The most important factors driving economic development and poverty reduction are widely debated (e.g. Handbook of Economic Growth Vol.1 and Vol.2, by P. Aghion). DFID (2008) summarises eight essential conditions for economic growth and highlights lessons from donor experience, including the need to prioritise binding constraints based on country-specific diagnostic research. Examples of factors to consider by PSD programmes include:
1. Macro-economic factors: Macro-economic stability is generally seen as a pre-condition for inclusive growth. Fiscal policy can have a direct impact on the poor through the government’s overall fiscal stance and the distributional effects of tax policy and public spending. Monetary and exchange rate policies can further affect the incomes of the poor, either directly (e.g. due to inflation) or through the country’s overall competitiveness and growth. Macro-economic policies however need to be complemented by other supporting policies and a conducive legal and regulatory business environment in order provide the foundations for inclusive growth (see relevant reading under competency PSD4-add link).
2. Political factors: Policies and technical solutions to development often fail in practice because of institutional and governance issues – the formal and informal rules and power structures through which state and non-state actors interact. Key implications include (a) basing policy reform processes on a sound understanding of the local political economy and b) integrating economic development strategies with efforts to promote more inclusive and effective governance structures (although evidence on effective practice is still limited).
3. Security and conflict: Some economists argue that security is a pre-condition for growth, while others focus on the linkages between low levels of economic development, inequality and conflict. Practical experiences highlight the role of the private sector in providing an important route out of poverty even during conflict, and its potential to contribute to economic development and stability.
4. Social factors, including gender norms: Social factors, including gender norms have an important impact on the formal and informal rules that govern private enterprise and affect prospects for inclusive economic growth. A broad body of research confirms that women’s economic empowerment (WEE) is a critical enabler of business growth and inclusive economic development.
5. Environmental factors:
The natural environment is central to economic activity and growth, including by providing the resources needed to produce goods and services. As such, in order to be sustainable, economic development depends on due consideration for the environment, including the causes and consequences of climate change. ‘Green Growth’ strategies seek to address this, although their impact on poverty reduction and inclusion remains debated.