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Inclusive Growth or Else

The decision to place inequality at the center of the discussion at Davos this year was a promising development. But actual solutions remain undeveloped, and concern about widening economic disparities within many countries remains inadequate, which must change if the current global economic recovery is to continue.

LONDON/WASHINGTON, DC – At this year’s World Economic Forum meeting in Davos, Switzerland, participants did not question the basic building blocks of growth in today’s global economy: free markets, good governance, and investment in human capital and infrastructure. But they did criticize how unfairly the benefits of growth are being distributed. Rightly so: without a strong policy response aimed at building a more inclusive growth model, rising populism and economic nationalism will impair the functioning of markets and overall macroeconomic stability – potentially cutting short the current global recovery.

Virtually every economic policy has an impact on both aggregate income and its distribution. Some reforms – such as those promoting impartiality and efficiency of legal institutions – are good for growth and equity (in this case, equality of opportunity). Incidence results for deregulation of product and labor markets are more mixed, possibly as a result of data limitations and the specific circumstances of each reform.

By contrast, when it comes to financial deregulation and the liberalization of international capital flows, there are clear equity-efficiency tradeoffs: they boost growth, but they also tend to increase inequality. The evidence points in a similar direction for some measures aimed at liberalizing current-account transactions (trade in goods and services).

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