Editorial: Competition way to reduce inequality

Income inequality has widened in New Zealand. Photo / Thinkstock

OECD says NZ paid price for widening income gap

The OECD, often described as a club of rich countries, has produced a report supporting a view that a widening gap between rich and poor within its member states is not only bad for their society but also harms their economic growth. The report is of particular note to New Zealand because it names this country as one of those in which income inequality has widened most since the mid-1980s. It estimates that rising inequality has cost New Zealand more than 10 percentage points of possible economic growth since 1990, which appears to be more than any other member of the club.

In one sense this is not a surprise. New Zealand was a highly protected economy until the mid-1980s with a strongly unionised labour force, high taxation and universal benefits. It had removed these arrangements rapidly by the mid-1990s, conscious that it was opening itself to world markets later than most and with trade disadvantages of distance and scale. Even now, with its income gap having grown more than most, inequality in New Zealand is no worse than the OECD average.

We are on a par with countries such as Canada and Italy and more equal than Japan, the United Kingdom, Israel and the United States. All of them have suffered economically from inequality, according to the OECD's directorate for employment, labour and social affairs. Is this credible?

The directorate's results sit oddly with economic performance. The countries it finds more unequal are those that have come through the global financial crisis in generally better shape than those, mainly in Europe, that are more equal or becoming so. Greece, which had reduced inequality since the 1980s, became the first basket case of the euro zone.

Clearly if social equality is good for economic growth, other things matter more. Such as competitive industries, low inflation, sound public finances, balanced budgets and low public debt. All of these may come at a cost to social equality. But the OECD suggests how that cost might be minimised. Redistribution of incomes through higher taxes and benefits is one way, though it cautions that not all redistribution is good for growth. It depends on whether benefits are well "targeted" to needs. That does not mean concentrating on poverty, the report warns. Governments need to be concerned about how the bottom 40 per cent are faring. They need better education, training and services such as healthcare to narrow the income gap and make a greater contribution to economic growth.

Education, or the lack of it, is central to the theory that inequality harms an economy. OECD surveys show that children of poorly educated parents are more likely to be poorly educated themselves as income inequality widens. They leave school earlier and with less proficiency by comparison to those with better educated parents. New Zealand educationists call this the "tail" of under-achievement but it is surely not as high as 40 per cent in this country.

However, many school leavers are poorly equipped for survival in a modern economy. It is too many. The lesson of the OECD report is that education has to do better for those from households where parental expectations are low. They are increasingly being left behind in low-decile schools deserted by "white flight". The Government's incentive for other schools to help them might not go far enough. Equality for pupils might require less equality for teachers and schools, higher rewards for performance and leadership, mergers and takeovers, so that the benefits of reputable "brands" may be available to more children.

Competition has a way of closing the gap.

Debate on this article is now closed.