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CHAPTER 3. MAINSTREAMING INCLUSIVE GROWTH INTO POLICY MAKINGIntroduction The previous chapters have shown that, regardless of how it is measured, inequality of incomes is on the rise in most OECD countries, and that it is even higher, on average, in developing countries and emerging economies. Low incomes are associated not only with low material standards of living, but also with poorer health, shorter lives, less education, weaker attachment to the labour market, and lower levels of integration into society at all levels, all of which tend to persist across generations. Despite decades of social policies aimed, with some undeniable success, at narrowing the gaps in outcomes between the disadvantaged and the advantaged, it has become clear that more avenues need to be explored, because high and/or growing inequality pose a threat to both social harmony and to economic growth itself.
Building on the trends described in Chapter 1 and the key elements of the framework presented in Chapter 2, this chapter discusses the main policy areas that could be part of national Inclusive Growth strategies. Emphasis is placed on the key policy domains that are known to have a strong positive effect on the long-term growth potential of economies and could at the same time lead to improvements in the nonincome outcomes that matter for well-being, as well as a better distribution of these income and nonincome outcomes. In addition to the focus on outcomes, policy initiatives are also discussed with a view to improving the distribution of opportunities. The major policy areas reviewed in this chapter are macroeconomic (including tax/benefit systems); labour markets; education; competition and regulation;
innovation and entrepreneurship; financial sector; infrastructure and public services; national versus regional versus local issues; and foreign aid and development.
3.1 – The macroeconomic underpinnings of Inclusive Growth Sound macro-economic policies are a pre-condition for sustained growth, employment and poverty alleviation but can also generate some trade-offs between equity and efficiency. A stable macroeconomic framework makes investment less risky, ex ante, contributing to sustainable growth and job creation. There is however a trade-off between efficiency and equity in this context: higher investment leads to higher productivity and higher wages than would otherwise be the case, but higher investment and capital intensity can also result in higher income shares for the owners of capital. Low inflation, which characterises a predictable macroeconomic environment, also encourages investment, which is essential for growth, and preserves the real value of income, which is important for social groups with limited access to financial services and products. Moreover, low budget deficits and government indebtedness are known to create a favourable environment for growth and could make the fiscal policy stance more redistributive by creating room in the budget for higher spending on social services and protection. Macroeconomic policies that prevent a build-up of external imbalances also avoid corrective swings in exchange rates that can be detrimental to vulnerable social groups.
Adverse distributional effects from macroeconomic instability are likely to be strong in developing and emerging market economies. Income losses arising from high inflation are likely to be greater where financial markets are shallower, and many households, especially poorer ones, have no or only limited access to financial services (Prasad, 2013). In those countries, many workers are in the informal sector and have no entitlement to unemployment insurance and formal social safety nets that could cushion the effects of job losses arising from adverse macroeconomic shocks. An economic downturn can thus be financially catastrophic for many households, possibly with long-lasting effects.
Monetary policies and their impact on income distribution
Monetary policy affects the distribution of income. In many countries, monetary policy is conducted within an inflation targeting framework and focuses primarily on price stability. In some cases, central banks also pursue other targets, de facto or de jure, such as financial stability and exchange rate stability, and other indicators, such as the unemployment rate, are being used as intermediate targets where forward guidance is used as part of the monetary authority’s toolkit. However, changes in the monetary stance alter the relative prices of financial assets, shifting income between debtors and creditors and the net holders of different financial assets, thus impacting on the overall income distribution.