"Back to Rio- the Road to a Sustainable Economic Future" By Christine Lagarde, Managing Director, International Monetary Fund

IMF News, June 12, 2012

Source details

Canonical URL: "Back to Rio- the Road to a Sustainable Economic Future" By Christine Lagarde, Managing Director, International Monetary Fund

Other formats

Bibliographic details

Authors: Christine Lagarde
Published: June 12, 2012

Getting the basics right

Key premise: Sustainable development must spring from macroeconomic and financial stability, which paves the way for robust growth and a productive economy.
Current context (as presented): a "triple crisis"—an economic crisis, an environmental crisis, and an increasing social crisis—interacting and reinforcing one another.
Labor market facts:
- "200 million people worldwide cannot find work, including 75 million young people trying to take their first step on the ladder of success."
Advanced-economy policy recommendations:
- Rekindle demand today through a combination of:
- (i) very accommodating monetary policy,
- (ii) use of common resources to provide direct support to banks,
- (iii) when fiscally available, growth-friendly policies.
- Lay out a credible medium-term plan to lower public debt to preserve fiscal stability and avoid larger, sooner adjustments.
- Implement supply-side reforms to boost productive capacity: product market reforms (especially in non-traded sectors and less competitive regions) and labor market reforms (to help disenfranchised groups such as younger and older workers).
Recommendations for developing countries:
- Stand ready to rebuild policy buffers; those with fiscal space should prepare to use it if conditions deteriorate.
- Pursue greater economic diversification, trade integration, and greater investment in infrastructure.
- Example infrastructure need: "The infrastructure needs for sub-Saharan Africa, for example, amount to around 15 percent of the region’s GDP."
IMF role and actions:
- Past crisis response: "quadrupled lending, doubled access limits on loans, and zero interest rates, which have been extended to the end of this year."
- Use IMF resources to help countries cope with natural disasters (examples cited: Kenya and Burkina Faso).
- Priority: IMF needs more resources for concessional lending to help vulnerable countries.

Getting the green economy right

Overarching point: Growth must be pursued on a different track—one that internalizes environmental costs so that economic growth and environmental protection reinforce each other.
Climate and vulnerability findings:
- Climate change is both current and future threat; poorest and most vulnerable suffer most (example: Africa contributes least but suffers most).
- UN estimate cited: agricultural hit in Southern Africa could lead to "nearly a million more undernourished children."
- Global asset exposure: "about $3 trillion in valuable assets lie at or below three feet above sea level."
- Health impact example: "In India, pollution from coal generation plants causes about 70,000 premature deaths a year."
Policy prescription: "Getting the prices right"
- Use fiscal policy to reflect environmental harm in prices: environmental taxes or emissions trading systems with governments issuing—and preferably selling—pollution rights.
- Fiscal instruments change relative prices, incentivize cleaner behavior, and can catalyze private clean-technology investment (energy efficiency, renewables).
Fiscal revenue potential and targets:
- U.S. 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."
- 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."
Current gaps and reform priorities:
- "Less than 10 percent of worldwide greenhouse gas emissions are covered by formal pricing programs."
- Only a handful of cities charge for road congestion; farmers in rich countries are undercharged for scarce water.
- Many countries subsidize polluting energy systems; these subsidies are costly for budgets and the planet.
- When reducing subsidies, protect vulnerable groups by tightly focusing subsidies on products used by poorer people and by strengthening social safety nets.
IMF commitments and timetable:
- IMF launching an e-book on carbon pricing as a practical guide for policymakers (linked to Rio+20 materials on IMF webpage).
- Planned IMF activities: side event in Rio; event with the United Nations Environment Program later in the year on fiscal policy and energy subsidy reform.
- Staff tasking: produce actionable guidance for developed and developing countries on pricing—"interim results by the end of this year, with a final report within twelve months."
- Collaboration with UN and World Bank on natural resource accounting to measure incomes and costs associated with natural resources and extraction effects on national wealth.

Getting inclusive growth right

Core objective: Make growth more inclusive so all share in prosperity and have opportunities to fulfill potential; inclusiveness underpins social cohesion and sustainable economic outcomes.
Evidence and partners:
- Cited research: countries with more equitable income distributions are associated with greater macroeconomic stability and more sustainable long-run growth.
- IMF collaborations: International Labor Organization (ILO), International Trade Union Confederation, World Bank, and other UN agencies.
Jobs and policies:
- Jobs must be at the forefront; policies across labor market, fiscal, monetary, financial, trade, and macro-prudential domains matter.
- IMF is not a labor institution; it collaborates with ILO on employment and labor market issues.
Fiscal and distributional policy recommendations:
- Use government spending and tax policy to reduce inequality—options include reducing tax evasion and avoidance, making income taxes more progressive at high income levels, and protecting social transfers that promote more even income distribution.
- Developing countries should allocate public spending to social safety nets; social protection can be the difference between survival and catastrophe.
- Move away from universal price subsidies (especially energy) toward effective and targeted social programs (e.g., conditional cash transfers).
- Country examples:
- Iran: slashed energy subsidies and compensated the population with cash transfers.
- Mozambique: phasing out poorly-targeted fuel subsidies and using savings to improve social protection.
Revenue mobilization target:
- "We think an extra 2-4 percent of GDP is plausible," based on reforms like streamlining tax codes and procedures, removing exemptions, and strengthening revenue and customs administration.
IMF program outcomes on social spending:
- "Spending on health and education rises faster in countries with IMF-supported programs than in developing countries as a whole."
- Over an average five year program period:
- "health spending rises by 1 percentage point of GDP,"
- "education spending by ¾ percentage point."
- IMF participation in the social protection floor initiative to help poor countries set up basic affordable levels of protection.
Principle: Social protection should be seen as an investment in sustainable development, not merely a cost.

Conclusion

Vision: Sustainable development as a unified pursuit of economic vitality, social harmony, and stewardship of the planet—"the future we want."
Call to collective action: Rich and poor nations, economists, environmentalists, social policymakers, public sector, private sector, civil society, and international organizations must work together.
Final appeal to responsibility and shared belonging, echoed in Wangari Maathai quotes urging healing the Earth and reviving a sense of belonging to a larger family of life.

Source: "Back to Rio- the Road to a Sustainable Economic Future" By Christine Lagarde, Managing Director, International Monetary Fund; June 12, 2012. As prepared for delivery.