Growth or Inclusion?

The syllabus for IB Economics (both HL and SL), expects candidates to examine 'the relationship between equity and efficiency', to 'discuss the possible consequences of economic growth on the distribution of income' as well as to 'examine how income distribution may contribute to economic development'.

A great resource for me in my teaching over the past several years has been the quarterly magazine Finance and Development  published by the IMF.  It is free, it is accessible, and most articles are highly relevant to the IB Economics syllabus.  I highly recommend it to both students and teachers.

In the latest issue (June 2018) there is a most interesting and useful article for us by Jonathan David Ostry, the deputy director of the research department at the IMF.  The title of the article is Growth or Inclusion? With the right policies, countries can pursue both objectives.  It is available also in pdf format (to email to students perhaps).  Definitely worth reading- 3 pages, not more than 20 minutes of careful reading.

Here are a few excerpts that I found interesting (to whet your appetite?):

Economists have long believed that improving the supply side of the economy—reducing barriers to entry in product markets and making labor markets more flexible are notable examples—is the key to sustaining growth... 

In work undertaken several years ago, we found strong support for the idea that structural reforms conferred sizable benefits for economic growth.  

Since the global financial crisis of 2008, however, economists and policymakers have begun to question whether supply-side policies alone can ensure sustained growth. They point to mounting evidence that growth tends to be more fragile and less resilient when it is not inclusive and its fruits accrue mainly to the wealthiest.

This could reflect the fact that—when adverse shocks occur—there is less support in unequal societies for the kinds of policies that help right the economic ship, because the short-term pain doesn’t bring broadly shared longer-term gains. 

(or, as I write in my SG, but much less succinctly... (p. 96): With a more equitable income distribution, '...social tensions will be lower, so governments can more easily undertake important economic reforms requiring a high degree of consensus within the population. If people feel that they enjoy the fruits of economic growth then they will be willing to work harder and sacrifice more now in order for them or their children to enjoy more at a later date'.)

It could also simply reflect the fact that these societies don’t offer equal access to education, health care, nutritious food, credit markets, and even the political process (equality of opportunity for short), making them less resilient in general.

(or, 'inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of shocks, and thus that it tends to reduce the pace and durability of growth', from 'Redistribution, Inequality,
and Growth', see bottom of this post)

And:

We argue (Ostry, Loungani, and Furceri 2018) that policymakers’ faith in their ability to get growth going through supply-side measures and deal with distributional issues later is a dangerous gamble, and that they should instead focus simultaneously on the size of the pie and its distribution. I call this a macro-distributional view for short.

Concerning the trade-off between equity and efficiency that is often discussed, Ostry has the following to say:

Economists have generally frowned upon paying attention to distributional issues. (This) is evident also in the modern work of Nobel laureate Robert E. Lucas Jr., who wrote in 2003 that “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.” The basis of this view is the so-called trickle-down theory, which holds that a rising tide lifts all boats, so that if growth is assured, there is no need to worry about distribution.

But...

...if healthy growth is undercut by excessive inequality, then even the policymaker who has no qualms about the moral or social implications of inequality should be concerned about the economic cost.

Ostry continues, and in his last paragraph, concludes...

The task of policymakers is to ensure that the disadvantaged also have the opportunity to succeed in the modern, hyperglobalized economy, by designing reforms and globalization with an eye to their distributional effects. If they fail, pro-growth reforms will lose political legitimacy, enabling destructive nationalist, nativist, and protectionist forces to gain further traction and undermine sustainable growth. 

I hope you are now more interested in reading all of Ostry's (short) article.  In case you are really in to the importance of inclusive growth (for your country, not just for the May/Nov final exams...), then you could also check out this: Redistribution, Inequality, and Growth Prepared by Jonathan D. Ostry, Andrew Berg, Charalambos G. Tsangarides, April 2014.