IFPRI Policy Seminar presentation on Inclusive Growth and Policy Relevance for Asia and the Pacific by Asian Development Bank VP Dr. Ursula Schaefer-Preuss. Remarks delivered at IFPRI on 28 September 2010.

1. 0-800100Lecture by Dr. Ursula Schaefer-Preuss <br />Vice President<br />Knowledge Management and Sustainable Development<br />Asian Development Bank<br />IFPRI Seminar<br />28 September 2010<br />Washington, DC<br />The Concept of Inclusive Growth and its Policy Relevance for Asia and the Pacific<br />I. Introduction<br />Dear colleagues, friends, ladies and gentlemen,<br />I am very pleased to be here at IFPRI to discuss a topic of significant importance to the Asia and Pacific region and to global development. <br />Some 30 years ago, Amartya Sen argued in his article, “Development: Which Way Now”, that economic development involves the expansion of people’s capabilities and that economic growth is only a means to that end. This idea has had significant influence on development policy making and discussions around the world. <br />Since 1990, the UNDP’s Human Development Index has been used as a measure of progress in development. The development community promoted the concept of “pro-poor growth” by the development community in the late 1990s; and the international community adopted the Millennium Development Goals (MDGs) in the early 2000s. Thirty years on, Sen’s insights about the essence of economic development remain as relevant as ever.<br />Today, I would like to talk about inclusive growth, a development concept very much rooted in Sen’s notions, and which more and more developing countries are embracing, particularly in Asia and the Pacific. <br />In the most general sense, inclusive growth is about a development process in which every member of society can participate in and benefit from economic growth on an equitable basis. In this process, economic growth is a necessary, but not sufficient, condition. A critical issue is how to translate this concept into policy actions. <br />Let me share with you ADB’s perspective on inclusive growth, which was formed during the preparation of our long-term strategic framework, Strategy 2020, in the last couple of years.<br />I will first look at why Asia and the Pacific are embracing inclusive growth, what it is and what it means for policy making. I will then turn to the issue of MDGs, a key component of the inclusive growth concept. In particular, I will discuss how inclusive growth can help achieve the MDGs. Finally, I will talk briefly about how ADB supports inclusive growth and the MDGs in Asia and the Pacific.<br />Why Asia and the Pacific are embracing inclusive growth<br />The Asia and Pacific region's economic performance has been remarkable, with per capita GDP increasing almost three-fold from 1990 to 2008 (5.7% a year). This has significantly reduced the level of extreme poverty. But, the region remains home to two-thirds of the world’s poor: a staggering 1.8 billion people live on less than $2 a day and 900 million struggle to survive on less than $1.25 a day.<br />Figure 1 shows that: <br />Poverty reduction between 1990 and 2005 was most pronounced in East Asia, where poverty declined by about 44 percentage points at the $1.25-a-day poverty line. This was driven largely by the People’s Republic of China (PRC).<br />Southeast Asia was a far second, with about a 20 percentage-point reduction in poverty at both the $1.25-a-day.<br />South Asia made the least progress in poverty reduction, only less than 9 percentage points at the $1.25-a-day poverty line. <br />The picture is similar if we use the $2-a-day poverty line, with the poverty reduction during 1995-2005 most significant in East Asia, by 48 percentage points, but much less in South Asia, by 7 percentage points only. <br />Vulnerability to economic and other shocks remains a major challenge for many countries, as shown by the fallout following the recent energy and food crises and slump in the global economy and financial market.<br />Equally disturbing is that, despite decades of strong growth, suffering as revealed by a number of key social indicators, remains high.<br />For example, overall, more than half of the population in Asia and the Pacific live without basic sanitation, and 900 million without electricity. But there are large variations across countries:<br />Figure 3 shows that, in 2006, less than 30% of the population had access to improved sanitation in countries such as Nepal, Cambodia, India, and Afghanistan. This is in sharp contrast to more than 95% in Malaysia, Thailand, Kazakhstan, and Uzbekistan and 100% in Singapore.<br />Figure 4 shows that, in 2008, less than 30% of the population had access to electricity in countries such as Myanmar, Afghanistan, East Timor, and Cambodia, in sharp contrast to almost 100% in Brunei, PRC, Malaysia, Thailand, Taipei,China, and Singapore.<br />The Asia and Pacific region accounts for a significant proportion of the developing world’s deprived people for many human development indicators.<br />Figure 5 shows that:<br />More than 70% of the developing world’s population with no access to basic sanitation live in Asia and the Pacific, amounting to 1.9 billion.<br />Close to 70% of the developing world’s under-5 children who are underweight are also in Asia and the Pacific, amounting to 96 million. This is, however, good progress; in 1990, 141 million of the region’s children were underweight. <br />The region is home to the largest number of people infected with tuberculosis, more than 60% of the developing world’s total.<br />41% of deaths of children under five years and 44% of maternal deaths occur in Asia and the Pacific.<br />Although there has been progress in several indicators, the current rates of deprived people are unacceptable, especially for a basic need like drinking water.<br />Rising inequality, in both income and non-income dimensions, is an emerging and important concern for Asia and the Pacific.<br />A recent ADB study shows that a large number of countries in the region saw Gini coefficients increasing between 1990 and 2005. The increase was most pronounced for Nepal, PRC, Cambodia, Sri Lanka, and Bangladesh.<br />Inequality in access to basic social services such as education and health also persists, and this is exacerbated by income inequality.<br />Although economic development and structural transformation are likely to entail processes that increase inequality, this only partly explains the rise. Much of it is due to market and policy failures, governance and institutional weaknesses, and social exclusion. <br />All of these suggest that the benefits of the region’s rapid economic growth need to be shared more widely. In response, more and more countries are embracing the concept of inclusive growth. The new budgets of India and the PRC represent the latest policy initiatives toward inclusive growth in the region. India’s budget, released in February 2010, clearly identifies the fostering of high rates of growth and broadening inclusiveness as key government objectives. The PRC’s budget, released in March 2010, emphasizes improving the lot of the rural population as part of the effort to build a harmonious society.<br />III.What is inclusive growth?<br />As I argued earlier, in the most general sense, one could consider growth to be inclusive when every member of society participates in and benefits from growth on an equitable basis. The issue is how to translate this concept into policy actions.<br />In this regard, it is important to distinguish between two types of inequality: one driven by unequal access to opportunity and the other by differences in individual effort. The former is often related to differences in individual circumstance, such as parental education and family background, gender, religious belief, and geographical location. As such, it largely reflects market and policy failures, institutional weaknesses, or social exclusion. Inequality related to individual effort, on the other hand, reflects the rewards and incentives that a market economy provides for citizens who work harder, look for opportunities, and take risks in seizing them. <br />Naturally, it is the unequal access to opportunity that must form a nonnegotiable target of policy interventions toward inclusive growth. Accordingly, inclusive growth can be defined as quot;
economic growth coupled with equality of opportunityquot;
. Since equality of opportunity will be attained by reducing inequality of opportunity over time, inclusive growth also means quot;
growth coupled with declining inequality of opportunityquot;
. <br />Let me emphasize that this definition differs from the notion of pro-poor growth (which was at the heart of development policy discussions several years ago), although the two are closely related. <br />First, pro-poor growth targets people living below a specific poverty line, while inclusive growth is concerned with a wider population, including the poor, people living just above the poverty line, and the non-poor but disadvantaged. Hence, inclusive growth represents a broader development agenda, which is relevant to very poor as well as middle-income countries. <br />Second, pro-poor is defined solely by poverty reduction—a one-dimension outcome─ whether it is in the sense of Kakwani and Pernia or Ravallion and Chen. On the other hand, inclusive growth focuses on a development process that seeks to equalize access to opportunities, leading to more equitable distribution of incomes and sustainable poverty reduction.<br />Third, pro-poor growth is a development concept prescribed largely by developed countries to developing countries. The concept of inclusive growth, on the other hand, is developed and very much owned by developing countries themselves.<br />IV.What does inclusive growth imply for policy making?<br />Under this definition, an inclusive growth strategy would need the following policy pillars. <br />First, it requires high, sustained, and efficient economic growth to create sufficient numbers of productive jobs and expand economic opportunity for all. In Asia and the Pacific, about 500 million people are estimated to be unemployed or underemployed and tens of millions are joining the labor force each year. If growth fails to provide decent jobs for a wide population, it cannot be considered inclusive. <br />Second, an inclusive growth strategy needs to ensure that every man and woman has equal access to opportunity. In Asia and the Pacific (and other parts of the world), many are excluded from economic opportunity for reasons beyond their control. Ensuring equal access to opportunity means investing in education and health to expand human capacity—especially that of disadvantaged people—and eliminating market and institutional failures and social exclusion to level the playing field. <br />Third, inclusive growth requires effective social safety nets to mitigate the risks and vulnerabilities associated with transitory livelihood shocks, often caused by ill health, economic crises, industrial structuring, or natural disasters, and to cater to the special needs of the disadvantaged and chronically poor. <br />Finally, these three policy pillars—expansion of economic opportunity, promotion of equal access to opportunity, and social safety nets—and their implementation need to be supported by good governance and institutions.<br />To implement an inclusive growth strategy, the government and private sector will each, and together, play critical roles. Although growth is largely driven by a dynamic private sector, there are many instances where the market fails to function efficiently. The central role of the government is to develop and maintain an enabling environment for business investment and private entrepreneurship by eliminating impediments created by market, institutional, or policy failures. <br />This requires the government and public sector to invest in physical infrastructure and human capital, build institutional capacity, maintain macroeconomic stability, adopt market-friendly policies, protect property rights, and maintain the rule of law. In setting policy and reform priorities, the government should identify the binding constraints to growth, and target its efforts and resources at relaxing them. Private-Public Partnerships in creating productive jobs should also be part of the policy package. The government should pay attention not only to the pace, but also to the pattern of growth, and make it “broad-based”.<br />V.Inclusive Growth and the MDGs<br />Let me now turn to the issue of the MDGs and how inclusive growth will support their achievement. <br />This year is the 10th anniversary of the international community’s adoption of the MDGs, which set specific goals for reducing poverty and improving basic human development outcomes by 2015. They require countries to increase citizens’ access to basic services such as education, health, water supply and sanitation, and take measures to protect them from major communicable diseases. They also specifically target increasing gender equality in education, improving women’s health, and gender empowerment. As such, the MDGs translate the concept of inclusive growth into a practical and concrete program of action.<br />Achieving the MDGs by 2015 is an enormous challenge, and we in Asia and the Pacific are still some distance away. Prior to the global economic crisis, the region had made impressive progress not only on income poverty, but also on 11 of the 20 non-income MDG targets we are monitoring. The PRC has been a leader in reducing income poverty, while Malaysia, Thailand, Mongolia, Armenia, and Azerbaijan, among others, have also made significant progress on all the MDGs.<br />On the other hand, the region has lagged in alleviating hunger, improving educational quality, and attaining the health and environmental goals. Moreover, the global crisis has severely strained public resources, significantly complicating the task. It has prevented millions in our region from escaping poverty and hunger, put large numbers of children out of school, and significantly increased preventable deaths of children and expectant mothers.<br />The MDGs require governments to scale up spending on basic services and to set up effective institutions and policies to ensure poverty is reduced by half and to tackle exclusions caused by insufficient human development and social prejudices—particularly gender. As I explained earlier, all these are integral to an inclusive growth strategy.<br />In the last couple of days, I was in New York attending the United Nations (UN) High Level Forum on the MDGs and other associated events. An overriding concern there was how the world could collectively focus attention on accelerating MDG progress in the remaining five years of the target period.<br />VI.How ADB supports inclusive growth and MDGs in Asia and the Pacific<br />ADB is fully committed to supporting inclusive growth and the achievement of the MDGs in Asia and the Pacific.<br />Inclusive growth is one of the three critical strategic agendas of Strategy 2020, ADB's recently adopted long-term strategic framework. In partnership with the governments of our developing member countries and development partners, ADB is promoting inclusive growth through investment in infrastructure (transport, energy, irrigation, etc); assistance in financial sector development; investment in education and basic public services such as water and sanitation; and promotion of private sector development, good governance, and gender equality. <br />A large part of our operations that support inclusive growth are targeted at the MDGs. Last week, we joined ESCAP and UNDP in launching a joint regional report on the MDGs called “Paths to 2015.” Let me now highlight the key findings of that report.<br />Progress on MDGs is mixed: <br />The region is likely to achieve targets on poverty, primary enrolment, gender parity in education, access to safe drinking water, and reversing spread of TB and HIV.<br />But it is lagging in primary school completion, child and maternal health, basic sanitation, forest cover, and CO2 emissions.<br />The report identified as priority areas of focus: <br />Hunger and food security;<br />Health and other basic services; and<br />Basic infrastructure.<br />It also identified seven drivers necessary to accelerate MDG achievement:<br />Strengthening growth by stimulating domestic demand and intra-regional trade;<br />Making growth more inclusive and sustainable;<br />Strengthening social protection;<br />Reducing gender gaps;<br />Ensuring financial inclusion;<br />Supporting least developed and structurally disadvantaged countries; and<br />Exploiting potential of regional economic integration.<br />I should also add that ADB is keenly aware of Asia’s food security concerns. Asia’s ability to feed its people, including the large number of the poor and hungry, is fundamentally important to inclusive growth and the MDGs. In this connection, I welcome the recent report of the Asia Society and the International Rice Research Institute on food security and sustainability in Asia. The report articulated a number of challenges, as well as opportunities, and identified several key areas for action. These include enhancing farm productivity with better use of resources; improving connectivity through investment in infrastructure, trade and market reforms; and strengthening safety nets, particularly for health and nutrition. These are very much in line with ADB’s multi-sector food security strategy. We look forward to continued partnership with IFPRI on food security issues. <br />Through all these efforts and interventions, ADB contributes to the creation of productive and decent jobs and expansion of economic opportunity; connecting the poor, women and disadvantaged to markets; broadening access to basic productive assets, essential public services, and economic opportunity; and, ultimately, the eradication of poverty in Asia and the Pacific. <br />Our member countries recently endorsed a larger role for ADB through a three-fold capital increase. To meet their expectations, we must work in partnership with other international and regional institutions. Alone, ADB can accomplish only a little; in partnership, it can accomplish a great deal more. <br />Thank you.<br />