Inclusive Growth: Why It Is Important

by Juzhong Zhuang and Rana Hasan

Striving for equal access to opportunity is essential for helping lift the poor

On the street Developing social safety nets to prevent extreme poverty should be part of inclusive growth policies
Photo by Ian Gill

Many countries in developing Asia have experienced impressive rates of economic growth over the last two decades. However, various data—from household income and expenditure surveys, labor force surveys, tax returns, and corporations—suggest that growth has not been inclusive; that is, the fruits of growth have not been widely shared. The richer are getting richer much faster than the poor.

How should developing Asia’s policy makers view the increases in income inequality? There is no simple answer.

On the one hand, there are reasons for concern about growing inequality—and thus calls for action. Increasing inequalities could imply a slower pace of poverty reduction. As is now widely recognized, for a given growth rate, a growth process in which inequalities are increasing sharply will lower poverty reduction. There are also compelling reasons why high levels of inequality could dampen growth prospects. High inequality could lead to adverse consequences for social cohesion and the quality of institutions and policies, which, in turn, slow growth.

On the other hand, many analysts agree that economic development is likely to entail processes that increase inequality. For example, Nobel Laureate Arthur Lewis’s point about inequality and the development process is a powerful one. As he eloquently argued in the 1950s: “Development must be inegalitarian because it does not start in every part of an economy at the same time. Somebody develops a mine, and employs a thousand people. Or farmers in one province start planting cocoa, which grows in only 10% of the country. Or the Green Revolution arrives to benefit those farmers who have plenty of rain or access to irrigation, while offering nothing to the other 50% in the drier regions.”

Many economists would therefore see the situation in the People’s Republic of China (PRC), where measured inequalities have risen significantly over the last two decades or so, reflecting at least partly the type of processes Lewis talked about. In fact, as these economists also like to point out, despite the sharp rise of income inequality, the PRC has also been able to achieve a stellar record in reducing poverty.

Another argument for inaction on the policy front is that designing and implementing policies that are effective in combating inequality are extremely difficult and could even be counterproductive. An editorial piece in the Wall Street Journal is a good example of this type of thinking:

“Why are booming Asian countries so worried about income inequality? Such talk is hardly cheap. If these fears spur bad economic policies, it could end up costing Asia dearly…The danger is that all this talk of ‘inequality’ will lead to policies that, in the name of redistributing income, reduce economic growth and thus make it harder for Asia’s poor to join the middle class. The Asian ‘pie’ is growing for everyone. The challenge is to keep it that way, instead of quarrelingover the relative size of the pieces.”

Both arguments have merits. So where does this leave us? One answer, we would argue, is that policy interventions aimed at tackling inequality need to distinguish between two types of inequality. One is driven by unequal access to opportunities and circumstances beyond the control of individuals—sometimes referred to as “bad inequality.” The other is driven by effort and reflects the rewards and incentives that a market economy provides for citizens who work harder, look for opportunities, and take risks in seizing them; this is sometimes called “good inequality.”

It is the unequal access to opportunities that must form a nonnegotiable target of public policy. The provision of basic health care and education to empower the poor and disadvantaged is fundamental. Concerns with poor delivery of these services—unfortunately still a reality in large swathes of developing Asia—cannot be used as an excuse for not doing enough. It is also essential to improve access to markets and basic productive assets by putting in place good policies and sound institutions, and leveling the playing field. And developing social safety nets to prevent extreme poverty should also be an important part of policies for inclusive growth.

At the same time, it is critical that policies aim to provide more jobs for the poor and to as wide a segment of the population as possible. In attacking poverty and inequality, we must be clear that success entails generating productive, well-paying, and decent job opportunities for the workforce. •