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Intereconomics 2019 | 3
184
Inclusive Growth
Michael Grömling and Hans-Peter Klös
Inclusive Growth – Institutions Matter!
The aim of the concept of inclusive growth is to derive political recommendations on the basis
of selected indicators so that a maximum number of socio-economic groups may benefi t from
the economic progress of a country. On the one hand, this initiative continues the long-running
debate on alternative welfare measures beyond GDP-per-capita. On the other, the discussion
on the relationship between growth and distribution is being revitalised. This article deals with
the potentials and limitations of the concept of inclusive growth. Conventional inclusive growth
concepts are less embedded within a growth context and not focused on political frameable
institutions. The indicators focus on results or outcome rather than on growth drivers. In
addition, outcome variables are mixed with supply-side indicators. Therefore, the conventional
concepts should be further developed into an institution-oriented ‘inclusive growth accounting’
with a focus on the growth factors of labour, education and capital.
DOI: 10.1007/s10272-019-0819-y
Michael Grömling, German Economic Institute, Co-
logne, Germany.
Hans-Peter Klös, German Economic Institute, Co-
logne, Germany.
The debate on the advantages and disadvantages of eco-
nomic growth has been one dimension richer for some
time now. In add ition to sust ainabilit y, i.e. the environm en-
tal and resource compatibility of growth, the question is
increasingly being asked whether all groups in a society
can benefi t suffi ciently from economic growth. Politi-
cal developments in many countries accompanied by a
strengthening of populist positions in recent years have
given additional impetus to the question of who are the
winners and losers of economic development.1 The anal-
ysis of the di strib ution al effects of gr owt h is not n ew, how-
ever; it has always been part of the debate on the various
consequences of economic development.2
A new dimension in the distribution debate
The new concept of inclusive growth questions whether
and how different population groups participate in eco-
nomic development. According to the Organisation for
1 M. Bussolo, M.E. Davalos, V. Peragine, R. Sundaram: Toward
a New Social Contract: Taking on Distributional Tensions in Europe
and Centr al Asia, Europe and Central Asia Studies, Washington DC
2018, World Bank Group.
2 S. Kuznets: Economic Growth and Income Inequality, in: American
Economic Review, Vol. 45, No. 1, 1955, pp. 1-28.
Economic Co-operation and Development (OECD), in-
clusive growth is an economic development that creates
opportunities for all socio-economic groups of the pop-
ulation and is able to distribute the monetary and non-
monetary growth fairly across society.
3 In essence, the
analysis of inclusive growth is ultimately about whether,
and to what extent, economic development can go hand-
in-hand with an improvement in the quality of life of all
population groups.
There are currently a number of analyses of how inclusive
growth can not only be interpreted and defi ned, but also
measured.4 These approaches are based on the manifold
efforts and proposals to measure welfare in an economy.
Above all, the report by Stiglitz, Sen and Fitoussi has
breathed new life into the question about the most ap-
propriate method for measuring and evaluating welfare.5
An expanded concept of welfare goes far beyond the per
capita income commonly used. Distribution and sustain-
ability targets beyond gross domestic product (GDP) are
explicitly included in the analysis, and policy measures
can be formulated accordingly.
An early OECD approach to inclusive growth was based
on measuring the multidimensional living standards of dif-
3 OECD: All on Board. Making Inclusive Growth Happen, Paris 2014;
OECD: Report on the OECD Framework for Inclusive G rowth, Paris
2014.
4 E.g. OECD: Report on the OECD Framewor k for Inclusive Growth, op.
cit.; C. Benner, M. Pastor: Inclusive Economy Indicators. Frame-
work & Indicator Recommendations, New York 2016.
5 J.E. Stiglitz, A. Sen, J.-P. Fitoussi: Report by the Commission
on the Measurement of Economic Pe rformance and Social Progress,
Paris 2009.
ZBW – Leibniz Information Centre for Economics 185
Inclusive Growth
Table 1
OECD concept for measuring inclusive growth
Note: Own classifi cation of the type of indicator: economic outcome; distributive outcome, supply-side factor and overall outcome.
Source: OECD: Opportunities for All. A Framework for Policy Action on Inclusive Growth, Paris 2018, p. 27; own adaptation.
ferent population groups.6 The method used indicators
for the three dimensions of income, work and health. The
aim was to measure whether certain population groups
could improve their position with regard to these indica-
tors or not.
A further approach of the OECD is based on a number
of different previous works and initiatives (e.g. Going for
Growth, Jobs Strategy).7 Table 1 shows the four catego-
ries of the measurement dashboard:
6 R. Boarini, F. Murtin, P. Schreyer: Inclusive Growth: The OECD
Measurement Framework, OECD Statistics Working Papers No. 6,
Paris 2015.
7 OECD: Oppor tunitie s for All. A Framework for Policy Action on Inclu-
sive Growth, Paris 2018.
1. Growth and ensuring equitable sharing of benefi ts
from growth
2. Inclusive and well-functioning markets
3. Equal opportunities and foundations for future pros-
perity
4. Governance
A total of 24 indicators have been defi ned for these four
categories, all based on internationally comparable sta-
tistics regularly compiled by the OECD. The background
for the OECD’s various measurement approaches to in-
clusive growth is partly formed by the recommendations
of the Stiglitz/Sen/Fitoussi Commission,8 and the OECD’s
analyses of welfare and distribution based on said rec-
8 J.E. Stiglitz, A. Sen, J.-P. Fitoussi, op. cit.
Categor y Core indic ator Typ e
1. Grow th an d
ensuring equitable
sharing of benefi ts
from growth
1.1 GDP-per-capita grow th (%) Economic
1.2 Median income growth and level (%; USD PPP) Distributive
1.3 S80/20 share of income (ratio) Distributive
1.4 Bottom 40% wea lth share and top 10% wealth share (% of household net wealth) Distributive
1.5 Life expectancy (number of years) Overall
1.6 Mortality from outdoor air pollution (deaths per million inhabitants) Overall
1.7 Relative poverty rate (%) Distributive
2. Inclusive and
well-functioning
markets
2.1 Annual labour productivit y growth and level (%; USD PPP) Economic
2.2 Employment-to-population ratio (%) Economic
2.3 Earnings dispersion (inter-decile ratio) Distributive
2.4 Female wage gap (%) Distributive
2.5 Involuntary part-time employment (%) Economic
2.6 Digital access (busines ses using cloud computing services) (%) Supply-side
2.7 Share of SME loans in total business loans (%) Supply-side
3. Equal opp ortunities and foun-
dations of
future prosperity
3.1 Variation in science performance explained by students’ socio-economic status (%) Distributive
3.2 Correlation of earnings outcomes across generations (coeffi cient) Distributive
3.3 Childcare enrolment rate (children aged 0-2) (%) Supply-side
3.4 Young people neither employed nor in education & training (18-24) (%) Economic
3.5 Share of adults who score below Level 1 in both literacy and numeracy (%) Economic
3.6 Regional life expectancy gap (% dif ference) Distributive
3.7 Resilient students (%) Overall
4. Governance 4.1 Confi dence in government (%) Overall
4.2 Voter turnout (%) Overall
4.3 Female political participation (%) Overall
Intereconomics 2019 | 3
186
Inclusive Growth
ommendations.9 The OECD approach to inclusive growth
can therefore essentially be placed within the context of a
distribution analysis. This is evident from a number of in-
dicators describing distributive outcomes: S80/S20 share
of income, bottom 40% and top 10% wealth share, rela-
tive poverty rate, earnings dispersion, female wage gap
and correlation of earnings outcomes across generations.
The fact that the concept of inclusive growth has now
also entered the political agenda is visible, for example,
in the ten-point plan for inclusive growth published by the
German Federal Ministry of Economics and Technology
during the 2017 election campaign in Germany.10 This
represented the fi rst prominent derivation of the rather
academic debate that set the political agenda of the Ger-
man government. The concrete reception of the concept
of inclusive growth also revealed the arbitrariness with
which the theory is interpreted in political practice. Ten
sections of the plan discussed defi cits in the achievement
of important political goals and potential countermeas-
ures. While at the target level (the targets being priority
for investment, good framework conditions for innovation,
digital strategy 2025, high employment level with better
wages) an understanding is likely possible even with dif-
ferent economic policy positions, there are still strikingly
different views on the selection and interpretation of the
indicators used – and even more so on the derivation of
political recommendations.
Outline of an alternative concept
Conventional approaches to measuring welfare and in-
clusive growth usually start with the growth process, so
that result variables such as GDP and indicators of in-
come distribution (e.g. income shares by decile, median
income, earnings spread) are in the foreground. This en-
compasses two conceptual diffi culties: on the one hand,
the question of whether growth is inclusive is primarily
answered by the result or outcome of macroeconomic
activity. This presupposes a normative guideline for as-
sessing a certain income distribution resulting from the
production process. This, in turn, raises questions about
what qualifi es as a socially fair or equitable distribution,
the level at which an existing degree of personal inequal-
ity is considered unfair and how regional differences in
distribution are to be assessed.
In addition to these normative problems in assessing eco-
nomic growth and the associated distribution of income,
9 OECD: Divided We Stand: Why Inequality Keeps Rising, Pa ris 2011;
OECD: How’s Life? Measuring Well-being, Paris 2011.
10 Bundesministerium für Wir tschaf t und Energie: Deutschland – stark
und gerecht! Ein Zehn -Punkte-Plan für inklusives Wachstum, Berlin
2017.
a number of measurement concepts for inclusive growth
do not distinguish between outcome indicators and those
indicators that contribute to, or allow for, certain results.
Thus, indicators such as investment, education, employ-
ment and political freedom can be understood as out-
come measures of economic growth on the one hand, but
also as deter minan ts of growth on the oth er. In Table 1, we
have classifi ed the single indicators as overall outcome,
distributive outcome, economic outcome or supply-side
oriented. Even if such a distinction is made conceptually
in the respective measurement approach, the two dimen-
sions overlap again in an overall assessment. This, how-
ever, leaves open which indicators are ultimately to be
regarded as important and which as less important, how
the individual facts can be compared and whether they
are at all accessible for an integrated assessment.11
Focus on income generation
The following explanations allow for a change of perspec-
tive towards an ‘inclusive production function’.12 Here, the
focus is exclusively on which institutions infl uence or de-
termine the outcomes of the economic process. Such a
concept starts with the growth process and the associ-
ated income generation (see Table 2). By focusing on the
supply side, one can avoid making a normative assess-
ment of the income distribution and an evaluation of the
fairness of the results. Nonetheless, the proposed con-
cept cannot do without normative defi nitions.
Above all, the observed commingling of outcome indica-
tors and process or supply-side indicators to measure
inclusive growth should be avoided. Table 1 (column 4)
shows the different types of indicators. The analytical
11 D. Brümmerhoff, M. Grömling: Volkswirtschaftliche Gesa-
mtrechnungen, 10th ed., Berlin, Bo ston 2015, p. 335.
12 See for details M. Grömling, H.-P. Klös: „Inklusives Wachstum“ –
Potenziale und Grenzen eines Konzepts. Eine institutionenökonomis-
che Analyse, IW-Analysen No. 126, Cologne 2018.
Table 2
Theoretical framework
Source: Authors‘ own depiction.
Focus on → Prioritisation / consequence
Growth process / supply side → Income generation
Growth theory → Theoretical reference
Growth factors → Factor markets
Equal opportunities → Fairnes s
Institutions → Political starting point
Impact analysis → Trade offs / complementarities
ZBW – Leibniz Information Centre for Economics 187
Inclusive Growth
Figure 1
Institutions and outcomes
Source: Authors’ own depiction.
separation of outcome indicators on the one hand, and
the determinants of the outcome on the other have al-
ready been addressed in a number of studies. While the
OECD approach is aimed at fairness of outcomes and a
corresponding improvement in the situation of individual
population groups, it explicitly calls for the results orien-
tation to be supplemented by a process orientation. Ac-
cordingly, all population groups should be able to con-
tribute to the growth process – with an explicit focus on
obviously less included groups. The supply side is central
to our understanding of inclusive growth.
Focus on opportunities
According to our defi
nition, inclusive growth is about
creating opportunities and access to broader participa-
tion in economic life. In this context, one can refer to the
‘capability’ approach put forward by Sen. Accordingly, a
person’s welfare depends on his or her chances. These
are largely determined by political freedoms and social
opportunities such as education and health. Roemer and
Trannoy provide a comprehensive overview of the many
theoretical concepts for analysing and measuring equal-
ity of opportunity.13 Ali and Son have developed a social
opportunity function in the context of inclusive growth to
measure the distribution of opportunities within a socie-
ty.14 This process orientation is also clearly refl ected in the
proposal and measurement approach of the Rockefeller
Foundation.15 However, a clear separation of outcome
and process indicators is not implemented here either.
Focus on institutions
From an institutional-economic perspective, the extent of
inclusive growth depends crucially on whether the institu-
tions relevant for economic development have an inclu-
sive effect and whether all members of society can there-
fore contribute to economic life to the same degree or to
an extent perceived as subjectively suffi cient, and thus to
income generation. Since technical progress and struc-
tural change can also devalue human capital and thus
reduce the employability of those affected, the design of
labour market and educational institutions, for example, is
of decisive importance with regards to whether and how
well (re-)integration into employment and economic life
succeeds.
13 J. Roemer, A. Trannoy: Equality of Opportunity: Theory and Meas-
urement, in: Journal of Ec omomic Literature, Vol. 54, No. 4, 2016, pp.
1288 -1332.
14 I. Ali, H.H. Son: Measuring Inclusive Growth, in: Asian Development
Review, Vol. 24, No. 1, 2007, pp. 11-31, Asian Development Bank.
15 C. Benner, M. Pastor: Inclusive Economy Indicators. Framework
and Indicator Recommendations, New York 2016.
This basic idea can also be found in the institutional-
economic development approach proposed by Acemo-
glu and Robinson.16 The presence of inclusive growth is
synonymous with the availability of inclusive economic
institutions (see Figure 1). The assessment and underlying
measurement of inclusive growth at the level of income
generation is ultimately about looking at and evaluating
the openness of the central economic markets to differ-
ent population groups. The growth process can qualify
as inclusive if society as a whole can participate in the
generation of income. In other words, growth is not inclu-
sive if members of society are restricted in their participa-
tion in the economic process and their ability to generate
income is thus impaired. Such an institutional-economic
approach should therefore be understood within the con-
text of equal opportunities and not against a backdrop of
fair results.
Focus on growth theory
Another criticism of conventional sets of social indicators
is that they are not distinguishably based on an economic
theory. Instead, they are often pure data collections with-
out a systematic theoretical reference. The approach
pursued here, on the other hand, is distinctly based on
growth theory or on a macroeconomic production func-
tion. Additionally, a growth function can explicitly be ex-
tended by further independent variables (e.g. institutions,
regulations) to a so-called ‘inclusive growth accounting’.
Pinpointed impact analysis
Inclusive institutions can increase growth and the as-
sociated macroeconomic income, but this is not always
16 D. Acemoglu, J. Robinson: Why Nations Fail: The Origins of Pow-
er, Prosperity and Pover ty, New York 2012.
Inclusive or
exclusive?
Inclusive or
exclusive?
Inclusive or
exclusive?
Institutions OutcomesAccess to factor
markets
Economic and
political
Labour, human capital
capital, technology
Economic and
distributional
Intereconomics 2019 | 3
188
Inclusive Growth
the case. The correlation between the inclusive quality
of institutions and growth performance must always be
transmitted via the dependent variables. Ultimately, this
interdependence can only be answered empirically. Con-
sequently, an empirical impact analysis would have to be
carried out for each of the relevant institutions, showing
the microeconomic and macroeconomic consequences
of introducing or varying individual institutional or regula-
tory parameters.
When selecting the relevant institutions, a fundamental
distinction should be made between the direct effects of
inclusive institutions on the one hand, and their indirect
effects on growth, distribution and welfare on the other.
This is done in order to avoid the commingling with out-
come indicators being criticised here. An example of this
is regulation aimed at facilitating work-life balance: in
such a case, women’s participation in the labour market
would be facilitated. The direct effect of such inclusive in-
stitutions would be a higher employment rate for women.
However, a higher labour force participation rate itself is
not a direct indicator of the inclusiveness of an institution,
but is already an outcome indicator. The corresponding
welfare effect would then become visible in income levels
and income distribution by gender. Accordingly, numer-
ous other labour, education and capital market institu-
tions initially lead to direct effects on participation rates
by age, gender or origin and indirectly to welfare effects,
visible for example in the level and distribution of income
by age, gender, region and origin. However, this analytical
differentiation is not made in conventional indicator sys-
tems.
Finally, when discussing the relationship between indi-
vidual institutions and individual outcome variables, one
must assess whether the basically inclusive institutions
actually have an inclusive effect. Attention must be paid
to potential trade-offs that can make a basically inclusive
institution, i.e. a law or an administrative regulation, ex-
clusive in the sense that they have a restrictive effect on
access and lead to insider-outsider effects. For example,
pronounced employment protection can lead to a higher
level of shelter for the employees benefi ting from it (insid-
ers), and at the same time impair companies’ propensity
to hire as a result of hig he r l abour c osts. This wea kens the
income earning potential of the existing unemployed or
those who are newly unemployed because of the higher
labour costs (outsiders). In this case, an institution meant
to be inclusive ultimately acts as a labour market barrier
and is thus exclusive. Whether and to what extent such
trade-offs become effective is a question that can only be
answered empirically on a case-by-case basis.
Central economic markets
If one pursues the basic idea that inclusive institutions
c
an be both drivers of growth as well as determinants
of its outcomes, then the next step is to look at individ-
ual growth factors and the institutions central to them. If
growth theory is taken as a starting point and a theoretical
foundation (see Table 2), then it is essentially a matter of
labour input, education and human capital stock, physical
capital stock and technical knowledge. This in turn forms
the theoretical and conceptual reference to ‘growth ac-
counting’. Specifi c factor markets can be defi ned for each
of these growth factors. In addition, the political system
or the quality of political institutions is also included in the
analysis. Figure 2 portrays the relevant economic markets
and some selected institutions.
In contrast to existing indicator systems for measuring
and evaluating inclusive growth, the supply-oriented ap-
proach proposed here assesses the openness of access
Figure 2
Synopsis of selected growth-relevant institutions
Source: M. Grömling, H.-P. Klös: Inklusives Wachstum – Potenziale und Grenzen eines Konzepts. Eine institutionenökonomische Analyse, IW-An-
alysen No. 126, Cologne 2018, p. 18.
• Bargaining autonomy
• Labour law
• Working time law
• Co-determination
Educational federalism
Vocational training
Research/Innovation
Early childhood support
•
•
•
•
Business start-ups
Knowledge capital
Competition law
Access to capital markets
•
•
•
•
Labour Market Capital MarketEducational System
System
Political
ZBW – Leibniz Information Centre for Economics 189
Inclusive Growth
to these central factor markets and to the political system,
and thus the opportunities for participation of individual
population groups in economic income generation.17 The
institutions responsible for the openness of these mar-
kets are therefore conceptually relevant for the analysis,
measurement and evaluation of inclusive growth.
Labour market institutions
One of the most important determinants of economic
growth and participation in an economic system is the
labour market. In a conventional ‘growth accounting’,
labour input is the most important factor in overall eco-
nomic activity. From a macroeconomic point of view,
labour income dominates income generation.18 Par-
ticipation in economic life through gainful employment,
combined with the opportunity to climb the income lad-
der by entering the labour market, is a central anchor of
legitimacy for market economies. Youth unemployment,
particularly long-term unemployment, represents a seri-
ous burden for social cohesion in societies. At the same
time, it signals an economic waste of growth and income
opportunities.
The labour market situation in a country is the result of a
multitude of intervening variables and institutions. These
central institutions have grown historically and together
determine employment conditions and the volume of em-
ployment. Important institutions of the labour market are,
for example (especially with regard to Germany):
• Wage autonomy: There are central interrelationships
between the specifi c wage-fi nding systems, for ex-
ample with their respective links to regional collective
agreements, and important labour market indicators
– employment, remuneration, working conditions –
which are also important in the assessment of inclusive
growth.19
• Co-determination: Company co-determination regu-
lates, for example, the working conditions in the re-
spective companies. This raises the question of wheth-
er and how this institution can be interpreted and eval-
uated as inclusive.
• Labour law: This regulates, for example, protection
against dismissal and fi xed-term rules. Here, too, the
17 For a comprehensive analysis see M. Grömling, H.-P. Klös, op. cit.
18 M. Grömling: Measuring the share of labour in GDP, in: World Eco-
nomics, Vol. 18, No. 4, London 2017, pp. 187-210.
19 ILO, OECD: Building Trust in a Cha nging World of Work. The Global
Deal for Decent Work and Inclusive G rowth Flagship Report 2018,
Genf, Paris 2018.
effects on macroeconomic employment and income
are decisive. Labour law does not have an inclusive ef-
fect, for example, if it is accompanied by insider-out-
sider problems because it develops into a labour mar-
ket barrier for certain groups.
• Working time law: Internationalisation and digitisation
can make greater working time fl exibility necessary at
the company level. Legal regulations that oppose this
may create barriers to entry and hamper more inclu-
sive growth.
Institutions of the education system
Human capital describes the qualitative dimension of la-
bour, i.e. the knowledge and professional skills of the la-
bour force. Investment in human capital, such as the bet-
ter education and qualifi cation of workers, can increase
productivity and income levels. With regard to the inclu-
siveness of growth, this means that access to the edu-
cation system in an economy must be as open as pos-
sible. If, on the other hand, there are barriers to access for
certain socio-economic groups in the education system,
individuals will have limited options for income genera-
tion. Here, institutions must be defi ned that are relevant
to equal opportunities in human capital formation. Essen-
tially, it is about equal starting opportunity, justifi ed from
both a justice perspective and a decidedly economic per-
spective. Institutions in the following areas of education
are mentionable:
• Educational federalism: One can examine whether
there are relevant regional educational differences at
varying federal levels as a result of regional institutional
decisions.
• Early support: Early childhood education has a major
infl uence on labour market opportunities and upward
mobility. Individual groups such as single parents and
families with a migration background may deserve
special attention on this front.
• Vocational education and training: Countries differ con-
siderably in terms of vocational training, vertical per-
meability in the education system and upward mobil-
ity. The design of vocational education and training
thus has an impact on the employment opportunities
of different population groups, especially on the em-
ployment and income effects as a result of progressive
digitisation.
• Research and development: Innovation policy, for ex-
ample, infl uences which regions and which popula-
Intereconomics 2019 | 3
190
Inclusive Growth
Figure 3
Interplay of economic and political institutions
Institutional development approach by Acemoglu and Robinson
Sources: M. Grömling, H.-P. Klös: Inklusives Wachstum – Poten-
ziale und Grenzen eines Konzepts. Eine institutionenökonomische Ana-
lyse, IW-Analysen No. 126, Cologne 2018, p. 56; based on D. Acemo-
glu, J. Robinson: Why Nations Fail: The Origins of Power, Prosperity
and Poverty, New York 2012.
tion groups can participate in the so-called ‘digital
revolution’.20 Access to digital infrastructure and digital
competence will be important institutional factors that
will also infl uence the employment and income paths
of different population groups.21
Capital market institutions
In general, the capital stock relevant for growth includes
buildings, machinery, equipment and intellectual property
(e.g. the results of research and development). The entre-
preneurial capital stock is an essential determinant of the
production level of an economy, and thus, a source of in-
come and welfare. In addition, the government provides
public buildings and infrastructure (e.g. transport net-
works). Lastly, technical knowledge plays a decisive role
in growth and welfare. In this context, the degree of open
access to new knowledge capital is particularly relevant.
Accordingly, within the framework of an inclusive growth
approach, one must also examine whether there are ac-
cess restrictions for certain socio-economic groups or
companies to a broadly understood capital market. In
concrete terms, this means whether different groups of
a society have adequate opportunities for capital forma-
tion, whether the fi nancial markets are equally open for
fi nancing investments and whether the economic op-
portunities of digitisation and the generation and use of
the associated intangible capital are broadly usable. The
question is whether the different socio-economic groups
or types of enterprises participate in the corresponding
capital formation and can thus also generate the associ-
ated capital income, or whether there is only limited com-
petition here, which ultimately leads to market power and
corresponding income concentration. The guiding prin-
ciple for forward-looking expectations is the hypothesis
that the growth and distribution effects of technological
change, with extensive digitisation in almost all economic
and social areas and the rapid advance of applications of
artifi cial intelligence (AI), depend on how broad sections
of the population succeed in participating in this develop-
ment and how the emergence of a ‘digital divide’ can be
prevented.22
20 J. Bienert, K.-G. Deutsch, H.-P. Klös, K.-H. Röhl: Skills, entre-
preneurship and new busines s models. Ways to rejuvenate the Ger-
man industrial model, IW-Policy Paper No. 13, Cologne 2018.
21 A. Korinek, J.E. Stiglitz: Artifi cial Intelligence and Its Implications
for Income Distribu tion and Unemployment, NBER Working Paper
No. 24174, Cambridge MA 2017.
22 Bertelsmann Stif tung: Technological Innovation and Inclusive Grow th
in Germany, Gütersloh 2017; J. Bienert, K.-G. Deutsch, H.-P.
Klös, K.-H. Röhl, op. cit.
Against this backdrop, the following considerations can
be drawn about the design of the relevant institutions:
• Business start-ups: Within the context of inclusive
growth, it is advisable to analyse which groups of peo-
ple found business start-ups and whether there are
group-specifi c barriers.
• Capital market access: The World Bank has set up a
database for more than 140 countries to measure fi -
nancial inclusion. Applied to the concept of inclusive
growth, the access of different socio-economic groups
to fi nancial services can be examined.
• Access to knowledge capital: So called intangibles are
gaining importance for economic growth. According-
ly, with regard to this production factor, one can also
examine whether property rights are neutrally defi ned
and guaranteed or whether there is a concentration
and corresponding market power.
• Competition law: In principle, this should counteract a
concentration of power and monopolisation. Further-
more, it needs to be clarifi ed whether and to what ex-
tent digitisation already poses new challenges to com-
petition law today.
Political Institutions
Long-term growth is directly determined by the produc-
tion factors mentioned above. However, the general
framework conditions that affect the functioning of the
Political
Institutions
Inclusive
Extractive
VIRTUOUS
CIRCLE
VICIOUS
CIRCLE
Extractive
Economic Institutions
Inclusive
ZBW – Leibniz Information Centre for Economics 191
Inclusive Growth
market system and the social security system in an econ-
omy also contribute to economic development. Political
participation also plays an important role. According to
Acemoglu and Robinson,23 the quality of economic insti-
tutions determines economic results. Political institutions
in turn determine whether there are any good economic
institutions at all (see Figure 3). The state as a constitu-
tional state defi nes property rights, assigns them to indi-
viduals and guarantees them. Only the guarantee of prop-
erty rights provides incentives for individuals and corpo-
rations to accumulate production factors and use them in
the production process. Against this backdrop, political
institutions should also be taken into account in inclusive
growth analysis.
The political dimension depends on whether broad soci-
etal participation of all sections of the population in the
formation of political will and decision-making (‘public
choice’) is guaranteed, or whether political power is con-
centrated within certain groups or an elite. It also de-
pends on whether political decisions are controlled by a
freely elected and representative parliament. Last but not
least, the question arises as to whether an independent
judiciary exists to enforce law and order neutrally. In this
context, the concept of social capital also plays a role,
such as trust in government and administration or civic
engagement of society.24 Political institutions are inclusive
if the members of a society are involved in political deci-
sion-making and control regardless of age, gender, origin,
religion or region. Inclusive political institutions have an
intrinsic value for the functioning of civil society and the
people’s understanding of the state, and thus also infl u-
ence economic processes, such as investments in pro-
duction factors, which in turn, impact the production and
income in a country.25
Limits and potentials of inclusive growth concepts
The concept of inclusive growth, predominantly devel-
oped and promoted by international organisations, is
becoming more and more relevant for both international
and national policymaking. The fundamental idea that
the formulation of economic policy goals should pursue
othe r aims in additio n to increasin g per c apita incom e a nd
that special attention should be paid to ensuring that all
groups of the population benefi t to an adequate extent
from general growth has now become fi rmly established
23 D. Acemoglu, J. Robinson, op. cit.
24 K. Scrivens, C. Smith: Four Interpretations of Social Capital. An
Agenda for Measurement, OECD Statistics Working Paper No. 6, Par-
is 2013.
25 R. La Porta, F. Lopez-de-Silanes, A. Shleifer: The Economic
Consequences of Legal Origin, in: Journal of Economic Literature,
Vol. 46, No. 2, 2008, pp. 285-332.
in national policy agendas. There is widespread agree-
ment that distribution issues should occupy a fi rm place
in analyses of the welfare effects of economic develop-
ment.
Based on most conventional indicators, Germany can
be assessed as inclusive when it comes to the participa-
tion of broad groups of the population in the outcomes
of the growth process.26 On the basis of outcome indica-
tors – which are indispensable for a welfare assessment –
Germany performs well. Key distribution indicators, such
as income inequality, improved in the stronger growth
years since 2005. However, there is widespread scepti-
cism about the potential consequences of digitisation,
which will motivate future political action. The basic idea
of inclusive growth will gain further relevance as a con-
sequence of rapid technological developments because
there is concern that gains from innovations will not ben-
efi t all population groups (“winner takes all”) and that the
majority of the technically less-educated population will
experience fears of a loss of control.
In our opinion, the concept of inclusive growth requires
further conceptual development along the following lines
in order to gain greater acceptance and applicability in
concrete policymaking:27
1. The conventional inclusive growth concepts have been
too normative to date. They primarily gather indicators
that are based on value judgements. The growth con-
text is not always established in the selection of indi-
cators. The target indicators used are predominantly
outcome indicators, not independent determinants of
growth. However, policy cannot have a direct impact
on results, but can at best use the target-means re-
lationships between certain parameter changes in in-
dividual growth factors and the results of the growth
process.
2. What is therefore required is a concept for a produc-
tion function to achieve inclusive growth in which, by
varying growth-relevant institutions, broad groups of
the population can participate as much as possible in
economic activities and thereby in macroeconomic in-
come generation. This is a change of perspective com-
pared to the conventional approach and requires the
identifi cation of growth-determining factors and the
relevant institutional set-up.
26 G. Schmid: Inclusive Growth: The Case of Germany, IZA Policy Pa-
per No. 139, Bonn 2018.
27 M. Grömling, H.-P. Klös: Inclusive growth – A primer for a supply
side concept, IW-Policy Paper No. 1, Cologne 2019.
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192
Inclusive Growth
3. Another shortcoming of conventional approaches is
the neglect of complementarities or substitutional ef-
fects for individual variables. For example, institutional
changes making fi xed-term employment more diffi -
cult can block access to the labour market for certain
groups of people. A measure meant to be inclusive can
thus prove to be exclusive. In addition, certain meas-
ures in individual policy areas can mitigate, neutralise
or reinforce the effects of measures in other areas.
4. The conventional approaches are also lacking in terms
of content and empiricism. In view of rapid technologi-
cal developments due to digitisation and artifi cial in-
telligence, participation in economic development will
depend more than ever on access to knowledge and
capital, basic technical and infrastructural equipment
as well as stable political conditions such as data and
cyber security. All these points play almost no role in
the current debate on inclusive growth. This makes it
all the more important to consistently promote the de-
velopment of human capital in a digitalised economy.
This must be taken into account (for example in the
form of certain educational formats) in an analysis and
measurement concept.
5. Furthermore, the question arises as to the extent
to which the interpretation and analysis of inclusive
growth presented here can also be implemented em-
pirically. The analytical concept outlined here is ac-
companied by a strong supply-side focus in com-
parison to other approaches for measuring inclusive
growth. A central goal should be to avoid a commin-
gling of process-oriented and outcome-oriented indi-
cators. This allows for stronger analytical clarity and a
focus on institutions that are relevant for ensuring that
the members of society are involved as comprehen-
sively as possible in the generation of income.
6. Lastly, an empirical implementation of the proposed
approach is not yet possible or only possible to a very
limited extent. This is also due to the fact that relevant
data for specifi c socio-economic groups is not avail-
able. Limitations in economic interpretation also arise
when the focus is solely on the measurability of facts or
the existence of available indicators. It is therefore pos-
sible that measurements are being made not of what
should be measured, but instead only of what can be
measured or has already been measured.
