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Inclusive Growth: Key to Identifying Development Priorities

Interview with Elena Ianchovichina and Susanna Lundstrom, Senior Economists, World Bank

In the Knowledge Brief What is Inclusive Growth? the authors argue that inclusive growth analytics has a distinct character focusing on both the pace and pattern of growth. The paper describes the conceptual elements for an analytical strategy aimed to integrate these two strands of analyses, and to identify and prioritize the country-specific constraints to sustained and inclusive growth.
In this interview, the authors discuss Inclusive Growth and how it affects our work on poverty.

“To be sustainable in the long run, growth should be broad-based across sectors, and inclusive of the large part of a country’s labor force.”

 iancho

Elena Ianchovichina

How do you define Inclusive Growth ?

Inclusive Growth refers both to the pace and pattern of growth, which are interlinked and must be addressed together. Rapid pace of growth is unquestionably necessary for substantial poverty reduction, but for this growth to be sustainable in the long run, it should be broad-based across sectors, and inclusive of the large part of a country’s labor force. This definition implies a direct link between the macro and micro determinants of growth.  The Growth Report: Strategies for Sustained Growth and Inclusive Developmentalso emphasizes inclusiveness as an essential ingredient of any successful growth strategy.

 

 lundstrom

Susanna
Lundstrom

Why does inclusive growth focus specifically on employment?

Inclusive growth focuses on productive employment, rather than on employment per se or income redistribution. There is no bias in the approach in favor of labor-intensive industry policies. Employment growth generates new jobs and income for individuals, while productivity growth has the potential to lift the wages of those employed and promote the returns of the self-employed. Actually, in many low-income countries the problem is not unemployment, but rather underemployment

 

Why do you choose not to focus on income redistribution?

We believe that while in the short run governments could use income distribution schemes to attenuate the negative impacts of policies intended to jump start growth, transfer schemes cannot be an answer in the long run and can be problematic in the short run. In poor countries such schemes can impose significant burdens on already stretched budgets, and it is theoretically impossible to reduce poverty through redistribution in countries where the average income falls below US$ 700 per year. According to a recent OECD study, even in developed countries, redistribution schemes cannot be the only response to rising poverty rates in certain segments of the population.

 

How will Inclusive Growth solve poverty issues?

Policies for inclusive growth are an important component of most government strategies for sustainable growth and poverty reduction. For example, a country that has grown rapidly over a decade without substantial reduction in poverty rates may need to focus on the inclusiveness of its growth strategy, specifically on equality of opportunities for individuals and firms. Other examples can be drawn from resource-rich countries. Extractive industries usually do not employ much labor and the non-resource sectors typically suffer contractions associated with Dutch disease effects during boom periods. These cases may call for an analysis of the constraints to broad-based growth with an emphasis on the non-resource sectors of the economy. When it comes to poor countries growing at very low rates, the main focus of the inclusive growth approach should be on getting the fundamentals for growth right.

 

Can Inclusive Growth be seen as part of the solutions to the global financial crisis?

At this time policymakers are undoubtly preoccupied by the choices they must make to manage the immediate impacts of the global financial crisis. Recent developments have a significant impact on the outlook for inclusive growth as macroeconomic stability is a necessary condition for growth in general. At the same time, policymakers must ensure that immediate crisis response policies do not hurt long-term growth prospects. As the crisis unfolds, growth slows down, and unemployment rates rise, policymakers will need to focus with vigor on key reforms that can jumpstart growth in the short-run and sustain it in the long-run by unlocking new sources of productive employment. In addition, the crisis may change the political economy context and create a new environment conducive to inclusive growth. To make these  policy choices, there is a need for analytical frameworks that can be used to diagnose the new constraints from the perspective of different economic actors.

 

How does the Inclusive Growth program affect the way the World Bank conducts its operations?

The inclusive growth program is inspired by the World Bank’s mission to help developing countries alleviate poverty by “building the climate for investment, jobs and sustainable growth,” and by “investing in and empowering poor people to participate in development.” The program focuses on the development and application of country-specific frameworks that integrate poverty, business environment and other types of micro-level analyses with growth analysis at the macro-level. Traditionally, these analyses were done separately. This integrated approach allows us to identify and prioritize country-specific constraints to sustained, inclusive growth in a systematic way, while relying on a wealth of information collected in different units of the Bank.

 

How can the Inclusive Growth approach be used in World Bank operations?
Applications of this approach can guide the development of concept notes for country analytic work in Country Economic Memorandums (CEMS) (e.g. Tajikistan) and other growth-oriented analytical and advisory work (AAA). Applications can be developed and disseminated as growth chapters in CEMs (e.g. Benin and Mongolia), Poverty Assessments, background papers for Country Assistance Strategies (e.g. Zambia) and other reports. Moreover, the analysis, can inform and facilitate discussions on trade-offs between different development priorities within a county. These discussions happen at different levels within the World Bank and involve different stakeholders: country teams, partner governments, and donor agencies.

 

What are the differences between inclusive and pro-poor growth?

Inclusive growth is in line with the absolute, but not the relative, definition of pro-poor growth. Under the absolute definition, growth is considered to be pro-poor as long as poor people benefit in absolute terms, as reflected in some agreed measure of poverty. In contrast, in the relative definition, growth is “pro-poor” if and only if the incomes of poor people grow faster than those of the population as a whole, i.e. inequality declines. However, 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 opportunities for employment created. Moreover, the inclusive growth approach focuses not only on one group – the poor, but more generally on parts of the labor force excluded from the growth process.

 

For more information on the program and literature, go to: www.worldbank.org/inclusivegrowth.


 




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