Concepts and definitions
Absolute poverty has fallen substantially over the last 30 years, with most of this reduction attributable to rapid economic growth in developing countries. However, the recognition that economic growth often does not meet the needs of the poor has stimulated the current debate on the need for inclusive growth. Economic growth in the absence of measures to ensure the sustained equitable distribution of the benefits of growth has frequently perpetuated the concentration of wealth in the hands of those already better off. As a consequence, many governments and donors have come to realise that in order to significantly reduce poverty they must promote inclusive growth. Despite the increased and urgent attention paid to the promotion of inclusive growth, there is no unanimous definition of the concept. A commonly used definition is that employed by the World Bank (2009), which defines inclusive growth as an absolute reduction in poverty associated with the creation of productive employment rather than direct income redistribution schemes. The World Bank maintains that inclusive growth should take into account both ‘the pace and pattern of growth’; these are considered to be linked and should therefore be addressed together.
Growth, poverty and inequality
Promoting inclusive growth requires policymakers to address both growth and income distribution, so it requires an understanding of the relationships between growth, poverty and inequality. Many studies have demonstrated that economic growth is a prerequisite for poverty reduction when income distribution is held constant. There is also consensus that the two primary factors which determine why there are different rates of poverty reduction at a given rate of growth are the initial level of inequality and how inequality changes over time. In light of this ‘essentially arithmetic’ relationship, Bourguignon (2004) emphasises that understanding the two-way relationship between growth and inequality is the real challenge for producing a development strategy focused on fostering pro-poor or inclusive growth. Several mechanisms that cause growth to change the distribution of income in an economy have been proposed. Some authors posit that growth alters the distribution of resources and labour in an economy as it grows, which in turn affects the distribution of income. Others cite institutional change, and propose that as average incomes grow there is a greater demand for adequate public services and accountable institutions, which in turn reduces inequality. Empirically, cross-country regressions indicate that there is no clearly discernible relationship between growth and inequality (the incomes of the poor tend to rise in line with an increase in average incomes). However, country-specific case studies find a strong and complex relationship between growth and inequality, which can be obscured by cross-country studies. Practitioners should note this when designing country-specific policies and interventions to promote inclusive growth. In the other direction, credit market imperfections, redistributive pressures and unaccountable institutions are posited as mechanisms through which inequality hampers growth. Empirically, there is similarly no overall relationship found between initial inequality and average growth rates. However, there is some consensus that marked high inequality reduces the rate at which the income of the poor increases in relation to that of the rich, and some emerging evidence that more equal distribution of income is associated with longer periods of growth.
The ingredients of inclusive growth
The acknowledgment that inequality affects the impact of growth on poverty reduction has led to a broad agreement that it is necessary to look beyond a ‘growth-first’ agenda in order to successfully deliver inclusive growth. A robust inclusive growth strategy will complement policies to stimulate economic growth with those that foster equality of opportunity, alongside a social security net to protect the most vulnerable. As such, economic policies to promote structural transformation and create productive employment for poor people will need to be complemented by investments in human capital and other programmes to support social inclusion and equal access to jobs. Consensus also prevails concerning the need for social protection measures targeted at the most vulnerable groups in society. Finally, it is often emphasised in the relevant literature that governments must widen their tax base in order to sustainably fund spending on inclusive growth.
The politics of inclusive growth
It is recognised that implementing economic and social policies to promote inclusive growth will not take place in a vacuum, but will require political institutions and arrangements to sustain them. Many academics, donors and policymakers have argued from a conceptual standpoint that inclusive growth will require inclusive institutions that enable all citizens to hold their governments accountable. Empirically, there is little evidence to show that inclusive institutions are a prerequisite for inclusive growth. More significant is the ability of the state to enact policies that are growth enhancing and promote increases in productive employment. Practitioners should note the experience of China, which has significantly reduced absolute poverty without establishing what can be formally described as inclusive institutions (OECD, 2014). Similarly, while some authors find that there is a two-way causal relationship between institutional quality and inclusive growth, it is less clear which types of institutional improvements result in sustained and inclusive growth. This is in line with Khan’s (2012) argument that all-encompassing good governance reforms are difficult to implement in developing countries due to the nature of their political settlements, and that care needs to be taken to identify the specific institutional solutions that can be implemented under specific political settlements.
Measuring inclusive growth
A shortage of robust data and the current lack of a universally accepted definition of inclusive growth will make successful measurement of inclusive growth programmes and policies challenging. Nevertheless there is some agreement in the literature on the methods required to measure and analyse inclusive growth policies, and how this should differ from the measurement of pro-poor growth. Measuring inclusive growth will involve ex ante analyses that examine ways of increasing the pace of growth by involving underused sections of the labour force. This differs from the measurement of propoor growth, which has typically focused on the ex post tracking of poverty measures to observe the impact of growth on poverty reduction. Indices used to track inclusive growth at a country level should also use indicators that measure the economic participation of poor people in the growth process, as well as those that gauge the improvement in economic outcomes for the poor as a result of growth. In contrast, measurements of pro-poor growth policies often focus solely on outcomes.