COPE Conference on Wealth inequalities: measurement and policies

Delivered 26-04-2018

Traditional growth models are not working. Although growth has return in all major regions of the world since the 2008 financial crisis – it has not translated into significant improvements in most people’s lives.

Median wages and living standards continue to stagnate, wages have become decoupled from productivity growth, and meanwhile corporate profits are at record highs in many countries.

People are angry because they still see massive income and wealth gains going to the already very wealthy. This anger is being fuelled by increasing transparency in some cases – we can think of the Panama and Paradise Papers – and also by less benign forces: we’re witnessing the return of populism and spread of misinformation in many places.

This anger is understandable – as inequalities continue to rise, and social discontent with the established political and economic order becomes more widespread, it has never been more important to further our evidence-based work on wealth inequalities and how they affect our societies.

I hope that today we will learn more about why and how such significant wealth inequalities continue to rise, and what we can do about it.

Before Sir John’s speech I would like to set the scene with some of the work the OECD has been doing on inclusive growth and wealth inequalities.

We launched our Inclusive Growth Initiative in 2012 as part of our broader response to the 2008 crisis, and a reappraisal of our entire approach to policymaking called New Approaches to Economic Challenges. This was borne from the reflection that traditional growth models failed to deliver broad-based prosperity for everyone and has failed to deliver sustainable growth within ecological limits.

The IG’s remit is to help governments tackle rising inequalities and provide them with integrated policy packages that address growth and inclusiveness simultaneously. The Initiative has seen several significant successes to date, including the establishment of COPE (the Centre for Opportunities and Equality), the launch of our Champion Mayors for Inclusive Growth, extending the OECD’s research on the productivity-inclusiveness nexus, contributing to the policy recommendations of several multi-lateral fora (such as the G7, G20 and APEC) and influencing many governments’ national IG strategies, such as Canada, Scotland or Italy.

Part of this work is coordinating the research the OECD is doing on inequalities. We have done great work on the statistics side, on issues relating to employment and social policy, on tax policy, and we have produced some fascinating work on wealth inequalities in recent years. And understanding wealth inequality is crucial for our inclusive growth initiative.

We have all heard about the rapid rise in income inequality in recent years. But what’s more troubling is the concentration of wealth at the very top of the distribution.

OECD data indicates that wealth inequality has grown over recent decades, with the richest 10% in the OECD owning 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.[1]

For the top quintile of the distribution, financial assets and property make up the biggest shares of their portfolios. Financial assets are particularly important in the Anglophone world.

And what’s interesting is that financial assets are much more unequally distributed than non-financial ones. Across the 28 OECD countries covered by our Wealth Distribution Database, households in the top quintile have on average financial wealth around 72 times that of those in the bottom quintile, compared with around 23 times for real-estate wealth.[2]

OECD research highlights three key mechanisms through which finance contributes to inequalities:

  • finance workers are concentrated at the very top of the income distribution and earn premiums unlinked to their productivity compared with their peers in other sectors;
  • high earners can and do borrow more so the majority of credit goes to high earners;
  • and most of the benefits of stock market expansion goes to affluent households who are able to invest in equities

There is also a strong relationship between home ownership – or lack of – and wealth inequality. We see that generally, high levels of home ownership are linked to low levels of wealth inequality, but the opposite is true when home purchases are highly leveraged through mortgages – lower house prices following purchase can lead to a large number of households experiencing negative equity, thus contributing to higher levels of wealth inequality.

The US, the Netherlands and Denmark are the three countries with the highest levels of wealth inequality and have among the lowest shares of households owning their home outright.

The issue of home ownership is particularly critical in countries where access to quality and affordable housing is limited. As you can see in the graph, many households in OECD countries are overburdened by housing costs.

The median housing cost burden for mortgage payers is about 18% of disposable income and 23% for tenants. The cost burden is much higher for low-income households, on average by more than one-third of disposable income.

Housing conditions, the neighbourhood and environment affect the quality of people’s lives, particularly children’s, and fundamentally influence our capacity to develop as happy, healthy, productive individuals.

Housing and its associated costs is also important for understanding the limited mobility of labour in some countries – this has knock on effects for the productivity of certain regions and firms.

Furthering our research on the interrelationship between housing, wealth inequality and inclusive growth is therefore one of the top priorities for the OECD.

Let me outline briefly what the OECD is doing to help government redress wealth inequalities and promote inclusive growth.

We are working on a Framework for Policy Action on Inclusive Growth. This aims to guide countries on how to design and implement policy packages to improve their performance on a number of key inclusive growth outcomes.

The Framework is underpinned by a dashboard of indicators that diagnoses key inclusive growth trends and challenges for countries and includes a policy mapping exercise that builds on various OECD strategies, such as the Jobs Strategy, Skills Strategy, Innovation Strategy, Growth Strategy and Digital Strategy.

This Framework aims to better sustain and share the benefits of growth by promoting dynamics in a couple of key areas including:

  • enabling strong, inclusive markets that prepare people and firms for the future of work by promoting inclusive labour markets, updating social protection systems and boosting productivity growth and business dynamism;
  • establishing equal opportunities for all by investing in lifelong learning, promoting regional catching up and investing in communities’ well-being and social capital;
  • and re-building trust in government by embedding inclusiveness in policy-making and using data and digital technologies to design citizen-centred policies.

Tax is an important part of the Framework and a policy area where many governments have scope for tax reforms to reconcile growth and inclusiveness. They can do this by broadening tax bases, eliminating loopholes, especially those that mostly benefit wealthier individuals, and by relying more on revenues from immovable property and inheritance taxes.

OECD research has found that recurrent taxes on property are among the least detrimental to growth and are difficult to evade due to the immobility of the assets.

Recurrent taxes on property are also a more efficient alternative to transaction taxes on property, as they do not discourage labour mobility and are less sensitive to macroeconomic volatility, and volatility in the housing market.

Recurrent taxes on immovable property are also progressive, as those with high levels of income are more likely to have more housing wealth.

The inclusive growth agenda, particularly regarding taxation, goes beyond national borders, however. And so of course we should continue to make progress on limiting tax avoidance by wealthy individuals through the use of offshore tax havens and that of multinationals through BEPS and Automatic Exchange of Tax Information.

We will finalise the IG Framework for the OECD’s Ministerial Council Meeting at the end of May. We need to continue to strengthen our research on the drivers of wealth inequalities and provide governments with high-quality policy recommendations to tackle such inequalities. Part of this agenda is the development of national inclusive growth country studies, to help governments design and implement inclusive growth policy reforms.

Let me conclude by reiterating the importance of our work on this topic and on inclusive growth more generally – it is not an easy time to pursue the work we are doing, and we are facing resistance in many places. But that makes our work, and the research being presented by all of you today, even more crucial and I look forward to continuing to push this agenda forward with all of you.

Thank you.

———————–

[1] OECD (2015), In It Together: Why Less Inequality Benefits All, OECD Publishing, Paris, https://www.oecd.org/els/soc/OECD2015-In-It-Together-Chapter1-Overview-Inequality.pdf

[2] Balestra and Tonkin (2018 forthcoming), INEQUALITIES IN HOUSEHOLD WEALTH ACROSS OECD COUNTRIES:

EVIDENCE FROM THE OECD WEALTH DISTRIBUTION DATABASE, OECD Working Paper.

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Regional Meeting: Economic Reform Programmes for South East Europe

Delivered 24-04-2018

We are pleased to be working hand in hand with you on these Programmes to strengthen their transformative power, and assist you in aligning better and faster with OECD and EU good practices.

These Programmes are key drivers of change. And they require a coalition for reforms, which has been brought together by the European Commission and economies from the region. They chart macro-economic and fiscal policy frameworks and set reform agendas for the well-being of the citizens of South East Europe.

And to make these Programmes as effective as possible, we have built on a long cooperation – the OECD has had a presence in the region for nearly twenty years. So the OECD South East Europe regional programme – launched in 1999 – is uniquely placed to support partners in the Western Balkans and Turkey in preparing their annual Economic Reform Programmes.

To support policy makers in this process, the South East Europe programme has distilled OECD expertise and knowledge on the region by developing a Toolkit with practical guidance. It is based on a transparent and inclusive approach involving policy makers, business sector experts, academics and other stakeholders in developing the Economic Reform Programmes.

The Economic Reform Programmes exercise is an example of how our co-operation can bring about change to make an impact.

The OECD’s work with partners has helped to strengthen institutional capacities of government officials in the region. It has also led to the emergence of a “new approach” to reforms across South East Europe, which prioritises economic, social impact and stakeholder involvement over top-down decision-making.

Together we have made decisive steps to implement structural reforms, such as efforts to ease access to finance for SMEs; fight the informal economy; better align education and the labour market; and ensure that vulnerable group – including minorities – benefit from equal opportunities.

And this is important because, in the broader context, we are seeing renewed growth everywhere, including across the Western Balkans; growth is forecast to rebound to 3.2% in 2018 and 3.5% by 2019, creating new job opportunities across the region. But this should not distract us from the challenges lying ahead.

I’m referring to the major, global trends that need to be addressed, such as climate change, changing demography and a rapidly ageing population, the high levels of inequalities of wealth, income and of opportunities, and of course the acceleration of digital, the long-term effects of which are still largely unknown. We also need to deliver on the SDGs.

Added to this are the regional challenges, and the need to tackle two key obstacles to economic performance: declining productivity growth and rising inequality – two challenges, which also plague most OECD economies.

If the region is to lock in progress, foster productivity, and increase growth – which I have to emphasise must be inclusive and must be green – then the power of structural reforms needs to be fully harnessed.

This means that the work on the Economic Reform Programmes needs to be intensified.

And in this respect, the comprehensive nature of your Economic Reform Programmes and the focus on coherent, multidimensional approaches can help.

After the economic crisis, the OECD launched the New Approaches to Economic Challenges initiative, to look at economic policy-making in a fundamentally different way.

In this context, our Productivity-Inclusiveness Nexus highlights the need to break up traditional policy silos, to pursue reforms and institutional capacity building, to encourage a coherent policy making.

This is also what your Economic Reform Programmes aim to achieve. This is why, in our co-operation, we have taken inspiration from these OECD initiatives, but also from our horizontal work on Green Growth, Innovation, Skills and Better Lives.

At the OECD, we advocate putting the person at the centre of public policy. And our Inclusive Growth Initiative looks into investing more and better in improving people’s potential and leaving no one behind, including women and youth enhances the economy’s growth potential and deliver tangible results.

There has been too much of a focus on economic growth at all costs, and then redistributing the benefits later. But that doesn’t work.

The benefits haven’t trickled down to most of the population and what we’re seeing is that there is a bottom 40% that is becoming left behind.

We have to consider ex-ante inclusive policies to ensure that growth is even and benefits everyone. And in the Balkans, it’s important to bear this in mind.

The OECD South East Europe Competitiveness Outlook

This morning, the Secretary-General launched the 2018 edition of the OECD South East Europe Competitiveness Outlook.

This impressive policy assessment[1]  – which is one of the most comprehensive policy benchmarking exercises for the 6 Western Balkan economies – shows that the challenges are serious and cross-cutting.

Our analysis shows that it’s necessary to improve policy design, reform labour markets and promote innovation in the region.

For example, addressing the persistently high levels of youth unemployment of 37.6%[2] in the Balkans is crucial. Having policies that help young people into work will enable them to also have a share of the growing pie. We’re seeing talented young people leave the Balkans to seek opportunities abroad, which aggravates the region’s demographic challenge. In fact, the Western Balkan population is ageing and shrinking with a median age of the region 8.7 years above the world average.[3] This may severely impact human capital formation, competitiveness and economic convergence.

Economic Reform Programmes need to support an imminent pick-up in the pace of reforms.

Countries implementing bold reforms prove to be more resilient and successful in achieving their policy objectives in OECD and non OECD members.  For example, Japan has introduced significant reforms in access to childcare services; Greece – where I was last week to discuss education reforms – is undertaking reforms in competition law, regulatory policy and administration; Slovenia is taking reforms to promote its 2030 Economic Development Strategy, or Argentina, which is undertaking comprehensive tax reforms.[4]

My home country – Mexico – has begun to implement the most ambitious reform package in the OECD, including labour, telecommunications, competition, education, financial, fiscal and energy reforms. These reforms address challenges that have remained unresolved for decades and have required a historic Pact for Mexico, involving all key stakeholders.

Ladies and Gentlemen,

Structural reforms play a crucial role for economic growth and resilience. We, at the OECD, are more than ever committed to supporting you in fostering reforms in favour of competitiveness, stability and shared prosperity leaving no-one behind.

Let’s keep the well-being of citizens at the core of the Economic Reform Programmes in order to lift living standards and bring about lasting progress in the region.

I wish you an inspiring discussion.

Thank you.

[1] The SEE Competitiveness Outlook is unique insofar it is one of the (if not the) most comprehensive policy benchmarking exercises for the 6 Western Balkan economies, focusing on 17 policy areas.

[2] The World Bank, Western Balkans Labor Market Trends: 2018, http://www.worldbank.org/en/region/eca/publication/labor-trends-in-wb

[3] Bruegel, The Western Balkans on the road to the European Union, Policy Contribution, Issue n˚04 | February 2018, http://aei.pitt.edu/93432/1/PC-04_2018.pdf.

4The European Commission adopted a Strategy for the Western Balkans on 6 February 2018. It provides a credible enlargement perspective for the EU with the region, https://ec.europa.eu/neighbourhood-enlargement/news_corner/news/strategy-western-balkans-eu-sets-out-new-flagship-initiatives-and-support-reform_en

[4] Based on “Going for Growth”, “Getting it Right” (Mexico).

Growth has returned since the global financial crisis, how can it be made more inclusive?

Delivered 04-04-2018 London, UK

Inclusive Growth

Inclusive Growth

 

In our last Economic Outlook, for the first time in many years we confirmed that the global recovery is broadly based, and has by last reached the growth level that we attained before the crisis. This is good news, but should not led to complacency as the major challenges of increased inequalities an sustainability are here to stay. Besides, the rapid decline in unemployment in recent months has not translated yet into significant and broadly-based wage and well-being gains for workers.

The scale of the challenge is huge, as after rising rapidly in 80s and 90s, inequalities have worsened in the aftermath of the financial crisis as market incomes mainly went to the rich and redistribution weakened or stagnated in most OECD countries.

The top 10% in OECD countries now take home around 10 times the income of the bottom 10%, up from just 7 times 30 years ago.

Wealth inequalities are even more pronounced than income: the top 1% holds a staggering 19% of total wealth.[i] Material inequalities feed inequalities of opportunities and outcomes. Through all of our reports, we confirm that being born in the wrong neibourhood, could determine a lifecycle of deprivation.

And gender disparities remain a huge problem. Gender wage gaps, for example, have changed little since 2010 and remain substantial, averaging at 15% across the OECD in terms of the median monthly pay gap for full-time employees.[ii]

Our recent report Preventing Ageing Unequally shows that inequalities in education, employment, income and health build up from early ages and compound in old age. Children whose parents did not complete secondary school have only a 15% chance of making it to university – compared to a 60% chance for peers with at least one parent who had attained tertiary education.

More troubling still is the fact that the very same children at a disadvantage in the education system, connect if they do with lower quality jobs, with lower salaries, and may  most worryingly of all, to leave shorter lives.

A 25-year old university-educated man can expect to live almost 8 years longer than his lower-educated peer, on average across OECD countries..[iii] The trends are not receding, and the emergence of the digital revolution raises questions related to winner takes all dynamics. Redistribution systems have also become less effective.

There is also a strong regional component to these growing divides. In many countries, we have seen a rise in regional inequalities in terms of income and productivity but also in  many other dimensions, eg life expectancy, jobs and access to public services.

 

Here in the UK, this trend is worrisome, regional disparities are the highest across OECD regions, with productivity in London versus the rest of the regions diverging since the early 2000s. This regional divergence has is more pronounced than in other OECD countries. This is contributing to widening disparities in regional living standards and giving rise to “geographies of discontent”.

How can we redress these inequalities and promote inclusive growth?

To build an inclusive growth model we need first to move away from the old mantra of neoliberal economics that claimed that we need to “growth first, redistribute later”. We need models of inclusive growth that ensures not only that the benefits of growth is fairly shared, but that growth itself allows for everybody to participate and contribute.

This is not only a matter of equity. The OECD’s work on the Productivity-Inclusiveness Nexus shows that these two components are mutually reinforcing. Investing in human capital of children from low income families supports both growth and inclusiveness. Giving a fair chance to workers to have quality jobs do not only improve their living conditions, but boost demand, and reduces government spending to address social problems.

An inclusive growth agenda

More inclusive societies are also more resilient societies.

There are several interrelated parts to this agenda.

We must raise employment and strengthen social protection in the context of digitalisation and the changing nature of work, particularly for previously marginalised groups. Lots of efforts have already been made in this area, particularly in facilitating the labour market integration of women, youth and low-skilled workers. These efforts are paying off but in all these areas there is still much ground for improvement.

Consider first the role of skills development. Under current policies and institutions future advances in digital technologies and the expansion of knowledge-based capital are likely to further increase inequality through skill-biased technological change, accelerated job displacement and winner-takes-all dynamics. This at least needs to be considered as a serious risk.  Young people need to be prepared for the dynamic labour market of the future by acquiring strong cognitive and socio-emotional skills.

Indeed giving equal chances to all students to succeed would increase equity in education and improve long-term productivity. In the United Kingdom, family background is more important for an individual’s skill level than in most other OECD countries. Young people whose parents have low levels of educational attainment have the lowest level of basic skills proficiencies than in all other countries surveyed. Moreover, higher child poverty threatens to increase the number of children whose disadvantaged background affects their educational chances. Recent projections show that relative child poverty, after stalling since 2010, could increase from around 30% to about 35% by 2021-22.[iv]

Another response, likely to yield more rapid and inclusive results, is to devote much more attention to the significant share of workers who are either over- or under-skilled for their job. Addressing skills mismatch through better vocational education and training systems as well as adult or lifelong learning programmes is both a priority and a challenge for most countries.

There are many factors that underpin productivity growth and inclusiveness – and policies to take an holistic approach to unlock the potential of firms and people. These include quality and affordable health services, education and housing.

At the moment, the lack of affordable housing is a significant challenge for inclusive growth, particularly in the UK. The median housing cost burden for mortgage payers is about 18% of disposable income (around the OECD average) but 28% for tenants, five percentage points higher than the OECD average. The cost burden is much higher for low-income households, on average, by more than one-third of disposable income.

Reforms of housing market policies are therefore strongly needed, as well as urban planning policies and transportation policies that allow people to be highly mobile across places avoiding segregation and exclusion.

Consider next the role of businesses. Recent OECD analysis has shown that one way to achieve higher overall productivity is to promote stronger and faster diffusion of innovation from leading to lagging firms. But to catch up with industry leaders and make the most of new technologies and workers’ skills, lagging firms must be given incentives to make the necessary investment in R&D, new digital equipment and organisational know-how.

At the moment R&D spending and ownership of intellectual property is highly concentrated amongst leading firms. In 2012, among the world’s 2000 largest corporate R&D investors, the top 250 firms accounted for more than 70% of R&D and patents and 44% of trademarks amongst the group, whilst amongst the top 100 firms the top 5% of the accounted for 55% of that group’s R&D expenditure, 53% of patents and 30% of trademarks.[v]

Governments can help by improving the level and efficiency of public support for private R&D, particularly smaller firms, as well as by creating a strong eco-system, with sound collaboration between research centres (or universities) and industry.

We must also strengthen the effectiveness of redistribution through tax and transfer policies to ensure that the benefits from technological progress and globalisation are more broadly shared.

In fact, taxation is one area where governments in many countries have ample scope for tax reforms that can reconcile growth and inclusiveness by broadening tax bases, eliminating loopholes, not least those that mostly benefit better-off individuals, and by relying on revenues from immovable property and inheritance taxes. Internationally, progress continues to be made to limit tax avoidance by multinationals through the BEPS action plan elaborated under the auspices of the G20 and the OECD.

An opportunity for reforms that governments should not miss

These are all difficult challenges that need to be tackled in a context where political resentment has been on the rise. However, the return of higher global growth offers a window of opportunity to reinvigorate trust in the power of governments to make a positive difference in people’s lives. But to do so, we must make inclusive growth our priority.

To help governments do so the OECD will launch its Framework for Policy Action on Inclusive Growth at its Ministerial Council Meeting in May 2018. The Framework will provide governments with guidance on how to design and implement policy packages to tackle key inclusive growth challenges. This will build on other OECD initiatives in this area, such as the network of Champion Mayors for Inclusive Growth and the Business for Inclusive Growth platform, which you’ll hear more about tomorrow.

We’re looking forward to sharing more of our work with you, hearing about your experiences and what you’re doing in your own parliments to tackle these issues over the coming days.

Thank you.

[i] OECD (2015), In It Together: Why Less Inequality Benefits All, OECD Publishing, Paris, http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htm

[ii] OECD (2017), Bridging the Gap: Inclusive Growth 2017 Update Report, OECD Publishing, Paris, http://www.oecd.org/inclusive-growth/Bridging_the_Gap.pdf

[iii] OECD (2017), Preventing Ageing Unequally, OECD Publishing, Paris, http://www.oecd.org/employment/preventing-ageing-unequally-9789264279087-en.htm

[iv] OECD (2017), OECD Economic Surveys: United Kingdom, OECD Publishing, Paris, https://www.oecd.org/eco/surveys/United-Kingdom-2017-OECD-economic-survey-overview.pdf

[v] OECD (2017), Bridging the Gap: Inclusive Growth 2017 Update Report, OECD Publishing, Paris, http://www.oecd.org/inclusive-growth/Bridging_the_Gap.pdf