social progress

Breaking the vicious cycle of inequality

Low Section Of Man Standing By Poor And Rich Text On Road
We lost our way on sharing the benefits of growth; let's try a new route this time around. Source: Getty [M]

Tomorrow, G20 leaders will convene in Hamburg – a historical port city and a success story in “making globalization work for all.” Ever since the city was created in 808, it has been open to its neighbors and to the world, adapting to successive waves of global integration by building on tradition, not becoming its prisoner. Shocks like the introduction of the shipping container saw the port change its focus toward new technology and the training and upskilling that allow people to adapt to a changing economy and ensure sustainable growth. The decline of shipbuilding and the oil industry stimulated entrepreneurs and the authorities to seek and invest in new opportunities.

The recently opened concert hall and promotion of culture is just one example of how Hamburg is capable of redefining itself. It also shows how this pleasant city thinks about well-being and quality of life, not just economic growth. That is a valuable lesson for all of us.  We need to change our mindset – abandon the mantra of growing first and distributing later, and embrace equality and quality considerations beforehand. Putting people at the center of our policy making – as the G20 German presidency says – should be the focus of our thinking. We have to make the economy serve society.

This is a global challenge. Many people around the world are disenchanted because the growth model we have followed during the last decades has failed us on three accounts: the financial crisis, increased inequalities, and the impact on environment. We have to admit that in pursuit of economic growth, we have been blind to social progress falling behind. The bottom 40 percent of the income distribution have not seen their lives improve in the last decade. At the other extreme, the highest paid 10 percent of the population now earn 10 times more than the poorest 10 percent – up from 7 times 30 years ago. Wealth is even more highly concentrated – the richest 10 percent in the OECD countries own half of total wealth, while the bottom 40 percent own little over 3 percent.

Providing all children with access to affordable and quality formal early childhood education could potentially break the vicious cycle of inequality.

We also have to tackle the wide dispersion of productivity growth between leading and lagging firms that has provoked increased inequalities among people, firms and regions. Inequality of income and opportunity and the political dissatisfaction it generates are not sustainable. One consequence is that trust in government is deteriorating. But turning against global integration is not the answer. The world economy is too interconnected. Global challenges need global solutions, and the G20 has a duty to deliver for the well-being of people, accounting as it does for three-quarters of global trade and embracing around two-thirds of the global population.

This is easier said than done. How do we make globalization more inclusive? Hamburg shows us that equality of opportunity is the best way to overcome inequalities. Low-income groups accumulate disadvantages in terms of education, life expectancy, access to quality jobs, and participation in society – a vicious cycle that lasts for generations.

Given that 40 percent of the population is being left behind, the goal is to level the playing field for the worst off so they can fulfill their full potential. For example, we urgently need to break the link between socio-economic background and educational attainment. On average across OECD countries, if your parents had not attained upper secondary education, you have only a 20 percent chance of going to university, while those with at least one parent who attained tertiary education have 66 percent chance of succeeding. This is a quasi-feudal pattern. Education is therefore central to building bridges towards societies which offer equal opportunities for people. We need to make education count, not just for the wealthy and their networks, but so that each individual can flourish according to his or her own capacities and efforts. Providing all children with access to affordable and quality formal early childhood education could potentially break the vicious cycle of inequality by making sure that children from disadvantaged backgrounds do not miss out on this opportunity.

The state has a crucial role to play in helping to change our society and economy.

Considering the magnitude of the benefits of education to the multidimensional well-being of people including healthcare and employment in later life, there is no better investment if we are to tackle inequalities. To this end, OECD’s PISA was a game changer in driving countries towards better policies by showing the outcomes of systems that work best in terms of achieving quality and equity in education.

But this is just the tip of the iceberg. New challenges need new thinking for new solutions. The state has a crucial role to play in helping to change our society and economy. We need an empowering state – one that focuses on strategic investments to allow people, firms and regions to turn the challenges from global megatrends into opportunities, and to fulfill their potential.

The city of Hamburg can be an inspiration for the G20 leaders to put people back at the center of our policy efforts, and broaden the objectives of policies to include not only material well-being but many other things that are important such as health, quality jobs, a sense of identity, social cohesion, and environment.

To contact the author: gastautor@handelsblatt.com

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