Earlier this year Treasurer Joe Hockey negotiated a significant commitment among G20 Finance Ministers to aim for an additional 2% of global growth over the next five years. As countries develop their action plans for achieving this goal in the lead-up to the next G20 Finance Ministers' meeting in September, it's worth considering whether this is the right target.
While the 2% target has been highlighted as a major achievement of Australia's chairing of the G20 so far — getting these nations to agree to anything these days is laudable — it is interesting that we have placed GDP growth at the centre of the G20 agenda. This commitment comes at a time when the economic orthodoxy of pursing growth above all else is being challenged.
Whether it is the work of economist Thomas Piketty, the OECD, World Bank, or even the IMF, economists everywhere are talking about the idea of 'inclusive growth'.
Inclusive growth seeks to consider not only the pace of growth but also its distributional impact. The World Bank argues that the 'rapid pace of growth is unquestionably necessary for substantial poverty reduction, but for this growth to be sustainable in the long run, it should be broad-based across sectors, and inclusive of the large part of a country's labour force.'
While the concept of inclusive growth and related ideas of equity economics and social inclusion have been discussed for some time, it really came to the fore in economic theory following the global financial crisis. What has emerged in recent studies is that despite the extraordinary accumulation of wealth and economic growth, inequality has increased, particularly in the US but also in Australia and other countries. This has spurred an urgent debate on broader ideas around growth and its impact.
Of course, growth is a good thing. But what the G20's 2% growth target fails to do is reflect the lessons of recent years that growth alone will not necessarily deliver benefits to everyone. The IMF has argued that tackling inequality is not antithetical to striving for growth. Instead the opposite is true: rising inequality is a drag on growth.
To provide further leadership at the G20, Australia should seek to build on the 2% growth target by adding the additional measure of inclusive growth. One option would be to commit to a 2% improvement in the incomes of the bottom 20% of households over the next five years. This would be simple, measurable, achievable and proportionate. It would incentivise nations to consider the distributional impact of growth and begin to address the inequality that persists in many nations, including our own.
It won't address all issues of measuring inclusiveness, particularly as income is just one measure of the distributional impact of growth, but it would be a start.
Treasurer Hockey has an opportunity to build on his G20 success when he meets finance ministers again in September. By including even one measure that broadens the discussion from growth to inclusive growth, Australia would be leading the effort to finally grapple with inequality within and between our nations. Now that's a goal worth striving for.