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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