1. Inclusive Growth Dynamics and Determinants in Emerging Markets *
ThFederation of ASEAN Economics Association Conference, Manila
Inclusive Growth Dynamics and Determinants in Emerging Markets *
Shanaka Jay Peiris
IMF Resident Representative to the Philippines
* Based on IMF’s Regional Economic Outlook for Asia and Pacific (October 2011), IMF country report 2012 and forthcoming IMF Working Paper by Anand, Mishra and Peiris. The views expressed are those of the authors and do not necessarily reflect those of the IMF.

2. Stylized Facts EMs and Asia’s Experience over the Last Two Decades

3. In the last two decades, Asia has grown rapidly, enabling significant reductions in poverty…

4. However, inequality has increased sharply, contrary to Asia’s history of equitable growth

5. Inequality has risen more sharply in Asia than elsewhere and is now approaching global highs

6. How Pro-Poor is Asia’s Growth?

7. Empirical Strategy: Data
Growth is pro-poor if it reduces poverty (Ravallion and Chen, 2003)
Data Sources: World Bank Povcal database, household surveys for NIEs, and Penn World tables.
Sample: Unbalanced panel of 105 developing and emerging economies, covering

8. Empirical Strategy: Model
Estimate following regression:
P is poverty headcount below the $2 line in country i at time t,
y is real per capita income in country i at time t
GINI is the Gini coefficient in country i at time t, and
γ and ρ are country and decade dummies
Equation in logs, so β and δ are elasticity of poverty reduction with respect to growth and inequality, respectively.

9. Growth is generally pro-poor, but relatively less so in most of Asia and Latin America…
On average for our sample, 1 percent increase in real per capita income leads to 2 percent decline in poverty headcount.
However, 1 percent increase in Gini offsets it.
Relationship varies across regions and economies.
MENA, EE, Central Asia and SSA

10. How Inclusive is Asia’s Growth?
Inclusive growth is in line with the absolute definition of pro-poor growth, but not the relative definition. Under the absolute definition, growth is considered to be pro-poor as long as poor people benefit in absolute terms, as reflected in some agreed measures of poverty (Ravallion and Chen, 2003). In contrast, under the relative definition, growth is pro-poor if and only if the incomes of poor people grow faster than those of the population as a whole; that is, inequality declines (Dollar and Kraay, 2002; IMF 2011). By focusing on inequality, the relative definition could lead to suboptimal outcomes for both poor and non-poor households. For example, a society attempting to achieve pro-poor growth under the relative definition would favor an outcome characterized by average income growth of 2 percent where the income of poor households grew by 3 percent, over an outcome where average growth was 6 percent, but the incomes of poor households grew by only 4 percent

11. Inclusive growth is both pace and distribution
Curve AB is a macro social mobility curve. This is, in fact, a generalized concentration curve when the individuals are arranged in ascending order of their incomes.
Growth will be inclusive if it shifts the social mobility curve upward at all points.
The two social mobility curves with the same average income (Ybar) but different degrees of inclusiveness. Social mobility curve (A1B) is more inclusive than the social mobility curve AB, as the average income of the bottom segment of the society is higher.

12. Measure of inclusiveness
Calculate an index from the area under the curve as in Ali and Son 2007:
The greater the Ystar the greater will be the income available to the population. If everyone in the population has exactly the same income, then will be equal to Ybar.
 Thus, we propose a macro income equity index (IEI) as in Ali and Son 2007:
Higher the value of omega (closer to one), the higher is the income equity.
To achieve inclusive growth, we need to increase Ystar, which can be accomplished by increasing the average level of income or increasing the equity index or both.

13. Only a few countries have achieved high YSTAR

14. As a result of both income and distribution changes

15. Macro social mobility curves in EMs and Asia

16. What Explains Inclusive Growth?

17. Some standard growth determinants promote inclusiveness…

18. 1. Tax and transfer policies are less equitable in Asia, with lower (and more regressive) tax takes and lower (and less targeted) social spending…

19. 2. Education and health spending are positively correlated with inclusiveness

20. 3. Inclusiveness is positively associated with degree of employment protection and minimum wage levels

21. 5. Narrow access to financial services hurts the poor disproportionately

22. Conclusions
Macroeconomic stability, human capital and competitiveness are found to be key determinants of inclusive growth in emerging markets.
The standard growth drivers such as education, initial income and institutions are also important while technological change and trade globalization has a less discernible impact.
In terms of financial globalization, foreign direct investment (FDI) fosters inclusive growth but financial depth has a negative impact, as in IMF (2007), highlighting need for financial inclusion. A striking feature is that the distribution of income (both inequality and poverty) does not appear to matter when controlling for economic fundamentals, while inflation and GDP volatility are unambiguously detrimental for inclusive growth.
Competitiveness, measured by deviations REER deviations from PPP, and infrastructure are also important for inclusive growth

23. Thank You