REDUCING income inequality
would boost economic growth, according to a new OECD analysis. This work finds
that countries where income inequality is decreasing grow faster than those
with rising inequality.
The single biggest impact on growth is the widening gap between the lower middle
class and poor households compared to the rest of society. Education is the
key: a lack of investment in education by the poor is the main factor behind
inequality hurting growth.
“This compelling evidence proves that addressing high and growing inequality
is critical to promote strong and sustained growth and needs to be at the centre
of the policy debate,” said OECD Secretary-General Angel Gurría. “Countries
that promote equal opportunity for all from an early age are those that will
grow and prosper.”
Rising inequality is estimated to have knocked more than 10 percentage points
off growth in Mexico and New Zealand over the past two decades up to the Great
Recession. In Italy, the United Kingdom and the United States, the cumulative
growth rate would have been six to nine percentage points higher had income
disparities not widened, but also in Sweden, Finland and Norway, although from
low levels. On the other hand, greater equality helped increase GDP per capita
in Spain, France and Ireland prior to the crisis.
The paper finds new evidence that the main mechanism through which inequality
affects growth is by undermining education opportunities for children from
poor socio-economic backgrounds, lowering social mobility and hampering skills
development.
People whose parents have low levels of education see their educational outcomes
deteriorate as income inequality rises. By contrast, there is little or no
effect on people with middle or high levels of parental educational background.
The impact of inequality on growth stems from the gap between the bottom 40
percent with the rest of society, not just the poorest 10 percent. Anti-poverty
programmes will not be enough, says the OECD. Cash transfers and increasing
access to public services, such as high-quality education, training and healthcare,
are an essential social investment to create greater equality of opportunities
in the long run.
The paper also finds no evidence that redistributive policies, such as taxes
and social benefits, harm economic growth, provided these policies are well
designed, targeted and implemented.
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