Inclusive development vs equitable growth

In a few days from now the first Budget of the new United Progressive Alliance (UPA) government will be presented in Parliament. This Budget would surely try to provide the financial support to a roadmap of policies spelt out in President’s address of June 4. “In 2004 my government had set before the country a vision of an inclusive society and inclusive economy. My government sees the overwhelming mandate it has received as a vindication of policy architecture of inclusion that it put in place. It is a mandate for inclusive growth, equitable development and a secular and plural India”.

What is exactly meant by inclusive growth, which has been presented as equivalent of equitable development as the mandate of the government? Are the two concepts similar, implying a similar set of policies? Are there differences even for the same country and for the same period of time? An examination of these issues would allow us to evaluate the policies of the next Budget, meant to fulfil the mandate of the government.

There is a considerable literature on the quality of growth and the characterisation of the development process in terms of inclusiveness as well as equity. And more often than not the approaches are clearly distinguished in terms of the necessity and effective implementation of redistributive policies. The initial post-war literature looked at economic development as increasing the rate of growth of gross domestic product (GDP). The questions of redistribution of income for reducing inequality were secondary to policies that aimed at enlarging the size of GDP. Nobel laureate Sir W. Arthur Lewis, the father of post-war development literature, considered GDP growth as the most essential indicator of economic development because he did not recognise the instrumental role of GDP. Development is meant to increase welfare and GDP growth is not an end in itself, but a means of increasing welfare and therefore development. But still Sir Lewis and most other economists of that period considered GDP growth as the most reliable indicator of development, and in practical policy terms an end in itself, because most determinants of welfare and therefore development were functions of GDP growth. The instrumental value of determinants such as health, education, nutrition, housing, all depended on expanding GDP growth. So the GDP growth rate was taken as a proxy for the increase of welfare, allowing the policymakers to concentrate on GDP alone.

Over the years, empirical results from all over the world came to establish that GDP growth alone cannot bring about all-round development, and specific policies targeted at specific constraints affecting people at different levels of standard of living where necessary to allow all-around development. The instrumental role of GDP growth for development was not questioned, but making that as the objective of policy was not considered useful any more. Dr Amartya Sen elaborated this point in his capability approach, making the expansion of capabilities and freedom of choice of the people as the primary determinant of development. The growth literature thereafter moved on to examining the methods of expanding those variables, with or without an increase in the growth of GDP. It was Dr Sen’s contribution to show development as capability expansion of the poor and made an increased pace of human development with adequate food, health, nutrition and housing as the primary indicators of development.

Development literature, however, went much beyond in the 1980s and 1990s and brought in the concept of equity, in terms of reduction of inequality and the promotion of distributive justice. That meant a redefinition of poverty encompassing not only the lack of adequate income or purchasing power but also education, health and other determinants that sustain a rising standard of living. The reduction of inequality thus became an essential determinant of increasing welfare and development.

It is in that perspective that the idea of inclusiveness of development was introduced in the literature, mainly by the World Bank and by liberal economists. The economists that rely upon the benefits of free market operations do not in general favour redistributive policies, because they distort the free play of market forces and reduce efficiency and thereby lose potential income. But as empirical evidence from many different countries kept on showing that without market intervention, economic growth does not automatically reduce poverty or increase the income of the poor. In the short to medium term, these economists admitted the need for policies of inclusive development which were expected to reduce poverty without interfering with the market-based process of income distribution. They were again meant for the short and medium term because over a long term if the average GDP of a country grows at a sustained rate it would raise the level of income of all sections of the population although at different rates. In other words, long-term GDP growth would increase income also of the poor, making it inclusive, if policies can resist an adverse deterioration of income distribution. There will be an absolute decline of poverty or increase in the absolute income of the poor even if the relative distribution worsens and the rich become richer much more than the poor. An inclusive development policy, therefore, would limit itself to no adverse change of income distribution, which can be protected with a minimum income transfer, especially when the income of some section of people may fall due to unemployment or structural adjustment of a market-based process to economic growth. In short, inclusive development would mean that all sections of people have some increase in their absolute income with limited income transfers that are necessary, allowing market forces full freedom of operations.

This concept of inclusive development, although logically quite coherent, is very difficult for new liberal forces to sell, especially to democratic developing countries. It is seldom possible in a democratic society to accept a process that will increase the inequalities of personal income and wealth or regional-sectoral shares in GDP. That is how the notion of inclusive development is being increasingly associated with equitable growth. But policies for equitable growth are quite different from policies of inclusive development. Equitable growth would require much proactive intervention of the state and the market, allowing the poor and the vulnerable to have greater access to income towards them through affirmative action in education, health, and other variables determining welfare. The simple market process cannot address these problems and they go much beyond the original notion of inclusive development, which is concerned only with income transfer, to avoid decline in absolute income.

It will be interesting to see how the Budget of the new UPA government distinguishes between the process of inclusive development and equitable growth. The poor and vulnerable people in India have now tasted blood and are asking for jobs. They cannot be satisfied sharing trickle-down growth, especially if the disparities keep rising. They are expecting equitable growth — with a larger share of the pie today to compensate for centuries of deprivation.

Dr Arjun Sengupta is a Member of Parliament
and former Economic Adviser to Prime Minister Indira Gandhi