The case for inclusive growth

The concept of inclusive growth has become central to economic development due to rising economic inequality and its effects on human well-being and prosperity (see sidebar, “What is inclusive growth?”).1 Indeed, despite the longest economic expansion in US history through much of the 2010s,2 the Gini3 index reached 0.485 in 2018—the most inequitable level of income distribution recorded in the United States since the Census Bureau began tracking the metric, and the highest level of income inequality among Group of Seven countries.4 In terms of wealth inequality, the top 1 percent hold nearly 40 percent of the nation’s net worth as of 2019, the highest on record since the Federal Reserve began collecting survey data in 1989.5

This inequality has disproportionately affected communities of color, women, those less physically abled, and certain geographies. For example, between January 1972 and December 2019, other than during the aftermath of recessions, the unemployment rate for Black workers has stayed at or above twice the rate for white workers.6 On the wealth front, the racial wealth gap between Black and white households grew from $100,000 in 1992 to $164,100 in 2019.7 The impact of shrinking such inequities would be huge: eliminating disparities in wealth between Black and white households and Hispanic and white households could result in the addition of $2 trillion to $3 trillion of incremental annual GDP to the US economy.8The economic impact of closing the racial wealth gap,” August 2019; Ingrid Millán, Nick Noel, Lucy Pérez, and Alfonso Pulido, “US Hispanic and Latino lives and livelihoods in the recovery from COVID-19,” September 2020. Furthermore, unlocking women’s economic potential in the workforce over the coming years could add $2.1 trillion in GDP by 2025.9The power of parity: Advancing women’s equality in the United States,” McKinsey Global Institute, April 2016.

At the same time, as of the end of 2020, more than 70 million Americans—approximately 40 percent of US workers—had applied for unemployment benefits since the start of the COVID-19 pandemic.10 And the US economy contracted by 3.5 percent on an annual basis in 2020 alone and may take several years to recover.11 Indeed, COVID-19 is accelerating trends that existed before the pandemic, and without a more inclusive recovery, existing disparities may further calcify.

These realities demand that leaders work to both stimulate the US economy and make it more inclusive, ensuring that the COVID-19 pandemic does not considerably increase material deprivation, lead to financial ruin or downward mobility, or result in permanent, detrimental changes to our economic structure. We believe that to achieve long-term, sustainable, and inclusive growth, public-, private-, and social-sector leaders must work together to embed equity in the development process.

Why growth and inclusion reinforce each other

The perceived tension between inclusion and growth—and the false belief that they should be addressed separately—has hampered efforts to pursue and achieve inclusive growth. But in fact, insufficient economic inclusion is a threat to prosperity, and it is difficult to improve economic mobility and resource distribution without increasing the overall size of the economy (Exhibit 1).

Increases in both prosperity and resource distribution are required for inclusive growth.

Research suggests that up to 40 percent of GDP growth in the US economy between 1960 and 2010 can be attributed to greater participation of women and people of color in the labor force through improved talent allocation.12 Furthermore, economies grow faster and more vigorously—not to mention for longer periods—when prosperity is more equally distributed across segments of the population.13

Additionally, research shows that today’s inequalities may be self-perpetuating: as living standards and social mobility stagnate, many populations fall into a vicious cycle of underdevelopment that threatens long-term growth for everyone. Families and communities aren’t able to make investments in their children and their physical and social environments, creating barriers to human and place-based development that thwart access to opportunities. In turn, this limits the ability of these groups to participate in growth processes, and, worse, their environments are left without the ingredients to build momentum and reverse these dynamics.14

How leaders can work together to achieve inclusive growth

In working closely with state and local governments, private-sector and civic leaders, and communities across the country, we’ve developed a three-phased approach practitioners can take to realize a more inclusive economy (Exhibit 2). This approach is informed by an understanding that any successful effort will need to bring together technical expertise, adaptive approaches and mindsets, and community engagement to alter adverse dynamics in complex environments.

Three actions, informed by three underlying principles, can help leaders successfully pursue inclusive growth.

1. Diagnose the current state and develop a bold vision for change

Too often, economic-development planning happens to communities rather than with them. To achieve an economy in which the benefits are shared across, for example, race, class, gender, and geography, leaders must take an approach that is fully rooted in the human perspective, directly engaging diverse voices and giving decision-making authority to the communities they seek to empower.

It is equally important for leaders to understand the starting point and measure the potential opportunity of addressing key outcomes. Robust fact gathering that highlights not just current-day realities but also the rich historical context of communities can help stakeholders fully appreciate the depth and complexities of the challenges they face.

Finally, aligning public-, private-, and social-sector leaders on a bold, measurable aspiration that is anchored in facts and the assets of the community provides a North Star by which to navigate measurable goals, interventions, and investments.

2. Design comprehensive community- and human-centered interventions

The first step in designing comprehensive interventions is to identify barriers to and opportunities for impact. Practitioners should consider conducting assessments to identify the root causes impeding key journeys and forces leading to inequality. Understanding these forces will allow practitioners to assess the trade-offs of different interventions and also design targeted interventions that will generate more equitable outcomes.

For example, there is a clear homeownership gap in the United States across demographic groups. Compared with white Americans, Black Americans have 30 percent lower homeownership rates, Hispanic Americans have 26 percent lower rates, and Asian Americans have 16 percent lower rates. Numerous barriers contribute to these discrepancies, including economic, market, sociocultural, and institutional factors. Whereas traditional interventions address a single barrier at a time, true change will require coordinated action from public-, private-, and social-sector stakeholders to comprehensively address bottlenecks across all barriers.

3. Take coordinated action to ensure long-term accountability and momentum

Public-, private-, and social-sector leaders should consider implementing critical infrastructure to help sustain progress and achieve inclusive economic outcomes over time. For example, they can invest in monitoring and evaluation systems that collect feedback, launch pilot initiatives to help establish proofs of concept, and establish ways of meaningfully engaging internal and external stakeholders to inform actions and refinements. Also, it is important for leaders to continually and transparently communicate progress with communities and change course as needed.

It will take strong shifts in resources and capabilities, stakeholder interests and organizational incentives, and trust across social networks to sustain execution that ensures inclusion occurs alongside growth in the development process. By working together, public-, private-, and social-sector leaders can achieve this to help various demographic groups overcome the barriers that have kept them from fully participating in and contributing to an economy that benefits everyone.

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