The mirage of inclusive growth

In these times, the process of achieving a higher persistent rate of economic growth is seen as the ultimate means of achieving prosperity for all. Economists and policymakers recklessly use the word “inclusive growth” to define the goals and rationale for each policy and reform measure.

It therefore becomes relevant to explore the underlying neoliberal idea of ​​inclusive growth which does not apply in practice to the context of the developing world (particularly India in South Asia).

The idea of ​​inclusive growth has shaped our understanding of growth since the mid-1960s. The process of achieving such growth encompasses the inclusion of all sections as beneficiaries and partners of growth, and envisions that ‘inclusion of the excluded should be integrated into the growth process.

Such growth, as expected, in itself will then lead to a high elasticity of poverty reduction (higher poverty reduction per unit of growth), also reducing income inequalities at the individual and collective levels.

Inequality curve

Simon Kuznets (1966) explained how inequalities do not last long. According to Kuznets, “Economic inequalities increase over time as a country begins to develop; however, once a certain average income is reached, inequality begins to decrease ”.

The inequality curve – the Kuznets curve – is an inverse U-shape, where inequalities tend to decrease after a certain point for two reasons: First, with higher economic growth, governments’ tax revenues are likely to decline. increase, allowing them to spend more on infrastructure development, education, health care and skills development; especially in backward areas where the need for such social investment is greater, improving opportunities for people without the capital to develop.

And second, after the initial period of economic growth and boom, the stated expectation of neoliberal supporters is that it will trickle down to people, creating more jobs and income for many.

Jagdish Bhagwati cites the need for “Track II” reforms in developing countries where he calls on the government to massively spend the economic benefits of liberalizing markers on health care, education, etc. so that the initial growth is reflected and realizes the principles of equity and sustainability.

it just widens

In her 2012 article, Indira Hirway provides useful empirical evidence from South Asia to debunk the myths attached to the “inclusive” theoretical application of the neoliberal version of economic growth. Hirway explains how, despite the adoption of pro-market policies in most South Asian countries, the level of income inequality continues to widen.

Of the 14 Asian countries studied, inequalities increased in 11 – including Sri Lanka, China, Cambodia, India, Indonesia and Nepal. Malaysia and Thailand are the only two countries where inequality has declined marginally. In the case of India, the Gini coefficient (a measure of income inequality) has fallen from 0.44 to 0.47 over the past decade.

The problem with the Indian case has been mainly with the implementation of Track II reforms where, despite higher and sustained levels of economic growth since the early 2000s, public spending on education and health has remained considerably low (less than 3% and 2% percent of GDP, respectively, so far). This has resulted in the accumulation of economic wealth in limited geographic city centers where economic prosperity is enjoyed by the few who directly accumulate the benefits, leaving “the others” entirely dependent on government. Upward mobility of income within these low-income classes remains a problem due to lack of adequate education, health standards and access to growing productive employment opportunities.

In the area of ​​employment and work, researchers indicate poor performance in creating productive jobs with “decent work” conditions. In India, the unemployment rate fell from 1.96 percent in 1993-94 to 2.2 percent in 1999-2000, to 2.37 percent in 2004-05 and to 2.06 percent in 2009- 10.

Although different reasons are cited for this increase by economists, trends show that the rate of employment growth, including the rate of growth of “decent work”, is far from satisfactory.

This is not only true in the case of India, but also in other developing economies. According to the ILO, between 1995 and 2006, declared unemployment increased by 22 percent, setting the global unemployment rate at 6.3 percent. While the growth rate of output was much higher than the growth of employment, it is appalling how the obsession with output as the ultimate driver of inclusive and coherent growth continues to drive the economy forward. imagination of our decision makers.

Need an alternative

A major limitation of the theory behind the neoliberal policy framework is that it leaves two important macroeconomic components beyond its reach: natural resources or natural capital, and unpaid labor or labor that is outside. of the production limit but within the general production limit of the United Nations System of National Accounts. These two exclusions are associated with the excluded sections of the population, relevant to developing economies.

There is therefore a strong need for policy makers in India and the developing world to take a fresh look at the macroeconomic framework that underpins current policies. Breaking the tug-of-war between the growth and redistribution phases is essential as there is an obvious gap between the two.

The dominant growth process which creates exclusion as well as inequalities tends to dominate the process of redistribution and intensifies exclusion in the process. As argued by Hirway, “the growth phase and the redistribution phase must be complementary for the general growth process to be inclusive”.

For this, first of all, the macroeconomic policy framework justifies a radical shift, where we need a shift in vision from short-term goals to a longer-term focus.

It is also important that growth in developing economies remains more labor-intensive and on a larger scale, as job creation in large-scale production is perhaps the best way to achieve this. include excluded and marginalized sections of the population. This can be achieved by investing more in the development of small and medium enterprises and providing an easier line of credit for their development.

Second, it is essential to take a rights-based approach that accepts people’s citizenship rights. Access to education, health care and basic infrastructure are among the fundamental rights of every citizen. A persistent increase in social investments such as education and health care is associated with long-term benefits and is part of a macroeconomic strategy to improve worker productivity and increase aggregate effective demand in the economy. .

It would therefore be useful for developing economies to rethink the theoretical applications of existing neoliberal policies which, somewhere, have failed to include the excluded and, in so doing, to modify the theoretical basis of these policies to indigenize them more appropriately. with a longer focus on the term.

The writer is executive director of the Center for International Economic Studies at OP Jindal Global University

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