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Subversive ideas from the IMF

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In a speech recently delivered in London, IMF's Managing Director, Christine Lagarde, advocates the emergence of a new multiculturalism for the 21 st century.* In the process, she singles out major flaws in our economic system and offers solutions to correct them. Meant to offer practical solutions to a crucial issue -- the future of the global economy in the coming decades -- the speech may be viewed as subversive in some quarters.

Ms. Lagarde begins by stating that our "hyperconnected digital age" threatens our world the same way "the modern industrial society brought about massive dislocation" in the early 20 th century which led to World War I and the Great Depression. This "hyperconnectedness' is the source of "two broad currents [which] will dominate the coming decades -- increasing tensions in global interconnections and in economic sustainability".

Global interconnections bring the "world closer together". Trade and financial transactions link countries together. Paradoxically, global interconnections pull the world further apart. "One of the major megatrends of our time is the shift in global power from west to east". Consequently, while the world may be "more integrated economically, financially, and technologically", it is also "more fragmented in terms of power, influence, and decision-making." "Tensions in economic sustainability" is the second broad current which will dominate the next few decades. Will the world continue to grow or will it slow down? After reminding us that the "financial crisis" is still with us", Ms. Lagarde examines three threats to world growth: demographics, environmental degradations, and income inequality.

World population is growing larger and older. Some countries are experiencing a "youth bulge" which "could prove a boon or a bane." "Migrations from young to old countries" may result in a "brain drain" sapping young nations' productive potential. Climate change epitomizes environmental degradations. "The bad news is that we are getting perilously close to the tipping point." To counter the threat, Ms. Lagarde wants "people to pay for the damage they cause". These "externalities", as economists called them, are damages firms inflict on the environment without carrying the cost. In the same vein, she advocates a phasing out of energy subsidies which "mostly benefit the relatively affluent, not the poor." Finally, after reminding her audience that the Confederation of British Industry and Pope Francis spoke about income inequality, Ms. Lagarde states: "Put it simply, a severely skewed income distribution harms the pace and sustainability of growth over the long term." Inequality may be reduced through "tax and spending policies" such as progressive taxation, access to health and education, etc.

Moving on to international cooperation, Ms. Lagarde takes on the United States' hegemonic economic power. How could the multilateralism she is advocating function with the dollar as the reserve currency? The international monetary system inherited from Bretton Woods, dubbed the "non-system" after Nixon's decision to severe the link between gold and the dollar, is incompatible with multilateralism for it implies a dollar replacement. Her reference to John Maynard Keynes may thus be a veiled signal to institute the "bancor', the international fiduciary currency the British economist suggested and which Harry Dexter White, the American delegate, rejected. Her British audience must have been pleased. But, she quickly threw cold water on her listeners by calling for a "financial oversight" clamping down on excess", and endorsing a "culture" where the ethos is to serve rather than rule the real economy". She was aiming directly at the City. Her proposal to reform the banking sector could or should take the form of a World Financial Organization (WFO) which would complement the global governance's present structure -- something neither the City nor Wall Street would welcome with open arms.  

Externalities, energy subsidies, progressive taxation, entitlements, the bancor and a new ethos in the banking sectors are anathemas in some circles in Washington DC, New York and London. To an attentive auditor, her speech is a stark critique of our market economy and a call to reform the way it is run.

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*February 3, 2014.

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Former Vice President Citigroup New York (retired) Columbia University -- Business School Princeton University -- Woodrow Wilson School


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