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Chapter 2: Review of Related Literature

Since its emergence as a development paradigm at the turn of the century when
Kakwani and Pernia (2000) defined what is pro-poor growth and up to this writing
there has been several papers written on Inclusive Growth that sifting through the
materials, it would seem that this is one topic which has been prolifically written by
academics and development practitioners.
However, for this proposal, the focus of the review of literature and studies will be
on (a) definition of inclusive growth; (b) evolution of inclusive growth; (c) inclusive
growth and policy implications; and (d) measuring inclusive growth, as these are the
elements that have to be taken into consideration in reference to the objectives of
this paper.
What is Inclusive Growth
While the Asian Development Bank has produced several studies, publications on
inclusive growth and inclusive development, it is worth noting that there is no
agreed and common definition of inclusive growth or inclusive development among
international institutions, the term is understood to refer to growth coupled with
equal opportunities and consisting of economic, social, and institutional dimensions.
There is inclusive growth when all members of a society participate in and
contribute to the growth process equally regardless of their individual
circumstances. In the same way, inclusive growth is one which emphasizes that
economic opportunities created by growth are available to all, particularly the poor
to the maximum possible extent. ( Rauniyar and Kanbur, p. 39)
It was only in 2009 that the World Bank has released a note on the definition of
inclusive growth (Lanchovichina & Lundstrom, 2009) which was put in a box:
Box 1: What is Inclusive Growth (IG) About?
IG focuses on economic growth which is a necessary and crucial condition for
poverty reduction.
IG adopts a long term perspective and is concerned with sustained growth.
(a) For growth to be sustained in the long run, it should be broad-based across
sectors. Issues of structural transformation for economic diversification
therefore take a front stage. Some countries may be an exception and
continue to specialize as they develop due to their specific conditions (e.g.
small states).
(b) It should also be inclusive of the large part of the countrys labor force,
where inclusiveness refers to equality of opportunity in terms of access to
markets, resources and unbiased regulatory environment for businesses and
individuals.
IG focuses on both the pace and pattern of growth. How growth is generated is
critical for accelerating poverty reduction, and any IG strategies must be tailored to
country-specific circumstances.
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IG focuses on productive employment rather than income redistribution. Hence


the focus is not only on employment growth but also on productivity growth.
IG has not only the firm, but also the individual as the subject of analysis.
IG is in line with the absolute definition of pro-poor growth, not the relative
one.
IG is not defined in terms of specific targets such as employment generation or
income distribution. These are potential outcomes, not specific goals.
IG is typically fueled by market-driven sources of growth with the government
playing a facilitating role.
Source:
http://siteresources.worldbank.org/INTDEBTDEPT/Resources/4689801218567884549/WhatIsInclusiveGrowth200812
30.pdf

Similarly, the International Policy Centre for Inclusive Growth (IPC - IG) had come up
with the list of definitions of inclusive growth (Ranieri & Ramos, 2013) and a matrix
of definitions with the key elements:

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Inclusive growth is also defined by several countries distinctly such as harmonious


growth by the Peoples Republic of China. Inclusive growth for PRC or what is
understood as harmonious growth or society requires continued reforms to keep
growth high and sustainable, carefully designed redistributive policy to promote
equal access to opportunities, and good governance and strong institutions to
ensure economic and social justice and an even playing field ( Zhuang, 2008). In
Thailand it is termed as sufficient economy,(Felipe, 2010)

EVOLUTION OF INCLUSIVE GROWTH PARADIGM


Haan and Thorat (2013) traced succinctly the emergence of inclusive growth as a
paradigm. The eighties and the 90s were mainly influenced by the growth first
concern which is driven by neoliberal ideas. Neoliberalism also impacted economic
globalization which explains the Washington-Consensus approach to structural
adjustment programs imposed in developing countries.
Many economies stagnated in the 1980s, until the East Asian turn-around came
about which transformed several countries such as South Korea, Taiwan and even
Malaysia and Thailand into economic miracle. These economies proved that growth
with equity can be achieved. Thus, inequality was once again given importance
which proved that along with growth, poverty reduction, distribution of income,
wealth and opportunities should also be given attention. Frameworks and concepts
of inequality, growth-poverty linkages, pro-poor growth and inclusive growth
evolved.
Inclusive growth according to Saad-Filho (2010) was a reaction to the Washington
and Post Washington consensus which were actually still following the neo-liberal
paradigm. The Washington Consensus focused on market-oriented economic
principle, price dictated policies and globalization, among others. The Post
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Washington Consensus still adopted the former market-orientation with an


emphasis on the role of institutions.
The reaction was mainly an effect of the realization that poverty reduction does not
automatically happen because of trickle-down effect, economies can growth albeit
without effect on families being lifted out of poverty or achieving income
distribution. Poverty has to be addressed with focused policies and strategies. The
pro-poor agenda came about in the late 1990s when debates focused on growth
and inequality. The precursors were Nanak Kakwani, Ernesto Pernia, (Kakwani &
Pernia, 2000) Martin Ravallion (Ravallion, 2004) to name a few.
Pro-poor growth by Kakwani is defined by the increase in the income share of the
poor. In contrast, Ravallion focused on the absolute improvement of the living
standards of the poor, regardless of changes in inequality. Pernia defined pro-poor
growth as one that enables the poor people to actively participate in and
significantly benefit from economic activity. It is a major departure from the trickledown development concept. It is inclusive economic growth. Its outcome should be
no person should be no person in society should be deprived of the minimum basic
capabilities. For instance, everyone should be adequately nourished, no child should
be allowed to die prematurely, and people should be able to enjoy long and
satisfying life. (Kakwani & Pernia, 2000)
The pro-poor growth debate with the new neoclassical growth framework developed
by the World Bank and its associates ushered in the definition the inclusive growth
(IG) paradigm in the late 2000s by the World Bank (Saad-Filho, 2010).
Ranieri and Ramos (2013) in their Working Paper also walked through the debate on
the concept of pro-poor growth. They began by putting in context that growth is
not inherently pro-poor; therefore, growth processes need to be calibrated for propoor growth to be obtained (Ranieri and Ramos 2013). Again, the two authors
mentioned that it was Kakwani and Pernia who brought up the word inclusive to
growth and development. At the end, as with the other authors tracing the
genealogy of inclusive growth as a paradigm, they are one with the others to
conclude that Much has been written about inclusive growth, and it is ever more
present in policymaking and policy debates, but much like what has happened with
the concept of pro-poor growth, no unanimous concept of inclusive growth has
emerged. (Ranieri and Ramos, 2013)
Inclusive Growth and Policy Implication
Out of the debates on definition and concepts on inclusive papers, several studies
emerged which prescribes policies on how to implement inclusive growth, the
development paradigm, through specific policies.
Foremost among them was the book written by Felipe (2010). The main messages
that Felipe conveyed in his book were as follow:
Growth, alone, does not mean much and should not be the primary objective of
economic policy
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Structural change drives growth and employment dynamics. Market alone does
not do it
Growth is inclusive when it allows all members of a society to participate in the
growth process
Full Employment should be the primary objective of economic policy in developing
Asia
Needed: A set of policies that lead to Full Employment in the context of the
challenges posed by structural change: (i) Agriculture; (ii) Public Investment; (iii)
Industrial Policy; (iv) Fiscal and Monetary; (v) Job Guarantee Programs
On the same year, the Asian Development Bank through Habito came up with a
book on inclusive growth focusing on the Philippines (Habito, 2010).
In this publication, Habito identified the two fold challenge for the Philippines
namely accelerating and sustaining higher rates of growth, and ensuring that such
growth involves and benefits a broader spectrum of the economy, both sectoraly
and geographically.
A country diagnostic study done in 2007, ADB Critical Development Constraints
Study (ADB, 2007) identified the following as the main factors inhibiting the
economic growth of the country as follow: tight fiscal situation; inadequate
infrastructure, particularly in electricity and transport; weak investor confidence due
to governance concerns; and market failures leading to a small and narrow
industrial base.
The paper cited these constraints have not eased and have in fact even turned for
the worse. All four constraints are ultimately linked to weak governance manifested
in various forms. Tight government finances result from poor tax administration,
widespread tax evasion, and smuggling. Lack of infrastructure is in turn a direct
result of this. Weak investor confidence results from policy reversals and poor policy
implementation and/or enforcement, which undermine the predictability of the
policy and regulatory environment. Cumbersome government procedures and
requirements significantly increase transaction costs for business, further negating
the investment climate. Over-centralized decision making leads to ill-conceived
interventions, often unresponsive to actual local needs. Regulatory capture fosters
monopolistic tendencies that lead to narrow benefits and higher costs in key
industries, thereby undermining competitiveness in downstream economic activities
and leading to small and narrow industrial base.
Finally, the industry/sectors identified that would have positive impact on inclusive
growth are Agriculture and Agri-business; tourism; business process outsourcing;
food and design based manufactures; and Mining.
Measuring and Monitoring Inclusive Growth
The report Framework of Inclusive Growth Indicators Key Indicators for Asia
and the Pacific 2011 Special Supplement (Asian Development Bank, 2011) is a
special supplement to the Key Indicators for Asia and the Pacific 2011 which
presents a framework of inclusive growth indicators (FIGI) and proposes a set of 35
indicators of inclusive growth. The FIGI was conceptualized with the three policy
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pillars. The first pillar is on High, Efficient and Sustained Growth to Create
Productive Jobs and Economic Opportunity; the second pillar: Social Inclusion to
Ensure Equal Access to Economic Opportunity; The third pillar: Social Safety Net.
Klasen, (2010) discussed the indicators that should be used to monitor inclusive
growth at the country, program or project level. After defining inclusive growth and
reviewing the existing literature on the topic, it was emphasized that inclusive
growth should be measured both by process and outcomes. Formally, an instance of
inclusive growth at the country level is defined as one that exhibits: positive per
capita income growth rates; income growth rates for predefined disadvantaged
groups at least equal to per capita rates; and expansion of non-income dimensions
of well-being for disadvantaged groups that exceed the average rate. At the
program or project level, country level indicators are deemed too crude to measure
inclusive growth. Instead, the focus should be on assessing the project's goals in
regard to beneficiaries and comparing this data to an inclusive growth agenda. This
can be done by defining indicators such as: Does the project / programme aim to,
and be likely to, lead to increased employment of poor people (using the $2.50/day
indicator)?
McKinley, (2010) outlines a composite inclusive growth index at country level,
consisting of indicators in the areas of: (1) growth, productive employment, and
economic infrastructure; (2) income poverty and equity, including gender equity; (3)
human capabilities; and (4) social protection. The index can be used as a diagnostic
tool for assessing country progress on inclusive growth, or as an initial framework to
assess the alignment of donor assistance to a countrys strategic priorities.
The report of Ramos and Lammens (2013) acknowledged the lack of a clear
definition of inclusive growth, this report attempts to comprehensively measure
inclusive growth at the country level using three indicators: poverty, inequality, and
the employment to population ratio (EPR). The authors highlight that poverty and
inequality are already established as measures of pro-poor growth and inclusive
growth from an outcomes perspective, and that it is EPR that adds an inclusive
aspect to this measure through its participatory focus. EPR is used as a proxy for
economic participation, as productive employment is poorly defined and difficult to
operationalise due to lack of data. The analysis shows that most developing
countries have managed to increase their level of inclusiveness due to a decrease in
poverty levels and no increase in inequality. The authors argue that this increase in
inclusiveness cannot be explained by economic growth, as some countries showed
high increases in inclusiveness with low growth, and some of the countries with the
worse inclusiveness performances had very high growth rates.

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