## 1. Inclusive Growth Topology

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---

### I. Introduction
- Inclusive growth is an important policy priority in most countries; many emerging market and developing economies and many advanced economies have adopted explicit inclusive growth strategies.
- After the 2010-11 turbulent period in the Middle East, country authorities emphasized job creation and inclusive growth; the 2018 regional conference summarized priorities as ACT NOW—Accountability, Competition, Trade and Technology, No one left behind, Opportunity and Work (IMF, 2018).
- Purpose of the paper: develop a tool for inclusive growth diagnostics—the per-percentile accounting framework—to help evaluate growth inclusiveness and improve targeting of public policies.
- Contributions:
  - Presents a simple accounting framework of inclusive growth narrowly defined as growth that reduces inequality in consumption.
  - Illustrates parameter shifts needed to turn non-inclusive growth into inclusive growth.
  - Proposes per-percentile policies to rebalance consumption growth across the consumption expenditure distribution.
  - Applies the approach to Iraq and Tunisia.

### II. Definition (Inclusive growth narrow focus)
- Inclusive growth (in this paper): growth that reduces inequality in consumption.
- Two components:
  - Average growth (average per capita growth in consumption across percentiles).
  - Distribution of that growth by percentiles of consumption.
- Key conceptual points:
  - Average per capita growth in consumption is the relevant indicator for growth inclusiveness analysis rather than just real GDP growth.
  - If average per capita growth across the distribution is negative, the country faces contraction; distribution can improve during contraction but contraction cannot be considered inclusive because the whole distribution becomes poorer.
- Relevant indicator: per capita consumption expenditure (reflects current income, wealth, saving rates); position relative to mean measures relative inequality.

### III. Growth Incidence Curve (GIC)
- Definition and interpretation:
  - GIC measures per-percentile changes in real per capita consumption expenditure between two household surveys.
  - Parts of the curve above the X-axis: percentiles that benefit from growth.
  - Parts below the X-axis: percentiles whose consumption declines.
  - If the whole GIC is above the X-axis, growth reduces poverty; if the GIC crosses the X-axis, impact on poverty is ambiguous.
  - Sections above the overall mean: percentiles that benefit relatively more than an average household.
  - Sections below the mean but above zero: percentiles that benefit less than an average household.
- Complementarity: GICs provide per-percentile detail; poverty indicators remain useful complements because growth may not be inclusive while shifting large portions out of poverty.
- Statistical measures referenced (conceptual): squared poverty gap, Watts index, Gini coefficient, mean log deviation (MLD), decile ratio, dynamic comparisons of bottom deciles versus average/highest deciles.

### IV. Data considerations for GIC analysis
- Minimum data requirement: at least two household surveys with comparable methodology including consumption expenditure by households.
- Data quality issues:
  - Difficulty collecting consumption expenditure in low-income countries with large informal sectors.
  - Outliers may lead to negative growth rates at distribution tails.
  - Lowest and highest percentiles may be unreliable because the very poor and very rich often do not participate in surveys.
  - Survey comparability affected by changes in household size and sociodemographic variables across surveys.
  - Using consumption as a proxy for income requires the strong assumption that saving rates are constant across time and income levels.

### V. Stylized (linear) GIC properties and scenarios
- Linear GIC cases illustrated:
  - Zero mean (GIC overlaps X-axis): no growth.
  - Positive mean with GIC positively sloped: growth and distribution worsening (higher percentiles gain more).
  - Zero mean with positively sloped GIC: no average growth and increasing inequality.
  - Zero mean with negatively sloped GIC: no average growth but distribution improving.
  - Positive mean with negatively sloped GIC: positive inclusive growth.
  - Negative mean with negatively sloped GIC: contraction with distribution improving (theoretically possible).
- Typical displacements of GIC:
  - Increase in growth with unchanged distribution → GIC shifts up.
  - Improvement in distribution without growth → GIC tilts more negatively.
  - Increase in growth and improved distribution → GIC shifts up and slope becomes more negative.
  - Increase in growth with worsened distribution → GIC shifts up but slope becomes less negative or turns positive.

### VI. Growth Distribution Accounting (formal framework)
- Per-percentile definitions and identities:
  - g_t(p) = y_t(p) / y_{t−1}(p) − 1      (1)
  - y_t(p) = y_{t−1}(p) + g_t(p) y_{t−1}(p)     (2)
  - μ_t = ∫_{0}^{1} d p y_t(p)      (3)
  - μ_t = μ_{t−1} + ∫_{0}^{1} d p g_t(p) y_{t−1}(p)    (4)
- Targeted properties for inclusive growth:
  - Positive mean growth: ∫_{0}^{1} d p g_t(p) > 0      (6)
  - Distribution improvement (GIC negatively sloped): g'_t(p) < 0      (7)
- Linear GIC specification:
  - g(p) = g(0) − (g(0) − g(1)) p     (8)
  - For linear GIC, positive mean requires: 1/2 ( g(0) − g(1) ) > 0     (9)
  - Distribution improvement requires: g(0) > g(1)      (10)

### VII. Targeted per-percentile changes and simple three-group example
- Targeted distribution mapping using linear GIC:
  - y_t(p) = (1 + g(0) − (g(0) − g(1)) p) y_{t−1}(p)     (11)
  - Required per-percentile change: δy(p) = (g(0) − (g(0) − g(1)) p) y_{t−1}(p)     (12)
- Three-group classification by real consumption percentile ranges:
  - Poor: p < 20%
  - Middle class: 20% < p < 80%
  - Rich: 80% < p < 100%
- Piecewise definitions:
  - y_{t−1}(p) = { y1, p < 20%; y2, 20% < p < 80%; y3, 80% < p < 100% }     (13)
  - g(p) = { g1, p < 20%; g2, 20% < p < 80%; g3, 80% < p < 100% }     (14)
  - y_t(p) = { y1 (1 + g1), y2 (1 + g2), y3 (1 + g3) }     (15)
  - δy(p) ≡ y_t(p) − y_{t−1}(p) = { g1 y1, g2 y2, g3 y3 }     (16)
- Average consumption (previous period) and change:
  - μ_{t−1} = 1/5 ( y1 + 3 y2 + y3 )     (17)
  - μ_t − μ_{t−1} = 1/5 ( g1 y1 + 3 g2 y2 + g3 y3 )     (18)

### The sign of the GIC distinguishes growth from contraction; classifications
- Definitions:
  - If g_t(p) > 0, there is growth.
  - If g_t(p) < 0, there is contraction.
- Three classification patterns (three-group linear parametrizations):
  - Distribution-improving (inclusive):
    - g_t(p) = { g_1 = g; g_2 = g − δg; g_3 = g − 2δg } (Equation 19)
    - μ_t − μ_{t−1} = g/5 (y_1 + 3y_2 + y_3) + 1/5 (−3δg y_2 − 2δg y_3) (Equation 20)
  - Distribution-neutral (inclusiveness neutral):
    - g_t(p) = { g_1 = g; g_2 = g; g_3 = g } (Equation 21)
    - μ_t − μ_{t−1} = g/5 (y_1 + 3y_2 + y_3) (Equation 22)
  - Distribution-worsening (non-inclusive):
    - g_t(p) = { g_1 = g − 2δg; g_2 = g − δg; g_3 = g } (Equation 23)
    - μ_t − μ_{t−1} = g/5 (y_1 + 3y_2 + y_3) + 1/5 (−2δg y_2 − 3δg y_3) (Equation 24)

### Comparative Growth Regimes (empirical observations)
- Six combinations of average growth and GIC slopes identified (illustrated with Middle East household surveys):
  - distribution improving growth (Tunisia)
  - distribution neutral growth (Egypt)
  - distribution worsening growth (Djibouti, Iraq)
  - distribution improving contraction (Iran)
  - distribution neutral contraction (WBG)
  - distribution contraction (unnamed)
- Empirical observations from Middle East samples:
  - Tunisia, Egypt, Djibouti, and Iraq: growth between two survey dates positive on average across distributions.
  - Iran and West Bank Gaza (WBG): contraction (average growth negative across distribution).
  - Linear GIC slopes:
    - negative for Tunisia and Iran,
    - close to zero for Egypt and WBG,
    - positive for Djibouti and Iraq.
- Operational steps to assess growth inclusiveness:
  - (i) Establish slope of the GIC from at least two sequential household surveys.
  - (ii) If slope is positive (non-inclusive), identify measures to increase income/consumption of lowest deciles while increasing mean growth rate (not at expense of higher deciles).
  - (iii) If slope is negative (inclusive), identify measures to increase absolute value of slope by accelerating consumption growth of lower deciles without hampering others.
  - (iv) Alternatively or additionally, find measures to reduce inequality that shift the entire GIC up.

### Country case study — Iraq: Achieving Inclusive Growth
- Empirical facts:
  - World Bank analysis of 2007 and 2012 household surveys: secular improvement in consumption expenditure; poverty in Iraq declined.
  - Despite average improvement, consumption of the very poor (below the 10th percentile) declined; lower-middle class (20th–40th percentiles) grew below average; upper-middle class (40th–80th) and the rich (except above 90th) increased — implying worsening inequality (non-inclusive growth).
- Policy objective:
  - Increase average growth and ensure substantially faster growth of consumption expenditure of the poor relative to the rich — shift GIC up and change slope from positive to negative.
- Policy scenario presented:
  - Using 2007 as base year: target a 300 percent increase in consumption expenditure for the 1st percentile and 0 percent increase for the 100th percentile; interpolate percent increases for other percentiles between 300 percent and 0 percent according to initial distribution.
  - Expected outcome of that scenario:
    - Doubled average consumption growth to about +1.5 percent.
    - Slope of GIC would change from positive to negative; poor benefit more than rich; inequality would decline; growth becomes inclusive.
- Dollar and percent targets to double average consumption expenditure (assuming all additional income is consumed):
  - Annual income of the 20th percentile should become US$ 2,898 or 240 percent higher relative to 2007 level.
  - Annual income of the 80th percentile should be US$ 1,600 or 60 percent higher relative to 2007 level.
  - Exact additional income needed for each percentile calculated (Figure 5.c).
- Note: 2012 survey suggests that while consumption growth occurred between 2007 and 2012, inclusiveness was not achieved; consumption profile did not change much between surveys.

### Country case study — Tunisia: Strengthening Growth Inclusiveness
- Survey periodicity and grouping:
  - Household surveys every five years allowed GICs for 2000-05, 2005-10, 2010-15.
  - Poverty thresholds: 15.2 percent in 2015; 20.5 percent in 2010; 23.1 percent in 2005.
  - Approximation of groups:
    - 0-20th percentiles = poor
    - 20-80th percentiles = middle class
    - 80-100th percentiles = rich
- Average consumption expenditure annual growth rates:
  - 2000-05: 7.0 percent annually
  - 2005-10: 7.7 percent annually
  - 2010-15: 10.7 percent annually
- Evolution of inclusiveness:
  - 2000-05: GIC flat → inclusiveness neutral; inequality broadly unchanged.
  - 2005-10: GIC negatively sloped → growth became more inclusive (redistribution toward poor).
  - 2010-15: Negative slope tripled, indicating tripling of growth inclusiveness on average (post-2011 Revolution measures included hiring about 70 thousand low-income people into public administration and several thousand into public enterprises).
- Heterogeneity across percentiles and periods:
  - 2000-05: poor (0-20th) benefited less than average; within middle class, 20-40th benefited more than average; 40-60th benefited about average; 60-80th slightly less; rich (80-100th) gained most except the very top.
  - 2005-10: most poor and virtually entire middle class benefited; very rich beyond 90th percentile lost in relative terms.
  - 2010-15: consumption of poor and lower-middle increased substantially faster than upper-middle and rich; middle class’s consumption growth lower than economy average.
- Policy accounting for middle class protection:
  - Use Equations 19 and 20 to determine, given a fixed budget envelope, how much consumption expenditure of each percentile should change and at whose expense to smooth undesirable social shifts.
  - Findings:
    - Relative to 2015 average, consumption of middle class should increase, primarily for households in roughly the 20-50th percentiles.
    - Increase for 20-50th percentiles expressed as area A (dinars per capita per-percentile) and area a (percent).
    - Financing can come from additional taxes on 50-80th percentiles, yielding area B (dinars) or b (percent).
    - Depending on population shares of 20-50th versus 50-80th percentiles, savings in B can equal or outweigh additional expenditure in A.
  - Conclusion: middle class position can be stabilized by redistribution inside the middle class itself without worsening the rich, and without increasing the fiscal deficit — redistribution occurs within the given budget envelope. Success depends also on monetary and fiscal policies to increase growth so the poor maintain positive real expenditure growth without eroding middle class purchasing power.

### Policy framework and per-percentile policies
- Core prescription:
  - Develop targeted redistribution policies based on GIC diagnostics to equalize consumption expenditure and achieve inclusive consumption growth.
  - Replace generalized redistribution with well-targeted policies to eliminate troughs in consumption growth that indicate left-behind percentiles.
- Targeting granularity:
  - Policies can target at least three income groups (poor, middle class, rich) or be customized to each decile or each percentile for higher granularity.
  - Per-decile approach: monitor relative position of homogeneous groups and ensure their consumption growth reduces inequality.
  - Per-percentile policies: target people in each percentile to eliminate troughs in consumption growth patterns.
- Fiscal policy instruments for per-percentile targeting:
  - Use progressive direct taxes and transfers; analyze per-percentile taxable income and consumption before and after taxes/transfers to identify lagging percentiles and inform tax-bracket settings.
  - Design income tax rates by percentile.
  - Implement in-kind transfers targeted to specific percentiles to reduce consumption inequality.
  - Target transfers in education and health by percentile to change distribution of human capital and promote social mobility.

### Limitations of granular fiscal policy design
- Key limitations identified:
  - Many low-income and emerging-market economies do not have the targeting mechanisms in place to design fiscal policy at a very granular level.
  - The government may not be able to identify the group of households at the bottom of the distribution.
  - Even if the government can identify those households, these groups may be commonly part of the informal sector, and the government may not have a transfer system (cash or in kind) capable of delivering benefits to these groups.
  - Fiscal policy should—among other things—balance equity and efficiency considerations; as a result, per percentile design of tax brackets for the personal income tax may not be efficient and difficult to implement and enforce.
  - Only a positive change in aggregate consumption would be beneficial to growth.
- Implications for policy design:
  - Targeting constraints imply reliance on broader, less granular instruments where identification and delivery systems are weak.
  - Informality and lack of transfer infrastructure limit the effectiveness of narrowly targeted fiscal transfers.
  - Equity-efficiency tradeoffs argue against highly granular personal income tax bracket designs in contexts with weak administrative capacity.
  - Policies should prioritize mechanisms that raise aggregate consumption positively to support growth.

*Source: IMF staff presentation in “1. Inclusive Growth Topology” (wpiea2020050-print-pdf).*

### 1. Inclusive Growth Topology __________________________________________________________ 5

### 1. Inclusive Growth Topology

### I. Introduction
- Inclusive growth is an important policy priority in most countries; many emerging market and developing economies and many advanced economies have adopted explicit inclusive growth strategies.
- After the 2010-11 turbulent period in the Middle East, country authorities emphasized job creation and inclusive growth; the 2018 regional conference summarized priorities as ACT NOW—Accountability, Competition, Trade and Technology, No one left behind, Opportunity and Work (IMF, 2018).
- Purpose of the paper: develop a tool for inclusive growth diagnostics—the per-percentile accounting framework—to help evaluate growth inclusiveness and improve targeting of public policies.
- Contributions:
  - Presents a simple accounting framework of inclusive growth narrowly defined as growth that reduces inequality in consumption.
  - Illustrates parameter shifts needed to turn non-inclusive growth into inclusive growth.
  - Proposes per-percentile policies to rebalance consumption growth across the consumption expenditure distribution.
  - Applies the approach to Iraq and Tunisia.

### II. Definition (Inclusive growth narrow focus)
- Inclusive growth (in this paper): growth that reduces inequality in consumption.
- Two components:
  - Average growth (average per capita growth in consumption across percentiles).
  - Distribution of that growth by percentiles of consumption.
- Key conceptual points:
  - Average per capita growth in consumption is the relevant indicator for growth inclusiveness analysis rather than just real GDP growth.
  - If average per capita growth across the distribution is negative, the country faces contraction; distribution can improve during contraction but contraction cannot be considered inclusive because the whole distribution becomes poorer.
- Relevant indicator: per capita consumption expenditure (reflects current income, wealth, saving rates); position relative to mean measures relative inequality.

### III. Growth Incidence Curve (GIC)
- A growth incidence curve (GIC) measures per-percentile changes in real per capita consumption expenditure between two household surveys:
  - Parts of the curve above the X-axis: percentiles that benefit from growth.
  - Parts below the X-axis: percentiles whose consumption declines.
  - If the whole GIC is above the X-axis, growth reduces poverty; if the GIC crosses the X-axis, impact on poverty is ambiguous.
  - Sections above the overall mean: percentiles that benefit relatively more than an average household.
  - Sections below the mean but above zero: percentiles that benefit less than an average household.
- Complementarity: GICs provide per-percentile detail; poverty indicators remain useful complements because growth may not be inclusive while shifting large portions out of poverty.
- Statistical measures referenced (no new numbers introduced beyond conceptual):
  - squared poverty gap, Watts index, Gini coefficient, mean log deviation (MLD), decile ratio, dynamic comparisons of bottom deciles versus average/highest deciles.

### IV. Data considerations for GIC analysis
- Minimum data requirement: at least two household surveys with comparable methodology including consumption expenditure by households.
- Data quality issues:
  - Difficulty collecting consumption expenditure in low-income countries with large informal sectors.
  - Outliers may lead to negative growth rates at distribution tails.
  - Lowest and highest percentiles may be unreliable because the very poor and very rich often do not participate in surveys.
  - Survey comparability affected by changes in household size and sociodemographic variables across surveys.
  - Using consumption as a proxy for income requires the strong assumption that saving rates are constant across time and income levels.

### V. Stylized (linear) GIC properties and scenarios
- Assuming a linear GIC helps illustrate cases:
  - Zero mean (GIC overlaps X-axis): no growth.
  - Positive mean with GIC positively sloped: growth and distribution worsening (higher percentiles gain more).
  - Zero mean with positively sloped GIC: no average growth and increasing inequality.
  - Zero mean with negatively sloped GIC: no average growth but distribution improving.
  - Positive mean with negatively sloped GIC: positive inclusive growth.
  - Negative mean with negatively sloped GIC: contraction with distribution improving (theoretically possible).
- Typical displacements of GIC:
  - Increase in growth with unchanged distribution → GIC shifts up.
  - Improvement in distribution without growth → GIC tilts more negatively.
  - Increase in growth and improved distribution → GIC shifts up and slope becomes more negative.
  - Increase in growth with worsened distribution → GIC shifts up but slope becomes less negative or turns positive.

### VI. Growth Distribution Accounting (formal framework)
- Define real per capita consumption distribution y_t(p) by percentile p and the GIC g_t(p) as per-percentile change from year t−1 to t:
  - g_t(p) = y_t(p) / y_{t−1}(p) − 1      (1)
  - y_t(p) = y_{t−1}(p) + g_t(p) y_{t−1}(p)     (2)
- Average consumption expenditure μ_t:
  - μ_t = ∫_{0}^{1} d p y_t(p)      (3)
- Change in average real consumption expenditure:
  - μ_t = μ_{t−1} + ∫_{0}^{1} d p g_t(p) y_{t−1}(p)    (4)
- Targeted properties for inclusive growth:
  - Positive mean growth:
    - ∫_{0}^{1} d p g_t(p) > 0      (6)
  - Distribution improvement (GIC negatively sloped):
    - g'_t(p) < 0      (7)
- Linear GIC specification:
  - g(p) = g(0) − (g(0) − g(1)) p     (8)
  - For linear GIC, positive mean requires:
    - ∫_{0}^{1} d p g_t(p) > 0 → 1/2 ( g(0) − g(1) ) > 0     (9)
  - Distribution improvement requires:
    - g'(p) < 0 → g(0) > g(1)      (10)

### VII. Targeted per-percentile changes and simple three-group example
- Targeted distribution mapping from initial y_{t−1}(p) using linear GIC:
  - y_t(p) = (1 + g(0) − (g(0) − g(1)) p) y_{t−1}(p)     (11)
  - Required per-percentile change:
    - δy(p) = (g(0) − (g(0) − g(1)) p) y_{t−1}(p)     (12)
- Simplified three-group classification by real consumption percentile ranges:
  - Poor: p < 20%
  - Middle class: 20% < p < 80%
  - Rich: 80% < p < 100%
- Assume initial consumption expenditures in ranges take values (y1, y2, y3):
  - y_{t−1}(p) = { y1, p < 20%; y2, 20% < p < 80%; y3, 80% < p < 100% }     (13)
- Assume these expenditures grow by (g1, g2, g3) in each group:
  - g(p) = { g1, p < 20%; g2, 20% < p < 80%; g3, 80% < p < 100% }     (14)
- Resulting consumption expenditure:
  - y_t(p) = { y1 (1 + g1), y2 (1 + g2), y3 (1 + g3) }     (15)
- Per-percentile consumption change:
  - δy(p) ≡ y_t(p) − y_{t−1}(p) = { g1 y1, g2 y2, g3 y3 }     (16)
- Average consumption expenditure (previous period):
  - μ_{t−1} = 1/5 ( y1 + 3 y2 + y3 )     (17)
- Change in average consumption:
  - μ_t − μ_{t−1} = 1/5 ( g1 y1 + 3 g2 y2 + g3 y3 )     (18)

*Source: IMF staff presentation in “1. Inclusive Growth Topology” (wpiea2020050-print-pdf).*

### 20. The sign of the GIC distinguishes growth from contraction. If 푔

### wpiea2020050-print-pdf - 20. The sign of the GIC distinguishes growth from contraction. If 푔

### Definitions and classifications
- The sign of the GIC distinguishes growth from contraction:
  - If 푔_t(푝) > 0, there is growth.
  - If 푔_t(푝) < 0, there is contraction.
- Growth and contraction can each be:
  - Distribution-improving (inclusive)
    - 푔_t(푝) = { 푔_1 = 푔; 푔_2 = 푔 − 훿푔; 푔_3 = 푔 − 2훿푔 } (Equation 19)
    - Change in average consumption expenditure:
      - μ_t − μ_{t−1} = 푔/5 (푦_1 + 3푦_2 + 푦_3) + 1/5 (−3훿푔 푦_2 − 2훿푔 푦_3) (Equation 20)
  - Distribution-neutral (inclusiveness neutral)
    - 푔_t(푝) = { 푔_1 = 푔; 푔_2 = 푔; 푔_3 = 푔 } (Equation 21)
    - μ_t − μ_{t−1} = 푔/5 (푦_1 + 3푦_2 + 푦_3) (Equation 22)
  - Distribution-worsening (non-inclusive)
    - 푔_t(푝) = { 푔_1 = 푔 − 2훿푔; 푔_2 = 푔 − 훿푔; 푔_3 = 푔 } (Equation 23)
    - μ_t − μ_{t−1} = 푔/5 (푦_1 + 3푦_2 + 푦_3) + 1/5 (−2훿푔 푦_2 − 3훿푔 푦_3) (Equation 24)

### Applications: Comparative Growth Regimes
- Six combinations of average growth and GIC slopes identified (illustrated with Middle East household surveys):
  - distribution improving growth (Tunisia)
  - distribution neutral growth (Egypt)
  - distribution worsening growth (Djibouti, Iraq)
  - distribution improving contraction (Iran)
  - distribution neutral contraction (WBG)
  - distribution contraction (unnamed)
- Empirical observations:
  - Tunisia, Egypt, Djibouti, and Iraq: growth between two survey dates positive on average across distributions.
  - Iran and West Bank Gaza (WBG): contraction (average growth negative across distribution).
  - Linear GIC slopes:
    - negative for Tunisia and Iran,
    - close to zero for Egypt and WBG,
    - positive for Djibouti and Iraq.
- Operational steps to assess growth inclusiveness:
  - (i) Establish slope of the GIC from at least two sequential household surveys.
  - (ii) If slope is positive (non-inclusive), identify measures to increase income/consumption of lowest deciles while increasing mean growth rate (not at expense of higher deciles).
  - (iii) If slope is negative (inclusive), identify measures to increase absolute value of slope by accelerating consumption growth of lower deciles without hampering others.
  - (iv) Alternatively or additionally, find measures to reduce inequality that shift the entire GIC up.

### Country case study — Iraq: Achieving Inclusive Growth
- Empirical facts:
  - World Bank analysis of 2007 and 2012 household surveys: secular improvement in consumption expenditure; poverty in Iraq declined.
  - Despite average improvement, consumption of the very poor (below the 10th percentile) declined; lower-middle class (20th–40th percentiles) grew below average; upper-middle class (40th–80th) and the rich (except above 90th) increased — implying worsening inequality (non-inclusive growth).
- Policy objective:
  - Increase average growth and ensure substantially faster growth of consumption expenditure of the poor relative to the rich — shift GIC up and change slope from positive to negative.
- Policy scenario presented:
  - Using 2007 as base year: target a 300 percent increase in consumption expenditure for the 1st percentile and 0 percent increase for the 100th percentile; interpolate percent increases for other percentiles between 300 percent and 0 percent according to initial distribution.
  - Expected outcome of that scenario:
    - Doubled average consumption growth to about +1.5 percent.
    - Slope of GIC would change from positive to negative; poor benefit more than rich; inequality would decline; growth becomes inclusive.
- Dollar and percent targets to double average consumption expenditure (assuming all additional income is consumed):
  - Annual income of the 20th percentile should become US$ 2,898 or 240 percent higher relative to 2007 level.
  - Annual income of the 80th percentile should be US$ 1,600 or 60 percent higher relative to 2007 level.
  - Exact additional income needed for each percentile calculated (Figure 5.c).
- Note: 2012 survey suggests that while consumption growth occurred between 2007 and 2012, inclusiveness was not achieved; consumption profile did not change much between surveys.

### Country case study — Tunisia: Strengthening Growth Inclusiveness
- Survey periodicity and grouping:
  - Household surveys every five years allowed GICs for 2000-05, 2005-10, 2010-15.
  - Poverty thresholds: 15.2 percent in 2015; 20.5 percent in 2010; 23.1 percent in 2005.
  - Approximation of groups:
    - 0-20th percentiles = poor
    - 20-80th percentiles = middle class
    - 80-100th percentiles = rich
- Average consumption expenditure annual growth rates:
  - 2000-05: 7.0 percent annually
  - 2005-10: 7.7 percent annually
  - 2010-15: 10.7 percent annually
- Evolution of inclusiveness:
  - 2000-05: GIC flat → inclusiveness neutral; inequality broadly unchanged.
  - 2005-10: GIC negatively sloped → growth became more inclusive (redistribution toward poor).
  - 2010-15: Negative slope tripled, indicating tripling of growth inclusiveness on average (post-2011 Revolution measures included hiring about 70 thousand low-income people into public administration and several thousand into public enterprises).
- Heterogeneity across percentiles and periods:
  - 2000-05: poor (0-20th) benefited less than average; within middle class, 20-40th benefited more than average; 40-60th benefited about average; 60-80th slightly less; rich (80-100th) gained most except the very top.
  - 2005-10: most poor and virtually entire middle class benefited; very rich beyond 90th percentile lost in relative terms.
  - 2010-15: consumption of poor and lower-middle increased substantially faster than upper-middle and rich; middle class’s consumption growth lower than economy average.
- Policy accounting for middle class protection:
  - Use Equations 19 and 20 to determine, given a fixed budget envelope, how much consumption expenditure of each percentile should change and at whose expense to smooth undesirable social shifts.
  - Findings:
    - Relative to 2015 average, consumption of middle class should increase, primarily for households in roughly the 20-50th percentiles.
    - Increase for 20-50th percentiles expressed as area A (dinars per capita per-percentile) and area a (percent).
    - Financing can come from additional taxes on 50-80th percentiles, yielding area B (dinars) or b (percent).
    - Depending on population shares of 20-50th versus 50-80th percentiles, savings in B can equal or outweigh additional expenditure in A.
  - Conclusion: middle class position can be stabilized by redistribution inside the middle class itself without worsening the rich, and without increasing the fiscal deficit — redistribution occurs within the given budget envelope. Success depends also on monetary and fiscal policies to increase growth so the poor maintain positive real expenditure growth without eroding middle class purchasing power.

### Policy framework and per-percentile policies
- The accounting framework advocates developing targeted redistribution policies based on GICs:
  - Replace generalized redistribution with well-targeted policies to equalize consumption expenditure and achieve inclusive consumption growth.
  - Policies can target at least three income groups (poor, middle class, rich) or be customized to each decile or each percentile for higher granularity.
  - Per-decile approach: monitor relative position of homogeneous groups and ensure their consumption growth reduces inequality.
  - Per-percentile policies: target people in each percentile to eliminate troughs in consumption growth patterns indicating left-behind percentiles.
- Fiscal policy instruments for per-percentile targeting:
  - Use progressive direct taxes and transfers; analyze per-percentile taxable income and consumption before and after taxes/transfers to identify lagging percentiles and inform tax-bracket settings.
  - Design income tax rates by percentile.
  - Implement in-kind transfers targeted to specific percentiles to reduce consumption inequality.
  - Target transfers in education and health by percentile to change distribution of human capital and promote social mobility.

*Italic source: Excerpt from the supplied IMF content unit.*

### 38. The suggested granular design of fiscal policy would face limitations. First, many

### Limitations of Granular Fiscal Policy Design

### Key limitations identified
- Many low-income and emerging-market economies do not have the targeting mechanisms in place to design fiscal policy at a very granular level.
- The government may not be able to identify the group of households at the bottom of the distribution.
- Even if the government can identify those households, these groups may be commonly part of the informal sector, and the government may not have a transfer system (cash or in kind) capable of delivering benefits to these groups.
- Fiscal policy should—among other things—balance equity and efficiency considerations; as a result, per percentile design of tax brackets for the personal income tax may not be efficient and difficult to implement and enforce.
- Only a positive change in aggregate consumption would be beneficial to growth.

### Implications for policy design
- Targeting constraints imply reliance on broader, less granular instruments where identification and delivery systems are weak.
- Informality and lack of transfer infrastructure limit the effectiveness of narrowly targeted fiscal transfers.
- Equity-efficiency tradeoffs argue against highly granular personal income tax bracket designs in contexts with weak administrative capacity.
- Policies should prioritize mechanisms that raise aggregate consumption positively to support growth.

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*Source: Authors’ presentation.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020050-print-pdf.pdf_