Inclusive growth
Analytical Paper, New Atlantic Capitalism, 3-4 March 2011, Washington DC
by
Professor Iain Begg, European Institute, London School of Economics and Political Science
The term ‘inclusive growth’ has a number of possible interpretations and, in policy terms, has been given two
distinctive meanings in recent strategic approaches to growth. The first has been adopted by the World Bank in
its calls for fresh thinking about how to maximise the labour input into economic activity.1 The essence of the
approach is that mobilising the potential labour force not only increases the sustainable growth rate by making
for a more balanced pattern of growth, but also facilitates poverty reduction (Commission on Growth and
Development, 2008).
The second is the emerging ‘Europe 2020’ strategy with its leitmotif of ‘smart, sustainable and inclusive
growth’. The three arms of the strategy are intended to define a growth model in which a first emphasis is on
innovation as a driver of competitiveness, with the ‘knowledge’ economy seen as an especially promising
ambition for the EU insofar as high educational levels are perceived to be EU strengths. While ‘sustainable’ is
most often associated with ‘green’ and, latterly, with action to counter climate change, a social dimension has
also been prominent in the EU approach to sustainable development. The inclusive element in the Europe 2020
strategy is intended to encompass a higher level of employment, alongside ‘social and territorial cohesion’.
There is evident common ground between the World Bank and EU approaches, notably in the emphasis given
to investing in people, both to equip them with needed attributes and to protect them against the risks of
unemployment, ill-health and poverty, as well as the insistence that the focus should be on the individual. As
the Commission on Growth and Development (2008: 6) puts it:
“Policy makers should resist calls to protect industries, firms, or jobs, but they should endeavor to
protect people. Perhaps the best protections a government can provide are education, which makes it
easier to pick up new skills, and a strong rate of job creation, which makes it easy to find new
employment. Beyond that, governments should also establish social safety nets—which provide a
source of income to people between jobs—and ensure uninterrupted access to basic services. These
policies are both ethical and practical. Without them, popular support for a growth strategy will quickly
erode”
This approach is echoed in the EU in what has now come to be known as ‘flexicurity’ and in the concept of
‘employability’ that has been at the heart of European employment policies since the late 1990s. However, the
EU approach also has a unique blend of characteristics that have been central to the Union’s socio-economic
1
For an overview of this approach, see a briefing paper by Ianchovichina and Lundstrom (2009).
philosophy and – despite the ambiguity around the term and the many different forms it takes across the 27
countries – the notion of the European social model.2
The meaning of ‘inclusive’
Inclusion is a concept open to a variety of interpretations and, in turn, is shaped by diverse influences. The
World Bank vision of inclusive growth tries to break away from redistribution as the response to poverty or
social exclusion. It implies a long-term focus on the size of the cake and not just how it is sliced, but also
stresses shifts from under-employed or low-productivity activity to patterns of labour utilisation that make
better use of the attributes of the workforce. In making the case for the Europe 2020 strategy, the Commission
(2010a) spells out a range of ‘inclusion’ challenges. These can be split into four main classes:
•
Making full use of labour potential, an orientation that is directly linked to the ‘grand challenges’ of
adapting to the ageing of the population and intensifying global competition.
•
Combating poverty and its consequences
•
Advancing social inclusion, notably by paying greater attention to opportunities and obligations over the
life-cycle
•
Ensuring territorial cohesion in the sense of preventing or reducing the extent of regional disparities
The first and second are close to the World Bank concept of inclusive growth, while the third and, to a greater
degree, the fourth represent more distinctive EU priorities.
An important strand of any inclusive strategy is activation – most obviously of the economically inactive of
working-age, although it could just as readily be applied to other factors of production. It is self-evident that an
economy which cannot make optimal use of its resources will tend to under-perform, but a further concern is
that it will be more at risk of macroeconomic imbalances and volatility. A spatial dimension is also pertinent
and, as just noted, in the EU great stress is placed in the related concept of cohesion on a territorial as well as a
social dimension of inclusion.
A further tricky facet of inclusion is the definition of poverty. On the whole, absolute poverty is not the problem
on either side of the Atlantic that it is among the poorer developing countries and, although the US has
traditionally employed an absolute threshold to identify poverty3, the thrust of policy is generally much more
on the relative position of poorer households. An absolute poverty target, concentrates on alleviating gaps in
basic needs, rather than improving the relative positions of the poor. In the EU, by contrast, the official poverty
line is defined as 60% of median income and is, thus, a relative measure. In practice, it identifies inequality
more than poverty. However, it also has potentially perverse incentive properties insofar as a target of poverty
reduction can be achieved without any growth or improvement in the circumstances of poorer people, simply
by having mechanisms to distribute the fruits of growth evenly. There is, consequently, a case to be made that
inclusive growth should mean genuine increases in the well-being of the poor, and that an undue focus on
relativities may be harder to justify.
2
A notion often easier to define by focusing on what it is not (for example the US model) than what it is.
3
The cost of food multiplied by three was the measure until recent refinements
2
Sources of exclusion
Inclusion can also be seen as the antidote to social exclusion, a phenomenon that has multiple causes. While
poverty in the direct sense of a lack of income is inevitably a major source of exclusion from mainstream society
and activity, and invites a redistributive response, an inclusive strategy can go further by dealing with other
determinants of exclusion. In this vein, among the vectors of exclusion that an inclusive growth strategy could
try to counter are the following:
•
Migration, whether across or within national borders. Such flows of population can be both a source of
opportunity and a cause of labour market segmentation and societal strains. The traditional US model of
openness to economic migrants is clearly under strain, although there remains a strong expectation that
economic adjustment within the country should encompass geographical mobility by workers. In Europe,
the resistance even to intra-EU migration has been substantial and there are evident problems in
integrating some categories of migrants (notably asylum-seekers) into the workforce, as well as specific
problems in integrating family members of those who migrate for economic reasons.
•
Gender is a source of exclusion and, for some EU countries, is unfinished business, whereas the US has
made generally made greater, if still incomplete, progress
•
Age (the top and bottom of the working population distribution) has been a problem in the majority of
European countries, although it is important to note the significant differences and the impact of rather
diverse approaches to issues such as early retirement or youth activation. Youth unemployment is an
especially destructive phenomenon, aggravated when it becomes long-term.
•
Disability, too, is a contentious issue in many European countries, especially where there has been a
tendency to push individuals towards disability or incapacity registers and benefits, rather than standard
unemployment benefits.
•
Poor matching of job opportunities and skills or other labour market attributes, including as a result of
geographical location.
Social protection and inclusive growth
An often-heard argument is that welfare is a drag on economic performance, imposing both direct budgetary
costs and creating indirect barriers to employment by reducing incentives to work. The social investment
function of social protection has been identified by a number of authors as a novel though increasingly
pervasive approach to welfare reform. Indeed, Taylor-Gooby (2008) maintains that in its idealised form, the
social investment approach to welfare can bring together economic and social objectives in a self-reinforcing
manner; this implies inclusive. However, he also notes that the practice falls short of the rhetoric, implying that
rather than social investment, what has happened is ‘negative activation’ – workfare or similar employment
schemes that take people out of unemployment but do little more to develop human capital. He attributes this
outcome partly to the weakness of unions and notes that there has been a disjunction between the emphasis
on social investment in policy debates and the realities of what has been done within many countries. In
Europe, this is now being addressed as a core policy goal, notably through the development of the flexicurity
model in which the(social) investment theme remains prominent. A linked approach in the EU has been that of
‘active inclusion’, a slogan that encompasses not just connection to the labour market, but also income
guarantees and access to social services of different sorts.
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From employability to flexicurity in Europe
A high level of prosperity is closely linked to the level of productivity an economy attains, but, to state the
obvious, output is also a function of the number of people employed. In Europe, a diagnosis that gained
traction from the mid-1990s was that too few people were in work and comparative work showed that there
were systematic differences among economies in employment rates (that is, the number of people in work as a
proportion of the working age population). For some Member States with high productivity rates, France being
a good example, unemployment was persistently high, suggesting that too few of the less productive workers
were obtaining employment. For France (and for a number of other EU countries) , the explanation is that
employment rates are especially low for youths and ‘seniors’ – those outside the prime working-age of 25-55.
By contrast, Sweden and Denmark, countries with high overall employment rates, employ in excess of 60% of
55-64 year old workers.
The ‘employability’ approach at the heart of the EES sought to alter the approach to the labour market. It is
essentially about equipping individuals with attributes that increase the probability that they will be hired when
a job becomes available, rather than direct job creation (or preservation). It was initially regarded with
considerable suspicion by many EU countries and by labour interests, because it was contrary to the rightsbased principles of national solidarity and social protection systems.
A clear line can be discerned linking these early initiatives to the flexicurity model that is now centre-stage in
the EU. The neologism was coined to capture an approach which combines greater flexibility in the terms and
conditions of employment with assurances of security. It is often portrayed as the former being for the benefit
of employers, while the security is for workers, and the nub of the approach is that the protection in the latter
term should be targeted at the worker and not at the particular job. However, a more nuanced approach to
flexicurity has been under discussion in recent years and has been given renewed impetus by the economic
crisis.
Today, the flexicurity and inclusive growth agenda are closely inter-twined and doubts about whether
flexicurity was only a ‘fair-weather’ approach that would founder in periods of economic stagnation appear to
have been debunked. Indeed, there is now a search in Europe for a refinement of flexicurity models (see, for
example, Bovernberg and Wilthagen, 2008). Their approach can be interpreted as being about redefining the
contours of the employment and flexicurity models to include income and employment security along with
greater flexibility in labour markets, work organisation and industrial relations. It is important, in this vein, to
emphasise that there can be different configurations that achieve similar goals.
Economic crisis and inclusive growth
Recent labour market trends on the two sides of the Atlantic are revealing but also disparate. Several EU
countries have avoided the degree of increase in unemployment that might have been expected as a result of
the downturn, yet others (notably Spain) have seen a rapid surge in unemployment. Canada has manifestly
fared much better than the US with unemployment rising by half as much as the US and already well down
from the pea levels attained in 2009, to the extent that modèle Canada has now become a contender as the
beacon for others to follow.
In the EU a possible explanation for the relatively muted rise in unemployment is that the maintenance of
employment had, over the period since the European Employment Strategy (EES) was launched in 1997, been a
prominent policy goal. In the two preceding decades, the damaging effects of high unemployment had been a
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source of great concern politically. It was recognised to be a cause of social exclusion and to have the
debilitating economic effect of aggravating ‘hysteresis’ – the detachment of individuals from the labour market
– leading to rising structural unemployment and an erosion of human capital. This trend was manifestly
damaging to European society, whether seen from economic or a social perspective.
What is critical in policy response to these trends is how the downturn in labour demand is accommodated.
Short-time working implies that hours take the strain and thus that there is a burden sharing in income loss
among workers, with companies contributing to the extent that payrolls are higher than strictly necessary.
Firing preserves the most viable jobs but switches the burden to the unemployment roll and to the workers
who lose jobs, while activation policies involve the buffer of training systems and flexible forms of work. All
constitute different approaches to managing the social risk of job loss, but have to be looked at in the round to
assess their merits and drawbacks.
The policy responses
The relationship between active labour market policies and public finances in a period of recovery deserves
particular scrutiny. More people in employment generates additional tax revenue and, especially in countries
with generous unemployment benefits, relieves pressure on public expenditure. It follows that optimising the
timing of reversion to business as usual in the aftermath of the crisis will be tricky and a clear difference can be
seen in how the two sides of the Atlantic are approaching this, with the US maintaining the fiscal stimulus while
many European governments are pursuing what is euphemistically know as fiscal consolidation.
How countries manage the exit from crisis has, therefore, is likely to be a key policy question for the next
decade. So far, the focus of attention has been mainly on budgetary policy, but employment and labour market
policies are coming to the fore. Any economic recovery will remain incomplete without a return of employment
growth and it has to be stressed that the macroeconomic sustainability of recovery depends in the mediumterm on sufficient job creation. A jobless recovery could lead to the damaging conjunction of over-heating in
the parts of the economy alongside persistent unemployment, as happened a decade ago. This would risk
increased imbalance in the economy that reduced growth potential, as well as social divisions. The corollary is
that sufficient priority should continue to be given to employment promotion.
Estimates by Corley-Coulibaly and Ernst (2010) suggest that too early a withdrawal of stimulus measures that
maintain employment would have a favourable short-term effect on the public finances, but rapidly reverse to
leave a legacy of worse deficits. But there is also the short-term effect on government debt to consider:
markets can be unforgiving in driving-up the cost of borrowing and the experience of many European countries
is that once public debt reaches a level at which the markets take fright, the pressures can rapidly become
inexorable. The policy implication is that in pursuing inclusive growth in a period of recovery, governments
need to do more to promote employment take-up with fewer resources.
One answer is to focus employment policy on job creation rather than preservation. A subtle balance will be
needed in subsequent employment policies, favouring job creation but avoiding putting at risk more existing
jobs. This implies shifts of emphasis, rather than radical reconfiguration of policies, for example:
•
More of the effort on training could be directed towards the unemployed or inactive than to those
currently in employment or short-time working arrangements
•
Wage subsidies aimed at keeping people in work might shift towards more investment in job search or
subsidies for hiring
•
Support for mobility of workers, rather than special programmes (such as scrappage) for firms
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•
Targeting support to SME start-ups and growth rather than public projects
Green jobs continue to be seen as an important direction for change and a source of net job creation, but their
quantitative significance has to be queried. In some areas, there are genuine opportunities to create new jobs,
but to the extent that ‘green’ replaces ‘dirty’ (consider coal-mining), the new jobs will be substitute for existing
jobs rather than net additions to the stock of jobs.
In a period of weak job demand, the scope for those facing multiple disadvantages in the labour market to
obtain jobs will be diminished further and additional efforts by public employment services are likely to be
needed to counter a drift into deeper exclusion. Possible solutions include the definition of pathways that
include training as a first stage, followed by subsidised jobs or social enterprise, before envisaging placement in
an unsubsidised private sector job. How cohesion policy should evolve is the subject of intensive debate in the
EU and, by implication, the interpretation of ‘inclusive’ is also open for debate. The balance of objectives is
further complicated by uncertainty in the definition of ‘territorial cohesion’ as a treaty commitment.
Funding of inclusive growth policies
In the EU, the quasi-federal level has a very limited budget, amounting to barely 1% of EU GDP and just over 2%
of aggregate public spending by all tiers of government. It is, moreover, concentrated on a small number of
spending lines, with some three quarters of it split between just two areas: the common agricultural policy and
the ‘cohesion policy’. The latter has the remit of promoting the economic development of regions lagging
behind or adversely affected by structural changes, while also contributing to social inclusion and (a further task
introduced by the Lisbon treaty) addressing a range of territorial objectives (including spatial planning, crossborder concerns and unbalanced economic development).
The EU budget is set in a multi-year framework within which the main headings of expenditure are determined
form the full period (currently a seven-year one running from 2007-13, and required by the treaty to be a
minimum of five years). To mollify widespread dissatisfaction with the shape and content of the budget when it
was last settled in 2006, it was agreed that a mid-term review would be carried out and that there would be no
taboos in what it could propose as reforms. Its (delayed) outcome was a communication from the European
Commission, published in October 2010 (Commission, 2010b), that contained an extended discussion of
options, but had very few concrete proposals (for a critique, see Begg, 2010). The review nevertheless stressed
that the budget should be an instrument for delivering the Europe 2020 strategy, and made clear a strong
connection between ‘inclusive’ and the future cohesion budget. In the current budgeting period, cohesion
policy has already been called upon to support the objectives of the Lisbon strategy (the predecessor to Europe
2020) and a de facto rule has been that at least 60% of cohesion spending should be devoted to public
investments that contribute to the enhancement of EU competitiveness. This obligation can lead to tensions
between these EU-wide goals and the inclusiveness and developmental mandate.
Concluding comments
The economic crisis has led to a widespread re-appraisal of the economic governance of advanced capitalist
economies. Unsustainable growth and imbalances have been shown to have damaging effects that have been
masked by short-term success, prompting a fresh look at the form and rate of economic growth. Gradually, a
new paradigm may be emerging in which the shape as well as the rate of growth matters.
Inclusive growth has to be understood as a two-way street. Rapid growth can manifestly generate resources
sufficient to improve the well-being of all, provided that mechanisms exist to spread the benefits. In absolute
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terms, poverty will be alleviated by the combination of trickle-down from increased wealth creation and explicit
social policies that redistribute. In Europe, the principal policy instrument for this purpose is the social
protection system which significantly reduces poverty. However, inclusion also contributes to growth by
increasing the pool of active human resources, the more so if the system is able to add to the human capital.
It is, therefore, an appealing approach, though with the concomitant flaw that what is appealing is often also
prone to ambiguity: the very term inclusive is one that hardly anyone will want to oppose. Yet inclusive growth
also encompasses a variety of approaches and socioeconomic philosophies – a feature that it arguably shares
with other warm and beguiling expressions such as ‘cohesion’. An implication is that attention has to be paid to
what lies behind the slogan and that the details are critical. US and European experiences have strengths and
shortcomings, but neither is manifestly superior nor has all the answers. The tempting answer is to fuse them
into a coherent post-crisis package, doing so will not be easy because the necessary accommodations have to
be worked out over decades rather than months or years. That said, the diverse experiences provide
ammunition for development of better policy.
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References
Begg, I. (2010) ‘Mollfiying everyone, pleasing no-one: an assessment of the EU budget review’ SIEPS European
Policy Analysis 2010.14epe
Bovenberg, L. and Wilthagen, T. (2008) ‘On the Road to Flexicurity, Dutch proposals for a pathway towards
better transition security and higher labour market mobility’ Tilburg University.
Commission on Growth and Development (2008) Growth Report: Strategies for Sustained Growth and Inclusive
Development, Washington: The World Bank
Corley-Coulibaly, M. and Ernst, E., ‘Promoting employment recovery while meeting fiscal goals’, International
Institute for Labour Studies, Geneva, 2010.
European Commission (2010a) Europe 2020: a strategy for smart, sustainable and inclusive growth, COM(2010)
2020, Brussels, 3.3.2010
European Commission (2010b) ‘The EU budget review’, Communication: COM(2010) 700, Brussels, 19.10.2010
Ianchovichina, E. and Lundstrom, S. with
Garrido, L. (2009) ‘What is inclusive growth?’
http://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1218567884549/WhatIsInclusiveGrowth20081230.pdf
ILO, Accelerating a job-rich recovery in G20 countries: Building on Experience, ILO, Geneva, 2010.
OECD (2008) Growing Unequal? Income Distribution and Poverty in OECD Countries, Paris: OECD
Taylor-Gooby, P. (2008) ‘The new welfare state settlement in Europe’ European Societies 10, 3-24
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