What is Inclusive Growth?
Rafael Ranieri and Raquel Almeida Ramos explore the history of the "inclusive growth" terminology in "Inclusive Growth: Building up a Concept," published in May 2013 by the International Centre for Inclusive Growth (Working Paper #104). A little earlier, Elena Ianchovichina and Susanna Lundstrom produced a note on "What is inclusive growth?" for the World Bank in a note published on February 10, 2009.
Apparently, the term "inclusive growth" originated in an essay "What is Pro-poor Growth?" by Nanak Kakwani and Ernesto M. Pernia, which appeared in the Asian Development Review in 2000. They use the term "inclusive" growth only once, and in a way which makes it synonymous with "pro-poor growth." They write: "Broadly, pro-poor growth can be defined as one that enables the poor to actively participate in and significantly benefit from economic activity. It is a major departure from the trickle-down development concept. It is inclusive economic growth."
The reasons why "inclusive growth" or "pro-poor growth" seemed like a new thing back about two decades ago was rooted in how people used to talk about development economics . A common framework at that time was the notion that low-income countries were trapped in poverty, and needed big boost of investment capital to jolt themselves forward into a process of industrialization. The "Kuznets curve" held that a process of economic development first brings a period of greater inequality, as new industries take hold, which would then followed by a period of greater equality as prosperity spreads or diffuses through an economy.
All of these frameworks have been challenged in various ways. It's not clear that low-income countries are in a poverty "trap"--it's just that they have slow growth, which isn't necessarily the same thing. It wasn't clear that industrialization would necessarily diffuse through an economy: for example, Latin American countries had a reasonable degree of growth from the 1960s on, but with persistent and high levels of inequality. By the 1970s, arguments were emerging that poverty itself held back economic development, so rather than seeking development first and hoping it would reduce poverty eventually, a direct approach to improving the nutrition, health, education, and income-earning prospects of the poor could bring development. The greatest economic development success stories from the the 1960s through the 1980s, the East Asian "growth miracle" that saw the take-off of economies like South Korea, Thailand, and Taiwan didn't involve a large rise in inequality, nor did the earlier take-off of Japan's economy. As Ranieri and Ramos note:
Another core reason for the shift of development thinking towards a constructive, or at least not pernicious, relationship between growth and equity was the phenomenal developmental performance of the so-called Asian tigers: Hong Kong, Singapore, South Korea and Taiwan. The East Asian developmental experience, which unfolded over the course of a larger time span but received most attention from the 1970s into the 1980s and early 1990s, decisively challenged the existence of an inescapable trade-off between growth and equity. Combining rapid growth in per capita income with relatively stable and low inequality, it suggested that “there might be policy measures to foster the benign combination of high growth and rapid poverty reduction” ...But as the goal of inclusive growth became common, a number of detailed questions emerged. For example, did inclusive growth mean an improvement in the level of standard of living for the poor, or did it mean that the standard of living for the poor needed to be faster than the average for the middle and upper income groups? To what extent did the word "inclusive" apply to the broader middle-class as well as the poor? Does inclusive growth refer to income that includes government transfers, or only to income earned in the market? Does inclusive growth include only private income, or does it also refer to improved provision of government services like education, health services, sanitation and water, or reliable electricity? Should the "inclusiveness" of growth be understood at least partially in terms of institutions for democratic representation and governance?
These different concepts of inclusive growth have different policy implications. While it's easy to feel an attraction to the concept of inclusive growth, it's not clear that it offers a growth formula that works. After all, for many low-income countries around the world, it hasn't seemed that their choice was between "inclusive growth" or "noninclusive growth," but rather they were just struggling to have meaningful growth of any kind.
There's no question that the conceptual problems with "inclusive growth" are severe. Rememver, the Ramieri and Ramos working paper is written for what is called the International Policy Center for Inclusive Growth (which in turn seems to be a joint venture between the UN Development Programme and the Brazilian government), and the writers nonetheless conclude:
"[G]overnments and multilateral development institutions speak of inclusive growth and devise and label objectives, strategies and policies accordingly. But there is no clarity about what is actually meant by inclusive growth; definitions vary and tend to be vague. In general, what seems to be implied is that inclusive growth involves improving the lot of underprivileged people in particular and overall making opportunities more plentiful while lessening barriers to the attainment of better living conditions. But exactly what these entail and whether and how they are interconnected is not made clear. As the meaning of inclusiveness determines policy objectives, while it remains unclear, so do the objectives to be sought in designing policies aimed at promoting inclusive growth."
But despite the conceptual confusion, it seems to me that the terminology of "inclusive growth" does capture some important themes. The great problem of economic development is we cannot yet enunciate any compact list of government policies that reliably leads to a growth miracle. Indeed, given the many different circumstances of nations and economies, it may be that no single list exists, and that instead each country must diagnose which economic or institutional constraints are holding it back. Or it may even be that such diagnosis is too faulty to be reliable, and the best a a country can do is to work on basics like education, health, physical infrastructure, rule of law, and hope for best.
But when thinking about either the inputs to the development process or the outputs of the process, the inclusive growth concept can offer a useful reminder. When thinking about policies to encourage development, it's a reminder that steps which help lower-income people in a direct way are worthwhile, not only because they might help to bring about economic growth but because benefiting those with lower incomes is beneficial in itself. In the general category of policies to help people in a direct way, I would include not just vaccinations and schooling and nutrition, but also policies that help people overcome the hurdles to starting a small business, or that allow people to monitor how public officials are spending money. When judging the results of development efforts, it's a useful reminder to look beyond the images of a huge and flash project like a dam, highway, factory, or mine, and consider the extent to which the project improved the day-to-day lives of lower-income people--whether through jobs and wages or through more affordable goods and services.
To steal a phrase from Ranieri and Ramos, the inclusive growth agenda is to search for a "constructive interaction of declining poverty and inequality and economic growth." That may be an insufficient agenda for economic development, in and of itself, but keep the potential for such constructive interactions in mind is surely worthwhile.
This essay will provide a unique perspective regarding the impact of economic growth and the importance of economic growth. This essay will also provide the argument of the research found that will provide how economic growth can lead to increased prosperity in the developed, the underdeveloped, and emerging countries.
What is economic growth and why is economic growth important? According to Webster’s online dictionary, ‘Economic growth is a steady growth in the productive capacity of the economy and so a growth of national income (webster-dictionary.com)’ Economic growth can sometimes signify that the economy has become wealthier, is producing more, society as a whole is better off and that living standards have become higher. Economic growth is important because it can be seen as a desirable objective for all economies. Economic growth can be calculated by GDP (Gross Domestic Product minus the sun total of the value of a country).
The importance of economic growth can lead to increased prosperity in the developed countries. Economic growth is can be of importance because of the impact of growth in productivity. According to authors,
‘Productivity still remains a very important subject and a very large issue in the construction sector, promising cost savings and efficient usage of resources. Productivity has become an important issue in both developed and developing countries, (Enshassi, Adnan; Mohamed, Sherif; Mustafa, Ziad Abu; Mayer, Peter Eduard, pg. 245).
Economic growth can result in the increased efficiency because of the use in many different factors in productivity. Productivity can lead to positive outcomes that can impact the economic growth for the longevity. According to research, ‘The main factors negatively affecting labor productivity are: material shortage lack of labor experience lack of labor surveillance misunderstandings between labor and superintendent and drawings and specification alteration during execution,’ (Enshassi, Adnan; Mohamed, Sherif; Mustafa, Ziad Abu; Mayer, Peter Eduard, pg. 245). Improving productivity has become a major concern in economic growth.
Some of the important advantages that may have a positive impact on economic growth can include, improvements in employment and lower levels of unemployment. In many developed countries such as the United States, where the economy is experiencing businesses that are growing and where there is a high demand for goods and services can help to employ more individuals as the industry experience some economic growth. Also, if there a country is experiencing economic growth, more than likely, that country has the ability to employ more people as its country is growing. Therefore allowing the government to be able to tax. This can allow the government to improve the increasing deficit, its living standards, can improve, and create a growing economy. The more developed countries have become more aware of the importance of economic growth.
The importance of economic growth can lead to increased prosperity in the undeveloped countries. According to research,
‘The classical modernization perspective, argued that the export of capital to undeveloped countries promoted economic growth by creating industries, transferring technology, and fostering a “modern” perspective in the local population. Dependency theory challenged this pervasive belief (Kentor, 1024).’
Research found that, ‘The dependency school made arguments that the ownership of capital deter-mined the effect on the underdeveloped economy can experience economic growth. An economy that could be controlled by foreign interests would not develop organically. It would experience economic grow in a disarticulated manner, (Kentor, 1025).’
Investment in capital into an undeveloped country can provide the opportunity for these countries to experience some type of economic growth. By investing capital to these underdeveloped counties it can lead to increasing that countries way of improving the manufacturing of the goods and services that their country can produce, and it can help that country to create better jobs for the people. Investing in capital this factor can have a major effect on economic growth for these underdeveloped countries. Every government, whether the country is developed or undeveloped, can use various ways to try to increase economic growth the very best way they can.
The importance of economic growth can lead to increased prosperity in the emerging countries. According to research,
‘Negative impacts of the recent global financial crisis, has caused several countries to experience a slow pace in their rate of economic recovery. This negative impact has been consistent since the early year of 2009, taking into consideration that financial systems were the most affected. In addition, economic recovery has been fragile due to several reasons. For instance, there have been increased uncertainties on the performance and sustainability of the U.S. economy, (EKMEK’?O??LU, 147).’
However, many of the financial systems have a great advantage for future expansion due to a solid economic growth, declining inflation and interest rates. According to research, ‘When GDP is recognized through production, it can be seen throughout many sectors from agriculture and financial services that has experienced negative growth rates in 2009, (EKMEK’?O??LU, 150).’ According to EKMEK’?O??LU,
‘In the fourth quarter of 2009, the services and industry sector experienced a surge and this contributed to a 6 percent increase in GDP. The high growth trend especially in domestic demand and industrial sector continued in 2010, (150).’According to research, ‘Economic growth and recovery has been significant over the many years with a GDP growth of 8.9%, which is an increase from now to compare back in the early 2009. Industry and services sectors are among the major contributors to the experience of this growth with 3.6% and 3.5% increase respectively, (EKMEK’?O??LU, 151).’
Research was found that, ‘Financial growth plays a leading role in influencing economic development in emerging economies. Arestis (2005) says that when monetary authorities are in a position of making funds available at low interest rates, investment and consumption will also increase. As a result of the global financial crisis, global output shrank by 1.1% in the last quarter of 2009. However, substantial fiscal and monetary measures taken to combat the crisis reduced the shrinkage to 0.6%. The recovery process was slow but emerging markets showed a strong growth performance, (EKMEK’?O??LU, 152).’
Many explanations of countries that have experienced economic growth are focused at the national level. They conditions are associated with factors such as geography, demography, natural resources, and political development. Other explanations can be found at the industry level. However, economic growth does not fall on a countries societies, their governments, or its industries to create more jobs but it’s entirely up to companies and the countries leaders to create better jobs. It is business entrepreneurs and the countries businesses whether they choose to spend, invest, or to hire. According to research, there are different ways in which a business can produce more for less. It states, ‘The first is what we call “sustaining innovation,” the purpose of which is to replace old products with new and better ones. Efficiency innovation” is the second type; it helps companies produce more for less. Efficiency innovations allow companies to make and sell established products or services at lower prices. The third type is “market-creating innovation.” When most industries emerge, their products and services are so costly and inaccessible that only the wealthy can buy and use them. Market-creating innovations transform such offerings into products and services that are cheap enough and accessible enough to reach an entirely new population of customers, (Mezue, Christensen, Clayton M, and van Bever, Derek, 76).’
The importance of economic growth to a growing economy, whether the country is developed, underdeveloped, or emerging, may have a rising output level but also can experience a growing birth rate which can also have an effect on the standards of living. This can have a positive or negative impact on the growth of the economy. In normal situations, real income is often used when determining economic growth.
What drives economic growth? According to research, ‘foreign direct investment (FDI) is typically considered to transfer both physical capital and intangible assets, such as technology, among countries. According to standard growth theories, capital accumulation and technological innovation are the major factors driving economic growth, (Wang, and Wong, 316).’ Wang and Wong also states, ‘The effect of aggregate foreign direct investment (FDI) on economic growth remains uncertain in the literature. We revisit this FDI’Growth relation by analyzing the components of FDI ‘ Greenfield investment and cross-border mergers and acquisitions (M&As). Our analysis contributes to the existing literature by focusing on potentially heterogeneous growth effects of different FDI entry modes. Using a sample of 84 countries from 1987 to 2001, we separately examine the growth effects of Greenfield investment and M&As. We find that Greenfield investment and M&As have different impacts on economic growth. Greenfield investment promotes economic growth while M&As can be beneficial only when the host country has an adequate level of human capital, (316).’
According to research, ‘The major determinants of economic growth in the United States are total factor productivity growth, domestic investment growth, and foreign direct investment growth. 2. Causal relationships between foreign direct investment growth and economic growth is uni-directional, running from foreign direct investment to economic growth. 3. Causal relationships between foreign direct investment growth and total factor productivity growth is uni-directional, running from foreign direct investment to total factor productivity. These findings suggest that foreign direct investment growth has a significant impact on the United States economic growth. Additionally, foreign direct investment has a significant impact on total factor productivity in the United States, further contributing to the United States’ economic growth. This calls on the U.S. policy makers to devise policies that are conducive to increasing the amount of foreign direct investment in this country, (Asheghian, 63).’
More important, economic growth can also be calculated as an increase in per capita real GDP (gross domestic product) measured by its rate of change per year. In many cases, an increase in growth rates are very important because any change can make a significant difference in the years to come. The knowledge of economic growth can be important because it can provide insights that can allow a person to gain valuable information.
There is no single strategy that a country, whether developed, underdeveloped, or emerging, can use to achieve a satisfactory economic growth rate. A nation can use any approach they feel is necessary to enhance economic growth. For example, in order to reduce a countries current deficit, they should probably try to increase their exports, and also try to substitute the imports in order to achieve its desired level of economic growth.
Even if a country is developed, underdeveloped, or emerging, the world’s richest countries have no guarantee that they will remain rich and the world’s poorest countries are not considered to be doomed forever. Rich countries don’t always remain rich and poor countries do not always remain poor. Factors that can determine a nation’s productivity can explain why some countries incomes are much higher than in other countries.
Economic growth can also be determined in three ways according to research. It was stated that, ‘First, we can examine international data of the real GDP per person. This can give you a feel of how much the level and the growth of the living standards that can vary around the world. Second, the role of productivity can be examined. This is the amount of goods and services that a country ca produce each hour by a worker. Third, the link between productivity and the nation’s economic policies can be examined, (Mankiw, 532.)’ Because of the difference in growth rates between nations, how the ranking of countries based on their income, changes constantly over time. This explanation can be explained by one word, and that is productivity. The countries ability to produce goods and services has a major impact on its economic growth.
A nations workers has a major impact on a countries ability to be productive. If the nation’s workers are provided with the proper tools in which to work can play a major role in its economic growth. According to Mankiw, ‘The stock of equipment and structures used to produce goods and services is called physical capital or just capital, (537).’ If a country is producing blue jeans, the workers have to be provided with the proper tools and materials needed in order to produce capital.
Every nation’s leaders will use various policies that are based on the factors that was previously used within this essay to try their best to improve ways to try to increase economic growth. These factors that were mentioned throughout this essay have a substantial effect on a countries economic growth rate. There are many reasons for economic growth that are complex. Economic growth comes as a result of the use of a countries available resources and the factors in their production. These factors can directly or indirectly affect the levels of economic growth.
Economic growth will lead to a increase in the prosperity in the developed, underdeveloped, and emerging countries. There are some factors that can have a positive or negative result in the economic growth for any country. Economic growth is important because of the factors that will indicate that a country has improved throughout many years. The importance of economic growth should always be considered in the impact that it could have on any nation. Economic growth can become widespread and can cause damage to a nation’s economic conditions whether that nation is developed or not. The prediction of economic growth over the past years and the years to come has had some significant consequences for many nations throughout the globe. Economic growth can lead to the enabling of leaders to consider ways to improve the needs of the country to maintain growth. The objective for any country is to ensure that growth is maintained to the best of their ability. Economic growth will always be the main objective for all countries.