A Low-Growth World Is an Unequal, Unstable World
IMF Blog, July 23, 2024
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- Authors: Kristalina Georgieva
- Published: July 23, 2024
Overview
- Author: Kristalina Georgieva
- Date: July 23, 2024
- Core message: Prolonged low global growth risks entrenching poverty and widening within-country inequality, but a balanced set of policies can prevent a low-growth, rising-inequality trap.
Growth outlook and macro risks
- IMF World Economic Outlook update projections:
- Global growth expected to reach 3.2 percent this year.
- Global growth expected to reach 3.3 percent in 2025.
- These figures are well below the 3.8 percent average from the turn of the century until the pandemic.
- Medium-term growth projections remain at their lowest in decades.
- Despite resilience to successive shocks (including higher interest rates), the danger is a prolonged period of anemic growth that would entrench poverty and inequality.
Evidence on stagnation and inequality
- New IMF analysis: periods of stagnation lasting four years or more tend to push up income inequality within countries by almost 20 percent—considerably higher than the increase due to outright recession.
- Mechanisms during stagnation:
- Sluggish job creation and wage growth increase structural unemployment.
- Reduced share of a country’s income flowing to workers.
- Limited fiscal space amplifies widening gaps between top and bottom income groups.
- Pandemic impacts cited:
- Extreme poverty increased after decades of decline.
- Global hunger surged.
- The long-term decline in inequality across countries stalled.
Gearing Up Inclusive Growth (policy priority 1)
- Diagnosis: Most of the decline in growth in recent decades has been driven by a slump in productivity; labor and capital aren’t flowing to the most dynamic firms.
- Recommended measures:
- Promote competition and improve access to finance to allocate resources more efficiently and boost productivity.
- Increase labor force participation (for example, of women) to offset the drag on growth from aging populations.
- Preserve open trade as an engine of growth and jobs; over the last 40 years:
- Real income per capita has doubled globally.
- More than a billion emerged from extreme poverty.
- Trade as a share of gross domestic product increased by half.
- Ensure the gains from trade are shared fairly rather than closing off economies.
Making Fiscal Policies People-Focused (policy priority 2)
- Fiscal context:
- Many economies face severe fiscal pressures.
- In developing countries, debt-servicing costs are taking up a bigger share of tax revenue while spending demands grow.
- Fiscal strategy:
- Implement a gradual and people-focused fiscal effort to alleviate fiscal risks while limiting negative impacts on growth and inequality.
- Measures include raising revenue, improving governance, and protecting social programs.
- Revenue potential and equity:
- There is much scope for developing countries to raise more revenue through tax reforms—as much as 9 percent of GDP, according to IMF research.
- Emphasize progressive taxation so those who can afford to pay more do so (examples: taxing capital income and property).
- Governance and trust:
- Taxpayer confidence requires that taxes fund public services rather than enrich the powerful; improve transparency and reduce corruption.
- Social spending:
- Protect social-spending programs (school meals, unemployment insurance, pensions).
- Well-targeted cash-transfer programs—such as Brazil’s Bolsa Familia—can support the vulnerable.
- IMF research shows that strong redistributive policies in a growing G20 economy—such as social-spending programs and public investment in education—can reduce inequality between 1.5 and 5 times more than weaker policies.
Strengthening the Global Backstop (policy priority 3)
- IMF actions to bolster the global financial safety net:
- Reviewing concessional lending instrument for low-income countries, the Poverty Reduction and Growth Trust (PRGT), to ensure it is adequately resourced and its long-term finances are sustainable given demand expected to exceed pre-pandemic levels.
- Reviewing the surcharge policy for the first time in nearly a decade to ensure continued provision of financing at affordable rates.
- Members agreed last year to increase permanent quota resources, allowing the IMF to maintain lending capacity; the IMF is counting on G20 members to ratify the increase.
- Rationale: A strong global safety net is needed to serve the IMF’s most vulnerable members and prevent countries from falling into crises that exacerbate inequality and instability.
Concluding policy imperative
- One lesson of recent history: do not ignore those left behind by economic and technological progress—individuals within countries or entire nations.
- With the right mix of policies and international cooperation, it is possible to escape a low-growth, rising-inequality trap and build a more prosperous and equitable world for all.
Source: IMF blog post "A Low-Growth World Is an Unequal, Unstable World" by Kristalina Georgieva, July 23, 2024.
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