Income Inequality and Economic Development

1. Income Inequality and Economic Development Bill Rosenberg Policy Director/Economist N Z Council of Trade Unions billr@nzctu.org.nz 4 March 2012

2. Overview • Growing inequality of increasing concern • Cause of major social unrest but also has significant economic effects • Brief survey of recent research • Economic effects • Drivers • Implications for agreements on international commerce like TPPA

3. Growing inequality • Rapidly growing inequality, highest levels in some OECD countries since 1920/30s • Revolutions in North Africa • Concerns shown • OECD • IMF, ILO • Chief Economic Advisor to the US President • “Occupy” movement…

4. Economic effects of inequality • Wide range of social and health indicators worsened by high inequality: • violent crime, imprisonment rates, infant mortality, mental illness, obesity, teenage births, dropping out from school, adult literacy. • Economic as well as social cost • Cost to health, education, welfare, justice and prisons services as well as economic potential Source: “The Spirit Level: Why More Equal Societies Almost Always Do Better", by Richard Wilkinson and Kate Pickett, publ. Allen Lane, 2009.

5. Economic effects of inequality • IMF research: higher levels of inequality • Build up unsustainable household debt levels leading to financial crisis (relatively closed economies) • Increase current account deficits and thus international debt in financially open economies (avoided by some developing countries due to low financial openness) • Shorter durations of GDP growth

6. Economic effects of inequality • European research • Falling labour income share loss of demand • Hence poorer economic growth rates • Find in a range of studies that the following increase productivity growth: • Demand growth • Wage growth • Stronger labour market regulation • Wage growth drives productivity growth via • Inducing firms to invest in labour-saving technology • Greater effort from employees

7. Drivers of inequality Include • Trade, supply chains - effect on developed countries (IMF, OECD, ILO) • e.g. IMF: Technology in the past, but “recent work assigns greater importance to the role of trade, particularly to offshoring and soaring production within multinational firms” • OECD: increased imports from low-income countries if weak employment protection

8. Drivers of inequality • Financial globalisation (IMF, ILO) • E.g. IMF: Stock market liberalization in emerging markets; financial globalization, especially FDI • Lowered employment protection; loss of employee bargaining power (IMF, OECD, ILO, Krueger) • Increased part time work (OECD) • Taxation • Skills, education • Technology? (challenges by IMF, Stockhammer)

9. “Wage-led growth” Strong wage growth best for economic growth - generates domestic demand Individual relatively open economies can gain advantage by suppressing wages and tapping international demand (exports) But the world is a closed economy Hence economies suppressing wages do so at cost of international growth Economies suppressing wage growth do so at cost of own productivity and domestic demand

10. Implications for TPPA etc Trade and financial openness are not good for their own sake – contribute to inequality – may undermine, growth of GDP and productivity Need balance – scope and balancing institutions Labour rights – unions, employment protection – important balancing institution These suffer in open economies without domestic government support International agreements must enable this balance

11. Conclusion Thank you • Trade and financial openness increasingly out of balance with needs of both social and economic development • Intrusion into domestic regulation, increased power for capital (investors) carry further dangers • Raises question whether the TPPA model is sustainable socially and economically.