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

_IMF News, June 17, 2015_

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## Bibliographic details
- Authors: Christine Lagarde
- Published: June 17, 2015

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### 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.*

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## References

- [Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)
- [India and the IMF](http://www.imf.org/external/country/IND/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Chile and the IMF](http://www.imf.org/external/country/CHL/index.htm)
- [Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)
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- [Christine Lagarde](https://www.imf.org/external/np/omd/bios/cl.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF note](https://www.imf.org/external/pubs/cat/longres.aspx?sk=42986.0)
- [IMF paper](https://www.imf.org/external/pp/longres.aspx?id=4750)
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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp061715_