In developing countries, growth only benefits a very small proportion of the population. These intra-country inequalities undermine the political, social and economic balances. How to make this growth more inclusive?

Photo: Contrast / Chris Hoare - CC Flickr
Photo: Contrast / Chris Hoare - CC Flickr

Extreme poverty fell by half between 2000 and 2015, with the number of people living on less than USD 1.90 a day dropping from 1.9 billion to 836 million over this period. At the same time, intra-country inequalities (i.e. within the same country) have increased everywhere, undermining the political, social and economic balances of the countries the most concerned. How to make growth and development more inclusive? Mario Pezzini, Director of the OECD Development Centre and Special Advisor to the OECD Secretary General, takes a look at this nagging question.

 

Inequalities are increasing around the world. According to data from Crédit Suisse, global wealth is in the hands of 1% of the population. Is this being debated at the OECD and in what terms?

It is an extremely important debate, and we started by working on this topic in OECD countries, with an initial version of a report entitled in 2008 “Growing Unequal?”. We subsequently removed the question mark, as the fact was irrevocable. We published another report in 2011, “Divided We Stand, Why Inequality Keeps Rising” about the gap between the rich and poor in OECD countries.

In developing countries, intra-country inequalities follow the same trend. These countries have had high growth rates for several years, but this growth only benefits a very small proportion of the population. There has therefore, indeed, been a general increase in the standard of living, which has lifted thousands of people out of extreme poverty. However, at the same time, only certain segments of the population have fully benefited from this national enrichment.


 

Growth has consequently given rise to frustrations. When you are in a traffic jam and see the lane next to you moving, you are pleased, because you know that you are also going to move forward. If this does not happen after a quarter of an hour, you start to get angry and want to cross the line. This is the type of frustration caused by non-inclusive growth, which carries threats of violence.

 

Are certain regions more affected than others?

Latin America has the highest levels of intra-country inequality in the world, with differences between countries: Brazil, Mexico and Peru are more unequal than Uruguay for example. However, policies have been implemented, such as the Bolsa Familia scheme in Brazil and Progresa, also known as Oportunitades, in Mexico, which make conditional payments, giving preference to women, if their children go to school and see a doctor regularly. These redistribution mechanisms have reduced inequalities, as they are set up at the same time as minimum wage policies, which are quite active in Brazil, and progress in education.

In Africa, intra-country inequalities have also increased in recent years, despite record growth rates. Many countries owe their recent good macroeconomic performance to exports of their basic agricultural products (rice, cocoa…), or to the exploitation of their natural resources (oil in Angola and Nigeria, ores in South Africa…). In both cases, they are growth drivers that are not inclusive or diversified, generate little employment, and are unstable due to the fluctuations in global commodity prices. Not enough countries have managed to engage in structuring national agricultural processing activities, or in implementing strategies to diversify economies. It is for this reason that increasingly unequal societies are emerging.


 

Should capital owners, billionaires for example, be taxed more heavily?

Beyond the question of dollar billionaires, the number of which is increasing in the developing world, there is very clearly a need for a real tax reform in these countries, in order to increase taxes and the capacity to collect them. We repeat this in our recommendations. In addition, companies which partly operate in developing countries must pay taxes where they produce wealth.

There has been headway. The OECD has fought to eliminate tax havens as much as possible, by publishing a list of them for example. We have facilitated the automatic exchange of information between countries concerning people who deposit money in banks. Finally, in June 2015, we launched a project called “Tax Inspectors Without Borders” with the United Nations Development Programme (UNDP). The aim is to allow tax inspectors to help their colleagues in other countries, faced with multinational enterprises with strong legal departments.


 

Do we need to reform the global economic and financial system as it operates today?

This is the big issue. Some, such as Thomas Piketty (see Capital in the Twenty-First Century, published in 2013, editor’s note), think that the machine itself produces inequalities, because the wealth and profits derived from capital ownership increase at a faster rate than growth. Consequently, how can inequalities be reduced with systematic or periodic policies? The other hypothesis consists in integrating more equality into growth mechanisms. Inclusive growth is a watchword at the OECD.

 

By what means?

Redistribution and social policy mechanisms are already in place in OECD countries, with taxes and the redistribution role played by the State. The average Gini coefficient for the European Union (30) consequently remains lower than in Brazil (51.5 in 2014), Colombia (53.5 in 2014), South Africa (63.1 in 2013) and Nigeria (48.8 in 2013). In developing countries, there is no notable difference in inequality before and after taxes, partly because these States do not manage to either collect taxes efficiently or redistribute the revenues equitably.

 

On the same subject read the analysis “Putting an end to inequalities, proposed by the website Planet for life, coordinated by Tancrède Voituriez (Iddri), Emmanuelle Cathelineau (AFD) et Françoise Rivière (AFD).

 

The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.

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