OECD: Income Inequality Harms Growth

Just a quick note – unfortunately, quick notes appear to be all I have time for these days. The OECD has released a new report on the influence of income inequality on economic growth (excerpt):

Inequality hurts economic growth, finds OECD research

09/12/2014 - Reducing income inequality would boost economic growth, according to 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....

...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....

...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.

You can access the full paper here. I haven’t read it yet, so I’ll forbear from commenting on just how solid the conclusions are.

Apropos, there was some commentary on this on BFM’s Morning Run today. Guys, there’s a big difference between the Gini Coefficient for wealth (e.g. ASB or EPF) and the Gini for income (wages, salaries, dividends etc). They’re not the same thing and shouldn’t be compared together. To use an accounting analogy, the former is balance sheet, while the latter is profit and loss. Wealth Ginis are always and everywhere higher than income Ginis.

For the record, Malaysia’s income Gini has been slowly declining over the past decade, so we have been and are likely to continue to see income inequality decline. Malaysia’s income Gini is also actually quite near the global average. The wealth Gini, what we know of it anyway, on the other hand appears to be increasing, but even more slowly than the income Gini is declining. Why that is, is a research question of some interest.

Technical Notes:

Cingano, F. (2014), "Trends in Income Inequality and its Impact on Economic Growth", OECD Social, Employment and Migration Working Papers, No. 163, OECD Publishing