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Inclusive Growth:
A framework for linking living standards to policies Alain de Serres OECD Economics Department
New Approaches to Economic Challenges (NAEC)
Seminar, 3 February 2014
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Framework for linking outcomes to policies
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Incl
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What the framework should aim to achieve
1. Provide a clear link between individual dimensions of the welfare function and policies
2. Identify the main channels of transmission
3. Make explicit the main policy trade-offs and synergies
4. Be sufficiently flexible to be adaptable to country-specific challenges and circumstances
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A framework for policy analysis
Outcomes and their distribution:
Material well-being: Income, consumptionjobs
Quality of life: HealthEducationPersonal SecurityEnv. quality of life…
Welfare function
depending on outcomes
Production function or process
Policies
EconomicFinancialCompetition
LabourSocialHealth policies
Education policies
Return on physical and human capital, demand for jobs …
Other drivers(institutions; norms; exogenous factors)
Sources of growth, equality of opportunities
Going for Growth /
Green growth /
Divided we stand
Work on education and health etc.Work on side-effects of growth policiesWork on equality of outcomes and opportunities
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Linking outcomes to policies requires that a number of conditions be fulfilled
1. A good understanding of the key drivers of the outcomes in the welfare function is critical
Firm link to policies requires that processes generating outcomes be well understood and defined
Supported by analytical framework
2. The identification of robust empirical relationships between living standards and policies is also important
Could be more difficult for quality-of-life aspects of certain dimensions (e.g. environment, education)
Constraint of data availability over time and across countries
3. The amenability of outcomes to policy instruments will also determine the choice of variables
Estimated economic impact must be significant
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The case of income and health status
1. Health status (non-material dimension)
Proxied by life expectancy
Matters for both material and non-material living standards
2. Income generation (material living standards)
Measured by mean household disposable income…
… but link to policies anchored in growth accounting framework (drivers of GDP per capita.
3. Income distribution
How aggregate income trickles down across various parts of the distribution
Mean, median, lower part of the distribution
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Linking policies to outcomes
From production to income to living standards taking into account health outcomes and inequality
Income distribution
Production (income generation)
Living standards
Household Income Life Expectancy
MedianMean Bottom
GDP per capita
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1. Health outcomes (non-material dimension although can have a material impact)
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Life expectancy: Substantial improvement in EMEs
Vast majority of OECD countries experienced a significant reduction in the ratio of bottom to middle incomes amid diverging trends in overall income inequality
1.1.1. Life expectancy at birth, 2009 (or nearest year), and years gained since 1960
JapanSw itzerland
ItalySpain
Australia
Life expectancy at birth, 2009 Years gained, 1960-2009
United KingdomGermanyGreeceKorea
IsraelIceland
Sw edenFranceNorw ay
New Zealand
PolandMexicoEstonia
Slovak Republic
CanadaLuxembourg
OECDDenmark
NetherlandsAustria
BelgiumFinlandIreland
Portugal
ChinaBrazil
SloveniaChile
United StatesCzech Republic
IndonesiaRussian Fed.
IndiaSouth Africa
HungaryTurkey
83.0
82.3
81.8
81.8
81.6
81.6
81.5
81.4
81.0
81.0
80.8
80.7
80.7
80.6
80.4
80.4
80.3
80.3
80.3
80.0
80.0
80.0
79.5
79.5
79.0
79.0
78.4
78.2
77.3
75.8
75.3
75.0
75.0
74.0
73.8
73.3
72.6
71.2
68.7
64.1
51.7
405060708090
Years
15.2
10.9
12.0
12.0
10.7
9.9
8.6
8.3
10.7
7.2
9.7
9.4
11.3
7.1
11.7
9.6
11.2
10.4 27.9
10.2
11.0
10.0
15.6
11.2
6.6
10.5
21.4
8.3
6.7
8.0
17.8
6.5
4.4
6.0
25.5
26.7
18.1 30.0
0.0
21.7
2.6
0 5 10 15 20 25 30
Years
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Health status: the policy determinants of life
expectancy
Missing determinants such as poverty, exclusion, discrimination and job insecurity. Less of a problem if they correlate with income inequality
Health care
provisionsPollution
Life Expectancy
Education Life style
Environmental
policies
Productionactivites (pro-
growth policies)
Educationalpolicies
Health policies:SpendingEfficiency
Household income
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2. Production or income generation (material living standards)
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Inco
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Income generation:
The policy determinants of GDP per capita
Basic growth framework anchored in production function approach has allowed for multiple policy channels to be explored and identified
GDP per capita
EmploymentLabour Productivity
Geography
Framework conditions and institutions
Education policies
Human capital
Innovation policies
Knowledge-based capital
Product and financial market policies
Physical capital Life expectancy
Labour market policies
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Inco
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gen
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Income generation:
The policy determinants of GDP per capita
This simple breakdown into labour productivity and employment would be necessary to have the latter dimension explicitly linked to policies
GDP per capita
EmploymentLabour Productivity
Geography
Framework conditions and institutions
Education policies
Human capital
Innovation policies
Knowledge-based capital
Product and financial market policies
Physical capital Life expectancy
Labour market policies
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Income generation:
The policy determinants of GDP per capita
Further decomposing labour productivity into its main underlying drivers would allow for a richer set of policies to be included and to have explicit link to additional dimensions such as education
GDP per capita
EmploymentLabour Productivity
Geography
Framework conditions and institutions
Education policies
Human capital
Innovation policies
Knowledge-based capital
Product and financial market policies
Physical capital Life expectancy
Labour market policies
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3. Income distribution: From GDP to average household disposable income and across the distribution
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Important to understand how GDP per capita trickles
HH incomes at different point of the distribution
Mean and median incomes have in many countries lagged GDP growth during the pre-crisis period
Real annual growth rates in GDP, mean and median income
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
B. Mid 90s-20071
Median income Mean income GDP per capita
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OECD countries have experienced a
form of cross-country “convergence”
This is based on the Gini coefficient over a specific time period and sample of countries.
Changes in inequality against initial level, mid-1990s to late 2000s
AUSAUT
BEL
CAN
CZE
DNK
FIN
FRADEU
GRC
HUN
IRL
ITA
JPNLUX
MEX
NLD
NZL
NOR
PRTESP
SWE
TUR
GBR
USA
CHL
ISR
-0.1
-0.075
-0.05
-0.025
0
0.025
0.05
0.075
0.2 0.225 0.25 0.275 0.3 0.325 0.35 0.375 0.4 0.425 0.45 0.475 0.5 0.525 0.55
A. InequalityChange
Initial level
Correlation coefficient= -0.76
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Income distribution: Beyond the Gini
Vast majority of OECD countries experienced a significant reduction in the ratio of bottom to middle incomes amid diverging trends in overall income inequality
AUSAUT
BEL
CAN
CZE
DNK FIN
FRADEU
GRC
HUN
IRL
ITA
JPNLUX
MEX
NLDNZL
NOR
PRT
ESP
SWE
TUR
GBR
USA
CHL
ISR
-0.1
-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
-0.3 -0.25 -0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7
''Overall'' income inequality
A. Developments in the lower half of the income distribution and in "overall" inequality
Increased overall inequality but decreased inequality in the lower half of the income distribution
Increased overall inequality as well as in the lower half of the income distribution
Decreased overall inequality but increased inequality in the lower half of the income
Decreased overall inequality as well as in the lower half of the income distribution
Inequality in the lower half of the income distribution
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Mild decline in the Gini in Spain but falling income at
the low end of the distribution
Relative advantage for the middle class, combined with losses for the poor in absolute terms
-10
0
10
20
30
40
50
60
70
80
90
100
-10 -8 -6 -4 -2 0 2 4 6 8 10 12
Bottom to top-sensitive income standards
Percentage growth of income standard
Mean income
Growth in income standards between the mid-1990s and late-2000s
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Potential policy trade-offs
1. Growth policies
May raise incomes for a majority but also entail higher air or water pollution : unclear net effect health and living standards
2. Environmental policies
May lower GDP per capita and household disposable income but still improve living standards through better health
3. Health policies
Higher spending on health can raise life expectancy but could also crowd-out other types of public or private investment (or consumption)
Higher life expectancy may lead to higher employment and GDP but only if working life is adjusted in proportion