A discussion on inclusive economic growth

What is the problem that we wish to solve utilizing an inclusive economic growth process?

We wish to tackle some of the unfolding puzzles, such as climate change, declining productivity growth, and inequality. The need for a more inclusive and sustainable model of growth and development is one of the riddles of social scientific research. Yet, the literature has not made enough progress on this topic. To analyze this problem, I discuss: i) a broad working definition of inclusive economic growth, ii) emergence and dynamics of inclusive economic growth, and iii)supporting factors that help inclusive economic growth to occur. Empirical and theoretical approaches provide different margins to tackle the problems we face, in this talk I will try to develop a theoretical approach.

To form a working definition of inclusive economic growth, let’s ask how does the growth occurs? Some still believe that development is an exogenous process. Exogenous means having an external cause or origin. Exogenous event occurs due to some unknown outside conditions. Thus, conceptualizing growth as exogenous does not explain why growth emerges. It merely explains as if the growth is manna from heaven. Yet, considering economic history and development this is an incomplete account.

If what we are concerned about is the long-run growth, then we could refer to the empirically valid Neo-Schumpeterian approach to the growth process.[1] Accordingly, long-run growth emerges from the internal dynamics of political, economic, and social systems as a result of interacting economic agents, such as entrepreneurs, to improve the total factor productivity (TFP) or socioeconomic level. Growth may result from innovation involving creative destruction, internal interactions between macro and micro determinants of growth, and economic change. This shapes the trajectory of the development process. Economic growth results from the decisions of micro-level entities. Individuals, households, firms, and organizations are some of the types of micro-level agents. Economic growth does not only re-shape the economic sphere, but it also transmits to the social, political, and environmental spheres. Development in a society affects people, organizations, politics, and the environment. Decisions of the past shape the conditions of the present. Thus, it is the result of internal interactions and not given as manna from heaven. Therefore, long-run growth is an endogenous process, meaning that it has an internal cause or origin.

To assess the growth process explicitly, we will consider the foundations of the growth and development process. Namely, assessing micro-and meso-foundations.[2] This will help us to understand the problem we wish to solve through inclusive economic growth.

What is inclusive economic growth? What type of inclusion: political, economic, social, environmental, or all four?

To analyze the inclusive economic growth process, I develop a working definition. Inclusive economic growth strives for sustainable economic growth through interactions of heterogeneous individuals, firms, organizations in political and social realities. I identified three key determinants of inclusive economic growth: a) social inclusion: for instance, more cohesive societies to bridge the divides that make our development process inclusive. A growth process that serves our global society and the planet while alleviating poverty and inequality. Social inclusion implies equity, equality of opportunity, and protection in the market important for sustainable growth. b) political inclusion: enabling people to shape public policymaking. Political participation in the process and allocation of benefits of growth. c) pace and pattern of growth: a sustainable socio-ecological growth, with higher level and rate of socioeconomic progress. Resilience is a result of inclusive economic growth pace and pattern that may enable sustainable development. These three factors, social inclusion, political inclusion, and pace and pattern of growth contribute to the resilience of the economy, society, nature, and politics.

Besides economic consequences, inclusive economic growth takes the importance of the social, political, and environmental factors into consideration. Thus, incorporates a multi-dimensional approach into the growth process, not assuming as if the economic space is independent of them. Simply inclusive economic growth is a well-being snapshot in a changing world to capture what matters for people and the planet. However, this is an under-researched topic, and I still work on it, therefore, we do not know enough in order to form sound generalizations.

Yet, we need to understand how inclusive economic growth might occur. To do so, one needs to analyze the contributing and internal factors of the growth process. To help us understand the nature of the inclusive economic growth process, I use micro-meso-macro dynamics to categorize the growth process in three-level inter-linkages. Consider this hypothetical visualization of micro-meso-macro, in reality, there are millions of different microstructures embedded composing meso and macro.

Figure 1: Hypothetical depiction of micro-meso-macro dynamics and supervenience

What are transmission dynamics between micro-meso-macro properties in the economy? How does inclusion relate to the development process? How do the macroeconomic inter-linkages emerge? Micro-meso-macro can help to identify the interlinkages necessary for inclusive growth and its stability and sustainability. Let’s start with micro-foundations and explain how meso-foundations supervene on micro-level and macro-level supervene on micro-and meso-foundations. Yet, one needs to bear in mind that the interaction is not a one-way direction even if higher-level social emergent properties supervene on lower-level ones.

• Micro: economic agents, such as individuals, households, and organizations develop/adopt new rules. Inside the macro economies are individuals, firms, or organizations making decisions about interactions, nonetheless, policy restraints can inhibit many types of desired coordination by the micro-level entities.

• Meso: an adoption, adaptation, and retention of a rule by micro-agents leading to a structural transformation of the meso economic system. For instance, domestic markets, sectoral competition, policies, rules, and laws. People inside the economy respond to changes in their environment and policies that might be implemented along the way. The economy is based upon the coordination and interaction of micro and meso foundations. This implies growth comes from the interaction of millions of people and firms on a daily basis and growth is an iterative process.

• Macro: changes on micro and meso-level affect macro-level structures, for example, an institutional or technological regime, international markets, domestic and global economy. Macro-level structures and entities supervene on micro and meso thus creating it as a higher-level social emergent property. Shaping the macro level can be done from three levels, micro, meso, or macro. To discuss the resilience of the system we need to talk about its underpinnings. The connection between growth and development could help to answer how institutional development shapes the relationship among, for instance, firm size distribution, reallocation, and growth.

What does inclusive economic growth imply?

Inclusive economic growth aims to enable the interaction of micro-level agents, to reduce the barriers while encouraging participation in the economic process. This is easier said than done. In many countries, some laws privilege certain groups of people while marginalizing others to participate in the economic, social, and political process equally. Additionally, in the market process, social economy organizations (SEOs) face immense difficulties and unfair competition due to funding facilities, market regulations, or rules that are not adjusted for different types of organizations, legal entities. Concentration around fewer and bigger players makes the system volatile and restricting means for innovation. Certainly, this inhibits the process of including all in the growth process in many countries. Therefore, we need to bear in mind the contextual and circumstantial differences between developing and developed countries.

Figure 2: Imaginary network of micro-agents

Although this is a hypothetical depiction, in the real world, there is a concentration around certain groups, organizations or firms while not including the others equally.

Under which conditions may inclusive economic growth work?

Now some of the questions we may ask include: how can we enable social and political inclusion in the economic process? What could be the level of healthy competition and participation in an economy to facilitate inclusive economic growth? What are the factors or supporting causes affecting the inclusivity of economic growth? I have identified three types of potential supporting causes:

1) Shaping micro-and meso-level entities to achieve inclusive macro-level:

What types of firms, organizations should there exist to shape appropriate growth institutions and policies for inclusive economic growth? Industrial organizations include three types: i) for-profit commercial organizations, simply known as firms ii) commercial non-profit, organizations, such as cooperatives and social enterprises; iii) non-commercial non-profit organizations, such as civil society organizations, trade unions, non-governmental organizations, and foundations. Why certain types of organizations are different? How these heterogeneities aggregate up to create the macroeconomic reality we experience? This will help us to understand where we should make interventions. As a result, one needs to understand the microstructures, for example, to come up with an analysis of incentive structures of organizations and individuals to shape meso rules. Thus, the macro. We need to take into consideration the long-run consequences of microstructures with different types of organizations.

How does the market making of organizations shape the economic growth trajectory? Adjusting the aggregate composition of organizations participating in an economy can shape the trajectory of addressing climate change, social inequalities, sustainable growth. Some types of organizations, such as social economy organizations, strive for higher social and political inclusion. The structural transformation of the economy will change work-life, investing in human capabilities, providing opportunities to every member of our society. Transformations could be perceived as innovations, and innovations tackle arisen problems as a creative response. Then there is an adaptive response in the market because the market itself is not deterministic, but an evolving social entity. The competition itself is a driver of this creative response, in which one seeks to capture market power. This creates a discovery of entrepreneurial opportunities. For instance, if we re-shape the foundations of our macroeconomies such that there are a multitude of types of organizations interacting, we can shape the macroeconomy resiliently to achieve inclusive economic growth.

2) Development finance:

The impersonal exchange is the hallmark of an advanced society and money is one key institution that supports it. Trade emerges when we have monetary regimes and monetary systems are key to support impersonal exchange, intertemporal trade, and, consequently, large-scale development.[3] Accordingly, financial development is important to understand future macroeconomic outcomes. Yet, there exists a time-varying endogenous macroeconomic risk that arises from the risk-shifting behavior of financial intermediaries. For instance, banks can perform and deepen their risk-taking performance only using the services provided by financial market infrastructures, such as central counterparty clearings and central saving depositories. Nevertheless, if we look at the data, we see there are almost no financial market infrastructures existing in developing countries, implying that they cannot achieve their own inclusive growth within a given country unless financial market infrastructure or other types of meso-rules for financial micro-agents will be introduced.

Even if there would be someone willing to start an SME or a social economy organization, they may face many limitations to finance their initial activities. Do societies, individuals, or organizations have access to the necessary means to fulfill the desired ends? Financial development is closely related to the socio-economic level and financial innovation technology. If we incorporate the connection between financial development and economic growth, the type of financial development can also shape the type of economic growth we achieve. Traditional finance has gathered in economically developed regions and offer solutions to firms, leading to widespread financial exclusion for vulnerable groups or other types of industrial organizations, such as non-profit commercial organizations.

Development finance emphasizes the coverage and sustainability of financial services, helps the bottom of the economy and society to gain the ability to put into production, and offers financial services to weak enterprises with financial constraints that have the ability to technological innovation. It expands households’ abilities to make different intertemporal choices, including business investment. Development finance implies that providing effective and sustainable financial services for all sectors of society, fully tap the superiority of inclusive finance in solving the financing constraints of small and medium-sized enterprises, social-economy organizations, and promoting technological innovation, and provide a sound financing environment for innovation and entrepreneurship or micro-agents. Thus, a well-designed endogenous financial intervention as a new meso-rule would promote the formation of stronger foundations for inclusive economic growth.

3) Growth institutions and policies:

Macroeconomic policy has a crucial role in accelerating development, in particular sustainable development. How do we develop those policies that address them? How can we support risk-taking and entrepreneurship while safeguarding inclusivity? What type of policies should we develop? Countercyclical fiscal and monetary policy does also play a crucial role, yet we need to also question how we shape them as economic policies possess unintended consequences after being implemented.

From an inclusive economic growth perspective, we need to consider that it is individual organizations, firms, and households that shape the decisions taken if and only if they were to be allowed to take part in meta-governance of policymaking. A government’s policy can try to adjust the meso and micro-dynamics when required. From this perspective, the government is a supporting condition for inclusive economic growth rather than the actual cause of this process. Because with a certain type of policies and regulations it only supports and facilitates the market-making mechanism. Therefore, considering the micro-and meso-foundations hypothesis, a government is just another macro type of institution (emergent property) derived from the society and the economy that supervene on its micro and meso foundations.

Inclusive economic growth may help to account for how to strengthen the economic system to achieve sustainable and resilient development for all. From a broader perspective, this explains that it is people, organizations, and policies shaping the system internally. Therefore, resilient and sustainable growth can occur necessarily as an endogenous process. The resilience of the economy to face future challenges and disruptions, even against persisting shocks is a major implication of inclusive economic growth. It can improve the economic situation by enhancing micro-level interaction problems and identifying meso-level challenges that create certain barriers for the micro-agents to interact.

The growth is a convoluted process and requires local and circumstantial analysis to develop sound strategies. Micro- and meso-foundational approaches could explain the inclusive economic growth process partially. What remains is how could we implement it in reality to tackle the challenges of the 21st century. In the end, ideas can change the economic growth trajectory as they did in the past. What we say determines, how we act. We need to pursue our ideologies to try to refute current thought practices. Perhaps only then, we could re-shape the social and economic arrangements as inclusive and sustainable.

Disclaimer: I delivered this writing during the oikos Spring Meeting 2020. The ideas presented in this writing are a work in progress. There are a lot more to assess, this was a short introduction to my depiction of inclusive economic growth.

[1] An explanation of long-run economic growth, see Aghion, P., Akcigit, U., Howitt, P., (2015) The Schumpeterian Growth Paradigm. Annual Review of Economics 7:557-575

[2] Although there are some crucial loops in the general concept itself to embark on detailed research, see as a reference Dopfer, K., Foster, J. & Potts, (2004) Micro-meso-macro. Journal of Evolutionary Economics. 14, 263–279. https://doi.org/10.1007/s00191-004-0193-0

[3] See a macroeconomic experiment demonstrating the importance of monetary institutions to facilitate exchange and, thus, growth. Bigoni, M., Camera, G., and Casari, M. (2020), Money is more than memory, Journal of Monetary Economics, https://doi.org/10.1016/j.jmoneco.2019.01.002