Could equality drive growth?

In many ways, the situation in the first quarter of the 21st century looks very hopeful. Across the world, people are living longer, democracy in many forms is developing and more people are educated. But disturbingly inequalities also seem destined to grow.i The contours of a very challenging puzzle are becoming clearer: how can economic progress be achieved without locking in structural inequalities?

Inequality is coming to be understood as a structural, multidimensional phenomenon that affects the well-being of all parts of society. There is growing evidence that inequality is harmful to everyone in society and that greater social and economic inclusion is strongly associated with longer and stronger periods of sustained economic growth. OECD research shows that pre-crisis economic approaches, which allowed − even encouraged − these marked rises in inequality, simply do not make good economic sense. Inequality is not simply about uneven incomes. It also has psychological dimensions − status, self-worth, anxiety; it affects the quality of social relations, constrains social mobility and drives consumption.ii It has a negative impact on educational attainment and health conditions.

We can see evidence of rising multidimensional inequality within technologically advanced economies, even as some measures of inequality are reducing in emerging and developing economies. In the first quarter of 2014, one in three unemployed people in OECD countries had been out of work for 12 months or more, almost twice the number in 2007.iii Today, the richest 10% of the global population earn almost 10 times the income of the poorest 10% (it was 7:1 in 1980).iv Rising inequalities have become a macroeconomic concern, the full societal impact of which has been significantly underappreciated thus far.

Disaffection with the extreme disproportionality in incomes between the rich and everyone else, along with inequality in political voice, drives social unrest. Over the past decade, the yearly average of mass protests in major markets has jumped 54%.v Citizens throughout the world have been taking to the streets to voice their concerns and demands: from the Arab Spring to Los Indignados in Spain, Occupy Wall Street-London-Davos, labour protests in South-East Asia and student protests in Santiago de Chile and Montreal.

For governments trying to address rising inequalities by kick-starting economic growth, several new dimensions of the puzzle complicate the effort: the recent G20 summit highlighted the fragility of global economic growth and the unevenness of the recovery following the global financial and economic crisis. Technological joblessness, i.e. the trend of replacing human labour with machines, is occurring in all economies and moving up the skills ladder, as robots now can even perform surgery. In the so-called “digital economy”, there are more diverse business models and extreme scales of enterprise: huge firms with massive earnings but relatively few employees and micro-firms with global reach.vi Changing employment patterns and weaker redistribution mechanisms, such as tax and benefits, are also driving inequalities. Many previously stalled middle-income countries are experiencing growth re-acceleration but it is too early to declare victory.vii Prospects in the developing world are heavily dependent on middle-income transitions going well.

Growing unequally carries a cost for future growth. OECD research reveals that even a modest increase in income inequality lowers yearly GDP per capita growth by an average of 0.2 percentage points.viii This calls for a new approach to economic progress, one that makes equality a driver of growth and also positions growth as a means to human well-being, rather than an end in itself.

Inclusive Growth Is the Key to a New Economic Velocity

Inclusive Growth recognizes that strong per capita GDP does not necessarily signal that an economy is healthy. Achieving Inclusive Growth requires supplementing GDP with multidimensional well-being metrics and using a mix of measurable, objective and subjective indicators.ix

Inclusive Growth calls for a more coherent approach, which examines the effects of policies on different groups in society. Market democracies are living, value-creation systems. They can adapt and evolve. They can change course and shift direction as a result of better redistribution mechanisms and opportunities being opened to all. Well-being metrics can provide new and wider perspectives to policy-makers in areas that matter most to people. Progressing Inclusive Growth on a global scale will involve working effectively across different scales and systems of governance to restore a dynamic of social mobility in democracies, restructuring domestic tax systems, learning to work with multidimensional well-being metrics and bringing forward a new economic paradigm in which equality is a key driver of growth.