I must confess that I have been struggling to find a good working definition of inclusive growth for some time, although I believe I understand the concept vaguely. This term is now very widely used in the development policy discourse in Asia and the Pacific. However, I come away with the feeling that the term is used by different people in different ways. True to the cliché, you ask five economists about the definition of inclusive growth and you get six answers! On top of this, most existing definitions do not seem to fully capture the concept of inclusive growth.
For a definition of inclusive growth to be useful, it should have the following elements, in my view.
One, the definition should clearly state the outcome that inclusive growth seeks to achieve, rather than merely defining the process leading to it. As economists would say, it should have a clear objective function. If poverty reduction is the intended outcome, then all growth will be inclusive, because of the well-established relationship between growth and poverty reduction. In that case, the definition would not make much sense. On the other hand, if the goal is to reduce inequalities, this should be clearly stated.
Two, the definition should provide some guidance in how to measure inclusive growth. The definition should help in ranking countries by strength of their inclusive growth approaches and outcomes. At a minimum, it should be able to distinguish between inclusive and non-inclusive growth.
Three, the definition should be simple. The answer to the question, "What is inclusive growth?" should be a simple one-sentence, preferably one that I can use to explain the concept to anyone. Given the complex nature of poverty and exclusion, there is a temptation to make the definition comprehensive and all-encompassing. However, the broader the definition, the greater the confusion. While the concept of inclusive growth needs broad and complex analysis, the working definition should be simple and results-oriented. A broad definition could confuse policy-makers about the interventions needed to engender inclusive growth. In fact, at one extreme, such a definition could lead to the tautological conclusion that any development intervention would support inclusive growth.
Do I have a proposal? Yes, I do.
For growth to be inclusive, the consumption by the “excluded group” should increase by at least the same rate as the growth rate.
The excluded group could be clearly defined based on the country context and could include combination of groups including the poor, people in the lowest income percentile, ethnic minorities, women, elderly or any other such group. This definition is very similar to the one used by International Monetary Fund (IMF). For the sake of simplicity, let us define the excluded group as those in the bottom income quintile (20%) of the country. In that case, if the economic growth rate is 5 percent, for it to be inclusive, the consumption by people in the bottom quintile should increase by at least by 5 percent. The greater the increase, the more inclusive would the growth be deemed to be.
I am proposing increase in consumption rather than income, since consumption represents actual welfare gain. It also more effectively captures in-kind transfers. Consumption is also easier to measure than income. The definition I have proposed implies that in, an inclusive growth environment, the welfare of excluded people improves faster than the average incomes in the country.
Having defined inclusive growth, let me now get back to my real work, i.e., how to mainstream inclusive growth approaches in ADB operations, which, of course, is much more complex! However, a well defined goal-post helps.
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