The financial crisis revealed the significant limits of existing economic growth models, including the assumption that growing the pie is enough to generate improvements in well-being for all. A focus on pro-growth policies that target efficiency in isolation has led some governments to follow policy options that have brought about unintended social consequences. The debt-to-assets ratio of the bottom wealth quintile reached on average 123% in 2014 across OECD countries. Similarly, the average gap between the bottom and top quintile leverages amounted to 117 percentage points’ gap in 2014 across OECD countries. Mortgages and consumer loans contracts have often not been sufficiently secured or compiled with other assets through securitisation, particularly for the low-income groups (André, 2016).
It is important to reflect on the outcomes of the policy choices of the past, if we want to understand how we can move towards more inclusive growth. There is scope to better align structural and macroeconomic policies to sustain growth, for instance by ensuring that fiscal policy works counter-cyclically and that fiscal space is used for productive investments that improve opportunities of the worst-off (OECD, 2017p). Also, more could have been done to achieve these objectives by creating policy frameworks that open up markets and encourage private and public investment in people, cities, infrastructure and skills; and by helping those who may lose out from economic change to better adapt to new economic conditions, and to break the cycle of disadvantage.
The focus is on policies that promote win-win situations in terms of productivity growth and equity, because such policies can improve the perspectives of the bottom 40% of the income distribution. Well-designed packages of structural (e.g. labour and product market policies) and macroeconomic and financial market policies, as well as international coordination, could have eased the implementation of reforms and maximised their impact on growth, while promoting quality job creation and equity (OECD, 2018i). The main issue does not necessarily concern the way in which individual structural policies have been pursued to steer inclusive growth. The complexity of the inclusive growth agenda raises important challenges in terms of governance, as policy fragmentation needs to be reduced and institutional mechanisms integrated in order to design coherent policy packages and deliver them more effectively (OECD, 2016f).
An improved economic outlook provides an opportune moment to implement more ambitious structural reforms. Any short-term costs from reforms may be lower and shorter-lived when demand and job creation are stronger, especially if accompanied by complementary labour market reforms and income support that help displaced workers transition to new jobs and acquire new skills. Other actions needed to enhance inclusiveness, such as improving the participation of under-represented groups in the labour market, are also more likely to have durable benefits if implemented at a time of job-rich growth. Recent progress has, however, been modest in enacting reforms to reduce gender gaps, strengthen job creation and help workers find new jobs (OECD, 2018h).
Further efforts are also needed to exploit synergies and explore ways to mitigate trade-offs when implementing policies for inclusive growth. Some Going for Growth (OECD, 2018i) policy priorities cannot be unambiguously classified as pro-inclusive growth or not. Such is the case for reforms aimed at stimulating innovation and technological progress, including measures to reduce barriers to competition, firm entry and entrepreneurship. Progress along these lines is fundamental to spur productivity growth but may put further pressure on the relative demand for skilled workers through skill-biased technical change, and hence contribute to rising wage inequality among workers. At the same time, insofar as such reforms also contribute to job creation, they are likely to counteract reform-driven increases in wage dispersion, with an overall ambiguous effect on disposable income inequality. In a long-term perspective, competition and innovation policies may also contribute to enhance equity, for instance if they lead to a reduction in firms’ rents and undermine the market dominance of incumbents, while promoting social mobility (OECD, 2018i). Recent evidence suggests that intergenerational income mobility increases with the degree of entrepreneurship and innovativeness in the economy (Aghion et al., 2015; 2016).
Not every policy reform is a win-win for inclusive growth, though. Trade-offs may, for example, arise in the case of some tax and benefit reforms, such as shifting from direct to indirect taxes or reducing marginal income tax rates (OECD, 2018i). This is the case when robust empirical evidence on their income inequality impact is lacking or relatively limited, or when the impact is highly dependent on reform design. One example is product market reforms, which have been found to increase both employment and wage dispersion so that the overall effect on household disposable income inequality is ambiguous (OECD, 2018i). Reducing barriers to competition is one key policy lever to boost growth with gains materialising relatively quickly. The equity effects of product market reforms are likely to depend on reform design as well as on time horizon (OECD, 2018i).