The global economy is stagnating, which could be a major blow to the fight against poverty and inequality.
The Group of 20 finance ministers and central bank governors meeting in Rio de Janeiro this week face a sobering outlook. As the latest update of the IMF’s World Economic Outlook shows, global growth is expected to reach 3.2 percent this year and 3.3 percent in 2025, well below the 3.8 percent average from the turn of the century until the pandemic. Meanwhile, our medium-term growth projections continue to languish at their lowest level in decades.
To be sure, the global economy has shown encouraging resilience to a succession of shocks. The world has not fallen into recession, as some predicted when central banks around the world raised interest rates to curb inflation.
However, as we move beyond the years of pandemic crisis, we need to prevent the world from falling into a prolonged period of anemic growth that exacerbates poverty and inequality.
The pandemic has already set back the fight. Extreme poverty has risen after decades of decline, while global hunger has surged and the long-term decline in inequality between countries has stalled.
A new IMF analysis suggests that periods of stagnation lasting four years or more tend to increase income inequality within countries by nearly 20 percent—considerably more than the increase due to a full-blown recession.
During periods of stagnation, slow job creation and wage growth increase structural unemployment and reduce the share of a country’s income that flows to workers. Coupled with limited fiscal space, these forces tend to widen the gap between those at the top and bottom of the income scale.
In other words, the longer we remain stuck in a low-growth world, the more unequal that world will become. That in itself would be a setback for the progress we have made in recent decades. And as we have seen, rising inequality can fuel discontent with economic integration and technological advances.
It is therefore timely that Brazil has made combating inequality, poverty and hunger a priority of its G20 presidency. With the right policies, we can still escape a trap of low growth and rising inequality, while working to reduce poverty and hunger. Let me highlight three priority policy areas.
Preparing for inclusive growth
First, we need to address the underlying problem of slow growth. Much of the decline in growth over the past few decades has been driven by falling productivity. A big reason for the decline is that labor and capital are not flowing to the most dynamic firms.
But a smart mix of reforms could boost medium-term growth. Measures to promote competition and improve access to finance could make resources flow more efficiently, boosting productivity. Meanwhile, bringing more people into the workforce, such as women, could counter the drag on growth caused by an aging population.
Nor can we forget the role that open trade has played as an engine of growth and jobs. Over the past 40 years, real income per capita has doubled globally, while more than a billion people have been lifted out of extreme poverty. Over the same period, trade as a share of gross domestic product has halved. It is true that not everyone has benefited from trade, which is why we must do more to ensure that the gains are shared fairly. But closing our economies would be a mistake.
Making tax policies people-centered
Second, we need to do more to ensure that fiscal policies support the most vulnerable members of society.
The challenge is that many economies are facing severe fiscal pressures. In developing countries, debt service costs are taking up a larger share of tax revenues at a time when they are dealing with a growing list of spending demands, from infrastructure investments to the cost of adapting to climate change. A gradual, people-focused fiscal effort can alleviate fiscal risks while limiting any negative impact on growth and inequality, including by increasing revenue, improving governance and protecting social programs.
There is plenty of room for developing countries to raise more revenue through tax reforms—up to 9 percent of GDP, according to our research. However, it is crucial to take a progressive approach, which means ensuring that those who can afford to pay more taxes contribute their fair share. Taxing capital income and property, for example, offers a relatively progressive way to raise more tax revenue.
Regardless of the strategy, people need to have confidence that the taxes they pay will be used to provide public services — not to enrich those in power. Governance improvements, such as increasing transparency and reducing corruption, must also be part of the equation.
At the same time, Social-spending programs can make a big difference in inequality, including through school meals, unemployment insurance, and pensions. These must be protected. Well-targeted income transfer programs—like Brazil’s handbag Family—can support the vulnerable.
Our research shows that strong redistributive policies in a growing G20 economy — such as social spending programs and public investment in education — can reduce inequality between 1.5 and 5 times more than weaker policies.
Strengthening the Global Backstop
Finally, we need a strong global financial safety net for countries that need support. With this goal in mind, the IMF is working on a package of reforms to our lending framework.
To continue to meet the needs of our most vulnerable members, we are reviewing our concessional lending instrument for low-income countries, the Poverty Reduction and Growth Trust. With demand expected to exceed pre-pandemic levels, it is vital that our members come together to ensure that the PRGT is adequately resourced and that its long-term finances are put on a sustainable footing.
We are also taking a closer look at our surcharge policy for the first time in almost a decade. The review aims to ensure we can continue to provide affordable funding to members who need our support.
Last year, our members gave us a strong vote of confidence by agreeing to increase our permanent quota resources, allowing us to maintain our lending capacity. I am counting on G20 members to ratify the increase now.
One of the lessons of recent history is that we should not ignore those left behind by economic and technological progress — whether they are individuals within a country or entire nations struggling to close the gap. But with the right policies and working together, we can build a prosperous and equitable world for all.
