Revisiting Inclusive Growth

9 min readNov 20, 2018

What is the bigger challenge- poverty or income inequality? Discussing the relationship between inclusive growth, poverty, and income inequality.

Introduction

Inclusive growth i.e the economic growth which includes all. Sustained economic growth, rapid reduction in poverty, universal access to quality education, employment opportunities for all, reducing gender inequality, improvement in healthcare, basic amenities like electricity, housing, sanitation, clean & accessible drinking water are the consequences of inclusive growth.

Inclusive Growth embraces long-term perspective, typically defined as broad-based economic growth concerned with sustained growth, the benefits of which monetary and non-monetary are more equally shared across society and focusing on people’s well-being. Thus it captures both macroeconomic and microeconomic determinants of economic growth.

In 2015, countries adopted the 2030 Agenda for Sustainable Development and its 17 Sustainable Development Goals, two of which are:

Goal Number 1, “No Poverty” and

Goal number 10, “Reducing Inequality”

Situation and magnitude of the problem

Over the last two decades, the world has made great progress, the GDP growth rate (Gross Domestic Product which determines the size of the economy at a point of time) among low-income and middle-income countries has risen since the 1990’s, not only reducing the gap between low-income and high-income economies but substantially reducing poverty. According to UN figures, around 1.1 billion people have escaped poverty since 1990.

Across OECD countries (Organisation for Economic Co-operation and Development is an intergovernmental economic organization with 36 member countries from North and South America to Europe and Asia-Pacific), the average Gini-Coefficient (it measures income inequality, takes the value between, 0–1 if the value is 0 people have the same income and when one person has all the income value is 1) reached 0.318 in 2013/14 highest since the 1980’s. This means the average income of the richest 10% of the population is about nine times that of the poorest 10%
In emerging economies, such as China and India, a sustained period of robust economic growth lifted millions of people out of absolute poverty. But the benefits of growth have not been evenly distributed and high levels of income inequality have risen further.
Among the dynamic emerging economies, only Brazil managed to strongly reduce inequality, but the gap between rich and poor is still about five times that in the OECD countries.

Despite the fact that remarkable strides have been made to uplift people from extreme poverty these figures are glaring-

Around 783 million people live below the international poverty line of US $1.90 a day.
Globally, there are 122 women aged 25 to 34 living in extreme poverty for every 100 men of the same age group.
As of 2016, only 45% of the world’s population was effectively covered by at least one social protection cash benefit.
Most people living below the poverty line belong to two regions: Southern Asia and sub-Saharan Africa
High poverty rates are often found in small, fragile and conflict-affected countries.

Economic inequality and poverty are widespread and inevitable and this drives policymakers to project Inclusive Growth as their strategic pillar especially for developing economies, but the question arises;

Is there a relationship between income inequality, poverty, and inclusive growth? How do they affect each other?
How should we re-think economic growth to ensure that the benefits are more equally shared?
Is inclusive Growth still elusive? Where do we stand?

So is there a relationship between inclusive growth, income inequality, and poverty? How do they affect each other?

The answer is Yes, there tends to be an interlink.

The growth of any country is measured in terms of its GDP(Gross Domestic Product) which determines the size of the economy at a point of time, higher the GDP, higher the productivity, higher the income and when income is higher it improves the standard of living but what if the income distribution is not equitable? ie not evenly distributed.

Of course, it leads to income inequality hence leading a person in a vicious circle of poverty it can also lead to a decreased economic growth.

How inequality affects poverty and economic growth

When the economic growth of a country is increasing, welfare may not be the consequence because the increase in income may be concentrated in the hands of a few individuals or firms, making few better off and rest worse off.

This will create inequality, this gap further increases when few individuals or firms, take advantage of economic development.

When income inequality is fairly high it tends to limit access to productive resources which results in fewer investments thus decreasing economic growth.
Inequality affects poverty because it determines the distribution of wealth in general and income in particular.
Even the rapid growth would not allow by itself, reduce poverty and the uneven distribution of growth will not benefit poor.

How should we re-think economic growth to ensure that the benefits are more equally shared?

Undoubtedly rapid growth is of paramount importance but for it to be sustainable we need inclusive growth focussed policies providing equality of opportunity to all, UNDP insists that economic growth is an important factor in a significant reduction of poverty but insufficient, given the role of inequality.

In 2005, the UNDP report considered ‘inequality’ as the main cause of human underdevelopment, because of its multiplier effect on economic growth, it emphasized the need to steer the growth to the poor.

Economic growth and changes in inequality are important factors on the level of poverty. Thus rapid poverty reduction essentially comes through robust economic growth and a significant reduction in inequality particularly by fiscal redistribution like making taxes more progressive, introducing minimum wages, or strengthening the patchy nature of the welfare system, fighting corruption, and breaking down the digital divide are of few. Let's see how-

Making the tax system more progressive

Taxation policy has a particularly important role in addressing inequality and boosting economic growth.

Priority should be given to making the taxes more progressive
Reviewing the efficacy and effectiveness of wealth and inheritance taxes
Reduce the ability of high-wealth individuals and companies to shift assets and income offshore to avoid taxation.
Abolishing or scaling back a wide range of tax deductions, credits, and exemptions which benefit high-income recipients disproportionately
Achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average

Universal Basic Income or Minimum Wages

Can minimum wages become a tool to address inequality thereby reducing poverty?

Minimum Income is a hotly debated social policy issue all over the world, policymakers are even thinking it as an alternative to their subsidy based social programmes and some making it statutory.

Why?

Because the government spends a huge amount of money on social programmes that are run for the poor but the issue arises when this money doesn’t reach the bottom of the social ladder.

What is Universal Basic Income or Minimum Wages and is it really a solution?

Minimum Basic income or Universal Basic Income is a powerful idea which provides minimum wages to all irrespective of their social status to meet living costs.

More evidenced-based policy designs are needed to implement the Minimum Wage system especially in developing countries but yes, it may address poverty if

Firstly governments regulate the informal sector

Right now minimum wages apply to only a minority of poor workers, not part of the informal sector.
Minimum wage directly affects earnings and employment in the formal sector but in most developing countries the minimum wage does not apply to the informal sector as it employs low-skilled or unskilled workers and where it is common for workers to earn below the legal minimum wage.
Informal sector occupies a dominant place in the economy but doesn't contribute to it.

Secondly, the wage floor can be set through statutory minimum wages and collective bargaining agreements.

Thirdly Minimum Wage is associated with job destruction but if job losses in the formal sector are small, raising the minimum wage is likely to reduce poverty.

Small-scale trials have taken place around the world, each using different methods and delivering different results

The United Kingdom recently announced to progressively increase the minimum basic income to a level of living wages by 2020
Qatar just announced the introduction of a minimum wage system
South Africa announced the introduction of a new national minimum wage in 2018
India is thinking of extension of minimum wages to all wage-earners.

Considering inequality as part of national anti-corruption agendas.

Corruption impacts poor and vulnerable the most thereby widening inequality, it is the biggest constraint on economic growth. A higher bribery retards both the real sales and the labor productivity growth of firms.

Effective anti-corruption strategies should aim sectoral level approach rather than changing the top.

Reducing the corruption which drives economic development and promotes job creation, thus reducing inequality.

Infrastructure development

Infrastructure facilities are called economic and social overheads these consists- Energy, Transport, Communication, Banking, Science and Technology and social overheads like healthcare, education.

The economic prosperity is directly proportional to the infrastructure a country has, thus the development of infrastructure is an important aspect of increasing production.

In the last 200 years or more industrial and agricultural revolution accompanied by a revolution in transport, communication, banking has changed the face of the world.

Fourth Industrial Revolution is driving us into an uncertain, unknown and exciting era of technologies like Artificial Intelligence, Blockchain Development but half the world is still struggling to achieve basic services such as water and electricity that often occupy a significant fraction of poor households' budgets.

Foster and Yepes (2005) show that households in developing countries spend a significant fraction of their income on water and electricity.

For example, in a sample of Latin American countries, households in the poorest quintile often spend more than 5% of their income on water and more than 7% on electricity.

In East Asia, the average share of total household expenditure spent on water services varies between 0.8% (China) and 3.2% (Cambodia) but can reach up to 16-33% for some of the poorest households (Indonesia).

As for energy, average spending was 2.9% for Vietnam, 7.6% for China, 9% for Indonesia and 24% for Cambodia.

More investments in infrastructure and social sectors are needed for overall economic growth to ensure the well-being and quality of life of people.

Technology

Technology is a powerful development tool but still, more than 4 billion people, mostly in developing countries, don’t have access to the internet connection due to infrastructure weaknesses, affordability, cultural barriers, language barriers for example;

In sub-Saharan Africa, some 600 million people (almost two-thirds of the region’s population) do not have regular electricity, and this applies to nearly a quarter of people living in South Asia.

In Rwanda, Uganda, Kenya, South Sudan, and Ethiopia, where 75 million people (67% of the total population in these countries) currently have no access to the internet.

Internet penetration significantly impacts a country’s ability to- participate in the digital economy, improve access to education or healthcare.

Thus breaking down the digital divide for the 55% of the world’s population should be the priority agenda for governments, businesses, and civil society.

Conclusion

Thus income inequality affects poverty. Economic growth and rapid poverty reduction essentially comes through robust economic growth and a significant reduction in inequality

The economic systems tend to be complex and given the glaring facts and figures, inclusive growth seems to be elusive however the world has envisioned the sustainable development and to ensure that benefits are equally shared among all the actors of the economy, the government should focus on inclusive growth as their policy objective by aiming at inequality, this will need political will and capacity, resources and partnership, policies and strategies, breaking the digital divide and maximizing the benefits of technology, sharing economy may transcend human race from the vicious circle of poverty.