There is no bigger policy challenge preoccupying leaders around the world than expanding social participation in the process and benefits of economic growth and integration. A geographically and ideologically diverse consensus has emerged that a new, or at least significantly improved, model of economic growth and development is required.
But despite accumulating evidence that reducing inequality can actually strengthen economic growth, the political consensus about inclusive growth is still essentially an aspiration rather than a prescription. No internationally- recognized policy framework and corresponding set of indicators or measurable milestones has emerged to guide countries targeting broad-based progress in living standards, rather than economic growth per se, as the bottom- line measure of national economic performance.
Toward an Actionable Framework
Strong economic growth is the sine qua non of improved living standards. While a growing national economic pie does not guarantee that the size of every household’s piece will be larger, such an outcome is arithmetically impossible unless the overall pie does indeed expand. Growth creates the possibility of a positive-sum game for society, even if it does not assure it.
The extent to which economic growth broadens improvements in economic opportunity and living standards is influenced by an interdisciplinary mix of structural and institutional aspects of economic policy, going well beyond the two areas most commonly featured in discussions about inequality: education and redistribution. Appreciation of the crucial role of institutions – particularly legal frameworks and public agencies that administer rules and incentives – in the development process has grown in recent decades, supported by an expanding body of research and practical experience. In fact, economic institution building has been a crucial part of the development path of essentially every country that has industrialized and achieved high living standards.
This was a key finding of the landmark 1993 World Bank study, The East Asian Miracle, of how eight economies in the region succeeded in achieving a remarkable record of “high growth with equity” from 1960 to 1990. The international Commission on Growth and Development chaired by Nobel Laureate Michael Spence reached a similar conclusion in its 2008 report entitled, The Growth Report: Strategies for Sustained Growth and Inclusive Development. Indeed, starting at the turn of the century and gathering force in the decades following the Great Depression, most of today’s advanced industrialized countries underwent a sustained process of institutional deepening that broadened the base and strengthened the resilience of their economies. Labor, investment climate, social insurance, competition, education, infrastructure and other reforms had the effect of engineering a more inclusive and sustainable growth model by spreading purchasing power, which supported aggregate demand and lessened vulnerability to investment-driven booms and busts.
Because development is a complex and multidisciplinary process – many conditions need to be fulfilled in order for widespread poverty to be replaced by ever-rising middle-class prosperity – this process of institutional deepening occurs across a wide spectrum of domains. But the process is not automatic. Although rising national income generates additional resources and policy space to establish and effectively implement such institutions as public education systems, independent judiciaries, labour markets and protections, and competition, investment climate and social protection frameworks, they do not guarantee it. The pace and pattern of economic institution building is a choice, a function of policy decisions and public- private cooperation. It is endogenous to the development process. As a result, so to a considerable extent is the payoff to society from growth in the form of broadly rising living standards.
This lesson needs relearning today, as the world economy continues to struggle to find a more solid foundation for growth and escape the shadow of the 2008-2009 crisis. Structural reform usually refers to measures aimed at boosting economic growth by sharpening market signals and restoring the health of public finances, often in response to fiscal or balance-of-payments crises; they frequently have the effect of squeezing living standards in the short term. But a serious effort to strengthen institutions in some or all of the domains that particularly matter for social inclusion would also constitute an exercise in “structural adjustment” – in this case, for the purpose of boosting broad living standards while contributing to a more balanced and sustainable pattern of growth.
The practice of a more socially inclusive model of growth and development therefore requires widening the lens through which priorities are set in national economic strategy. The cultural change that such a rebalancing of emphasis would require in governments and classrooms should not be underestimated. Macroeconomic, trade and financial stability policies remain critically important as they establish the basic conditions for the resource allocation efficiency that underpins growth. But domestic institutional development in a wide spectrum of other areas is vital to diffusing the opportunities and benefits created by growth throughout society, and it can reinforce the growth process itself. It therefore deserves equal emphasis in national economic policy with the traditional responsibilities of Finance and Trade Ministries.
What are the areas of policy and institutional strength that have a particularly strong bearing on social participation in the process (productive employment) and outcomes (median household income) of economic growth? The Report presents a Framework and a corresponding set of indicators of performance and enabling environment conditions in seven principal policy domains (pillars) and fifteen sub-domains (sub- pillars). Societies that have had particular success in building a robust middle class and reducing poverty and social marginalization have tended to create effective economic institutions and incentives in many of these areas, while supporting growth through sound macroeconomic policies and efficiency-enhancing reforms.
A database of cross-country statistical indicators has been compiled in each sub-pillar, permitting comparison at the pillar, sub-pillar, or individual indicator level within peer groups. Out of this benchmarking exercise emerges a distinct profile of the institutional strength of countries relative to their peers in areas that particularly help support broad-based progress in living standards. These comparative Country Profiles are like diagnostic scans of each country’s institutional enabling environment as it relates to social inclusion.
To provide added context, a Dashboard of Key Performance Indicators is shown for each country in the areas of Economic Growth and Competitiveness; Income-related Equity; and Intergenerational Equity. This provides an integrated view of a country’s overall performance on inclusive growth and development (i.e., in generating broad-based and sustainable improvements in living standards as opposed to annual growth in GDP per se). It complements the more detailed Country Profiles, which benchmark performance and institutional enabling environment conditions in the fifteen policy areas of the Framework. Together, these three elements are intended to help policymakers and other stakeholders translate an aspiration for a more inclusive model of economic growth and development in their country into a practical national strategy.
Inclusive Growth and Development Dashboard of National KPIs
*Labor Share of Income is used for Advanced Economies and Share of the Middle Class is used for Upper Middle Income, Lower Middle Income and Low Income Countries.
Analyzing Country Profile Results
Over 140 quantitative indicators have been assembled to provide an illustration of enabling environment conditions and performance across 112 countries within each of the policy and institutional domains of the Framework. These comparative profiles of institutional strength and use of policy space are intended to help spotlight and prioritize opportunities for improvement within countries and enable transfer of knowledge about best practices among them. By bringing a fuller spectrum of such opportunities into sharper relief on a country-by-country basis, the aim is to enable a more concrete and productive conversation within societies about how to achieve greater social inclusion along with stronger and more resilient growth.
Data are displayed within peer groups of countries at similar levels of development as defined by income: advanced, upper-middle income, lower-middle income and low-income. Separate tables for each of the four groups of countries compare the pillar and sub-pillar scores of each country via a traffic-light shading scheme that ranks countries relative to their group. Red corresponds to the lowest quintile of performance within the group, orange to the fourth quintile, yellow to the median or middle quintile, light green to the second quintile, and dark green to the best quintile of performers. In addition to the cross-country sub-pillar tables presented in this Report (see Country Results), the online version includes individual country profiles. These list the score for every indicator within every sub-pillar for each country covered by the Report. Readers should consult their country’s complete Inclusive Growth and Development Country Profile.
This Framework does not in any way suggest that there is a single, ideal policy or institutional mix for the pursuit of inclusive growth and development. For this reason, in contrast to the Forum’s other benchmarking studies, an overall aggregate ranking or league table of countries has not been computed. However, what countries often do have in common is an unexploited opportunity to think more systematically about the full range of instruments and approaches available to address the problem.
Six significant findings emerge from an overview of the data
- All countries have room for improvement. There is considerable diversity in performance not only across but also within countries. No country is a top performer in every sub-pillar. Indeed, not a single country scores above average in all 15 sub-pillars.
- There is no inherent trade-off in economic policy-making between the promotion of social inclusion and that of economic growth and competitiveness; it is possible to be pro-equity and pro-growth at the same time. Several of the strongest performers in the Forum’s Global Competitiveness Index (GCI) also have a relatively strong inclusive growth and development profile.
- Larger fiscal transfers are not necessarily incompatible with growth and competitiveness, but neither are they always the primary or most effective available option for broadening socioeconomic inclusion. Many of the world’s most competitive economies have high levels of social protection and the significant tax burdens these imply. However, other countries achieve moderate or low Gini ratios mainly because their pre-transfer level of inequality is comparatively modest to begin with rather than due to the significance of their transfers.
- Policies and institutions supporting social inclusion are not solely a luxury of high-income countries. There is extensive overlap in absolute scores across at least three of the four income groups of countries in the sub-pillars of Business and Political Ethics, Tax Code, Financial System Inclusion, Intermediation of Business Investment, Productive Employment; Concentration of Rents, and Educational Quality and Equity.
- There are, however, significant regional or cultural similarities, a number of examples of which are identified in the Report.
- Seen from this practical, evidence-based perspective, the current debate on inequality and social inclusion is unduly narrow and unnecessarily polemicized. It is possible, indeed essential, to be pro- labor and pro-business, to advocate a strengthening of both social inclusion and the efficiency of markets. The inequality debate focuses almost exclusively on up-skilling of labor and redistribution – when it moves beyond problem identification. For many countries, these may be among the most appropriate responses to widening dispersion of incomes, but they represent only a minority of the policy options available. To focus only on them is to miss the fuller opportunity to adapt or “structurally adjust” one’s economy to the challenge of strengthening the contribution of economic growth to broad-based progress in living standards in the face of forces such as technological change and global economic integration that can pull in the opposite direction.
Several other actionable options are not traditionally thought of as equity-enhancing because they concern strengthening of the enabling environment for real economy business investment and entrepreneurship. But these can be just as critical to a country’s success in in expanding employment, boosting wages and widening asset ownership, which are central to advancing progress in living standards. The scaling and leveling effects of technology are increasing returns to capital and innovation. But while digitization in particular will continue to create enormous challenges for employment in many industries and countries, it also has the potential to create extensive opportunities for new entrepreneurs and small businesses by reducing barriers to entry and transaction costs as well as disintermediating and unbundling existing activities performed by larger organizations, including in international trade. Moreover, as manufacturing productivity improves and societies age, the market for services – many of which are less tradable across borders than goods – will expand, creating further opportunities for small-business ownership and asset building. Improving the regulatory and financial environment for running and investing in a small business can help a larger proportion of the working population to capture a larger share of these gains through the profits and equity appreciation that can accompany business ownership.
Similarly, in today’s more internationally competitive and technologically dynamic environment, the effectiveness of private investment in the real economy is a critical determinant of a country’s ability to support productive industrial employment. This includes the cost, patience and range of risk capital available for long-term investment in productive capacity and productivity improvements. Other critical determinants of the number and quality of employment opportunities include the quality and cost of infrastructure and basic services that link goods to markets and equip people for jobs as well as the extent of deadweight losses to economic efficiency and innovation in the form of corruption and rents. A strategy to improve the enabling environment in these areas must be considered just as integral to the construction of a more inclusive model of economic growth as efforts to improve skills or fiscal transfers.
Through this new Framework and cross-country benchmarking data, the Forum hopes to expand appreciation among policy-makers and stakeholders about the wide spectrum of concrete opportunities available to expand social inclusion in the process and benefits of economic growth without undermining incentives to work, save and invest. The aim is to stimulate discussion about how the political objective of inclusive growth can be brought closer to economic reality, including during the National Strategy, Regional Summit and Annual Meetings of the World Economic Forum over the next two years as part of its Global Challenge Initiative on Economic Growth and Social Inclusion. Work will continue on the data and methodology of this beta version of the Framework, and a related compendium of best policy, corporate and public-private practices will be developed. This qualitative database will be designed to support policy-makers, companies, and other stakeholders interested in adapting approaches used with success elsewhere to their own circumstances, helping them to respond in practical ways to the policy and institutional gaps revealed by the quantitative benchmarking information presented preliminarily in this report.