There is an African proverb: “When the music changes, so does the dance.” This year, we have the chance to take a new approach—to change the music—and put all countries firmly on the path to sustainable, inclusive growth. To grasp this window of opportunity, we must consider our next steps carefully—and act. In that spirit, I would like to focus on two issues:The changing global development landscape and ;The actions developing countries need to take to support sustainable growth.

1. The changing global development landscape

First, the development landscape. How have circumstances changed since the Millennium Development Goals were adopted 15 years ago? And what trends have emerged that will help to shape the next 15 years? For me, three trends stand out in particular. Three “V’s”: velocity, variance, and volatility.

The first is “velocity.” Over the past 15 years, most systemically important emerging markets have prospered. Many developing countries have become more integrated into the global economy. As a result, there has been a rapid expansion of growth, trade, and capital flows.

Since 2009, for example, developing country GDP and trade have expanded at annual average rates of 10 percent.¹ Since the early 2000s, capital flows to developing economies have increased more than three-fold.² This economic expansion is good news. But the bad news is that it has not been shared equitably. I call this “variance.” Better performing economies—often underpinned by robust domestic policies—have forged ahead. Sadly, the poorest and most fragile have been left behind. In fact, over the last 15 years, real per capita GDP in non-fragile low-income countries has increased by almost 70 percent.³ In the fragile countries it has risen by less than 15 percent.⁴

Another important dimension of “variance,” of course, is the high level of income inequality within countries, even if—generally speaking—inequality between countries has declined in recent decades.

The third “v” is “volatility.” As well as the Great Recession itself, conflicts and natural disasters have also set many countries back. Climate change represents an increasing problem—with poor countries hit especially hard. Since 1990, for example, almost three-quarters of all natural disasters have occurred in developing countries.⁵ Location and reliance on agriculture can make the poorest countries especially vulnerable.

Another factor with implications for volatility is demographics. Countries with aging populations face rising dependency ratios that could strain government finances and slow down growth. Others—especially in Sub-Saharan Africa—could reap a “demographic dividend” if they harness an expanding workforce.

So three trends: velocity, variance, volatility. Some boats have built-up speed, while others struggle to make headway; they all remain at risk of storms and the uncharted waters that lie ahead. Each trend has important implications for global development. To make the right choices in 2015, they must be taken into account.
Making the right choices in 2015 also rests on commitment—from all partners. This brings me to my second theme: the role of developing countries themselves.

2. The important role of domestic policies to support sustainable growth

When we look back over the last 15 years, one lesson is that those developing countries that have performed the best, have generally been those that have assumed the greatest ownership—that drive their own development. What does that entail?

Coming from the IMF, my first words of advice will come as no surprise to you: macroeconomic stability is a prerequisite for sustainable growth. That includes keeping inflation moderate and public debt sustainable. It also means implementing policies that help to maintain resilience in the face of external shocks

Think about Sub-Saharan Africa: the region demonstrated remarkable resilience in the face of the global financial crisis. In fact, nearly two-thirds of Sub-Saharan countries have recorded ten or more years of uninterrupted growth.⁶ Their prudent policies paid off. Of course, strong macroeconomic policies will remain of paramount importance—especially as the region confronts new challenges and risks.

That is why the IMF places so much emphasis on the macroeconomic dimension. Because stability helps people to prosper; and because instability victimizes the poor and vulnerable. High inflation, for instance, is regressive. And instability is the death-knell of large scale private investment, the driver of growth over time.

It is only with a stable foundation—a watertight hull and an even keel—that we can raise the mast, hoist the sail, and chart our course toward inclusive, sustainable growth.

What are the priorities?

Mobilizing revenues is an imperative. In about half of all developing countries, tax ratios are below 15 percent of GDP,⁷ compared with an average of 34 percent in OECD countries.⁸ The situation is even worse in some fragile states. By implementing tax systems that are simple, broad-based, and fair, this can be turned around.

A recent IMF study examined 126 low- and middle-income countries between 1993 and 2013.9 It found that Fund-supported programs with revenue conditionality helped implementing countries increase their tax revenues by 1 percentage point of GDP one year after the program was put in place. Moreover, after three consecutive years of a program, tax revenues increased by 3 ½ percentage points of GDP. Why is this important? Because these are extra tax revenues that can be redirected to support development needs.

Indeed, this is a salient point: once revenues are raised, they must be spent efficiently and effectively in support of inclusive growth. Strong fiscal institutions and public financial management are essential. As other IMF research has shown, for example, well-managed public investment has a key role to play in improving infrastructure and supporting inclusive growth.

Unfortunately, we have found that around 30 percent of the potential gains from public investment are lost due to inefficiencies in public investment processes.¹⁰ Were a country in the lowest efficiency quartile able to increase its efficiency to the level of the highest quartile, it would double the economic “bang” it gets for its investment “buck.”¹¹

So mobilizing revenues efficiently is key. Another priority is to develop the financial sector in a way that supports growth and tackles poverty. IMF staff estimated that the annual growth rate of developing economies with more liberalized banking sectors exceeds that of economies with less liberalized banking sectors by about 1 percentage point.¹² We also know that the percentage of people living on less than 1 or 2 dollars a day can fall more rapidly with higher levels of financial development.¹³

Governments can play an integral role by setting the rules of the game at an early stage: applying supervision, protecting legal rights, and strengthening financial infrastructure. Improving the business environment in this way helps to attract private finance and investment, both domestic and foreign.

Of course, it is also essential to share the fruits of growth—by promoting economic inclusion and environmental sustainability. This includes providing access to finance, strengthening social protection, and empowering women and girls—the latter an issue that I particularly care about.

It is estimated that, if women participated in the labor force as much as men, per capita incomes would rise by 27 percent in the Middle East and North Africa; 23 percent in South Asia; 17 percent in Latin America; 15 percent in East Asia; 14 percent in Europe and Central Asia; and 12 percent in Sub-Saharan Africa.¹⁴ In short, empowering women is an economic game-changer.

More generally, IMF research shows that an increase in the income share of the bottom 20 percent is associated with higher GDP growth.¹⁵ We have also found that a one-gini-point increase in inequality is associated with a 6 percentage point higher risk that a growth spell will come to an end in the coming year.¹⁶ So growth that is more inclusive is also higher and more durable. To put it another way: fairness is good economics as well.

The bottom line? By implementing policies conducive to sustainable growth, developing countries can go a long way to support their own development. But they cannot do it alone. The international community also must play a key role, working hand-in-hand with developing countries themselves.

By Christine Lagarde
Managing Director, IMF
The Brookings Institution, Washington, D.C.

1 IMF, Financing for Development—Enhancing the Financial Safety Net for Developing Countries, p.9.

2 IMF, Financing for Development—Revisiting the Monterrey Consensus, p.11.

3 Ibid, p.10.

4 Ibid.

5 Ibid, p.13.

6 IMF estimates. Also see speech on Africa Rising—Building to the Future.

7 IMF, Financing for Development—Revisiting the Monterrey Consensus, p.15.

8 OECD, Revenue Statistics tax to GDP ratio changes between 1965 and 2012.

9 IMF, Does conditionality in IMF-supported programs promote revenue reform? Revenue estimates are calculated using the coefficients in Table 6 (page 19).

10 IMF, Making Public Investment More Efficient.

11 Ibid.

12 IMF, Structural Reforms and Economic Performance in Advanced and Developing Countries, p.17.

13 IMF, A Bigger Slice of a Growing Pie. Also see Beck et al, “Finance, Inequality and the Poor,” Journal of Economic Growth, Vol. 12, No. 1, pp. 27–49.

14 IMF, Women, Work, and the Economy. Also see Cuberes and Teignier, Gender Gaps in the Labor Market and Aggregate Productivity.

15 IMF, Causes and Consequences of Income Inequality.

16 IMF, Redistribution, Inequality, and Growth.