Interview with Lagarde, Managing Director of IMF

Financing to members in economic difficulties, policy advice, and working with developing nations to help them achieve macroeconomic stability and reduce poverty are some of the ways the International Monetary Fund (IMF) supports its members (IMF, 2014). On June 16, 2014, Christine Lagarde, the managing director of the IMF talked with Fortune’s Magazine Geoffe Colvin. Covering a wide range of topics such as, research that the IMF has conducted on the association between income inequality and low economic growth, the issues of corruption as it relates to economic growth such as with tax havens, and an aid program that the IMF has developed for Ukraine (Colvin, 2014).

 

During this interesting interview Colvin asked Lagarde, about how income inequality and low economic growth are associated with each other, and which causes which (Colvin, 2014)? Lagarde answered by stating that, with income inequality “We believe that it tends to increase financial risks if you have too much disparity in income distribution…rising inequality is not supportive of sustainable growth. There are countries showing very strong signs of rising inequality, and that is the case in the U.S. ”

 

Colvin continues by talking to Lagarde about the danger of the developed economies finding themselves in a low-growth trap and asking what’s the policy prescription? Lagarde replies, “ It has to be country-specific. What works in some European countries …will not necessarily work in the United States. My own belief is that the first way to deal with inequality is to make sure that everybody has a job. You start with that one. Second, make sure that public spending is focused on those policies that will reduce inequalities, such as good health services for all, including the poorest, and access to education, including to those who are not well-off. And then you have the redistributive policies that can be applied, provided they're well calibrated and not excessive, because if you set marginal [tax] rates too high, they are clearly disincentives to perform and create growth” (Colvin, 2014). At the moment the U.S. is considering of raising its minimum wage.   

 

Colvin later compares to Lagarde about the late euro-area crisis with Greece and the “nucleus of a crisis” of Ukraine. “Now there is one additional interconnection that is present in the Ukraine case that did not exist in the Greek case or in the Thai case, and that's the energy factor. Ukraine is a transit country through which a lot of gas is channeled from Russia to other European countries. The alternatives farther south are not yet available, the LNG [liquefied natural gas] terminals are not yet built, and there is that degree of uncertainty, which clearly could cause problems going forward” (Colvin, 2014).

 

Despite this crisis and “the world's slow climb out of the financial crisis, the world still saw 3% growth last year, a 3.6% forecast this year and 3.9% next year.” However, Lagarde added “this is not a full potential and certainly not enough for some regions of the world to absorb the unemployment that we have in many, many corners, but it is recovery underway.”

 

References:

Colvin, G. (2014, Jun 16). Fortune. 6/16/2014, Vol. 169 Issue 8, p123-126. 4p.

 IMF. (2014, Aug 20). What We Do: International Monetary Fund. Retrieved from International Monetary Fund: http://www.imf.org/external/about/overview.htm

My research has shown Lagarde to be accurate when speaking of countries and "understanding of the interconnectedness, whether through trade, through foreign direct investment, and, more important, through financial channels" (Colvin, 2014). Lagarde's decision supports the founding principles of the IMF  and "lending which is a core responsibility of the IMF" (Peng, 2014, p. 216).  A great example was when the IMF made headlines when it extended a $17 billion aid program to Ukraine after Russia annexed Crimea. Due to disorder between Ukraine and Russia a lot of capitol that was once invested is now being removed leaving Ukraine unstable. "Ukraine from, a transit country which a lot of gas is channeled from Russia to other European countries" is now being aided by decisions like Lagrade's of the IMF.  Although the IMF whose the "Lendor of last resort to help member countries out of financial difficulty" are sometimes the only solution to problems posed such as Greece (Peng, 2014, p. 216).
References:

IMF (2011, April 12).  An Introduction to the IMF [video].  Retrieved from http://digital.films.com/play/MAJSFD

Peng, M. W. (2014). Global business (3 ed.). Mason, OH: South-Western, Cengage Learning