Size of States, efficiency and equality: Successful cases in the global economy

Publications / 02.12.16
Size of States, efficiency and equality: Successful cases in the global economy

The growth in inequality in OECD countries has a long history, and the recent economic crisis has only confirmed this trend. Data from the past thirty years tells us that, in this particular field, society in OECD countries is currently at its worst. The high level of economic inequality and the debate about its economic, political and social consequences occupies a central place in the political agenda of governments and in the concerns of ordinary citizens, who, in many cases, see it as a potential threat to social peace, political stability and economic security and progress.

Despite this overall picture, a significant variability in terms of equality in all the OECD countries can be observed, even if we focus on those which are relatively rich. Relatively unequal countries (such as the USA and the UK) coexist alongside societies where income is distributed far more equally such as Norway and Denmark. In this work, we wished to focus specifically on an analysis of those countries which, despite enjoying the highest levels of equality, have not had to sacrifice much higher levels of prosperity. Whether by coincidence or not, nine of the ten countries (all of them European) that fulfil the defined conditions for prosperity and equality are small countries (which in our definition here means they have less than 20 million inhabitants). Germany being the exception in our sample of countries. In short, the results of our study clearly contradict the voices claiming that small states are doomed to irrelevance in the global economy. Not only that, but we can state that some of these small states are among the best at managing their economy; which means they can offer their citizens better deals in terms of economic welfare.

Our analysis shows that these ten countries share a final destination (equal distribution of income), however, they follow very different paths to get there. Some countries, like Switzerland, choose to promote equality in the processes of market income creation and distribution through very high employment rates and very little incidence of low wages. This makes the use of a very
powerful system of redistribution (via taxes and transfers) unnecessary and, in fact, the redistributive component of the Swiss tax system is virtually nil.

However, other countries such as Belgium and Germany base their egalitarian redistribution systems on a much more interventionist strategy, which allows them to correct distributions in market income that are relatively unequal. This is due, partly, to very poor employment rates (Belgium) or an inequitable wage structure (Germany). Finally, the most egalitarian countries in terms
of disposable income (Denmark and Norway) combine powerful redistribution mechanisms based, mainly, on the use of transfers with an efficient labour market allowing them to achieve relatively equitable levels of distribution of market income.

Although we should not resign ourselves to considering that the growth of inequality is inevitable, we must also recognize that it is a very complex phenomenon and one which is largely attributable to the major restructuring that has taken place in the global economy over the last forty years. Economic studies point to technological change and economic globalization
as two of the main factors responsible for the changes in income distribution. Given this fact, economic policy makers face the enormous challenge of ensuring economic growth and wealth generation that have a more inclusive character. They need to pay particular attention to measures that can foster a fairer distribution of income and one which ensures high levels of equal
opportunities for all members of society.