Seizing a Once-in-a-Generation Opportunity
Keynote Remarks by Christine Lagarde
Managing Director, IMF
The Brookings Institution, Washington, D.C.
July 8, 2015
Good afternoon. I am delighted to join you all for this timely discussion on the post-2015 development agenda.
Thank you—Kemal—for your kind introduction. Let me also thank our hosts, the Brookings Institution. I am pleased to be alongside Nancy Birdsall from the Center for Global Development, Michael Elliott from the ONE Campaign, and Homi Kharas from Brookings.
Next week, many of us will be in Addis Ababa for the UN Conference on Financing for Development. As you know, this will be the first of three major conferences on global development this year. In September, New York will host the meeting on the new Sustainable Development Goals. And climate change will be the focus of the December conference in Paris.
Last month I gave a speech called “Lifting the Small Boats” that I would like to expand on today. In that speech I expressed my belief that, taken together, these three conferences represent a once-in-a-generation opportunity for global development. Decisions taken in this pivotal year will resonate for decades to come. Let me be blunt: this chance will not come again anytime soon.
There is an African proverb: “When the music changes, so does the dance.” This year, we have the chance to take a new approach—to change the music—and put all countries firmly on the path to sustainable, inclusive growth.
To grasp this window of opportunity, we must consider our next steps carefully—and act. In that spirit, I would like to focus on three issues:
- The changing global development landscape.
- The actions developing countries need to take to support sustainable growth.
- The contribution of the international community—including the IMF.
1. The changing global development landscape
First, the development landscape. How have circumstances changed since the Millennium Development Goals were adopted 15 years ago? And what trends have emerged that will help to shape the next 15 years?
For me, three trends stand out in particular. Three “V’s”: velocity, variance, and volatility.
The first is “velocity.” Over the past 15 years, most systemically important emerging markets have prospered. Many developing countries have become more integrated into the global economy. As a result, there has been a rapid expansion of growth, trade, and capital flows.
Since 2009, for example, developing country GDP and trade have expanded at annual average rates of 10 percent.1 Since the early 2000s, capital flows to developing economies have increased more than three-fold.2
This economic expansion is good news. But the bad news is that it has not been shared equitably. I call this “variance.” Better performing economies—often underpinned by robust domestic policies—have forged ahead. Sadly, the poorest and most fragile have been left behind. In fact, over the last 15 years, real per capita GDP in non-fragile low-income countries has increased by almost 70 percent.3 In the fragile countries it has risen by less than 15 percent.4
Another important dimension of “variance,” of course, is the high level of income inequality within countries, even if—generally speaking—inequality between countries has declined in recent decades.
The third “v” is “volatility.” As well as the Great Recession itself, conflicts and natural disasters have also set many countries back. Climate change represents an increasing problem—with poor countries hit especially hard. Since 1990, for example, almost three-quarters of all natural disasters have occurred in developing countries.5 Location and reliance on agriculture can make the poorest countries especially vulnerable.
Another factor with implications for volatility is demographics. Countries with aging populations face rising dependency ratios that could strain government finances and slow down growth. Others—especially in Sub-Saharan Africa—could reap a “demographic dividend” if they harness an expanding workforce.
So three trends: velocity, variance, volatility. Some boats have built-up speed, while others struggle to make headway; they all remain at risk of storms and the uncharted waters that lie ahead. Each trend has important implications for global development. To make the right choices in 2015, they must be taken into account.
Making the right choices in 2015 also rests on commitment—from all partners. This brings me to my second theme: the role of developing countries themselves.
2. The important role of domestic policies to support sustainable growth
When we look back over the last 15 years, one lesson is that those developing countries that have performed the best, have generally been those that have assumed the greatest ownership—that drive their own development. What does that entail?
Coming from the IMF, my first words of advice will come as no surprise to you: macroeconomic stability is a prerequisite for sustainable growth. That includes keeping inflation moderate and public debt sustainable. It also means implementing policies that help to maintain resilience in the face of external shocks.
Think about Sub-Saharan Africa: the region demonstrated remarkable resilience in the face of the global financial crisis. In fact, nearly two-thirds of Sub-Saharan countries have recorded ten or more years of uninterrupted growth.6 Their prudent policies paid off. Of course, strong macroeconomic policies will remain of paramount importance—especially as the region confronts new challenges and risks.
That is why the IMF places so much emphasis on the macroeconomic dimension. Because stability helps people to prosper; and because instability victimizes the poor and vulnerable. High inflation, for instance, is regressive. And instability is the death-knell of large scale private investment, the driver of growth over time.
It is only with a stable foundation—a watertight hull and an even keel—that we can raise the mast, hoist the sail, and chart our course toward inclusive, sustainable growth.
What are the priorities?
Mobilizing revenues is an imperative. In about half of all developing countries, tax ratios are below 15 percent of GDP,7 compared with an average of 34 percent in OECD countries.8 The situation is even worse in some fragile states. By implementing tax systems that are simple, broad-based, and fair, this can be turned around.
A recent IMF study examined 126 low- and middle-income countries between 1993 and 2013.9 It found that Fund-supported programs with revenue conditionality helped implementing countries increase their tax revenues by 1 percentage point of GDP one year after the program was put in place. Moreover, after three consecutive years of a program, tax revenues increased by 3 ½ percentage points of GDP. Why is this important? Because these are extra tax revenues that can be redirected to support development needs.
Indeed, this is a salient point: once revenues are raised, they must be spent efficiently and effectively in support of inclusive growth. Strong fiscal institutions and public financial management are essential. As other IMF research has shown, for example, well-managed public investment has a key role to play in improving infrastructure and supporting inclusive growth.
Unfortunately, we have found that around 30 percent of the potential gains from public investment are lost due to inefficiencies in public investment processes.10 Were a country in the lowest efficiency quartile able to increase its efficiency to the level of the highest quartile, it would double the economic “bang” it gets for its investment “buck.”11
So mobilizing revenues efficiently is key. Another priority is to develop the financial sector in a way that supports growth and tackles poverty. IMF staff estimated that the annual growth rate of developing economies with more liberalized banking sectors exceeds that of economies with less liberalized banking sectors by about 1 percentage point.12 We also know that the percentage of people living on less than 1 or 2 dollars a day can fall more rapidly with higher levels of financial development.13
Governments can play an integral role by setting the rules of the game at an early stage: applying supervision, protecting legal rights, and strengthening financial infrastructure. Improving the business environment in this way helps to attract private finance and investment, both domestic and foreign.
Of course, it is also essential to share the fruits of growth—by promoting economic inclusion and environmental sustainability. This includes providing access to finance, strengthening social protection, and empowering women and girls—the latter an issue that I particularly care about.
It is estimated that, if women participated in the labor force as much as men, per capita incomes would rise by 27 percent in the Middle East and North Africa; 23 percent in South Asia; 17 percent in Latin America; 15 percent in East Asia; 14 percent in Europe and Central Asia; and 12 percent in Sub-Saharan Africa.14 In short, empowering women is an economic game-changer.
More generally, IMF research shows that an increase in the income share of the bottom 20 percent is associated with higher GDP growth.15 We have also found that a one-gini-point increase in inequality is associated with a 6 percentage point higher risk that a growth spell will come to an end in the coming year.16 So growth that is more inclusive is also higher and more durable. To put it another way: fairness is good economics as well.
The bottom line? By implementing policies conducive to sustainable growth, developing countries can go a long way to support their own development. But they cannot do it alone. The international community also must play a key role, working hand-in-hand with developing countries themselves.
3. The development role of the international community—including the IMF
This brings me to my third and final point: in today’s interconnected world, we share a common responsibility for our common fate.
How can international partners help create an environment more conducive to sustainable and inclusive development? In other words, as I have asked before, how can we lift the “small boats”?
The challenge is multidimensional. It ranges from cooperation to combat tax evasion, to constructing an even stronger multilateral trading system. It includes raising aid levels in rich countries, and reducing the cost of transferring remittances in poor countries. And it requires committed partnerships.
Let me emphasize: these partnerships are not just about governments. There is a crucial role for non-state actors, such as civil society organizations that bring to the table their unique perspectives and expertise. Along with other new networks of influence, civil society plays an essential part in what I have called the “new multilateralism.” That is why I always relish listening to civil society, and why I always encourage IMF staff to do so.
The Fund—with its global membership and mandate to promote economic growth and stability—is also a committed partner for development. In this pivotal year—ahead of next week’s conference in Addis—we have sought to identify areas where providing additional support will have strong payoffs. What are these?
First and foremost, in our core policy advice and capacity building, we will strengthen our work in several areas:
- We will help more countries mobilize domestic revenues, and then repurpose these resources to tackle poverty and drive sustainable growth. We plan to allocate additional resources to this area, which already accounts for one-fifth of IMF capacity building. For example, the Fund will work to bring developing countries more fully into the debate on international taxation, helping to ensure that new tax rules address their concerns. We will also expand our support to increase the efficiency of public spending—such as by eliminating untargeted subsidies, such as energy subsidies that primarily benefit the better-off, while having adverse environmental effects.
- e will support countries seeking to invest in infrastructure and thereby develop their economies. In particular, we will use a range of tools to assess public investment management capacity, identifying areas where technical assistance to strengthen domestic institutions is needed. We will then summarize those assessments in our Article IV reports—and publish them on a website to help share knowledge.
- And we will deepen our engagement with countries on issues of rising concern—equity, inclusion, and climate change. This will include expanding our analytical work on inequality, gender, jobs and financial inclusion—and applying these findings in our operational work. Over the medium-term, we expect considerations around inclusion to become an increasingly regular component of our operational work.
We are fully alert to the challenges faced by fragile and conflicted-affected states—where development lags and, in many cases, terrorism breeds. We know that achieving results in fragile states requires engagement for the long-haul—the hard slog of re-building key economic institutions, the inevitable set-backs on the way—but we are in it for the long-haul and will stay the course.
Beyond our policy advice and capacity building, I am also pleased to announce several changes to our financing facilities for developing countries—approved by our Executive Board just a few days ago:
- First, to better protect countries from external shocks, we will expand access to all concessional facilities by a full 50 percent.
- Second, we will target our concessional resources more on the poorest and most vulnerable countries.
- Third, we will maintain the interest rate on our Rapid Credit Facility loans—our loans to fragile states and countries hit by natural disasters—at zero percent over the longer term.
IMF loans constitute an important safety net for countries confronting external payments imbalances: the expanded safety net will provide an additional level of support to countries pursuing ambitious development.
In these concrete ways, the IMF intends to create a more supportive environment for developing countries to prosper in the period ahead. We will play our part.
There is another African proverb:“If you want to go fast, go alone. If you want to go far, go together.”
This year marks a once-in-a-generation opportunity for global development. The only way to seize it is through partnership. To go far, we must go together.
1 IMF, Financing for Development—Enhancing the Financial Safety Net for Developing Countries, p.9.
2 IMF, Financing for Development—Revisiting the Monterrey Consensus, p.11.
3 Ibid, p.10.
5 Ibid, p.13.
6 IMF estimates. Also see speech on Africa Rising—Building to the Future.
7 IMF, Financing for Development—Revisiting the Monterrey Consensus, p.15.
8 OECD, Revenue Statistics tax to GDP ratio changes between 1965 and 2012.
9 IMF, Does conditionality in IMF-supported programs promote revenue reform? Revenue estimates are calculated using the coefficients in Table 6 (page 19).
10 IMF, Making Public Investment More Efficient.
12 IMF, Structural Reforms and Economic Performance in Advanced and Developing Countries, p.17.
13 IMF, A Bigger Slice of a Growing Pie. Also see Beck et al, “Finance, Inequality and the Poor,” Journal of Economic Growth, Vol. 12, No. 1, pp. 27–49.
14 IMF, Women, Work, and the Economy. Also see Cuberes and Teignier, Gender Gaps in the Labor Market and Aggregate Productivity.
15 IMF, Causes and Consequences of Income Inequality.
16 IMF, Redistribution, Inequality, and Growth.