Inclusive Growth Framework Applied Inclusive Growth Analytics Course June 29, 2009 Susanna Lundstrom, PRMED

Outline  Rationale for Inclusive Growth  The IG framework  The three main steps 1. The overall dynamics 2. The profile of the economic actors 3. Going through the tree

Why Inclusive?  Rapid pace of growth is unquestionably necessary for substantial poverty reduction Kraay (2004): Explains 70% in the short run and 97% in the long run Lopez and Serven (2004): The poorer country the more important  But for sustainable growth in the long run it is typically: broad-based across sectors, and inclusive of the large part of the country’s labor force.  Growth Commission: IG and sustainable growth Important for efficient use of resources, political stability and to avoid conflicts  Part of the social welfare function – people care about inclusion

Characteristics of IG analytics  Growth is fundamental and the core of the analysis  Improved incomes through productive employment rather than direct redistribution (“the poor as economic actors”)  Equality of opportunities and level playing field  Absolute pro-poor growth  Focus on ex-ante analysis of sources and constraints to IG growth

How much focus on general growth or inclusiveness?  General growth is fundamental, but the constraints can also be analyzed from the perspective of different economic actors  Focus is on productive employment – self or wage employed  The weights depend on the country context. Zambia: Highly concentrated growth – equality of opportunities important Mongolia (and Zambia): Resources rich, Dutch disease effected countries – broad-based growth fundamental Tajikistan: Migration – need for domestic productive employment Benin: Very poor, low growth country - general growth

Business Environment Analysis Returns to economic activity Social Returns Private Appropriability Government failures Macro risksMicro risks Market failures Cost of finance International sources of finance Local sources of finance Domestic savings Financial sector intermediation

Economic Growth Poverty Reduction/ Inclusion Wage-employedSelf-employed Employability Analysis Business Environment Analysis Income increases through productive employment EA: Constraints for individuals viewed from the perspective of different economic actors BEA: Constraints for firms viewed from the perspective of different economic actors

Growth Diagnostics vs. IG Analytics  Growth Diagnostics emphasize: The firm as starting point Constraints from the perspective of a representative firm Short Time-Horizon Business Environment Analysis Human Capital from the perspective of a firm  Inclusive Growth Analytics emphasize: The individual/economic actor as starting point – worker or firm owner Disaggregated analysis – constraints depending on self/wage employed, size of firm, sector, formal/informal,… Long Time Horizon: More emphasise on time-lags from reform to impact, structural changes central Sector Dynamics Analysis, Employability Analysis and Business Environment Analysis Human Capital central in many dimensions

Three Main Parts 1. The overall dynamics Drivers of past growth: sustainable or dividends? Past dynamics and the potential in different sectors: Growth- Poverty Pattern, Sector Dynamics, Labor migration and Demographics, Productivity Dynamics, Diversification, etc 2. The profile of the economic actors Identifying the income-generating activities and resources (health, education/skills) of the different economic actors, especially the non-included group 3. Going through the tree Given the characteristics and future opportunities of different economic actors identified in step one and two: Look at the constraints from the perspective of different economic actors (when that differs: country-specific)

Human Capital in IG Analysis  Study of demographic trends To analyze dynamics of the population and labor force To ascertain expected changes in participation rates  Dynamics of Output, Poverty and Employment Growth decomposition in employment and productivity changes Poverty – Growth links  Profile of the Economic Actors Analysis of selected labor groups:  Employed vs unemployed (and underemployed); Agricultural, Informal, Self employed vs Modern Employees; Rural vs Urban + Poor vs non poor (i.e. Poor Rural vs Poor Urban); Selected Economic Activities  Human Capital Constraints from the Perspective of the Individuals Employability Analysis  Human Capital Constraints from the Perspective of the Firms Returns to Education Estimating labor demand, probability of participation and probability of getting “good” jobs Labor market regulations

Human Capital in the IG Tree