2013.11.15_OECD-ECLAC Regional Consultation_nora lusting

1. Inclusive Growth:
A framework for linking living
standards to policies
Alain de Serres
OECD Economics Department
15 November 2013
ECLAC-OECD joint workshop
Santiago, Chile

2. 2
IG: Framework for linking to policies
What the policy 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

3. 3
IG : Framework for linking to policies
A framework for policy analysis
Welfare function
depending on outcomes
Outcomes and their
distribution:
Material well-being:
Income,
consumption
jobs
Quality of life:
Health
Education
Personal Security
Env. quality of life
…
Production
function or process
Policies
Economic
Financial
Competition
Labour
Social
Health 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 policies
Work on equality of outcomes and opportunities

4. 4
IG : Framework for linking to policies
Linking outcomes to policies requires that a
number of related 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)
 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

5. 5
IG: Framework
The case of income and health status
1. 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)
2. Health status (non-material dimension)
 Proxied by life expectancy
 Matters for both material and non-material living standards
3. Income distribution
 How aggregate income trickles down across various parts
of the distribution
 Mean, median, lower part of the distribution

6. 6
IG: Framework
1. Income generation (material living
standards)

7. 7
OECD average
Lower half of OECD
IG : Income generation
Large differences in GDP per capita in middle-income
countries are mostly accounted for by productivity gaps
Russia
Chile
Mexico
Turkey
Brazil
South Africa
China
Indonesia
Except for Turkey and South Africa.
Percentage difference in
labour productivity3
Percentage GDP per capita difference
compared with upper half of OECD
countries1
Percentage difference in labour
resource utilisation2
-100 -80 -60 -40 -20 0 20
India
countries
-100 -80 -60 -40 -20 0 20 -100 -80 -60 -40 -20 0 20
OECD average
Lower half of OECD
Russia
Chile
Mexico
Turkey
Brazil
South Africa
China
Indonesia
India
countries
2012 2008

8. 8
IG : Income generation
Convergence in productivity levels has been uneven over
the last decade
Average growth in GDP per hour over 2001-11 against level in
USA
NOR
POL
PRT
SVK
SVN
GBR
ESP
SWE
CHE
TUR
Productivity growth could be higher in some countries considering the
11
10
9
8
7
6
5
4
3
2
1
scope for catching up
2001
AUS
AUT
BEL
CAN
CHL
CZE
DNK
EST
FIN
FRA
DEU
GRC
HUN
ISL
IRL
ISR
ITA
JPN
KOR
MEX NZL NLD LUX
RUS
BRA
CHN
IND
IDN
ZAF
EU
0
0 2.5 5 7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5 35 37.5 40 42.5 45 47.5 50 52.5 55
Level, US dollars, 2001
Average of growth rates, 2001-11
OECD average
OECD average

9. 9
IG: Income generation
Labour utilisation is generally high but so is informality
Share of persons in informal employment in total non-agricultural
employment, 2009
Russia² Chile³ Turkey South Africa Brazil Mexico Indonesia India
Per cent
Tackling informality would be good for growth (human capital
90
80
70
60
50
40
30
20
10
0
development and productivity) and inclusiveness (income prospects)

10. 10
IG : Income generation
Low female participation limits labour force participation
in some LACs
Per cent
Particularly low relative to total participation in Mexico, Turkey but
90
80
70
60
50
40
30
20
10
also low in Chile.
Labour force participation rates, 2011
0
Women Total

11. 11
IG : Income generation
Quality and equity of education are also
fundamental for inclusive growth
Strength of the relationship between performance and socio-economic background above the OECD average impact
Strength of the relationship between performance and socio-economic background not statistically significantly different from the OECD average impact
Strength of the relationship between performance and socio-economic background below the OECD average impact
Shanghai-China
United States
Above-average reading performance
Above-average impact of socio-economic
background
Germany
Turkey
Chile
Argentina
United Kingdom
France
Brazil
Portugal
Spain
Mexico
Australia Japan
Italy
Finland
Canada
Korea
Indonesia
600
550
500
450
400
350
300
30 25 20 15 10 5 0
Mean
score, OECD average = 500
Percentage of variance in performance
explained by the PISA index of economic, social
and cultural status (r-squared x 100)
Above-average reading performance
Below-average impact of socio-economic
background
Below-average reading performance
Below-average impact of socio-economic
background
Below-average reading performance
Above-average impact of socio-economic
background
OECD

12. 12
IG : Income generation
Income generation:
The policy determinants of GDP per capita
GDP per capita
Labour Productivity Employment
Geography
Knowledge-based
capital
Physical capital Life expectancy
Innovation policies
Product and financial
market policies
Framework conditions and institutions
Human capital
Education policies
Labour market policies
Basic growth framework anchored in production function approach has
allowed for multiple policy channels to be explored and identified

13. 13
IG: Framework
2. Health outcomes (non-material dimension)

14. 14
IG : Health and life expectancy
Life expectancy: Substantial improvement in EMEs
1.1.1. Life expectancy at birth, 2009 (or nearest year), and years gained since 1960
Life expectancy at birth, 2009 Years gained, 1960-2009
Japan
Sw itzerland
Italy
Spain
Australia
Israel
Iceland
Sw eden
France
Norw ay
New Zealand
Canada
Luxembourg
Netherlands
Austria
United Kingdom
Germany
Greece
Korea
Belgium
Finland
Ireland
Portugal
OECD
Denmark
Slovenia
Chile
United States
Czech Republic
Poland
Mexico
Estonia
Slovak Republic
Hungary
Turkey
China
Brazil
Vast majority of OECD countries experienced a significant reduction in
Indonesia
the ratio of bottom to middle incomes Russian Fed.
amid diverging trends in overall
India
income inequality
South Af rica
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
90 80 70 60 50 40
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

15. 15
IG : Health and life expectancy
Health status the policy determinants of health
outcomes
Health care
provisions
Pollution
Life Expectancy
Education Life style
Environmental
policies
Production
activites (pro-growth
policies)
Educational
policies
Health policies:
Spending
Efficiency
Household
income
Missing determinants such as poverty, exclusion, discrimination and
job insecurity. Less of a problem if they correlate with income inequality

16. 16
IG: Framework
3. Income distribution

17. 17
IG : Income distribution
Chile and Mexico saw notable contractions in inequality
(Gini coefficient)
Changes in inequality against initial level, mid-1990s to late 2000s
AUS
AUT
CAN
FRA
LUX JPN
BEL
DEU
CZE
FIN
DNK
IRL
GRC
HUN
ITA
Change
0.075
0.05
0.025
0
-0.025
-0.05
-0.075
A. Inequality
OECD countries have experienced what could be referred to as a form
of cross-country “convergence”
MEX
NLD
NZL
NOR
ESP PRT
SWE
TUR
GBR
USA
CHL
ISR
-0.1
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
Initial level
Correlation coefficient= -0.76

18. 18
IG : Income distribution
Income distribution: Beyond the Gini
Chile has done better in the lower half of the distribution
A. Developments in the lower half of the income distribution and in "overall" inequality
DNK FIN
AUT AUS
''Overall'' income inequality
Increased overall inequality
but decreased inequality in
the lower half of the income
distribution
BEL
CAN
FRA
DEU
LUX
NOR
IRL
CZE
GRC
GBR
NLD
HUN
ITA
JPN
NZL
MEX
PRT
ESP
SWE
TUR
USA
CHL
Increased overall inequality as
well as in the lower half of the
income distribution
ISR
0.1
0.08
0.06
0.04
0.02
0
-0.02
-0.04
-0.06
-0.08
-0.1
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
-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
Inequality in the lower half of the income distribution
Vast majority of OECD countries experienced a significant reduction in
the ratio of bottom to middle incomes amid diverging trends in overall
income inequality

19. 19
IG : Income distribution
Mild decline in the Gini in Spain but falling income at
the low end of the distribution
Growth in income standards between the mid-1990s and late-2000s
Percentage growth of income standard
100
90
80
70
60
50
40
30
20
10
0
-10
Mean income
-10 -8 -6 -4 -2 0 2 4 6 8 10 12
Bottom to top-sensitive income standards
Relative advantage for the middle class, combined with losses for the
poor in absolute terms

20. 20
IG : Income distribution
Important to understand how GDP per capita trickles
HH incomes at different point of the distribution
Real annual growth rates in GDP, mean and median income
Mean and median incomes have in many countries lagged GDP growth
6
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
during the pre-crisis period
6
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-0.5
B. Mid 90s-20071
Median income Mean income GDP per capita

21. 21
IG : Framework
Linking policies to outcomes: The case of household
income and life expectancy
Living standards
Household Income Life Expectancy
Mean Median Bottom
Income distribution
GDP per capita Income generation
Moving from GDP to household income is not a problem from a
measurement perspective but less straightforward from the point of view
of linking to policies to incomes

22. 22
IG: Framework
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

23. 23
IG : Growth policies
Growth policy priorities for Brazil, Chile and Mexico
Brazil Chile Mexico
Enhance outcomes and equity in
education (X)
X X X
Ease EPL for regular workers (X) /
extend UI benefits (Y)
X / Y X
Lower labour tax wedge (X) X
Promote labour force participation of
women (X) / older workers (Y)
Y X
Lower barriers to entry and competition
(X) / investment in infrastructure (Y) / to
FDI (Z)
X / Y X / Z
Strengthen competition law X
Improve efficiency of financial markets X
Improve rule of law X

24. 24
IG: Framework
Thank you !