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Inclusive Growth: From Desirable to Essential

The global financial crisis and the spike in food prices have pushed millions of people into poverty worldwide. By the end of 2010, the financial crisis is estimated to have added some 64 million people to the ranks of the poor who live under $1.25 a day. Meanwhile, social unrest and popular demands for better and fairer societies are echoing across the world.

The concern for inclusive growth, or a growth pattern that includes all income strata, is not new. What is different is the urgency for achieving greater inclusiveness -- and a nascent realization that without it, sustained growth will not be possible in the future.

People stress different dimensions of inclusive growth. First, there is the crucial connection between income inequality and poverty. Where growth was more inclusive, poverty was reduced more sharply. The East Asia and the Pacific region reduced poverty incidence from 78 percent to 17 percent in the quarter of a century since 1980. Globally, a one percentage point growth in income is associated broadly with a decline in poverty by about 2.4 percentage points. If India could raise its response of reduction to growth to this level, a one percentage point growth could lift roughly 10 million people out of poverty.

Second, many see the value of inclusive growth in the stability and peace it can promote. Socio-political instability and violence have been seen to follow episodes of highly uneven growth, either from absolute deprivation for some people or from a sense of unfairness when economic gains are shared very unequally. Interestingly, highly unequal societies such as Brazil or Mexico have become more equal in the past two decades, while relatively more equal ones such as China and India have become more unequal -- signaling a degree of convergence in inequality across Asia and Latin America.

Third, some see greater inclusion as an aid to growth itself. Highly unequal countries see additional constraints to growth compared to more equal ones. As former Secretary-General of the UN Kofi Annan once noted, "If we cannot make globalization work for all, in the end it will work for none." Several governments have put inclusive growth high on their policy agenda, notably the world's most populous and fastest growing countries, China and India.

Finally, I'd go further to say that without greater inclusion, countries will not be able to grow in a sustained way in the coming years. The main reason is that as the world is coming up against increasing resource constraints to growth, it will be more and more difficult to raise economic growth without a larger share of the population participating in that process.

There is an important caveat, however, to all this. The objective of inclusive growth ought not to be equal outcomes regardless of the efforts, an approach that can hurt the incentives for growth. Instead, inclusiveness means leveling the playing field, getting rid of special enticement for lopsided development, and making the effort to engage every segment of the population.

There seem to be four steps countries can pursue for greater inclusion. First, building on the impressive record in many places for expanding access to basic education, we need actions to increase access for secondary and tertiary education. The focus should not be solely on the access to education, but also on the relevance and quality of education, and its link to skill formation. The ironically high rates of unemployment among educated populations, be it in the Middle East or other places, need to be addressed as well.

Second, areas with high labor intensity deserve special attention, especially when we have seen the harmful effect of their neglect, as in the case of agriculture. This is a particularly important issue given that this year food prices have risen to near 2008 levels, driving some 44 million people into poverty. Improving agricultural productivity can help not only the rural poor by directly increasing their income, but also the urban poor by lowering food prices. There are efforts underway to reverse the decline in agricultural investments, for example in Africa. To see a rise in employment and productivity as a result, however, we will need to capitalize on the key linkages with agro-business and small and medium enterprises.

Third, remittances present a yet to be capitalized area for development. The inflows of remittances into developing countries from abroad have been relatively robust even in the midst of the financial crisis. Better incentives and stronger financial infrastructure for channeling a greater proportion of remittances for productive investment can help small businesses to flourish and stimulate job creation, leading to more inclusive growth.

Fourth, a state that is accountable to its citizens, with checks and balances that help to minimize capture by particular groups, is essential. Establishing an effective organizational structure to deliver results in service provision, especially for the poor, is a key component of an accountable government. Well-targeted and well-functioning programs for social protection can make a timely difference.

Inclusion is vital for getting quality results from economic growth. What is more, inclusion is necessary to ensure that growth can indeed be sustained in the future.

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