Countries in the advanced economy category are best positioned to ensure inclusive growth, as they have the greatest financial means and generally sophisticated markets and economic frameworks. Yet the extent to which they succeed varies widely. The Nordic countries, Switzerland, New Zealand, and Canada do comparatively well, while others such as the United States, France, and several countries in Southern and Eastern Europe fall short in many areas.
Australia ranks 8th among all countries on the Inclusive Development Index (IDI), reflecting its strong growth and intergenerational equity. The country is also delivering quite well in terms of intergenerational equity but could do more to broaden the distribution of income and wealth. The Framework indicates that Australia’s economy is particularly characterized by strong asset-building, entrepreneurship, and new business creation (ranked 3rd among advanced economies). This is thanks to its supportive regulatory framework and lack of red tape, as well as healthy access to finance for business creation and development. Access to education is excellent, though its quality could be improved, as could the equity of outcomes for students from different income levels. There is also scope to increase the participation of women in the workforce, for example through more affordable child care, which could help to lower the high rates of temporary and involuntary part-time employment. Australia could also make further use of fiscal transfers, improving the generosity of social protection benefits, to ensure more equitable outcomes from growth.
Canada ranks 15th on the IDI, having made modest progress in the last five years. The country benefits from high median living standards, a relatively high employment rate, and a dependency ratio that is favorable at present. On the other hand, income inequality is wider compared with peers, labor productivity has improved slightly, and carbon intensity of GDP is high. The Framework shows that Canada benefits from reasonably strong access to finance for businesses, though they remain relatively small, not managing to scale as in some peer economies. Canada ensures strong equity of educational outcomes for students from all socioeconomic backgrounds, but formal and vocational curricula must continue to be adapted to the needs of a rapidly transforming economy. Canada’s tax code – especially property taxes– effectively promotes inclusivity of economic outcomes. Some steps that could further foster inclusivity, and which the government is in many cases exploring, include broadening family-leave policies, making child care more accessible and affordable to increase the participation of women in the workforce,and taking measures to foster greater entrepreneurship for new business creation and scaling.
Denmark is ranked 5th on the IDI, driven by strong environmental stewardship and intergenerational equity. Its social protection system also fosters inclusive outcomes as Denmark makes effective use of fiscal transfers to correct the higher levels of income and wealth inequality delivered by market outcomes. The Framework indicators show that Denmark benefits from low levels of corruption, but the banking sector and some rents are rather concentrated as compared with the situation in its peer countries. It has a strong culture of entrepreneurship and relatively low levels of bureaucracy facing business creation and operations. Wage compensation is equitable, with a high labor share of income and a particularly low gender pay gap. However, it would benefit from higher quality and equity in its education system, as well as greater financial inclusion to encourage business investment.
Finland comes in 11th overall, its IDI score having declined over the last five years in part due to the slow growth of its already-low GDP per capita and a rising dependency ratio. However, it continues to perform exceptionally well across most areas. The Framework shows that Finland makes effective use of market levers to deliver greater social inclusion, ranking 8th in this area. It tops the rankings for education and training, which are characterized by both high quality and inclusiveness of outcomes, with only small differences in educational performance between students at different income levels. It is also ranked 1st for asset-building (in the form of employee stock ownerships and profit-sharing schemes) and does well at fostering entrepreneurship, with businesses facing relatively little red tape. Corruption and rent seeking are low, and workers receive comparatively generous wages. Finland could, however, improve its use of fiscal transfers: although the tax code is progressive and effective at reducing poverty and inequality, it could be less distortionary in terms of incentivizing work and investment.
France is ranked 18th on the IDI, with declines across several areas over the past five years suggesting that efforts to promote social inclusion and equity have not been fully effective. Employment levels are low and the results related to intergenerational equity are of significant concern, with a rising dependency ratio and growing public debt putting future prosperity at risk. The inclusive growth Framework points to more weaknesses than strengths driving these outcomes. Strengths include excellent infrastructure and basic services, particularly transport and healthcare, as well as strong social protection, which is necessary given poor market outcomes. France’s weaknesses include significant red tape in creating or growing businesses, which applies brakes on employment creation; and a tax system that distorts incentives to work and invest. These and other factors have led France’s youth unemployment levels to be among the highest in advanced economies.
Germany ranks 13th on the IDI with a mostly middling performance across the subdimensions of the Index, but moving modestly in the right direction over the last five years. While its income inequality is somewhat average among advanced economies, wealth inequality is high, ranked 25th. GDP is also highly carbon intensive, an issue the government is actively working to address. The Framework shows that Germany has managed to keep youth unemployment low by European standards, while providing high median living standards and an economy that delivers a high share of income to workers. This is explained in part by the success of its vocational training programs in equipping workers with skills that the market demands. Citizens also benefit from strong social protection, and businesses can access the finance they need to develop, though new business creation remains muted compared with many peers. Other areas requiring attention include increasing participation of women in the workforce, improving the progressivity of the tax mix, and addressing regulations that protect incumbents and concentrate rents (thus stifling new business creation).
Greece ranks lowest out of all 29 advanced economies on the IDI, while also registering the worst five-year trend in scores among this group. Several developing economies manage a higher score, which indicates how urgently reforms must continue as the country struggles to emerge from a deep economic crisis. The Framework indicates the many areas in which Greece must make progress to put in place the drivers of future growth and inclusiveness. Particular priorities include reforming the education and training systems to improve outcomes and narrow the gaps between students from different socioeconomic backgrounds; addressing high levels of corruption and red tape that are holding back business creation and development; and incentivizing companies to move out of the informal sector to create better employment opportunities and widen the tax base needed for the government’s coffers.
Italy, a country in the midst of some political instability, ranks 27th out of the 29 advanced economies on the IDI, with its overall score having deteriorated over the last five years. This particularly reflects poor performance in terms of growth, employment, and intergenerational equity, with a high debt-to-GDP ratio potentially weighing on future generations. There are also high levels of exclusion in the economy – Italy ranks a low 21st on levels of poverty and inequality. The Framework shows that Italy’s social protection system does not start to address these concerns as it is neither particularly generous nor especially efficient. Italy also suffers from pervasive corruption and concerns about business and political ethics. Entrepreneurship is constrained by poor access to finance – an issue also related to low levels of research and patenting activity – limiting job creation and growth. In this context, unemployment, involuntary part-time work, informality, and vulnerable employment remain high, even as women’s participation in the workforce is extremely low and the gender pay gap is high. Further, there is little social mobility, indicated by the high intergenerational persistence in wage differentials.
Japan ranks a low 24th on the IDI among advanced economies. Some of its clear strengths are the longest healthy-life expectancy and relatively low wealth concentration. On the other hand, the country struggles with high poverty, with 16% of households earning less than half the median income. In addition, high debt and an increasingly high dependency ratio – in both cases the worst among advanced economies – point to a lack of intergenerational equity as a major concern. The Framework shows that despite these poor outcomes, Japan still gets a lot of the basics right: education is equitable and of high quality, whose outcomes feed into a highly-skilled workforce that benefits from low levels of informality and unemployment. Areas of concern include the gender gap – more affordable child care could incentivize greater participation of women in the workforce, which will be critical for the country given its growing demographic challenges. Despite having a high level of patenting activity, technological readiness, and private spending on research and development, Japan registers relatively few new businesses – which could be related to administrative barriers, or negative attitudes toward entrepreneurial failure. Promoting a stronger culture of entrepreneurship will also be important for driving more dynamism in the economy.
The Netherlands comes in 7th overall on the IDI, with relatively low income inequality and poverty, as well as an ability to provide reasonably high median living standards. The Framework shows that the country benefits from top-notch basic infrastructure and health services, as well as an education and training system that does a reasonably good job of ensuring that student performance is not hindered by socioeconomic background. The country also benefits from strong business creation, which is powered by a culture of entrepreneurship, strong asset-building, and generally good access to finance. While social protection is a strength, the tax system could do more to further inclusivity – notably through a more progressive income tax and a higher capital tax.
New Zealand owes its overall 9th position on the IDI in large part to low level of debt, high employment rate, and a lack of wealth inequality compared with peers. While its level of income inequality is among the worst in all advanced economies (27th rank among 29 countries), this is managed through a strong system of progressive redistribution. The Framework shows that New Zealand’s strong points include little red tape around business creation (ranked 1st), strong business and political ethics (2nd), and easy availability of financial intermediation for real economy investment (1st). The country also manages to foster greater inclusivity through its tax code and social protection schemes without distorting the market, ranking 8th on this measure. Opportunities to make growth even more inclusive include a focus on ensuring more equitable outcomes in the education system for students from various socioeconomic backgrounds, and vocational training that is more effective at linking vulnerable people with productive employment opportunities.
Norway tops the IDI, with improvements over the last five years reflecting its success in following a clearly articulated policy to pursue inclusiveness in its growth process. Median living standards are high and rising, while inequality is the lowest among advanced economies after taxes and transfers. The Framework shows that in particular, the country benefits from strong use of market levers to promote equitable outcomes while keeping social protection effective. Norway’s strengths include a high degree of social mobility, low unemployment, and high female labor force participation – with generous policies on parental leave and affordable child care that keep talented women and parents in the workforce. Strong collective bargaining protects workers’ rights. Nonetheless, even in Norway there is some room for improvement – the education system could do more to prepare the workforce for a rapidly changing economy. Fostering a greater culture of entrepreneurship would inject further dynamism into the economy.
The Republic of Korea ranks 14th overall on the IDI with measureable improvements over the last five years, despite recent political turmoil. The country does especially well on intergenerational equity – with high savings rates, significant spending on education, and favorable demographics. However, Korea suffers from elevated poverty rates despite impressive employment levels – potentially related to the low overall number of citizens in the labor force as women’s participation is among the lowest in advanced economies. This is also likely related to an exceptionally high pay gap between men and women. Among the country’s strengths is its excellent education system which delivers relatively equitable outcomes. Areas of concern include rent-seeking behavior among those in power, and a regulatory system that perpetuates the concentration of rents within a limited number of large, family-run companies. The country could do more to promote inclusiveness through its social protection system, including healthcare.
Singapore is not ranked on the IDI because data is unavailable on poverty and median incomes. On other measures, it scores well on intergenerational equity and recent per-capita growth, but less well on income inequality as well as the extent to which the economy is carbon intensive. The Framework ranks Singapore low among all advanced economies on its use of taxes and transfers to tackle its high levels of income inequality. Singapore has many strengths to build on, however: rigorous business and political ethics (ranked 3rd); an excellent education system (with top scores in PISA Reading and Math)1 catering well to students from lower-income backgrounds; and strong entrepreneurship supported by excellent access to capital (scoring well on financial intermediation for real economy investment). Unemployment is extremely low at 3%, as is youth unemployment at 7%. However, the country ranks poorly on female participation in the labor force and the economy would benefit from narrowing the gender pay gap. Another priority is finding ways to translate productivity gains into pay rises – the share of national income going to labor, as opposed to capital, is relatively low and declining.
Spain ranks 26th among the 29 advanced economies on the IDI, with a score that has worsened over the last five years. This reflects slow GDP per capita growth as well as high income inequality and poverty, with median living standards worsening in recent years. The Framework shows that the positives for Spain include relatively strong infrastructure and improving basic services, particularly transport and healthcare. Its challenges include a relatively low-quality education system which does little to lift up students from underprivileged socioeconomic backgrounds; high unemployment, particularly among the youth; and a large informal sector. Creating high-quality employment opportunities will depend on making it easier and more financially viable to start new enterprises. Improving access to information technology could help.
Switzerland follows Norway and Luxembourg on the overall IDI, ranking 3rd on the back of robust growth and employment, high median living standards, strong environmental stewardship, and a fair degree of intergenerational equity. Among Switzerland’s many strong points are good basic services and infrastructure, particularly ground transport and healthcare; lack of corruption; and a vigorous vocational education system that contributes to high levels of social mobility. More could be done, however, to reduce inequality and distribute gains from growth more fairly – the country’s capital and property taxes help to reallocate income, but its concentration of wealth is among the highest in advanced economies. Other points where improvement could be made include increasing the talent pool by making child care more affordable and narrowing the gender pay gap. The dynamism of the economy would be boosted by greater entrepreneurship through efforts such as improving access to finance for small, non-financial corporations.
The United Kingdom comes in 21st on the IDI. Its median living standards have declined over the last several years, and it scores relatively low on health-adjusted life expectancy (24th rank), income inequality (22nd), and measures of intergenerational equity such as adjusted net savings. The UK’s efforts to deliver inclusive growth show a mixed picture. Its strengths include relatively vigorous business creation, supported by access to finance – both important drivers of new employment and growth –though it is not yet clear what impact the recent Brexit referendum will have on investment. The country also makes good use of the tax code – including property, inheritance, and progressive income taxes – to make economic outcomes more equitable. However, it needs to improve the education system to better prepare the workforce, address youth unemployment, and fix low levels of social mobility. Ensuring better access to quality healthcare for all is also a priority, as is increasing the participation of women in the labor force, for example through improved labor protection and better access to affordable child care.
The United States, despite being a global economic and innovation powerhouse, ranks only 23rd on the IDI. Although the country has grown rather rapidly in recent years, it is among the three advanced economies with the highest levels of poverty and income inequality. Median household income has been on a downward trend, though there has been a slight improvement in the past couple of years. Its high levels of debt call into question its fiscal sustainability. The Framework shows that the US does have some strong foundations for improving inclusiveness – it enables strong asset-building and entrepreneurship, with easy access to capital and other supporting conditions for business creation. However, several areas require attention. Policy reform on parental leave and affordable child care could improve participation of women in the workforce and deepen the talent pool. Higher wages could also help to boost consumption which has been constrained since the financial crisis. While taxes on inheritance, property, and capital have some effect on inequality, the tax code remains comparatively regressive by not levying taxes on those best able to contribute. The United States has a less comprehensive social-safety net than many other advanced economies, constraining not only living standards but also some risk-taking critical for innovation.