- The IMF must part of the solution, not the problem
Recently, the Managing Director (MD) of the International Monetary Fund (IMF), Kristalina Georgieva, gave a speech at the ‘Peterson Institute for International Economics’ in Washington on the topic ‘The financial sector in the 2020s: building a more inclusive system in the new decade’, which has some important takeaways.
Foremost, she indicated that ‘If I had to identify a theme at the outset of the new decade it would be increasing uncertainty.’ Here she indicated that inequality remained a ‘particular driver of uncertainty’, where while overall inequality between countries had fallen considerably over the last two decades ‘led by the rise of key emerging markets in Asia’, yet during the same time period, inequality within countries had been rising.
In this regard, she indicated ‘In the United Kingdom, for example, the top 10 percent now control nearly as much wealth as the bottom 50 percent. This situation is mirrored across much of the OECD [Organization for Economic Co-operation and Development] where income and wealth inequality have reached or are near record highs.’ The IMF has centre-staged the impact of inequality on the economy, and the MD articulated this: ‘We know that excessive inequality hinders growth and hollows out a country’s foundations. It erodes trust within society and institutions. It can fuel populism and political upheaval.’ A strong emphasis by IMF on the importance of inequality for economy, unlike the previously held stance by many multilateral institutions including IMF, of treating inequality as an exogenously determined issue in economies, one to self-resolve under the trickledown process, this indeed is a much-needed change in approach.
The private sector and banking industry have a critical role to play here. That is certainly the case when it comes to climate and stability, an area where we will unveil new research in the spring. The financial sector can play a crucial role in moving the world to net zero carbon emissions and reach the targets of the Paris Agreement…
Here, it would have been more representative an observation, had she also highlighted a) the rising level of inequality within many emerging and low-income economies in addition to the OECD countries, b) especially in those countries, which had been prolonged users of IMF resources, and whose financial sector, among other sectors, had undergone IMF structural adjustment programmes– formulated under the neoliberal or Washington-consensus-based influence. This admission– in agreement with ample research during the last two decades, at least, drawing similar conclusions regarding the adverse impacts of IMF programmes on inequality, poverty, and growth in recipient countries, including the emphasis of IMF’s related Independent Evaluation Office (IEO) that IMF should revisit the ideological underpinnings of its programmes– would have at least now opened greater scope for shifting the ideological neoliberal basis of IMF programmes.
The MD very aptly draws the similarity of the 1920s’ ‘Gilded Age’ with the present situation of inequality, where she highlights ‘In some ways, this troubling trend is reminiscent of the early part of the 20th century– when the twin forces of technology and integration led to the first Gilded Age, the Roaring Twenties, and, ultimately, financial disaster.’ Having said that, one big way in which inequality and poverty is driven, and which had not any similarity as such with the 1920s, was the challenge of climate change. In this regard, she pointed, according to World Bank estimates ‘that unless we alter the current climate path an additional 100 million people may be living in extreme poverty by 2030.’
To address inequality, the MD highlighted that while the countries mostly looked to fiscal policies to deal with the issue of inequality, there was little focus on financial sector policies. In this sense, the IMF MD’s policy stance is quite in sync with the broad recommendations of major works, like one by Thomas Piketty in his famous Capital In The Twenty-First Century. In it, he traces the astronomical way in which the evolution of financialization of the economy has facilitated the already rich small segment of societies to get even richer– in turn increasing the gap between rich and not-so-rich/poor over a small period; the latter groups of people just did not have much recourse to investments in such high-returns-giving financial instruments.
In this regard, she points out ‘our new staff research, launched today, shows how a well-functioning financial sector can create new opportunities for all in the decade ahead. But it also shows how a poorly managed financial sector can amplify inequality.’ Moreover, she pointed out that there were three ways in which financial sector impacted inequality; firstly, ‘there is a point at which financial deepening is associated with exacerbated inequality and less inclusive growth. Many factors drive inequality –corruption, regressive taxes, intergenerational wealth – but the connection between excessive financial deepening and inequality holds across countries.’
Secondly, lack of financial stability led to greater levels of inequality, where going into the 2020s, ‘the financial sector will have to grapple with preventing the traditional type of crisis, and handle newer ones, including climate related shocks.’ Moreover, with regard to the impact of a financial crisis on an economy, the MD highlighted that ‘on average a financial crisis leads to a permanent output loss of 10 percent… Then the housing bubble burst in 2007. The subsequent Global Financial Crisis (GFC) dealt a devastating blow to millions across the world and over the long-term worsened inequality. Just one example. Today, as a result of the crisis, 1 in 4 young people in Europe are at-risk of living in poverty.’
Hence, to bring greater financial stability, especially one that leads to reduction in inequality, the MD pointed out that ‘Developing economies need more finance to give everyone a chance to succeed. Think of deeper domestic bond markets that finance a new business or investment opportunities that help people save for retirement.’
Thirdly, and in a sense related to the second aspect, there should be greater financial inclusion, where the MD highlighted ‘Research by IMF staff and others shows a strong association between increasing access to bank accounts and reducing income inequality. The data also shows that while both men and women gain from inclusion, the largest reduction in income inequality comes when women are given increased access to finance. Interestingly, the relationship between access to finance and inequality is consistent across nations with different income levels.’
Moreover, the MD pointed that ‘Policies to Build a More Inclusive System in the Next Decade – Safer, Stable, Smarter… There is no substitute for high-quality regulation and supervision… Safe growth of financial markets requires increasing financial literacy, so people fully understand what they are being offered and what it means for their family. And this brings me to my second point, building a more stable system… The private sector and banking industry have a critical role to play here. That is certainly the case when it comes to climate and stability, an area where we will unveil new research in the spring. The financial sector can play a crucial role in moving the world to net zero carbon emissions and reach the targets of the Paris Agreement… my third and final point, create a smarter system. Broadening financial access to low-incomes households and small businesses is one of the most effective ways to reduce inequality. But too much too fast can backfire.’
