Measuring Inclusive Growth in Developing Countries: Composite Index Approach and Sectoral Transformation Analysis

Inclusive growth is increasingly recognized as being critical to sustainable development, particularly in the context of rising income inequality and social polarization around the globe. Effective policy requires robust measurement, prompting the need to move beyond GDP and supplement traditional economic indicators. This study proposes a novel inclusive growth index (IGI) for 73 developing countries. The index is constructed using factor analysis with principal component analysis (PCA) across four pillars: economy, living conditions, equality, and governance. Our results reveal significant heterogeneity among developing countries, largely driven by variations in economic development and governance. Further analysis using OLS regression explores the impact of sectoral transformation, demonstrating a statistically significant positive relationship between shifts from the agricultural to the service sector and the IGI. These findings provide valuable insights for policymakers seeking to create more opportunities and target interventions to achieve more inclusive growth in developing economies.