OECD-ECLAC Regional Consultation on Inclusive Growth in Latin America and the Caribbean

1. A MULTI-DIMENSIONAL
FRAMEWORK FOR
INCLUSIVE GROWTH
OECD-ECLAC Regional Consultation
Paul Schreyer OECD
14th November 2013

2. Contents
• Defining Inclusive Growth
• Results
• Issues

3. Defining Inclusive Growth

4. • Intuition: growth is important but not
sufficient for welfare improvements if the
growth dividend is not shared in a fair way
• Key features of OECD approach
– Multi-dimensionality
– Emphasis on distributions
– Policy-orientation

5. Which dimensions? Start with OECD How’s Life?
framework
Quality of Life Material Well-being
Health Income and Wealth
Work-Life Balance Jobs
Education and skills Housing
Social Connections
Civil Engagement and Governance
Environmental Quality
Personal Security
Subjective Well-being

6. Which dimensions for Inclusive Growth?
Criteria.
1. Dimensions speak to current policy debates
2. Possibility to establish testable links with economic
policies
3. Measurability in the OECD area and beyond
4. Empirical support for selection
Our choice:
Income
Jobs
Health

7. Indicators for each dimension should be
reflective of…
• Households and individuals
• Outcomes
• Distributions
• This mirrors OECD work on:
– Well-being (How’s Life?)
– Analyses of inequalities (Divided we Stand)

8. Indicators
• Income: Household real disposable income
– HH real adjusted disposable income preferable but not
widely available
• Jobs: (Risk of) unemployment
– strong determinant of subjective WB
– Alternative: employment rate: captures differences in
labour market participation
– Problem: informal employment not captured
– No distinction between durations of unemployment

9. Indicators (2)
• Health: Life expectancy
– Morbidity preferable?
– But issues of data availability and aggregation
– Also, even in OECD countries, significant variance of
evolution of life expectancy between countries and
sizable differences between socio-economic groups
– Likely to be more accentuated in developing countries
and emerging economies

10. Aggregation across dimensions
Social welfare function (Kolm 1966, Atkinson 1970, Sen 1973,
Jorgenson 1990, Fleurbaey and Blanchet 2013, Jones & Klenow
2012)
Living standards = equivalent income of
‘representative’ household=
*
1    
W(y , y ,...y ) [y ][1 I(y , y ,...y )] *
N
*
2
*
1
*
N
*
2
Averages Distribution
y, :
 
average market and non market income
equivalent income of household i
Kolm 
Atkinson inequality measure
*
i
y  y  
:
*
N
i i
*
2
*
1
I(y , y ,...y ) :

11. Finally, our definition of Inclusive
Growth
• Growth is inclusive if ΔW>0
• Note normative nature of defining whose
equivalent income is ‘representative’
• OECD default: median household
• But other possibilities, e.g., lowest decile or
quintile

12. Measuring equivalent income (loss) for jobs
and health
• Requires shadow prices of unemployment risk
and health status
• Derived by regressing results of life
satifsfaction surveys on income,
unemployment and life expectancy

13. Some Results

14. ΔlnW >0: a priori, growth has been inclusive
But: possible Living upward standards bias as only and income GDP/distribution
capita
considered
Positive but weak correleation with GDP (only 38% of
variance explained): Large differences between countries
ΔlnW-ΔlnGDP: ex. France and Germany

15. Accounting for living standards of
median households 1995-2007
2.5
2
1.5
1
0.5
0
-0.5
-1
-1.5
-2
Inequality Income growth Longevity Unemployment Interaction term Economic growth Living standards
DEU AUT USA SWE PRT BEL DNK CAN NLD ITA FRA CZE NZL GBR NOR AUS HUN FIN

16. Sensitivity to definition of W, average annual % change
1995-2007
7
6
5
4
3
2
1
0
Belgium Denmark Finland Sweden UK USA All countries
Growth in living standards
Average
Mean
Percentile 10
Normative choices matter

17. 10
5
0
-5
-10
-15
Welfare accounting during the crisis
Rise in unemployment, inequality and slow income drags
Inequality Income growth Longevity Unemployment Interaction term Economic growth Living standards
down growth of living standards
Note: full effects of the crisis likely to be observed post 2009

18. Level comparisons: loss of living standards
relative to best performer

19. Issues

20. • Is the OECD approach towards measuring IG
relevant in LAC context?
• Do income, jobs and health capture the
essential outcomes and opportunities?
• Choice of ‘representative’ HH in LAC?
• Key methodological and data challenges?
• Link to policies?

21. Looking ahead – links to policies
Dimensions of well-being
Outcomes and their
distribution:
Living standards:
Income,
Jobs
Health
Other areas of
quality of life:
Jobs
Education
Personal Security
Env. quality of life
…
Production
function or process
Return on physical and
human capital, demand
for jobs …
Sources of growth,
equality of
opportunities
Other drivers
(institutions; norms;
exogenous factors)
Going for Growth /
Green growth /
Divided we stand
Work on education and health etc.
Work on side-effects of growth policies
Work on equality of outcomes and opportunities

22. Thank you!
Paul.Schreyer@oecd.org