06/06/2017 - Against a backdrop of growing inequalities, a new report to the 35 Ministers of OECD countries recommends key policy steps for breaking the vicious circle of increasing inequalities and low growth prospects. The update of the OECD’s Inclusive Growth Initiative, entitled “Bridging the Gap”, along with the accompanying policy brief “Time to Act: Making Inclusive Growth Happen”, indicate that the response to growing disparities is to develop policies that enable people, particularly from disadvantaged backgrounds, to succeed.
For this, the report calls to increase the progressivity of the tax systems, and target public and private investments. Consideration should be put to using part of the revenue from broadening the tax base to support low income households.
OECD Chief of Staff and G20 Sherpa Gabriela Ramos, who is in charge of the Inclusive Growth Initiative at the OECD said: “It is not only about addressing inequalities of income and opportunities. It is about changing a growth model that did not prevent the rise of inequalities in many OECD countries. This means focusing on investing in skills of low income people and the wellbeing of their children, infrastructure in laggard regions, and promoting a thriving business environment where people and firms succeed according to their merits and not their initial endowments. For this, we will need to change the ‘grow first, redistribute later’ narrative, to advance equity considerations ex ante in policy design. We have focused too much on markets and efficiency, and too little on people. It is time to build people-centred growth.”
Economies are struggling to grow robustly and societies are profoundly divided. The latest OECD report “Bridging the Gap” shows that these are not just coincidences. In the OECD, the wealthiest 1% holds 19% of the total wealth, while the bottom 40% holds 3%. These inequalities frame the opportunities of the next generation: children with at least one parent who attained tertiary education are four times more likely to go to university than children whose parents did not complete secondary school; likewise, high-skilled individuals work in the best-paid firms and the most productive and performing firms draw exponential benefits from technological advances of digital economies when compared to the rest of companies. These dynamics have been documented in the “Nexus between productivity and inequalities” work at the OECD. These divergences are lowering trust in institutions and feeding people’s feelings of disempowerment.”
In response, the OECD is calling governments and economies to go inclusive. New rules are needed to ensure that open trade, financialisation, technological change and free capital movements do not reinforce disadvantages, but rather are harnessed to overcome them. Similarly, new trends in labour markets, such as the increase in non-standard jobs, are adding new challenges that require constant upskilling of workers’ capacities. Diminished progressivity in tax systems as well as increasing tax competition between jurisdictions is also putting additional pressure on public finances to fund social programmes.
Comprehensive policy packages that put people centre-stage are needed to overcome the silo perspective. In particular, governments need to prioritise expenditures for the bottom 40%, including increasing investment in education; adopting preventive health-care policies for the vulnerable; investing in physical and digital infrastructures that raise connectivity of the poor; and improving the design of active labour market policies in service to the low-skilled and low-income.
According to the report, the three areas with the largest potential for expanding people’s opportunities and drastically fighting the rise of inequalities are:
Tax systems should be redesigned to ensure that they support vulnerable people. This means strengthening the progressivity of taxation, for instance through more equitable property taxes; strengthening inheritance and gift taxes; pursuing capital tax reforms to reduce rate differentials across assets; and bolstering global governance of tax policy.
Early Childhood Development and Skill Policies at all critical junctures in life:
Early childhood is key for well-being and success throughout life. Socio-emotional and cognitive skills developed early on in life have a large impact on people’s potential, and inadequate learning environments can prevent full child development. The following policies need to be considered in order to ensure quality learning opportunities for children from disadvantaged backgrounds: remove barriers to early childhood education and care services for the bottom 40% households; put in place community programmes that develop socio-emotional and cultural skills; help poor parents connect to the resources they need to educate their children; and unlock opportunities to invest in lifelong learning beyond early education, particularly in tertiary education for the neediest. The reinforcement of socio emotional skills for disadvantage kids has the power to help them succeed without needing the vas endowments and networks of the more wealthy children.
Maintaining a Strong Business Environment to the benefit of SMEs and Young Firms:
A vibrant business environment is needed to revitalise growth and spur innovation and productivity across all firms. There is a growing gap between high and low productive firms and this is mirrored by increased earnings differential across workers. To ensure that all firms can thrive, governments must pursue efforts to bolster competition and innovation policies that prevent market concentration, catalyse grassroots innovation and unleash productivity diffusion.
Inequalities do not happen in vacuum, and therefore regional and urban-rural policies should also focus on those policies that will help build a more inclusive type of growth.