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FEATURE STORY

Shared Prosperity: A New Goal for a Changing World

May 8, 2013

Inequality often weakens a nation's economy and social stability.

STORY HIGHLIGHTS
  • The World Bank Group will be promoting shared prosperity, or inclusive economic growth.
  • A new Shared Prosperity Indicator will track income growth among a nation's bottom 40 percent.
  • The new indicator marks a departure from how economists have traditionally measured a country's progress.

The World Bank Group’s mission to help free the world of poverty has been translated into two clearly articulated goals. The first goal is a moral imperative to end extreme poverty for the 1.2 billion people who continue to live with hunger and destitution.

Along with lingering poverty, groups of people are fall behind in some developing countries that enjoyed strong economic growth over the past decade – in many cases with widening inequality as a result. The second goal established by the World Bank Group is therefore to promote shared prosperity.

Jaime Saavedra-Chanduvi, the Bank’s Acting Vice President for Poverty Reduction and Economic Management, explains why the institution decided to focus on shared prosperity, and how this will guide its work in coming years.

 

What does the term “shared prosperity” mean for the Bank?

The shared prosperity goal captures two key elements, economic growth and equity, and it will seek to foster income growth among the bottom 40 percent of a country’s population. Without sustained economic growth, poor people are unlikely to increase their living standards.  But growth is not enough by itself. Improvement in the Shared Prosperity Indicator requires growth to be inclusive of the less well- off.

 Why is the Bank focusing on shared prosperity at this time?

We know that economic growth is sometimes accompanied by greater inequality and social exclusion. Our focus on shared prosperity reflects the fact that many countries are seeking rapid and sustained increases in living standards for all of their citizens, not just the privileged few. While ending extreme poverty by 2030 is a clear target and priority, our mission is not just about the poorest developing countries. We care about poor people wherever they are.

Open Quotes

Our focus on shared prosperity reflects the fact that many countries are seeking rapid and sustained increases in living standards for all of their citizens, not just the privileged few. Close Quotes

Jaime Saavedra-Chanduvi
Director, Poverty Reduction and Equity

Does the shared prosperity goal imply reducing inequality by redistributing wealth?

No. We need to focus first on growing, as fast as possible, the welfare of the less well off. But we’re not suggesting that countries redistribute an economic pie of a certain size, or to take from the rich and give to the poor.

Rather, we’re saying that if a country can grow the size of its pie, while at the same time share it in ways that boost the income of the bottom 40 percent of its population, then it is moving toward shared prosperity. So the goal combines the notions of rising prosperity and equity.

We’ll be tracking growth in incomes of the bottom 40 percent, and due to the fact that that this will be done alongside national income growth monitoring (which countries already do), countries will see directly how the less well-off are faring.

We do not use as an indicator of the shared prosperity goal the growth of the bottom 40 percent relative to the average growth rate, because there are periods in the development process when incomes of the poor are rising fast, and that is a good outcome even if there is some increase in inequality. But we also recognize that steady increases in inequality are not socially and politically sustainable over long periods.

It’s a fact that no country has transitioned from middle to high-income status with high levels of inequality. A persistent rise in inequality (or being stuck at high levels of inequality) will ultimately limit income growth of the less well-off and, eventually, limit economic growth itself.

How can the new Shared Prosperity Indicator measure progress over time?

Tracking the incomes of the bottom 40 percent of a nation’s population is a departure from how economists have traditionally measured progress – by focusing mainly on growth in the gross domestic product (GDP) per capita.

The assumption in the past was that a growing GDP would trickle down to the poor – well, now we know that’s not always the case. The Shared Prosperity Indicator will instead take the direct route of measuring income growth of those we are concerned about: the less-well off.

What will it take for a country to achieve shared prosperity?

The path to shared prosperity for a country will depend on both context and time.  There are many pathways to shared prosperity, and they often complement one another. Plus, different societies assign specific roles to the government, firms, civil society and citizens in general.  Let me mention a few examples.

First, prosperity can be broad-based if growth generates jobs and economic opportunities for all segments of the population. The private sector is typically the main engine job creation, but the government plays a critical role by implementing policies and regulations that promote a favorable environment to maintain high investment rates, and by investing in labor skills needed to build a modern and dynamic workforce.

However, the pattern of growth has to be such that it generates income opportunities for the poor. So the poverty impact of natural resources-based growth that does not pull the rest of the economy will be very different than growth sustained by agricultural productivity increases, for example.

Second, there is a need for a healthy and stable “social contract” in every country that commits to investments that improve and equalize opportunities for all citizens.

For children and youth, for example, this would mean providing universal access to early childhood development, health, nutrition, education and basic infrastructure. For women in many societies, it would mean dismantling barriers to their participation in economic, social, and political life.

A social contract would also commit to investments in safety nets that protect the poor and vulnerable against deprivation and shocks. And it should offer mechanisms that support the government’s commitments – most importantly, a tax system that creates incentives for economic growth and fairness.

Are countries interested in implementing social contracts to promote greater and more equal access to opportunities?

All countries have different histories and needs and no one solution will fit all. Progress toward equitable access to opportunities for all citizens requires long-term vision, willingness to build solid institutions, social change and strong political will.

The Bank can help shape programs and policies that meet our shared prosperity goal. We will continue to work closely with our partners and client countries to develop solutions that fit their specific needs.