Michael Spence, a Nobel laureate in economics, is professor of economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution
About a decade ago, the Commission on Growth and Development (which I chaired) published a report that attempted to distill 20 years of research and experience in a wide range of countries into lessons for developing economies. Perhaps the most important lesson was that growth patterns that lack inclusiveness and fuel inequality generally fail.
The reason for this failure is not strictly economic. Those who are adversely affected by the means of development, together with those who lack sufficient opportunities to reap its benefits, become increasingly frustrated. This fuels social polarization, which can lead to political instability, gridlock, or short-sighted decision-making, with serious long-term consequences for economic performance.
There is no reason to believe that inclusiveness affects the sustainability of growth patterns only in developing countries, although the specific dynamics depend on a number of factors. For example, rising inequality is less likely to be politically and socially disruptive in a high-growth environment (think a 5-7 per cent annual rate) than in a low- or no-growth environment, where the incomes and opportunities of a subset of the population are either stagnant or declining.
The latter dynamic is now playing out in France, with the “yellow vest” protests. The immediate cause of the protests was a new fuel tax.
In reality, the protests were less about the fuel tax than what its introduction represented: the government’s indifference to the plight of the middle class outside France’s largest urban centres. With job and income polarization having increased across all developed economies in recent decades, the unrest in France should serve as a wake-up call to others.
By most accounts, the adverse distributional features of growth patterns in developed economies began about 40 years ago, when labour’s share of national income began to decline. Later, developed economies’ labour-intensive manufacturing sectors began to face increased pressure from an increasingly competitive China and, more recently, automation.
For a time, growth and employment held up, obscuring the underlying job and income polarization. But when the 2008 global financial crisis erupted, growth collapsed, unemployment spiked, and banks that had been allowed to become too large to fail had to be bailed out to prevent a broader economic meltdown. This exposed far-reaching economic insecurity, while undermining trust and confidence in establishment leaders and institutions.
France, like a number of other European countries, has its share of impediments to growth and employment, such as those rooted in the structure and regulation of labour markets. But any effort to address these issues must be coupled with measures that mitigate and eventually reverse the job and income polarization that has been fuelling popular discontent and political instability.
So far, however, Europe has failed abysmally on this front. In Britain, widespread frustration with the status quo fuelled the vote in 2016 to leave the EU, and similar sentiment is now undermining the French and German governments. In Italy, it contributed to the victory of a populist coalition government.
The situation is not much better in the United States. As in Europe, the gap between those in the middle and at the top of the income and wealth distribution – and between those in major cities and the rest – is growing rapidly. This contributed to voters’ rejection of establishment politicians, enabling the victory in 2016 of U.S. President Donald Trump.
In the longer term, persistent non-inclusive growth patterns can produce policy paralysis or swings from one relatively extreme policy agenda to another. Latin America, for example, has considerable experience with populist governments that pursue fiscally unsustainable agendas that favour distributional components over growth-enhancing investments.
Greater political polarization has also resulted in an increasingly confrontational approach in international relations. This will hurt global growth by undermining the world’s ability to modify the rules governing trade, investment, and the movement of people and information. It will also hamper the world’s ability to address longer-term challenges such as climate change and labour-market reform.
The main lessons from experience in developing and now developed economies are that sustainability in the broad sense and inclusiveness are inextricably linked. Moreover, large-scale failures of inclusion derail reforms and investments that sustain longer-term growth. And economic and social progress should be pursued effectively – not with a simple list of policies and reforms, but with a strategy and an agenda that involves careful sequencing and pacing of reforms and devotes more than passing attention to the distributional consequences.
The hard part of constructing inclusive growth strategies is not knowing where you want to end up so much as figuring out how to get there. And it is hard, which is why leadership and policy-making skill play a crucial role.
Copyright: Project Syndicate, 2018.