On
May 27, 2014, Christine Lagarde participated in the conference for
inclusive capitalism in London. The Managing Director of the IMF
spoke about economic inclusion and financial integrity.
My
introduction needs some explanation.
First,
what is inclusive capitalism? According to Christine Lagarde, it is a
market economy in which trust, opportunity, and rewards for all
prevail.
Second,
inclusive capitalism faces which challenges, according to the IMF?
Christine Lagarde says it’s the rising income inequality and the
lack of an integer financial system.
Income
inequality is on the rise.
“The
85 richest people in the world, who could fit into a single London
double-decker, control as much wealth as the poorest half of the
global population – that is 3.5 billion people.”
This
is perhaps a shocking statement but, as such, not a major problem for
inclusive capitalism. What matters more is, according to Christine
Lagarde, the inequality of opportunities that comes with any
inequality of outcome. Put differently: If you have less money, your
education and health care will suffer; thus, you will get less
opportunities in your life, compared to others.
“Fundamentally,
excessive inequality makes capitalism less inclusive. It hinders
people from participating fully and developing their potential.”
Another
problem of income inequality is that it undermines solidarity and
reciprocity in societies. Ultimately, this may threaten democracies.
The
financial system is not integer.
“We
are familiar with the factors behind the crisis – a financial
sector that nearly collapsed because of excess. A sector that, like
Icarus, in its hubris flew too close to the sun, and then fell back
to earth – taking the global economy down with it.”
Every
day, we can read in the financial press that the integrity of the
financial system is a problem. So what can we do about it? Christine
Lagarde presents four answers:
- Avoid financial institutions becoming too big to fail: Increasing minimum capital ratios on systemic banks can reduce systemic risk significantly. In addition, an international agreement on a cross-border resolution of mega banks would also help.
- Make better rules and better monitor shadow banks.
- Make derivatives markets safer and more transparent.
- Change the behavior and culture in the finance industry: Supervise banks stronger, allocate greater resources to independent supervisors, align incentives with expected behavior, and promote prudence and social consciousness as a core value of banking are the key words here.
“The
true role of the financial sector is to serve, not to rule, the
economy. Its real job is to benefit people, especially by financing
investment and thus helping with the creation of jobs and growth.”
“Prudence
has long been a byword of banking, and yet has been sorely missing in
action in recent times.”
This
is all nice and right. But it still remains pretty vague for me. And,
in addition to being vague, Christine Lagarde says that the above
topics will also take a very long time to be implemented:
“Just
as we have a long way to go to reduce our carbon footprint, we have
an even longer way to go to reduce our financial footprint”.
Something
makes me think that this is not the last time that I write about
these topics…
Some additional quotes
Resource:
