There is broad agreement amongst academics, donors and practitioners that the substantial decline in absolute poverty over the last three decades has been due to rapid economic growth (Dollar, Kleineberg and Kraay, 2013; Commission on Growth and Development, 2008). However, the current emphasis on inclusive growth stems from a recognition that prioritising economic growth alone cannot meet the development needs of poor people, as it fails to directly address issues such as inequality and unemployment. Rather than a focus on rapid growth alone, inclusive growth ‘refers both to the pace and pattern of growth’ (World Bank, 2009), which are considered to be linked and should therefore be addressed together.
The concept of inclusive growth is based on the recognition that economic growth must be increasingly ‘pro-poor’. The concept represents recent thinking on development, and supplants the ideas of ‘trickle-down development’ advocated in the 1950s and 1960s (Kakwani and Pernia, 2000), and the policies associated with the Washington Consensus of the 1980s and 1990s. To define inclusive growth, it is crucial to understand the literature on pro-poor growth – primarily because the definitions of these terms overlap. The literature on pro-poor growth represented the first significant departure from the belief that poverty reduction requires economic growth to be prioritised above all else.
Other growth concepts
Broad-based growth and shared growth are other terms commonly used in policy discussions on poverty reduction in a development context, often without being clearly distinguished from inclusive growth or pro-poor growth.
Shared growth: While it has been used synonymously with inclusive growth, the term shared growth can mistakenly imply a focus on income distribution schemes. As such, the World Bank (2009) has signified a preference for the use of inclusive growth as the terminology of choice.
Broad-based growth: The term broad-based growth first came into usage in the World Development Report 1990 (World Bank, 1990), indicating growth that involved a range of sectors across a country’s economy. It is now arguably subsumed within the World Bank’s definition of inclusive growth as ‘broad-based across sectors, and inclusive of the large part of the country’s labour force’ (World Bank, 2009).
From pro-poor growth…
There are two key definitions of pro-poor growth:
- The absolute definition, which states that economic growth can only be pro-poor if the average incomes of poor people rise and as a consequence income poverty falls (Ravallion and Chen, 2003).
- The relative definition, which describes economic growth as being pro-poor only if the incomes of poor people increase at a rate which is greater than that of the non-poor – i.e. if poverty falls more than it would if all incomes increased at an equal rate (Kakwani and Son, 2003). The relative definition is concerned with changes in inequality that favour poor people.
DFID (2004) emphasises that the suitability of these two definitions depends on the objectives of the donor or practitioner, and notes that the absolute definition of pro-poor growth is more suitable for practitioners focused on poverty reduction. This is because under the relative definition, a change in inequality can be pro-poor without producing absolute benefits for poor people (this can occur in a contracting economy), while economic growth accompanied by an increase in inequality can still result in large absolute income gains for the poor (Ravallion, 2004; DFID, 2004).
…to inclusive growth
Despite the substantial literature and policy discussion on the topic, there is no unanimous definition of inclusive growth. For some authors, there is no obvious distinction between inclusive growth and pro-poor growth (Raniere and Ramos, 2013). Nonetheless, the World Bank has outlined a clear definition of inclusive growth, stating that it corresponds to the absolute definition of pro-poor growth apart from the following two distinctions:
- ‘While absolute pro-poor growth can be the result of direct income redistribution schemes, for growth to be inclusive, productivity must be improved and new employment opportunities created’ (Ianchovichina and Lundstrom, 2009; World Bank, 2009: 3).
- ‘The pro-poor growth concept has traditionally focused on growth and poverty measures whereas inclusive growth focuses on an ex-ante analysis of the sources of, and constraints to sustained, high growth and poverty reduction’ (World Bank, 2009).
The notion of productive employment highlighted in the first point has become central to the concept of inclusive growth, as it focuses not only on outcomes for poor people, but also on ensuring their participation in the growth process. As such, inclusive growth is related to the notion of broad-based growth across various sectors of an economy (see box below), but also requires non-discriminatory participation by large segments of the population for its inclusiveness to be realised (Klasen, 2010).
Shared prosperity
The term ‘shared prosperity’ has recently surfaced in the international development arena as one half of the World Bank’s new twin goals announced in 2013. Promoting shared prosperity can be defined formally as increasing ‘the growth rate of incomes in the bottom 40 percent of households’ (Dollar, Kleineberg and Kraay, 2013), and is viewed as a means of making economic growth more inclusive.
The World Bank’s rationale for using a measure of prosperity rather than inequality is twofold. Firstly, a society can become more equal without any improvement in the lives of the bottom 40 percent. Secondly, throughout history many countries characterised by strong economic growth have experienced short-term increases in inequality. Therefore, placing the priority on inequality could lead to policies that may limit the level of economic growth needed in order to improve the lives of the bottom 40 percent (World Bank, 2013).
Despite this justification, the World Bank’s decision to focus on shared prosperity rather than a measure of inequality has generated substantial criticism. Policy specialists from Save the Children, Oxfam, and the Centre for Global Development (Provost, 2013; Third World Economics, 2013) emphasise that poverty reduction will require tackling inequality. This, they argue, necessitates a measure that assesses the income gaps between the top and bottom of society. Others have also argued that focusing on shared prosperity as a development measure will lead to the promotion of policies which promote economic growth on the assumption that it will deliver poverty reduction (Woodward of NEF in Guardian interview, 2013). They regard this as a retrograde step reminiscent of a world of ‘trickle-down’ development.
There is no complete consensus that building on the absolute definition of pro-poor growth is the best approach to defining inclusive growth. Klasen (2010) argues that when considering outcomes, ‘inclusive growth should not focus solely on (income) poverty reduction because interpreting it in terms of disadvantage-reducing growth is potentially more interesting.’
Furthermore, other academics and policymakers have highlighted that despite the twin focus on process and outcomes, the definition of inclusive growth outlined above is still too narrow as expanding human capabilities (e.g. through productive employment) are only regarded as instrumental in improving economic outcomes. Instead, a broader interpretation of inclusive growth may be required, in which non-income measures of human capabilities and well-being are valued as human development outcomes, rather than solely as instruments to accelerate economic growth (McKinley, 2010).
Annotated bibliography
World Bank. (2009). What is Inclusive Growth? Washington DC: World Bank
This summary paper notes that rapid and sustained poverty reduction requires inclusive growth – rapid growth that is sustainable in the long-term, broad-based across sectors and inclusive of a large section of a country’s labour force. Inclusive growth therefore encompasses both the pace and the pattern of growth, which are linked and must be addressed together. The authors highlight that inclusive growth focuses on improving the income of excluded groups by increasing productive employment rather than direct income transfers. This emphasis on productive employment, as well as a focus on ex ante sources of, and constraints on, sustained high growth and poverty reduction is what differentiates the inclusive growth concept from pro-poor growth. Central to increasing productive employment is employment growth, which generates new jobs and income for individuals, but also productivity growth, which has the potential to increases wages and profits.
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Raniere, R. and Ramos, R. (2013). Inclusive Growth: Building up a Concept. Brasilia: International Policy Centre for Inclusive Growth
How has the concept of inclusive growth developed over time? This paper charts the shift in development thinking from the post-WW2 view that rapid growth and industrialisation was the most effective way to improve poor people’s living standards by means of ‘trickle-down’ development, through to the debate around inclusive growth today. It notes that, despite the substantial literature on inclusive growth, no unanimous definition has emerged. Often there is no clear distinction between inclusive growth and pro-poor growth. Some definitions of inclusive growth differ from pro-poor growth in that they incorporate non-income dimensions while still focusing on outcomes, while others focus on who actually participates in the process of growth, often emphasising a concern for the increase of employment opportunities across all societal groups rather than among the poor alone. The notion of productive employment, which focuses on both outcomes and process, has been gaining traction in the inclusive growth debate. The authors conclude that specifying what ‘inclusiveness’ means, and establishing a framework to account for the relationships among the elements of inclusive growth, will be critical to defining, operationalising and measuring the concept.
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Ravallion, M. (2004). Pro-Poor Growth: A Primer. Washington DC: World Bank
This paper finds that there are two significantly different definitions of pro-poor growth in the literature. The relative definition holds when growth is accompanied by distributional shifts that favour the poor, while the absolute definition states that growth is pro-poor only when poor people benefit in absolute terms against an accepted poverty measure. A common empirical finding is that at the country level growth tends to be distribution neutral on average – i.e. inequality falls just as often as it rises after a period of economic growth. However, the paper notes that there may be significant measurement issues associated with these findings, and that no change in overall inequality can obscure the fact that there are significant winners and losers at all levels. Regardless of these caveats it can be said that economic growth is typically pro-poor growth by the absolute definition. The author argues that, to devise a package of reforms that promotes growth and ensures that the poor can participate in the growth process, it will be important to identify the country-specific and sub-national factors that influence the distribution of growth, and the extent to which those factors can be influenced by policy.
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World Bank. (2013). The World Bank Goals: End Extreme Poverty and Promote Shared Prosperity. Washington DC: World Bank
In this paper the World Bank sets out its twin goals of ending extreme poverty across the globe within a generation and promoting shared prosperity. The target set to target extreme poverty is a reduction in the number of people globally living with less than $1.25 a day to under 3 percent by 2030. Promoting shared prosperity is defined as fostering income growth for the bottom 40 percent of the population in every country. It is therefore a focus on improving the income of the less well-off everywhere, not just in the poorest countries. The World Bank is unequivocal that economic growth is still central to the notion of shared prosperity, which will require ‘expanding the size of the pie continuously’ while sharing it in a way that ensures that the welfare of the bottom 40 percent increases as quickly as possible. The paper also analyses the relationship between inequality and shared prosperity. It highlights that income growth for the bottom 40 percent sometimes comes at the expense of a temporary rise in inequality (as in East Asia a few decades ago) and that a fall in overall inequality in a country can occur with almost no increase in incomes for the bottom 40 percent (as in Egypt from 2000-2010). Finally, while shared prosperity is fundamentally an income measure, the paper emphasises that promoting shared prosperity is also about progress in non-income dimensions of welfare.
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Additional resources
DFID. (2004). What is pro-poor growth and why do we need to know? London: DFID
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Provost, C. (2013, 21 March). World Bank’s new vision on tackling poverty ‘very unambitious’. The Guardian.
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- Dollar, D., Kleineberg, T. and Kraay, A. (2013). Growth Still is Good for the Poor. Washington DC: World Bank
See full text - Commission on Growth and Development. (2008). The Growth Report: Strategies for Sustained Growth and Inclusive Development. Washington DC: Commission on Growth and Development
See full text - World Bank. (1990). World Development Report 1990. Washington DC: World Bank
See full text - Ianchovichina, E. and Lundstrom, S. (2009). Inclusive Growth Analytics: Framework and Application. Washington DC: World Bank.
See full text - Klasen, S. (2010). Measuring and Monitoring Inclusive Growth: Multiple Definitions, Open Questions, and some Constructive Proposals. Mandaluyong City, Philippines: Asian Development Bank.
See full text - McKinley, T. (2010). Inclusive Growth Criteria and Indicators: An Inclusive Growth Index for Diagnosis of Country Progress. Mandaluyong City, Philippines: Asian Development Bank.
See full text - Ravallion, M. and Chen, S. (2003). Measuring Pro-poor Growth. Economic Letters, 78(1), 93-99
See full text - Kakwani, N. and Pernia, E. (2000). What is Pro-poor Growth. Asian Development Review, 18(1), 1-22.
See full text - Kakwani, N. and Son, H. (2003). Poverty Equivalent Growth Rate, Paper prepared for the WIDER conference on Well-Being, WIDER, Helsinki.