The Challenge of Inclusive Growth

Guillermo Larrain

Universidad de Chile

Overview

1. Overall agreement with approach. The idea that a multidimensional approach and a multidisciplinary analysis is needed is perfect.

2. However, its results are difficult to translate into simple messages to the population. Simplicity is valuable, but I am not sure we fully assess some of the problems it create.

3. It seems clear that, face to simple metrics such as indexes which become popular (competitiveness, economic freedom, etc…), governments tend to look for ways to increase their relative position in the ranking.

4. Hence, the ranking tend to bias the way policies are designed and implemented, they affect the priorities given to various initiatives.

Overview

5. An index on inclusiveness developed by the OECD/CEPAL could be powerful and will certainly affect policies, in part because in order to improve in the ranking governments will tend to simulate the indexes.

6. This is understandable pitfall of the approach is that it pretends to put such a multidimensional approach within a single numerical variable, a social welfare function (SWFs).

7. Two additional comments on the specific methodology:a) We know SFWs can be shaped differently reflecting different views on the

trade off between equity/efficiency and this is normative. • The presentation recognizes there are normative judgements but at first sight they

seem to be from a different nature (ie., representative equivalent income), within an already chosen option of such a trade off. This is not clear from the presentation.

• If a democratic society such as Sweden chose to increase inequality, should it be considered as a negative entrance into the formula?

b) Some aspects of inclusiveness are difficult or impossible to measure.

Overview

8. The (Income-Jobs-Health) choice has the merit of being measurable but

a) Given crude measures of jobs/health, why didn’t use other equally crude measures of other dimensions?

b) For LA, Chile has quite high health or personal security indexes at all levels, but others (education, social connections, work-life balance,..) do not.

9. One additional aspect, which could be embedded in “environmental quality” or “work-life balance” but which at least large Latin-American metropoles require is transportation

Conceptual Challenges for Emerging Economies

1. How to apply ita) Which order? -> prioritiesb) Which dose?c) Which speed?

2. Example: Labor reformsa) Jobs issues: income, productivity, competitivenessb) Social issues: work/life balance, subjective

wellbeing, education, training, unionization (social connections), health,…

Multidimensional approach from the perspective of an Emerging Economy

1. Preconditions:a) Budget constraint: multidimensional approach

requires resourcesb) Democratic rule: governance, transparency

o Prioritieso Trade offs

Four additional dimensions of Inclusiveness important in Latin America

1. Productive structures:a) Elinor Olstrom: governance of “commons”, but more generally

different ways by which production can be organized. b) In LA, the emphasis on growth has to do with incentives, and this

leads us to promote productive structures which are as close as possible to for-profit-firms. By exagerating this effort, at least in Chile, we have eventually crowd out other possible ways of spontaneous organization of production. Inclusiveness must also recognize that there are other ways in which communities may organise itself.

2. Democratic Institutions:a) Hacker-Pierson: inequality in US as an outcome of the political

process by means of the political influence of unions.b) In LA not only democratic regimes are weaker than the average OECD,

but the political influence of interest groups in more unbalanced.

Four additional dimensions of Inclusiveness important in Latin America

3. Tradeoff regulation-trust:a) Aghion-Cahuc: minimum wage or part time legislation in Franceb) In LA there is no trust, and this is costly. How to engineer a retreat

from the State in conditions in which social partners can in reasonable terms replace general rules imposed from the State.

4. Behavioral economicsa) Shiller: democratizing finance, humanizing financeb) There is a trade off. On the one hand, financial integration is risky.

This has left the financial sector with relatively little international competition as compared with other sectors. This is complex because this sector provides “services” to people, and producing services requires particular characteristics, in particular corporate governance. Hence, protection has meant releasing pressure on domestic interest groups which dominate finance which have no interest in humanizing finance.