New Priorities for the Global Economy
February 5, 2020
Holy Father, Ministers, Distinguished Guests—I am truly honored to be here with you today.
I would like to thank the Pontifical Academy of Social Sciences for inviting me to this important workshop. In our discussions so far, we have been able to delve into some of most pressing issues of our time—and we are now moving from analysis to focusing on the way forward.
So here is the question: What are the new priorities for the global economy? Let me give you the short answer: In the words of Pope Francis, “the first task is to put the economy at the service of people.”
This is a beautiful description of the world we want. And it is the world we need if we are to meet the challenges of the 21st century.
It also speaks to the fundamental purpose of leadership in the public and private sectors. In the world we need, we are all called upon to be “ministers” in the original sense of the word—serving not ourselves, but serving others with an open mind and a kind heart.
The good thing is that we can build on the progress achieved. Our world has been transformed by global integration and cooperation, incredible technological advances, and—yes—many sound economic policies. Over the past three decades, child mortality has fallen by half; and more than a billion people have lifted themselves out of extreme poverty.
These are remarkable achievements, unprecedented across the entire span of human history. That economy—the one we have now—can be a powerful source of hope, a beacon of light.
And yet, the same economy has cast dark shadows. Think of excessive inequality: since 1980, the top one percent globally has captured twice as much of the gains from growth as the bottom 50 percent.
Think of the fact that many developing economies are no longer catching up with high-income countries—instead of narrowing the gap in living standards, they are now falling behind. And above all, think of how the current economic structure is harming our natural environment.
It is not surprising, therefore, to see the results of a recent global survey, in which more than half of respondents said that capitalism does more harm than good.[ii] The implications are alarming: from declining trust in traditional institutions, to rising political polarization and social tensions.
So how can we lift these dark shadows and bring in more light? How can we help create an economy that is at the service of people?
I would like to highlight three areas of action: (i) inclusive growth—helping countries foster a culture of solidarity; (ii) integration—promoting a globalization of hope; and (iii) climate action—caring for our common home.
1. A culture of solidarity
Let me start with inclusive growth—where I would like to focus on Latin America, which is home to many of you in this room.
This region has made significant progress in reducing excessive inequality. And yet, the recent increase in social unrest in some countries is a powerful reminder that all countries can do more.
It is no coincidence that discontent erupted in places where the gap between rich and poor is too high, and where growth is too low to deliver better opportunities for those who need them most. In fact, many who consider themselves ‘middle class’ are left with growing fears that gains could be reversed—that they could be moving back towards the shadows of poverty.
If Latin American countries are to meet these challenges, they will need to foster a stronger culture of solidarity—one that rebuilds trust and recognizes the sense of dignity that comes with good jobs, reliable public services, and stronger safety nets.
The best way to nurture solidarity is to reduce the inequality of opportunity. This means investing in people—not just spending more on schools and training, but improving the quality of education and the access to life-long learning and re-skilling. Not just expanding social programs, but allocating spending more effectively to reach the most vulnerable.
These policies help reduce the inequality of opportunity—which in turn is critical for lower income inequality. IMF research has also shown that lower income inequality is associated with stronger and more sustainable growth.
But how can Latin American countries scale up social spending and vital infrastructure investment when most of them are facing limited room in their budgets?
For one, there is room to boost the efficiency of spending, and there is room to generate higher public revenue over the medium term. Here the IMF is deeply engaged through our capacity building efforts, supporting our members in “raising more and spending better.”
The goal is to ensure that policies deliver for people. And that is why the IMF has increased its focus on social spending issues, and we have increased our attention in IMF-supported reform programs to helping vulnerable groups.
Of course, stepping up economic reforms is critical for inclusion and growth. For many Latin American countries, this means addressing market concentration that limits job creation and hurt the poor through higher prices.
It means empowering women by reducing discriminations in the labor market. And it means broadening financial access to low-incomes households and small businesses, including through a well-managed fintech sector.[iii]
Above all, there is room to step up the fight against the darkness of corruption. We know that corruption hinders growth and hollows out the economic and social foundations; it feeds into growing discontent, especially among young people.
A related problem is the massive extent of tax avoidance and tax evasion. Globally, wealth in offshore financial centers is estimated at $7 trillion, or 8 percent of world GDP—a sizeable share of this wealth likely comes from illicit activities.[iv]
These are not just problems for Latin America—they affect all of us. Which is why the IMF is supporting its members in fighting money laundering. And we are working with our partners to help close the loopholes in international taxation.
Our analysis shows that non-OECD countries lose about $200 billion a year because companies are able to shift profits to low-tax locations.[v]
This missing revenue makes it even more difficult for fragile economies and low-income countries to increase growth, employment—and to meet the Sustainable Development Goals to improve the well-being of their people.
Clearly, while the efforts to boost inclusive growth must begin at home, they cannot end there. We also need a global culture of solidarity.
2. A globalization of hope
This brings me to the second priority area—fostering a globalization of hope. What do I mean by that?
Let us remember that income inequality between countries has declined sharply, because of the rise of emerging markets such as China and India.[vi] At the same time, income inequality within countries has generally increased—which has led in some cases to what I would call “globalization blues.”
This “blue mood” has been intensified by the worrying implications of trade tensions. And we are now concerned about the impact of the coronavirus infection—the outbreak has not only led to a tragic loss of life, but it has underscored the fragility of global integration itself.
Naturally we are focused on the latest developments, but we also have a sense that deeper changes are underway.
When it comes to trade, we can see the dawn of a new era. A world in which data flows become more important than physical trade and where services become the main driver of global commerce. Who would benefit from that?
Certainly advanced economies, because they are globally competitive in many service sectors, especially financial, legal, and consulting. But also developing economies such as Colombia, Ghana, and the Philippines, because they are promoting growth in industries such as communications and business services.
These transitions could help re-energize the global trade engine. They could help ensure that trade can play its essential role in boosting productivity and employment, spreading new technologies, and lowering prices, especially for poorer consumers.
But one thing is clear: for trade to be better, it needs to be more inclusive. How? Every country must do more to help communities harmed by the dislocations associated with technology and trade.
We need scaled-up investment in training and social safety nets—so that workers can upgrade their skills, transition to higher-quality jobs, and earn more.
We also need stronger international cooperation to ensure that the new era of trade delivers for people. The recent “phase-one” trade deal between the U.S and China is an important step to deescalate tensions—but only one step. If we are to unlock the full potential of services and e-commerce, we must work together to create a more modern trade system.
That spirit of cooperation is also needed to ensure that financial integration delivers for people. The fact is that, over the past four decades, global capital flows increased 13-fold, compared with an eleven-fold expansion in global trade.[vii]
This abundance of capital has underpinned much-needed investment, especially in emerging and developing economies. But it has also opened the door to episodes of high capital flow volatility, which can hurt financial stability and the prospects of businesses and households.
Is there an optimal way to handle volatile capital flows? For many emerging economies, the task is daunting, because there is little consensus on the right combination and timing of policy measures.
Consider the 2018 episode of capital outflows from emerging markets: Brazil and Malaysia used significant amounts of foreign currency reserves to shore up their currencies. Colombia and South Africa barely intervened. Some raised interest rates, while others did not. Heavy intervention often mitigated depreciation, but not always.
All this raises questions, including for the IMF. We are now in the process of reassessing our advice. We are learning from diverse experiences, improving our policy toolbox—so that we can provide the most tailored advice to our 189 members.
The key is that we must work in partnership. Our joint responsibility is to help make trade more inclusive and capital flows safer. This is how we can help foster a globalization of hope—a culture of solidarity that goes well beyond economics.
3. Caring for our common home
This brings me to the third priority area—caring for our common home by tackling climate change.
None of the economic challenges we face will be relevant in 20 years if we don’t address climate change now.
The human costs of climate-related disasters are immeasurable. The economic costs, however, can be measured. Just one example: damages from Hurricane Maria amounted to over 200 percent of Dominica’s GDP and over 60 percent of Puerto Rico’s GDP.
And it’s the poor who are often most vulnerable to climate shocks. The World Bank estimates that, unless we alter the current climate path, an additional 100 million people may be living in extreme poverty by 2030.[viii]
So, how can we lift the climate shadow that is hanging over humanity?
Let us recognize that we need to adapt to the new realities. For many countries, this means investing in areas such as coastal protection and more resilient infrastructure and agriculture.
These types of investments can deliver a “triple dividend”: averting future losses, delivering innovation gains, and generating social benefits. And work by the Global Committee on Adaptation suggests the benefits of such investments could far outweigh their cost.
But adaptation will only take us so far. We also need much greater efforts to reduce carbon emissions and offset what cannot be reduced. The reality is that our species can only thrive if our activities are in balance with our natural environment.
The best way forward is to put a price on carbon. Countries such as Chile, Colombia, and South Africa recently implemented carbon taxes; and China is about to launch an emissions trading system. These initiatives will encourage households and firms to use less energy and shift to cleaner fuels—and we need more of that.
We estimate that the global carbon price will need to increase from $2 per ton to as much as $75 per ton if we are to keep global warming under 2C. This transition must be fair and growth-friendly. For example, carbon tax revenues can be used to provide upfront assistance to poorer households, lower burdensome taxes, and support investments in health, education, and infrastructure.
Of course, managing the transition to a zero-carbon world will not be easy. Think of “stranded assets” such as oil, coal and gas reserves, which could become unusable. Some estimates suggest the potential costs of devaluing these assets range from $4 trillion to $20 trillion.[ix]
The financial sector will need to factor in transition risks by shifting to a more sustainable approach—one that is grounded in better risk management and longer-term thinking.
Stronger disclosure standards can help lenders and investors see the full picture. If the price of a loan for an at-risk project increases, companies may simply decide that the money for the project could be better spent elsewhere.
More sustainable finance also means seizing new opportunities: the IMF estimates that a low-carbon transition could require $2.3 trillion in energy sector investment every year for a decade.[x]
The good news is that green bonds, impact investing, and many other forms of sustainable finance are growing fast. But this is not nearly enough. The private sector can do more, and I believe it will in the days ahead. Why? Because the price of inaction is too high.
How can the IMF help? By intensifying our engagement on climate change, with a focus on macroeconomic impacts. We are deeply committed to supporting adaptation and mitigation efforts through our policy advice, financial support, and capacity building.
We will include climate stress testing in our assessments of financial sectors (FSAPs). We will encourage more consideration of climate factors when countries create national statistics. And we will work with our partners to help create common standards for environmental disclosure.
By learning from each other and by implementing the right policies, we can help finance the transition to the new climate economy. Our children and grandchildren are counting on us.
So, what do the new priorities for the economy look like? We know what they are—inclusive growth, fair global integration, climate action—now we have to act.
Let me conclude with a line from Leo Tolstoy, who wrote: “All the variety, all the charm, all the beauty of life is made up of light and shadow.”
Pope Francis has brought us together. And I certainly look forward to our discussions on how we can help lift the shadows and bring in more light.
Thank you very much.
[v] Working Paper: “Base Erosion, Profit Shifting and Developing Countries.”
[vii] IMF staff analysis.
[x] IMF publication: October 2019 Fiscal Monitor. The $2.3 trillion estimate includes the current investment of $1.8 trillion plus additional investment needs of $0.5 trillion.
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