Fact check: Does the gap between rich and poor affect a country's growth?
When leaders of the G20 recently committed to raising global economic growth targets by 2 per cent, there were criticisms that no targets were set for "inclusive growth".
This type of economic growth aims to benefit all members of a country, not just the wealthy.
Opposition foreign affairs spokeswoman Tanya Plibersek says economic growth is good, but has to be inclusive.
"There is terrific data from the OECD that shows that the larger the difference between the richest and the poorest, the less likely it is that a country's growth will be strong," she said on the ABC's Q&A on November 17.
"It is actually better for growth to have less inequality in a country."
The increasing gap between rich and poor
Ms Plibersek's claim specifically focuses on the differences between the richest and poorest in a country and how this affects growth.
The most widely accepted measure of inequality is the "gini coefficient", which can be applied in different ways. For instance it may measure income levels of people or disposable incomes or net wealth.
A gini coefficient of zero expresses perfect equality while a gini coefficient of 1 expresses maximum inequality.
A May 2014 report by the OECD, a group of 24 of the richest countries, says income inequality has widened in most member countries over the last 30 years.
Even countries like Germany, Denmark, and Sweden, which are traditionally low in income inequality, have seen an increase.
"The gini coefficient, a standard measure of inequality, increased from 0.29 in the mid-1980s to 0.32 in 2010 on average in OECD countries," it said.
The report says in the United States 47 per cent of total income growth over the last 40 years went to the top 1 per cent of earners. In Canada it was 37 per cent, and the figure stood at around 20 per cent in Australia and the United Kingdom.
However the OECD notes that "widening inequality does not necessarily imply an increase in poverty."
For instance, even while inequality has grown the report says "there has been significant improvement in adult literacy, school enrolment and educational attainment worldwide".
What is inclusive growth?
There is a large body of international research devoted to the topic of inclusive growth.
A briefing paper prepared for the recent G20 meeting by the "C20" - or "Civil Society 20" - lists various ways of measuring the concept developed by the OECD, the International Monetary Fund, the World Bank, the International Labour Organisation, the Asian Development Bank, and Oxfam.
The OECD says inclusive growth is "a new approach to economic growth that aims to improve living standards and share the benefits of increased prosperity more evenly across social groups".
One of the difficulties in discussing inclusive growth is that inequality can be measured by more than income.
In the OECD's May 2014 report it lists many ways "inclusion" can be assessed including: literacy; life expectancy measured against educational attainment; access to water supply and sanitation; having skilled medical professionals at a child's birth; and opportunities for women.
Has the OECD produced 'terrific data'?
The OECD launched an "initiative on inclusive growth" in response to the challenges of the slowdown that followed the global financial crisis. Its first workshop on inclusive growth was held in April 2013.
It has since had two more workshops and has produced a range of research.
In May 2014 it published a comprehensive 200-page report on the subject.
The OECD's body of work on inclusive growth contains comments about evidence of the impact of inequality on growth.
For example, at the second workshop of the OECD's inclusive growth initiative in February 2014, participants were told that "mounting evidence suggests that over the longer term inequality can diminish growth returns".
In a speech in June 2014, OECD secretary-general Angel Gurria said: "New work underway at the OECD confirms that the vicious cycle of inequality harms economic growth."
However, the OECD does not appear to have published conclusive data.
The report of the workshop also said: "The good news is that while many countries have witnessed an increase in income disparities, in spite of sustained growth prior to the [global financial] crisis, others have managed to grow strongly and at the same time narrow the income gap between rich and poor. These contrasting experiences show that there may not be a trade-off between equity and growth."
The May report said: "The arguments about the impact of the level of inequality on economic growth go both ways."
In his June speech, Mr Gurria referred to the inclusive growth initiative as a whole and said: "This is still pretty much work in progress..."
Fact Check asked Ms Plibersek for the basis for her comment. Her office referred to a speech she made to the McKell Institute on inclusive growthwhich included comments from the IMF managing director, Christine Lagarde.
In that speech she referenced a report by the International Labor Organisation, which says the OECD estimated that "on average, an increase in income inequality by 1 gini point lowers yearly GDP per capita growth by around 0.2 percentage points". The report then says "while more research is needed to establish causality and the channels through which inequality effects growth, the strong positive association suggests inequality cannot be ignored".
Fact Check also asked the OECD what data was available on the subject. A spokesman replied: "The OECD is continuing to work on this issue. An important paper on inequality and growth with the latest results of our work will be published on December 9."
Link between inequality, growth 'inconclusive'
The OECD's May report talks about the "inequality-growth nexus".
It refers to contrasting experiences. "More than three out of four OECD countries, including traditionally more equal countries, registered widening inequality this century when growth was rapid," it said. However, after the global financial crisis, when growth weakened in many countries, it says "this trend has accelerated".
It notes a number of ways wider inequality might reduce growth:
voters could insist on higher tax, regulation and even confiscation of property
it could cause social unrest, and economic chaos
But it also notes several ways in which greater inequality might increase growth
if highly educated people are much more productive, with higher rates of return, it may encourage more people to seek an education
if rewards are high, people might work harder and be prepared to take more risks to get higher incomes
The report says many empirical attempts to explain the links between inequality and growth have been "inconclusive".
It concludes: "Sometimes increasing inequality will be a prerequisite for higher growth returns. Often, however, tackling inequality will be an important driver for improving growth."
The verdict
While many leading international economists are calling for growth to be more inclusive, the most comprehensive report from the OECD on inclusive growth, published in May 2014, says that sometimes increasing inequality will be a prerequisite for higher growth returns. On the other hand it says, often, tackling inequality will be an important driver for improving growth.
Ms Plibersek's definitive claim that the "OECD has terrific data" is overreach.
Sources
ABC News story, G20 Leaders' Communique, November 16, 2014
Tanya Plibersek, Q&A, ABC, November 17, 2014
OECD, Report: "Making Inclusive Growth Happen:, 2014
C20 Australia 2014, Briefing paper "Inclusive Growth"
OECD, Initiative on Inclusive Growth
OECD, Inclusive Growth, First Workshop: Defining and Measuring, April 3, 2013
Angel Gurria, OECD Secretary-General, speech, "Inclusive Growth: The way forward for the US", June 12, 2014
Tanya Plibersek, speech, McKell Institute Address "Inclusive Growth", November 5, 2014
International Labour Organization, report "G20 labour markets: outlooks, key challenges and policy responses", 2014
_Editor's note: On December 9, 2014, after this fact check was published, the OECD released its Focus on Inequality and Growth report. Fact Check's verdicts are based on evidence available at the time. _*
