Inclusive Growth Should not be the G20's Game
In 2002 David Dollar and Art Kraay, both at the World Bank at the time, published an article in the Journal of Economic Growth called 'Growth is Good for the Poor'. Dollar and Kraay showed that if an economy's growth increased by a percentage point, then growth of the incomes of the poor increased by one percentage point too.
This study was updated in 2013 with a more extensive set of data covering 118 countries over four decades. The robust one-to-one relationship is still there.
Dollar and Kraay find that growth is most pro-poor in Latin America, where the relationship is slightly above one-for-one, and least pro-poor in Asia, where it is slightly below. However, because Asia grew the most, the poor in those countries actually saw the most growth in their incomes compared to other countries.
The authors also note that they have found it difficult to identify any policies that make growth more pro-poor, concluding that 'there is no robust evidence that certain policies are particularly "pro-poor" or conducive to promoting "shared prosperity" other than through their direct effects on overall economic growth.' The importance of growth is paramount. They find that 77% of the cross-country variation in growth in incomes of the poorest 40% of the population is due to variation in the growth of average incomes.
It appears, then, that 'inclusive growth', which Turkey has nominated as a priority for its 2015 G20 presidency, is just growth. So what determines growth?
Over the last 15 years, a rich academic literature has studied the institutional determinants of growth. Recently, this subject was taken outside of academic journals by Daron Acemoglu and James Robinson with their popular book Why Nations Fail. In this framework it is the power of elites, and whether institutions are extractive (the fruits are enjoyed by the elite alone) or inclusive (the rewards from economic growth are widely shared) which fundamentally determine economic performance.
There is little in this popular and influential framework to suggest that international pressure will have a significant effect on domestic institutions. The odd special case may exist where international pressure has led to better outcomes – South Africa springs to mind – but this line of academic enquiry emphasises the primacy of domestic interests. The international community, and fora like the G20, are just not a powerful constituency in driving domestic reform. The G20 has a hard enough time winning over national assemblies on topics that are its bread and butter; just consider the difficulties IMF reform faces in the US Congress.
But haven't we just seen the completion to a successful Australian presidency, where countries rallied around a growth agenda and made commitments that will increase global growth by two percentage points?
If ever the G20 was going to affect global growth, it was going to be under the Australian presidency, which had a laser-like focus on growth. However, I remain unconvinced that it has had any effect.
The IMF and World Bank do not appear to have changed their forecasts of world growth in response to the Australian presidency. This is despite the fact that the IMF was involved in measuring the predicted impact of the 2014 commitments. It seems that international organisations either accounted for the fact that these actions would have likely gone ahead in G20 countries regardless of the agreement, or they suspect that the commitments are not going to be implemented. In any case, it leaves the G20 looking like a damp squib when it attempts to get mixed up in individual nations' political economy. It just does not look as if international soft power has had much influence.
The G20 should be concerned by the plight of the poor, but a focus on inclusive growth is not the way to assist them. There is plenty for the G20 to do. In my piece for the Lowy Institute's latest G20 Monitor, I consider two agendas the G20 could address: taxation of corporate income and climate change. These issues have particular relevance for the poor, and progress can only be made with the G20. In both cases, international agreement is necessary for success.
The lesson is that the G20 should pick its fights carefully. Inclusive growth is one to be avoided.
Photo courtesy of Flickr user G20 Australia 2014.
Leon Berkelmans is the Director of the International Economy Program at the Lowy Institute.