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Promoting Inclusive Growth

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This blog post by Caroline Heider is cross-posted from the IEG World Bank Group blog.

Children that would benefit from inclusive growth policies.

To promote inclusive growth the Bank Group needs to get the diagnostics of inclusion right before designing meaningful interventions that level the playing field for all.

During its Annual Meetings earlier this month, The World Bank Group discussed with its shareholders and partners how to transform economies to benefit the poor, and in particular the need to bring the public and private sectors together to better combat global poverty.  

The challenges are formidable. Growth projections have been down-graded in light of the slow recovery from past crises and the impact of new ones; millions of people are jobless and millions more are seeking to enter the job market; technology provides opportunities for incredible advances but much of it goes towards jobless growth; wealth inequality leads to an increased concentration of wealth in the hands of a few, who exercise outsized influence on policies.

As these issues were discussed, I was left with a feeling that the underlying, age-old challenge remained: building trust between the public and the private sector to work towards shared prosperity for the population at large. Was the public sector capable and efficient, was the private sector paying its taxes rather than profiteering? Were either of them doing the best they could to ensure citizens benefited from good governance as much as services?

And, what is the role of The World Bank Group in this scenario? Being a partner to the public and the private sector, the work of the Bank – from analytics and advisory, through investments, trade and project finance, equity and policy lending, to guarantees, partnerships and monitoring – has played a vital role in the development arena.

IEG has looked at a number of areas that shed light on how well the Bank Group is promoting inclusive growth, in particular for private sector development. Here are some lessons.

Creating a level playing field

Two of our evaluations concern creating a level playing field for private sector development. One is on investment climate reforms, the other on targeted support to small and medium sized enterprises (SME) development. The results of investment climate reforms were positive when it comes to making it easier for business to invest. However, the impact of these changes on investments, jobs, business creation, and growth is not straightforward. Likewise, when promoting SME development, it was far from clear which hindrances the Bank Group interventions addressed, and whether and how SME development was helped. Did the interventions, for instance, contribute to growth or jobs, and, if so, for whom. In promoting regulatory reforms, the Bank Group has focused on the cost to businesses and less so on the broader effects of reforms on inclusion or shared prosperity.

Enabling private sector growth by supporting innovation capacity

In our evaluation of innovation and entrepreneurship IEG found that the Bank Group supported its client countries in a number of ways - by supporting public and private research and development capacity and by strengthening entrepreneurial capabilities. The interventions tried, to a lesser extent, to bring together actors from public and private sector. Overall, the evaluation found that the Bank Group needed a clearer vision of how to support client countries with a systemic approach that brings private and public actors together to facilitate and promote innovation in a way that ensures that those living in extreme poverty also benefit.

Better services through partnership

Our evaluation of Public-Private Partnerships (PPPs) shows that the Bank Group has made significant contributions to building capacities, which is essential to overcome local gaps in skills and resources. Overall, investments in these partnerships have produced expected outcomes, often defined in aspects relevant to cash flow, such as the number of people that obtained access to infrastructure. However, success was not defined in terms of whether the poor – or bottom 40% – benefited from the services, or whether the quality of the services improved.

Investing in people

The same evaluation suggested that the fiscal implications of PPPs were not sufficiently considered in the design and implementation of the partnerships, which risked weakening a government’s fiscal position and eroding its capacity to invest in people.  Another evaluation suggests that government policies on pooling of revenues and risks, namely choices for financing the health sector, can create incentives for the behavior and performance of health service providers, health insurers, and individuals, and make these systems more inclusive.

To promote inclusive growth the Bank Group needs to get the diagnostics of inclusion right before designing meaningful interventions that actually level the playing field for all. It needs to understand where and how to facilitate the relationship between public and private actors, and how to strengthen each in their respective roles in boosting shared prosperity.  The Bank cannot assume that the distributional effects will occur by themselves.

This blog entry by Caroline Heider was originally posted on the IEG World Bank Group's blog roll.

Additional resources on inclusive growth: