Need to focus on reducing inequality, IMF cites risks to global economy

The world's financial sector should take rapid steps to address record or near-record inequality levels within countries that new research shows could be a harbinger of a new financial crisis, the head of the International Monetary Fund said Friday.

IMF Managing Director Kristalina Georgieva issued what she termed a "call to action", urging a shift to facilitate more lending to small and women-led businesses, which in turn would help bolster resilience in the event of a future crisis.

"Our new research shows that inequality tends to increase before a financial crisis, signalling a strong link between inequality and financial stability," she said, citing parallels to 1920s boom years that led to the Great Depression.

A report by IMF staff released Friday shows that expanding financial services to more low-income households, women and small businesses could serve as a powerful lever in creating a more inclusive society, but the increasing complexity of the financial sector often wound up benefiting mainly the wealthy.

"If we act, and act together, we can avoid repeating the mistakes of the 1920s in the 2020s," Georgieva told an event at the Peterson Institute for International Economics.

The Fund would apply the lessons of the new research to its assessment and surveillance of financial sector stability, while focussing on bolstered financial literacy among less "sophisticated" populations, she added.

Georgieva, who served as the World Bank's chief executive officer before moving to the IMF in October, has made reversing inequalities one of her top priorities.

In her speech on Friday, she said it was important to maintain high lending standards and good supervision, but work was needed to reverse widening gaps between rich and poor.

Unlike the 1920s, climate change was a huge factor exacerbating inequality today, she said, citing a World Bank estimate that 100 million people could be living in extreme poverty by 2030 if current policies were not changed.

The Fund in November called for central banks to develop stress tests for climate risks, and Georgieva said it would seek to incorporate them into its assessment instruments this calendar year. Devaluing climate-related stranded assets could result in costs of $4 trillion to $20 trillion.

Governments should continue using fiscal policies to address growing rates of inequality, she said, and avert the populism and political upheaval it could spawn.

But the financial sector also had a key role to play, she said, citing research by IMF staff that showed a 2-to-3-percentage point difference in longer-term gross domestic product (GDP) growth between financially inclusive countries and their less inclusive peers.