Inclusive capitalism requires not just promises but action: IMF Head


Oct 11, 2016 (LBO) – The Head of the International Monetary Fund (IMF) says to pull the world economy out of the “new mediocre” efforts to lift growth and support inclusion are critical and complementary priorities.

“Alongside stronger policies, the role of business is key. Enterprise not only benefits from greater inclusion, but is uniquely placed to support it — leading, employing, innovating,” Christine Lagarde, managing director, International Monetary Fund (IMF) said.

“Taking the next step on inclusive capitalism calls for decisive measures: not just promises but action.” She was speaking following IMF Annual Meetings over the weekend.

Economies are stuck in a protracted period of low growth, where 2016 marks the fifth consecutive year with global GDP growth below its long-term average, she said.

“Too many people feel left behind, questioning whether the economy is working for them. In some of the advanced economies in particular, a populist sentiment is growing that threatens to shift the needle against economic openness.”

The full text of the speech follows:

The Role of Business in Supporting a More Inclusive Global Economy
By Christine Lagarde

The Conference on Inclusive Capitalism, New York
October 10, 2016


Good afternoon. Thank you, John Micklethwait, for your kind introduction. I am pleased to be at the Inclusive Capitalism Conference once again—and in such illustrious company.

Henry Ford once said: “Coming together is the beginning. Keeping together is progress. Working together is success.” Likewise, the efforts of Lady Lynn de Rothschild and the coalition—in coming together, keeping together, and working together—are driving forward the critically important agenda of inclusive capitalism. I pay tribute to your vision and resilience.

This past weekend the IMF had its Annual Meetings, with our 189 member countries, and the state of the global economy took center stage. While the outlook remains subdued, the mood was resolute.

We are stuck in a protracted period of low growth: 2016 marks the fifth consecutive year with global GDP growth below its long-term average. Too many people feel left behind, questioning whether the economy is working for them. In some of the advanced economies in particular, a populist sentiment is growing that threatens to shift the needle against economic openness.

The fact is that growth has been too low, for too long, and is reaching too few. So we face a defining moment—and we must take decisive action to make globalization work—for everyone.

This will require pulling on all policy levers—monetary, fiscal, structural—to support demand, boost productivity, and reinvigorate trade. Investing in social safety nets, education, and retraining those affected by technological change are also key. Policymakers face a major challenge—and they cannot do it alone.

We need every creator of jobs and growth to step up. I am talking, of course, about business.

Business, after all, benefits from a more inclusive society because inclusion supports more durable growth and broader prosperity. I also believe that business is uniquely placed to support inclusion.

Some people are skeptical of the term “inclusive capitalism”—some see it as an oxymoron, others as PR to help companies seduce their consumers into buying their products and boosting their profits. Others call it a dangerous detour from free-market principles.

To respond, we must make the case that inclusion and durable growth are two sides of the same coin—we cannot have one without the other.

In that context, I will address three key roles of business: as leaders, as employers, and as innovators.


First, how can business leaders support inclusion?

Undoubtedly, business has a long history of leadership on inclusion. Think, for example, of the philanthropic giving of pioneers like Andrew Carnegie and John D. Rockefeller. Think also of the architecture of the industrial towns developed in 19st century Europe, they demonstrated the spirit of inclusion.

In more recent years, however, we have seen a growing sense of public anger against “elites,” with the so-called “one percent” seen as prospering at the expense of the “99 percent.” Particularly since the global financial crisis, many corporate heads have faced accusations of taking unnecessary risks, behaving unethically, and failing to share the fruits of enterprise.

The combined effect has been an erosion of public trust in big business. A recent Gallup poll finds that trust in large U.S. companies has been stuck at a lowly 18 percent for a decade. [1] Trust in banks has fallen from 49 percent ten years ago to 27 percent today. [2]

It is often said that trust “arrives on foot, but leaves on horseback.” And yet, trust is set to become even more critical in the years ahead. A recent Deloitte survey revealed that over half of millennials will not work for an organization if they are concerned about its standard of conduct. [3]

When I addressed the inaugural conference on inclusive capitalism two years ago in London, I spoke—among other things—about the need to improve corporate behavior and culture. One of my main points was that leaders must be as serious about values as they are about valuation, and just as passionate about culture as they are about capital.

Indeed, while strong regulation is essential, leaders themselves must also step up in the effort to tackle unethical behavior. Partly it is a matter of responsibility—after all, the buck stops at the top. It is also about effectiveness. Research shows, for example, that a bank is more likely to have an ethical culture if its executive team sets a good example with their own behavior. [4]

Responsible corporate compensation is an essential element. An IMF study shows that while the level of executive compensation is not consistently related to banks’ risk-taking, the structure of compensation is. [5] By linking pay with long-term rather than short-term performance, risk can be reduced.

Beside reducing risk-taking through more responsible compensation, another key building-block in rebuilding trust is to stamp out tax evasion. Even a casual observer of the Panama and Bahamas Papers revelation can see that efforts to avoid tax not only erode trust, but also short-change society.

There are no reliable estimates of the amount of tax revenue foregone through accounts detailed in the Panama Papers—both legally through sophisticated planning and illegally through tax evasion. These revelations, however, clearly show that there is a great deal of both. The resulting revenue losses represent a missed opportunity for society—and for pro-growth investments like education, health, and the environment. An efficient and fair tax system is an essential part of the circle of reinvestment.

More broadly, in many countries the private sector can play an integral role in tackling corruption in the public sector. After all, for every bribe received by a public official, there is a bribe paid by the private sector. By taking themselves out of this equation, businesses can help to stem corrupt behavior by public officials—both at home and abroad. And tackling corruption is critical in the ongoing fight against poverty and excessive inequality that is being fought in so many parts of the world.

At the other end of the spectrum, those who wish to not only avoid wrongdoing but contribute to positive social change are attracted to the philanthropy that I mentioned earlier. Inevitably, this is partly about PR. Undoubtedly, it is also about responsibility—to give back and share the prosperity with those who have not been as fortunate.

At the leadership level, the Gates Foundation’s Giving Pledge is an excellent example of this—since 2010 more than $365 billion has been pledged by 139 high net-worth individuals in areas from information technology to education to healthcare. Many companies also quite rightly support their employees in making charitable donations—thereby helping those in need, restoring trust, and investing in their staff.

This brings me to a second key role for business in promoting inclusion—as employers.


The potential for enterprise to create—and sustain—employment is especially critical at a time when so many people find themselves out of work. Despite the improving jobs situation in some advanced economies, the ILO estimates total global unemployment at 199.4 million this year—rising to above 200 million next year.[6]

The hardship is widespread—cutting across regions, sectors, genders, and ages. Let me highlight two specific groups: women and young people.

The sad truth is that, compared to their male counterparts, women are both underemployed and underpaid. And yet, research by the IMF and others has uncovered multiple macroeconomic benefits of empowering women.

Narrowing the gender gap supports economic growth and diversification. It is associated with lower income inequality. And it enhances the bottom line: an IMF staff study found that adding one more woman on a corporate board is associated with between 8 and 13 basis points higher return on assets. [7]

At the IMF, we are incorporating policy advice on gender issues into discussions with many country authorities—and in some of our recent programs, such as with Egypt. What would I say to you, as advocates and employers?

As advocates, I would like your support for smart public policies. In emerging and developing countries, these include investing in girls’ education, promoting broader access to finance, and strengthening infrastructure. In advanced economies, they include removing secondary earner tax disincentives, providing affordable high-quality childcare, and funding paid parental leave. Removing legal obstacles to women’s economic participation—which exist in an astonishing 90 percent of countries—is also key.

The good news is that, as employers, you have significant scope to empower women. A supportive attitude to flexible working and parental leave can help more women combine job and family. So can efforts to facilitate childcare arrangements. Mentoring and coaching by female role models can help women perform and rise up.

In addition to women, we should also focus on youth. Tragically, the number of unemployed young people is projected to rise by 500,000 worldwide this year—to a total of 71 million. [8]

As you know, addressing the scourge of high youth unemployment requires a range of efforts. I would like to highlight just one: skills development.

An essential component of helping young people to prosper is ensuring they have the right skills for our globalized and rapidly changing world economy. Too often, however, there seems to be a disconnect between the skills young people have and what they need.

The World Economic Forum, for instance, has found that, on average, just two-thirds of young people’s human capital potential is utilized. [9] Another report, by McKinsey, suggests that young people and employers are on the same page about this: a majority of both groups doubt that new graduates are ready for entry-level jobs.[10] By collaborating more with education providers, the report suggests, employers can make a big difference.

As part of the IMF’s ongoing surveillance and analytical work with our members, the IMF touches on these kinds of issues. Here in the U.S., for example, the Fund has been calling for more vocational education—including by expanding partnerships between industry and higher education institutions. [11] We have also called for an increase in the federal minimum wage—another key element in supporting inclusion.

In unleashing the potential of all those who feel excluded, one of the keys is to better equip people to thrive in the digital age, helping them adapt to a changing world of work. To use an ancient Chinese proverb, “When the winds of change blow, some people build walls and others build windmills.”


Which leads to my third key role for business: in promoting inclusion through technological innovation.

The relationship between technology and inclusion is a matter of vigorous debate. Some studies suggest that technological innovation can exacerbate inequality—with robots reducing people’s pay, or even taking their jobs.

These concerns are not new—as the 19th Century Revolt of the Canuts in France and the Luddite resistance in Britain to the Industrial Revolution — attest. Nowadays, people who worry about new technologies are often dismissed as living in the past. That would not be fair; such concerns must be addressed seriously—for example, by investing in skills and social safety nets.

We must also, however, appreciate the positive side of technological innovation. If harnessed, it has the potential to support inclusion, creating opportunities for people to participate more in the economy and reap more of the rewards. Think, for example, of the so-called “app development” or “gig-economy.” While by no means perfect, it is removing many people’s reliance on traditional business structures, creating new opportunities for millions of individuals to realize their potential.

For me—and the IMF—one form of technological change that holds great promise relates to financial inclusion. Expanding access to financial services can undoubtedly support economic development. This is no platitude. It is based on empirical evidence—including the IMF’s unique global database on financial inclusion, the Financial Access Survey. [12]

More than 60 countries—from India to Peru—have adopted strategic plans to expand financial inclusion. But while governments can create an enabling environment—including consumer protection laws and financial education—it is the private sector that ultimately must harness the technology.

One innovation with dramatic potential is digital finance. Across much of sub-Saharan Africa, for example, it is much easier to bank on a phone than in the nearest town. In 15 countries of the region, the number of mobile money accounts exceeds the number of depositors in commercial banks. Kenya’s mobile payment service, M-PESA, is a well-known standard-bearer for mobile banking. Operated through a private telecommunications provider, it offers nationwide coverage independent of traditional banks. And one added bonus: it helps expand women’s access to finance.

Expanding financial services also requires tailoring products to consumers’ circumstances. In Mexico, for instance, a large consumer retailer opened a bank in 2012—specifically aimed at serving the unbanked. By analyzing the parent company’s data, they were able to require less documentation to open an account than banks typically needed. Thousands of people opened bank accounts; research indicates that employment and income levels also increased.

In Chile, too, supermarket chains are gradually building credit histories for their unbanked customers. They start with small amounts of store credit, then expand it based on repayments—incrementally widening access to credit.

These are just a few examples of financial empowerment in action. In this way, and others, innovation and inclusion can go hand-in-hand.


To conclude, as we seek to pull the world economy out of what I have called “the new mediocre,” efforts to lift growth and support inclusion are critical, complementary priorities. Alongside stronger policies, the role of business is key. Enterprise not only benefits from greater inclusion, but is uniquely placed to support it—leading, employing, innovating.

Taking the next step on inclusive capitalism calls for decisive measures: not just promises but action. The ball is in your court.

Let me conclude with the words of President Woodrow Wilson:

“Y ou are not here merely to make a living. You are here in order to enable the world to live more amply, with greater vision, with a finer spirit of hope and achievement. You are here to enrich the world, and you impoverish yourself if you forget the errand.”

Thank you.