Chinese Academy of Governance
Remarks by Angel Gurría, OECD Secretary-General
19 March 2012
Beijing, People’s Republic of China
Ladies and Gentlemen,
It is a great pleasure to be at the Chinese Academy of Governance to exchange views on one of the most important policy challenges we are facing today: rising inequality. Thank you very much for inviting me.
More than ever before, inequality is at the top of our policy agenda – in the United States, in Europe, and here in China. Inequality has risen to alarming levels around the world. The protests and social unrest which brought people out to the streets in many countries are a reminder that inequality is a major threat to our economies and to our wellbeing. Addressing this issue calls for bold and decisive action.
Across the globe, inequality continues to rise
Our analysis shows that, across the OECD area, the average income of the richest 10% of the population is about nine times that of the poorest 10%, up from seven times 25 years ago. But this hides very different outcomes. Nordic countries’ ratio is 6 to 1 while the US and Turkey is 14 to 1. This is a very steep increase in inequality. What’s more: the top 1% of the population has recorded particularly large income gains over the past two decades, adding fuel to the protest movements from London to New York, from Tel Aviv to Santiago de Chile and from Plaza del Sol to Tahrir Square.
Only a few countries have managed to buck the trend. This is the case of Chile, Mexico and Brazil, where income inequality has actually fallen in recent years. But in all these countries, progress has been made against a backdrop of very high inequality: in Chile and Mexico, the incomes of the richest are still more than 25 times those of the poorest, and in Brazil the gap between rich and poor is still 50 to 1.
So, how does China compare with other countries on the basis of these indicators? The distribution of income has changed much more rapidly in China than in other emerging economies over the past two decades, a trend that reflects the rapid pace of transformation of the Chinese economy. In China, the income of the top 20% of the population grew faster than that of the bottom 20%, particularly in urban areas, where it grew twice as fast as the income of the bottom 20%. All in all, in China the earning of the 10% best paid workers were by the late 2000s about seven times higher than those of the least-paid 10%.
Let’s be clear: rapid economic growth has lifted hundreds of millions of people out of poverty in China. This is also the case of other large emerging-market economies, which is a major achievement. But the benefits of strong growth have not been evenly distributed among the different social groups, and income inequality has risen not only in China but also in countries like India and Russia.
Inequality should be at the centre of our attention for economic, social and political reasons. Above all, inequality threatens social mobility. The experience of OECD countries indicates that in countries with high inequality -- such as Italy, the United Kingdom and the United States -- the income of the younger generation is highly dependent on the income of the previous generation. Put simply, this means that countries with high inequality essentially reinforce the vicious cycle of poverty.
To reverse the trend of growing inequality, we need to clearly identify its causes
Greater disparity in wages and salaries has been the single most important driver of inequality in OECD countries. This does not come as a surprise: labour earnings account for three-quarters of total household income among the working-age population in most OECD countries.
The key question is: why have wages become more unequal? Labour markets across the world have gone through profound transformations driven by globalisation, technological changes and policy reforms. Workers with skills in high demand, such as information and communication technologies or in the financial sector, have enjoyed significant gains in earnings, while workers with low or no skills have been left behind.
And now that companies are increasingly competing in a global market, we have seen spectacular rises in executive pay. The emergence of a “winner-takes-all” culture in many countries has also underpinned this trend.
Policy and regulatory reforms, which have strengthened competition in the markets for goods and services and increased “adaptability” in labour markets, have also shaped labour market outcomes. At the OECD, we have provided ample evidence that these reforms have promoted productivity and economic growth and brought more people into work, in particular many women and low-paid workers. This is very good news. But as a consequence of such reforms we also observe an increase in part-time and low-paid work, which has widened the distribution of wages.
Another factor is that tax-benefit systems have become less effective at redistributing incomes over the past decades. The main reason is on the benefit side: the level of benefits has been reduced, and eligibility rules have been tightened to contain social spending in many countries where public finances have come under stress. Transfers to the lowest income groups have thus failed to keep pace with the rise in earnings of the well-off.
Finally, the distribution of non-wage incomes, especially capital income, has become more unequal. However, at around 7%, the share of capital income in total household income still remains modest on average and its impact on overall inequality is, therefore, limited.
We need to refocus our policies towards greater inclusiveness
The most promising way of tackling inequality is, more than ever, to boost the employability of under-represented groups. It is important to create more jobs – especially ones that are more productive and rewarding. But the key challenge is to give people the necessary skills and competencies to compete in the labour market for better paying jobs.
Our report clearly indicates that up-skilling the workforce is by far the most powerful instrument to counter rising inequality. This is about investing in people, and it must begin in early childhood, it must be followed by formal education, and it must be sustained through effective training throughout one’s professional life. The way that training is provided needs careful assessment, with both employers and individuals receiving the means and incentives to invest in human capital. It is also vital to ensure equality of opportunity for children from disadvantaged backgrounds to break the vicious circle of poverty and inequality.
Reforming tax and benefit policies can promote a better distribution of income. Over the past two decades, income and wealth tax systems have become less progressive in many countries. To remedy this situation, some governments are now re-examining their tax codes to ensure that wealthier individuals contribute their fair share of the tax burden.
This can be achieved in several different ways: top marginal tax rates can be raised, tax compliance can be improved, tax deductions can be eliminated, and the role of taxes on all forms of property and wealth can be reassessed. The OECD has been actively helping governments in these areas, not least to improve tax compliance and to fight tax evasion and avoidance.
Another instrument is the provision of high-quality public services, such as education, health, and family care. Such spending, if well-designed and implemented, will reduce inequality. Ensuring equal access to services is a challenge in many emerging economies, but it is of critical importance in order to reduce inequality and provide equal opportunities for the personal and professional development of all citizens. This is particularly important in China and we welcome the expansion of social safety nets and the increasing focus to foster domestic demand, which not only will improve distributional outcomes but will also contribute to address global and domestic imbalances.
This takes me to the regional dimension of inequality. In many countries, some regions have benefited more than others from strong economic growth. This has exacerbated income differentials between the fast-growing areas and those that have lagged behind. Reducing regional disparities must come back to the top priorities of policymakers. This is a very important policy challenge in China due to its dimensions and will also require continuous improvement of internal migration policies.
In short, our analysis in the case of China, shows that improving access to quality education can do much to lower inequality. Tackling labour market duality is also particularly relevant, both by integrating migrant workers and by fostering competition in sectors that are currently dominated by a few enterprises. China could also contain inequality by continuing to improve its social safety nets and reforming its tax system.
Ladies and Gentlemen,
There is nothing inevitable about high and growing inequality. The OECD’s recent landmark report on Inequality “Divided We Stand” provides powerful evidence of the need to put “better policies for better lives” at the centre of our reform efforts and to provide people with equal opportunities and confidence in their future.
The diverse experiences of OECD countries could be of interest to Chinese policymakers in dealing with rising inequality, and in return, the OECD can greatly benefit from the lessons of Chinese reforms.
Let’s share our expertise and experiences to tackle this problem together and to design better policies for better lives.