Overview of a conference by Mrs. Christine Lagarde

Last Wednesday, on June 17, IMF General Secretary Mrs. Christine Lagarde was speaking at “the great Catholic conferences” in Brussels. The topic of her brilliant speech, “Promoting the small boats” was how to deal with social inequality. The complete allocution is published in 7 languages on the IMF web site. Here you can also watch the Conference (in French). For the present blog, we have selected the parts that relate more specifically to her considerations about financial and tax policies.

Mrs. Lagarde introduced her speech by mentioning an anecdote in the port of New York, where bankers and brokers have wonderful big yachts, but their customers still have only small boats, although they followed all the advices given by these gurus of finance. Why do the bankers have big yachts but not their clients? Because in many cases economic growth has not lifted the small boats, but only “the big ones”.

The impact of economic growth can be counterproductive if it only worsens social inequalities: For the IMF, only growth that benefits the lower and middle classes is an indicator of real growth. Mrs. Lagarde points out: “Our studies shows that if you lift the income share of the poor and middle class by 1 percentage point, then GDP growth increases by as much as 0.38 percentage points in a country over five years. By contrast, if you lift the income share of the rich by 1 percentage point, then GDP growth decreases by 0.08 percentage points. One possible explanation is that the rich spend a lower fraction of their incomes, which could reduce aggregate demand and undermine growth.”

Ms. Lagarde underscores a paradoxical evolution: While a level world, differences in wealth between developed and emerging countries are reducing, at internal level of the countries, social countries internal inequality is increasing. “in 2016 the combined wealth of the 1% of the richest population will surpass from the remaining 99%.” In United States, one-third of the total wealth is in the hands of 1% of the population. (…) A positive aspect is the reduction in the inequality levels of Latin America, although this is still the region with the greatest inequality in the world.”

Among the factors that explain this global rising trend in inequality, Ms. Lagarde stresses the technical progress and financial globalization, and the unequal economic growth of emerging economies: Countries have been unable to distribute global growth with equity. There is a considerable divergence between the world positive trend (global economy will grow by 3.5% in 2015, and is projected to grow by 3.7% next year) and the general negative trend of growing inequality within countries.” China is an example of both trends. To lift out of poverty more than 600 million people over the past three decades, China has contributed substantially to a greater global equality of income. However, in this process it has become one of the most unequal in the world, because many rural areas are still poor, and because the income and wealth have registered a strong increase in the cities and in the highest levels of the Chinese society.”

Would extreme inequality be the “price to pay” for a sustained economic growth? No at all, answers the Secretary General. There is hope to change these patterns but this requires determined policies by national Governments: Three priorities are determined in this respect: The first priority should be macroeconomic stability. “Sound macroeconomic policies are the best friend of the poor, as it is good governance,” her second priority must be prudence. Let us fight against inequality, but not forget that a certain degree of inequality promotes innovation, economic dynamism, entrepreneurship, and competitiveness. The third priority is flexibility or adaptability of policies: “There should be no unique policies, but smart policies – capable of creating changes – that can contribute to reversing the trend to rising inequalities.”

What does this implies in term of tax policy?

A smart fiscal policy could be a game-changer.” The challenge here is to design measures on taxes and expenses with minimal adverse effects on incentives to work, saving and investment. The aim must be to promote greater equality and greater efficiency.

“This means widening the tax revenue base, by clamping down on tax evasion; reducing the tax deductibility of mortgage payments, primarily benefiting the rich; and reducing or eliminating tax relief on capital gains, stock options and the profits of private equity investments funds, known as “carried interest”.

(…) On the expenditure side, it means expanding access to education and health care. In many emerging economies, it means reducing energy subsidies – which are costly and inefficient – and use the freed-up resources to improve education and training, and stronger social safety nets.”

“According to a recent IMF study, this year governments around the world will subsidize the cost of oil, gas and coal for about $5.3 billion. This is the equivalent of what they spend for public health each year.”

Conditional cash transfers could be used to promote greater equality and efficiency. These are very successful tools for combating poverty. Mrs. Lagarde mentions here the Brazilian program Bolsa Família. This program assists poor families – in the form of prepaid debit cards with the condition that their children go to school and participate in Government vaccination programs. Bolsa família has proven to be both effective and cost-efficient: by spending equivalent to 0.5% of annual GDP, 50 million people receive aid: one of every four Brazilians. Similar programs have contributed significantly to reduce the inequality of income in countries like Brazil, Chile and Mexico.

Fiscal policies that encourage a greater financial inclusion are key to the equitable development of emerging economies.

In conclusion, the Secretary General of the IMF calls to transform good intentions “in strong and durable acts” and reminds the upcoming events where the world community must take a strong stand: “In September, the United Nations organized a major summit which aims to replace the Millennium Development Goals by a new set of sustainable development goals.” A Conference of the United Nations next July will try to finance this new development program.

“In December, leaders from 196 countries will meet in Paris to try to reach a comprehensive agreement to cut carbon emissions”. This could greatly contribute to protect the interests of the poorest populations, who are the first victims of climate change.

Some cynical voices question the need for action in these areas and admit defeat before starting the battle. “We must be able to prove these cynics wrong, by focusing our attention, forging partnerships and setting the right goals.”

In conclusion, the health of a society must be measured at its base, not at its apex.

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