Uprooting inequality to unleash growth

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Win-win policies that boost productivity and reduce inequalities are needed for inclusive growth, a key pillar of the Turkish presidency, says Angel Gurría, Secretary General, Organisation for Economic Co-operation and Development

Almost seven years after the beginning of the global financial crisis, countries are still recovering from the ripple effects. A legacy of declining or stagnating productivity growth, rising inequalities, high unemployment and weak demand has left the global economy struggling to make real progress.

 

Although governments are aware of these issues and are taking measures to address them, more must be done in order to avoid the path towards persistent stagnation. The recent bout of volatility in financial markets and emerging new risks to a modest recovery reinforce the need for policy reforms.
On the one hand, the weak recovery and current slow pace of growth can be attributed to durably sluggish demand. It is also, more structurally, the consequence of slowing productivity in many advanced economies – a phenomenon that existed before the crisis but was amplified by the latter – and more recently in the emerging countries. As underlined by the report, The Future of Productivity, published by the Organisation for Economic Co-operation and Development (OECD) in July 2015, the slowdown in knowledge-based capital accumulation and decline in business start-ups over the recent period raises concerns of a structural slowing in productivity growth.
On the other hand, the OECD’s latest publication on inequalities, entitled In It Together: Why Less Inequality Benefits All, shows that in many G20 member countries income inequality stands at an all-time high. The richest 10% of the population now receive 9.6 times the income of the poorest 10% in the OECD area, as opposed to seven times in the 1980s. But the picture becomes even more worrisome when one looks at the distribution of household wealth: the bottom 40% own only 3% of total household wealth, while 18% of the wealth is held by the top 1% in 18 advanced economies with comparable data. The problem, however, is not isolated to advanced economies. In G20 emerging economies, despite often impressive achievements in reducing absolute poverty, income inequality tends to be much higher than in the advanced countries. Even in those emerging economies where inequality has fallen, such as Brazil, it still remains at staggeringly high levels (the income difference between the richest and poorest 10% is still 50 to 1 in Brazil).
Slow growth and all-time high inequality levels are, to a significant extent, the two faces of the same coin. Recent OECD work shows that high inequality raises serious economic concerns, not just for the low earners themselves, but for the wider health and sustainability of our economies as well. Our organisation estimates that the rise in inequality, observed between 1985 and 2005 in 19 OECD countries, knocked around five percentage points off cumulative growth between 1990 and 2010. The fact that income inequality is highly correlated with inequalities of opportunities – for example, access to quality jobs, quality education, training and healthcare – amplifies its adverse impact on growth. In other words, although the social and political costs of high inequality justify in themselves prompt policy action, addressing high and often rising inequalities is also vital to sustain economic growth. Emerging economies too could benefit from lower inequality, which exists despite their often impressive growth rates and reductions in absolute poverty.
Policies with growth potential
Against this background, the OECD has been working closely with, and for, the Turkish G20 presidency on the very topic of inclusive growth, in line with the inclusiveness pillar of its three ‘I’s trilogy (investment and implementation being the other two pillars). Win-win policies – those that boost growth, bolster productivity and reduce inequalities – require reforms beyond traditional fiscal and monetary stimulus. We have, therefore, focused our efforts on one type of agenda: ambitious structural reforms that have the ability to ‘kill two birds with one stone’ – in other words, unlock the growth potential in our economies and ensure that it is shared by all. But what does this mean, in practice, for the G20 going forward?
First, the G20 should assess and improve the distributional impact of its existing pro-growth policies, including the G20 Growth Strategies, encapsulated in the G20 Brisbane Action Plan for Growth and Jobs, aimed at achieving a 2% upside growth scenario by 2018 (the so-called ‘two in five’). The G20 Brisbane Growth Strategies include more than 900 individual policy commitments spread over four priority areas, namely investment, employment, trade and competition – the core of which consist of structural policy commitments. While the growth strategies are aimed at boosting gross domestic product and productivity, it is also important to assess them from their potential distributional effects. An assessment by the OECD, focusing on the actual Brisbane key measures, shows that a large majority of growth-enhancing commitments have no clear effect on inequality. G20 members should therefore take a fresh, inclusive look at their national growth strategies, to develop policies that help to reduce income inequality and well-being without compromising the upside growth of the two-in-five objective. This would require additional policy commitments – involving both fiscal and structural reform elements – to complement or mitigate existing commitments that are currently affecting inequalities. This process would ultimately enable more equitable and distributive growth opportunities in G20 economies.
But the most efficient policy package will address income inequalities at the point where they originate, rather than trying to mitigate them at a later stage. Some, though not all, policies to reduce income inequalities will not only increase fairness but will also sustain growth. Identifying such policies is particularly important for achieving inclusive growth that creates opportunities for all and distributes the dividends of increased prosperity fairly. In this context, promoting inclusive growth requires a comprehensive strategy that addresses inequality from its multiple dimensions. Our evidence shows that the most efficient policy packages need to tackle inequalities where they originate, addressing four key policy areas.
First, tax-and-transfer systems and fiscal policies need to be more effective for inclusive growth. In recent decades, the effectiveness of redistribution weakened in many countries (in advanced economies in particular) due to working-age benefits not keeping pace with real wages and taxes becoming less progressive. A renewed focus on redistribution is important; this need not adversely affect growth if properly targeted, implemented and activated for employment purposes. Redistribution policies have been strengthened in many emerging economies, but there is still considerable scope to make their tax systems more progressive, to increase their tax revenues by promoting formal employment, to enlarge their tax base, and to enhance often embryonic social safety nets and social protection systems. Some countries with low levels of redistribution have already introduced transfers to increase income protection and reduce income inequality, such as Prospera, 65 y Más or Sin Hambre in Mexico. And of course, tax avoidance and evasion have to be tackled – which is a central objective of our work on base erosion and profit sharing (BEPS) and tax transparency. An efficient tax system in which everybody pays their fair share is a conditio sine qua non for inclusive growth.
Inclusion in the labour market
Second, skills need to be built for all age groups. This means investing in the early years of education, with a strong focus on children from low- and middle-income households. But it also means investing in skills throughout the working life. The G20 Skills Strategy, developed by the OECD and endorsed by G20 labour and employment ministers at their meeting in Ankara in September, is, in this respect, a very timely initiative.
Third, inclusion needs to be promoted in the labour market. Last year, the G20 leaders agreed on an ambitious, yet vital, target to reduce the gender gap in labour force participation by 25% by 2025. This year, the G20 labour and employment ministers endorsed a youth target focused on reducing the share of young people who are most at risk of being left permanently behind in the labour market by 15% by 2025. In the context of current uncertain and often still weak growth, setting such a commitment will send the right signal to the many young people who are facing very difficult circumstances. G20 members now need to focus on implementation.
Fourth, the final key policy area is the promotion of job quality. The principle priorities of the new G20 framework, agreed in Ankara by the labour and employment ministers, are vital: promoting job creation and job quality, reducing labour market segmentation and rebalancing employment protection, and ensuring the quality of the work environment.
The OECD features the distinct combination of analytical and statistical capacity, policy expertise, monitoring mechanisms, and a long-standing partnership with the G20 as well as with other stakeholders, including the B20 and the L20. It is for these reasons that the organisation has been at the forefront of the efforts to substantiate the newly adopted G20 youth ‘15 in 25’ target, to develop the G20 Skills Strategy and to support the elaboration of the G20 Job Quality Framework.
The OECD stands ready to continue supporting these efforts, including towards the implementation of agreed G20 objectives, strategies and frameworks, both in the context of the current Turkish G20 presidency and the upcoming presidency of China in 2016. The summit in Antalya this year will certainly deliver important milestones towards more inclusive growth and productivity, but it will not be the end of the journey. With this in mind, let us continue working together with the aim of moving forward towards better policies for better lives.

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