Rising inequality risks leading to new financial disaster, warns IMF chief

Current trends can lead to 'system that serves itself as much as it serves others'

Phil Thornton
Monday 20 January 2020 16:02 GMT
Managing director Kristalina Georgieva made her comments ahead of the World Economic Forum in Davos
Managing director Kristalina Georgieva made her comments ahead of the World Economic Forum in Davos (Reuters)

The head of the International Monetary Fund (IMF) urged governments not to roll back regulations aimed at reining in risky behaviour by banks as she published research showing a link between rising inequality and financial crises.

Kristalina Georgieva said that financial systems that went through a process of rapid expansion and increased complexity tended to benefit the wealthy, exacerbating inequality.

She said income and wealth inequality had reached or were near record highs in many members of the OECD rich countries club, picking out the UK where she said the top 10 per cent now controlled nearly as much wealth as the bottom 50 per cent.

In a speech at the Peterson Institute of International Economics in the US on Friday, Ms Georgieva highlighted the parallels between the new decade and the “roaring twenties” 100 years earlier that led to the Wall Street crash.

“This troubling trend is reminiscent of the early part of the 20th century when the twin forces of technology and integration led to the first Gilded Age, the Roaring Twenties, and, ultimately, financial disaster,” she said.

New research by IMF economists published at the same time showed that inequality tended to increase before a financial crisis, signalling a “strong link” between inequality and financial stability.

One reason is that greater inequality can create political pressure for a quick fix that actually makes the problem worse, she said.

“The negative impact is especially visible where financial sectors are already very deep. Here, complicated financial instruments, influential lobbyists, and excessive compensation in the banking industry can lead to a system that serves itself as much as it serves others,” she said.

She said that financial services could play a positive role in reducing inequality by using innovations such as mobile finance to bring in people who were previously unbanked, particularly in developing economies.

“We know that financial inclusion can be an economic game changer. It can help break down the barriers presented by gender, race, geography, and unequal starting positions in life,” she said.

However, Ms Georgieva said it was essential the financial sector was robust, but not overly complex and did not create heavy debt burdens or put an entire system at risk.

She said that efforts since the 2008 crisis to impose higher capital and liquidity requirements on banks and ensure that troubled banks could be wound down with relying on the taxpayers had achieved progress.

But she added: “We are safer, but not safe enough. Rolling back these achievements — as has already begun in some places — would be a profound mistake.”

She did not mention particular countries, but since the election of Donald Trump as US president, Wall Street has sought to push back against the tighter rules put in his predecessor Barack Obama.

Ms Georgieva also revealed that the IMF, which is the world’s premier financial watchdog, would use its spring meetings to publish research on the role the financial sector can play a crucial role in moving the world to net zero carbon emissions and reach the targets of the Paris Agreement.

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