She told a Brussels conference that growing and excessive inequality has become a problem for economic growth and development.
“You do not have to be an altruist to support policies that lift the incomes of the poor and the middle class. Everybody will benefit from these policies, because they are essential to generate higher, more inclusive, and more sustainable growth,” Lagarde declared.
“In other words, if you want to see more durable growth, you need to generate more equitable growth.”
Trickling up, not down
New IMF research shows that if you lift the income share of the poor and middle class by1 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.
“Our findings suggest that—contrary to conventional wisdom—the benefits of higher income are trickling up, not down,” Lagarde said, adding that one possible explanation is that the rich spend a lower fraction of their incomes, which could reduce aggregate demand and undermine growth.
Earlier IMF research shows that excessive income inequality actually drags down the economic growth rate and makes growth less sustainable over time.
Causes, consequences of excessive inequality
Lagarde highlighted the divergence between a steady, decades-long fall in inequality between countries—driven by rapidly rising average incomes in emerging market economies—and growing income inequality within countries.
The two main factors driving the widening earnings gap between higher- and lower-skilled individuals, especially in advanced economies, are technological progress and financial globalization, Lagarde noted. Other factors include overreliance on credit finance; low social mobility; and inequality of access to education, health care, and financial services, especially in developing economies.
Recipes for growth
“With these kinds of disadvantages—with this kind of inequality of opportunity—millions of people have little or no chance of earning higher incomes and building up wealth,” Lagarde said. But, she added, there are recipes for stronger, more inclusive, and more sustainable growth in all...