Christine Lagarde: The global economy is finally turning the corner
Normally a low-profile job, managing director of the International Monetary Fund became one of the world’s hottest assignments just about the time Christine Lagarde got it, in July 2011. The European debt crisis was growing intense, and the IMF, usually called on to aid small developing economies, was suddenly bailing out Greece, Portugal, Ireland, and other developed countries. The IMF was back in the headlines recently when it extended a $17 billion aid program to Ukraine after Russia annexed Crimea. Lagarde was also in the news when she withdrew from a commencement speech at Smith College after hundreds of students and faculty objected to her appearance, apparently in protest against the conditions imposed by the IMF (before and since Lagarde became chief) on poor nations that require financial rescue.
Lagarde talked recently with Fortune’s Geoff Colvin about the world’s slow climb out of the financial crisis, how to get the global economy growing faster, women in leadership, and much else. She had no comment on the Smith controversy beyond her public statement that she withdrew “to preserve the celebratory spirit of commencement day.” Edited excerpts:
Fortune: After five extremely tough years for the world economy, the latest IMF forecast shows growth increasing. How come?
Lagarde: Because the global economy is finally turning the corner of the crisis that we’ve had. We had 3% growth last year. We are forecasting 3.6% this year and 3.9% next year. So it is progress. It’s not yet at 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.
What are the keys to getting growth back up to where it could be and should be?
One thing we learned from the crisis is that it cannot be one size fits all. It has to be region- and sometimes country-specific, depending on the development of the economy, the structure, and the demographics. But what is probably a common factor to all economies is the need for structural reforms [e.g., more labor market flexibility, fewer protections for favored industries and groups, less bureaucracy]. This is something that the United States can afford. It is certainly something that the Europeans can do and also something that some of the developing countries and emerging markets can embark upon.
We believe monetary policy has to remain supportive in the European region and Japan. It’s now gradually under a tapering, and one of these days — not too soon — a tightening process in the U.S. From a fiscal point of view, there’s been a lot of fiscal consolidation during the austerity years, and now is the time to slow down a bit and let growth pick up.
The IMF recently announced an aid program for Ukraine. In the larger picture there, I’m hearing reports that the sanctions on Russia are leading Western banks to stop or restrict credit to Russian and other CIS customers and that this may harm the economic prospects not only of Eastern Europe but potentially even Western Europe. How great a threat is this?
The threat of sanctions has already had consequences and produced effects. You can see that in the capital flow out of Russia into other places. You will probably see foreign direct investment numbers down significantly in Russia. The forecast for growth by the Russian authorities themselves has been significantly lowered. We have revised ours to close to nothing this year and 1% next year, assuming the geopolitical situation is settled, which is a big assumption.
Clearly there are private sector actors that are also drawing lessons from the uncertainty and the unpredictability arising from the disorder between Russia and Ukraine. So it’s not surprising that banks would be pulling out or removing some of the capital they had invested, or restricting or reducing the activity they have in Russia.
What’s the threat of a larger crisis? In the late ’90s many people said, “Well, problems in Thailand — how could that possibly be significant?” It became highly significant, with a worldwide financial crisis. Could something like that happen here?
You always have the risk that one particular nucleus of a crisis would expand beyond that country. When the euro-area crisis started, we all thought, “Greece is not such a large member of the eurozone, and the matter could probably be settled, given the size of the Greek GDP relative to the rest of the zone.” Little did we anticipate that it would spread out and constitute a systemic risk. So, yes, all that can happen. But I believe that we today have a better understanding of the interconnectedness, whether through trade, through foreign direct investment, and, more important, through financial channels.
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.
Income inequality is a hot topic, and the IMF has done some research on it, finding that inequality and low economic growth are associated with each other. But which causes which?
The IMF has always been interested in that matter. We have always paid attention to the risk that inequality bears on macroeconomic and other policies. I spoke about it over a year ago because we saw and still see worryingly increasing trends of inequality, which we believe has consequences on the macroeconomy and other policies.
It is trendy at the moment because quite a few people have written about it, but we have been concerned about it for two reasons. One, we believe that it tends to increase financial risks if you have too much disparity in income distribution. And two, based on the research that we’ve done, we see that rising inequality is not supportive of sustainable growth. To the extent that growth is part of our mandate and critical for stability in the world, we believe that inequality needs to be looked at. There are countries that are showing very strong signs of rising inequality, and that is the case in the U.S.
What’s the policy prescription?
It has to be country-specific. What works in some European countries that have been used to a much larger tax burden 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.
What about the role of technology in the development of low-income economies? There would seem to be a real opportunity for changing the paradigm of growth on that basis.
There are network developments that we are seeing at play — for instance, in some African countries with the use of the mobile telephone as a device not to talk to each other or send texts to each other but to share information, move money around, cut out the intermediaries and make sure that money goes where it should, to make sure that the weather forecast is going to be received by the farmers so they can actually plan. That’s one of those developments where technology is breaking through old-fashioned and sometimes very heavy-loaded networks of rent seekers.
Corruption is a significant economic problem in many countries. Xi Jinping is campaigning against it in China. Do you see much progress in other countries?
Having been Finance Minister of France during the crisis and having endorsed the fight against tax havens, which are nice areas in which to park corrupted money and do money laundering — it is a very difficult task. There are lots of dark interests out there that have zero interest in progressing on this issue. The economic literature is unambiguous that it is a major brake on economic development. And it’s a very regressive factor.
You’ve talked about the danger of the developed economies finding themselves in a low-growth trap. Could you explain what that is and what the danger is?
The secular stagflation type of approach to life. We believe that if the right policies are adopted, if there is an early enough concern about deflation or the risk of low inflation, if the structural reforms that are badly needed in some of those advanced economies in particular are implemented, and if there are inclusive methods to develop growth — meaning giving women access to the workforce in some countries, facilitating immigration, improving education — that fear of secular stagflation should be set aside.
You have said that the glass ceiling still exists. Why does it persist?
Just look at the numbers and see how less paid women are for equal work in many countries, how little access many of them have to the capital market, to credit when they want to start a business, to land ownership in some countries, to education in other countries. The glass ceiling is unfortunately a kaleidoscope across the world, and not one-faceted as we tend to look at it from an advanced economic point of view. So when I talk about the glass ceiling, I think about that kaleidoscope that applies in Afghanistan, the Emirates, and Saudi Arabia and African countries, and Germany and Japan and the U.S. It’s multifaceted, and it is still there.
It’s a factor of culture, a factor of minority vs. majority, and it’s our internal factor, as has been described in a few books lately.
Do you think there’s a so-called glass cliff, meaning that women in leadership are often in riskier or more precarious positions?
Yeah, I think that is the case. There was a recent study about the stronger likelihood of a woman CEO being fired than the likelihood of a man CEO being fired.
Culturally, politically, is America or France ready for a woman President?
Time will tell! But there are lots of very competent women around.
Who is a leader you admire?
The current Pope has many of the attributes of a leader that I’m prepared to admire. I think General de Gaulle was an amazing leader in the face of adversity and with little support. Churchill was an incredible leader, in times of adversity more than in peaceful times. Gandhi was an extraordinary leader using alternative tools. Mandela was an amazing leader as well. I’m afraid there are many men in that group.
What inspires you to do what you do?
Two things. One is the thought that by us at the IMF doing a good job, providing the right analysis, and being honest in our relationship with authorities, we hope to improve the life of the little kids in Niger, in Mali, in Cambodia, in many places around the world where economic development has not yet raised the standard of living to let them have enough on the table every day and education as they should have it. The second thing is the group of very talented people who are driven by that same sort of mission spirit in the institution.
This story is from the June 16, 2014 issue of Fortune.