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UN Capital Development Fund (UNDCF) Workshop Inequality and Inclusive Growth in the Post 2015 Framework: How can the new goals address inequalities and foster inclusive growth?

Ms. Shamshad Akhtar Assistant Secretary-General for Economic Affairs Department of Economic and Social Affairs

7 March 2013, New York

The Millennium Declaration committed to creating a more equal and just world, recognizing equality and solidarity as essential to international relations in the twenty-first century. The Millennium Development Goals (MDGs), which emerged as practical and measurable articulation of the Millennium Declaration, have been source of inspiration and change. Yet, despite their many successes, they did not integrate all principles outlined in the Millennium Declaration, including equality.

Inequality manifests itself in different ways. Unequal opportunities, social and regional disparities, discrimination in labour or credit markets and unequal asset endowments. All have significant effects in the life prospects of individuals and their generations all over the world. While income inequality does not reflect this multidimensional character, it has traditionally provided a quantifiable measure that can be monitored and can inform public policy.

Inequality trends

Since the Millennium Declaration of utmost concern is that inequality within countries has increased, though inequality between countries has decreased.Income inequality within national borders has been a long-standing feature of human societies. Yet, the magnitude, complexity and broad scope of the deterioration observed in the last 30 years make it stand apart. Inequality has increased in most developed and developing countries. In about two thirds of countries, with available data, income inequality rose between 1990 and 2005.

From mid-1980s to the late 2000s, income inequality rose in 17 out of the 22 OECD countries, including some with higher levels of inequality at the beginning of the period. Income inequalities have also grown in most emerging market countries, with the exception of several Latin American countries. In Brazil, as in several Latin American countries, social programmes – targeting human capital through education and health services, as well as cash transfers – and labour market reforms have played a major role in reducing income inequalities.

Rapid growth in several developing and transition economies helped arrest or reverse the divergence in mean incomes since 2000. African countries grew around 4 per cent annually; Eastern European countries grew around 6 per cent; and Latin American countries grew around 3 per cent in 2001-2006. Global financial crisis disrupted these trends and as developed countries’ growth came to a halt and emerging and developing economies continued to grow, albeit at lower rates.

A recent World Bank policy research working paper , found that for the first time since the Industrial Revolution, there might have been a decline in global inequality (among individuals). The estimated global Gini decreased by 1.4 points between 2002 and 2008, following a long period during which global inequality rose to reach a very high plateau. Although it is too early to know, it is possible that inequality may be setting onto a downward path.

The main reason for the seeming decline in global inequality is the fast growth of very populous countries, most notably China and India. Nonetheless, inequality within China and India continues to increase, which can potentially lead to greater global inequality in the future.

Inequality-Growth Nexus

Up until recent years, the position that inequality is good for growth was widespread. Inequality was understood as providing incentives to accumulate and produce more and more efficiently. However, more recently the perception has changed and inequality is more and more seen as a serious handicap. According to Branko Milanovic , the increasing importance of human capital in development in relation to physical capital has been behind the shift towards the reverse view.

An ever increasing body of evidence shows that highly unequal societies have shorter and less robust periods of economic growth . More unequal countries are also more susceptible to financial crises . Inequality also reduces the impact of economic growth on poverty reduction . Crime, disease and environmental problems are found to be exacerbated by inequality. There is also evidence that high-income individuals tend to save during economic slowdowns when risk rises, while low-income individuals tend to consume marginal income, implying that transfers from high to low income individuals can be beneficial to growth.

Overall, inequality within countries represents a serious handicap, not only in social terms, but also in terms of political access to decision making as economic status and political power tend to be reinforcing.

Diagnostics regarding the sources of increasing inequality

For the development agenda to be sustainable, addressing income inequality and social disparities will need to be mainstreamed and properly integrated in the Post-2015 policy framework. In this context getting the diagnostics right will be key.

In a number of countries, both high and low income, good economic growth performance has not been accompanied by equally rapid rates of job generation, creating what is perceived as ‘jobless growth.’ Even for those employed, decent work “deficits,” in the form of underemployment, poor quality and unproductive jobs, unsafe work and insecure income, rights that are denied and gender inequality are widespread.

This has gone hand in hand with a rise in power in the financial sector and increased ‘rent seeking,’ which has impacted regulatory, tax and public investment policies and distorted resource allocation.

Financial markets have managed to detach themselves from the real economy, tying wealth creation to the rapid accumulation of debt, rising asset prices, and rent seeking through bonuses and stock options, rather than to productivity improvements and increasing incomes and aggregate demand. Furthermore, innovation has been increasingly channelled to financial engineering rather than to technological progress.

What can be done?

The impacts of globalization and technological change on domestic income distribution are not uniform. Rather, they depend on initial conditions and on how macroeconomic, financial and labour market policies interact with the forces of globalization and technological development. Structural changes do not necessarily lead to greater inequality if appropriate employment, corporate governance, competition policies, and wage, and income distribution policies are in place.

In a globalized and high-tech world, education at all levels, from pre-school to tertiary education, and job training and retraining, along with effective health care, are crucial to increasing equality of opportunities, both in developed and in developing countries.

Targeted tax and redistribution policies have proven effective in reducing inequality, especially when they provide incentives to improve human capital through education and health. Latin America recent experience is a case in point. Income-transfer mechanisms should therefore be coupled with appropriate training.

Well-structured policies to reduce income gaps do not necessarily reduce incentives to invest in fixed capital, innovation, and skills acquisition. On the contrary, in the context of globalization and open economies, the reduction of inequality that can be achieved is more likely to accelerate growth and employment creation than the past trend towards less progressive taxation and lower social transfers.

Yet, these policies only address the “real” side of the story. Policies that tax ‘rent seeking’ activities based on intermediating, instead of producing, would be particularly effective to address the “financial” side too. Taxes and policies to curb short term oriented profits and bonuses could serve the double function of reducing oversized profits while also changing incentives in the financial sector towards a longer-term decision frame and orientation. Recent proposals to curb executives’ pay in Switzerland and the European Union show that despite the financial sector’s influence and lobbying efforts, the panorama might be starting to change.

Although more research is necessary, financial inclusion has been shown to provide positive effects on poverty eradication. In addition, greater access to credit for SMEs could have a significant impact on reducing inequality. Thus financial sector policies are an important tool for decreasing inequality.

How can inequality be mainstreamed in the post-2015 agenda?

The Post-2015 UN Task Team has suggested that goals, targets and indicators should be carefully considered and selected so that they most effectively and powerfully address inequalities and the factors perpetuating them. It has suggested different options that could be considered in the debate among a wide range of stakeholders over the next several months and beyond as the process for constructing the post-2015 development agenda gets underway.

One recommendation has been to introduce specific goals on inequality. Reflecting inequality at the “goals level” would certainly give the issue more prominence, though it could be challenging to define precise goals, especially on a global level. To be effective, such goals would most likely have to focus on national indicators, and take into account the disparities in inequalities across countries, as well as recent trends.

Reflecting inequality in other goals is probably realistic and easier to implement. Focus on addressing dominant inequalities across individual human development indicators and sub-national targets such as gender and rural-urban indicators would be more pertinent.

At the same time, to dampen inequalities, emphasis on drivers and enablers such as the right governance to ensure targeted support reaches and benefits the lower income quintile population and more conducive financial sector policies which help revive real sector and support financial inclusiveness which empowers people with opportunities.

Finally, new technologies and platforms such as social media hold the promise of greatly widening civic participation in the monitoring of development goals – set, acted on and owned locally as well as sub-nationally and nationally.

Conclusion

Addressing all forms of inequality, alongside human rights, peace, and security, which if managed well, create conditions for equality. A more inclusive and equal society reinforces sustainable development. While tracking Gini coefficient and other measures of inequality helps track trends in inequality, but it does not solve the problem of inequality. In current discussion of the policy framework for post 2015 development agenda it would be appropriate to develop at country level appropriate income inequality reduction strategies. Income inequality cannot be fixed by concentrating on few ad hoc variables. It has to be driven by strong political conviction that fosters inclusive growth policies and focuses on means of implementation.

Prudent management of fiscal policy that helps redistribute economic gains and mobilizes and reorients funding for investments in human capital, social services and leverages public policy to generate jobs that not only targets the poor (a goal on which there is ample agreement) but reaches the middle income strata (underserved by the MDGs). Having better access to quality education and health services, housing and clean water, land, financing and judicial recourse means that poor and excluded people can become better equipped to contribute to economic growth, care for their children and embrace newer low-carbon approaches to production and consumption.

The changing world is presenting new challenges and risks to human progress. A major challenge of human development for the next two decades will be to unite poverty reduction and social progress in ways that protect the planet from climate change, and narrow the gaps, address their causes and link greater governmental accountability for all inhabitants with social and individual responsibility, capacities and participation. To achieve this, the emerging post-2015 agenda must make reducing all major forms of inequalities an integral part of its goals — just as poverty reduction was a central aim of the MDGs.

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