Cadmus

Inclusive growth: Why is it important for developing Asia?

Abstract
Although Asian countries attain relatively high growth rates of GDP, many citizens do not seem to benefit from it. To remedy this problem, multilateral development institutions have developed the concept of inclusive growth, defined as growth that allows all members of a society to participate in and contribute to the growth process on an equal basis, regardless of their individual circumstances. The most direct way to achieve inclusive growth in Asia is to bring the objective of full employment of the labor force (i.e., zero involuntary unemployment) to the top of the policy agenda. Specific policies to achieve it are: (i) Redress the neglect of agriculture; (ii) Undertake public investment in basic infrastructure; (iii) Use of industrial policy to accelerate industrialization and structural transformation in general; (iv) Direct fiscal and monetary policies to the achievement of full employment; and (v) Devise Job Guarantee Programs (JGP) to ensure full employment with price stability.

1. Introduction
Since 2007, institutions such as the Asian Development Bank and the World Bank have added the objective of attaining inclusive growth to their policy discourse on poverty reduction.1 By doing this, they acknowledge the widespread sentiment that growth is not benefitting everyone equally. There is a perception that although countries attain relatively high growth rates, many people do not seem to benefit from it. This is certainly not a new concern. About a decade ago, these same institutions were discussing whether growth was pro-poor or not, that is, whether growth benefited equally all segments of the income per capita spectrum, or whether it benefited more the higher income groups.2, 3 These sentiments are also shared today by Asia’s policy makers in their policy statements and development plans. They talk about concepts such as “harmonious society” (PRC) or “sufficient economy” (Thailand), and echo the need to address this discontent.
In a similar vein, and reflecting upon the post-crisis global economy, Rodrik argues that there is a “steady divide between what the elites and the common people feel, as well as a reluctance on the part of the elites and economists to accept that there is a core of legitimate grievance that is not simply a matter of ignorance and narrow self- interest.” And: “This [perceptions about multinationals and international banks] would not be a big issue if everybody in the domestic economy were as equally mobile as the multinationals. As a result, there is a very big divide in most modern societies between groups that perceive themselves as globally mobile and therefore view their opportunities and remuneration as set by what is happening in the world (i.e., capitalists and highly-skilled professionals), and the vast majority of most people, who are not globally mobile and whose livelihoods are determined by what happens in the domestic economy. The tension is due to the fact that democratically-led governments have to pay attention to the skilled professionals and capitalists, yet also have to listen to the mass majority of the electorate who are not as mobile”.*, 4
And Spence paints a clear picture of growing inequality in the US, arguing that it is driven in large measure by the demise of manufacturing and moderately skilled service sectors.5 This echoes previous concerns about polarization induced by technological change that eliminates jobs in the middle of the wage distribution. This process of specialization in services and high-tech industry widens, for example, the gap between workers holding college degrees and workers holding high-school degrees. Many developing countries are not immune to these developments. Indeed, the relocation of some parts of international supply chains has affected the price of goods, jobs and wages everywhere.
How does the notion of inclusive growth fit into these arguments? In recent work, Ali and Zhuang have defined inclusive growth as “growth with equal opportunities”.6 And in a related paper, Ali and Son 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.”7 This way, the notion of inclusive growth intends to be broader than the idea of pro-poor growth (which focuses exclusively on poverty reduction) by focusing on development processes that lead to the expansion of economic opportunities.
It could be argued that, one way or another, growth benefits the average citizen; that all concerns are simply transitory issues; and, therefore, the adjective “inclusive” is superfluous. The reality, however, is that large segments of society feel that their living standards are deteriorating vis-à-vis those of some privileged groups, with the consequence that the gap is widening. Many societies are failing to transform themselves fast enough to provide sufficient productive and decent employment to the increasingly large labor forces. For these reasons and at the risk of laboring the obvious, the adjective “inclusive” plays a role, if only to alert policymakers of the nature and magnitude of the problem.

A telling example is that of the Philippines. In 2010, the country registered its highest economic growth in 3 decades, 7.6%. However, this growth does not appear to benefit the majority of Filipinos, as poverty does not recede and there is no perceptible improvement in key labor market indicators such as unemployment and underemployment. Obviously, the mere quantity of economic activity, as measured by a common indicator like GDP growth, taken alone, “says virtually nothing about whether life for the common Filipino is getting better or worse. It ignores the distribution of income and makes no distinction between workers with top-paying jobs and those workers who can barely eke out a living. It ignores the fact, for instance, that the record remittances which make economic figures so rosy have a heavy social toll in terms of broken families. The booming mining industry which the government touts? That has environmental costs, too, which should count for something
when you’re calculating economic balance.”8 The purpose of this paper is to discuss the notion of inclusive growth and the policies to achieve it. Whether this new concept becomes useful or quickly degenerates into a fad and loses momentum will depend on how both multilateral development institutions and policy makers in developing countries operationalize it so that it becomes a means to achieve an end. For this to happen, both groups need to be able to transform ideas into concrete policy actions and specific interventions, in terms of both physical investments and reforms. And this requires a better understanding of the constraints that developing Asia faces. Developing Asia is undergoing significant structural transformation (the essence of growth) in a context of globalization and fast technical progress. This creates a permanent tension between the forces of growth in market economies; and the difficulties that market economies have solving problems such as inequality or unemployment. The rest of the paper is structured as follows. In section 2, I argue that inclusive growth requires achieving full employment of the labor force.
In section 3, I discuss whether it is possible to achieve full employment today. Finally, in section 4, I discuss five policies to achieve inclusive growth. Although much of the discussion focuses on developing Asia, many of the arguments apply equally to other developing regions.

 2. Inclusive Growth as Full Employment
Felipe and Hasan (2006) estimate that there are about 500 million people unemployed and underemployed in developing Asia. During the next decades, developing Asia’s labor force will increase significantly, from about 1.7 billion people in 2005 to almost 2.2.billion in 2030.9 Countries like Pakistan, Bangladesh or the Philippines, where population growth rates are still relatively high, will have to pay special attention to the question of job creation.
In a modern capitalist economy the necessary condition for a citizen to participate in society is that he/she undertakes a meaningful job.10 Human beings participate in and contribute to society through their capacity to work. A job is the means not only to receive a wage (and therefore to be able to consume) but also to participate in society. Human work is a conscious activity, purposive and fulfilling in that it is the instrument that allows human beings to be someone. As human beings, we have a working consciousness that allows us to develop our human creativity, the ability to create meaningful new forms. This attribute is what distinguishes us from other species. Work matters – to us as individuals, to our family and friends and also to the communities and societies in which we live. Indeed, work is one of the most defining aspects of our lives. As a consequence, those unemployed do not benefit from the opportunity and right to participate in society, as they are excluded. Unemployment and underemployment cause not only direct economic costs (e.g., loss of potential output and income, lower tax revenues due to a lower tax base, deterioration of labor skills and productivity), but also social costs such as poverty, misery, malnutrition, and injustice.11, 12, 13 Persistent unemployment and underemployment lead to social exclusion and violate basic concepts of membership and citizenship, and thus they do not allow inclusive growth. Ultimately, as Sen argues, it is a question of justice “…the unemployed may feel deprived because of the lack of freedom in their lives, and this goes well beyond just the lowness of income”.14 Indeed, analyzing one historical episode of mass unemployment, Solow concluded that “…apathy and the attenuation of social interaction were the main consequences of the experience of prolonged mass unemployment”.15 See box 1.

Box 1: What exactly is so bad about unemployment?
1. Loss of current output and fiscal burden: Unemployment not only reduces potential national output but also imposes a fiscal burden insofar as resources from those working have to be transferred in the form of unemployment subsidy.
2. Loss of freedom and social exclusion: Unemployed do not exercise much freedom of decision and are deprived of opportunities.
3. Skill loss and long-run damage: Unemployed “unlearn by not doing”.
4. Psychological harm: Unemployment causes intense suffering and mental agony.
5. Ill health and mortality: Unemployment can lead to dejection, lack of self-respect, collapse of motivation, and even suicide.
6. Motivational loss and future work: Long-term unemployment leads to a loss of motivation.
7. Loss of human relations and family life: Unemployment is disruptive of social relations and weakens the harmony and coherence within the family.
8. Racial and gender inequality: Both are exacerbated by unemployment.
9. Loss of social values and responsibility: Unemployed develop cynicism about the fairness of social arrangements.
10. Organizational inflexibility and technical conservatism: Unemployment may restrict the use of better technologies and resistance to any economic reorganization involving job loss.
Source: Sen (1997)

For these reasons, it is important that Governments pursue policies to achieve full employment of the labor force. This is the surest way to make growth inclusive. Full employment refers to zero involuntary unemployment. It means that no one who is ready and willing to work for an appropriate wage is without a job. This also means zero involuntary part-time employment, a type of underemployment pervasive across the developing world.*, 16 In developing countries, the latter aspect is very important, because underemployment is a much more serious problem than open unemployment. For this reason, the goal of full employment in developing countries is about reducing underemployment as well as reducing unemployment. Felipe and Hasan (2006) distinguish four types of underemployment: (i) working limited hours; (ii) high-skilled workers being forced to take up low-paying jobs; (iii) overstaffing; and (iv) workers carrying out their work with very little capital, and therefore, the objective of full employment must be complemented with that of generating productive employment.17
Likewise, the objective of policymaking must also be to generate decent employment (i.e., employment that provides living wages, benefits, reasonable job security, and a healthy work environment).

If the ultimate goal of policy making is to achieve a more equal society, policy efforts must be directed toward achieving full employment.18 Without disregarding the importance of growth (as an economic objective), it will not, by itself, deliver full employment. A full employment economy delivers great individual and social benefits. However, policy makers throughout the world have moved away from even attempting to achieve it. Despite this state of affairs, there are powerful reasons to argue the case for full employment if key institutions in developing countries, as well as multilateral lending institutions, are serious about reducing poverty, making growth inclusive, and achieving the Millennium Development Goals. First and foremost, an economy running at full employment creates high overall purchasing or spending power. This leads to more buoyant markets, businesses, investment, and employment. A full-employment economy will provide everyone with opportunities. Second, as mentioned above, an economy operating at full employment can deliver great individual and social benefits. Third, employment is a right, and full employment as an objective of economic policy is found in the International Covenant on Economic, Social and Cultural Rights, the International Covenant on Civil and Political Rights, the International Labour Organization Conventions, the Charter of the United Nations (Article 55 and 56), and the UN Universal Declaration of Human Rights (Article 23). In the US, high employment is a mandate of the Federal Reserve. The Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978 lists high employment, balanced growth, and price stability as specific policy goals. Fourth, since 2006, decent work is a target of the first Millennium Development Goal, namely, to eradicate extreme poverty and hunger. Fifth, full employment in the developing world contributes to political stability, as the levels of consumption of large segments of the population will be higher than when unemployment is widespread. Moreover, peace and prosperity in the developed world also depend on the well-being of the people in the developing world. And lastly, full employment should be an ethical imperative in today’s world. The benefits of full employment outweigh the costs of its achievement. It benefits everyone, including capitalists. They may end up getting a smaller share (in percentage) of the pie, but the size of the pie will be growing possibly faster than with significant levels of unemployment. Therefore, it is more rational to argue that developing countries cannot afford unemployment and underemployment, than to suppose that they cannot afford full employment. In the words of Paul Krugman: “An unsold commodity is a nuisance, an unemployed worker a tragedy; it is terribly unjust that such tragedies are created every day by new technologies, changing tastes, and the ever-shifting flows of world trade.”19 Expressing a similar sentiment, Alan Blinder stated that “high unemployment represents a waste of resources so colossal that no one truly interested in efficiency can be complacent about it. It is both ironic and tragic that, in searching out ways to improve economic efficiency, we seem to have ignored the biggest inefficiency of them all.”20 Relegating vast numbers of people to do nothing or to do rote work is a dreadful waste of human capabilities. It is both morally and economically inefficient. For this reason, full employment must be the natural point of reference for economic policy and for evaluating a government’s performance.


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