Stefano Scarpetta, Director of the OECD Employment, Labour and Social Affairs Directorate
A rising tide lifts all boats, or so many used to think. But the evidence suggests that over the past three decades in a large number of advanced and emerging countries economic growth has disproportionally benefited people who are already relatively well-off, leaving the lower- middle-class lagging behind.
Today the average income of the richest 10% of the population across the OECD is almost ten times that of the poorest 10%. We observe also a worrying pattern: in each of the past three decades the gap has increased by one factor – it was 7:1 in the 1980s, 8:1 in the 1990s and 9:1 in the 2000s.
These averages hide large differences across countries, from a ratio to 6:1 in Nordic countries, to 19:1 in the US, almost 30:1 in Mexico and Chile and beyond 50:1 in South Africa and other emerging economies. But over the past decades we have observed a convergence towards higher levels of income inequality (although some emerging economies have managed to reduce income inequality, albeit from very high levels). The situation is even worse when we look at the distribution of household wealth. Comparable data collected for the first time by the OECD for 18 OECD countries show that the top 10% of households owned half of all total household wealth in 2012, while the bottom 40% owned a meagre 3%.
Not only do high levels of income inequality challenge social cohesion, they also tend to reproduce themselves from one generation to the next. This happens largely because they hinder the opportunities of the lower middle-class to access the same education and health opportunities as their better-off counterparts. The gap in educational outcomes between individuals from a low socio-economic background and those with median and high background increases dramatically as one moves from a more egalitarian to more unequal country. Similarly, a new set of OECD data shows that at age 25, men with university education can expect to live almost 10 years longer than men with primary education. Surely we can agree that people’s life chances should not essentially boil down to their wealth, age, gender, or place of residence.
The risks posed by such lopsided growth are evident. Our recent publication In it Together revealed that economies grow more slowly when lower earners get left behind – and we are talking about as much as 40% of the population. The rise in inequality observed between 1985 and 2005 in 19 OECD countries knocked 4.7 percentage points off their cumulative growth between 1990 and 2010.
The implication is that if we want to achieve our full growth potential, we need to promote equality of opportunities rather than just relying on redistribution of income and wealth. In all countries, and particularly in advanced ones, redistribution still greatly reduces income inequality – typically through taxes and transfers such as unemployment and other social benefits. Yet, in recent decades, the effectiveness of redistribution has weakened in many countries. It is important to put a renewed focus on it, through effective and well-targeted transfers as well as by making sure that the rich and the very rich in particular pay their fair share of taxes.
But policies also need to do more to address inequalities at their roots, ensuring that people can access high-quality education and health services while having a reasonable prospect of finding good-quality jobs, regardless of their social backgrounds.
Improving access to pre-school care and education – and its quality – for children and youth in lower-income households is a key first step in all countries. Too many young people are leaving education without basic skills, even in some of the richest countries. The proportion is put at 24% in the United States, 22% in Norway and 14% in Switzerland.
But promoting equality of opportunities is not just about education. It is also important to promote inclusion in the labour market for underrepresented groups, like women and youth. Concerning women, for example, we need to stop talking about equal pay for equal work and just make it happen. We also need to better support families in areas like parental leave and childcare to ensure that both parents can balance their work-life commitments.
The situation of young people in labour markets has become a growing cause of concern since the financial crisis struck. In 2014, 14% of youth were not working, studying or in training in the OECD, but this share reaches 25% in Italy and Greece and even higher in some emerging economies. To avoid scarring effects on their long-term employment prospects, and for the sake of intergenerational justice and social stability, our societies need to offer our young people a better deal, especially those with low skills and from migrant families. To tackle high youth unemployment, we need to be ambitious and use well-targeted activation strategies and measures to encourage firms to provide high-quality apprenticeships, internship programmes and training opportunities.
Moreover, only focusing on increasing the number of jobs is not enough. To make sure that growth is inclusive, countries need to ensure that good education is rewarded by access to productive and rewarding jobs; jobs that offer career and investment possibilities; jobs that are stepping stones rather than dead ends. There is a lot that labour market policies can and should do to address labour market segmentation, improve working conditions and foster skills recognition and a better match of wages with productivity.
Inevitably, policy mixes will vary between countries, responding to their individual economic and political circumstances. There are a number of win-win policies – good for growth and inclusiveness. But, equally inevitably, countries may also face trade-offs between policies to boost growth in the short-run and those to improve the distribution of growth dividends. However, given the scale of the inequality challenges we face and its impact on long-term growth, we need to exploit synergies and complementarities of policy in different areas, while addressing possible short-term trade-offs, for a better and more inclusive future.
Useful links
OECD Centre for Opportunity and Equality.
In It Together: Why Less Inequality Benefits All OECD (2015)
Forum 2015, Investing in the Future: People, Planet, Prosperity will take place in Paris on 2-3 June. It will be organised around five themes: Investment; Inclusive growth; Innovation; the New Climate Economy; and Sustainable Development Goals
People
45 million people are unemployed in the OECD, which increases the risk of poverty, ill health, and the levels of inequality within our societies.
This legacy of the crisis is undermining the confidence and trust of citizens in everything from governments to markets, businesses and institutions at large.
The Forum will discuss how to promote access to more and better quality jobs, but also how governments, universities, business and civil society can address growing inequality by expanding access to education.
What skills will be needed to make people more resilient and entrepreneurial? And how to promote the exchange of knowledge between people, universities and business that leads both to innovation and more inclusive growth models.
The Forum will also reflect on actions aimed at reducing the gender gap and enhancing the role of women in economies and societies at large, in the context of the celebration of the 20th anniversary of the Beijing Declaration and the G20 commitment to reduce the gender gap in workforce participation by 25 % by 2025.
Planet
New technologies and business models are essential to help achieve a NEW CLIMATE ECONOMY, which combines strong economic growth while minimising impacts on the environment.
This will be an important issue in the run up to the COP 21 negotiations in Paris and discussion will be informed by the joint OECD, International Energy Agency (IEA), Nuclear Energy Agency (NEA) and International Transport Forum (ITF) work on aligning policies for the transition to a low carbon economy.
The Forum will be an opportunity to reflect on the importance of a coordinated approach to: mobilise infrastructure investment; rethink taxation and urban development; address resource scarcity and the food-water-energy nexus.
Cities will play a key role in this new economy. Cities already generate around 80% of global economic output, and use around 70% of global energy. 54 % of the world’s population lives in cities today, and this figure is expected to increase to 70% by 2050
Prosperity
The Forum will explore the importance of INVESTMENT in placing economies on sustainable growth paths; addressing inequalities; fostering innovation; helping the transition towards low-carbon economies; and financing the Sustainable Development Goals (SDGs).
Investment is still lagging compared to pre-crisis levels, dampening demand and constraining potential growth. Breaking this vicious cycle is a priority to restore dynamism to our economies and create jobs.
Read more on investment
Ongoing innovation in ICT, renewable energy, nanotech, telemedicine, biotechnology, Big Data and the “Internet of Everything” is offering promising solutions in areas such as health, ageing, climate change, food security and represents an increasingly significant source of future economic growth.
The update of the OECD Innovation Strategy will feed into Forum debates with particular emphasis on governments’ ability to meet social and environmental challenges by creating an enabling environment fostering innovation.
Better Life Index
The OECD will present the 2015 Better Life Index update, incorporating new data and communicating what has been learned from almost 90 000 user responses received since 2011. The Index will be available in seven languages: English, French, Spanish, German, Italian, Portuguese, and Russian.
A complimentary site, highlighting Italian well-being priorities will be launched in conjunction with Expo Milan 2015 in English and Italian.
The Electric Flats was the name given to a group of houses on the corner of the street in what’s now called North Lanarkshire, Scotland, where I grew up. It’s not that the rest of us didn’t have electricity (we even had indoor toilets) but the Electric Flats had a radiator in every room. Nowadays, you often see images of these blocks of 1960s and 70s social housing being dynamited to make way for something nicer. But at the time they were built, they were a great improvement on the picturesque slums the tenants had lived in before. Very few houses had central heating (look at how much clothing people wear indoors in old films) and when the first Scottish winter in their new flats arrived, the chosen few basked in the glow of modern home comfort. Then, as Glasgow writer James Kelman described it, it was as if somebody had thrown a giant switch and all the heating snapped off on the same day. The day the electricity bills arrived.
That’s the “fuel poverty” the February 2013 OECD survey of the UK economy mentions, so the problem obviously hasn’t gone away. It sounds incredible, given that GDP per capita has risen from less than $15,000 to over $35,000 in real terms since the Electric Flats were built. However, the expansion of the economy hasn’t benefited everybody equally and while many have done well, inequality is actually growing worldwide according to our latest figures. That’ll be the first thing discussed at the Green Growth and Sustainable Development Forum taking place at OECD headquarters on 13-14 November. This year’s theme is “Addressing the social implications of green growth”.
Looking at the agenda of big meetings like these, you can get the feeling that they’re abstract. But when I started writing this article, I was only going to use my neighbourhood as the intro, until I realised that that in fact you could use it as a microcosm of everything that’s being discussed at the Forum, and how it matters to “real” people in “real” life.
The inequality discussion looks at “multi-dimensional living standards and inclusive growth”, meaning not just income, but access to education, public services and so on. The next session looks at the impact of energy sector reform on households. The issues here vary considerably from one country to another. In OECD countries, the debate tends to focus on whether renewables can offer a reliable, reasonably-priced alternative to fossil fuels (and nuclear in countries such as Germany that are phasing out or reducing nuclear energy programmes). In a developing country, the issue may be building an energy infrastructure. The kind of energy supplied could also be an issue. The IEA, co-organising this session, calculate that developing countries spend over half a trillion dollars a year subsidising fossil fuel consumers.
The Forum includes “sustainable growth” in the title and other IEA work provides a grim example of why the vague-sounding “environmentally friendly” growth is, literally, vital. Research with the WHO on energy poverty reported in the 2010 World Energy Outlook shows that cooking will soon kill more people in developing countries than malaria, tuberculosis or HIV/AIDS. Indoor air pollution from burning biomass in inefficient stoves causes over 1.5 million premature deaths per year, over 4000 a day, especially young children. The IEA point out that 1.4 billion people don’t have access to electricity (other than costly batteries). That number will drop by 2030 thanks to general economic expansion, but only to 1.2 billion. Electricity also makes a whole range of other activities from studying to shopping in the evening easier.
Governments play a key role, which is why the Forum flyer says that the event is designed for “those with hands-on experience of shaping policy and advising policy makers in national and local government.” Here’s an example of how policy can make a difference. To go back to old films again, one standard shot of London used to be a double-decker bus poking its way across Westminster bridge in thick fog. The buses are still there, but the “pea soup” fogs like that of 1952 that caused 12,000 deaths (and even caused cinemas to cancel shows because you couldn’t see the screen) are a thing of the past, because the 1956 Clean Air Act made “smokeless” fuels mandatory in certain urban areas.
But let’s leave the big city behind and return home. Across the road from the Electric Flats was the Ravenscraig. It sounds like the setting of a romantic novel, but it was in fact one of the biggest steel works in Europe. It’s no longer there. It was shut down in 1992, then dismantled and sent to Malaysia. The environmental benefits of closing the Craig were immediate and long-lasting – no more sooty rims on flowers, no more racing pigeons dropping dead after flying too close to the smoke stacks… But what about the 800 or so men who worked there and the 10,000 other people whose jobs depended on the plant indirectly?
For some reason, huge numbers of them bought taxis, and the local train station had as many cabs as a major international airport until the implacable law of supply and demand that destroyed their salaried jobs destroyed their business too. The unemployment rate is still 20% above the Scottish average. A joint session at the Forum with the ILO will look specifically at what kind of skills policies can ensure this kind of thing doesn’t happen, and the Forum will examine the labour market implications of green growth more generally.
In North Lanarkshire, other indicators of “inclusiveness” like life expectancy are worse too, so let’s hope that the Forum organisers are right when they claim that “Green growth’s combination of strong economies and a clean environment could increase the well-being of all citizens” and that the Forum helps those attending to make sure that “the right policy mix is applied.”
Useful links
OECD work on green growth and sustainable development
Sustainable Development: Linking economy, society, environment OECD Insights
This post comes to us from Mark Hannam, honorary Research Fellow at the Institute of Philosophy at the University of London.
John Hope Bryant says that “financial literacy is the new civil rights of today.” He argues that every young person should be given the right to a basic bank account at birth. Others who campaign against poverty, notably Nobel-laureate Muhammad Yunus, have argued that access to credit is a human right.
How should we understand these arguments? It might make sense to talk in more general terms of a person’s right to be financially included, or of a human right to access a range of high quality financial services at reasonable costs. Philosophers and lawyers disagree about the nature and importance of human rights, but there are three questions that we should ask about the purported human right of financial inclusion. First, what sort of right is this? Second, who is responsible for meeting the obligations that the exercise of this right will incur? Third, is the language of human rights the most effective way of promoting the goal of financial inclusion?
How would the right to financial inclusion compare with other types of human rights? There are some human rights that provide protection for the person against physical or mental abuse: the right not to be subjected to arbitrary arrest and imprisonment, the right to a free trial, the right not to be tortured, etc. Another set of human rights enable citizens to participate in the political life of their community: the right to free speech, the right to vote, the right to form political associations, etc. A third set of human rights help to ensure a basic standard of well-being for all: the right to education, the right to healthcare, the right to employment, etc.
The right to financial inclusion does not look very similar to rights of personal protection, which tend to be negative; that is, they are rights not to be treated in a certain way. However, it might be a civil right – part of what it means to be a citizen – if we think that access to the financial system is crucial to effective participation in the life of the community. Or it might be a welfare right – part of what it means to achieve an acceptable standard of well-being – if we think of financial inclusion as part of living a good human life.
If we opt for the civil rights model then we would expect governments to take responsibility for ensuring this right is guaranteed for all community members, in the same way that they are responsible for ensuring that the legal system and the electoral system are accessible to all. This would imply a significant socialization of the financial system, with governments running far more of the financial infrastructure than they currently do.
Alternatively, if we opt for the welfare rights model then there seems no reason to think that the private provision of financial services would cease to be the norm, as it is, for example, in the provision of employment. But in this case, private sector providers would be under strong obligation to meet the standards of service provision set by the government, and the government would provide some form of safety net for those whose needs are not met by the mainstream.
However, this implies that communities with stronger and more reliable governments will be much better placed to provide inclusive financial services. In communities where government is weak and inconsistent, the provision of inclusive financial services is likely to be far more patchy. Those most in need of better financial services are therefore those least likely to get them.
In particular, the provision of financial services to the young – the basic education in financial literacy that John Hope Bryant advocates – is unlikely to be of high quality in communities that are already struggling to provide their children with adequate healthcare, education and employment opportunities. Nor is it clear that poorer communities should reallocate resources from health and education budgets in order to provide better financial services. This is not to say that financial literacy is not an important issue; simply to say that it is not the most important issue.
Using the language of human rights adds a certain urgency to the debate about the need for financial inclusion. It also challenges the complacent assumption that access to high quality financial services should remain a privilege of the rich. But, as I have argued elsewhere, “human rights are political claims, which citizens make against governments and against institutions that have been established by governments, such as courts and tribunals.” It follows that where governments are weak or ineffective, so too the promotion of human rights will be weak and ineffective.
Perhaps Muhammad Yunus would do better to consider the success of his own company – the Grameen Bank in Bangladesh – as a model for improving the provision of financial services to the poor. There is plenty of evidence from all over the world that private sector microfinance initiatives – or “bottom of the pyramid businesses” – are the best hope for better quality financial services reaching the poorest and most excluded people. Financial inclusion might therefore be better thought of as a challenge for innovative businesses rather than as an obligation for governments.
Useful links: