At its Spring Meeting, the Development Committee endorsed the eradication of poverty and the promotion of shared prosperity as the twin goals of the World Bank Group mission. What development agenda is implied by these goals? What are the key elements of a development policy framework that should inform WBG strategy to achieve these goals?
Economic growth has been central to the progress achieved in reducing poverty and boosting the incomes of the bottom segments of the population. The change in poverty can be decomposed into the growth of average incomes and the change in inequality. Cross-country analysis shows that, in the medium- to long-term, upwards of 70 percent of the variation in poverty can be attributed to economic growth. Similarly, the rise in the incomes of the bottom 40 percent of the population can be decomposed into the change in the income per capita of the country and the change in the share of total income that is received by the bottom 40 percent. A review of the data for changes in the income per capita of the bottom 40 percent over the past two decades reveals that, in most cases, overall economic growth played the predominant role.
Looking ahead, maintaining strong economic growth will be key to the attainment of the goals of ending poverty and boosting shared prosperity. Sustained progress towards these goals requires growth in the overall economy. There is a need to support the growth agenda in both low- and middle-income countries. The imperative of growth is clear in low-income countries, especially those where growth has continued to lag: they have high rates of extreme poverty and average incomes are low. Poverty rates are lower on average in middle-income countries, but these countries are home to a majority of the extreme poor in absolute number. Per capita incomes are higher, but even in the more dynamic middle-income economies they remain low relative to those in advanced economies. For example, China’s per capita income is only about one-tenth of that of the United States and India’s only 3 percent. So the development agenda remains large in the middle-income economies, including the challenge of structural transformation from growth driven by rural-urban transition and abundant labor to more sophisticated forms of production and technological innovation.
The goals of ending poverty and boosting shared prosperity will also require a stronger focus on policies to ensure that growth is inclusive. The objective is not only to ensure that the less well-off share in the benefits of growth but that they participate in the process of growth. The rise in income inequality in a number of countries in recent years reinforces the need to pay more attention to the inclusiveness of growth.
Environmental sustainability is crucial to the longer-term sustainability of growth and gains in social inclusion. Environmental damages are reaching a scale at which they are beginning to threaten both growth prospects and the progress achieved in social indicators. The poor are especially vulnerable to environmental stresses. Growth needs to be made greener, to reconcile the need to achieve higher, shared prosperity with the imperative of a better managed environment.
The policy agenda to achieve growth that is strong, inclusive, and sustainable over the longer term is broad and multidimensional. It is also country-specific. Development experience and research provide useful guidance on the core elements of this agenda, while also emphasizing the need to tailor growth and development strategies to diverse country circumstances. In the past decade or so, the Bank’s World Development Reports have examined several key dimensions of the development agenda. A synthesis of this and related work highlights the role of four broad elements:
(i) A Conducive Environment for Private Sector Led Growth and Job Creation. The private sector is the main driver of economic growth. Jobs are at the center of the translation of economic growth into improvements in human welfare. The private sector accounts for 90 percent of all jobs in the developing world. Accordingly, a core element of the agenda is to provide an environment that supports private investment, innovation, and productivity growth. A regulatory and institutional environment that enhances competition in product and factor markets not only spurs investment and efficiency but also fosters inclusive growth by leveling the playing field and promoting equality of opportunity. Infrastructure investment is a key complement of regulatory reforms to improve the climate for private activity, boost competitiveness, and expand opportunities for economic diversification. So is investment in human capital. Good governance―capacity, transparency, accountability―underpins this agenda, impacting the effectiveness of policy interventions and investments. Macroeconomic stability is another important cross-cutting determinant of the environment for private investment and growth, requiring sound management of macroeconomic policies to keep the economy on an even keel and paying attention to the longer-term implications of today’s policy actions, notably ensuring fiscal sustainability.
(ii) Empowerment of the Less Well-off. Economic growth creates opportunities for advancement but the poor and the less advantaged may not be able to capture those unless supported by more targeted policies to enhance their capacities to participate in growth. These include policies that improve poor people’s access to education, health, key infrastructure, financial services, and productive assets. Also important are social safety nets to protect the poor and vulnerable from shocks. A good example is conditional cash transfers that combine social assistance with programs that enhance the beneficiaries’ productive potential. Developing and sustaining such pro-poor programs to scale requires well-targeted public spending, underpinned by a tax system that generates needed resources efficiently and fairly. Removal of economic and social barriers against those often excluded, such as women and youth, benefits both inclusion and growth. A key to this agenda of inclusion and effective delivery of services to the poor and vulnerable is the enhancement of the voice of the disadvantaged segments of the population and development of public institutions responsive to their needs.
(iii) Integration of Environmental Sustainability into Development Policy. Ensuring the longer-term sustainability of growth requires reforms to improve the efficiency of use of natural resources and investment in green technologies. For growth to be greener, resources must be allocated in ways that reflect the social costs and benefits of using up scarce natural capital. This means that policies and institutions should correct for the overuse of environmental resources caused by market failures or policy distortions through appropriate pricing, taxes, and regulation. Green policies improve social welfare, taking into account not only present but future generations. Yet policy makers are naturally also concerned about potential trade-offs and costs for near-term growth and employment. Such costs can be minimized through well-designed, market-based policies that create incentives for people to seek out the least-cost ways of protecting the environment. There are also important win-win opportunities, such as the reform of energy subsidies that are inimical to economic efficiency and the environment and are regressive. Incorporating climate change mitigation and adaptation into infrastructure design can prevent economies from being locked into costly and unsustainable patterns. Green growth is necessary and, if supported with carefully designed policies, also inclusive and affordable.
(iv) Actions at the Global Level. In addition to policies at the national level, the goals of strong, inclusive, and sustainable growth require collective action at the international level. Global dimensions of growth and development, and the related global public goods agenda, are increasingly important in an interconnected world. This includes international cooperation in macroeconomic policies to ensure global financial stability and policies to promote efficient and fair functioning of international markets for goods and services, labor, and capital. Global collective action is essential to addressing the challenge of climate change, including supporting developing countries’ efforts through technology transfer and capacity building. Actions affecting the volume and effectiveness of development aid are especially important for poor countries, in supplementing their domestic resource mobilization.
Within the broad agenda outlined above, the mix and sequencing of policies and priorities vary considerably across countries, depending on factors that shape the specific development challenges they face, such as the structure of the economy, stage of development, and the past and current trajectory of development performance and progress on reforms. For example, the jobs challenge and policy priorities are different between agrarian and urbanizing economies. Resource-dependent economies offer their own unique challenges, as do countries in fragile and post-conflict situations. The Bank’s engagement, at the country as well as the global level, will need to be selective, responsive to the specific client needs, the Bank’s strategic goals, and its comparative advantage.