Income Distribution and Sustainable Growth: The Perspective from the IMF at Fifty -- Opening Remarks by Michel Camdessus
IMF News, June 1, 1995
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Bibliographic details
- Published: June 1, 1995
Context and framing
- Speech delivered at Conference on Income Distribution and Sustainable Growth, Washington, D.C.
- Date on page: June 1, 1995
- Document identifier: 95/9 Opening Remarks by Michel Camdessus, Managing Director of the International Monetary Fund
- Occasion: IMF 50th anniversary period — "until next July" the IMF is celebrating "the achievements of our first 50 years and the challenges of the next."
Global environment, risks, and IMF priorities
- Observation: "closer integration of markets across countries promises an unprecedented opportunity to achieve greater efficiency and higher economic growth worldwide," but also creates "a much more volatile global market environment."
- Reference to recent crisis experience: the need to avoid "Mexico-like" crises; Interim Committee (April 1995) recommendation to adopt "strict policy discipline to guard against adverse market reaction."
- Three avenues for IMF action articulated:
- strengthen surveillance to help member countries prevent economic crises, especially those that could involve risks to the international monetary system;
- find ways to help member countries deal with crises more effectively when they do occur;
- help member countries achieve conditions for "high-quality growth," defined as growth that is sustainable, respects the environment, brings lasting full employment and poverty reduction, and fosters greater equity through increased equality of opportunity.
Core questions posed
- The speech focuses on three related questions that "are likely to stay with us into the next century":
- First, why is income distribution an important policy issue?
- Second, what are the implications of income distribution for economic growth?
- Third, what are the implications of our concern about income distribution for IMF operations?
Why income distribution matters
- Relevance to poverty reduction:
- Sustained economic growth is "a crucial condition for reducing poverty."
- Growth alone "may not always be the case" for reducing poverty fast enough, especially when the initial distribution of wealth is "highly uneven."
- Policy implication: a poverty-alleviation strategy should focus on both growth and reduced income inequality.
- Relevance to social justice and political sustainability:
- Perceptions of social justice affect harmony among social groups and the political sustainability of economic policies.
- "Broad public support" for adjustment and reform is more likely when income distribution and opportunities are seen as relatively "fair."
Competing views on distribution and growth
- a. View stressing equity-growth trade-offs
- Redistribution via transfers and taxes may create distortions and disincentives and may reduce funds available for public and private investment in physical and human capital.
- Greater distributional equality could decrease aggregate savings because "high-income groups tend to save a larger portion of their income," thereby reducing investment.
- b. Views stressing equity-growth complementarity
- Excessively unequal income distribution may be detrimental to sustainable growth.
- Cost-effective programs aimed at reducing excessive income and consumption inequality, within macroeconomic stability and allocative efficiency, could "promote, not deter, sustainable economic growth."
- Three channels supporting complementarity:
- First channel: positive effect on efficient use and development of human resources — example of many East Asian countries achieving high growth and declining income inequality through good macroeconomic policies and high investment in physical and human capital, "with heavy emphasis on primary education."
- Second channel: positive effect on public and private savings — sound macroeconomic, budgetary, and financial policies that avoid excessive distributional inequality "create conditions for sustainable growth through higher rates of savings and investment."
- Third channel: positive effect on the political process and social cohesion — high inequality or lack of opportunity can lead to political and social instability, impede efficient economic activity, and generate pressures for unsound economic policies; well-designed income transfers (including social safety nets) can help secure support for policies crucial for economic reform and sustainable growth.
Implications for IMF operations
- Current IMF practice:
- Surveillance and program work already include distributional elements implicitly: labor market and unemployment issues, and effectiveness and efficiency of social expenditures are frequently discussed.
- IMF-supported reform programs include targeted safety nets to shield vulnerable groups from short-run adverse effects of reforms; the IMF provides technical assistance in this area.
- Collaboration with the World Bank seeks to "enhance the economic participation of the poor in the growth process."
- Key operational questions raised:
- Should the IMF, "as a macroeconomic policy institution, be interested in income distribution?"
- Is the IMF's current approach sufficient in light of evidence and conference findings?
- Do IMF policy advisories need amendment to better incorporate distributional concerns?
- Rationale for possibly doing more:
- "high-quality growth is still elusive in many countries;"
- "unemployment and poverty are more persistent worldwide than they could and should be..."
- Constraints and cautions for IMF action:
- Must not stray from the IMF's "central mandate."
- Must respect member countries' sovereign choices.
- Must be realistic about staffing constraints and other priorities.
- Need to "proceed with caution" while seeking to "optimize the mutually supportive interaction between growth-oriented adjustment strategies and a well thought-out approach to distributional issues."
Closing
- The Managing Director expresses anticipation that the conference will shed light on the three core questions and provide "valuable insights to help us deal with the challenges ahead."
International Monetary Fund