Remarks by Angel Gurría, OECD Secretary-General, OECD/Ford Foundation Workshop, New York, 27 February 2014
Ladies and Gentlemen, Ministers, Mayors, Colleagues,
It is a great pleasure to be here in New York for the second OECD-Ford Workshop on Inclusive Growth.
It has been almost a year since our first Workshop in Paris. Since then, we have worked hard to flesh out the ideas we shared, to strengthen our dialogue on the root causes and policy responses to growing inequalities, and ultimately, to change the conversation on growth.
Why Inclusive Growth? Growing unequal is no longer an option
This second Workshop is taking place during a growing debate about inequalities in the United States and beyond. President Obama discussed this issue in his recent State of the Union address, calling to end a trend that threatens to tear away at society’s fabric and undermine the growth prospect of our economies. Yesterday, I presented our latest work on inequality at the Council for Foreign Relations. I referred to this trend as “the social disease of rising inequality”.
Allow me to take a step back and share with you a few numbers that speak for themselves. Our analysis shows that income inequality has been on the rise in most OECD countries since the 1980s. At the onset of the crisis, the average income of the richest 10% of the population was about 9 times that of the poorest 10% on average in the OECD area, as opposed to 7 times 25 years ago. And the gap between rich and poor has widened further since the crisis, up to 9.5 times in 2010. Equally worrying is the rise in inequality even in traditionally more egalitarian countries, like Germany, Norway and Sweden, where the income gap rose from less than 5 to 1 in the 1980s to over 6 to 1 today.
Our work has also drawn attention to rising incomes at the very top. Over the last thirty years, a small group of top earners – the 1% – have benefitted the most from greater prosperity. The figures are astonishing: over the 1976-2007 period, 47% of total income growth was captured by the top 1% in the United States, 37% in Canada and about 20% in New Zealand, Australia and the United Kingdom. The Great Recession put a halt to this trend – but preliminary evidence for some countries shows that this was only temporary and that the top income earners seem to have again reaped most of the recovery’s benefits.
Inequality, of course, goes beyond income. Our collective work shows that rising inequality in income is often accompanied by growing exclusion in the labour market, lower intergenerational social mobility, and greater polarisation in educational and health outcomes. In turn, growing unequal can undermine the foundations of market economies and democracies. It weakens social cohesion, fosters discontent, and saps trust in policy and institutions.
We also know that growing unequal comes at an economic cost. It thwarts opportunity and alienates individuals and vulnerable social groups from economic life, which hampers society from using its human capital to the fullest potential. The result is stifled economic growth in the long term. Our analysis shows that inequality is particularly likely to be a brake on growth if the incomes of the lower and middle-classes fall behind the rest – as they have been in the United States. Inequality today goes hand in hand with the decline of opportunity and a potentially definitive loss of untapped economic prospect. Particularly disturbing is what this bodes for countries’ future: the decline of opportunity makes in return inequality more persistent.
This is important: I am not talking merely about statistics, I am highlighting a vicious circle that is set in motion by rising inequalities, that covers a whole spectrum of outcomes that matter for people’s wellbeing and undermines future growth.
But there is a silver lining: it is possible to grow more equal. Several countries have managed to combine strong growth with a better sharing of its benefits. In some parts of the world, including in some OECD countries, the gap between the rich and poor has actually narrowed over the last decade or so. Countries like Brazil, Chile and Mexico have managed to grow while reducing their still-high income disparities and making significant progress in education and other social outcomes.
The OECD approach: an innovative tool for policy makers
There is no secret to growing more equal! Our work is beginning to put together the puzzle pieces: there are policies – in education, social, innovation, regulation, health, and so many other domains – that are good for growth and inclusiveness. Where there are trade-offs between growth and inclusiveness, it is possible to put in place compensatory measures.
To do so, we are developing a three-pronged policy framework for Inclusive Growth:
First, it is multidimensional. It acknowledges that inequality goes beyond income and that policies must generate better standards across the board, including greater opportunities to access good jobs and education, a healthy environment and well-functioning institutions.
Second, it offers up new data and metrics. To look beyond GDP, we have to “reverse the telescope”, which our new composite indicator of living standards allows us to do. It combines changes in average household disposable income, longevity, unemployment and income inequality.
Our preliminary results show that, living standards grew faster than income in most OECD countries before the crisis, reflecting falling unemployment and improvements in health conditions that led to increases in longevity. In the United States, income per capita grew by about 2% per year during 1995-2007, whereas living standards rose by just over 3% per year over the same period. However, this positive effect was partly offset by a rise in inequality. When unemployment soared at the beginning of the crisis (2007-09), living standards of the middle-class fell almost twice as much as GDP per capita: -5.7% compared to -2.7%.
Third, it is policy-actionable. Our framework allows us to look at the combined effects of policies that are found to be good for GDP growth and determine if they favour, or are detrimental, to inclusiveness. Our preliminary work points to many areas where policies can be conducive to both higher average household income and lower inequalities.
For example, stepping-up job search assistance and support programmes for the long-term unemployed workers can boost growth while reducing inequalities and maintaining support for long-term unemployed. But there are also some trade-offs, and we have to deal with them. For instance, flexibility in the labour market is good for growth and jobs, but can also widen inequalities in market income.
The Way Forward: policies to foster Inclusive Growth
Policies in one sector impact other sectors. Our systems are interconnected; such as health and education. So what does that mean? It means that we have to look at policies in terms of synergies and packages – bundles if you will – and weigh policy impacts against one another. To conclude, I’d like to highlight three key areas where public action can help do the job: education, tax and cities.
First, investing in education and training will pay long-term dividends for the economy, for individual well-being, and for the overall prosperity of our societies. Reaching excellence through equity? Yes, it is possible. For that, we need to develop more ambitious education and skills policies. Our evidence-based PISA and PIAAC initiatives highlight large inequalities in education and skills. They also demonstrate that there are major potential benefits to equip disadvantaged groups, such as low social-background students and low-skilled workers, to acquire better skills and compete for better-paying jobs.
Second, can we reform our tax-benefits systems to support equity without necessarily increasing taxes and distorting growth? Yes, it is possible. This is a matter of rationalising the systems to make them more efficient, for instance by reducing tax expenditures, further taxing capital and immovable property whilst, of course, increasing the efficiency of education and health care systems. We also need to ferociously combat tax evasion and tax avoidance. The OECD, together with our G20 partners, is leading the international effort with the work on Automatic Exchange of Tax Information and Base Erosion Profit Shifting (BEPS) that close loopholes that allow financial accounts or profits to go untaxed.
Third, we need better urban policies for Inclusive growth. Cities are key actors in the provision of education and health care services, and play an important role in the delivery of social protection, training and employment. Local governments are also well placed to make growth more inclusive, by regenerating distressed neighbourhoods, upgrading the skills of the local workforce, and providing housing and transport.
Ladies and Gentlemen,
Many countries are facing the scourge of slow growth and rising inequality in income and opportunities. They risk being trapped in a vicious circle that could lead to weaker economic performance and greater exclusion.
To avoid this, policy action is needed. This is why the OECD and the Ford Foundation have joined forces and why we are here today: to share our expertise to set in motion a virtuous circle of growth and inclusiveness. In our search of Better Policies for Better Lives, it pays to “go inclusive”!