Towards an Empowering State: Turning Inclusive growth into a global reality

The economic hardship of the last nine years has created many casualties, but chief among them has been trust – the glue that holds our societies together. Trust between different groups of people, and trust in institutions has plunged to record lows, with public belief in governments in the OECD standing at just 42% in 2016.[i] This has now spilled over into the social realm, stoking fear and provoking the rejection of global interconnectedness, trade, migration and technological progress.

Everywhere we look, globalisation is being called into question and the potential consequences of the rise of protectionist measures could scarcely be greater. The origins of this loss of faith in international integration are numerous and vary considerably from country to country, but there is a common thread running throughout: a growing sense that the global economy is delivering only for the lucky few.

International elites have categorically failed to deal with this. The benefits of globalisation and rapid technological change were understood in an overly simplistic economic framework that relied too heavily on averages and representative agent models, blurring the outcomes for different income groups.

Simplistic assumptions of how the economy operates prevented us from advancing better policies. Trade and investment became an end in itself, and the efficiency of markets became the ultimate goal of economic policy. We neglected the differentiated outcomes of policies for different income groups, and by relying on incomplete metrics – like GDP per capita alone – we ignored the distributional outcomes of the policies we undertook.

We have since learned that this was not the right choice – and we have learned it the hard way. . Policies have affected different groups in very different ways. The initiative I lead at the OECD on Inclusive Growth has charted how rising income inequalities have been blighting people’s opportunities, wasting their potential contribution to productive activity and limiting their ability to lead meaningful lives.

The numbers make for stark reading. Here in the UK, the average income of the richest 10% has gone from being eight times that of the poorest 10% in the late-1980s, up to almost ten times greater today. The situation is markedly worse at the very top, with the highest 1% of earners in the UK taking home around 20% of pre-tax national income in the last three decades.[ii]

Our report All on Board: Making Inclusive Growth Happen has set out how this reflects a more general trend seen across the OECD, where those at the top of the income distribution have pulled away from those at the bottom. We see this particularly in the period after the crisis, where across the OECD, the top 10% of income earners have managed to recover their pre-2008 income levels, while those in the middle and at the bottom have seen incomes fall and stagnate. The picture is even more troubling in terms of wealth, where the richest 10% in the OECD own around half of all household assets, whilst the bottom 40% own barely 3%. At the very top of the distribution, the Top 1%, holds a staggering 19% of total wealth.[iii]

All too often, wealth and income inequality stand in a symbiotic relationship with the intangible social trappings of success, such as cultural capital and access to parental networks. Together, they influence the key formative outcomes in children’s lives, helping to turn the unequal outcomes of one generation into the unequal opportunities of the next, affecting everything from employment to health status.

Nowhere is the damage more keenly felt than in education. OECD data shows that the children of poorer parents struggle to keep up with the social and cultural capital of their wealthier class-mates. From that initial disadvantage, many go on to lower educational attainment, with children whose parents did not complete secondary school having only a 15% chance of making it to university against a 60% chance for peers with at least one parent who had attained tertiary education.^[iv] More troubling still is the fact that the very same children at a disadvantage in the education system typically go on to receive smaller salaries and, most worryingly of all, to lead shorter lives.

This is profoundly unjust. But it is not only those at the bottom who suffer when inequalities scale new heights – we all do. Of course, inequality has always been with us and it has often been presented as an engine for growth. When it derives purely from differences in efforts and investment, such an argument may have some merit, but with the levels of inequality we see today that is demonstrably not the case.

As OECD’s work on the Productivity-Inclusiveness Nexus spells out, when the poorest are unable to fulfil their potential, we all lose out on the visionary leaders, the innovators, and the economic growth that could have come to pass. Moreover, recent OECD research has highlighted how rising inequality knocked 6 to 10 percentage points of GDP growth between 1990 and 2010 across a range of OECD countries including the UK, Mexico, Finland, Italy, and the United States.[v]

With the ongoing global and technological transformation of our economies these issues are likely to be brought into starker relief. Digitalisation has the potential to unleash untold benefits for all of human kind, but if it is not managed properly, it could exacerbate inequalities by creating greater job insecurity and cementing ‘winner takes all’ dynamics in our most rapidly growing markets.

Already, since the early 90s, around half of the jobs created in the OECD have been in more insecure temporary, part-time or self-employed work. Over roughly the same period, the power of multinational firms at the global frontier to exploit their greater access to knowledge-based capital, digital technology, finance, cheap labour and low-tax jurisdictions have been able to lock-in their productive advantages. In the manufacturing sector for instance, since the early 2000s, labour productivity of OECD firms at the technological frontier has increased at an average annual rate of 3.5%, compared to just 0.5% for non-frontier firms.[vi]

Given the extent of these social and economic costs, it is hardly surprising that rising inequality has translated into growing political disaffection, anti-market sentiment and disenchantment with globalisation. In such a context, we desperately need to take action to promote inclusive growth and restore public confidence in the power of policy makers to improve people’s lives.

So what can we do to redress this situation and regain trust?

To start with, we need to listen to people. It is not enough to talk about a ‘post-truth’ environment. Or to say that people haven’t paid attention to facts and evidence. It is we that have not listened. We have to be honest with ourselves and acknowledge that the “truths” in our economic models have failed to capture much of what matters to people.

In short, we need to put people, and their multidimensional well-being, back at the centre. The OECD’s Inclusive Growth and New Approaches to Economic Challenges (NAEC) Initiatives are at the forefront of efforts to put people at the centre, to create social and economic models that provide a more accurate representation of the world around us. Today, advances in computing power are also opening up new tools to support our work, with possibilities for integrating complex systems dynamics and behavioural insights into our approaches with agent-based modelling and network analysis.

Yet, we also must recognise that economics does not have a monopoly on truth. In many countries, we have seen the bottom 40% left behind and their potential wasted. Only by recognising that mistakes have been made can we begin to build a new socio-economic narrative that goes beyond the old tropes of growth first, redistribution later; and beyond aggregate economic measures like GDP.

The false certainty provided by an all too literal interpretation of models needs to be balanced by a humbler, more grounded approach to economics that draws on the lessons of other disciplines like physics, biology, psychology, sociology, philosophy and history, to feed a richer, more nuanced policy discussion.

If we want to save open markets and globalisation, we need to re-write the rules of the economic system to make them work for everyone. We also need to bring back that much neglected concept, fairness, to the heart of the policy debate.

The role of the State is absolutely key to this discussion. We need to redefine and reimagine its role, to ensure that it is prepared for contemporary opportunities and challenges and is set up to empower people.

To begin with, we need a new approach to welfare that goes beyong just mitigating risk. The work of behavioural economists like Amos Tversky and Daniel Kahneman has shown us that people are not ‘risk averse’ so much as ‘loss averse’. If we are to create entrepreneurial societies that encourage everyone to fulfil their productive potential, we need to deploy this insight via welfare policy to reduce the consequences of failure.

To be sure, providing people with a social safety net is vital, but it is not enough. We need to move beyond this approach, to create an empowering State that serves its citizens as a launch pad by furnishing them with capacity enhancing assets.

Such a State would also seek to prevent disadvantage cascading down generations. It would recognise that its role was not simply to remove barriers to opportunities, but also to furnish people with the capacity to seize them. Crucially, it must see redistribution and social expenditure in vital areas like education and healthcare not as operating costs, but as investment in our most valuable assets – people.

In practice, this would mean deploying a coherent approach to intervention across individual’s life-cycles to provide high-quality early years education, comprehensive training throughout adult life, income and skills support to help people transition between jobs and perhaps even a universal basic income. But it wouldn’t stop there, because, when all is said and done, there is more to life than money. The key role of the State should be to support people helping them to have meaningful lives.

However we also need to face up to the big global challenges of dealing with concentration of wealth, international tax and competition issues, the mobility of tax bases, labour rights and regulatory standards. We need to ensure that globalisation is based on international rules that are respected. We have to create trade agreements that are comprehensive and, crucially, also inclusive. We must hold global firms to higher standards of responsible business conduct. OECD work on taxes, responsible business conduct, due diligence and anti-corruption will be key to ensuring better functioning global rules.

To restore the faith and trust of people in the role of governments, a priority for an empowering State must be to focus on the bottom 40%, who risk being trapped in a cycle of deprivation and lack of opportunity. We need to deploy targeted policies to help these groups access quality education, healthcare and the benefits of innovation, finance, and entrepreneurship.

Of course, giving people the chance to make the most of these opportunities is reliant on a thriving business sector. The State has a role to play to ‘crowd in’ financing in young and innovative sectors and in investing in basic R&D that will see positive spill-overs into countless other domains. We also need policies which support the diffusion of innovation through the economy, ensuring a level playing field for incumbents and challenger firms, enabling small companies to access finance, technology and high-quality skills.

Adopting such an approach will require some changes to the way we design and implement policies, with particular care taken to avoid the entrenchement of vested interests. One aspect of this will be ensuring that policy recommendations take regional and local circumstances into account. Regions and cities have a key role to play by adapting economy-wide policies to the characteristics of local communities, as well as by promoting local policies that reduce or remove the barriers limiting access to opportunities.

There is also a dire need to overcome traditional ‘silo-based’ approaches to policy making. This will require a renewed ‘whole-of-government’ push, where different government departments, agencies and ministries work together to deliver joined-up solutions as part of a coherent systemic approach.

The challenge before us is clear. Succeeding in our endeavours will demand a new approach, where political parties, and leaders from civil society and business come together to recognise that the long-term prosperity of a society depends on the success of its individual parts.

Together we can make inclusive growth a reality.

With thanks to Shaun Reidy, Acting Coordinator of the OECD Inclusive Growth Initiative

[i] Gallup World poll 2016

[ii] OECD Income Distribution Database

[iii] OECD Statistical Database

[iv] OECD (2016, forthcoming), calculations from PIAAC

[v] OECD (2015), In it Together

[vi] OECD (2015) The Future of Productivity, OECD Publishing, Paris