OECD Observer
News brief– Q4 2014

Inequality hurts growth-

©Arben Celi/REUTERSReducing income inequality would boost economic growth, a new OECD paper finds. The working paper, “Trends in income inequality and its impact on economic growth”, finds that countries where income inequality is decreasing grow faster than those with rising inequality. In fact, in Italy, the UK and the US, the cumulative growth rate would have been six to nine percentage points higher had income disparities not widened.

The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society. A lack of investment in education by the poor is the main factor behind inequality hurting growth, the research finds.

“Countries that promote equal opportunity for all from an early age are those that will grow and prosper” said OECD Secretary-General Angel Gurría on issuing the analysis. “Trends in income inequality and its impact on economic growth” is part of the OECD’s New Approaches to Economic Challenges initiative.

See www.oecd.org/social/inequality-and-poverty.htm

–and tax revenues rise

Tax revenues and tax burdens in advanced economies are starting to bounce back, reaching levels not seen since before the global financial crisis. Revenue Statistics 2014 shows revenues from personal and corporate income taxes are now recovering, after the sharp falls of 2008 and 2009. However, the 33.6% share of these taxes in total revenues seen in 2012–the last year for which full data is available–remains below the 36% share in 2007. The share of social security contributions has increased by 1.6 percentage points, to an average 26.2% of total revenue.

The average tax burden in OECD countries has also increased by 0.4 percentage points in 2013, to 34.1% of GDP, compared with 33.7% in 2012 and 33.3% in 2011. Denmark (48.6% of GDP) and France (45%) had the highest tax-to-GDP ratios in the OECD, while Mexico (19.7%) and Chile (20.2%) had the lowest.

See www.oecd.org/tax


Click to enlarge

The slow recovery expected in the latest OECD Economic Outlook is confirmed in the latest OECD composite leading indicators. These anticipate trends and turning points some months out, based on the likes of order books, building permits and long-term interest rates. The leading indicators point to stable growth momentum, particularly for the US, Canada, China and France, but to a loss of steam in Germany, Russia and UK.

GDP in the OECD area grew by 0.5% in the third quarter of 2014, up from 0.4% in the previous quarter, with the strongest increases among G7 countries being in the US and the UK.

OECD-area inflation rose by 1.5% in the year to November 2014, compared with 1.7% in October. Energy prices declined by 2.1%.

Unit labour costs in the OECD area rose by 0.2% in the third quarter of 2014. In the US, labour costs fell by 0.1%, but rose in the euro area by 0.4% and by 0.7% in Japan.

As for trade, total (seasonally adjusted) merchandise exports of the G7 and emerging markets grew by 1.6% in the third quarter of 2014 compared to the previous quarter, outpacing the growth of imports (0.4%). In China exports rose by 7.6%, the highest rate in over a year.

The unemployment rate in the OECD area stood at 7.2% in November 2014, as in the previous month. Some 43.8 million people were out of work, down slightly since August, and 5.9 million less than the peak in April 2010. The unemployment rate edged up by 0.1 percentage point to 5.8% in the US, and steadied in Japan at 3.5%, as well as in the euro area, at 11.5%, though falling in some countries, including a ninth monthly fall by 0.2 points in Ireland.

For latest updates on economic statistics, see www.oecd.org/std/statisticsnewsreleases.htm


Social views

"Judged by how much of their national income countries devote to social spending, we [the US] have the world's second-largest welfare state-just behind France".

–Robert J. Samuelson, The Washington Post, 26 November 2014

"Ageing Europe needs the migrants it doesn't want"

–Paul Taylor, Reuters.com, headline, 1 December 2014

Pick of the year

"I believe inequality up to a point [...] can actually be useful for growth and innovation. The problem is when inequality gest too large and becomes useless for growth [...] I do not believe there is much evidence that paying managers $10 million rather than $1 million has been useful at all."

–Thomas Piketty, addressing the OECD, July 2014


©Matthieu de Martignac/OECD               Click to enlarge

Terrorist attacks: OECD Secretary-General Angel Gurría (second from right), with French President Hollande (centre) and some 60 other world leaders, heading the Unity March of 1.5 million people through Paris, 11 January 2015

Mexico can dramatically boost growth and narrow the gap in living standards with advanced economies, and drive down poverty, the latest OECD Economic Survey of Mexico says. www.oecd.org/mexico

Latin America’s overall GDP growth rate slowed down in 2014, dropping below 1.5%, which was below the OECD average (est. 1.8%) for the first time in a decade; any recovery in 2015 will be challenging, warns the Latin American Economic Outlook, co-produced with the OECD Development Centre. www.oecd.org/latinamerica and www.latameconomy.org/es/

In India the economy is showing signs of a turnaround, but new reforms are needed to put the country on a path to strong, sustainable and inclusive growth. www.oecd.org/india Norway has taken some good initiatives to combat money laundering and terrorist financing, but despite good legal foundations and sound institutions, there are too few convictions, an evaluation by the Financial Action Task Force points out. Spain too has created a strong system to fight such money laundering and illicit financing, but improvements are needed, the FATF says. See “documents” at www.fatf-gafi.org/

On the development front, the UK has increased its development spending to 0.72% of gross national income (GNI) despite a challenging budget climate, says an aid review by the OECD’s Development Assistance Committee (DAC). The review also noted that the UK is now the world’s No 2 donor by volume, after the US, and the first G7 economy to meet the 0.7% UN recommendation. Ireland is also performing well among donors, albeit at 0.45% of GNI, focusing its effort on the neediest countries. See www.oecd.org/dac/peer-reviews/

The Netherlands should increase its support for workers suffering from mental health issues and their employers, and tackle the continued social stigma and limited knowledge around such illnesses, according to a new OECD Mental Health and Work review. Meanwhile, Asia/Pacific countries should step up efforts to improve access to affordable, quality health care, particularly for women, says Health at a Glance: Asia/Pacific 2014. www.oecd.org/health

Switzerland has signed the Multilateral Competent Authority Agreement, allowing it to activate automatic exchange of financial account information in tax matters from 2018. http://oe.cd/Qx

Bribery exposed

Most international bribes are paid by large companies, usually with the knowledge of senior management, says the OECD Foreign Bribery Report issued in December. The report, which analyses more than 400 cases worldwide, shows that most are paid to win contracts from state-owned or -controlled companies in advanced economies, with the mining, construction, transport and IT sectors mostly affected. Bribes equalled 10.9% of the total transaction value on average, and 34.5% of the profits, or some US$13.8 million per bribe–just the tip of the iceberg, says the report.


Steel warnings

Excess capacity in steel as growth in investment projects outpaces demand will pose risks for the sector for the foreseeable future, according to industry and government officials at the OECD’s Steel Committee meeting in Cape Town on 12 December 2014. The risk of trade conflicts in the industry was also flagged. http://oe.cd/Qy

Plus ça change…

A fundamental need for France was for a reconstructed conception, moral and philosophical, of the purposes of education to respond to the needs of modern French society.

"Progress and reform in French education", in OECD Observer No 51, April 1971

©OECD Observer No 301, Q4 2014