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Rising income inequality within countries has led to a worldwide consensus on the need for inclusive economic growth. Globally, the richest 10% has captured around 60% of income growth, while the poorest 50% has only captured around 10%. Too often, growth has benefitted the few and not the many, and international organisations have pointed out consequences such as political polarisation and an erosion of social cohesion in countries all around the world.
🗨️ Growing #inequality is one of the biggest social challenges in the world today, says OECD Secretary-General @A_Gurria.
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— OECD ➡️ Better policies for better lives (@OECD) August 23, 2019
Inclusive growth has been part of the global discourse for the past decade, and continues to be a top priority today: it was once again on the agenda of the WEF Davos meetings this year, where the theme was how to make globalisation work for everyone and not just the few. And, during the IMF/World Bank Spring meetings in mid-April this year, inclusive growth as a response to rising income inequality was the topic of discussion among their and the OECD’s lead economists. In a world of rising income inequality, most agree that inclusive growth is central for a sustainable future. But are we talking about the same thing? What is inclusive growth exactly?
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International organisations and scholars have developed different definitions and measures of inclusive growth, ranging from broad frameworks to narrow definitions, and differing in how they weigh the importance of inequality and poverty reduction. The OECD and the WEF have both developed broad frameworks, where they assess inclusive growth through a number of indicators, ranging from indicators of inequality, poverty and development to indicators of labour markets, governance and climate.
Figure 1: OECD Framework for Inclusive Growth
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Figure 2: WEF framework of Inclusive growth
This allows for a broad interpretation of inclusive growth, but does not tell us whether inclusive growth is growth that reduces inequality and/or poverty. Researchers from the IMF have developed measures that addresses this more directly, but without agreeing on an approach. One measure is the weighted average of GDP growth and the change in equity that prioritise poverty reduction in absolute terms. Here, you can have inclusive growth in a scenario of rising income inequality as long as GDP per capita growth is sufficiently high. Accordingly, China comes out as a country with inclusive growth.
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Let’s think back for a moment: Why is inclusive growth so important? Most agree that rising income inequality within countries is the main challenge that inclusive growth should overcome. So, why not agree that inclusive growth is growth that reduces income inequality (and preferably poverty)? This brings us to Growth Incidence Curves (GICs, originally developed by Martin Ravaillon and Shaohua Chen in 2003), recently suggested as a framework for inclusive growth by researchers from the IMF, that show how different groups of households, ranging from poor to rich, have gained from growth. In plotting GICs, the vertical axis shows the growth rate of income, and the horizontal axis shows income percentiles or deciles (depending on data availability). Now, how can we relate this to inclusive growth? Simple: inclusive growth is a negative slope on the GIC and positive mean growth (figure 3). Accordingly, we can only have inclusive growth in a scenario where both income inequality and poverty are declining.
Figure 3: Inclusive growth – a simplified illustration
Finally, let’s take a look at a country comparison of inclusive growth and non-inclusive growth using household survey data from the World Bank (PovcalNet). We’ll consider the examples of China and Brazil. First, plotting the average annual income growth across income deciles (solid line) and mean income growth (dashed line) for China from 1990-2015, we see positive mean growth and a positive slope on the GIC (figure 4). According to this framework: non-inclusive growth, as the income of the richest part of the population has grown at a higher rate than the poor part. China have had very high growth rates in the past decades, resulting in impressive poverty reductions, but income inequality has been on the rise.
Figure 4: Growth Incidence Curve, China, 1990-2015
Second, plotting the GIC for Brazil from 1990-2015, we see positive mean growth and a negative slope (figure 5). This is an example of inclusive growth: positive mean growth, while the income of the poor has grown at a higher rate than the rich. Brazil has succeeded in reducing both poverty and income inequality.
Figure 5: Growth Incidence Curve, Brazil, 1990-2015
Of course, the two countries have started at very different levels in terms of living standards, poverty and income inequality, and they are thus not directly comparable. Nevertheless, I think the Growth Incidence Curves are a useful tool to study inclusive growth trends within a country.
In conclusion, if we agree inclusive growth is essential to overcome the global challenges of inequality and poverty, we need to make inclusive growth a matter of reducing both inequality and poverty.
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