Indicators of inclusive
growth to complement
GDP growth
e-frame conference 11/02/2014

material by Paul Minty and Bartek Lessaer
The need for inclusive growth
•
•
=> Need to focus on inclusive nature of
growth, not just growth itself
OXFAM(2014): 85
richest people in
world own same
as poorest half of
population
President Obama,
Dec. 2013: growing
inequality and lack
of upward mobility
“the defining
challenge of our
time”

GDP ignores how benefits of growth distributed

Which measures?



Dashboard of indicators needed
to inform on distributional aspects, e.g.
Growth in real median income (total population + top
bottom quintiles)

Adjusted growth in real GDP per capita (Sen index)

Overall life satisfaction + associated gaps
&
Importance of use of data on household sector
Stiglitz et al:
material
living
standards
better
monitored through
measures
of
household income
and...
GDP
does
not
sufficiently capture
changes
in
material well-being
of households
Real growth in median disposable income
and GDP/cap can differ markedly
Annual change in real GDP per capita and in real annual median income (%)
• what people
actually receive out
of national income
•  more focus on
inclusive growth
• easy to
communicate
ES
EL
10
10
5
5
Real Gross Domestic
Product per capita
growth
0
-5
Real annual growth in
median income
-10

Real annual growth in
median income
-15
2004 2005 2006 2007 2008 2009 2010
lack of strong link
GDP/cap & median
income
monitor median
income to gauge
inclusiveness of
growth
-5
-10
-15

Real Gross Domestic
Product per capita
growth
0
2004 2005 2006 2007 2008 2009 2010
SE
UK
10
10
5
5
Real Gross Domestic
Product per capita
growth
0
-5
Real annual growth in
median income
-10
Real Gross Domestic
Product per capita
growth
0
-5
Real annual growth in
median income
-10
-15
-15
2004 2005 2006 2007 2008 2009 2010
2005 2006 2007 2008 2009 2010
Source: Eurostat, national accounts and own calculations based on Eurostat, EU-SILC
Growth in (median) income can vary substantially
across quintiles
Index of median income by quintile (2004 = 100),
Austria
Index of median income by quintile (2004 = 100),
Denmark
130
130
125
125
120
120
Median of 1st quintile
115
Median of 2nd quintile
110
Median of 3rd quintile
Median of 2nd quintile
110
105
Median of 4th quintile
105
100
Median of 5th quintile
100
95

95
90
90
2004
2005
2006
2007
2008
2009
Median of 1st quintile
115
2010
Median of 3rd quintile
Click to edit the
outline text format
Median of 4th quintile
Median of 5th quintile
2004
2005

130
130
125
125
2008
2009
2010
Second Outline
Level
120
120
Median of 1st quintile
115
Median of 3rd quintile

110
105
Median of 4th quintile
105
100
Median of 5th quintile
100
Third Outline
Level
Median of 1st quintile
115
Median of 2nd quintile
110
Median of 2nd quintile
Median of 3rd quintile
Median of 4th quintile
Median of 5th quintile
95
95
90
90
2004
2005
2006
2007
2008
2009
2010
Source: Own calculations based on Eurostat, EU-SILC

2007
Index of median income by quintile (2004 = 100),
Spain
Index of median income by quintile (2004 = 100),
Portugal

2006
2004
2005
2006
2007
 Fourth
2008
2009
2010
Outline
Level
monitor income developments within different parts of income distribution
(esp. lowest income quintile)
Real annual growth in (median) income
clarifies real situation people face
PORTUGAL
Annual growth in median income across
quintiles in PT (%, adjusted for inflation)
Top and bottom quintile median income
growth in PT (%, adjusted for inflation)
10
10
Bottom quintile
5
Bottom quintile
2nd Quintile
0
3rd Quintile
4th Quintile
-5
Top quintile
-10
Top quintile
5
0
-5
-10
2005
2006
2007
2008
2009
2010
2005
2006
2007
2008
2009
2010
SPAIN
Annual growth in median income across
quintiles in ES (%, adjusted for inflation)
Top and bottom quintile median income
growth in ES (%, adjusted for inflation)
10
10
Bottom quintile
5
Bottom quintile
2nd Quintile
0
3rd Quintile
4th Quintile
-5
Top quintile
-10
Top quintile
5
0
-5
-10
2005
2006
2007
2008
2009
2010
2005
2006
2007
2008
2009
2010
Distributional adjustment of GDP/capita
can strongly modify growth outcomes
Adjust GDP/capita to
take account of
distributional issues
Sen index: (1-Gini)

penalises countries
w high inequalities
(GDP/Cap ↓)
If ethics were not enough
to stand up against
social injustice
there are:
economic
and social reasons too
What are the consequences of inequality
on economic performance?
High and rising inequality can undermine sustainable
growth by


inducing insufficient demand + unsustainable borrowing
at lower end of income distribution
amplifying risk of crisis or making it difficult for poor to
invest in education -> lowers growth potential
Key driver of duration of growth spells

longer growth spells associated with more equality in
income distribution (Berg & Ostry, 2011)
Considerable variation between top and
bottom quintiles of life satisfaction



Gap varies
considerably
among MS
largest in CEEC
but also AT, DE
and UK (even
though
average high)
smallest gaps
in Benelux and
Nordic MS
Money does not make you happy
but it calms your nerves*


Income
position
important
element in life
satisfaction in
most MS
more so in
CEEC + DE,
EL, PT & UK
*A German saying
Happiness is a beautiful thing but
it won't buy you money*

Strongest
predictor:
being deprived
of at least two
essential
consumer
items
-

2/3 among
those with
low life
satisfaction
vs all others
only 1/3
Also being in
arrears and
poor quality
housing
* from a Czech song but a Slovak singer
The UN post-2015 agenda

Various international organisations have voiced preferences, e.g.
UN: reduce by 1/2 share of households with incomes below
half of national median
World Bank: track income growth among bottom 40 % of
distribution
OECD: Initiative for inclusive growth

EU: framework should cover basic living standards + ensure
benefits of growth and employment widely shared
Social risks of inequality

damaging effect on social trust and civic
involvement
critical for functioning of societies
cooperative behaviours, investment in education quality of
institutions

potentially: higher criminality, social anxiety, lower
subjective well-being
=> Gap Between Rich And Poor Named 8th Wonder Of The
World
The problem of averages:
When you've got your head in the fridge
and your feet in the oven, you're – on
average - very comfortable
Thank you
bartek.lessaer@ec.europe.eu
Cf. ESDE 2013 chapter 7
by Paul Minty and Bartek Lessaer
http://ec.europa.eu/social/BlobServlet?docId=11365&langId=en