Addressing Inequality for High-Quality Growth: Insights from Joseph E. Stiglitz, Exercises of Economics

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Bridging the development gap

and addressing increasing

inequality

Joseph E. Stiglitz

China Development Forum

Beijing

March 2019

An essential part of the move to high-

quality growth

• Growth in GDP does not necessarily lead to increases in incomes of

most citizens

• Trickle-down economics never worked
• And it has been especially not working in recent decades
• There are, in any economy, strong centrifugal forces increasing societal divides
• These have to be complemented with centripetal forces—largely public—bringing it back together
• Increases in income and GDP do not necessarily translate into

increases in standards of living

• The “Beyond GDP” agenda that is central to high quality growth

2

Some key ingredients of an inclusive

growth agenda

• Education
  • Major determinant of equality of opportunity and long-run productivity - Must ensure that everyone lives up to their full potential - Not doing so is a waste of a country’s most important resource
  • Beginning with pre-school—importance of work of Heckman and China Development Foundation
  • Access to high-quality tertiary education for all
  • Quality of all educational institutions
    • Best high school’s in Shanghai score at top of PISA tests
    • Gap between best and rest
  • Hukou system may still impose major impediment

4

Some key ingredients of an inclusive

growth agenda

• Health
  • Has to be provided largely publicly—America’s largely private system delivers worse health outcomes at higher costs than Europe’s
  • Important for ensuring productivity—America’s failures in health part of explanation for low labor-force participation
  • Many dimensions to health—including nutrition and social habits (smoking, alcohol)
• Environment
  • Poor environment (quality of air) exerts greatest toll on poor
  • Pre-natal exposure to environmental hazards (including poor air quality) can have adverse lifelong effects

5

Some key ingredients of an inclusive

growth agenda

• Decent work for all (ILO agenda, including new report on Work) - Access to jobs with public transportation - Opportunities for mobility—eliminating Hukou system - More time flexibility in labor market - Important for bringing in more women and elderly into labor force - Which will be of increasing importance with slower growth in population - Also critical for achieving better work/life balance (^7)

Equalities across all segments of

society

• Gender equality—China has some notable successes (female labor force participation), but still relatively few woman at top - Especially in comparison to best-performing societies
• Between rural and urban, between different regions of China
• Ethnic equality
• Cross-generation equities
  • A problem in all countries, with rising real estate prices, climate change
    • Even more in countries where students are forced to go into debt to finance their education
  • Asset side (investments, including the preservation of natural capital) more important than liability side - In many countries there has been excessive preoccupation with debt

8

Tax policies

• Important instrument for shaping economy
  • While simultaneously raising revenues for inclusive public expenditures
  • Important that taxation be progressive (not regressive, as in the US)
• Environmental taxes
  • Especially carbon taxes and others that affect air pollutants
• Land (property) taxes and capital gains taxes
  • To curb unproductive speculative gains, to encourage productive “real” investments
  • Major source of inequality
  • Reduce economic volatility, major source of inequality
• Inheritance taxes—to prevent the creation of inherited oligarchy
• May need to strengthen controls on capital movements out of the country to avoid tax avoidance/evasion

10

Social Protection

• Market failures—absence of insurance to cover major risks
  • Huge loss of welfare
    • Lack of security cited as major problem
  • Problems in insurance risks: Unemployment, annuities, disability, insurance against inflation
  • Explained in part by theories of asymmetric information
• Good systems, with active labor market policies and industrial policies

(including place-based policies) can both enhance well-being and

national productivity—facilitating transitions

• And can do so without undermining individual responsibility
• An integrated national social insurance system (Singapore’s provident

fund) can mitigate risk and minimize attenuation of incentives and

facilitate creation of national labor market, increasing overall

productivity

11

Full Employment

• Most important social policy
  • Unemployment represents waste of resources
  • But also leads to adverse social consequences
  • Market economies do not automatically lead to full employment
  • And excessive focus on inflation can lead to higher

unemployment than necessary

13

Broader perspective

• Government has a role in promoting equality of market incomes
  • Basic rules of the game
  • Ensuring equal endowments of human capital
  • Preventing excessive transmission of wealth and advantages across generations
• Government has an even bigger role in promoting equality of after-tax and transfer incomes - Consistent with maintaining high levels of incentives—and increasing overall growth and well-being - Reflecting pervasive market failures—and recognizing markets create problems of inequality, environmental degradation, market power, and exploitation - Reflecting even modicum of equality of income may not ensure most citizens have access to perquisites of a modicum of a decent life

14

Concluding remarks/summary

• Have to also address special problems of disadvantaged and

their children, including migrants and those living in

disadvantaged places

• Also have to address problems of inequality at the top
  • Dangers of unbridled financial sector, real estate
• Government will have to play a central role in this agenda

16

Much is at stake

• China’s decisions will affect not only the performance of the economy - Well designed social programs can even increase productivity - Making sure that all of the country’s talents are given the opportunity to reach their potential - Correcting, or mitigating, market failures - And with a well-designed safety net, individuals may be freer to take risks than they would otherwise, encouraging innovation (the Scandinavian model)
• But the nature of Chinese society itself 17