Speech: Innovation, Technology and the 21st Century Global Economy
By Christine Lagarde
Managing Director, International Monetary Fund
Stanford University, February 25, 2014

Excerpt

…Technology and rising inequality
This feeds into a broader concern: Technological advance creates a small cohort of big winners, leaving everybody else behind. Which brings me to my second topic today—the problem of rising inequality.

Income inequality is on the rise across the world—starkly so. According to Oxfam, almost half the world’s wealth is owned by one percent of the population and, stunningly, the bottom half of the world’s population owns the same as the richest 85 people in the world. Since 1980, the richest 1 percent increased their share of income in 24 out of 26 countries for which we have data.

Here in the US, the share of income taken home by the top 1 percent more than doubled since the 1980s, returning to where it was on the eve of the Great Depression. Since 2009, the richest 1 percent captured 95 percent of all income gains, while the bottom 90 percent got poorer.

While this is happening, the International Labor Organization tells us that labor’s share of income has fallen over the past two decades in 26 out of 30 advanced economies—even though labor productivity has risen.

What is causing such a convulsion in the distribution of income? There is no single factor here, although it seems clear that technology is one of the major factors—it can create huge rewards for the extraordinary visionaries at the top, and huge anxieties for the ordinary workers at the bottom.

Certainly, those with the lowest skills are having the toughest time in today’s economy. Here in the US, the unemployment rate for people without a high school diploma is three times greater than for those with a bachelor’s degree or higher. Indeed, over the past two decades, only those with college degrees have seen rising real wages. Some are simply giving up and dropping out of the labor force altogether—this is probably one reason why the participation rate is the lowest in a generation.

I know that these concerns resonate strongly at this university, which was founded—to use the words of Jane Stanford—with a “spirit of equality”. One of her goals for the university was “to resist the tendency to the stratification of society, by keeping open an avenue whereby the deserving and exceptional may rise through their own efforts from the lowest to the highest stations in life”. This noble ethos has always served Stanford well, and we will need more thinking like this in the years to come.

Why? Because if not managed carefully, rising inequality and economic exclusion can have pernicious effects. It can undermine economic, social—and perhaps even political—stability. It can tear the very fabric that holds society together.

We now have firm evidence—based partly on IMF research—that a severely skewed income distribution harms the pace and sustainability of growth over the longer term.

We also know from our work at the IMF that careful design of tax and spending policies can help reduce inequality. Think about improving access to health and education, putting in place effective, targeted social programs, and making taxation more progressive.

Policies aimed at countering inequality are hard to design. They throw up winners and losers. The potential for conflict and discord requires courage and determination. And yet, giving the huge stakes, the work must begin.

In the years ahead, it will no longer be enough to look simply at economic growth. We will need to ask if this growth is inclusive—whether the small boats rise with the big boats instead of being capsized by them.

The importance of education and the new multilateralism

This brings me to my third major point today. Taking a step back, how can we make the new economic age enhance, rather than diminish, our humanity? How can we make this amazing innovation advance the prospects of all people?…

…Putting it simply, educational systems are not keeping pace with changing technology and the ever-evolving world of work. Not enough people are thinking strategically enough in this area.

Fundamentally, we need to change what people learn, how people learn, when people learn, and even why people learn. We must get beyond the traditional model of students sitting passively in classrooms, following instructions and memorizing material. Computers can do that for us!

A 21st century educational system must focus on the areas where humans can outclass computers—such as in cognitive skills, interpersonal skills, fine motor skills, or sophisticated coding skills. Think of creative jobs, caring jobs, jobs that entail great craftsmanship. And given the rate and pace of change, we will need the ability to constantly adapt and change through lifelong learning.

This means that public and private sectors must work closely together. It means that institutes of education must think even harder about how to equip today’s generation for tomorrow’s world.

Top-tier schools like Stanford have an especially important role to play here. As you know so well, Stanford’s model of education was innovative from the outset—co-educational, non-denominational, and always practical, focusing on the formation of “cultured and useful citizens”. Stanford was ahead of its time back then. I know that it will continue to be ahead of its time as we venture into the exciting period ahead.

Yes, machines can replace our muscles. Computers may even replace our intelligence. But they can never replace the capacities that make us truly human: our creativity and innovation, our passion.

So education must be the bridge between the present and future, the old and the new. But we must also build an enduring platform. By that I mean a new way of thinking about the global economy—the “new multilateralism”, where all stakeholders take joint responsibility for the global common good, breaking down the borders and barriers that are really relics of a bygone age.

This is really the only surefire way to bend the new age to our will, to manage the complex channels of a hyperconnected world, to get to grips with global problems that are no longer amenable to only national solutions, because they completely ignore borders.

The good news is that we already have some key institutions of multilateralism at our disposal. Think about the IMF, for example. The Fund is essentially an economic club of 188 member countries that commit to working together and to helping each other in time of need—secure in the knowledge that in helping one, they are helping all.

Going forward, the new multilateralism must build on the old—and adapt to a world that is more interconnected and networked, but also more diffuse and dispersed in terms of power and decision making.

As a first step, that means that institutions like the IMF must be brought fully up to date, and made fully representative of the changing dynamics of the global economy—including the shift toward dynamic emerging markets. We are working hard on that.

More than this, the new multilateralism must also encompass the dense web of networks and coalitions that are now deeply embedded in the fabric of the global economy. Think about the rise of cities and multinational corporations. Think about civil society organizations that, thanks to technology, now have a global reach.

There will be many different types of actors on this new global stage. The challenge is for them to work cohesively—and together, write the next great act of our grand global destiny…