Inequality has widened, with detrimental effects on our economies and societies. Can inclusive growth work? Yes, though it requires new thinking and approaches, and these are driving important initiatives at the OECD.
The benefits of economic growth do not trickle down automatically. This notion may run counter to orthodox economic wisdom, but it has been confirmed by the crisis. Indeed, the long period of economic growth that preceded the financial crisis was characterised by growing inequalities of income and opportunity. Our economic systems, with all their strengths and advantages, have been producing and perpetuating social disparity for decades, and this has worsened since 2008. We need to reverse this trend and ensure that the next phase of economic expansion benefits more than the lucky few. We have learned from the crisis, and now, as the recovery takes hold, a real opportunity has opened up to create more inclusive growth. The OECD is ready to help make it happen.
Inequality has reached unacceptable heights in many countries. In 2010 the average income of the richest 10% in OECD countries was 9.5 times higher than that of the poorest 10%, greater than at any moment in the previous 30 years. In other parts of the world, including in India, Indonesia and South Africa, inequality has soared. Only in very few countries, notably in Latin America, did inequality decrease, albeit generally from an extremely high level. In Brazil, for instance, the gap between the richest and the poorest 10% has narrowed, but nevertheless stands at 50:1. In many countries, lower-wage workers have been working harder and harder, but have not moved up the social ladder. Take the case of the United States: while average working hours among lower-wage workers increased by more than in other OECD countries before the crisis, household incomes of those at the bottom actually fell. The pernicious consequences of increased inequality, however, extend far beyond income. Access to employment, good health and educational opportunities are all disproportionately determined by socio-economic status.
The crisis has widened these gaps. In at least half of OECD countries, income inequality increased by more over the first three years of the crisis (2007-2010) than in the previous 12 years. In fact, the cost of the crisis has not been shared evenly. Vulnerable groups have borne the brunt of adjustment. The full force of this effect was highlighted in an OECD-wide youth unemployment rate of 16% in 2013, twice the standard rate. And the employment prospects remain discouraging in many countries: equitable access to quality employment is becoming harder to achieve, with non-standard working arrangements now accounting for 40% of total employment. At the same time, in-work poverty has increased, and now affects 8% of the total population. In Greece, Israel, Japan, Spain and the US, the rate of in-work poverty can be as high as 12%. This rate is far greater in emerging and developing countries due to the size of their informal sector.
Inequalities which surface in the job-market are often entrenched during education, which puts those at the bottom at a serious disadvantage. Poorer students struggle to compete with their wealthier classmates and go on to lower levels of educational attainment, smaller salaries, and most strikingly, shorter lives. Data from 15 OECD countries shows that, at age 30, people with the highest levels of education can expect to live, on average, six years longer than their poorly educated peers.
The detrimental effects of inequality have translated into growing political disaffection and anti-market sentiment. Citizens are increasingly feeling that they are losing out, while a small elite siphons off the gains of greater prosperity. Millions of people report low levels of life satisfaction and are losing confidence in the ability of policymakers to respond. In the OECD, confidence in governments stands at a record low 40%.
At the OECD we take these problems seriously. We know that applying the same policies that have resulted in these disparities or that have not helped to reduce them is not an option. We are conscious that we need to revise the ideas, theories and concepts that were used to measure, diagnose and produce our policies. This is why we have launched the New Approaches to Economic Challenges (NAEC) initiative. Our aim is to help governments to overcome the crisis through policies which take complexity and behavioural economics into account, and explore new ways to measure progress. The ultimate goal is to infuse a more inclusive, sustainable form of growth. Our focus is on economic growth, not as an end in itself, but as a means to improve well-being. It puts people at the centre of the policy debate.
The OECD is leading the charge against income inequality by devising metrics, analysing the evidence and developing the policy tools needed to combat it. We have pioneered new work to develop well-being indicators and measurements that go beyond GDP and productivity to reflect what matters most in people’s lives. Inclusive growth means caring about people, and the NAEC initiative will explore new ways of combining strong growth with a better distribution of income and other outcomes, such as opportunity, education, and a clean environment. This work will enhance policymakers’ understanding of the adverse effects of rising inequality on growth, with the overarching aim of turning inclusiveness into a driver of strong economic performance.
Our approach is multi-dimensional, policy relevant and actionable, allowing policymakers to identify, analyse and exploit synergies among mutually-reinforcing policy levers, and to make the right policy choices.
With government budgets under stress and the recovery still fragile, it is more important than ever to set in motion a virtuous circle of growth and inclusiveness. Our future prosperity and well-being depend upon it. At the OECD we are determined to help our member and partner countries design, promote and implement better policies for better lives. By fostering inclusive growth, we can make a measurable and positive difference to people’s lives everywhere.
OECD (2011), Divided We Stand: Why Inequality Keeps Rising, Paris.
OECD (2013), “Crisis squeezes income and puts pressure on inequality and poverty”, Paris.
OECD work on Social and Welfare Issues
OECD work on Income Distribution and Poverty
OECD Forum 2014 Issues
Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20
@OECD Yearbook 2014