Managing an Inclusive Transition for the Global Economy

IMF News, October 7, 2016

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Authors: Christine Lagarde
Published: October 7, 2016

1. A changing IMF, a changing world

IMF implementation and outreach since the financial crisis:
- About 75 programs for a total of US$415 billion.
- Close to 670 Article IV consultations.
- Almost 17,000 technical assistance missions.
Institutional milestones completed since last Annual Meetings:
- Completion of the 2010 Quota and Governance reforms, resulting in four emerging market countries now in the Fund’s top-ten shareholders.
- Inclusion of the Chinese renminbi in the Special Drawing Rights basket.
- Extension of zero interest rates on all IMF concessional facilities.
- Members pledged bilateral borrowing agreements totaling more than $340 billion to help maintain the IMF’s firepower at around $1 trillion.
Organizational acknowledgements:
- Recognition of Executive Board, Management team, and staff efforts.
- Personal note: Christine Lagarde’s second term as Managing Director; has travelled to more than 60 member countries.

2. The global outlook

Growth projections and characterization:
- We project global growth at 3.1 percent this year, with only a modest acceleration to 3.4 percent next year.
- Advanced economies: low-growth, low-investment, low-inflation cycle.
- Emerging markets: growth picking up; low-income commodity exporters struggling with low prices.
Socio-political consequences:
- Growth described as “too low, for too long, and benefiting too few.”
- Persisting high inequality in many countries; rising conflict and migration; trade becoming politically contentious.
Framing:
- Emphasis on the need for openness and international cooperation to address demographic pressures, climate change, and new technology.

3. Moving into the digital age

Nature and uncertainty of technological change:
- Rapid advances cited: autonomous vehicles, robotics and automation across industries, cell phones replacing bank branches, artificial intelligence and quantum computing.
- Acknowledgement that nobody knows exactly how the future will unfold.
Distributional implications:
- New machine age likely to favor higher-skilled workers and put pressure on less well-equipped workers across advanced, emerging, and developing economies.
- Historical perspective: David Ricardo’s concern that machinery “may render the population redundant” contrasted with historical evidence that innovation has reshaped and created industries, lifted productivity, and increased employment.
Policy inference:
- Education and social safety nets must be retooled to support adjustment during major economic transitions.
- Warning that failure to manage transitions can lead to reversals in globalization (example: Great Depression and Smoot–Hawley Tariff).

4. Policies for inclusive growth

Overarching goal:
- Need for growth that is inclusive and accelerates now.
First priority: escape the “new mediocre” (low growth, low employment, low wages) by using all policy tools—monetary, fiscal, and structural—and amplifying impact through coordination across countries.
Fiscal and structural policy recommendations:
- Implement structural reforms to unleash economic potential.
- Use fiscal tools—where available—to prepare for the transition; with interest rates at historic lows, public investment is prioritized.
- Public investment examples: expand access to high-speed internet, promote energy-efficient transport, build climate-friendly infrastructure.
- Where fiscal space is limited, reallocate funds into R&D via tax credits and support for public research institutions.
- Historical note: technologies enabling smartphones benefited from public funding (wireless networks, GPS, touch screens).
Trade and inclusion:
- Reinvigorate trade to leverage new technologies into productivity increases.
- Over the past 25 years, trade helped reduce by half the proportion of the global population living in extreme poverty (From 1990-2010; World Bank figures: World Development Indicators) and created millions of new jobs with higher wages (example: in the US, workers in export-intensive industries earn a premium perhaps as high as 15 percent over other industries).
- Warning: building trade barriers reduces overall output, investment, and jobs.
Second priority: provide everybody with a level playing field—three examples:
- Increase equality of opportunity: smart education policies (especially for girls), retraining for displaced workers, minimum wages, tax incentives to improve women’s labor market opportunities.
- Promote fair burden-sharing: an international tax system that minimizes loopholes, guards against corruption, and protects low-income countries from tax base erosion and profit-shifting.
- Preserve competition and market access: address network effects and market concentration in the digital economy to protect innovation and prevent wealth concentration.

5. International cooperation and the role of the IMF

Supporting low-income countries:
- Low-income countries need higher and more reliable government revenue to invest in infrastructure, healthcare, and education; building capacity in domestic revenue mobilization is a priority.
- Every year, the IMF helps more than 100 countries improve their domestic revenue mobilization and is responding to increasing demand.
Global financial safety net:
- Reducing inequality between countries requires a stronger global financial safety net to help emerging and developing countries cope with volatility.
- Strengthening the IMF’s lending toolkit and cooperation with regional institutions will contribute to this objective.
Institutional modernization (AIM agenda):
- Progress on making the IMF more Agile, Integrated, and Member-focused.
- Stepped-up efforts in fiscal, monetary, and exchange rate advice; expanded macro-financial analysis.
- Increased attention to financial inclusion, gender equality, corruption, migration, and climate change.
- Capacity development growth: more than 13,000 people – from 184 countries – have successfully completed IMF online courses (MOOCs).

Conclusion

Normative framing:
- Quoting Henry Morgenthau: “Prosperity has no fixed limits… Prosperity, like peace, is indivisible. We cannot afford to have it scattered here or there among the fortunate or to enjoy it at the expense of others.”
Final charge:
- Manage the economic transition so that it yields greater prosperity for all, not just the fortunate few.
Personal note:
- Christine Lagarde recounts memorable interactions with people served by the IMF, including a Syrian woman in a refugee camp in Jordan asking for help to rebuild her country.

Source: Managing an Inclusive Transition for the Global Economy, By Christine Lagarde, 2016 IMF-World Bank Annual Meetings Plenary, Washington, DC, October 7, 2016.

Managing an Inclusive Transition for the Global Economy

Source details

Other formats

Bibliographic details

1. A changing IMF, a changing world

2. The global outlook

3. Moving into the digital age

4. Policies for inclusive growth

5. International cooperation and the role of the IMF

Conclusion

References