World Economic Forum calls for new growth model as wealth inequality rises

- Finance - Jan 17, 2017

More than three quarters of the world’s economies saw an increase in wealth inequality by an average of 6.3 percent over the past five years, according to the World Economic Forum.

The organisation, now meeting in Davos, has issued a report proposing a shift in economic policy priorities to respond more effectively to the insecurity and inequality accompanying technological change and globalisation. The Inclusive Growth and Development Report 2017 concludes that most countries are missing important opportunities to raise economic growth and reduce inequality at the same time because the growth model and measurement tools that have guided policymakers for decades require significant readjustment.

The Report finds that annual median incomes declined by 2.4 percent or $284 per capita across 26 advanced economies between 2008 and 2013 (or most recent period available). Developing countries fared much better, with median incomes rising by an average of 10.7 percent or $165. However, 23 percent of them experienced a decline in median per capita income of 9 percent, as compared to 54 percent of advanced countries experiencing a decline of an average eight percent or $1044 per person equivalent to $2,505 per average household.

The Report argues that sustained, broad-based progress in living standards, a concept that encompasses income as well as economic opportunity, security and quality of life, should be recognised by policymakers as the bottom-line objective of national economic performance rather than GDP growth. It proposes a new policy framework and set of measurement tools to guide the practice and assess the performance of countries accordingly.

Inclusive Development Index (IDI)

The report ranks countries based on 12 Key Performance Indicators of inclusive development. Providing a more complete measure of economic development than GDP growth alone, the Index has three pillars: Growth and Development, including GDP growth, labour force participation and productivity, and healthy life expectancy; Inclusion, including median household income, poverty and two inequality measures; and Intergenerational Equity and Sustainability, including adjusted net saving (including natural capital depletion and human capital investment), demographic dependency ratio, public debt and carbon intensity.

51 percent of the 103 countries for which these data are available saw their IDI scores decline over the past five years, attesting to the legitimacy of public concern and challenge facing policymakers regarding the difficulty of translating economic growth into broad social progress. In 42 percent of countries, IDI decreased even as GDP per capita increased. A chief culprit was wealth inequality, which rose in 77 percent of economies by an average of 6.3 percent.

Some countries rank significantly higher in the IDI than GDP per capita, suggesting they have done a relatively good job of making their growth processes inclusive, including countries as diverse as Cambodia, the Czech Republic, New Zealand, South Korea and Vietnam. By contrast, others have significantly lower IDI than GDP per capita rankings, indicating that their growth has not translated as well into social inclusion. These include Brazil, Ireland, Japan, Mexico, Nigeria, South Africa and the United States.

Richard Samans, Member of the Forum’s Managing Board said: “There is a global consensus on inclusive growth, but it has been far more directional than practical. To respond more effectively to social concerns, economic policy needs a new compass setting, broad-based progress in living standards, and a new mental map in which structural reform is reimagined and reapplied to this task, with chief economic advisers and finance ministers prioritizing it every bit as much their traditional focus on macroeconomic, financial supervisory and trade policy.”

Read the January 2017 issue of Business Review Europe magazine. 

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