Making Growth Inclusive: Some lessons from countries and the literature

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Growth is back on the development agenda, promoted by bilateral and multilateral donors, and the G20, as the most effective way to lift people out of poverty. Economic growth has reduced poverty in developing countries in the past, but by ignoring the issue of equality, donors and poor country governments have failed to maximise the benefits of that growth – and in some cases, people have become worse off. This paper extracts lessons from case studies of Brazil, Viet Nam, and Ghana to suggest three key areas that may deliver growth that is inclusive: a proper redistributive agenda
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  Oxfam Research Reports Making Growth Inclusive: Some lessons from countries and the literature Elizabeth Stuart Senior policy advisor, Oxfam International  April, 2011 Growth is back on the development agenda, promoted by bilateral and multilateral donors, and the G20, as the most effective way to lift people out of poverty. Economic growth has reduced poverty in developing countries in the past, but by ignoring the issue of equality, donors and poor country governments have failed to maximise the benefits of that growth – and in some cases, people have become worse off. This paper extracts lessons from case studies of Brazil, Viet Nam, and Ghana to suggest three key areas where action by governments is likely to deliver: a proper redistributive agenda; appropriate macroeconomic prudence; and a policy environment that fosters a pro-poor private sector. www.oxfam.org    Making Growth Inclusive :, Oxfam Research Report, April 2011 2 Contents Contents ............................................................................................................................ 2   Executive summary ......................................................................................................... 3   Introduction ...................................................................................................................... 6   1. Inclusive growth defined ........................................................................................... 8   2. Three case studies ..................................................................................................... 15   3. What can we learn from the case studies? ............................................................ 22   4. Conclusion .................................................................................................................. 32   Bibliography .................................................................................................................. 33   Notes ................................................................................................................................ 40      Making Growth Inclusive :, Oxfam Research Report, April 2011 3 Executive summary Economic growth in developing countries is desirable and necessary, but it is the distribution of that growth that matters for poverty reduction, rather than the pursuit of growth for its own sake. Policy makers have often promoted economic expansion as the panacea for poverty reduction in the developing and emerging world. But there has been a failure to recognise that growth is a means to an end, rather than an end in itself (‘The Growth Report’). 1  Growth can be an unpredictable weapon in the fight against poverty. It has been more effective in delivering poverty reduction in some countries than in others, and at differing rates. In countries as diverse as Cambodia, Honduras, Uganda, and South Africa, inequalities have risen as they have grown (Kanbur and Spence 2010; Ramcharan 2010). Poverty reduction is twice as responsive to economic growth in East Asia as in sub-Saharan Africa, because structural inequalities matter in translating growth into poverty reduction (Draper, el al. 2010). Economist Bill Easterly has found that the rate of improvement of almost all quality of life indicators is only weakly related to the rate of economic growth (Easterly 1999). In the wake of the global economic and food and fuel crises, as the deadline to meet the Millennium Development Goals (MDGs) approaches, and with the emergence of the G20, the international community is again focusing on growth, although this time apparently recognising that the type of growth that is aimed for matters: that there is a need for it to be ‘inclusive’ and ‘sustainable’. These are welcome aims, but to date the challenge has yet to be taken on in a clear-eyed way, and policy makers do not appear to have shifted their approach to meet the manifold challenges of development in the 21st century. In many respects, there have been important successes in development in the past half-century. There has been global progress in health, education, and civil and political rights. Since 1960, global average infant mortality has halved; between 1970 and 2000 the global average ratio of female to male literacy improved from 59 to 80 per cent; the overwhelming majority of people now live in countries that have signed the UN Universal Declaration of Human Rights (Kenny 2011); and the African continent as a whole has seen a rise of more democratic and accountable governments (Radelet 2010). Progress has been seen even in countries where prospects appeared to be the least promising: in landlocked Mali, for example, since the mid-1990s infant mortality has declined by a quarter, the primary school completion rate has doubled, and poverty has fallen by one-third. And in the wake of the global economic crisis, at least moderate growth is set to continue in both emerging economies and low-income countries (LICs), unlike in the advanced economies. 2  But in many other respects, the challenges of development – and in particular, the risks – are arguably more difficult than in the past, in part due to our increasing interdependence: countries and people are more vulnerable to economic and climactic shocks, and are having to fight for access to scarce resources such as land, food, and water.    Making Growth Inclusive :, Oxfam Research Report, April 2011 4 Without the correct complementary policies in place, economic growth may be even less able to meet these challenges than previously: in particular, because it has a very imperfect relationship to risk. In many cases economic growth can entail increased risk to poor people. Central to the response to these new challenges, studies suggest, should be a real shift to battling inequality. This means inequality of income, and also of assets, both financial and human, such as education and good health; inequalities of opportunity and also a genuinely level playing-field for poor people; inequalities based on gender, and also on where in a country people live, on what race they are, and what they believe. Such inequalities are not only morally repugnant, but they are holding back people from benefiting from the progress that has taken place in their countries. As a senior economist at the IMF writes: ‘In sum, when economic growth is positive, society might be better off when compared with the past. But economic policies that simply focus on average growth rates could be dangerously naïve, especially in countries with high existing levels of inequality’ (Ramcharan 2010). Using secondary research, this paper suggests that one key element in reducing intra-country inequalities is redistribution – that is, aligning more opportunity towards those at the bottom. Investments in education and labour-intensive livelihoods are examples. But creating opportunity may not be enough to ensure inclusiveness in growth: an actual redistributive mechanism for income – progressive taxation – may be necessary. Moreover, while Kraay (2006) stated that ‘sustained poverty reduction is impossible without sustained growth’, other academics have shown that distribution can play as strong a role as growth – or an even stronger one – in increasing income for poor people (White and Anderson 2001; Bourguignon 2004). ‘The Growth Report’ surmises that, while growth is the main route to poverty reduction, as a country develops, redistribution becomes more important as a way to reduce poverty. This need not be massive or confiscatory to create large benefits for poverty and society as a whole, but it will entail something of a redistribution of power. In Oxfam’s experience, political and economic transformation are inseparable, so any discussion of redistribution of assets should include the redistribution of power and voice that is required for such changes to take place. These issues are covered in detail in other Oxfam research (Green 2008) and so, for reasons of space, will not be covered here. This paper is not an attempt to examine what causes growth, which is a vast and controversial research landscape. Also beyond its scope is an examination of the environmental and ecological impacts of increased growth, and whether growth will need to be limited to counter those impacts. As part of a new agenda for development, we will have to change our production and consumption patterns, our ways of generating energy, and deal with the issue of inter-generational inequalities. This is a very important subject which will be tackled by future Oxfam papers. Instead this paper focuses on the ‘inclusive’ element of ‘inclusive and sustainable growth’, at the national level. It starts by asking why growth needs to be
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