Divided We Stand: Why Inequality Keeps Rising

OECD.05/12/2911. The gap between rich and poor in OECD countries has reached its highest level for over over 30 years, and governments must act quickly to tackle inequality, according to a new OECD report. “Divided We Stand: Why Inequality Keeps Rising” finds that the average income of the richest 10% is now about nine times that of the poorest 10 %  across the OECD.

The income gap has risen even in traditionally egalitarian countries, such as Germany, Denmark and Sweden, from 5 to 1 in the 1980s to 6 to 1 today. The gap is 10 to 1 in Italy, Japan, Korea and the United Kingdom, and higher still, at 14 to 1 in Israel, Turkey and the United States. In Chile and Mexico, the incomes of the richest are still more than 25 times those of the poorest, the highest in the OECD, but have finally started dropping.

Income inequality is much higher in some major emerging economies outside the OECD area. At 50 to 1, Brazil's income gap remains much higher than in many other countries, although it has been falling significantly over the past decade.

Launching the report in Paris, OECD Secretary-General Angel Gurría said “The social contract is starting to unravel in many countries. This study dispels the assumptions that the benefits of economic growth will automatically trickle down to the disadvantaged and that greater inequality fosters greater social mobility. Without a comprehensive strategy for inclusive growth, inequality will continue to rise.”

The main driver behind rising income gaps has been greater inequality in wages and salaries, as the high-skilled have benefitted more from technological progress than the low-skilled. Reforms to boost competition and to make labour markets more adaptable, for example by promoting part-time work or more flexible hours, have promoted productivity and brought more people into work, especially women and low-paid workers. But the rise in part-time and low-paid work also extended the wage gap.

Tax and benefit systems play a major role in reducing market-driven inequality, but have  become less effective at redistributing income since the mid-1990s. The main reason lies on the benefits side: benefits levels fell in nearly all OECD countries, eligibility rules were tightened to contain spending on social protection, and transfers to the poorest failed to keep pace with earnings growth.

As a result, the benefit system in most countries has become less effective in reducing inequalities over the past 15 years.

Another factor has been a cut in top tax rates for high-earners.

“There is nothing inevitable about high and growing inequalities,” said Mr Gurría. “Our report clearly indicates that upskilling of the workforce is by far the most powerful instrument to counter rising income inequality. The investment in people must begin in early childhood and be followed through into formal education and work.”

The OECD underlines the need for governments to review their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden. This can be achieved by raising marginal tax rates on the rich but also improving tax compliance, eliminating tax deductions, and reassessing the role of taxes in all forms of property and wealth, the report says.

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- An Overview of Growing Income Inequalities in OECD Countries (free .pdf)

- Special Focus: Inequality in Emerging Economies (free .pdf)

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World Bank.Bolivia.Country partnership strategy progress report for FY2012-FY2015

Bolivia has undergone a period of profound change since the Government of President Morales came to power in January 2006. The Morales administration has implemented an array of economic and social policies to empower indigenous peoples and reduce poverty and inequality.

Macroeconomic results have been positive, with regular fiscal and current account balances for the first time in decades, declining public debt and steady 4.5 percent annual growth rates over the past seven years. In the nearly six years since Mr. Evo Morales was elected as Bolivia's first indigenous president, the country has experienced significant socio-political and economic change.

Driven by high commodity prices and prudent fiscal and monetary policies, Bolivia's economy has had an annual average growth of 4.5 percent for the past seven years, increasing per capita income by 18 percent. Current account surpluses have prevailed since 2003, and the fiscal balance turned positive in 2006 for the first time in decades. Thanks to this positive macroeconomic performance and debt relief, gross public debt dropped from 96 percent of gross domestic product (GDP) in 2003 to 40 percent in 2010 while international reserves increased from less than $1 billion to nearly $10 billion over the same time span. Despite progress, Bolivia faces major development challenges.

It has one of the lowest GDP per capita levels in the Latin America and Caribbean (LAC) region, moderate poverty afflicts more than half of the population and income inequality is still very high. Recent economic growth is vulnerable to shifts in international commodity prices and total investment is low, limiting economic expansion. This four-year World Bank Group (WBG) Country Partnership Strategy (CPS), agreed upon with the Government, proposes a viable medium-term program for addressing some of Bolivia's challenges.

During the consolidation of the reform process initiated by the election of the Government of President Morales, the World Bank Group (WBG) has operated through two consecutive Interim Strategy Notes (ISNs), following the recommendation from the 2005 country assistance evaluation to use shorter-term strategies in the face of high uncertainty.

Now that the conditions for the implementation of a CPS are in place a new constitutional framework, consolidated policy environment, sound macroeconomic situation, good dialogue between the WBG and authorities and improved implementation capacity and the Government has requested Bank support through a medium-term strategy.

Document Date:2011/11/01. Country Assistance Strategy Document.Report Number: 65108. Volume No: 1 of 1. Country:Bolivia.Disclosure Date: 2011/11/09

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Should cash transfers be confined to the poor ? implications for poverty and inequality in Latin America

This paper compares for 13 Latin American countries the poverty and inequality impacts of cash transfer programs that are given to all children and the elderly (that is, "categorical" transfers), to programs of equal budget that are confined to the poor within each population group (that is, "poverty targeted" transfers).

The analysis finds that both the incidence of poverty and the depth of the poverty gap are important factors affecting the relative effectiveness of categorical versus poverty targeted transfers. The comparison of transfers to children and the elderly also supports the view that choosing carefully categories of beneficiaries is almost as important as targeting the poor for achieving a high poverty and inequality impact.

Overall, the findings suggest that although in the Latin American context poverty targeting tends to deliver higher poverty impacts, there are circumstances under which categorical targeting confined to geographical regions (sometimes called "geographic targeting") may be a valid option to consider. This is particularly the case in low-income countries with widespread pockets of poverty.

Argentina,Bolivia,Brazil,Chile,Colombia,Dominican Republic,Ecuador,El Salvador

Author:Acosta,Pablo;Leite,Phillipe;Rigolini,Jamele.Document. Date: 2011/11/01.Document Type:  Policy Research Working Paper.Report Number: WPS5875.Volume No: 1 of 1

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