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Can growth benefit all?

Felipe Jaramillo's picture

As an economist, I always thought that sustained growth over many years was the key to reduce poverty and promote development. Now I know, that while growth is important, it is a particular type of growth, the one that is inclusive, that is key for sustained development to take place.

As policy makers we are now focusing all our efforts in identifying and promoting policies targeted at boosting the incomes of the bottom 40 percent of the population. We need to ensure that growth provides benefits to those that are in the lowest deciles of the income distribution.

Why do we do this?

First, it’s a moral imperative. A growth process that does not provide opportunities to all and protect those who fall behind, is unfair and ethically indefensible.

Second, it makes development sense, and we want to achieve the goal of reducing the incidence of extreme poverty (at $1.90/day) to 3 percent by 2030.  If between now and 2030, countries grow at the average rate of the past 20 years and there are no changes in their income/consumption distribution (that is, the growth rate is not faster growth for poorer people relative to the overall growth), the proportion of extreme poor in the world would reach 5.8 percent by 2030, above the World Bank Group’s target. If, however, average growth rate remains the same, but with a 1 percentage point growth premium for the bottom 40%, the proportion of extreme poor in the world would fall to 2.9% by 2030 (Ferreira, Galaso and Negre, 2016).

Shared prosperity is also linked to sustaining growth.  There is growing evidence that too much inequality can be harmful to growth sustainability.  Inequality might deprive the poor of the ability to stay healthy and accumulate human capital, particularly considering financing constraints; generate political and economic instability that reduces investment; and impede the social consensus required to adjust to shocks and sustain growth.

Third, it’s doable. Between 2006 and 2011, in 67 out of 86 developing countries with available data, the bottom 40% grew faster than the overall mean growth.  This is good news, but we need to do more.

So in the Bank we are working across different teams to identify policy options and programs that can help those in the bottom 40%. Critically, we need to level the playing field so all have similar opportunities, including economic opportunities, by investing in education, health and other similar activities that build human capital and improve employability. 

Some of the questions we are grappling with are: (i) What is meant by promoting equal opportunities and why is it important for inclusive growth? (iii) how should public policy seek to promote equal opportunities and prioritize between competing needs? (iii) what is the role of labor markets in enabling the poor and the bottom 40% to participate in the growth process, including the kind of regulatory policies that are needed to make these markets more efficient and equitable? And, (iv) how can policies address the exclusion of historically disadvantaged groups in a society from opportunities?

We also look at it from a fiscal perspective and we wonder: (i) How can a fiscal package be used to promote equality of opportunity, and how is that different from a primary focus on reducing income/wealth inequality? (ii) how important is it for fiscal policy to be “fair” and to be perceived as so? and (iii) what are  the political challenges to implementing a fiscal policy that supports equality of opportunity?

All these will be discussed in the Inclusive Growth Conference 2016 that the Bank is organizing. If you could think of one concrete proposal to benefit the bottom forty in your country. What would you propose?

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