PARIS SCIENCES & LETTRES (PSL)
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Innovation-driven growth and rising inequality: what to do?

Global poverty is decreasing but inequalities are on the rise. Is it possible to reconcile growth through innovation and the control of inequalities? Yes. The question is to chose the right objectives.

2
January 2018
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Executive Summary

The Great Escape, released in 1963, is the title of John Sturges’ famous movie with Steve McQueen on a spectacular escape of prisoners during WWII; it is also the title of a recent book by economist Angus Deaton (Nobel Prize for Economics 2015) on inequalities and their relationship to technical progress and development.

For Angus Deaton, the history of development is the story of a humanity seeking to escape poverty and disease, like those prisoners who seek to escape Stalag Luft III, in order to achieve freedom and individual fulfillment. In the book, as in the film, it is ingenuity and invention that offer prospects for progress and freedom, but in both cases there are those who manage to escape and there are those who are left behind, unable to escape from insecurity and poverty.

Innovation and the development of inequality

What are the effects of innovation on inequality? The combined effects of advances in knowledge, growth and international trade have enabled a large part of the world’s population to escape poverty. According to World Bank figures, in 1981 nearly 40% of the world’s population lived below the poverty line, i. e. with less than one dollar a day. This figure fell to 14% in 2008. In India, 40% of the urban population lived in poverty in 1988; this figure fell to 12% in 1999, just 11 years later, thanks to an acceleration of growth from an average annual rate of 0.77% in the 1970s to 3.9% in the 1980s.

The reduction in global inequalities affects not only income but also health. Between 1940 and 1980, average life expectancy in developing countries increased from 44.5 to 64.3 years, an increase of nearly 20 years, while in developed countries it increased by only 9 years over the same period.

There are those who have been able to innovate or adapt to technological revolutions , and those who have not been able to take full advantage of these evolutions or have been left on the roadside.

Accelerated growth in China and India since the early 1980s has enabled more than two billion Chinese and Indian people to escape poverty. At the same time, however, this growth has created new inequalities between these countries and other economies, particularly in Africa, which have not experienced the same take-off. And growth in India and China has increased inequality within these countries: only a portion of the Chinese and Indian populations have become prosperous or even rich, even though poverty rates in these two countries have declined sharply since the 1970s.

The same phenomenon of growing “intra-country” inequalities is also observed in advanced countries. On the one hand, there are those who have been able to innovate or adapt to technological revolutions (ICT, artificial intelligence), and on the other hand those who have not been able to take full advantage of these evolutions or have been left on the roadside. Should we be concerned about the rising inequalities within advanced countries? 

Fighting poverty, increasing social mobility

There are several ways to measure inequality. One may want to focus on the share of the “richest top 1%” in a country’s income. One may prefer a more comprehensive measure of inequality, such as the GINI coefficient that measures wealth distribution within the entire population. One may also consider social mobility and the poverty traps that impede this mobility.

My opinion is that, in order to reconcile growth through innovation and the control of inequalities, the main objectives are to fight poverty and increase social mobility. Interestingly, greater social mobility tends to be associated with less overall inequality (this is called the Magnificent Gatsby Curve), so by focusing on mobility you kill two birds with one stone.

Should we not be concerned about the richest 1% or 0.1%? Yes, because the rich can use their resources to block new innovations or prevent reforms aimed at democratizing access to education and health: those who were successful yesterday may want to prevent others, today, from “escaping” and competing with them.

Hence the importance of an economic and social model for stimulating growth through truly inclusive innovation: a model (1) which fosters social mobility, in particular through quality education, training and health systems that are accessible to all; (2) which protect individuals from falling into poverty by ensuring, in particular, that they are protected against the risks associated with job losses or changes in employment; (3) which encourages technical progress and innovation as a source of prosperity, while at the same time putting in place safeguards (tax, competition law, anti-corruption laws...) to prevent yesterday’s innovators (the “escapees”) from preventing others from moving towards greater prosperity and freedom.

Philippe Aghion
Professor of Economics, College de France and the London School of Economics