What Is Inclusive Growth?

We need to make growth more inclusive — to expand access to opportunities so that all can participate, regardless of their individual circumstances.

— Haruhiko Kuroda, ADB's President (2008)

During the last few years, terms such as "harmonious society" in the People's Republic of China (PRC), "sufficient economy" in Thailand, and similar terms in other countries across Asia, have made their way into the discourse of policy makers. The message in all cases is similar: development is more than growth. The Commission on Growth and Development (2008) in its Growth Report also echoes the same sentiment. The Government of India, for example, boasts to have fostered "inclusive growth." By this it means that the budget has increased allocations to school meals or rural road-building. The high-growth policies implemented across the region since the 1960s were successful and led to increases in per capita income and dramatic reductions in poverty, contributing to closing the gap with the developed world. But today a feeling has spread that policies and objectives need to be revised as citizens across Asia demand more than growth. Inequality, productive and decent employment, the environment, health, and climate change are becoming increasingly important in the agendas of policy makers. Institutions such as the World Bank and the Asian Development Bank also acknowledge the issue and argue that growth and globalization have to be inclusive.

What is inclusive growth? Although the term has not been formally defined, Ali and Zhuang (2007, 10) claim that a consensus is emerging as to what it means: "growth with equal opportunities." In a related paper, Ali and Son (2007, 1–2) further argue that inclusive growth is "growth that not only creates new economic opportunities but also one that ensures equal access to the opportunities created for all segments of society. Growth is inclusive when it allows all members of a society to participate in, and contribute to, the growth process on an equal basis regardless of their individual circumstances" (Box 1.1 and Table 1.1 on the PRC).

In this book, I discuss the implications of inclusive growth for policy making in developing Asia. If the term inclusive growth is a useful concept, how should it be interpreted in developing policies? What sort of policies should be implemented to achieve it? What are the constraints and tradeoffs? And finally, can it be achieved? The central argument of the book is that in order to achieve inclusive growth, governments must commit efforts and resources to the pursuit of full employment. The most significant way for a person to participate in society as a valuable member is through a productive and decent job. Moreover, maintaining the economy as close as possible to full employment will lower the need to dedicate resources to set up safety net expenditures. In the final analysis, full employment is the most direct way to improve the long-run well-being of all the people in the country. The questions into which the book is divided discuss different aspects of the link between inclusive growth and full employment and, in so doing, offer a menu of policies that will have to be tailored to each country's circumstances (some proposals may not even apply to some Asian countries). All this implies that governments must set objectives and policies aimed at achieving inclusive growth (Stiglitz 1998). As modern economic theory and historical experience show, markets are the best way to organize the production of goods and services, but in some instances they fail to produce efficient outcomes (e.g., as a result of the existence of public goods, externalities, imperfect information, technology). But of all the market failures, none is perhaps more important for its social consequences than the failure of an economy to utilize its resources fully, especially employment. This is a key tenet of this book.

Does this mean that growth is not important? No, certainly not. Growth is fundamental for developing countries. One of the main themes of this book is the relationship between growth and structural change. This is how I understand the story of the successful developing Asian countries. Understanding the dynamics of structural change is essential for comprehending the difficulties in achieving full employment. However, the elasticity of employment with respect to output in many parts of Asia is not particularly high, and in some cases it has even decreased (Felipe and Hasan 2006, chapters 3 and 4). What does this mean? To cite Felipe and Hasan (2006, 113) in discussing the PRC's employment elasticity: "In the 1980s, it took a 3% growth rate of output to induce a 1% increase in employment. By the 1990s, however, it took more than twice as much growth — about 7.8%, to achieve the same result." In the same vein, the United Nations Conference on Trade and Development (UNCTAD) has also recently claimed that although "most developing economies have seen strong growth in employment or even succeeded in stabilizing or slightly reducing unemployment rates ... open unemployment in developing countries is much less responsive to high growth rates than it is in developed countries. ... The main reason for the low impact of growth on open unemployment in many developing countries and emerging market economies could be the huge reserves of...