Transcript

Transcript of Income Inequality Matters: How to Ensure Economic Growth Benefits the Many and Not the Few

April 13, 2019

Speakers:

Christine Lagarde , Managing Director, IMF

Gita Gopinath , Economic Counsellor and Director of the Research Department, IMF

Laurence Boone , Chief Economist, OECD

Pinelopi Koujianou Goldberg, Chief Economist, World Bank

Ms. Lagarde: Good afternoon to all of you. Welcome to our discussion on Income Inequality Matters: How to Ensure that Economic Growth Benefits All and Not Just A Few.

Let me start by introducing our distinguished panelists. Laurence Boone is the Chief Economist of the OECD. Before her appointment she was the Chief Economist at AXA Group.

Pinelopi Koujianou Goldberg, otherwise often called by those in the know as “Penny”—you’ve allowed me to do that—is the Chief Economist of the World Bank Group. She is on leave from Yale University.

Gita Gopinath is the Economic Counsellor and Director of the Research Department at the International Monetary Fund. She is on leave from Harvard University’s Economics Department, hopefully for a long time.

Did you all notice something? Thank you. Thank you. Can we have a big round of applause? This is the first time in history that, at the same time, the Chief Economists of the Fund, of the Bank, and of the OECD are women. And not just that, they are fantastically talented. I know, no pressure, no pressure, Laurence. This is just fine. I have total trust in all of you anyway.

Back to the topic, inclusive growth is one of the critical challenges of our time. The bittersweet reality is that despite economic growth there are still far too many people who are left out. We know from research that has been conducted in our institutions that excessive inequality hinders growth, erodes trust, and fuels political tensions.

Income inequality increased in most advanced economies since the ‘90s. It remains elevated in emerging market and developing economies. The top one percent accounts for about 10 percent of total income in G20 countries, and the top one percent owns about half of the world’s wealth.

Income inequality often reflects inequality of opportunity. IMF research on Europe shows that inequality across generations has risen since 2007, and 20 percent of adults in advanced economies, and 80 percent in emerging market and developing economies are excluded from formal access to finance.

Now, I’m not going to tell you how many women around the world are excluded from access to the labor market, access to finance and access to political leadership. It is obvious. Added to that, if you want to spice it up a little bit, is the rising corporate market power in advanced economy that has had only a very small effect on the share of national income paid to workers, which, as we know, over the course of the last few years has been declining.

Add another ingredient, technology and economic integration that have brought large benefits to many economies by driving productivity and growth, and lifting millions out of poverty, but also that can lead to structural change and job displacements in obsolete sectors and professions, and can sometimes have a very unequal impact in that women are more affected than men.

My job here today is actually to vanish and disappear and to let the really talented Chief Economists of the IMF, the World Bank and the OECD actually address those issues, and take you through those policies which, in their opinion, based on the research that is being done by their team under their leadership can actually deliver in terms of trying to remedy this unfortunate state of affairs.

Without further ado, I’m going to leave the floor to you, Gita, you are the moderator. I know you’re going to inject all your wisdom in that debate as well, but you have two terrific ladies, if I may say, all three, the floor is yours.

Ms. Gopinath: Thank you. It is a real pleasure to be here with Penny and Laurence. We have about 20 minutes to solve a huge problem, and we are going demonstrate how we three women can do it really quickly. Okay? So, we’re going to have a quick conversation, we’re going to put out there the big issues related to inequality, and what policies may address them.

To start with, what strikes me when I think about inequality is that it’s not one common concept in the sense that there is tremendous heterogeneity when you think of inequality, global income inequality as if anything improved with about one billion people being lifted out of poverty.

If you look at within countries, if you look at advanced economies there’s certainly a trend towards an increase in inequality between 1990 and now. But then when you look at emerging and developing economies, it’s more mixed. You have countries like Brazil where you had an improvement in inequality.

The question is that, I mean I don’t think that there’s any doubt about the fact that inequality is a major priority for many countries in the world; it’s a good question to ask why that is. So, I'm going to start with that, and Penny maybe you can jump in there. Why do you think that this has become such a major priority at this time despite the fact that this trend has been going on for many years now?

Ms. Koujianou Goldberg: That’s a very good question, so thank you for opening up with it. By the way, as you said, and that Madame Lagarde noted there are many different aspects of inequality. So, when you have a discussion of inequality, as we’re having now, one can spend easily, not half-an-hour, but three hours debating definitions and semantics. I’ll abstain from doing that, but I’ll point out the following.

First, inequality has become a huge issue in the last few years in advanced economies. I would say it’s still not the main priority in developing countries, maybe it should be, but if you ask people—they’re having surveys in China, in India, in many developing and many emerging markets—people do mention inequality but still their priority is aggregate growth.

They are not as concerned about inequality as we are in advanced economies. In advanced economies this has become a major issue, and it’s an interesting question of why. So, my first answer, my immediate answer, it’s because of its political ramifications. We see a crisis of our institutions, declining trust in democracy. There is a backlash, not only against globalization, but also against the elites, the experts, and so on.

And this all, to a certain extent, stems from this view that the elites have captured all the gains that we have made in the last few years at the expense of the rest. And so, whenever inequality becomes too large it becomes threatening, we’ve had major revolutions. We’ve had the French Revolution, we had the October Revolution, so it brings social unrest, and we see a little bit of the social unrest. We see many political developments in advanced economies that are of concern, and so this has become a priority item.

Ms. Gopinath: So, Penny, would this have been an issue if there hadn’t been the global financial crises?

Ms. Koujianou Goldberg: I think yes. The global financial crisis was in 2008. We didn't see all these developments until very recently, I would say, until the last two years. And I'm not even sure I would link them to the global financial crisis. I think there are other developments that contributed as well, including technology, including globalization. In general, changes that bring about disruption, and we haven’t had very good ways in dealing with disruption.

Ms. Gopinath: But, you know, my point was that is inequality becoming a priority because of the global financial crisis. You're absolutely right at the trends. I want to throw that to Laurence.

Ms. Boone: So, first, thanks for being here, and thanks for the very kind introduction that Madame Lagarde made to the three of us.

I think, yes, I agree with Penny that it started way before the financial crisis. And what strikes me is that these inequalities are reproducing themselves, because they are not only inequality of income which we were discussing but there are also inequality of opportunities.

And generation after generation we are reproducing this inequality, and that means that kids and youngsters of today who are not born in the right family or in the right geography, they don't have access to the same education, health care, you mentioned financial inclusion, public transport, even digital is an issue for them, and obviously you don't want that to persist.

Ms. Gopinath: Go on.

Ms. Koujianou Goldberg: I want to make one more point that I think is important, that one other thing that has changed in recent years, is the salience of inequality. The world was always unequal, but people did not know how much better some of the world lived. Maybe they knew about the kings, but beyond that they didn't have much information about how the rest of the world was doing.

So now, partly because of technological progress, we have much more information about how people who are not next to us, how they live, social media have contributed to that, so it's much easier for people to have access to this information and to be dissatisfied.

Ms. Boone: Can I add as well?

Ms. Gopinath: Jump in.

Ms. Boone: It's also the case that we're seeing a polarization of society. The middle class is hollowing out so the tensions are much more apparent. When you had a growing middle class voting for democratic governments, and some policies that were opening, our economies making the benefits of growth for all, it was easier.

But because the middle-income in advanced economies seeing its revenues not progressing, while the price of housing is increasing, the price of transport is also increasing, they're feeling left out, and it's this middle class that forms and shapes the democracy of our society and how people vote.

Ms. Gopinath: Both of you brought up the fact that technology and globalization are important drivers. I'm going to throw in that mix: labor market deregulation, decline and cooperative bargaining, progressivity of taxes. So, when we think of technology and globalization, and the impact that has had on countries, and in terms of solutions then for inequality. Again, what I notice is the heterogeneity in experience.

So, if you think of what globalization and technological change has done for the U.S. and Germany, it seems to be more of a superstar firm phenomenon. Right? It's much less about people—while it is the case of people with different skills have had less, or different wage growth, but it makes big difference which firm you're working in.

So, there are some firms that seem to be superstar firms, but for the same level of skill you get paid a whole lot more if you happen to be employed in that firm. And so then the issue is about: why is there not that transmission of that wage growth from best firms to the smaller firms?

And then if you think about inequality in emerging and developing economies, it's a different thing. It is about people moving from rural areas to urban areas, certain people work in urban areas are getting paid more, more skilled people getting paid more.

And all of this has come, again, through the two channels of globalization and technology. So, the question is, when you see solutions for reducing inequality: firstly, what do you think hasn't worked and what do you think might work? So that would be useful. And you see that it's going to be very country-specific and there's not one simple solution.

Ms. Boone: Me?

Ms. Gopinath: Yes. Go ahead.

Ms. Boone: So, we were talking before that three minutes to find a solution, which is going to be challenging. But I think you shaped the thing really well. So one of the things is, as you say, some superstar firm capturing a rent based on the data that they're accumulating, the platform they're building and the network they are creating.

So one thing is, there's obviously not enough competition within firms which would allow some of them to grow, little one to become bigger and challenge the one who have started. So, we must first attack rents; that's one thing.

And the second thing which I think is super, super important, and Penny sort of mentioned it earlier, it's the issue of fairness globally as well. If we want diffusion globally of the digital technology, then we must ensure that that the world is actually a level playing field, and that means that multinational do not really have—should not have the opportunity of fishing for tax arbitrage, or regulatory arbitrage. So at the global level, we must ensure that firms pay the fair share of taxes, where they create value, employ people, (inaudible) things.

And the third thing is perhaps, and I'm sure you would complete, the one thing which is super, super important I think is education and providing access to people to this new technology. And two numbers come in mind: one is that only four people out of 10 in rural areas have access to high speed internet. And only 11 percent of the firm globally actually work on the data, so we do have an issue of providing this access. And that means the government must help provide the infrastructure to people who are remote locally and geographically or do not have same means as others to access those.

Ms. Gopinath: Penny, in terms of the globalization you’ve known, we’ve known, the fact that trade has winners and losers, and policies were tried. So why didn’t they work, and what does one need to do to get it right now?

Ms. Koujianou Goldberg: So first I think this is generally true, but I think it’s particularly true with trade. There has always been a two-step approach.

Step one is we implement trade reforms, or we worry about growth and efficiency and productivity. And then we think once these efficiency gains are realized, then we take it to step two --- namely, then we worry about redistribution and inequality.

And this two-step approach doesn’t always work well. As I remember, once I was teaching trade --- we teach the Ricardian Model again from trade ---and a student comes in the end and says, “Well, Professor Goldberg, I understand what you are saying but how can you even talk about gains to an economy when some people win and some people lose. What does it even mean?”

And then we have a very good answer as economists, right? We say we apply the parietal criterion, and what gain means is those who win, they win so much, they can take some of the gains and give them to the losers. And then comes the next question, well, the fact that they can do it doesn’t mean that they will actually do it, right? And that’s the problem once you’ve established a certain division of wealth, it’s very hard to take away from those who have.

So, I think there has to be an approach where you address these issues at the time when these policies are implemented. That’s something that we have not done. So even organizations like the World Bank and the IMF and the World Trade Organization, we advocate for structural reforms and the trade liberalization. And then when they ask us about redistribution, then we say, well, this is up to the domestic sector, this is up to the national governments, they will figure it out. So I think we need to be much more proactive ex-ante rather than worrying about these ex-post.

Second point I want to make very briefly: Laurence mentioned various policies. I think one insight we’ve had in the last few years that came out of research and was really surprising is that the geographical dimension matters. And it matters much more than people have thought. So the gains are distributed unevenly within countries, across different areas. And the reason we always discounted this aspect is we always thought people are very mobile, if one area is hit with a shock, then they pack and they move to another area. And it turns out that’s not the case. In fact people are very local, they’re attached to the town where they live, to their commuting zone, they’re not willing to move.

So once we realized that, there are all kinds of policies we can consider ---policies that are tied to the place they live in the short run, policies that are going to force their mobility across locations. But also policies that make it so people are less tied to the place where they live right now.

Ms. Gopinath [To Ms. Boone]: Would you like to jump on the two points about making sure that the communities where people have lost jobs revive so people won’t have to move out of it. And then second, about taxation and redistribution, and maybe that’s a channel that hasn’t been used enough.

Ms. Boone: On mobility, I was about to disagree a little because I think effectively, quite a lot of people who are in the middle class or below the middle class don’t really want to move because they cannot. They lose their family support. Usually when some industry has left the area, then the value of the house is worth nothing. And it’s super difficult to move and take a job away from your family and community if you know that you have a chance to lose this job a couple of months later.

So perhaps digital can help; we can think about actually connecting the people to the jobs, allowing them to work remotely, and providing them access to digital and internet so that they can actually stay where they are and continue to work.

On taxation, and it’s a topic we have in common with the IMF. There’s a lot of work that’s been done by the G20 to ensure transparency of information and the profits that firms are making and also looking at how digital is changing the business model and how this multinational firms should pay their taxes so that where they are making money when they’re leveraging on their data, their technology, they actually contribute to the money that’s being made.

With this exchange of information so far, I think it’s about $100 billion which has been collected, which we could use to actually invest in education, help the workers that have lost their jobs because of the combined effect of trade and digital, which Penny was mentioning. And I think we need to do a lot more actually because the digitalization of usage changes the business model and allows some firms to escape more easily taxation.

Ms. Gopinath: Penny, did you want to say anything about collective bargaining, the decline of trade unionization, the minimum wage. Is there something, any of those could work?

Ms. Koujianou Goldberg: Well, there’s this huge literature on those topics, and one aspect of inequality is that, at least in the United States, where wages have stagnated. Many people actually attribute that to the decline of unions. Why this has happened is a very interesting question. Some would even blame immigration partly for this decline. So how do we address that?

So taxation is one way, transfers, poverty alleviation measures and so on, but there are also labor market policies. There are direct labor market policies one can use, and minimum wage is one of them. This has been one of the most controversial issues in the United States, with very mixed evidence as to whether an increase in the minimum wage has adverse effects on employment or not, and how it affects unskilled workers. The jury’s still out on this issue.

But the one thing I would say is that the governments for sure have many tools to use towards redistribution. I think there are two questions in my mind. One is, what are the objectives? Do we have consensus on what the objectives are at the national level, what the values of society are and what exactly we want to achieve?

And second, even if we have agreement in the objections, in some cases we don’t have enough knowledge how to implement policies that work. We don’t have enough knowledge about who gains and who loses in certain cases, and how to address this.

Ms. Gopinath: Do you have an example of a particular policy where you feel like we know less about who gains and who loses?

Ms. Koujianou Goldberg: So the example that comes immediately to my mind is trade. Because until a few years ago, no one would have thought that the relevant dimension is the community dimension, the geographical dimension. So if you asked people, a few years ago if you asked trade economists or anyone else what’s the proper way to address these issues, the standard response was by providing retraining, by trying to make sure people can retool, enter new professions. And it turned out that these kind of programs have not been very successful. There is a lot of evidence that retraining has not really worked. But even if it worked, I would say that if the real issue is then that people don’t move geographically, if the hardship is felt at the community level. If it’s not tied to the skill level of the worker, then this would have been the wrong response. Then you need a different response. This is a case where I think people meant well, but who were just ignorant, and this is where I think research, open-minded research is very important.

Ms. Gopinath: I agree. I think a few of the points that came out that we’ve learned about how better to address income inequality is first to address it quickly. Because of what you said is thatwe take a policy action that’s trying to grow the pie in growth, and then inequality comes in second, and so we think of policies too late. And then it gets compounded into people having not just losing the jobs, but health issues. And that’s when we intervene, and we have to move faster.

The second point is that certainly we need to be using tax policy too. And I think the point you made about the international taxation and making sure that multinationals actually pay their taxes and their other tax bases widen enough. And this is even more important for low income countries, as we’ve done in the Fund in our research, that they in fact lose the most by having this possibility of, tax avoidance by companies. And so I think that’s a very important thing.

And a third factor I’m going to throw in there, is also through women, but I think it’s important to empower women even more. And a lot of work that we’ve done shows that that helps. And I mean it’s not just helps the overall level of the economy, but certainly helps with redistributive considerations.

So, we have one or two minutes left, any last words?

Ms. Boone: I think I agree with you. The one thing—first it’s not even addressing inequality quickly, it’s that it’s addressing inequality at the root, so making sure everybody has access to the same chances. Because, as you say, reskilling is not that easy. And with the digitalization, the skills are changing. You want people who are creative, able to adapt to changing situation. If we think that about 50 percent of the job will totally change in nature over the next 10 years, then it’s urgent we equip people from the very early age with this capacity to adapt and think by themselves.

The second thing, as you say, is redistribution. And I think the last thing I would add is about trust in governments. You mentioned it, Penny, at the beginning. But we really need to strengthen, again, our institution in the sense that people need to trust the government, and governments must show that they are capable of actually having a better governance. And on this I would just say two things.

The less skilled you are, the less you respect the government, the more worried you are about their capacity to help you, which is another reason to help the lower skilled people. And the last thing is the more we undermine multilateralism, and I think the three of us are an example of why it’s important, the work we do is important. The more we undermine multilateralism, the more difficult it is going to be to reach any agreement on taxation, to understand how value chains are working, and how we can actually help people locally and geographically to grasp the opportunity rather than being passive and suffering from them.

Ms. Gopinath: Penny, any last words?

Ms. Koujianou Goldberg: Some concluding remarks. Since my identity is Chief Economist of the World Bank, as a woman, as part of a multilateral institution, I’d like to make three points.

First of all, to end on an optimistic note. So, we are talking about increasing inequality, but global inequality has decreased dramatically, and this is one of the biggest achievements of our time. And this is something we should not forget, that the inequality between India and the United States has gone down dramatically.

Number two, gender inequality, at least in advanced economies, has also declined. And that’s another part of the development, as Madame Lagarde said, a few years ago we would not have imagined a panel like this one. So again, this is a positive message.

And finally, to the extent that you ask, you know, a small message, to be extended that we think why is it so important to address inequality. So I would say inequality may not be just a goal in itself. The reason you want to reduce inequity is because you want to give everyone a chance and you want to give people who have the potential to do good work, to actually deploy their potential. And that applies especially to women.

And in that spirit, let me ask the question: we are three women in multilateral institutions, what is it we could do differently compared to what has been done in the past? I think we could engage in more cooperation among institutions in the spirit of multilateralists. And further, some of the agendas that Laurence mentioned where we actually do have agreement on what needs to be done.

Ms. Gopinath: So we are out of time. I think if we had five more minutes we would have solved everything. So thank you, Penny, and thank you Laurence, and it’s been great to have both of you here. Thank you.