Gulf between rich and poor drags down growth, OECD finds

9 Dec 14

Rising inequality is hitting economic growth in many countries and government action to reduce income disparities could boost worldwide output, the Organisation for Economic Co-operation and Development has found.

By Richard Johnstone | 9 December 2014

In an analysis of global trends, the economic think-tank concluded that countries where income inequality was falling had higher growth in the two decades leading up to the 2008 financial crisis.

Greater equality helped increase gross domestic product per capita in Spain, France and Ireland by at least 3.6 percentage points over this 20-year period, the report stated.

By contrast, rising inequality was estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand over the same interval. The report, Trends in income inequality and its impact on economic growth, also concluded that in Italy, the United Kingdom and the United States, cumulative growth rates would have been six to nine percentage points higher had income disparities not widened during the period of the study.

OECD secretary general Angel Gurría said the single biggest impact on growth was the gap between lower middle-class and poor households and the rest of society.

The disparity leads to fewer educational opportunities for children from poorer backgrounds, which lowers social mobility and hampers skills development. In turn, the reduced availability of skilled individuals knocks economic prospects at the national level, the report asserted.

‘This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate,’ Gurría said. ‘Countries that promote equal opportunity for all from an early age are those that will grow and prosper.’

The report called for government action to tackle inequality, but also warned anti-poverty programmes would not be enough. The OECD said both cash transfers and improved access to public services, such as education, would be required to foster greater equality.