The design and implementation of policies to promote inclusive growth will not take place in a vacuum. Khan (2012) argues that the political settlement, the ‘combination of institutions and organisations that can reproduce itself over time’, defines the boundaries of possible change in any given society. Policies that succeed in fostering inclusive growth will therefore require the correct combination of political institutions 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. Inclusive institutions can be defined as those that grant equal rights and enable equal opportunities, and are based on principles of universality, non-discrimination, or targeted action (Carter, 2014). This accountability is viewed as important in stopping the policymaking process from being captured by vested interests (OECD, 2014; Zhuang et al., 2010). The World Bank (2013) also emphasises that inclusive growth requires the participation of all groups, including the poorest and most marginalised, in decision making processes.
Further, Birdsall (2010) argues that sustained growth is more likely where a politically salient middle class demands the stable political and economic institutions that encourage investment by ensuring the rule of law and recognition of private property rights. Finally, some authors view inclusive institutions as basic development outcomes rather than just as a means to poverty reduction (Zhuang et al, 2010). However, in reality institutions rarely fit completely into ‘inclusive’ or ‘exclusive’ categories, and some institutions may exclude certain groups from certain resources and rights while enabling them to access others (Carter, 2014).
Empirically, there is little evidence to demonstrate that inclusive institutions are a prerequisite for economic growth that stimulates productive employment (Pritchett and Werker, 2012). More significant is the ability of the state (through its institutions) to enact policies that are growth enhancing and promote increases in productivity. 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 (e.g. voice and accountability or rule of law) result in sustained and inclusive growth (Zhuang et al, 2010). 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.
Annotated bibliography
OECD. (2014). Making Inclusive Growth Happen: The Role of Institutions. In All on Board: Making Inclusive Growth Happen (chapter 4). Paris: OECD.
This report explores the role of institutions in fostering inclusive growth. It emphasises that inclusive institutions are particularly important as political and economic inequalities often reinforce each other. This can lead to some socioeconomic groups being over-represented in the design and implementation of economic and social policies, and at worst can lead to the capture of policymaking by the most privileged groups (resulting in pro-rich policies). As such, an inclusive policy process will require effective and representative citizen participation and checks and balances to curb the influence of vested interests. This type of inclusive policy process acts not only to increase inclusiveness, but also improves efficiency as it mitigates service failures and improves policy outcomes. The authors also note the need for governments to use new technologies to engage with citizens, as well as the need for effective decentralisation to sub-national institutions, in order to foster institutions and policies that lead to inclusive growth.
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Khan, M. (2012). The political economy of inclusive growth. In Promoting Inclusive Growth: Challenges and Policies. Paris: OECD.
What kind of political settlement is required to foster inclusive growth? This paper argues that achieving inclusive growth in developing countries will require institutional solutions to address market failures (e.g. governance reforms to strengthen property rights), in order to facilitate competition in global markets. However many of these ‘good governance’ reforms are difficult to implement in developing countries due to the nature of their political settlements, which are often variations of clientelism with numerous informal institutions and arrangements. This is because a particular institution that suggests an allocation of benefits that differs from the distribution of power sustained by a political settlement is likely to be resisted by informal arrangements. The author therefore argues that fostering and sustaining inclusive growth will require specific institutional solutions to market failures that can be applied under particular political settlements.
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Zhuang, J., De Dios, E. and Lagman-Martin, A. (2010). Governance and Institutional Quality and the Links with Economic Growth and Income Inequality: With Special Reference to Developing Asia. Mandaluyong City: Asian Development Bank.
This study finds that countries in developing Asia with government effectiveness, regulatory quality, and rule of law at above the global mean in 1998 grew faster in the next decade than countries below the global means for those dimensions of good governance. However, no such causal link was established for voice and accountability, political stability and control of corruption. Various explanations are explored for this including problems with measurement, the role of informal institutions and the context specific nature of the relationship between institutions and growth. Similarly, no clear relationship is found linking governance and institutions with inequality in the sample of Asian countries. Despite this, the authors argue that the value of good governance and inclusive institutions is intrinsic and underlies the notion of inclusiveness, and as such they should be pursued as a basic development goal. Strengthening government effectiveness and improving regulatory quality and rule could be used as entry points for development strategies in developing Asia.
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Pritchett, L. and Werker, E. (2012). Developing the guts of a GUT (Grand Unified Theory): elite commitment and inclusive growth. Manchester: ESID.
Why are some countries able to initiate periods of rapid growth while other undergo periods of stagnation, and why are some able to sustain growth over decades while others see growth reverse or stagnate? This paper finds a high level of variance in growth rates between countries with the same quality of institutions, and that many countries with high and sustained growth rates have weak institutions (across a variety of indicators). The authors argue that only highly developed nations have been able to develop institutions that create and enforce ‘rules’ – which are impersonal and apply equally to everyone. It is not the inclusive nature of the institutions, or the ability to enforce good rules, that result in rapid or sustained growth and structural change. Arguably, it is the shift to an environment in which ‘deals’ can be made in an ordered and stable manner which leads to growth and increased productivity.
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Additional resources
Thorbecke, E. (2014). The structural anatomy and institutional architecture of inclusive growth in sub-Saharan Africa. Paris: OECD.
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Bluhm, R. and Szirmai, A. (2012). Institutions and long?run growth performance: An analytic literature review of the institutional determinants of economic growth. Maastricht: Maastricht Graduate School of Governance.
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Birdsall, N. (2010). The (Indispensable) Middle Class in Developing Countries; or, The Rich and the Rest, Not the Poor and the Rest. Washington DC: Centre for Global Development.
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Acemoglu, D. and Robinson, J. (2012). Why Nations Fail: The origins of power, prosperity, and poverty. New York: Crown.
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Kjaer, A. (2014). From ‘Good’ to ‘Growth-Enhancing’ Governance: Emerging Research Agendas on Africa’s Political-Economy. Governance in Africa, 1(1): 2, 1-10
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For further resources, see the GSDRC topic guide on Inclusive Institutions (Carter, 2014).