OECD says inequality causes slower growth

Widening inequality creates a drag on growth that can be counteracted by tax policies to benefit the less well-off, according to the Organisation for Economic Co-operation and Development.

The Paris-based group said it undermines growth by preventing disadvantaged people from accessing education to develop their skills, impeding social mobility. To offset the damage, policy- makers need to be concerned with the general welfare of the bottom 40% of society and not just the poverty of the lowest 10%.

The study taps into a global debate this year about inequality, an issue also raised by US Federal Reserve Chair Janet Yellen in October when she questioned the disparities of wealth and income growth.

According to the OECD, inequality knocked about 6 to 7 percentage points off US gross domestic product growth between 1990 and 2010, while the UK, Italy and Mexico were among countries that also experienced a drag.

The report “challenges the view that policymakers necessarily have to address the trade-off between promoting growth and addressing inequality,” the OECD said. “Policies that help to limit or reverse inequality may not only make societies less unfair, but also wealthier.”

In general, a widening in inequality comparable to that seen in OECD states over the past two decades would slow growth by a “statistically significant” 0.35 percentage point a year, resulting in a cumulative loss of 8.5% over a quarter century.

“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,” said Angel Gurria, secretary-general of the OECD, in a statement.

“Countries that promote equal opportunity for all from an early age are those that will grow and prosper,” it said. The analysis is based on the Gini coefficient scale, which measures inequality on a scale from zero to 100.