Davos briefing: Inclusive growth

As the international community prepares for the World Economic Forum Annual Meeting 2014 in Davos, inequality remains at the top of the global agenda – and with good reason.

Over the last two decades, inequality has been on the rise in most OECD countries. This presents a particular challenge as the latest trends in the 2000s showed a widening gap between rich and poor, not only in some of the already high-inequality countries such as Israel and the United States, but also – for the first time – in traditionally low-inequality countries, such as Germany, Denmark and Sweden (and other Nordic countries), where inequality grew more than anywhere else in the 2000s.

In the US, the top 1% of earners last year earned 19% of all income, according to Internal Revenue Service figures. This is the top one per cent’s highest share for 100 years and US President Barack Obama has placed the issue of inequality at the top of the political agenda.

In Europe, the stark contrast between rich and poor has been intensified by huge rises in unemployment and underemployment, especially among the young.

In developing countries, grinding poverty and exclusion from the formal economy, often in the shadow of the shining skyscrapers built from the unshared proceeds of natural resources, generate not only economic poverty, but also a dangerous cocktail of helplessness and anger.

For myriad reasons, today’s current economic models appear broken, apparently no longer able to drive sustainable, more inclusive growth; instead we see dangerous societal divisions. The challenge of creating more inclusive societies has rarely been more of an imperative than it is now.

The problem of inequality is starkest in the world’s great cities, which account for around 80% of global GDP. So-called megacities – defined as those with populations of over 10 million – are magnets for those seeking to escape poverty.

Megacities are growing at great speed. The UN forecasts suggest that by 2030 almost 5 billion people will live in cities and 2 billion of those will live in slums. In the words of Donald Kaberuka, the president of the African Development Bank, many cities in emerging countries are little more than pockets of wealth surrounded by seas of despair.

Great inequalities are in evidence within cities in developed countries, but it is undoubtedly in emerging countries where urbanization is growing fastest and wealth disparity is most acute and apparent. Even in some of Africa’s resource-rich countries, while demand for luxury goods among a super-rich elite booms, most people live on little more than US$ 1 a day.

According to the Population Reference Bureau in the US, the population of sub-Saharan Africa will more than double by 2050 to over 2 billion. As these megacities grow, the poorest are forced ever outwards from the centre, often to live in appalling conditions without access to basic services. Already the time it takes to travel to and from places of work can be extreme – those commuting from townships outside Johannesburg can spend six hours a day travelling.

Key questions arise in managing these megacities: How can education and health programmes be delivered effectively? What infrastructure investment is needed? How can disruptive technological innovations be deployed to best effect? How can we redesign these megacities to be more liveable for the vast majority?

When economic benefits are spread in a way that creates vast inequality and a sense of powerlessness, the ties that hold a society together come under strain; in some extremes they will rupture.

We have seen the results of this in many diverse countries, from the rise of the Arab Spring to riots and protests in the UK, Turkey, India, Brazil and Ukraine, and the spread of the Occupy anti-globalization movement. The causes of these protests may be complex, but at root they have in common a sense of injustice and disenfranchisement, a belief that civil disobedience is the only way to be heard. There is deepening distrust in government, institutions and big business. Fear and resentment is also contributing to a rise, particularly in Europe, of xenophobic right-wing politics.

Inclusivity must deliver broader involvement in decision-making and public policy. It also means allowing fair access to a functioning justice system, education, utilities and other public services.

Questions arise as to whether new growth models should focus not only on economic development, but also new metrics, such as ethics, good governance, gender equality, healthcare, welfare and public safety.

Designing a more inclusive future is not only a moral imperative, it is essential if we are to build sustainable economies not fractured by social divisions. It is also economically rational to bring the marginalized into the formal economy to take part in productive employment in which they pay taxes and have a voice.

There will be no silver bullet solution. Different countries will have specific priorities and solutions will be diverse. But, according to those who participated in the Summit on the Global Agenda 2013 in Abu Dhabi, there are common policies that can apply almost everywhere.

A commitment to education is vital. How can we ensure that all poor children receive a level of education allowing them to break the legacy of poverty they will otherwise inherit from their parents? In some countries, conditional cash transfers are made to poor families – in which they receive money on condition their children attend school, for example.

Resource-rich countries need policies that give everyone a fairer share of revenues generated from what must be regarded as national assets. Alaska pays cash to all its citizens from the proceeds of its oil riches, a model that could be replicated elsewhere.

Finance is another crucial issue. How do we ensure the entrepreneurs of tomorrow – the wealth and job creators – are fostered? Most importantly, how can we ensure they have access to the lending they need to build their businesses? An estimated, 30 million young people worldwide currently meet the criteria for credit, but have no access to finance.

Technology needs to be harnessed imaginatively. Technological innovation can destroy jobs by radically disrupting a market, but it can also bring about economic empowerment and create many different jobs by opening up new markets.

Meeting these challenges requires a combination of creative thinking and partnerships between multiple stakeholders: governments, businesses, NGOs and individuals. Certainly, those worst affected by the problem of marginalization must be party to the solution.

Driving Inclusive Growth is one of four thematic pillars of the World Economic Forum Annual Meeting 2014. This is a summary of discussions on this topic from experts in the Network of Global Agenda Councils, led by Martina Gmür.

Image: Children skate in an artificial ice rink in the slum district of Petare in Caracas. REUTERS/Carlos Garcia Rawlins