The Growth of Inequality: A Breeding Ground for Populism Conference of Montreal

Delivered 14-06-2017, Montreal

Thank you Michel, Ladies and Gentlemen,

It is an honour to join you here to speak about inclusive growth.

Even though in our last economic outlook the world economy seems to be picking up with a broader basis, we should not forget that it has been almost a decade when the financial crisis erupted causing a strong economic and social impact.

This financial crisis transformed into an economic  one and finally turned into a political backlash. People expressed their frustration at a ballot box, and democratic processes give rise to protectionism, populism and a rejection of the globalization process. It caused a decline in trust in our societies, that is the glue what bind us together.

Why this reaction, why this backlash? Because people believe that the growth model that we have followed for the last decades has delivered very unfair outcomes.

According to our  analysis, and to the Inclusive Growth initiative that I lead at the OECD,  they are right.

Even before the crisis, inequalities of income, wealth and opportunities were increasing, but the crisis exacerbated them, with the bottom 40% of the income distribution seeing their standard of living stagnant or falling in the last decades.  This is not only the poorest of the poor. This is the squeezed middle classes.

In OECD countries, which have the most advanced social safety nets, the richest 10% of the population own around half of all household assets, whilst the bottom 40% owns barely 3%. The top 1% holds a staggering 19% of total wealth!

Between 2010 and 2014, the income of the top 10% grew five times faster than for the bottom 10%.

The problem is that rising income inequalities leads to inequalities of opportunities (including access to quality education, quality jobs or health services), and have now impacted socio-economic mobility as some groups accumulate disadvantages.

Indeed, if you are born into a family whose parents did not reach secondary education, you have almost 5 times less chances to reach high school compared to more affluent kids.

For business people, and we have many in this room, you should know that inequality hinders growth. It does by the lack of enough investment in human capital and it does by the skills mist-matches that you face, all along with low quality jobs.

It also does by government budgets needing to palliate the problems instead of building a more solid basis for growth.

The current context is then aggravated by slow -down of productivity growth.

This is a paradox given the rapid technological change, the Next Production revolution and the internet of things. But again, the leading technologies and the most advanced processes seems to have a differentiated impact.

The decline in productivity growth is not even. Frontier firms, the most advanced technologically are enjoying rates of growth of 3 to 5% of their productivity while the rest of the firms are flat.

We call it the breakdown of the diffusion machine, as the trickle down of technological change is not working, and “winner takes all” dynamics in the platform economy are emerging.

Rapid technological change is also fuelling fear and uncertainty. Over the past century, the rate of uptake of technology has increased exponentially:  it took 45 years for 25% of the US population to use electricity, the telephone took 35 years, TV took 26 years, and smartphones took just 4 years for the same percentage of the US population to be using them.

And now we have Uber, Netflix, that provide endless possibilities. I always say that my daughter studies in Mcgill, and I thank the iphone for allowing me to see her happy face!

But the downsides are that estimates put 9% of jobs at a high risk of automation, with another 25% of jobs undergoing significant change, and people and institutions are not prepared.

Together with the impact of international trade particularly in heavy manufacturing, this is leading to many displaced workers, who are often concentrated regionally.

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So what do we do about it?  The answer is not to retreat from international economic integration and the benefits it brings.

But we definitely need to change the growth model. We need to change the metrics and the conventional wisdom that led us to think that equity considerations were secondary to the efficiency of markets. Get rid of the growth first and distribute later axiom.

We need to get away from averages and develop better metrics to capture the distributional impact of the policies we take.

Above all, we need to put people at the centre of our economic policies. This means people’s well-being with its multi-dimentional character. Income and material well-being is important, but there are other dimensions that matter for people. Social capital, clean environments, quality jobs, quality institutions, good working conditions, etc.

Above all, we need to recover trust and here the private sector has a very important role to play, and I invite you to join the OECD platform for inclusive businesses.

In a context of finite public resources, governments will need to prioritize those investments that deliver for everyone, but that have higher impact on the conditions of the bottom 40% of the population. We call it the Inclusive Growth test.

Education is key. But let’s get more specific. For example investment in child hood education and care, particularly before age 5 is one of the best tools we have, as it levels the playing field for disadvantaged children, and boost their socio-emotional skills that are so important to succeed in life.

Investment in laggard regions and laggard firms is also important to improve their growth potential, via quality infrastructure, and access to finance and managerial skills.

More than anything, we also need a change in paradigm. In the 30ths after the great recession, we saw the emergence of the welfare state. It played a very important role to support the advancement of the whole population.

We now need something different. Yes, to improve the tax and benefit systems that have somewhat lost its effectiveness.

Yes, ensure that everybody pays their fair share of taxes (and the OECD is leading here with the BEPS and the Automatic Exchange of Information), yes, to increase the progressivity of tax systems and avoid excessive concentration of income, wealth and productive capacities. But this will not be enough.

We need what Denis Snower from Kiehl institute calls the empowering state. One that invest in capacity enhancing assets for people to draw on throughout their lives.

Allow people to fulfil their full potential. People want a meaningful life, not to live on transfers.

With this framing, you can also build more productive and competitive economies. At the OECD we call it the inclusiveness-productivity nexus. It means that by being inclusive, you can also become more productive, and this is also important for the private sector.

But it also means understanding better the complexity and interconnectedness of the world economy,  and improve our analytical frameworks.

At a global scale, and to save the open regimes of trade and investment, we should deliver on implementing international standards, regarding labour and migration, regarding the environment, regarding RBCs.

In this sense, It is really encouraging to see how the business sector, the cities and regions, and many countries have backed up the climate agreement now that the US has decided to quite. We should lead by example.

Being in Canada, one of the  countries that remain open and that cares for inclusive growth is a perfect setting to have this discussion and we produce a brochure that you have in front of you and left some homework particularly on gender and indigenous people.

I want to thank the Montreal Forum of the Americas for the opportunity to have this important reflection. We hope to continue it in Paris, in the Forum edition that we will host at the OECD.

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Bridging the Gap: OECD Inclusive Growth Initiative and Report

Bridging the Gap: OECD Inclusive Growth Report and Initiative from Gabriela Ramos

[Slide 1]

Ministers, Esteemed Colleagues, Ladies and Gentlemen,

I’m very pleased to be here to present you with an update of our inclusive growth initiative and the report Bridging the Gap.

This initiative was launched in 2014, but the work to document the increased inequalities of income and opportunities at the OECD started more than a decade ago. 

Beyond this, the inclusive growth, along with our New Approaches to Economic Challenges is an effort to re-think the growth model that we have been following and get better results.

Why, before this growth model failed us three times. First by not avoiding the financial crisis. Second by not avoiding the increased inequalities, and third because of its impact in the environment.

So it is time to re-think, and move from growth first redistribute or clean later, to include equity considerations in our economic policies. It is also about to put people at the center, and not to rely on aggregate outcomes.

And why is it so urgent to do it now?

[Slide 2]

Because on top of the economic and social challenges, we are seeing a decrease in trust in governments, which is the glue that keep our societies together. Indeed, last year trust in governments in the OECD stood at just 42% and – as you can see from this chart – public confidence is even lower.

This is what is created the backlash against globalization in Advance economies, as 40% of the population has not seen their standards of living improved.

[Slide 3]

What do we know: In terms of income, as you can see from this chart, the top 10% of have captured the bulk of the gains from growth in recent years, leaving everyone else floundering in their wake. Today in the OECD, this group take home around 10 times the income of the bottom 10% up from just 7 times 30 years ago.

The squeezed middle class have lost out comparatively to the richer peers, as you can see from this chart.

[Slide 4]

The picture is even more troubling in terms of wealth. The richest 10% in the OECD come to own around half of all household assets, whilst the bottom 40% owns barely 3%. At the very top of the distribution, the Top 1%, holds a staggering 19% of total wealth! And this is the OECD average! Wealth concentration is much larger is some countries.

As we note in the report that we are releasing today “Bridging the Gap”: income inequality produce inequality of opportunities and inequality of outcomes.

 Inequalities stand in a symbiotic relationship with the intangible social trappings of success, such as cultural capital and access to parental networks, dragging down on social mobility and impairing opportunities of the neediest individuals.

In some countries, this means 40% of the population.

[Slide 5]

Nowhere is this clearer than with education.

Children born into poorer families find difficult to overcome their socio-economic background, which is reflected in their learning outcomes as shown in this graph. In very unequal countries this impact can be double on that of children in low income households.

Besides, in the OECD, children whose parents did not attain upper secondary education have just a 15% chance of making it into tertiary education – against a 60% chance for those with at least one parent who went to university.  This also impacts social mobility that is the next frontier in our analysis.

This is feeding social discontent.  But it also harms growth as low income families do not invest enough in the skills of their children.

This may have also an impact on productivity that follows the same pattern between highly productive frontier firms and the rest that face stagnant growth of productivity.

Our ongoing work on the Productivity-Inclusiveness Nexus underlined that when the poorest are unable to fulfil their potential, we all lose out on the visionary leaders, the innovators, and the economic growth that could have come to pass.

On the other hand, frontier firms accumulate advantages, some sorting out.

[Slide 6]

So, we need to put people first.

The OECD’s work on Inclusive Growth aims to do just that.

Our latest report “Bridging the Gap”, sets out to promote a new socio-economic model that puts people at its centre.

It highlights that the overarching goal of policy making must be to furnish people with capacity enhancing assets that they can draw on throughout their lives. It also underlines the essential role of the State in enabling individuals, firms and regions to flourish by doing the right investments, prioritising and targeting the needs of low income groups and getting the framework right to level the playing field. reducing excessive concentrations of income, wealth and productive capacity. It is not only about redistribution, but should be about opportunities and investments. It is about ensuring that people succeed by their own merits and not by their initial endowments. 

Increasing progressvity of tax system is an area we should look at.  Capital and income taxes need to become more progressive, for instance through accrued taxes on inheritance and gift or on residential property.

Tax transparency, and broadening the tax base provide other oportunity. Tax systems for gender is also important, and for low income individuals.

But we also need targeted investments in people, firms and regions, s that offer the biggest “bang for the buck” in terms of inclusive growth.

From this perspective, one of the most effective interventions is early childhood education and care for children from low income families, and more specifically support to foster socio-emotional skills of their children.

The report also recognises that the success of our societies rests, in part, on the success of business.

It emphasises that the State has a role to play to ‘crowd in’ financing in young and innovative sectors and in investing in basic R&D that will see positive spill-overs into countless other domains, particularly to support young and small-medium enterprises that constitute the large majority of firms in most OECD countries and the largest source of job creation.

The report also stresses the importance of ensuring a level playing field for incumbents and challenger firms, that fights against market concentration and ensures that small companies can harvest the opportunities of digitalisation and the next production revolution.

The advent of new technologies, platform economies and non-standard jobs raise a number of challenges for workers as well. This is another area wake-up call to governments and the business sector to ensure that technological disruptions help bridge economic and social divides rather than the opposite.

Ladies and Gentlemen,

Seizing this moment will not be straightforward. Vested interests and the push to go business as usual will be strong.

But continuing on our current trajectory is not an option, if we want to ensure a sustainable future.

At the beginning of this session we asked you whether the Nordic model was a key way to ensure growth benefits all, rather than the few?

Doubtless the Nordic model has very been successful, and it relies on the nexus of the ex-ante equity considerations I mentioned, but also in efforts to ensuring a thriving business environment.

The Nordic Model is a role model for economic opportunity and equality as well as of social cohesion: it has the strongest social mobility in the OECD area and breeds a record-high level of trust in institutions. It is the living proof that inclusive growth is key to underpin vibrant societies and successful economies. Of course it has high taxes as well, but citizens actually find a lot of value in paying those taxes.

All of us can learn from this model in our efforts to promote inclusive growth.

[Slide 7]

Thank you.