In a recent speech, Kristalina Georgieva, the new head of the IMF, outlined the possible future crisis of the global economy. Similar forecasts were made by World Bank analysts. But in this case, we are more interested in the mechanism of the expected global stagnation as recipes to minimize its destructive consequences.
According to the International Monetary Fund head, such risks include inequality and insufficient financial integration of an economy. “I must admit that in the same period (amid a decrease in the stratification of society in Asian countries with high rates of economic development, – ed.), inequality within many countries increases... inequality in income and wealth has already reached record levels... We know that this uncertainty of prospects weakens confidence. Therefore, we must learn the lessons of history, taking into account the peculiarities of our time. We know that excessive inequality impedes growth and erodes the foundations of countries. It undermines trust within society and trust in its institutions; it can inflame populism and cause political upheaval. To solve the problem of inequality, many governments primarily turn to fiscal measures the policy. These measures are and will remain critical.”
As for the financial sector, it turned out that its growth and structure can also dramatically affect the level of inequality in society, not to mention the correlation of indicators such as capitalization of the financial sector and economic growth dynamics. The IMF identifies three aspects of the impact of the financial system on social segregation of society.
The first aspect is financial sector strengthening, that is, an increase in its share in the GDP structure. Initially, the growth of this indicator leads to significant achievement in the process of combating poverty, as happened in India and China. But then "at a certain level, deepening the financial market is associated with increased inequality and less inclusive growth." The financial lobby is crystallizing With the growing influence on the economy, this is how an "economy for itself" model is forming. As the head of the IMF (!) noted: "The strong influence of lobbyists and excessive remuneration in the banking industry can lead to the creation of a system that pursues its own interests no less than serves the interests of others."
In Ukraine, the decrease in the penetration effect is very clearly seen when comparing indicators such as the ratio of net loans to GDP and household deposits to GDP. The first indicator fell to 44.7% in 2014, to 12.3% in 2019, and the second - from 29.1% in 2013 to 14.1% last year.
The second aspect is financial stability. Crises, as a rule, cost the economy about 10% of GDP, and inequality deepens on the eve of another collapse.
The third aspect is financial integration, that is, the financial services coverage of the widest segments of the population, including small and medium-sized businesses. The mechanics here are quite simple - if banks do not buy speculative financial instruments and engage in microcredit, they will reduce the risk of another financial bubble, that is, delay the crisis, reduce their risks and reduce the overall level of inequality due to the access of the population to additional sources of financing. And this is also the position of the IMF: "Lending to small companies increases financial stability and reduces risk compared to lending to large firms."
The Bali financial technology program adopted by the IMF and the World Bank in 2018 shows that “expanding access to financial services for low-income households and small enterprises is one of the most effective ways to reduce inequality.” According to the WB, an analysis of the activities of 135,000 companies in 40 countries showed that microcredit directly affects the reduction of income inequality. This creates a new global financial "construct" - a rational financial system.
In this context, IMF mathematical models are interesting regarding causal relationships in the process of external debt formation (50 countries over 36 years). There is an inverse relationship between the growth of net exports and net foreign assets. A 1% decrease in net foreign assets leads to an increase in exports by 0.7%, that is, a net inflow of investments leads to an increase in export potential. This model also has correction factors: export response to a positive change in investment flows within the country in developing economies is on average 1.8 years. And the general flow imbalance of external debt, which is balanced by improving export potential, is overcome in 10-50 years.
And here we can draw our own conclusions. In the theory of the real business cycle, cyclical fluctuations are not always caused by a supply crisis, when the state should not intervene in the process of "creative destruction" of the industrial core. This might be a crisis of the economic and political paradigm (as it happened in Ukraine) or a combined shock of aggregate supply and demand (as it happened in USA in 2008).
The technological shock in Ukraine is explained not by the fact that nobody needs our rockets and planes, but by the fact that the toxic model of state management dominates the economy, which creates a "liquidity preference" in the form of a speculative pyramid of government bonds rather than lending to micro-business, using fiscal measures stimulate the export of raw materials and reduce the efficiency of capital in processing industries with a high level of added value. This is a kind of Keynesianism, on the contrary, aimed not at economic expansion, but at economic restriction, that is, a deliberate limitation of the productivity of its economy, which after a collapse in 2014-2015 by 16% could not be slowly restored at a rate of 2-3% per year, and fully grow by 5-7%. Indeed, only high growth rates are the basis for both overcoming poverty and reducing social inequality.
The whole world is preparing for the “left political march,” turning financial systems towards lending to microbusiness, while in Ukraine the “saga on bonuses and salaries of officials” only leads to social frustration and an increase in the sense of injustice and inequality in society. And the country's financial system is unfolding "backwards" to the economy and "forward" to the lobby of financial speculators. And the IMF is well aware of this. That's just the current government is so convenient to present the fund in the form of a monster that does not want to lend to Ukraine until it sells its land and scraps of industrial potential for scrap.