OECD: changes must cut inequality, not just boost economic growth

At the opening of the G20 meeting, the thinktank says politicians must prioritise policies that share the gains of stronger growth

Politicians must focus on policies to ensure that stronger economic growth goes hand in hand with fairer distribution of the financial gains if they are to stem rising inequality, a leading economic thinktank has said.

The Organisation for Economic Co-operation and Development (OECD) made its comments on the potentially harmful effects of some pro-growth policies as finance ministers from the G20 group of nations convened in Istanbul to discuss plans to shore up the global recovery.

Analysing the effects of pro-growth policies on inequality, the Paris-based organisation identified widening gaps in wealth distribution in many rich nations, with the poorest hardest hit.

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The OECD urged governments to prioritise policies that help reduce inequality while also boosting growth, such as more education for low-skilled workers and measures to get more women into work.

The recommendations, part of the thinktank’s annual Going for Growth report, were unveiled in Istanbul on the first day of the G20 finance ministers’ meeting. They gather as concerns grow that a standoff between Greece and its international creditors could blow up into a fresh eurozone crisis with repercussions around the world.

The OECD suggestion that some pro-growth policies have widened inequality will further fuel the heated debate over how countries can best restore sustainable economic growth six years after the global financial crisis.

“The financial crisis and continued subdued recovery have resulted in lower growth potential for most advanced countries, while many emerging-market economies are facing a slowdown,” says the report.

“In the near term, policy challenges include persistently high unemployment, slowing productivity, high public-sector budget deficit and debt, as well as remaining fragilities in the financial sector. The crisis has also increased social distress, as lower-income households were hit hard, with young people suffering the most severe income losses and facing increasing poverty risk.”

The report comes as Greece’s new leftwing government argues that relentless cuts under the terms of its bailout package have stifled the economy and caused widespread hardship. The OECD report highlights large increases in income inequality and poverty in Greece, alongside other countries hit hard by the crisis: Iceland, Ireland and Spain.

The OECD says that for Greece, gaps in GDP per capita and productivity continue to widen relative to best performing OECD countries.
Overall, the thinktank is gloomy about inequality trends across its 34 member countries.

“Income inequality has increased in a majority of OECD countries since the mid-1990s. Households’ disposable income has grown by less than gross domestic product (GDP), and income of the poorest households by less than that of the richest,” the report says.

The OECD says: ‘On average across OECD countries and from the mid-1990s to the late 2000s, gains in household disposable incomes have not matched those in GDP per capita and the gap has been particularly large for poorer households and the lower middle class, suggesting that growth has come with rising inequality.’
The analysis echoes a series of recent warnings that inequality will worsen as labour markets polarise into high-skilled and low-skilled jobs with many mid-level roles being replaced by machines.

The analysis of pro-growth policies found three main patterns. Some contributed to “technology inequality”, such as reforms that boosted innovation. Other policies that promoted labour force participation and job creation widened wage dispersion, but there was an offsetting effect of higher employment. Finally, a number of changes, such as better access to education, “unambiguously reduce wage dispersion and/or household income inequality”, the report said.

It concludes: “Given the need in many countries to tackle rising inequalities, priority should be given to policy packages which both reduce income dispersion and boost growth. Especially important is raising the earnings potential of the low-skilled and promoting the labour force participation of women.”

The thinktank’s annual overview of structural changes for each OECD country urges policymakers to push on with those in areas such as labour markets and taxation or else risk a “vicious circle” of low demand and low growth.

The OECD secretary-general, Angel Gurría, said during a launch event in Istanbul that although the changes were hard to enact, they were a crucial part of boosting growth. He said, however, that those that cut inequality should be prioritised.

“We still see structural reforms combined with effective fiscal and monetary policy as part of an essential trilogy to boost growth,” he said.

“The pursuit of comprehensive reform strategies can be one of the keys to addressing rising inequalities and the lingering social consequences of the crisis.

“Implementing reforms that raise the job opportunities and earnings potential of low-skilled workers, help young people get a step on the job ladder and improve the labour market opportunities of women will unlock growth potential in our economies and ensure that it is shared by all.”

The OECD’s chief economist, Catherine Mann, noted a “slowdown in the pace of structural reforms observed across a majority of OECD countries over the past two years”. She said some of that stemmed from rising concerns about inequality and a drop in popular support for a “pro-growth reform agenda”.

“These are legitimate concerns. In some of the countries hardest-hit by the crisis, substantial labour market reforms aimed at restoring competitiveness have been introduced without commensurate and parallel efforts in product markets and without the availability of fiscal resources to cushion the social impact.

“The result has been severe job and income losses, hurting young people the most. More broadly, there are indications that the most vulnerable households have been losing ground since the crisis across a majority of OECD countries,” she wrote in the report.

“Yet, a slowdown in the pace and breadth of reforms carries a bigger risk. That is of letting a vicious circle develop, whereby weak demand undermines potential growth, the prospects of which in turn further depress demand, as both investors and consumers become risk averse and prefer to save.”

The OECD has called for more structural reforms given that ‘more than six years after the onset of the financial and economic crisis, a return to the pre-crisis growth path remains elusive for a majority of OECD countries’. Here its analysis shows how GDP per head compares with the upper half of OECD countries for the UK and some of the countries hit hardest by financial crisis.

Other recommendations for governments include making the most of current low borrowing costs to invest in infrastructure, cutting barriers to entrepreneurship and research and development, and promoting cross-border trade and investment.

For the UK, the OECD urges more action to improve education outcomes. “Student performance is below the OECD average and is uneven across social groups,” the report says.

It also calls on the UK to strengthen employment programmes, noting that spending on active labour market policies is “significantly below” the OECD average and that the share of young people not in employment, education or training (neets) is relatively high. It also recommends improving the planning regime and public infrastructure.