"Lifting the Small Boats," Speech by Christine Lagarde, Managing Director, IMF

IMF News, June 17, 2015

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Authors: Christine Lagarde
Published: June 17, 2015

Introduction and central message

Delivered at Grandes Conferences Catholiques, Brussels, June 17, 2015. As prepared for delivery.
Core thesis: Reducing excessive inequality by "lifting the small boats" (poor and middle class) is both morally/politically right and sound economics. More equitable distribution supports higher, more inclusive, and more sustainable growth.

Global economic outlook

IMF spring forecast: global economy will grow 3.5 percent this year and 3.8 percent in 2016.
Advanced-economy trends:
- US: outlook for a strong expansion; weak first quarter viewed as temporary.
- Euro Area: prospects improving, partly due to European Central Bank monetary easing.
- Japan: beginning to reap rewards of the “three arrows” recovery strategy (monetary, fiscal, and structural).
Emerging and developing economies: forecasts generally slightly worse than last year, notably because commodity exporters (especially oil) are affected by price declines.
Country divergence: examples range from still strong growth in India to recession in Brazil and Russia.
Medium-term concern: IMF view that growth potential of both advanced and emerging economies is likely to be lower in the years to come due to changing demographics and lower productivity — the “new mediocre.”

Causes and consequences of excessive inequality

Global vs within-country inequality:
- Global income inequality (between countries) has fallen steadily over past decades as average incomes in emerging markets (e.g., China, India) rose faster than richer countries.
- Income inequality within countries has risen substantially in most advanced economies and major emerging market economies over the past two decades.
Key statistics and notable findings:
- Top 1 percent in advanced economies account for about 10 percent of total income.
- Oxfam estimate: in 2016, combined wealth of the world’s richest 1 percent will overtake that of the other 99 percent.
- In the United States, a third of total wealth is held by 1 percent of the population.
- Latin America: declining inequality levels but remains the world’s most unequal region.
- China lifted more than 600 million people out of poverty over the past three decades but has become one of the world’s most unequal societies.
IMF research findings on distribution and growth:
- Lifting the income share of the poor and middle class by 1 percentage point increases GDP growth by as much as 0.38 percentage points in a country over five years.
- Lifting the income share of the rich by 1 percentage point decreases GDP growth by 0.08 percentage points.
- Possible mechanism: the rich spend a lower fraction of their incomes, reducing aggregate demand and undermining growth.
Drivers of extreme inequality:
- Technological progress and financial globalization widen earnings gaps between higher- and lower-skilled individuals.
- Overreliance on finance (credit) can distort income distribution, corrode political processes, and undermine stability and growth.
- In emerging and developing economies, inequality of access (education, health care, financial services) is a major driver:
- Almost 60 percent of the poorest youth population in sub-Sahara Africa has fewer than 4 years of schooling.
- Nearly 70 percent of the poor in developing economies give birth without access to doctors or nurses.
- More than 80 percent of the poor in developing economies do not have bank accounts.
- Low social mobility amplifies inequality across generations.
Gender dimension:
- Women are less likely than men to have paid jobs (especially in the Middle East and North Africa), are more likely to work in the informal sector, and earn three-quarters as much as men in the same occupation and with the same education.
- Worldwide, about 865 million women have the potential to contribute more fully to the economy.

Policy priorities and recommendations

Overarching priorities:
- Macroeconomic stability: sound monetary policy, fiscal discipline, and control of public debt are essential to prevent slower growth, rising inequality, and instability.
- Good governance: combat endemic corruption which signals social and economic inequality.
- Prudence: acknowledge that some inequality provides incentives; policies should balance equity and incentives.
- Country-specific approaches: tailor policies to political, cultural, and institutional settings; avoid one-size-fits-all.
Smart fiscal policy:
- Widen the tax revenue base by clamping down on tax evasion.
- Reduce tax relief on mortgage payments (benefiting the rich), and reduce/remove tax relief on capital gains, stock options, and profits of private equity investment funds (“carried interest”).
- In many European countries: reduce high labor taxes, including cuts to employer social security contributions, to incentivize job creation and reduce part-time/temporary positions.
- Reallocate savings from reducing energy subsidies to education, training, and stronger safety nets.
- IMF study: governments worldwide will subsidize oil, gas, and coal to the tune of $5.3 trillion this year — equivalent to what they spend on public health each year.
- Expand access to education and health care; rely more on conditional cash transfers (CCTs) as efficient anti-poverty tools.
- Bolsa Familia example (Brazil): for expenditure of 0.5 percent of GDP per year, 50 million people are supported — one in every four Brazilians.
Structural reforms:
- Prioritize education across levels and regions: “education, education, education” as the primary structural tool to reduce income inequality.
- Emerging/developing economies: promote more equal access to basic education.
- Advanced economies: focus on quality and affordability of university education.
- Labor market reforms:
- Well-calibrated minimum wages, policies to support job search and skill matching, and reforms that protect workers rather than jobs.
- Nordic model example: limited job protection combined with generous unemployment insurance that requires jobseekers to find new positions — increases labor-market flexibility while safeguarding worker interests.
- Gender-focused policies: affordable childcare, maternity leave, workplace flexibility, removal of legal barriers and tax discrimination to increase female labor force participation.
- Financial inclusion:
- Microcredit, building credit histories for unbanked people, and cell-phone-based banking as transformative in developing economies, especially Sub-Saharan Africa.
- Financial equality enables poor families to invest in health and education, boosting productivity and income potential.

IMF role and concluding outlook

IMF engagement:
- Promote global economic and financial stability; assist 188 member countries in policy design, implementation, and lending in times of distress.
- Support Sub-Saharan Africa with zero-interest loans, increased financing, and capacity building.
- Stepping up research on inequality, gender, and climate-related issues as macro-critical topics.
- Exploring ways to increase access to IMF loans for developing countries to buffer external shocks, with increased focus on the poorest and most fragile countries.
Calls to action and global agenda:
- Leverage once-in-a-generation opportunities:
- UN summit to replace Millennium Development Goals with Sustainable Development Goals.
- U.N. conference to finance the new development agenda.
- December meeting of leaders from 196 countries in Paris to seek a comprehensive deal to cut carbon emissions, protecting the poorest who are most vulnerable to climate change.
- Leadership, courage, and collaboration required from politicians, policymakers, and business leaders to translate intentions into bold, lasting actions.
Moral and practical conclusion:
- Measure society’s health at its base; lifting the “small boats” builds a fairer society and a stronger economy, creating greater shared prosperity for all.

Source: Speech by Christine Lagarde, Managing Director, IMF — "Lifting the Small Boats," June 17, 2015.

"Lifting the Small Boats," Speech by Christine Lagarde, Managing Director, IMF

Source details

Other formats

Bibliographic details

Introduction and central message

Global economic outlook

Causes and consequences of excessive inequality

Policy priorities and recommendations

IMF role and concluding outlook

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