Economic growth and ‘something else’ to address inequality

Wednesday, August 13, 2014

Although the developing world has achieved unprecedented economic growth rates over the past decade that have translated into a rapid decline in poverty, that growth has also come with rising inequality.

Inequality threatens social cohesion, limits social mobility and individual choice and reinforces factors such as inherited poverty or discrimination by gender, ethnicity and location, delegates heard last week at the 2nd OECD Development Center high-level meeting — part of Development Week 2014 hosted by the Organization for Economic Cooperation and Development.

So how can fast-growing developing economies close the inequality gap and ensure that economic growth is followed by structural transformation that not only reduces poverty but also improves access to opportunities, promotes mobility and enhances social capital?

They need to find ways to provide growth and “something else” or opportunities for social cohesion and mobility for those at the bottom of the pyramid, Julie T. Katzman, executive vice president and COO at the Inter-American Development Bank said during an interview with Devex on the sidelines of the event in Paris.

Below are more highlights from our conversation:

Social cohesion for growth is being talked about as one of the main challenges for growing economies — particularly fast-growing economies. How can they close the inequality gap and are there any concrete, practical solutions that are gaining traction this week here in Paris?

Whether yesterday or today, there is general agreement across the board that without social inclusion you have anything from lower growth to less durable growth … although I think the majority would say it’s both less growth and less durable growth … You can see that in Latin America, for example, has been very successful in a macro sense, but that social cohesion and solving the problems of social inclusion have been elusive.

And you can see that in a lot of different ways. If you’re an economist, you can see it by looking at the Gini coefficient. If you’re the rest of us, you can see it by turning on the TV and watching people demonstrating, whether in Chile, Brazil, Colombia, or the countries of the Arab Spring. In Chile, because of the lack of quality in education; in Brazil, ostensibly because of the price of public transportation, but in reality about education and healthcare quality; in Colombia, because of the effects of poor infrastructure on farmers trying to get goods to market. You go around the world and that’s what you’re seeing.

It’s a good news-bad news story about the gains of the last 10 years. There are fewer people in poverty and more people in the middle classes. With that, people’s demands and expectations are now higher and their willingness to go out and try to do something about them are also now higher. So that’s the backdrop to that part of the conversation this week.

So it’s raising the bar, but presumably you wouldn’t be advocating for the management of expectations?

No, not at all. It’s raising the bar in terms of expectations and raising the bar in terms of the downside if you don’t meet the expectations. The fact that in Peru, for example, they’ve created a ministry of social exclusion, and in Colombia they’ve created a department of social prosperity tells you that governments have flipped the switch and said, “This is really important, both as a matter of economics, and as a matter of morals.”

A moral imperative?

Absolutely. Countries have used conditional cash transfers to create that first wave of movement up the ladder. But I think that we’ve seen that CCTs are not going to get you all the way there to a workforce that is capable of participating in 21st-century industry … It’s not going to drive innovation.

So what do you do? If you look at the Mexican reform package, for example, you see a lot of pieces in there that directly or indirectly address this. And it ties with what we’re thinking about at IDB, namely what to do when the commodity boom has tapered and governments are going to have to figure how to do at least the same, if not more, with the same, if not less.

Source: Devex (link opens in a new window)