Inclusive Growth:

A framework for linking living standards to policies

Alain de SerresOECD Economics Department

15 November 2013ECLAC-OECD joint workshopSantiago, Chile

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What the policy framework should aim to achieve

1. Provide a clear link between individual dimensions of the welfare function and policies

2. Identify the main channels of transmission

3. Make explicit the main policy trade-offs and synergies

4. Be sufficiently flexible to be adaptable to country-specific challenges and circumstances

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A framework for policy analysis

Outcomes and their distribution:

Material well-being: Income, consumptionjobs

Quality of life: HealthEducationPersonal SecurityEnv. quality of life…

Welfare function

depending on outcomes

Production function or process

Policies

EconomicFinancialCompetition

LabourSocialHealth policies

Education policies

Return on physical and human capital, demand for jobs …

Other drivers(institutions; norms; exogenous factors)

Sources of growth, equality of opportunities

Going for Growth /

Green growth /

Divided we stand

Work on education and health etc.Work on side-effects of growth policiesWork on equality of outcomes and opportunities

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Linking outcomes to policies requires that a number of related conditions be fulfilled

1. A good understanding of the key drivers of the outcomes in the welfare function is critical

Firm link to policies requires that processes generating outcomes be well understood and defined

Supported by analytical framework

2. The identification of robust empirical relationships between living standards and policies is also important

Could be more difficult for quality-of-life aspects of certain dimensions (e.g. environment)

Constraint of data availability over time and across countries

3. The amenability of outcomes to policy instruments will also determine the choice of variables

Estimated economic impact must be significant

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IG: F

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rkThe case of income and health status

1. Income generation (material living standards)

Measured by mean household disposable income…

… but link to policies anchored in growth accounting framework (drivers of GDP per capita)

2. Health status (non-material dimension)

Proxied by life expectancy

Matters for both material and non-material living standards

3. Income distribution

How aggregate income trickles down across various parts of the distribution

Mean, median, lower part of the distribution

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Large differences in GDP per capita in middle-income

countries are mostly accounted for by productivity gaps

Except for Turkey and South Africa.

Percentage difference in

labour productivity3

Percentage GDP per capita difference

compared with upper half of OECD

countries1

Percentage difference in labour

resource utilisation2

-100 -80 -60 -40 -20 0 20

India

Indonesia

China

South Africa

Brazil

Turkey

Mexico

Chile

Russia

Lower half of OECD

countries

OECD average

-100 -80 -60 -40 -20 0 20 -100 -80 -60 -40 -20 0 20

India

Indonesia

China

South Africa

Brazil

Turkey

Mexico

Chile

Russia

Lower half of OECD

countries

OECD average

2012 2008

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Convergence in productivity levels has been uneven over

the last decade

Productivity growth could be higher in some countries considering the scope for catching up

Average growth in GDP per hour over 2001-11 against level in 2001

AUS

AUT

BELCAN

CHL

CZE

DNK

EST

FIN

FRA

DEU

GRC

HUNISL

IRL

ISR

ITA

JPN

KOR

LUXMEX NLDNZL

NOR

POL

PRT

SVK

SVN

ESP

SWE

CHE

TUR

GBRUSA

RUS

BRA

CHN

IND

IDN

ZAF

EU

0

1

2

3

4

5

6

7

8

9

10

11

0 2.5 5 7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5 35 37.5 40 42.5 45 47.5 50 52.5 55Level, US dollars, 2001

Average of growth rates, 2001-11

OECD average

OECD average

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Labour utilisation is generally high but so is informality

Tackling informality would be good for growth (human capital development and productivity) and inclusiveness (income prospects)

Share of persons in informal employment in total non-agricultural employment, 2009

0

10

20

30

40

50

60

70

80

90

Russia² Chile³ Turkey South Africa Brazil Mexico Indonesia India

Per cent

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Low female participation limits labour force participation

in some LACs

Particularly low relative to total participation in Mexico, Turkey but also low in Chile.

Labour force participation rates, 2011

0

10

20

30

40

50

60

70

80

90Per cent

Women Total

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Quality and equity of education are also

fundamental for inclusive growth

Argentina

Germany

TurkeyChile

United Kingdom

Brazil

PortugalSpain

Mexico

United StatesFrance

Shanghai-China

Australia Japan

Italy

FinlandCanada

Korea

Indonesia

300

350

400

450

500

550

600

051015202530

Mea

n

sco

re, O

ECD

ave

rage

= 5

00

Percentage of variance in performance explained by the PISA index of economic, social

and cultural status (r-squared x 100)

Strength of the relationship between performance and socio-economic background above the OECD average impact

Strength of the relationship between performance and socio-economic background not statistically significantly different from the OECD average impact

Strength of the relationship between performance and socio-economic background below the OECD average impact

Above-average reading performanceBelow-average impact of socio-economic

background

Below-average reading performanceBelow-average impact of socio-economic

background

Below-average reading performanceAbove-average impact of socio-economic background

Above-average reading performanceAbove-average impact of socio-economic background

OEC

D

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Income generation: The policy determinants of GDP per capita

Basic growth framework anchored in production function approach has allowed for multiple policy channels to be explored and identified

GDP per capita

EmploymentLabour Productivity

Geography

Framework conditions and institutions

Education policies

Human capital

Innovation policies

Knowledge-based capital

Product and financial market policies

Physical capital Life expectancy

Labour market policies

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rk 2. Health outcomes (non-material dimension)

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cyLife expectancy: Substantial improvement in EMEs

Vast majority of OECD countries experienced a significant reduction in the ratio of bottom to middle incomes amid diverging trends in overall income inequality

1.1.1. Life expectancy at birth, 2009 (or nearest year), and years gained since 1960

JapanSw itzerland

ItalySpain

Australia

Life expectancy at birth, 2009 Years gained, 1960-2009

United KingdomGermanyGreeceKorea

IsraelIceland

Sw edenFranceNorw ay

New Zealand

PolandMexicoEstonia

Slovak Republic

CanadaLuxembourg

OECDDenmark

NetherlandsAustria

BelgiumFinlandIreland

Portugal

ChinaBrazil

SloveniaChile

United StatesCzech Republic

IndonesiaRussian Fed.

IndiaSouth Africa

HungaryTurkey

83.0

82.3

81.8

81.8

81.6

81.6

81.5

81.4

81.0

81.0

80.8

80.7

80.7

80.6

80.4

80.4

80.3

80.3

80.3

80.0

80.0

80.0

79.5

79.5

79.0

79.0

78.4

78.2

77.3

75.8

75.3

75.0

75.0

74.0

73.8

73.3

72.6

71.2

68.7

64.1

51.7

405060708090

Years

15.2

10.9

12.0

12.0

10.7

9.9

8.6

8.3

10.7

7.2

9.7

9.4

11.3

7.1

11.7

9.6

11.2

10.4 27.9

10.2

11.0

10.0

15.6

11.2

6.6

10.5

21.4

8.3

6.7

8.0

17.8

6.5

4.4

6.0

25.5

26.7

18.1 30.0

0.0

21.7

2.6

0 5 10 15 20 25 30

Years

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cyHealth status the policy determinants of health

outcomes

Missing determinants such as poverty, exclusion, discrimination and job insecurity. Less of a problem if they correlate with income inequality

Health care

provisionsPollution

Life Expectancy

Education Life style

Environmental policies

Productionactivites (pro-

growth policies)

Educationalpolicies

Health policies:SpendingEfficiency

Household income

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Chile and Mexico saw notable contractions in inequality

(Gini coefficient)

OECD countries have experienced what could be referred to as a form of cross-country “convergence”

Changes in inequality against initial level, mid-1990s to late 2000s

AUSAUT

BEL

CAN

CZE

DNK

FIN

FRADEU

GRC

HUN

IRL

ITA

JPNLUX

MEX

NLD

NZL

NOR

PRTESP

SWE

TUR

GBR

USA

CHL

ISR

-0.1

-0.075

-0.05

-0.025

0

0.025

0.05

0.075

0.2 0.225 0.25 0.275 0.3 0.325 0.35 0.375 0.4 0.425 0.45 0.475 0.5 0.525 0.55

A. InequalityChange

Initial level

Correlation coefficient= -0.76

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Income distribution: Beyond the Gini

Chile has done better in the lower half of the distribution

Vast majority of OECD countries experienced a significant reduction in the ratio of bottom to middle incomes amid diverging trends in overall income inequality

AUSAUT

BEL

CAN

CZE

DNK FIN

FRADEU

GRC

HUN

IRL

ITA

JPNLUX

MEX

NLDNZL

NOR

PRT

ESP

SWE

TUR

GBR

USA

CHL

ISR

-0.1

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

-0.3 -0.25 -0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7

''Overall'' income inequality

A. Developments in the lower half of the income distribution and in "overall" inequality

Increased overall inequality but decreased inequality in the lower half of the income distribution

Increased overall inequality as well as in the lower half of the income distribution

Decreased overall inequality but increased inequality in the lower half of the income

Decreased overall inequality as well as in the lower half of the income distribution

Inequality in the lower half of the income distribution

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Mild decline in the Gini in Spain but falling income at

the low end of the distribution

Relative advantage for the middle class, combined with losses for the poor in absolute terms

-10

0

10

20

30

40

50

60

70

80

90

100

-10 -8 -6 -4 -2 0 2 4 6 8 10 12

Bottom to top-sensitive income standards

Percentage growth of income standard

Mean income

Growth in income standards between the mid-1990s and late-2000s

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Important to understand how GDP per capita trickles

HH incomes at different point of the distribution

Mean and median incomes have in many countries lagged GDP growth during the pre-crisis period

Real annual growth rates in GDP, mean and median income

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

B. Mid 90s-20071

Median income Mean income GDP per capita

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rkLinking policies to outcomes: The case of household

income and life expectancy

Moving from GDP to household income is not a problem from a measurement perspective but less straightforward from the point of view of linking to policies to incomes

Living standards

Household Income Life Expectancy

MedianMean Bottom

GDP per capita Income generation

Income distribution

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rkPotential policy trade-offs

1. Growth policies

May raise incomes for a majority but also entail higher air or water pollution : unclear net effect health and living standards

2. Environmental policies

May lower GDP per capita and household disposable income but still improve living standards through better health

3. Health policies

Higher spending on health can raise life expectancy but could also crowd-out other types of public or private investment (or consumption)

Higher life expectancy may lead to higher employment and GDP but only if working life is adjusted in proportion

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sGrowth policy priorities for Brazil, Chile and Mexico

Brazil Chile Mexico

Enhance outcomes and equity in education (X)

X X X

Ease EPL for regular workers (X) / extend UI benefits (Y)

X / Y X

Lower labour tax wedge (X) X

Promote labour force participation of women (X) / older workers (Y)

Y X

Lower barriers to entry and competition (X) / investment in infrastructure (Y) / to FDI (Z)

X / Y X / Z

Strengthen competition law X

Improve efficiency of financial markets X

Improve rule of law X

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Thank you !