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Income Inequality Signals Need for Protecting People, Not Industry, says Report

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OverviewGlobal ImbalancesGlobal WarmingIncome Inequality

May 21, 2008 — Countries should combat rising income inequalities across the globe with social insurance or similar policies to support workers rather than turning to protectionism of industry, says the new Growth Commission Report.

Protecting companies and jobs from competition will slow economic progress, the report argues. “A better approach is to protect people and incomes, providing support to workers between jobs and preserving their access to essential services during these transitions.”

Policy-makers in most countries “have done too little to ameliorate” the effects of two trends: the rapid movement of economic activity from one location to another; and the impact of labor-saving technologies, particularly in the sphere of information-processing.

“Both trends add to the economic growth. But both also pose a potential threat to some people’s jobs and job security,” says the report.

Much of the rise in income inequality is attributed to globalization. “The result is a growing skepticism about the benefits of globalization, in developing and developed countries alike,” the report notes.

In political terms, these attitudes can translate easily into protectionist sentiment. The Doha Round of global trade talks, seen as a test of the world’s commitment to a flexible multilateral trading system, were supposed to be completed by 2004 but are still going on, the report notes.

Governments May Need to Adapt Safety Nets

“With enough effort from governments and international organizations, the benefits of the global economy could be distributed widely across nations and within them,” says the report. “The net welfare gains from openness provide ample resources to compensate globalization’s casualties, if governments have the political will to manage the problem. At the moment the rhetoric is consistent with this priority, but the actions are not.”

Governments may have to change their domestic policies to shore up support for an open global economy, the report adds. That might mean adapting the country’s safety nets, social insurance systems, and tax system.

“The alternative approach is distinctly worse. It is to preserve domestic systems in aspic and to shy away from the global economy itself.”

“Some kind of competition is absolutely essential at every stage of economic development,” says Robert Solow, Nobel Laureate and a member of the Growth Commission.




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