What is inclusive growth and why does it matter?

Ensuring economic growth benefits everyone – the concept of inclusive growth – has become a political priority. In the first of a two-part series, Josh Stott outlines what inclusive growth is and why it’s important.

Inclusive Growth – growth that benefits everyone – is in fashion. Its win-win allure, promising a more prosperous economy combined with more equitable society, is proving irresistible. But there seems to be a lot of confusion around what inclusive growth actually means and what an inclusive growth strategy looks like. We’ve been working on this agenda since 2013, focussing on what can be done at the city or city regional level to develop more inclusive local economies. In this first in a series of blogs, drawing on our recent submission to the RSA’s Inclusive Growth Commission, we set out JRF’s position on inclusive growth and explain why it is so important.

Why do we need more inclusive growth?

Originally stemming from economists working in developing countries, the term inclusive growth emerged during the 2000s when organisations such as the World Bank realised their economic predictions were proving to be flawed. Growth in developing countries was not always resulting in the reductions in inequality and increases in living standards that had been expected. A more proactive approach was needed to ensuring growth was more inclusive and didn’t simply pass many people and places by.

It is hardly surprising that this notion of inclusive growth quickly gained traction in the developed world too. A compelling set of economic, social and fiscal rationales has emerged for pursuing the agenda:

  • Poverty is bad for growth – So say the IMF and OECD. This is partly because they weaken the ‘consumption engine’ - the amount of money people have to spend on goods and services in the economy. Even more critically, unequal countries have lower levels of social mobility and are failing to take full advantage of their most prized asset – human capital (people). To drive up innovation, creativity and productivity we need a more dynamic, socially mobile labour market built around an effective education and skills system. Whether it’s young people entering the labour market for the first time, unemployed people seeking work or under-employed workers whose skills are not being utilised, an inclusive growth agenda seeks to enable people to fulfil their own potential, and in doing so the potential of the economy they are a part of. Poverty can also generate a vicious cycle whereby people are not motivated to invest in their own education, skills and careers if they perceive their job prospects to be a low-paid, ‘dead-end’ job, or worse still, no job at all.
  • The fiscal costs of poverty are huge - Poverty is not just a cost to individuals; it is also a drain on public resources. JRF research estimates that the annual cost of poverty to the public purse is £78 billion. We also know that for every out-of-work claimant that moves into a job paid at the Living Wage, the government gains on average £6,900. Getting more people into decent paying jobs reduces welfare spending, increases tax receipts and reduces the demand for services. This can free up resources to invest in supporting growth as opposed to dealing with the consequences of poverty. Reducing spending on preventative, proactive services that reduce poverty can be self-defeating in the long-run, merely adding to the fiscal cost of poverty. It is clear that the challenges we tend to think of under the domain of ‘social policy’ – poverty, economic inactivity, education attainment gaps, poor health, neighbourhood disconnection – have been costing us economically.
  • Work no longer assures a route out of poverty – More than half of people living in poverty in the UK are in a working household. The bottom end of the labour market often becomes a trap for people, stuck in low-paid, insecure jobs that offer no prospects for progression - four fifths of those that enter low-paid work remain low paid 10 years later. Globalisation and technology change are shaping a more polarised, hollowed out, labour market with more high and low-skill jobs but fewer mid-skill jobs. This means fewer opportunities for progression as the rungs on the ladder become further apart. New business models are also emerging which are increasing the number of insecure jobs on flexible contracts. The recent High Court rulings in cases against Uber and Deliveroo highlight how policy and employment law is still catching up with practices. These labour market developments make it more important than ever to consider the nature of growth, and who the proceeds are going to.
  • Many communities across the country feel disconnected and do not feel benefits of economic growth - The Brexit vote has been a wake-up call to national and local politicians, here in the UK, and provided a major impetus for an inclusive growth agenda. Even if greater inclusion did not contribute to economic growth, it would widely be regarded as a good thing in itself. It is shocking that we have such high levels of poverty in our society and, for many people, addressing this is quite simply the right thing to do. The rise of populism on both sides of the Atlantic has highlighted the potential social and political consequences of growth which is not inclusive.
  • Uneven growth - Our research highlights the growing spatial inequalities between towns and cities in the UK. The dominance of London and the South East has led to a skewed economy, where economic opportunity is determined by where people live. Rebalancing the economy represents a key challenge for inclusive growth. Growth has also been uneven within every town and city too. All too often it is the ‘same old places’ left behind. When the fortunes of a deprived neighbourhood are improved, the challenge is to ensure that the original residents benefit. If they are unable to access the new jobs being created, the risk is that they are simply displaced elsewhere as the area gentrifies.

What are the priorities for inclusive growth?

Two questions sit at the heart of the debate on inclusive growth. Who is benefitting from economic growth and what outcomes do we want growth to deliver? These are captured by the OECD’s definition of inclusive growth:

Economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society.

The dual emphasis on outcomes as well as opportunities is what defines an inclusive growth agenda from a narrower inclusion agenda. Connecting people up to the opportunities that exist in the labour market through better education, transport and employment support is vital. But intervention is also needed to influence the growth side of the equation. An inclusive growth strategy must seek to proactively influence and shape the nature of employment opportunities. This includes boosting employers’ demand for skills, shaping the occupational and sectoral make-up of the economy, and ultimately pushing up levels of pay and improving terms and conditions of employment contracts.

Inclusive growth is a somewhat vague and slippery term being interpreted and adopted by many different interests/organisations. Some place greater emphasis on wider notions of well-being, others integrate environmental sustainability. The scope of inclusive growth can be adapted to the needs of particular places; however, we need to guard against conflating too many issues under the inclusive growth banner. Reducing poverty through jobs and improving the labour market must be the overarching priority.

The role of cities in delivering inclusive growth

Responsibilities for inclusive growth must be shared between individuals, employers and the state. Our work focusses on the role that cities - as engines of growth but also locations of the greatest levels of poverty - can play in creating inclusive economies. Cities comprise the businesses, employers, policy makers, service providers, institutions and communities that interact and shape the nature of local growth. These networks within cities create jobs and the opportunities for citizens to access them. Cities are by no means all that matter, but their role in championing an inclusive growth agenda shouldn’t be underestimated.

We launched an international review of inclusive growth in cities at our conference in January 2017. This new blog, outlines what an inclusive growth strategy for a city might look like and some of the practical steps for cities in taking forward the agenda.