The Challenge of the Century: Inclusive Growth and Development
In rich and poor countries alike, social inclusion is a burning political issue. Here’s what to do about it.
In rich and poor countries alike, social inclusion is a burning political issue. Here’s what to do about it.
between countries has declined signifiWHILE INCOME INEQUALITY cantly over the past 20 years, it has grown markedly within countries. A combination of accelerating technological change, global integration, domestic deregulation and immigration has been driving major changes in labour markets in most advanced countries. This has resulted in heightened dislocation, pressure on median wages and insecurity — even though these countries have enhanced efficiency and overall national income. At the same time, many developing countries have had difficulty diffusing the benefits of rapid growth and industrialization widely enough to satisfy rising social expectations. The result: In rich and poor countries alike, social inclusion is a burning political issue.
The dawning Fourth Industrial Revolution appears likely to accelerate the forces of dispersion. Advanced technologies are being applied and combined in ways that promise to transform multiple industries. In particular, the increased sophistication and declining cost of industrial robots and artificial intelligence are projected to transform manufacturing and services in a variety of sectors in coming decades, leading to major job losses.
Social impatience with stagnation is spiking in advanced countries, as dramatically illustrated by the Brexit vote and the 2016 U.S. presidential election. A widespread sense of frustration is contributing to the growing popularity throughout the West of political parties that challenge the fundamental tenets of the post-war liberal international economic order. At the same time, increasingly- educated and connected populations in developing countries are raising their own demands for more widely-shared economic opportunity.
Government, business and other leaders from every region have been calling for a way to turn the current vicious cycle of stagnation and dispersion into a virtuous one in which greater social inclusion and sustainable growth reinforce each other.
In an effort to narrow the gap between aspiration and action, the World Economic Forum has developed an actionable framework for inclusive growth. In this article we will present it, along with its accompanying metrics.
The ultimate objective of national economic performance is ‘broad-based and sustained progress in living standards’—a concept that encompasses wage and non-wage income (e.g., pension or child care benefits), economic opportunity and quality of life. This is the bottom-line basis on which a society evaluates the economic dimension of its country’s leadership.
Economic growth is one means to this end, albeit a very important one. 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 expands. Growth creates the possibility of a positive-sum game for society, even if it does not assure it.
To borrow from a business concept, growth can be thought of as the top-line measure of national economic performance, with broad-based or median progress in living standards representing the bottom-line. The related concept of inclusive growth can be thought of as a strategy to increase the extent to which top-line performance is translated into the bottom-line result society is seeking, i.e., broad-based expansion of economic opportunity and prosperity.
Inclusive growth is more than that: An economy is not a business, and history has shown that there is a feedback loop between the bottom and top lines (growth and equity) in a national economy. This feedback loop can run in a positive or negative direction. Broadly-shared prosperity can be a tonic for growth, creating a virtuous cycle of buoyant domestic consumption, increased business and investor confidence, higher investment, stronger aggregate demand, expanding employment, rising wages, further boosting consumption and demand, and thus even stronger growth. Alternatively, the dispersion and hollowing out of living standards can create a pernicious cycle of sluggish consumer demand, anemic business and investor confidence, weak investment, expanding unemployment or underemployment, stagnant wages — and thus even slower growth.
There is mounting evidence that inequality has a statistically significant negative impact on growth, and that reducing it can enhance and strengthen the resilience of growth. According to research by the International Monetary Fund, if the income share of the top 20 per cent increases, GDP growth tends to decline over the medium term. One explanation is that wealthier households spend a lower fraction of their incomes, which could reduce aggregate demand and undermine growth.
In contrast, an increase in the income share of the bottom 20 per cent is associated with higher GDP growth. If the income share of the rich is lifted by one percentage point, GDP growth decreases by 0.08 percentage points; if the income share of the poor and the middle class is increased by one percentage point, GDP growth increases by as much as 0.38 percentage points over five years.
The Inclusive Development Index (IDI)
The conventional metric used to measure countries’ level of economic development is Gross Domestic Product (GDP) per capita. But, given the multidimensional nature of living standards — and the systemic nature of the strategy needed to achieve and sustain them — a wider set of key performance indicators (KPIS) is needed.
Our Dashboard of National KPIS includes GDP as well as the best available cross-country measures of several other important facets of broad-based progress in living standards. Four indicators have been chosen within three key pillars:
captures four core metrics PILLAR 1: GROWTH AND DEVELOPMENT of economic growth and development: GDP per capita; labour productivity, which underpins wages that account for household income; employment, a proxy for the breadth of economic opportunity and ultimately family, security; and healthy-life expectancy, a measure of quality of life.
includes four core measures of social inPILLAR 2: INCLUSION clusion: Median household income, perhaps the single best proxy for the breadth of progress in living standards; poverty rate, a measure of the extent to which progress occurs at the bottom of the income scale; income Gini, the standard international measure of inequality; and wealth Gini, the analogous measure of wealth concentration.
incorporates four meaPILLAR 3: INTER-GENERATIONAL EQUITY sures of intertemporal equity and sustainability for the reason that growth and gains in living standards are not truly socially-inclusive if they are generated in a manner that unsustainably burdens future generations. These are: Adjusted net saving, which measures the true rate of saving in an economy, after taking into account investments in human capital, depletion of natural resources, and damage caused by pollution; public indebtedness as a share of GDP, which roughly illustrates the scale of borrowing by the current generation against the capacities of future ones; the dependency ratio or proportion of retirees and youth (under 15 years of age) to the working-age population, which is also a leading indicator of likely future pressure on a nation’s finances; and carbon intensity of economic output, an indicator of the country’s relative performance on climate change.
The result is an index that captures a more integrated picture of the relative state of economic development than that provided by GDP alone. Comparing this new composite indicator with the traditional GDP ranking, it is not surprising that there is a high correlation — 0.75 — between the two measures, particularly given that our Index includes GDP per capita as one of its 12 indicators. Indeed, Germany and Sweden have exactly the same rank for both (12 and 6, respectively) and five countries only differ by one rank, namely Australia, Austria, Denmark, Norway and Switzerland. These are the countries whose broader
An increase in the income share of the bottom 20 per cent is associated with higher GDP growth.
inclusive growth performance is highly consistent with their growth in national output more specifically.
However, three advanced countries have a rank that is at least 10 positions higher on our Index than in the basic GDP per capita measure: the Czech Republic, New Zealand and the Slovak Republic. These are countries where, despite comparatively low output per capita, much is in place for an inclusive and sustainable growth process as they move forward.
The U.S. presents a striking counterexample: It ranks ninth in terms of GDP per capita, but a very low 23rd on the Idi—the largest difference by far of all advanced economies, indicating that what looks like healthy growth is in fact characterized by significant shortcomings in terms of the inclusiveness and sustainability of the growth process.
In looking at the difference for a selection of developing countries, the correlation between GDP per capita and the IDI is a bit lower at 0.73, although for many countries the relationship is quite strong — for example, for Lithuania and Hungary. However, 18 out of 82 developing countries display an IDI score that is nine places or more higher than their GDP per-capita ranking. Six of these — Azerbbaijan, Nicaragua, Vietnam, Cambodia, Bangladesh and Nepal — register IDI scores that are 20 or more places higher than their GDP per capita rankings, suggesting that their development model is considerably more balanced and inclusive than that of countries with a comparable national income per capita.
By contrast, 16 of 82 countries register an IDI ranking that is nine places lower than their GDP per capita standing. Six of these — South Africa, Namibia, Swaziland, Nigeria, Zambia and Mauritania — have IDI ranks that are 20 or more places lower than their GDP per capita standing. The interactive version of this Index [available at wef.ch/igd17] enables users to vary the weighting of the indicators in the Index to emphasize the elements they believe are most important for a country’s circumstances.
Towards a New Global Agenda
Based on our analysis of the Inclusive Development Index, five dimensions of workforce development and security merit particular attention in industrial countries seeking to keep pace with the labour market challenges accompanying the Fourth Industrial Revolution. Sadly, our data suggest that few countries — if any — are performing well across all five.
As the pace of change accelACTIVE LABOUR-MARKET POLICIES. erates, the enabling environment for worker adjustment and training becomes more vital. Some countries, such as Denmark, Sweden and Finland, have kept pace thus far; others, notably the U.S., Israel and Japan, are lagging substantially behind. For example, the U.S. invests only 0.11% of GDP in active labour-market policies (i.e. training and job-search assistance) compared with an OECD average of 0.6% and levels of 1% or more among top performers. A gap such as this predisposes countries to skills mismatches, long-term under- and unemployment, eroding labour force participation rates, and persistent geographical pockets of social exclusion. That is to say, lower economic growth and social inclusion.
Inequitable eduEQUITY OF ACCESS TO QUALITY BASIC EDUCATION. cational opportunity is another source of avoidable underand unemployment and suppressed human and economic potential. The policy indicator data reveal large variations in country performance, suggesting that some countries can learn a considerable amount from the practices of others. Across several measures of the impact of socioeconomic status on educational performance, Luxembourg, France, Belgium, Czech Republic, Israel, Slovak Republic, Sweden, Austria, and Greece exhibit the greatest weakness, with Canada, Japan, Estonia, and Finland leading the way. Laggards in this area risk locking-in higher levels of inequality and social exclusion across generations.
Redressing major disparities in the participaGENDER PARITY. tion of women in the workforce can be one of the most effective ways to raise rates of economic growth and progress in broad living standards. East Asian economies have particular room for improvement in this area, with Japan and Korea having among the widest gender gap in labour participation within the OECD (i.e., female rates of less than 80 per cent of men). However, other countries such as Italy, Greece, Singapore, Ireland and the Czech Republic would also benefit from greater initiative in this area. Gender gaps in income are even more pronounced — with female workers earning an estimated 60 per cent or less of the level earned by men — in the UK, Korea, Netherlands, Japan, Italy, Austria, Greece, Ireland, Israel and the Slovak Republic. Rates in top-performing countries, by contrast, are 80 per cent or more.
Almost half of NON-STANDARD WORK BENEFITS AND PROTECTIONS. the jobs created between 1995 and 2007 in OECD countries were temporary, part-time, or involved self-employment. As sharing, on-demand, and care-economy jobs expand along with the digital economy and employers seek to remain as flexible as possible in the global market, this part of the labour sector is likely to expand further. Because these workers tend to experience weaker statutory benefits and protections in many countries, there is a risk that inequality will expand as a result of the changing nature of work. Most such rules were crafted in an earlier era, and updating them should be a priority in the Fourth Industrial Revolution.
Many advanced economies have SCHOOL-TO-WORK TRANSITION. made great progress in raising the proportion of student population that goes on to attain a tertiary education degree. Others still have a considerable way to go in making university education broadly accessible, with Canada, Switzerland, the UK, and Slovak Republic having enrollment rates below 60 per cent, compared with 80 per cent or above in the top-12 OECD countries. At the same time, some advanced countries appear to be significantly underinvesting in technical, software and skilled trades. In six countries — Canada, Singapore, Republic of Korea, Japan, Ireland, and reportedly the U.S. (for which official data are incomplete) — fewer than one third of secondary students enroll in vocational programs.
Refocusing Trade and Investment: Action Items
A more inclusive approach to international trade and investment cooperation will require a shift in policymakers’ emphasis from the negotiation of formal new norms such as free trade agreements to the facilitation of trade and investment activity within as well as among countries. Four sets of recommendations are particularly relevant for inclusive growth. 1. SCALING INTERNET-ENABLED SMALL-BUSINESS TRADE • Create comprehensive, online, single points of enquiry for cross-border service providers to learn about the regulatory, licensing, and other administrative requirements in the host country. • Establish standardized customs levels to facilitate crossborder flows of small packages supplied by Internet-enabled retail services providers, especially small and medium enterprises (SMES). For example, by adopting a $100 (or even $200) minimum common threshold for developing countries and a higher threshold, such as $800, for advanced countries. • Adopt interoperable, digitally-enabled single windows for customs and border compliance with open application program interfaces (APIS) that allow developers to create digital platforms which seamlessly link SMES with various countries’ single windows. • Establish clear rules pertaining to electronic transmission of data and related services by aligning rules with reading practices regarding intermediary liability, privacy, intellectual property, consumer protection, electronic signature, and dispute settlement; and by allowing the free flow of data across borders, subject to an exceptions provision.
2. FACILITATE REDUCTIONS IN BARRIERS TO TRADE IN SERVICES AND TO
INVESTMENT IN INDUSTRIAL VALUE CHAINS • Develop a comprehensive World Trade Organization Framework for Trade Facilitation in Services, with both capacity-building and graduated normative elements as in the recent WTO Trade Facilitation Agreement to support the inclusion of developing countries. • Establish a Global Value Chain Partnership — a publicprivate platform to improve the cross-country inclusivity and social responsibility of global supply chains. The platform would facilitate cooperation between governments seeking to integrate their economies with international supply chains and the companies and experts who could be their partners.
3. CATALYZE THE LEVELING-UP OF SOCIAL AND ENVIRONMENTAL STAN
DARDS • A group of like-minded governments could catalyze the scaling of responsible supply-chain practices by multinational and other companies around the world by forming an open ‘club’ that establishes a common floor for such standards. They would assist other countries to join them by offering trade preferences and substantial capacity-building assistance. The recent partnership between the World Bank and the World Economic Forum to create an Inclusive Development Hub to facilitate the contribution of responsible value
chains to inclusive development could provide a platform to facilitate progress in this respect.
4. MODERNIZE AND HARMONIZE INTERNATIONAL INVESTMENT AND REGIONAL TRADE AGREEMENTS
• A public-private process to create a Model Investment Agreement — using the G20 Guiding Principles for Global Investment Policymaking and United Nations’ Conference on Trade and Development Investment Policy Framework for Sustainable Development as starting points — could seek to build common ground on various facets of investment agreements, including state and investor obligations. Formulated as a best practice open for voluntary adoption, this model framework would be a bottom-up way to spur harmonization across the more than 3,200 existing international investment agreements.
Countries eager to improve social inclusion and economic growth must assemble a much wider structural economic reform strategy than has been the norm, drawing from the considerable expertise available within the international community.
The framework described herein will inform the development of the WEF’S new Centre on the Fourth Industrial Revolu- tion. Based in San Francisco, it will examine governance considerations related to emerging technologies, including cross-cutting societal issues such as those addressed here. Through this initiative, the World Economic Forum seeks to contribute to a better appreciation within societies of how to make inclusive growth and development a reality at a time of accelerating change.
Richard Samans is a Member of the Managing Board of the World Economic Forum (WEF) and heads up its Centre for the Global Agenda. Jennifer Blanke is Vice President Agriculture, Human and Social Development at the African Development Bank and the former Chief Economist at the WEF. Gemma
Corrigan is Practice Lead for Inclusive Growth at the WEF. Margareta Drzeniek Hanouz is Head of Competitiveness Research and a Senior Economist with the Global Competitiveness and Benchmarking Network at the WEF.
The complete report on which this article is based can be downloaded at: http://www3.weforum.org/docs/wef_forum_incgrwth_2017.pdf