Economics of inclusion

In recent years, many developing countries have witnessed rapid growth in GDP but this has happened in sync with a surge in the number of people left behind. Another way of looking at this phenomenon is a confirmation of an age-old dictum that an increase in per capita income does not always necessarily spread across the spectrum. In some policy circles, there has always been a hidden mantra: "A rising tide lifts all boats". However, there is indisputable evidence to debunk this theory, but most importantly, we see in one country after another that this creed is not acceptable even as national policy.

In an article for The Daily Star at the beginning of Obama's ascendancy to power, I wrote an op-ed piece entitled "A rising tide lifts all boats: A myth" (February 18, 2010) and in a display of rhetorical flourish, called out, "Mr. President, a rising tide does not lift all boats. Some boats suffer damages, some lose their occupants, and others become too costly to run. And while the big boats and newer boats can sail away, the ones that stay behind need a little help to join the rest to sail out." I am, after all these years, glad (because we proved to be correct) and somewhat saddened that Obama is now leaving behind a legacy of greater wealth inequality. There is no doubt that one reason the Democrats lost the 2016 presidential elections in the US, and Britain voted to quit EU is precisely because the average person is still shouting "Don't leave us behind".

I don't remember where I read it for the first time, but there is a pithy and funny quote falsely attributed to Mark Twain, "Everyone talks about the weather, but nobody does anything about it." These days one could say the same about a new catchy word, "inclusion". Everyone talks about inclusiveness but nobody does anything about it. Economists, politicians, sociologists, and even the priests are incorporating the term "inclusion" in their lectures or sermons. Political leaders in most modern democracies never hesitate to declare their commitment to inclusion while running for elections or when they lecture before the parliament or the UN. But, as we know, only actions speak louder than words. The lip service to inclusion has remained only that because while pushing GDP growth is easy and usually demonstrable, achievements in the area of income inequality, reduction in the number of poor, or jobs for those on the bottom rungs of the ladder are tricky and rare.

Bangladesh, like all other developing countries, faces the challenge of inclusion on many fronts. While the country's economy is strong, and employment opportunities are increasing, the nation cannot fail to address the needs of those left behind. According to recent Asian Development Bank (ADB) data, 31 percent of the population remains below the poverty line. This is in sharp contrast to 21.9 percent for India and 6.7 percent for Sri Lanka. And these statistics should not be surprising. In Bangladesh, growth in recent years has been driven by the rapid expansion of the ready-made garments sector and remittances from abroad, both of which are at one level widening the gap between the have and the have-nots.

According to a study by ADB entitled "Overseas Employment of Bangladeshi Workers: Trends, Prospects, and Challenges", the recent trend to seek employment overseas, "… has become a major driver of the economy, comparable to the importance of the dominant garment industry.… But the economic impact of working overseas is not being spread evenly. High costs of migration due to recruitment fees and charges by intermediaries make opportunities highly skewed in favor of people in higher-income groups. Continued government oversight of the overseas recruitment process is needed."

Turning to market economies in advanced countries, the role of policy instruments to promote inclusiveness is getting renewed attention. At the 2017 Annual Conference of the American Economic Association held in Chicago on January 6-8, Prof. John Horton of New York University offered some evidence that many well-intentioned legislations, such as raising minimum wages in big cities, may adversely affect some workers, and even have some undesirable consequences by pushing them off the job market. The policy implication is that legal efforts to raise minimum wages must be accompanied by a programme to offer training to unskilled workers or to those who might have recently become unemployed.

One lesson we have learned from the experience of the US and UK is the continuous need to manage economic policy in a fashion to balance growth objectives with the goal of inclusion. Often, depending on the political party in power, policymakers do not hesitate to create a false dichotomy between growth and inequality. Pronouncements such as "Growth will create inequality" or "We must promote growth before addressing inequality" or "The benefits of growth will trickle down" are in abundant supply.

Admittedly, fast income growth is a necessary condition to reduce poverty. In a frequently cited cross-country study, Aart Kraay of IMF shows that growth in average incomes explains 70 percent of the variation in poverty reduction (as measured by the headcount ratio) in the short run, and as much as 97 percent in the long run. We also note that most of the remainder of the variation in poverty reduction is accounted for by changes in the distribution. The Organization for Economic Co-operation and Development (OECD) suggests that growth, at any level, often fails to tackle three overarching elements: poverty, unemployment and inequality. Therefore, there is a need to address the quality and inclusiveness of economic growth. These questions have recently acquired added relevance because of the slowdown of growth in rich countries and the simultaneous rise in inequality.

Fortunately, this call for inclusiveness is not only coming from progressive circles, but also from international agencies. IMF proclaimed that policymakers need to focus on the poor and the middle class. Research done by economists at IMF "has shown that income inequality matters for growth and its sustainability. Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels." That indeed is a bold statement!

And finally, UN agencies have also geared up to push inclusiveness in their Sustainable Development Goals. Likewise, the World Bank has embraced the goal of boosting of shared prosperity and growth of the bottom 40 percent as a companion objective to reducing global poverty to 3 percent by 2030, finally conceding the harsh truth that "the type of growth that inequality stimulates is the type that further advances inequality."

The writer is an economist who writes on public policy issues.