Forget about ‘inclusive growth’

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Ben D. Kritz

Ben D. Kritz

ONE of the most abused terms in political economics, especially in the insipid way it has been bandied about by the current Administration over the past couple years, is that old, ill-defined chestnut, “inclusive growth.”

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Most articles or papers that tackle the subject of inclusive growth begin with a disclaimer that opinions differ on what inclusive growth actually is, and then attempt to define it themselves. As a consequence, policymakers who actually use this information to make decisions are left to sort through a heap of vague suggestions, with predictably disappointing results.

For example, a World Bank paper from 2008 provides a definition that covers most of a page, and boils down to “it depends on the country’s situation.” A working paper from the International Monetary Fund last year took a more sterile approach and turned inclusive growth into a formula, which is an expression of possible relationships between income growth and income distribution. And in 2013, Indu Bhushan, who is the Director General of the Strategy and Policy Department at ADB, suggested in an article posted on the bank’s blog that, “for growth to be inclusive, the consumption by the ‘excluded group’ should increase by at least the same rate as the growth rate.”

The two things that all definitions do seem to agree on is that “inclusive growth” has something to do with poverty reduction and income inequality. The latter concept is difficult enough for highly-qualified scholars to understand—there is compelling evidence that the current intellectual idol of the cause, French economist Thomas Piketty, may have gotten it wrong —and so is naturally avoided by government planning types, particularly since tinkering with personal incomes is politically risky. So in practice, or what economic planners and political leaders think is practice, inclusive growth becomes all about poverty reduction—for governments, the ultimate in “throw money at it and make it go away” kind of problems.

That may not necessarily be a knock against the government, because socially oriented economics is fundamentally concerned with the individual; as the scale increases, so do the variables, thus at the national level, options to address poverty reduction in particular and inclusive growth in a broader sense are limited. Not surprisingly, the results are usually limited as well.

Determining if one is “included” in economic growth depends on whether or not he sees his personal economic circumstances improving at a rate approximately equal to the perceived growth of the overall economy. And he perceives growth by making comparisons to his environment—the GDP growth rate, despite our fascination with it, actually means very little if anything to the average person.

The definition suggested by ADB’s Bhushan may be as close as anyone’s idea comes to a useful definition of “inclusive” growth, which really should be called simply “balanced” or “equitable” growth. Personal or household consumption is a reliable indicator of increasing income; whether the GDP growth rate is the best benchmark or not is debatable, because again, it may bear no real relevance to local economic conditions.

To increase consumption, incomes must be increased, and in order to increase incomes, a steady (or ideally increasing) unmet demand for labor must be maintained—which means job creation at a rate faster than growth in the workforce—and real wages must increase faster than, at a minimum, the rate of inflation.

Whether anyone in the Aquino Administration ever realized that was the set of conditions that the government’s economic plan needed to encourage is a question that, based on the government’s piffling accomplishments against poverty, unemployment, and the relative cost of living, seems to answer itself.

Already we are seeing signs that the greater part of the country has given up on realizing any broadly practical benefits from the Aquino Administration, and is increasingly turning its attention to his prospective replacements. Any of those prospective replacements who might actually be serious about making government a pathfinder rather than a set of hobbles on the path to economic prosperity ought to forget about adding “inclusive growth” to their campaign repertoire; it has been rendered meaningless by overuse, and prescribes a top-down policy direction that inevitably falls short of aspirations because it cannot possibly account for so many variables.

Instead, the economic plan of the next administration should simply focus on growth; ultimately, that means focusing on increasing labor demand. That is a complex problem, and may have a number of equally satisfactory solutions; so long as an economic plan presented by a candidate, or in a little more than a year’s time, a new government, has that objective, it is worth considering.

ben.kritz@manilatimes.net.

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2 Comments

  1. OMG Hector you just hit the bullseye… I can’t wait to read Mr. Kritz’ response to your assertions… that is if he will… hehehe

    Galing bro!

  2. People need to look at inclusive growth in context of GDP and the Poverty Elasticity of Growth (PEG)
    The 2 together start to explain why such little progress has been made when it comes to the metrics which matter – poverty, inequality, job creation, unemployment, number of ofw’s – and why inclusive growth is nothing more than a slogan to be peddled, but ignored.

    The Poverty Elasticity of Growth – PEG ( the multiplier effect of % growth to % poverty reduction).
    This varies significantly country to country, dependant upon their economic environment/fiscal policies/population growth etc., and it is a key macroeconomic indicator and part of the, growth – income – poverty, triangle.

    Closely allied to poverty elasticity is often the presence of a high level of income inequality ( the philippines has nearly the worst income inequality in the world), and when both are present, even high levels of growth only have a marginal impact on job generation and poverty reduction, as money generated is concentrated in a few, and is sucked out of the economy, and not reinvested at the necessary rate, or in key areas needing re-generation, and consequently the money cycle becomes a self contained cocoon circulating within a small group of the population, with little ripple or downward benefits. Also not helped by a high proportion of income/profits being sent abroad – legally/illegally, and the distortions created by hot money.

    In such circumstances the double whammy (PEG and income inequality), ensures inclusive growth almost certainly will not and cannot happen without a raft of economic reforms addressing income inequality, which in turn becomes the engine of inclusive growth and driver of poverty reduction, and stimulus for entrepreneurship & innovation.

    A look at the historical growth figures in the Philippines suggests this is precisely why there is deadlock when it comes to poverty alleviation and employment generation, since it has hardly changed despite extended periods of headline gdp growth.

    Under current policies the philippines would need to achieve and sustain an impossible 9%+ annual growth year on year to have any real impact, and only then with focussed investment in key industries

    Other countries can generate jobs and achieve some poverty reduction with 2% gdp growth, ( that gives a clue that there is a fundamental problem with the current system in the philippines), so the propaganda surrounding high growth is irrelevant in itself and without being taken in conjunction with other key metrics – unemployment and poverty, which are the real composite measures of country progress and prosperity.

    Not surprisingly the philippines has the worst poverty elasticity of growth (PEG) in asia, and one of the worst in the world.

    The options and solutions are clearly there, but obviously not to pnoy aquino and his cabinet, who continue to support an outdated and inappropriate oligarch based economy, crony capitalism ( the philippines is the 6th highest in the world), and corresponding protectionist measures, confident in increasing OFW remittances, despite his promise ” to bring OFW’s home to well paying jobs”