Inclusive Growth

One of the prime roles of the government is to ensure that the citizens of the country lead a life with improvements in the standard of living from one year to the next. One of the aims thus is to ensure that income of individuals in all income groups – from the rich to the poor – is increasing. A pro-poor policy is where the government has programs that are designed specifically to improve the income and well-being of the poor. If the government simply aims to increase GDP per capita over time, it may not be pro-poor. An example of this is given below:

GDP, or Gross Domestic Product, is defined to be the market value of all the goods and services that are produced within a country over a given period of time. It is also the total income earned by all the individuals residing in a nation. As a simple example of the importance of inclusive growth, let there be two countries, Country A and Country B, and each country has just two individuals.

In Country A, person 1 earns 100 and person 2 earns 200. So the average income is 150.

In Country B, person 1 earns 140 and person 2 earns 160. Here too, the average income is 150.

In Country A, income is much more dispersed than in Country B, although average income (GDP per capita) is the same between the two countries.  Now next year, assume the income increases to the following:

In Country A, person 1 earns 90 and person 2 earns 240. So the average income is 165.

In Country B, person 1 earns 150 and person 2 earns 170. So the average income is 160.

Now, the average income of Country A is higher than that of Country B. However, in Country A, the rich got richer while the poor got poorer. In Country B, both the rich and the poor got richer.

If we just focused on GDP per capita, then Country A did much better than Country B, because GDP per capita grew more for Country A than Country B. However, if we look at the poor, we find that the poor in Country A got worse off over time. This shows the need to promote inclusive growth in a country – economic growth should be such that all segments of the population sees their incomes grow from one year to the next, instead of favoring a few specific groups.