How to Achieve Inclusive Growth

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Edited by Valerie Cerra, Barry Eichengreen, Asmaa El-Ganainy, and Martin Schindler Analyses the paramount economic, social, and environmental policy challenges of our day Lays out a comprehensive and integrated framework for designing policies to combat economic disparities for current and future generations across the globe Draws on the expertise of top economists from around the world and on the policy experience of experts from leading international institutions Provides additional resources for policymakers to help them take next steps and tailor solutions to their specific conditions and needs An open access title available under the terms of a CC BY-NC-ND 4.0 licence Cover How to Achieve Inclusive Growth Copyright Foreword: By Kristalina Georgieva, Managing Director of the IMF Foreword: By Jeffrey D. Sachs, University Professor at Columbia University Preface Contents List of Illustrations and Diagrams Figures Diagrams List of Tables List of Contributors Editors Authors 1: An Inclusive Growth Framework I. Issues and Perceptions of Inclusive Growth A. Key Facts and Issues B. Public Perceptions and Concerns C. Public Preferences for Fairness II. Dimensions of Inclusive Growth A. What is Inclusive Growth? B. Concepts of Well-being and Economic Welfare III. Measuring Inclusion A. Poverty B. Inequality C. Measurement Choices D. Non-monetaryMeasures E. Debates on Trends in Inclusive Growth IV. Adopting an Inclusive Growth Framework A. The Inclusive Growth Framework B. Integrating Inclusive Growth into Policy Making V. Road Map to Inclusive Growth References 2: Links Between Growth, Inequality, and Poverty I. Introduction II. Trends in Inequality, Poverty, and Growth III. How Does Growth Affect Poverty and Inequality? A. Empirical Estimates of the Impact of Growth on Poverty and Inequality B. Channels from Growth to Poverty and Inequality The Neoclassical Growth Model The Government: Public Goods and Redistribution Public Goods and Services Redistribution Factors and Markets Employment of Factors Labor Supply Response Differentiated Labor Market Structure Unbalanced Growth Sectoral Composition Capital Intensity Technology and Innovation Trade Financial Liberalization Empirical Estimates of Multiple Drivers of Growth and Inequality IV. How Does Poverty and Inequality Affect Growth? A. Empirical Estimates of the Impact of Poverty and Inequality on Growth From Poverty to Growth From Inequality to Growth B. Channels from Poverty and Inequality to Growth Channels by which Inequality Can Boost Growth Incentives Savings Channels by which Inequality and Poverty Can Depress Growth Poverty Traps and Human Capital Credit Market Imperfections Demand and Structural Transformation Risk Aversion and Decision-MakingCapabilities Political Economy Sociopolitical Unrest Gender Inequality V. Conclusion and Policy Implications References 3: Labor Markets I. Introduction II. Principles of Inclusive Labor Markets III. Measures of Inclusivity A. Access B. Fairness C. Protection D. Voice E. Informality as a Cross-CuttingIssue IV. Policies for Inclusion A. Rebalancing Market Power Minimum Wages Strengthening Collective Bargaining Institutions B. Sharing Risk Employment Protection Legislation Income Support and Activation Measures Social Protection Strengthening Resilience: Active Labor Market Policies C. Fighting Discrimination D. Addressing Labor Market Segmentation Encouraging Structural Change Taxation Administrative (E-Formality)Policies V. Conclusion References 4: Financial Inclusion I. Introduction II. What Is Financial Inclusion? A. Signs of Improvement B. Structural Conditions Affecting Financial Inclusion C. How to Interpret Gaps in Financial Inclusion III. Why Does Financial Inclusion Matter? A. Financial Inclusion as a Dimension of Broad Financial Development B. Macro-Leve lRelevance of Financial Inclusion Suggestive Empirical Results Regarding Inclusive Growth Tradeoffs Between Financial Inclusion and Financial Stability C. Channels Through which Credit Affects Economic Outcomes Relaxing Financing Constraints Microfinance, Financial Frictions, and Poverty Traps Financial Inclusion for Households D. Financial Inclusion for Micro, Small, and Medium Enterprises (MSMEs) Constraints to MSME Financial Inclusion Impacts of Relaxing Financing Constraints of MSMEs IV. Policies for Enhancing Financial Inclusion A. For Households B. Enhancing Financial Education and Capability C. For Micro, Small, and Medium-Sized Enterprises D. The Role of Competition and the Private Sector V. Conclusion References 5: Technological Progress and Artificial Intelligence I. Introduction II. Downside Risks of Technological Progress A. Labor-SavingTechnological Progress B. Resource-SavingTechnological Progress C. Information, Digital Monopolies, and Superstars D. Misguided Technological Progress E. Broader Harms Associated with AI III. Evaluating the Uncertainties and Opportunities A. Uncertainty about the Pace and Scale of Progress B. The Productivity Puzzle: Are We Really in an Era of Unprecedented Innovation? C. Putting AI in the Broader Context of Development Covid-19 Population Dynamics The Green Transition IV. Lessons from Past Technological Transformations A. Pre-IndustrialRevolution B. Industrial Revolution Innovation Can Be Very Disruptive Collective Action Can Mitigate the Adverse Effects Politics and Political Economy C. Manufacturing-BasedExport-LedGrowth D. What Is Different This Time V. Domestic Policy Responses A. Taxation, Redistribution, and Government Expenditures Social Protection Universal Basic Income Expenditure and Infrastructure Policy B. Pre-Distribution Steering Innovation in AI in High-income Countries New Development Strategies VI. Global Governance A. A Global Tax Regime for the Digital Age B. Global Competition Policy C. Intellectual Property Rights D. Data and Information Policy VII. Conclusion References 6: Competition and Innovation I. Introduction II. The Rise of Market Power A. Competition, Market Power, and Inclusive Growth in Advanced and Developing Countries B. Tycoons and Big Firms: The Good and the Bad C. The Rise of Big Tech D. The Consequences of Big Tech E. Big Agriculture and Inclusiveness III. Competition, Innovation, and Inequality IV. Competition and Growth Policies for Inclusive Growth A. Competition Policies to Promote Inclusiveness B. Growth Policies to Alleviate Poverty and the Role of Competition V. Conclusion References 7: Trade I. Introduction A. Trade and Inclusion Concerns B. International Trade Trends II. Aggregate Impact of Trade on Growth and Inclusion A. Standard Theories B. Evidence for Aggregate Net Benefits of Trade III. Relative Impact and Adjustment A. Impact and Adjustment in Advanced Economies B. Impact and Adjustment in Developing Economies IV. Policies to Share Trade Gains A. Trade-relatedPolicies B. Adjustment Policies C. Complementary Policies V. Conclusion References 8: Financial Globalization I. Introduction II. Facts about Capital Flows III. Facts about Inequality IV. Probing Deeper A. Foreign Direct Investment B. Non-FDIPrivate Capital Flows C. Official Capital Flows D. The Case of Mexico V. Policy Implications VI. Concluding Remarks References 9: Migration I. Introduction II. Consequences of Migration for Migrants III. Impact of Migration on Destination Countries A. Impact on the Labor Market The Substitution/Complementarity Effect The Productivity and Demand Effect B. Impact on Public Finance Short-termFiscal Impact Long-termFiscal Impact C. Impact on the Incidence of Crime D. Adopting Reasonable Immigration Policies and Fostering Integration Reaping the Benefits of Immigration Minimizing the Impact on Native Workers Paying Special Attention to Refugees IV. Impact of Migration on Origin Countries A. Impact on the Labor Market in Origin Countries B. The Role of Remittances C. Impact Through Trade and Investment D. Costs of Emigration Associated with the Brain Drain E. Country Case: Kyrgyz Republic F. Country Case: Mexico G. Policies that Can Help the Origin Countries to Maximize the Benefits and Minimize the Costs of Emigration V. Conclusion References 10: Governance I. Introduction II. Causes of Poor Governance: Corruption and Lack of Capacity III. Effect of Poor Governance on Inclusive Growth IV. Policies to Improve Governance: Overview V. Reducing Discretion when a Policy Decision Is Made A. Structural Reforms to Reduce Government Discretion B. A Case for Government Intervention: Automation, Outsourcing, Rules, and Procedures Rules and Procedures: Examples of Public Financial Management and Tax Administration Rules and Procedures: Example of Central Bank Safeguards Assessment Rules and Procedures: Example of Financial Sector Assessment Program (FSAP) VI. Reducing the Likelihood of Poor Governance A. Encouraging Good Governance: Human Resource Policies, Political Institutions, Capacity Building B. Discouraging Poor Governance: Tangible and Non-tangible Cost, Supply-Side measures, Anti-Money Laundering VII. Monitoring and Informing the Policy A. Transparency and Accountability B. Official Anti-CorruptionInstitutions C. Engaging Civil Society Examples of IMF’s Governance Policy Advice in Selected Countries VIII. Conclusion References 11: Macroeconomic Stability, Adjustment, and Debt I. Introduction II. Impact of Macroeconomic Volatility on Inclusiveness A. Impact of Volatility on Inclusiveness in Advanced Economies B. Impact of Volatility on Inclusiveness in Developing Economies C. Impact of Economic Crises on Inclusiveness III. Impact of Inclusiveness on Macroeconomic Volatility and Crises A. Macroeconomy and Inequality: A Paradigm Shift B. Impact of Inequality on Growth and Growth Volatility C. Impact of Inequality on Economic Crises IV. Macroeconomic Policies and Inclusiveness A. Fiscal Policy B. Monetary Policy C. Macroprudential Policies D. Exchange Rate Management V. Conclusion References 12: Tax Policy I. Introduction II. Taxation Principles A. Efficiency B. Equity C. Trade-off Between Equity and Efficiency D. Enforcement III. Taxation of Labor Income A. Use Individual Income as the Tax Unit B. Choose an Appropriate PIT Threshold C. Provide Relief for Low-incomeWage Earners D. Rationalize Tax Deductions E. Use a Stepwise Rising PIT Rate Schedule F. Set the Top PIT Rate at an Appropriate Level IV. Taxation of Capital Income A. Ensure Neutral Taxation of Entrepreneurial Income B. Tax Different Types of Investment Income Uniformly C. Minimize Tax Evasion V. Taxation of Wealth A. Strengthen Recurrent Property Taxes B. Consider a Net Wealth Tax (NWT) if other Capital Income Taxes are Hard to Impose C. Tax Inheritances and Gifts VI. Corporate Income Taxation (CIT) A. Design the CIT as a Rent Tax B. Consider Cost-BasedRather than Profit-BasedTax Incentives C. Adopt Tailored Anti-TaxAvoidance Measures VII. Consumption Taxation A. Design an Efficient VAT B. Impose Environmental Taxes C. Use Specific Excises VIII. How to Make It Happen? A. Ensure Strong Political Commitment and Leadership B. Build Consensus and Generate Public Support C. Develop a Clear and Broad Communication Strategy D. Emphasize the Joint Impact of Taxes and Expenditures E. Quantify the Impact of the Reform F. Sequence Reforms Well G. Recognize Institutional Constraints H. Build Effective Administrative Capacity I. Use Opportunities During Good Times J. Use Opportunities During Bad Times References 13: Public Expenditure I. Introduction II. Public Expenditure—Stylized Facts III. Public Spending and Inclusive Growth—An Analytical Framework IV. Public Spending and Inclusiveness—Evidence V. Policy Options A. Social Protection Social Safety Nets (SSNs) Pensions Universal Basic Income B. Government Effectiveness and Budget Institutions Rationalization of the Remuneration Policy in the Public Sector Replacing Generalized Subsidies by Targeted Transfers Building Inclusive Infrastructure Role of Budget Institutions VI. Conclusion References 14: Education and Health I. Introduction II. Education A. The Learning Crisis and Its Causes Systemic Causes of the Learning Crisis Technical Challenges Political Challenges B. Three Policy Responses Assess Learning Make Schools Work for Learners Reform the System Coalitions and Incentives Innovation and Agility III. Health Care A. The Challenges B. Building a High-Performing Health System Moving Away from Hospital-Centric Structures, by Increasing the Availability, Effectiveness, and Quality of Primary Care Improving Quality of Care in Treating Both Chronic and Acute Illness Reforming Mechanisms for Paying Health-Care Providers Improving the Price and Availability of Critical Medical Products Accelerating Technological Transformation, while Prioritizing Among Available Interventions and Technologies C. Efficient, Equitable Financing IV. Reasons for Optimism: Case Studies of Successful Reform A. Overall Human-CapitalDevelopment B. Successes in Education C. Successes in Health Care V. Conclusion References 15: The Political Economy of Inclusive Growth I. Introduction II. Demand for Redistribution: Theory and Practice A. Political Participation and Inequality B. What Other Factors Shape Preferences? III. The “Supply” of Redistribution A. Setting the Stage for Redistribution: Welfare States B. Measuring Pro-Poornessof Redistribution IV. Which Political Regimes Deliver More Redistribution? A. Redistribution under Proportional and Majoritarian Representation B. Redistribution with Changing Political Cleavages C. Redistribution under Populism: Then and Now D. Redistribution under Populism: The Outcome E. A Tipping Point? V. The “How” and “When” of Redistribution A. “Pre-distribution” versus Redistribution B. What Are the Constraints? C. Lessons from International Experience D. The Covid-19Pandemic: A Game Changer? E. Policy Options VI. Conclusion References 16: Gender Equality I. Gender Gaps Persist II. Understanding the Reasons Behind Gender Gaps A. Income Inequality, Inequality of Opportunity, and Poverty B. Violence Against Women C. Gender Gaps in Labor Market Participation D. Gender Gaps in Health E. Legal Barriers and Social Norms F. Implicit Gender Bias G. Financial Inclusion H. Sectoral Segregation and Type of Work I. The Glass Ceiling J. Unpaid Work K. Gender Gaps Across a Woman’s Life Cycle L. The Gender Gap in Pensions M. Gender-RelevantData N. Focus on Gender Data Enhancing Financial Inclusion of Women in Egypt III. Policies to Close Gender Gaps A. Fiscal Policy Revenue Policies for Gender Equality Gender Analysis of Tax Policy Enhanced Public Education on the Revenue System Methods for Tax Collection Methods for Payments of Social Transfers Gender-Related Public Expenditures Gender-Related Equal Opportunities Programs General Public Services Targeted at or Mostly Used by Women “Gender-Blind”Public Services/Policies Further Complexity in Low-Capacity Countries B. Structural Policies Legal Framework Explicit Legal Provisions to Protect Women Access to Justice Focus on the Access to Justice for Women Entrepreneurs in Jordan The Recent Wave of Legal Reforms Frameworks for Land Tenure Labor Market Policies Value Domestic Activities as Unpaid Work Reduce the Burden of Care and Domestic Work Redistribute These Tasks More Equally Between Men and Women Education, Training, and Skills Focus on Enhancing Women Employment in Central Asia Financial Inclusion Health Focus on Gender as Part of Health Crisis Responses Aid in Education and Health Culture of Gender Inequality and Implicit Bias Focus on Corporate Gender Quot IV. Conclusion References 17: Regional Disparities I. Introduction II. Key Facts III. Drivers of Regional Disparities: Conceptual Framework A. Firms, Jobs, and Capital B. Migration and Labor C. Spatial Equilibrium D. Growth and Regional Disparities in Developing Countries E. Lagging Regions in Advanced Economies IV. Policy Response A. Spatially Blind, Spatially Connective, and Spatially Targeted Policies B. Firms, Jobs, and Capital C. Migration and Labor Housing Costs Social Benefits D. Choice of Measures and Implementation Considerations E. Case Studies: German Reunification, and the Italian Mezzogiorno German Reunification The Italian Mezzogiorno V. Conclusion References 18: Generational Aspects of Inclusive Growth I. Youth Poverty and Unemployment A. Young People in the Labor Market B. Causes of Youth Vulnerability C. Policy Options II. Elderly Poverty A. Why Elderly Poverty B. Measuring Elderly Poverty C. Facts on Elderly Poverty D. Sources of Income for Elderly People E. Demographic Trends and Their Impact on Elderly F. Policies to Reduce Elderly Poverty III. Intergenerational Mobilit A. Measuring Intergenerational Social Mobility B. Barriers and Drivers of Social Mobility C. Policies to Promote Intergenerational Mobility IV. Conclusion References 19: Sharing Resource Wealth and Addressing Fragility I. Introduction II. The Challenges of Natural Resource Wealth A. The Challenge of Measuring Resource Wealth B. The Challenge of Political Myopia C. The Challenge of Falling Global Demand for Hydrocarbon Exports III. Resource Curse, Dutch Disease, and Exchange Rate Policies A. The Resource Curse and the Dutch Disease IV. Fiscal Policy Frameworks for Managing Resource Wealth A. Two Frameworks for Saving Resource Wealth: the PIH and BIH B. Country Examples of PIH and BIH Frameworks São Tomé and Príncipe and the PIH Framework Timor-Lesteand the Modified Permanent Income Hypothesis Fra Norway and the BIH Framework C. Fiscal Rules for Dealing with Volatile Resource Revenue Country Examples of Fiscal Rules for Managing Natural Resource Revenue Volatility V. Natural Resources, Poverty, and Inequality VI. Structural Policy: Making the Case for Economic Diversification A. The Experience of Malaysia with Economic Diversification B. The Experience of Chile with Economic Diversification VII. Conflict and Fragility VIII. Strengthening Governance in the Management of Resource Wealth The Santiago Principles The Extractive Industries Transparency Initiative IX. Conclusion References 20: Climate Change I. Introduction II. Science and Economics of Climate Change A. What Is Climate Change? B. Socio-EconomicDamages from Climate Change C. Other Environmental Threats D. What Needs to Be Done? III. Climate Change Mitigation A. Put a Price on Carbon B. Regulate and Set Standards C. Price Other Environmental “Goods” and “Bads” D. Align Financial System with Climate Objectives Financial and Monetary Policies for Climate Change Mitigation and Adaptation Managing the Financial Stability Risks Posed by Climate Change Closing the Gap Between the Social and Private Returns to Green Investment Mobilizing the Resources for Investment E. Accelerate Public Investment in Sustainable Infrastructure F. Support Climate-FriendlyInnovation G. Provide Nudges and Information to Change Social Values H. Cooperate Internationally IV. Building Resilience and Adaptation A. Smooth Impact of Shocks and Ease Adjustment to the Permanent Ones B. Reduce Exposure and Vulnerability V. Beyond GDP Growth: New Metrics and Policy Framework for Sustainability VI. Dealing with Climate Change: How to Make the Great Transformation Inclusive A. Making the Post-Covid-19Economy Sustainable VII. Conclusion References 21: Country Case Studies I. Introduction II. The Nordic Model of Inclusive Growth A. Main Features of the Nordic Model B. Inclusive Growth Policies in Nordic Countries Denmark Sweden Sweden Has Adopted Labor Market Reforms in Recent Years, but Challenges Remain III. India: Economic Reforms for Inclusion, 1990–2020 A. Introduction B. Main Features of the Indian Model High Growth Through Economic Reforms Macro-economicStability Redistribution Through Welfare Policies C. Inclusive Growth in India IV. Growth and Equity in Brazil A. Growth Dynamics B. Inclusive Policies V. The Middle East: The Case of Egypt A. Inequality Between Perceptions and Official Data B. Solving the Puzzle: Data vs Perceptions C. Policies in Favor of More Inclusion VI. Lessons and Conclusions References 22: Conclusions and Resources for Next Steps I. Recap of Main Takeaways A. High and Rising Disparities: The State of Affairs B. Headwinds Going Forward C. The Policy Response Education and Health Labor Market Policies Youth and Elderly Policies Gender Policies Migration Markets, Innovation, Diversification Financial Inclusion Financial Globalization Regional Policies Tax Policy Spending and Transfers Macro Stability Fiscal Frameworks for Resources Governance and Politics Climate Policies Global II. Knowledge Gaps A. Technology: Impact, Uses, Policies B. Data C. Political Economy and Governance D. Covid-19Impact E. Fiscal Sustainability/Crisis Response F. Customizing Policies for Countries and Regions G. Labor Markets and Vulnerable Groups H. Finance, Markets, and Economic Structure I. Natural Resources and Climate Policies III. Next Steps and Other Resources References Index Introductory Note