IMF: inequalities trigger economic crisis

The middle class is gradually growing at a global level, but it is in crisis in developed countries, the managing director of the International Monetary Fund (IMF), Christine Lagarde, said at the World Economic Forum in Davos.

She noted that the middle class is both growing and shrinking. Globally, it’s grown from 7% of the global population to 13% during 40 years, RNS reports.

"If there is excessive inequalities, it becomes difficult to achieve sustainable growth," she noted.

"If the policymakers do not listen now, I don't understand what can be done... There is no silver bullet response to excessive inequality," she said, adding that turning back on globalisation will be a wrong approach. 

"That is combined with signs of lack of trust, lack of hope, disenchantment with the vision of the future. With lower growth, more inequality and much more transparency, you have the good ingredients for a crisis of the middle classes in the advanced economies," Lagarde said.

The chief economist at PF Capital, Yevgeny Nadorshin, speaking to Vestnik Kavkaza, stressed that that the effect of income inequality on the economy varies depending on its extent: surmountable inequality stimulates growth, while overwhelming inequality hampers it. "Under certain conditions, income inequality encourages those who earn less, to earn more," he explained, noting that inequality, in fact, is one of the driving forces of the economy.

"But if inequality level exceeds a critical threshold, it becomes quite clear for the one who gets smaller income that he would never be able to reach a higher level. A man stops to look for opportunities. In order for inequality to be the driving force of the economy, it should remain moderate," Yevgeny Nadorshin said.

Lagarde's speech was devoted to this problem. "The IMF head was right in saying that growing inequality is a big problem. The development of the world economy has been very unequal in recent decades, unfortunately. Revenues of more well-off sectors of the population have increased, in fact, it happened in developed countries such as the United States," the economist said.

However, he noted that the IMF head can only call on countries to work on the reduction of income inequality, because there are no proper tools at the level of international organizations. "In fact, it is a key point to see the problem, as to solve it at the level of individual countries is not so hard. Governments have developed a huge amount of the distribution policy instruments. Now the fact is that they are not sufficiently affect the redistribution of income and do not compensate excessive inequality," Yevgeny Nadorshin concluded.

The director of the Institute of International Economics at the Russian Academy of Sciences, Ruslan Greenberg, agreed with Nadorshin. "It is right that the powers finally became aware of this problem. Let me remind you that we have started to talk about it even 15 years ago. The fact is that before the crisis of 2008-2009 there was a fairly long-lasting economic growth linked to loans. Then, lending could save people who had no money from inequality. After the crisis, loans dried up, and inequality has become abundantly evident," he said.

"In economic terms, inequality means the absence of mass purchasing power. If the middle class is shrinking or getting poorer, it slows down the entire economic growth," Ruslan Grinberg explained.

The economist also named measures to overcome inequality. "These are a redistribution of income, raising the minimum wage, increasing the progressivity of the income tax. Globally, the problem is much more difficult, because it requires to bring 5 billion people out of poverty, and it is very difficult due to lack of resources. It is also necessary to make the middle class wealthier, because only it provides a high purchasing power," the director of the Institute of International Economics at the Russian Academy of Sciences concluded.