Department of International Development

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Module Title Poverty, Inequality, and Inclusive Development in

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Emerging Economies
What is inclusive growth? Discuss with reference to
the experiences of at least one emerging economy.
What is inclusive growth? Discuss with reference to
the experiences of at least one emerging economy.
4165

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1. Introduction
The concept of inclusive growth is one of the most contested ideas in the field of
development study. Although there seems to be a consensus on the need of conceptual
departure to the idea of inclusive growth, many scholars came up with their own
interpretation of what the inclusiveness is (Kakwani and Pernia, 2000; Ali and Son,
2007; Bhalla, 2007; Habito, 2009; Ianchovichina and Lundstorm, 2009; Rauniyar and
Kanbur, 2010; McKinley, 2010; Klasen, 2010; Ranieri and Ramos, 2013). Given the
different interpretations on the notion of inclusiveness, it is not surprising that one
can see no universal framework for the measurement of inclusive growth (Ranieri and
Ramos, 2013), let alone how the policy makers may make use of the information in the
policy making. The frameworks currently available for the measurement of inclusive
growth are adjusted to serve their own purposes, incorporating different dimensions
and indicators (Ianchovichina and Lundstorm, 2009; McKinley, 2010; African
Development Bank, 2016). Thus, to conceptualise the idea of inclusive growth, one
need to have a comprehensive look on the dynamic conceptual and practical debate.
This paper aims to serve three main objectives. First, it discusses the conceptual
departure to the concept of pro-poor growth and inclusive growth. The discussion on
this section also covers the growing interpretations of the notion of ‘inclusiveness’. It
is argued on this paper that some common normative features of inclusive growth can
be drawn from existing literatures. Second, it reviews the available frameworks for
the measurement of inclusive growth and briefly discuss how the concept may affect
the policy making. Thirdly, on the later section, a growth episode of Indonesia for the
period of 2000-2012 is presented as a case study to illustrate the concept of inclusive
growth discussed on the paper.

2. Conceptualising Inclusive Growth

What makes a growth episode inclusive? Who should be ‘included’ in the growth?
What should be made inclusive in the growth episode? How can one measure the
‘inclusiveness’ of a growth period? How does it affect the policy responses? All these
questions and the likes are central to the debate of inclusive growth. The following
sub-sections discuss the existing literature on growth and development to unravel the
answers for the above questions.

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a. The shift toward the concept of pro-poor and inclusive growth
The early ideas in development thinking seems to believe that development
process happens through automatic and sequential stages, in which industrial
transformation is believed to be the main driver of economic growth which eventually
improve the wellbeing of all, including the poor (List, 1841; Rostow, 1959; Lewis, 1954;
Kuznets, 1955). Both List (1841) and Rostow (1959) came up with the idea of sequential
stages of development, which sees one stage of development as a precondition to the
next stage in the sequence to take place. Although the causal relationship between
stages on the two concepts is rather intuitive (Ranieri and Ramos, 2013), at least one
can see that two things are clear from these two concepts. First, it is assumed that the
progress of development runs automatically once it takes off. Second, although there
is no clear explanation on how everyone will benefit from the progress, it is assumed
that the development will eventually improve aggregate wealth, including the poor.
Lewis (1954) outlined a development model which expects the distributional problem
between industrial and agricultural sector would be worsening at the beginning of
growth process, but the equalising effect will take place after the ‘surplus labour
phase’. Kuznet (1955), with his infamous inverted U curve, came up in support to this
belief. He claimed that existing (or even rising) inequality in the early stage of
industrialisation is inevitably necessary for the growth process, and once the progress
reaches the steadiness, the ‘trickle down’ effect will take place and redistribute the
wealth to the lower income group. In short, on this early schools of thought, poverty
and inequality are the expected the trade-off for the economic growth, and there is no
intervention needed on the growth process, considering it will eventually benefit
everyone.
The validity of the orthodox view started to be questioned when the empirical
evidences showed contradictory realities. Some cross-countries studies attempted to
test the Kuznet’s (1955) curve hypothesis, and they found no sufficient results in
support to this theory (Anand and Kanbur, 1993; Deininger and Squire, 1996;
Ravallion and Chen, 1997). Some countries under the studies saw increasing
inequality during the progressing economic growth, challenging the trickle-down
effect promised on the orthodox view. Furthermore, some newly industrialised
countries in East Asia managed to pursue impressive growth in the second half of the

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twentieth century, and at the same time managed to lower the inequality (World Bank,
1993). This experience of the so called ‘East Asian tigers’ questioned the necessity of
rising poverty or inequality to allow the economic growth to take-off, as believed by
Lewis (1954) and Kuznet (1955), and it also posed a challenge to the notion of non-
intervention in the growth process. As Dagdeviren et al. (2000) argues, since
inequality and growth is not mutually exclusive, the right policies which could bring
the two together are possible. Since more evidences showed that growth is not
necessarily always benefit the poor, the development concept then started shifting to
the so called ‘pro-poor’ growth.
The pro-poor growth concept emerged following the emergence of popular idea
that growth alone is not sufficient to lower the poverty rate (Zepeda, 2004). The
urgency of the concept is also strengthened by some studies revealing that poverty is
bad for growth, and investment on the poor is necessary to promote sustainable
growth (Ahluwalia and Chenery, 1974; Dagdeviren et al., 2000). It is assumed under
this idea that development, unlike how it is believed in early development scholars,
does not happen automatically and some appropriate interventions are needed to
make sure that the poverty reduction is going along with the growth (Stiglitz and
Squire, 1998; Dagdeviren et al., 2000; Kakwani and Pernia, 2000). One should clearly
see that two things are clear in the concept of pro-poor growth, ‘trickle-down’ effect
is not guaranteed on a growth episode and some policy responses are needed to
address the issue.
But what does pro-poor growth exactly mean? One may find different definitions
on the concept. Since the list of the definitions can be excessive, one can have a look at
general classification of the growing definition of pro-poor growth. In general, one
can see two different meaning of pro-poor growth (Ranieri and Ramos, 2013). The
narrow meaning emphasises that pro-poor growth is a growth episode which involves
reduction in poverty rate, while the broader meaning advocates that not only the
poverty rate decreases, but the income improvement of the poor should also be
relatively higher during the growth episode (ibid.). Grosse et al. (2008) proposed
another classification on the meaning of pro-poor growth. They argued that there are
three acceptable definitions of pro-poor growth; (1) ‘weak absolute pro-poor growth’,
a growth episode with merely the improvement of the absolute poverty, (2) ‘relative

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pro-poor growth’, a growth episode with reduced poverty and relative inequality, (3)
‘strong absolute pro-poor growth’, a growth episode with decreasing absolute
inequality. The competing definitions has not yet achieved a consensus and remain
diverse up to today.
The idea of inclusive growth came to light when Kakwani and Pernia (2000) used
the word ‘inclusive economic growth’ (Kakwani and Pernia, 2000 : 3) on their
definition of pro-poor growth, which puts the concern on the active participation of
the poor in the economic activity to significantly benefit from it. Inclusive growth
requires that economic opportunities to be available to all layers of society (Ali and
Son, 2007; Klasen, 2010). The realisation that poverty or human wellbeing is
multidimensional (McGregor, 2007; Kakwani and Silber, 2008) also lead to the
involvement of non-income dimensions in the concept of inclusive development. One
can see that the later works of some scholars (McKinley, 2010; Klasen, 2010; Rauniyar
and Kanbur 2010) added various non-income dimensions to their version of inclusive
growth.
However, one may find the term pro-poor growth sometimes used
interchangeably with inclusive growth. This is somewhat understandable considering
that both concept lie heavily on the idea of reducing poverty and inequality. On the
one hand, some scholars define inclusive growth as merely a growth episode which
involves poverty reduction (Habito, 2009; Rauniyar and Kanbur, 2010), which one
may find similar with some definitions of pro-poor growth, especially those which fall
under the category ‘strong absolute’ pro-poor growth (Grosse et al, 2008). On the other
hand, some other scholars require that a growth should involve decreasing inequality
to be called ‘pro-poor’ (Ravillion, 2004; Kraay, 2004), which one might find similar
with the idea of inclusive growth. Thus, to avoid confusing terminologies, the
definition of pro-poor growth on this paper is limited to the growth which involves
absolute poverty reduction, while inclusive growth (as also called ‘inclusive
development’ by Rauniyar and Kanbur, 2010:6) has a broader scope than pro-poor
growth, taking into account the distribution of income from growth (inequality) and
other non-income dimensions of wellbeing. The next sub-section explores more about
the common normative features of inclusive growth and its conceptual relation with
pro-poor growth.

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b. Defining the ‘inclusiveness’ of growth
When one hears the word ‘inclusive’, one may loosely ask ‘who should be brought
into the inclusion, and what should be made inclusive?’. These two questions are
explored on this sub-section to unpack the features of inclusive growth. We shall start
the discussion by having a look at who should be included in and benefit from the
growth. On the concept of pro-poor growth, one can see quite clearly that it is the poor
who are becoming the central focus. On the other hand, the concept of inclusive
growth pays attention to all different income groups in the society (Ali and Son, 2007;
Klasen 2010). In addition, the concept of ‘horizontal inequality’ broaden up the
discussion that not only should growth be inclusive to all different income groups,
but it should also accommodate different social (cultural, gender, and other non-
income characteristics) groups in the society (Stewart et al., 2007; McKinley, 2010).
Unfortunately, unlike the inequality between the different income groups, one may
find that the inequality between other non-income based social classification is still
relatively understudied.
What, then, should be made inclusive in a growth episode? Based on the existing
literatures, this paper concludes that both the process and the outcomes of a growth
should be made inclusive. Earlier scholars focus on the income inequality as the
outcome of growth, advocating that inclusive growth should involve decreasing
income inequality (Grinspun, 2004, cited in Ranieri and Ramos, 2013; Habito, 2009).
Later scholars add some non-income dimensions to the debate of equity of outcomes,
arguing that not only the income inequality that should be reduced, but also the
inequalities in other non-income dimensions of well-being (McGregor, 2007; IDS,
2009, Rauniyar and Kanbur, 2010; Sumner and Mallet, 2013). The inclusiveness of
growth was then extended to the idea that the process of growth should also provide
equitable opportunity for everyone, particularly the poor, to be able to participate in
the process and to benefit from growth (Ali and Son, 2007; Bhalla, 2007; Ianchovichina
and Lundstorm, 2009; Klasen 2010; McKinley, 2010; Ranieri and Ramos, 2013).
One of the main features of inclusive growth to which many scholars seems to
agree upon is lower income inequality (Grinspun, 2004; Klasen, 2010; McKinley, 2010;
Rauniyar and Kanbur, 2010). Since everyone should benefit from the growth, does it
mean that all groups should benefit in the same proportion? Apparently not. To some

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scholars, the poor should relatively benefit more from the growth (Klasen, 2010;
McKinley, 2010), due to the expectation that the inclusive growth should come up
with decreasing inequality. However, one should bear in mind that income inequality
can also be reduced through other scenarios. For example, a growth where the income
improvement of the middle class is relatively higher (Birdsall, 2007; Rauniyar and
Kanbur, 2010). This is the point where one can see the conceptual relationship between
the two concepts. As the pro-poor growth concerns on the poverty reduction and the
inclusive growth focus on reduced income inequality, inclusive growth itself can be
more or less pro poor, depending on the direction to where income distribution lean
to (Rauniyar and Kanbur, 2010). Using this logic, one may argue that the more the
income improvement in the bottom layer contributes to the reduction of the income
inequality, the more pro-poor the inclusive growth is.
The process of growth should also be inclusive, in a sense that it allows broad
opportunity and participation. As UNDP (2013) suggested on their report, an effort to
make a growth inclusive by focusing only on the outcomes of growth would not be
sufficient to achieve one. Assuming that outcomes of growth and the benefit
distribution is highly interrelated, to deal with income inequality (outcomes) means
to deal with the structure of growth, which is affected by nature of the growth process
(ibid). Ali and Son (2007) suggested that an inclusive growth should be able to
improve the function of social opportunity, advocating for better distribution of
opportunity among the social groups. Bhalla (2007) conceptualised this broad
opportunity in the term of productive employment, arguing that inclusive growth
should promote broader distribution of job creation and productivity distribution
among sectors, particularly in the least productive sectors. Supporting this view,
Ianchovicina and Lundstorm (2009) argues that the idea of inclusive growth should
lead to structural transformation which allows sustainable and larger size of the
economy. Klasen (2010, p.3) emphasises more that the idea of inclusiveness promotes
‘non-discriminatory access’, but at the same time also concerns about improving the
wellbeing of those in the bottom.
The inclusiveness of the outcomes and process of growth should also be seen
through other non-income dimensions (McGregor, 2007; IDS, 2009, Rauniyar and
Kanbur, 2010; Sumner and Mallet, 2013). According to IDS (2009) and Sumner and

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Mallet (2013), the other non-income dimensions can be grouped to ‘relational’ and
‘subjective’ dimensions. Rauniyar and Kanbur (2010) also puts forward the other non-
income dimensions of growth outcomes, such as education and health, and how the
distribution should cover different genders and ethnicities. The debate on this non-
income dimensions of growth is also far from settled.

c. Measuring the inclusiveness of growth and how it affects the policy making
How do we know, then, if a growth episode has been inclusive? One may refer to
the normative features of inclusive growth discussed earlier to do the assessment. But
those would not be sufficient to be used as a tool to measure the level of inclusiveness
of a growth, so it cannot be compared to the others. Thus, we may need a settled and
carefully crafted measurement framework. However, having an unsettled debate on
the definition of inclusive growth, the scholars attempting to develop a framework for
the measurement of inclusive development came up with their own version of
measurement framework (Ianchovichina and Lundstorm, 2009; McKinley, 2010;
African Development Bank, 2016).
Existing frameworks seem to conform with their own idea of inclusiveness of
growth and the purpose of measurement they serve. Ianchovichina and Lundstorm
(2009) proposed a framework which considers variables related to pace and pattern of
growth, in the purpose of revealing factors which potentially hampers the growth.
McKinley (2010) developed a framework to serve ADB’s need to evaluate the
achievement of inclusive growth under their ‘Long Term Strategic Framework 2008-
2020’. Thus, the framework involved dimensions and variables which conform the
definition of inclusive growth adopted by ADB, such as sustainability of growth,
broader opportunity created in growth, and the human capabilities development.
Another framework recently published by the African Development Bank (AfDB,
2016), adjusted to AfDB’s view of inclusive growth and the expected goals of inclusive
development in African countries, incorporates ten dimensions which covers the
income and non-income dimensions of outcomes and process of growth. All in all, one
cannot yet see any universal framework which globally used by all.
This paper argues that the way inclusive growth is defined and how it is measured
greatly affects the policy making, in a sense that the policy makers will put the

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attention on and respond to the issues covered on the definition and measurement
framework in place. The definition and measurement framework which focus on
outcomes and both outcomes and process will trigger different policy responses. For
example, if the inclusive growth focus only on the income inequality, then what is
needed is the policies which can lead to desired redistribution (Dagdeviren et al.,
2000). Meanwhile, if the inclusive growth is believed to include changing economic
structure and broaden up the opportunities, then the policy responses should deal
with other things like eliminating discriminative practices, improving productive
employment, or pushing the economy to grow to larger size (Ali and Son, 2007; Bhalla,
2007; Ianchovicina and Lundstrom, 2009). Another example, a measurement
framework which promote gender equality and non-income dimensions in the
growth, such as the framework proposed by McKinley (2010) and AfDB (2016), will
push the policy makers to pay attention to dimensions other than income as well.

3. Case Study: Had the Growth of Indonesia Been Inclusive?

This section attempts to apply the normative features of inclusive growth drawn
on the previous section to the analysis of the growth in Indonesia from 2000 to 2012.
The period is selected due to the availability of data. The section discusses some
viewpoints covering poverty reduction, inequality reduction, inter-group and inter-
geographical benefit distribution, and the changing structure of the economy.

Source: Author’s formulation based on data provided by Statistics Indonesia (BPS)

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 We shall start the analysis by looking at the general picture of the growth in
Indonesia during the period of 2000 to 2012, shown by Figure 3.1. It can be seen from
the graph that Indonesian economic growth (shown by the percentage of change in
GDP) during the period grew steadily (with noticeable down turn in 2009, right after
the 2008 crisis) from 3.64 percent in 2001 to 6.26 percent in 2012. The percentage of the
poor people in the population also decreased quite significantly from 19.14 percent in
2000 to only 11.66 percent in 2012. However, the change in inequality (shown by Gini
index) did not show favourable outcome. The change in Gini index was almost
unnoticeable, with the exact figure actually increased from 0.34 in 2002 to 0.41 in 2012.
What does this figure tell us, then? One can argue that Indonesian growth during the
period had been pro-poor, considering the economic growth was followed by
decreasing headcount of the poor. But, had it been inclusive? If we define inclusive
growth as a growth episode which involve decreasing inequality, then arguably it had
not yet been inclusive. This is due to the rising inequality (judging from the increasing
Gini index alone, which is very simplified) which followed the growth. This is a
condition where one can see that pro-poor growth does not always lead to the
achievement of inclusive growth.

Figure 3.2 The Share Of Benefits From Growth Across Different Income Groups
in Indonesia

Source: Sumner, Andy. 2017. Poverty, Inequality, & Economic Growth (Lecture 4). King’s
College London. Available at https://keats.kcl.ac.uk/course/view.php?id=38643

9
 Let us continue the analysis by having a look at who benefitted from the growth.
Based on figure 3.2 (Sumner,2017), one can see how the benefits from growth during
the period of 2000 to 2012 are shared among different income groups in Indonesian
society. It is quite clear that the richest group (those whose income is more than $10 a
day) benefit the most from the growth, shown by their more significant increase of
consumption per-capita. The percentage change of consumption per-capita of those
on the top layer of the richest group even almost reached 150 percent. On the contrary,
the group in the bottom layer (those with income less than $2.5 a day) saw the least
significant change of percentage of consumption per-capita during the period, by just
around 50 percent. Such figure for the middle group shows that the percentage change
of consumption is higher on the richer part of the group. All in all, the whole line
confirms the direction of income distribution during the period, to the rich. If one
conforms to the idea that inclusive growth should favour the disadvantaged, then one
can argue that based on this graph, the growth period was not inclusive.

Source: Author’s formulation based on data provided by Statistics Indonesia (BPS)

Let us try another perspective, geographical distribution. Figure 3.3 shows the
percentage change of regional GDP among different regions in Indonesia. While the
trend of regional GDP growth in the other regions seem quite steady and converge to

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similar trend, the regional economic growth (shown by the percentage change of
regional GDP) in Papua and West Papua looked very different, they were highly
fluctuating. Such trend in Papua, in some years during the period (2004, 2006, 2008,
2010, 2010) even hit negative growth. While it is beyond the scope of this paper to
explore what causes the differences, one can arguably say that the growth in Indonesia
during the period had not been inclusive to the eastern part of the country.

Source: Author’s formulation based on data provided by Statistics Indonesia (BPS)

We have seen some numbers on the growth outcomes, we shall have a look at
another figure which may gauge the inclusiveness of the process of the growth.
Indonesian Labour Force Participation Rate (LFPR) in 2012 remained the same with
that in 2000, at 67.76. One may see this stagnant participation rate as an indication that
the growth did not improve opportunity, on a limited judgement. What about the
changing structure of the economy? Figure 3.4 shows the percentage change of GDP
in various economic sectors for the period we discuss. Based on the figure, one can see
how each sectors contribute to the growth. This paper assumes that the contribution
of each sectors can gauge the strength of the sector in the economy. The stronger the

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sector is, the more it supports productive employment. It is clear from the line graph
that the sectors saw very different trends of growth among each other. Some sectors
like mining, agriculture, and electricity saw a worsening growth, which is assumed
on this paper as an indicator of shrinking productivity and employment. This may be
justifiable, if it was in part because of the country’s strategy of transforming the
structure of their economy. Nonetheless, one can still see noticeable inequality
between growth among the economic sectors.
To sum up this section, based on several viewpoints that were set as normative
features of inclusive growth on the earlier section, we conclude that Indonesia’s
growth from 2000 to 2012 had not been inclusive due to some reasons. Firstly, the
growth, although came up with significant poverty reduction, had not been followed
by decreasing inequality. Secondly, although all different income groups benefited
from the growth, those on the top benefited way more than those in the bottom did.
Arguably, this upward distribution lead to the rising inequality we saw on the period.
Thirdly, unlike the other regions, the eastern part of Indonesia saw highly unstable
growth during the period. Lastly, the opportunity to participate had not saw an
improvement and some sectors in the structure of the economy had been lagging
compared to the others.
4. Conclusion
This paper explores the normative features of inclusive growth through two basic
questions; (1) who should be brought to the inclusion, and (2) what should be made
inclusive from the growth. Based on existing literatures, this paper draws some
normative features of inclusive growth. To be called inclusive, a growth episode must
involve all groups in the society, be it grouped by income or non-income based
classification. The inclusive growth is expected to come up with decreasing inequality.
Thus, it is expected that the growth allows the income improvement in the non-rich
groups to be relatively higher than that in the richer groups. To make a growth
episode inclusive, the process and the outcomes of the growth should be made
accessible and equitable to all, allowing broader participation and more equitable
economic structure. Although scholars apply them differently, the inclusive growth
concerns not only about the income dimension, but it also puts proper attention to the
non-income dimensions of poverty, such as education and health.

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 How does this affect our understanding on inclusive growth, then? This paper
suggested that despites the intense debate on the different interpretations of inclusive
growth, there are still some common features of inclusiveness which all the literatures
commonly share. Thus, one may make use of this common or normative features to
understand the core concept of inclusiveness. On the practical level, although different
practitioners may add various dimensions to their practical framework, these core
features will remain intact as the standard norms of inclusive growth. Therefore,
various additions to these core concept should be seen as enrichment which allows
broader application of the concept of inclusive growth, instead of being seen as
confusing contesting ideas.

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