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Economy Faces Triple Threat to Sustainable Future, Says Lagarde

Lagarde: ‘Different economic, environmental, and social objectives can be seen as distinct aspects of a single vision’ (photo: Stephen Jaffe/IMF)

Global Economy

Economy Faces Triple Threat to Sustainable Future, Says Lagarde

June 12, 2012

  • Economic, environmental, and social challenges require immediate attention
  • Sustainable development first needs macroeconomic and financial stability
  • Getting prices right must underpin green economy

The world faces triple obstacles to a green future, with the global economic crisis smothering action on global warming and feeding an expanding gap between haves and have-nots, IMF Managing Director Christine Lagarde warned. She said that the three different crises on economic, environmental, and social fronts feed off each other and cannot be addressed each in isolation.

“The global economy is still rocked by turmoil, with uncertain prospects for growth and jobs. The planet is warming rapidly, with unknown and possibly dire consequences down the line. Across too many societies, the gap between the haves and have-nots is getting wider and strains are getting fiercer,” she said.

Lagarde addressed an audience of policymakers and journalists at the Center for Global Development in Washington, D.C.

With these formidable challenges facing the world, Lagarde urged efforts toward economic growth, environmental protection, and social progress at the same time. “Different economic, environmental, and social objectives can be seen as distinct aspects of a single vision, essential parts of a connected whole,” she said.

Twenty years after the 1992 Earth Summit in Rio de Janeiro, Brazil, Lagarde will be taking this message back to Rio where the Rio+20, United Nations Conference on Sustainable Development is taking place next week.

World leaders, along with thousands of participants from governments, the private sector, and civil society will come together in Rio to discuss ways to reduce poverty, advance social equity, and ensure environmental protection.

Getting the basics right

For sustainable development to work it must spring from macroeconomic and financial stability, which in turn paves the way for robust growth and a productive economy, Lagarde said.

“So we need a strategy that is good for stability and good for growth—where stability is conducive to growth and growth facilitates stability,” she said

Yet many regions of the world today remain stuck in a trap of low growth and high unemployment, and great uncertainty hangs over global prospects. The International Labor Organization estimates that right now 200 million people worldwide cannot find work, including 75 million young people.

Lagarde called on policymakers in Europe to take decisive steps to break free of the crisis there.

“First, they need to rekindle demand today, to get the growth engine up and running again. Second, they must make sure that any spark to demand today leads to sustained growth tomorrow, which means reforms on the supply side to boost the productive capacity of the economy,” she said.

The rest of the world also needs to invest in stability and growth, she said. Developing countries in particular must stand ready, by rebuilding the policy buffers that served them so well during the crisis.

In the early days of the crisis, the IMF responded to the needs of low-income members with quadrupled lending, doubled access limits on loans, and zero interest rates.

In recent months the IMF has called on the international community to increase its resources for concessional lending, to help vulnerable countries navigate an increasingly volatile world.

Green economy

With climate change now seen as one of the great tests of this generation, getting the green economy right will be of upmost importance. While the IMF is not an environmental organization, it cannot ignore the extensive human suffering and the misallocation of resources that leads us down the wrong path, Lagarde said.

“Perhaps we can help with a simple concept that everybody can understand—getting the prices right. Getting the prices right means using fiscal policy to make sure that the harm we do is reflected in the prices we pay. I am thinking about environmental taxes or emissions trading systems under which governments issue—and preferably sell—pollution rights,” she said.

This kind of environmentally sensitive fiscal policy has two distinct advantages.

First, it is the best and most comprehensive route to reducing environmental damage. It changes relative prices and provides a powerful incentive to change behavior. It can also galvanize clean technology development and deployment by the private sector, such as investments in energy efficiency and renewables, she said.

Second, in these difficult budgetary times, countries need revenue and these kinds of tax or tax-like instruments can deliver. In the United States, for example, a carbon tax of about $25 per ton of CO2—which would add 22 cents to a gallon of gasoline—could bring in about 1 percent of GDP, or over $1 trillion over a decade. Charges on international aviation and maritime emissions would raise about a quarter of the $100 billion needed for climate adaptation and mitigation in developing countries—resources that developed countries have committed to mobilize by 2020, she said.

Lagarde urged those countries that continue to subsidize polluting energy systems to reduce their subsidies. “These subsidies are costly for the budget and costly for the planet,” she said. “But in doing so, they must protect vulnerable groups by tightly focusing subsidies on products used by poorer people, and by strengthening social safety nets.”

The IMF expects to come up with actionable guidance for both developed and developing countries on precisely how to better get these prices right by the end of this year, with a final report expected within twelve months.

Inclusive growth

An equally important goal is the need to make growth more inclusive. This means making sure that all share in the fruits of prosperity and that all are given the opportunity to fulfill their potential, Lagarde said.

“Without this, the social threads that bind society together can rip apart, with devastating economic consequences,” she said. “Indeed, recent research shows that countries with more equitable distributions of income are associated with greater macroeconomic stability and more sustainable growth over the longer term—it is all bound together.”

While it is not a labor institution, the IMF is working on ways to spur both growth and jobs, and to make sure that growth produces jobs. The IMF is also looking at other ways to help promote more inclusive growth—including better access to trade and finance, better transparency and governance, and better social protection, she said.

IMF research shows that government spending and taxes play a vital role in reducing inequality, especially in advanced economies.

Options here include reducing tax evasion and avoidance, making income taxes more progressive at high income levels, and protecting the kinds of social transfers that promote a more even income distribution. As well as advanced economies, developing countries too need to spend more on social safety nets. In these countries, social safety nets might be all that stands between survival and catastrophe, she said.

At the end of the day, social protection should not be seen as a cost but as an investment—an investment in sustainable development.