Making growth more inclusive

After a remarkable run, Asian countries are finding it increasingly difficult to sustain past rates of economic growth. In the aftermath of the 2008-2009 global financial crisis, governments across the region have plenty to worry about: slowing growth in [People's Republic of] China and India, a debt crisis in the eurozone and tepid recovery in the United States.

This is not to say that all is gloomy. Indeed, the Asian Development Bank’s (ADB) latest projections for the region’s developing economies are for still healthy growth of 6.9 per cent this year and 7.3 per cent in 2013.

For the development community, success in sustaining strong growth will depend heavily on countries finding effective solutions to the rising inequalities in income and opportunity in many emerging economies in Asia and the Pacific.

To do so needs a smart economic choice. With support for livelihood and skills training and policies to develop a vibrant sector of small entrepreneurs, inclusive growth – economic growth that is widely shared – opens up new sources of prosperity and broadens the human resource base. This holds especially true for the lower-income levels of society.

Highly uneven growth across the region has increased inequality. Historically, income distribution in Latin America was far more skewed than in Asia. But the two regions have been converging, with Latin America’s distribution – still noticeably more unequal than Asia’s – nonetheless becoming more equal and Asia’s less.

Despite strides in increasing the incomes of Asia’s working poor over the past decade, rising populations are making it harder to sustain progress, with more than 850 million people in the region still living in extreme poverty – on less than US$1.25 a day.

But it is no longer enough to reduce poverty, because the growing inequality of economic opportunity can even make strong growth socially unsustainable. In other words, inclusive growth is key to sustainable growth. Yet, this is where countries in the region have lagged.

So given the resource constraints, what are the most effective ways to increase inclusion in the growth process? Asia’s experience and evaluation of development interventions focus on three elements: entrepreneurship, innovation and governance.

First, creating an enabling environment for small entrepreneurs to prosper is fundamental for inclusive growth. But livelihood and skills training is not just about access; it must be relevant and calibrated to the needs of local markets and local employment situations.

In Cambodia, more than 80 per cent of women are employed in the informal sector, but they have lacked access to business development services. In a government project supported by the ADB and other international donors, women’s development centres are being set up offering livelihood training that varies from province to province to suit each area’s circumstances.

Second, innovative approaches – and scaling up successful models – will be needed to foster greater inclusion. Of growing interest to development practitioners is how improving access to information for micro and small entrepreneurs can help make often fragile businesses less vulnerable to market constraints and other hindrances.

For example, some four million small farmers in India now benefit from access to free, real-time pricing and other key agriculture information after Indian conglomerate ITC in 2000 began setting up village Internet kiosks to improve the supply chain for its agribusiness exports.

ITC’s so-called e-Choupal programme gives farmers a chance to increase incomes by better aligning their production to market demands. The portal – and there are now several thousand of these kiosks – also enables farmers to cut out brokers and trade directly with ITC.

Third, good governance is vital for achieving better development results. Unfortunately, weak institutions in many emerging economies present an array of challenges on preventing precious resources for economic and social advancement from being wasted. Civil society organisations are playing an important role in helping prevent leakage and improving transparency, and particularly in the often murky domain of public procurement.

Take G-Watch, a Philippine group, which mobilised citizens to monitor the procurement process for school textbooks – a multimillion-dollar business – from bidding, production to delivery. According to a study, G-Watch’s vigilance substantially reduced textbook costs and production times, and increased the delivery rate of textbooks to 95 per cent, from 60 per cent, saving US$3.6 million from books that did not disappear in transit.

Greater inclusion calls for innovative ways to make finance more accessible to lower income groups. Microfinance can be effective for delivering greater inclusion, and is now reaching over 200 million clients worldwide, according to a recent estimate.

But its success in reaching the poor (rather than the less poor) has been limited in the experience of the donor community’s support for microfinance.

The findings of an independent evaluation department’s 2012 study on ADB-supported microfinance operations between 2000 and 2010 provide fresh material on this widely debated and researched issue. The broad picture – based on six casestudy countries in Asia and the Pacific including Cambodia, Pakistan, Vietnam and the Philippines – shows that integrating microfinance in the formal financial system did not necessarily result in greater outreach to the poor.

Indeed, the penetration of microfinance among the poor remains low with fewer than 9 per cent of users living below US$1.25 per day and fewer than 22 per cent living below US$2 per day.

Better targeting with increased demand-side analysis and focus on intervention effectiveness need to go hand in hand for achieving greater economic inclusion for the poor using microfinance.

Greater inclusion therefore is both a social priority and a means to generating economic growth. But governments need to do some major work to develop the region’s considerable untapped human capital among lower-income groups through market-relevant livelihood and skills training, and improving access to finance, especially for the poor.

A common denominator among investments for greater inclusion has been how innovation can access new markets and sources of growth to spur the process. Better governance in the organisations involved in productive activities and service provision is also vital for improving the results of inclusive growth efforts.