Inclusive growth is a buzz-word in policy circles nowadays, among developed and developing countries. Its importance is increasingly being recognised and highlighted in work plans and strategies of the International Monetary Fund, G20, European Commission and the UK’s Department for International Development. As a concept, it has been included as a proposed goal by the Open Working Group on Sustainable Development Goals as a part of the post-2015 development agenda.
Inclusive growth is a concept that advances equitable opportunities for economic participants during economic growth with benefits incurred by every section of society. This concept expands upon traditional economic growth models to include focus on the equity of health, human capital, environmental quality, social protection and food security.
The definition of inclusive growth implies direct links between the macroeconomic and microeconomic determinants of the economy and economic growth. The microeconomic dimension captures the importance of structural transformation for economic diversification and competition, while the macro dimension refers to changes in economic aggregates. Sustainable economic growth requires inclusive growth. Maintaining this is sometimes difficult because economic growth may give rise to negative externalities, such as a rise in corruption, which is a major problem in developing countries. Nonetheless, an emphasis on inclusiveness—especially on equality of opportunity in terms of access to markets, resources and an unbiased regulatory environment—is an essential ingredient of successful growth. The inclusive growth approach takes a longer-term perspective, as the focus is on productive employment as a means of increasing the incomes of poor and excluded groups as well as raising their standards of living.
Inclusive growth as the literal meaning of the two words refers to both the pace and the pattern of the economic growth. The literature on the subject draws a fine distinction between direct income redistribution or shared growth and inclusive growth. The inclusive growth approach takes a longer-term perspective as the focus is on productive employment rather than on direct income redistribution, as a means of increasing incomes for excluded groups. Inclusive growth is, therefore, supposed to be inherently sustainable as distinct from income distribution schemes which can in the short run reduce the disparities between the poorest and the rest, which may have arisen on account of policies intended to jumpstart growth. While income distribution schemes can allow people to benefit from economic growth in the short run, inclusive growth allows people to “contribute to and benefit from economic growth”.Inclusive growth deals with the idea that economic growth is important but not sufficient to generate sustained improvements in welfare unless the dividends of growth are shared fairly among individuals and social groups. At the same time, there is increasing recognition that, in addition to income and wealth, people’s well-being is shaped by non-income dimensions, such as their health and education status. The level and distribution along these non-income dimensions are therefore key aspects of Inclusive Growth, making it a multidimensional concept. Moreover, to be relevant inclusive growth needs to be policy-actionable, allowing policymakers to better understand the trade-offs and complementarities that exist across policy areas and the tools that can be used to achieve improvements in both the level and distribution of income and non-income outcomes. This is why it is important to consider the various dimensions of inclusive growth simultaneously and not one by one.
Despite the agreed urgency to achieve inclusive growth, there is surprisingly little clarity as to what it actually is, with important differences in approach among key institutions and governments: the World Bank, Asian Development Bank (ADB) and International Policy Centre for Inclusive Growth (IPC-IG) all have different definitions and understandings. Even in the absence of a single shared definition, a look across the board at the initial attempts at definitions that have emerged shows some convergence in thinking on important aspects of inclusive growth. Small businesses play an important part in national and local development, contributing significantly to employment, economic growth and service provision. They also play an important role in inclusive growth.
Inclusive growth is a distinct concept from standard economic growth and is accompanied by a unique set of policy recommendations. It is often, however, included in donor approaches without much clarity about how an inclusive approach differs from the standard approaches. In mitigating against this risk, it is important that we work towards a definition of inclusive growth and look at the key factors that would contribute towards growth being more inclusive. To this end, in this essay, I have tried to identify the key elements of inclusive growth as a step towards a working definition of this concept. The various aspects that are important for making growth more inclusive have been considered in some detail. My recommendations to pursue inclusive growth are :
1. Develop clear definitions of what is meant by inclusive growth. Definitions matter because they clarify and set the objectives that will determine policy and spending choices.
2. Ensure that the objectives for inclusive growth are explicitly defined. These should focus on broader sustainable human development objectives than increasing incomes or GDP, such as gains in human development, poverty and inequality reduction, increased economic participation and promotion of the sustainable use of natural resources and climate protection.
3. Develop proactive strategies to ensure growth that is inclusive. This does not happen automatically. In addition, economic policy-makers should proactively aim to maximise social and environmental co-benefits.
4. Develop clear guidelines, objectives and indicators on how inclusive growth will be achieved and measured. This includes clearly articulating the methodology for implementation and theory of change behind a proposed approach.
5. Small businesses—where most poor people work—play a key role in making growth more inclusive. They, therefore, need to be prioritised in inclusive growth strategies. Given their importance for poor women and men the direct links between small businesses and inclusive growth should also be a focus for future research and policy evaluation.
Some recipes for inclusive growth contain many familiar elements from standard growth strategies such as macroeconomic stability and economic openness. This is not surprising when some institutions and governments see achieving high growth rates as the major contributing factor and prerequisite for achieving inclusive growth. However, governments and donors need to think outside the box and consider some of the wider factors contributing to inclusive growth. In fact, the inclusive growth debate challenges many of these old orthodoxies and has thrown up some new priorities and characteristic approaches. Some of the key ingredients for inclusive growth that are generally agreed upon include: investment in human capital, job creation, structural transformation and broad-based growth, progressive tax policies, social protection, non-discrimination, social inclusion and participation, strong institutions. The relationship between growth, inequality and poverty reduction are long contested and therefore their roles in “inclusive growth” are equally unsettled. Different institutions have traditionally adopted quite different stances. With regards to growth and poverty, the World Bank, for example, focuses on a high pace of growth as a pre-requisite for achieving poverty reduction, whereas IPC-IG avoids presuming a connection between economic growth and levels of inclusion. When it comes to outcomes, most discussions around inclusive growth focus on patterns of income growth. Growth is deemed to be inclusive, depending on the extent to which poor men and women have benefited through increased income. However, the Organisation for Economic Co-operation and Development (OECD) defines inclusive growth as having happened when other indicators of improved wellbeing, aside from income, have also improved for citizens: “We also need to rethink growth as a means and not as an end. We have to give priority to the quality of growth over the quantity of growth. For this, we need new models and tools to measure progress and the quality of our lives.”