Transcript The Economy in 2010 – and some alternatives

Income Inequality and
Economic Development
4 March 2012
Bill Rosenberg
Policy Director/Economist
N Z Council of Trade Unions
[email protected]
Overview
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Growing inequality of increasing concern
Cause of major social unrest but also has
significant economic effects
Brief survey of recent research
– Economic effects
– Drivers
Implications for agreements on international
commerce like TPPA
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Growing inequality
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Rapidly growing inequality, highest levels in
some OECD countries since 1920/30s
 Revolutions in North Africa
 Concerns shown
– OECD
– IMF, ILO
– Chief Economic Advisor to the US
President
– “Occupy” movement…
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Economic effects of inequality
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Wide range of social and health indicators
worsened by high inequality:
– violent crime, imprisonment rates, infant
mortality, mental illness, obesity, teenage
births, dropping out from school, adult literacy.
– Economic as well as social cost
– Cost to health, education, welfare, justice and
prisons services as well as economic potential
Source: “The Spirit Level: Why More Equal Societies Almost Always Do Better", by Richard Wilkinson and
Kate Pickett, publ. Allen Lane, 2009.
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Economic effects of inequality
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IMF research: higher levels of inequality
– Build up unsustainable household debt
levels leading to financial crisis (relatively
closed economies)
– Increase current account deficits and thus
international debt in financially open
economies (avoided by some developing
countries due to low financial openness)
– Shorter durations of GDP growth
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Economic effects of inequality
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European research
– Falling labour income share
loss of demand
– Hence poorer economic growth rates
– Find in a range of studies that the following
increase productivity growth:
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Demand growth
Wage growth
Stronger labour market regulation
– Wage growth drives productivity growth via
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Inducing firms to invest in labour-saving technology
Greater effort from employees
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Drivers of inequality
Include
 Trade, supply chains - effect on
developed countries (IMF, OECD, ILO)
– e.g. IMF: Technology in the past, but
“recent work assigns greater importance to
the role of trade, particularly to offshoring
and soaring production within multinational
firms”
– OECD: increased imports from low-income
countries if weak employment protection
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Drivers of inequality
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Financial globalisation (IMF, ILO)
– E.g. IMF: Stock market liberalization in emerging
markets; financial globalization, especially FDI
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Lowered employment protection; loss of
employee bargaining power (IMF, OECD, ILO,
Krueger)
Increased part time work (OECD)
Taxation
Skills, education
Technology? (challenges by IMF, Stockhammer)
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“Wage-led growth”
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Strong wage growth best for economic growth generates domestic demand
Individual relatively open economies can gain
advantage by suppressing wages and tapping
international demand (exports)
But the world is a closed economy
Hence economies suppressing wages do so at cost
of international growth
Economies suppressing wage growth do so at cost of
own productivity and domestic demand
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Implications for TPPA etc
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Trade and financial openness are not good for their
own sake – contribute to inequality – may undermine,
growth of GDP and productivity
Need balance – scope and balancing institutions
Labour rights – unions, employment protection –
important balancing institution
These suffer in open economies without domestic
government support
International agreements must enable this balance
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Conclusion
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Trade and financial openness increasingly out of
balance with needs of both social and economic
development
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Intrusion into domestic regulation, increased
power for capital (investors) carry further dangers
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Raises question whether the TPPA model is
sustainable socially and economically.
Thank you
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