## Back to Basics: -What Is Inclusive Growth? by Ruchir Agarwal

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## Bibliographic details
- Authors: RUCHIR AGARWAL
- Published: March 4, 2024

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### Definition and purpose
- Inclusive growth seeks to boost national wealth and well-being while reducing poverty, ensuring equity across generations, and preserving economic freedoms.
- Different interpretations of freedom:
  - Libertarian: minimal state intervention in private lives and free markets.
  - Capabilities approach (Amartya Sen): presence of opportunities to be healthy, educated, and secure, not just absence of restrictions.
- Every policy choice involves trade-offs between wealth creation, equality, and freedom.

### Wealth redistribution: scenarios and trade-offs
- Policy thought experiment: flat income tax of 30 percent for all versus increasing the tax rate for the richest to 50 percent.
- Interpretations:
  - Oppose tax increase: conservative approach prioritizing economic freedom and growth; favor uniform tax.
  - Support tax increase with revenue targeted to poverty reduction: broader inclusive-growth perspective willing to trade some economic freedom for anti-poverty initiatives.
  - Support tax increase to reduce wealth inequality regardless of revenue use: progressive stance, beyond traditional inclusive growth boundaries.
- Related policy options and viewpoints:
  - Universal basic income (UBI) paired with a flat income tax (as proposed by Milton Friedman and Gregory Mankiw).
  - Progressive economists (Thomas Piketty; Green New Deal-style proposals) sometimes endorse high marginal tax rates, often of 70 percent or more, in part to reduce wealthy political influence.
  - Dani Rodrik and others focus on concentration of wealth and innovation in selected firms and cities; proposed remedies include more labor rights, antitrust laws, higher minimum wages, subsidies, and industrial policies aimed at job creation in neglected areas.
- Concerns and counterarguments:
  - Risks to growth and implementation capacity from industrial policies.
  - Potential shift toward protectionist trade.

### Future generations and environmental policy
- Key question: how far should government intervene to ensure prosperity for children, grandchildren, and other species?
- Climate-change policy thought experiment: a carbon tax proposal of $35 a metric ton intended to significantly cut future carbon emissions.
  - Projected effect: raise costs on electricity, gasoline, and heating by about 20 percent for everyone.
- Interpretations:
  - Oppose tax: prioritize current economic growth and freedoms; emphasize immediate economic impact on poorer households and hesitancy in some developing economies.
  - Support tax: prioritize well-being of future generations; align with carbon pricing policies considered by several advanced economies.
  - Support tax on broader conservation grounds: value intrinsic worth of nature and biodiversity beyond human-centric benefits.
- Trade-off highlighted: balancing present economic comfort against long-term sustainability and existential risks.

### Public goods, market failures, and government role
- Public goods include education, health care, and nonmarket well-being elements (e.g., clean air) not measured in GDP.
- Market failures can arise from externalities (e.g., polluters not paying for environmental damage) and underinvestment in education and health care.
- In developing economies, government intervention may be more necessary due to poor infrastructure and limited access to quality services.
- Views on government capability:
  - Proponents: government can correct market imbalances and achieve social goals.
  - Skeptics: fear government failure, corruption, and unintended worsening of problems; favor market-based solutions (e.g., Ronald Coase’s emphasis on clear property rights and minimal transaction costs).
- Choice reflects trust in government versus faith in markets.

### Understanding inclusive growth and core principles
- Inclusive growth emphasizes creating a level playing field where futures are determined by talent and effort rather than birth circumstances.
- Distinct from policies solely aimed at reducing wealth inequality; focuses on equal opportunities alongside wealth creation and economic freedom.
- The government’s role depends on individual values, trust in political actors, and local realities.

### Key trade-offs, considerations, and policy levers
- Trade-offs frequently posed:
  - Economic freedom and growth versus redistribution and poverty reduction.
  - Present consumption and living standards versus investments for future generations and environmental conservation.
  - Market solutions versus government intervention to provide public goods and address externalities.
- Policy levers discussed:
  - Tax policy choices (flat tax at 30 percent, higher marginal rates for the wealthy including proposals to 50 percent and marginal tax rates of 70 percent or more).
  - Universal basic income versus targeted anti-poverty programs.
  - Carbon pricing (example: $35 a metric ton carbon tax with ~20 percent increase in energy costs).
  - Labor rights, antitrust enforcement, minimum wages, subsidies, and industrial policies to address geographic and firm-level concentration.

*Back to Basics: -What Is Inclusive Growth? — Ruchir Agarwal, March 2024*

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_Source: https://www.imf.org/en/publications/fandd/issues/2024/03/b2b-what-is-inclusive-growth-ruchir-agarwal_