reduced income inequality?

Income distribution also relates to social justice--and to perceptions of social justice, which can affect harmony among different social groups and the political sustainability of the good economic policies to which I have already alluded. Broad public support is more likely to come for a wise and sustained course of adjustment and reform when the distribution of income and opportunities to attain economic advancement are seen as relatively "fair," or at least not outrageously biased toward privileged groups. What degree of importance would you give to this objective?

2. What are the implications of income distribution for economic growth? This is my second question and is the central issue to which this conference is devoted. There seem to be two competing views.

a. View stressing equity-growth trade-offs

There is a long-held view that policies that reduce income inequality affect growth adversely for at least two reasons:

• The first reason is that transfers and taxes used to redistribute income may create distortions and disincentives. Moreover, the resources required for redistributive programs may reduce the funds available for public and private investment in physical and human capital.

• The second reason is that since high-income groups tend to save a larger portion of their income, greater distributional equality is likely to decrease aggregate savings and, thus, investment.

But you also have:

b. Views stressing equity-growth complementarity

There is growing recognition that an excessively unequal income distribution may itself be detrimental to sustainable growth. Couldn't cost-effective programs aimed at reducing excessive income and consumption inequality, in the context of macroeconomic stability and allocative efficiency, promote, not deter, sustainable economic growth? I will mention three well-recognized channels that provide insights into how economic policies are intertwined with social issues and the political process. The recognition of these channels, on which some of you have done pioneering work, forces us to think about the broader implications of, and necessary preconditions for, sound economic policies.

• The first channel is the positive effect of such policies on the efficient use and development of human resources. We all have in mind the example of many East Asian countries achieving remarkably high economic growth, together with declining income inequality, by pursuing good macroeconomic policies and high investment in physical and human capital, with heavy emphasis on primary education.

• The second channel is the positive effect of such policies on public and private savings. Sound macroeconomic, budgetary, and financial policies which avoid excessive distributional inequality also create conditions for sustainable growth through higher rates of savings and investment.

• The third channel is the positive effect of reduced income inequality on the political process and on social cohesion. A highly unequal distribution of income, or the lack of opportunity for large segments of the population, may lead to political and social instability and impede efficient economic activity. Moreover, in a democratic society, it could generate political pressures for unsound economic policies. This is the most fertile soil for populism to flourish. Greater income equality achieved through well-designed income transfers (including social safety nets) can help secure support for policies crucial for economic reform and sustainable growth.

If these three channels are essential,

3. What are the implications for IMF operations? This is the third and final question.

Should the IMF, as a macroeconomic policy institution, be interested in income distribution? What are the implications of the linkages between income distribution and economic growth for our operations? De facto, by trying to create conditions for high-quality growth, our policy advice often has, implicitly, a distributional content.

• In the surveillance process, in conducting a comprehensive analysis of the general economic situation and policy strategy of a member, discussions deal frequently with labor market and unemployment issues, as well as with the effectiveness and efficiency of social expenditures. As such, we cannot but call the attention of the country and of the membership to income inequality and its potential adverse consequences for the social fabric and sustainable growth.

• IMF-supported reform programs include targeted safety nets aimed at shielding the most vulnerable groups from the short-run adverse effects of economic reform measures. The IMF also provides technical assistance in this area. In collaboration with the World Bank, these reform programs are seeking increasingly to enhance the economic participation of the poor in the growth process.

But is this the proper way for the IMF to address distributional concerns? Is this sufficient, in light of the evidence gathered by this conference, and in light of your views on desirable strategies for achieving growth with equity? Do we need to amend our policy advice?

Well, when considering the present situation of the world, I feel that there is, perhaps, a need and potential to do more because:

• high-quality growth is still elusive in many countries; and

• unemployment and poverty are more persistent worldwide than they could and should be...

So, if anything, what more should we do?

Needless to say, we need to proceed with caution--for many reasons:

• We must be sure that we do not stray from our central mandate.

• We have to be realistic also about what we can achieve with regard to these sensitive issues, as we have to respect our member countries' sovereign choices.

• And, indeed, we have to think about our staffing constraints, and other priorities.

I add this note of caution not to discourage your imaginative suggestions but, on the contrary, to give you a more precise idea of the narrow path on which we must tread in trying to optimize the mutually supportive interaction between growth-oriented adjustment strategies and a well thought-out approach to distributional issues.

I look forward to learning about the proceedings of this conference. I trust that we shall all find this conference an absorbing experience and that it will provide valuable insights to help us deal with the challenges ahead.