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OECD: Reducing Inequality Would Boost Economic Growth

FILE - U.S. dollars and euros banknotes are seen in this illustration photo taken at a change bureau in Paris.
FILE - U.S. dollars and euros banknotes are seen in this illustration photo taken at a change bureau in Paris.

Moves by national governments to reduce inequality between their rich and poor citizens would help to lift economic growth, the Organization for Economic Co-operation and Development said on Tuesday.

The Paris-based think tank wrote in a report that high income inequality had a “negative and statistically significant impact” on growth as a widening gap between rich and poor often concealed falling income for all but the richest groups.

“The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society,” it wrote in a report based on 30 years of harmonized data from developed and highly developed countries. “It follows that policies to reduce income inequalities should not only be pursued to improve social outcomes but also to sustain long-term growth.”

To reduce inequality, countries should invest in education and redistribute wealth through taxes and other transfers, it added.

It said it found no evidence that redistributive policies harmed growth if they were well designed and implemented.

The economic impact of inequality has been in the spotlight this year after a best-selling book by French economist Thomas Piketty, which argued that the gap between rich and poor has been widening for decades in the West.

The OECD said that, over the past two decades up to the global slowdown of 2009, the cumulative growth rate would have been 6-9 percentage points higher in Italy, Britain and the United States had income disparities there not widened.

Conversely, greater levels of equality were helping boost Gross Domestic Product (GDP) per capita in Spain, France and Ireland before the crisis. In most developed nations the gap between rich and poor reached its highest level in 30 years in 2014, with the top 10 percent of the population earning 9.5 times the income of the poorest 10 percent, the OECD wrote.

The gap had been widening since the 1980s, when the richest segment earned seven times as much as the poorest. However, the biggest negative impact on growth was not from rising top incomes, but a widening gap between low income households and the rest of the population, it said.

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