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Promoting Growth: the Path G20 should Take

16 Nov 2014
Jim Yong Kim

Dr Jim Yong Kim, President of the World Bank Group, suggests that as we enter a period of relative economic calm, now is the time to address the issues that will benefit everyone globally: investing in infrastructure, tackling inequality and promoting inclusive growth.

Six years ago, the international community was on the brink of the most dramatic economic crisis since the Great Depression. In the intervening years, the global economy has seemingly lurched from one potential crisis to another but
 over time it has gradually settled. While problems persist – unemployment remains distressingly high in many countries, financial institutions are not yet fully restored to health and the eventual normalization of policies may yet generate short-term stresses – much progress has been made and high-income countries appear to be 
on a gradual road to recovery. Government deficits are under control, yields on debt that had reached scary heights are now back at manageable levels, and the challenges facing the global economy have lost the urgency of the immediate post-crisis period.

Capitalising Upon the Calm

In this new economic environment, the challenges facing G20 countries are less urgent, more medium-term in nature and, arguably, refreshingly “boring”. In Europe, the major concern is whether low inflation might pose a challenge for growth going forward. In the United States, policy challenges are turning toward improving the tax system and containing ageing-related expenditures to ensure long-term fiscal sustainability.
 In Japan, the fiscal and monetary arrows
 of Abenomics have restored growth and the focus has now turned to some of the deep structural reforms necessary to pick up the long-term pace of growth.
 For the developing countries of the G20, challenges are also increasingly centred on reinvigorating the structural reform agenda to ensure strong and sustainable growth in the years to come.
 Boring is good, especially after some of the existential dangers of the past. Moreover, boring is important because it is in overcoming the challenges common to high-income and developing countries that long-term progress and gains will be made. Ending extreme poverty, raising potential growth rates and ensuring that all share in the benefits of stronger growth are challenges that defy quick fixes. Rather, this is a battle that will be won through repeated small gains; increasing trend growth by 0.1, 0.2 and then 0.3 percentage points at a time can yield major benefits over the longer-term. Making those incremental gains will require different solutions in different settings.

Investing in Infrastructure

G20 countries face distinct challenges that demand innovative and targeted solutions. China, for example, realises that it needs to rebalance away from an export-led growth model to one driven by domestic demand. Indonesia and India, for their part, know that they need to do more to open markets to competition, trade and foreign investment.

G20 countries also face common challenges. One of those challenges is infrastructure. Australia has rightly identified infrastructure as a key issue for guiding the development of G20 growth strategies. To generate jobs, people and businesses need electricity and access to roads, schools and health services.

Another common challenge relates to private investment. Foreign aid continues to provide essential support to the poor, but the private sector accounts for 90 per cent of job creation in developing countries. We simply cannot meet the world’s growing demand for energy and infrastructure without significantly scaling-up private investment. To do so, governments need to establish business climates that are predictable, transparent and easy to navigate. They also need trade policies that promote competition and investment while maintaining high standards for the environment and workers. By putting infrastructure, employment, trade and competition at the forefront of the G20 agenda, Australia has identified the right themes around which to build country-level growth strategies.

A Focus on Inclusive Growth

However, ending poverty and boosting shared prosperity will require us to focus 
on an issue which is currently missing from the G20 agenda: inclusive growth. Pursuing growth alone is not enough. Governments must also focus on ensuring that the benefits of growth extend to all people. Experience shows that growth will not
 result in significant job creation if it accrues primarily to an elite few. Unbalanced growth also undermines the ability of governments to sustain the political consensus needed to challenge vested interests and to implement reforms that keep growth strong.

In recent years, inequality has risen in many countries, including those in the 
G20. Rising inequality hurts social stability. In our increasingly interconnected world, policymakers can no longer ignore their people’s demands to share in the gains of economic progress. Whether in the Bolivian Highlands or the Indian state of Uttar Pradesh, modern technologies drive home the bruising reality of global inequalities to the most rural and impoverished locations. History has shown that people will no longer stand by and tolerate exclusion.

A growing body of research also shows that unchecked inequality could actually weaken growth over the longer-term. Those toward the lower end of the income ladder spend a higher portion of their income. The more they spend, the more businesses
 are likely to create new jobs to meet rising demand for their goods and services.

Including more women in the workforce could also significantly lift countries’ GDP. 
In the Middle East and North Africa, low participation of women in the workforce results in income losses of an estimated 27 per cent. Raising women’s employment to the same levels as men’s employment would raise average income by 19 per cent in South Asia and 14 per cent in Latin America.

Finally, non-inclusive growth detracts from poverty reduction. Our research shows that in countries with rising income inequality, growth contributes less to poverty reduction and, in some cases, can actually exacerbate poverty. If left unchecked, inequality could imperil the global goal to end extreme poverty by 2030.

Inequality is an issue for us all. According to 2010 figures, about half
 of the world’s extreme poor live in G20 countries. Therefore, promoting inclusive growth and explicitly tackling the problem of rising inequality should represent central components of the G20 growth agenda. People deserve – and demand – nothing less.


Dr Jim Yong Kim is the President of the World Bank Group. 

This is an extract from G20: Words into Action Brisbane 2014 published by Faircount Media in association with the Australian Institute of International Affairs in October 2014.