A country’s economic growth is usually measured in terms of a change in gross domestic product, or GDP. This is a measure of everything a country produces in a year. When a country’s production increases year-over-year, it is said to be experiencing economic growth. Why a country experiences economic growth is a question economists have been trying to answer for decades. What makes factories and workers in a particular country more productive? Why does one country produce more from one year to the next when its neighbor produces less? The answers to these questions could help lift millions of people out of poverty.
World Bank economists, based in country offices and in the Washington, DC, headquarters, follow certain methods to examine the sources of economic growth within a country and better understand its drivers. Often their inquiries are guided by questions that come directly from countries. That is, leaders in developing nations might want to fix specific aspects of their economy or grow in a particular way. They might ask a World Bank team:
• How can we industrialize?
• How can we boost exports or diversify trade?
• How can we create jobs?
Techniques: Finding out what is wrong
World Bank economists use different methodologies to understand more systematically what is hindering growth. They try to identify the most important hurdles, or “binding constraints,” that need to be overcome for a country to grow faster. For example, they might ask: What is hindering investment in country X? That might lead to subsequent questions: Is it that investors don’t see profits, but have to spread their gains across taxes, bribes and other costs? Do entrepreneurs have poor access to technology from abroad? Is the government not investing in public infrastructure or education?
Economists use a range of tools to do these analyses. Some of them are listed below, and they are further explained here and here.
· Growth Diagnostics: This methodology sets up a decision-tree that helps investigators systematically evaluate constraints to economic growth in any given country.
· Growth Accounting: This approach decomposes GDP growth into different inputs (capital, labor) and productivity. It can point to deteriorations in productivity, which may suggest particular underlying problems with growth that will require further investigation.
· Rate of Return to Capital: This test can shed light on how efficiently a country uses its capital stock, including privately held capital, such as factory machinery, or public infrastructure, such as roads and railways.
· Business Diagnostics and Dynamics (BuDDy): This tool helps analysts understand formal sector enterprise dynamics, including the pace at which industries are raising productivity and creating jobs.
· Trade Competitiveness Diagnostic Toolkit: This tool structures inquiry into a country’s trade policies, infrastructure, and business environment. It helps countries identify economic biases caused by tariffs, exchange rate and tax regimes, and other regulations.
Is growth benefitting the poor?
A main mission of the World Bank Group is to promote “inclusive growth,” or growth that helps the poor as well as the middle class and wealthy. This was codified as the first of four special themes for IDA 17, the most recent round of funding committed to helping the world’s poorest countries. The theme “speaks to the need to maintain the growth momentum in IDA countries while ensuring that the opportunities and benefits of growth are broadly distributed throughout the population, including the poorest and most disadvantaged groups.” The World Bank recognizes that rising inequality has undermined progress in poverty reduction in IDA countries, and that increased economic opportunity for marginalized groups, including women and youth, can make growth more robust and sustainable. Accordingly, diagnostics that focus on the patterns – not pace – of growth feature prominently in the World Bank’s ongoing development of a standardized Systematic Country Diagnostic.
Currently, World Bank economists create country-specific reports – such as Country Economic Memoranda, Economic Updates, and Growth Reports – to address questions related to economic growth. These reports are critical inputs for the Bank’s dialogue with country authorities and, together with sector-specific reports, frame country strategies. Some examples of recent reports are listed below:
· Indonesia Economic Quarterly (March 2014): In a regular assessment of the state of the economy in Indonesia, World Bank economists find the economic growth rate is 5.7 percent year-on-year, but likely to moderate to 5.3 percent in 2014. It finds that the composition of growth has tilted more towards net exports while fixed investment remains subdued.
· Greening India’s Growth (March 2014): A new book finds that although the past decade of rapid economic growth has brought many benefits to India, the environment has suffered. The population has been exposed to serious air and water pollution that costs India $80 billion per year—5.7% of its economy.
· Georgia Rising: Sustaining Rapid Economic Growth (July 2013): This report finds that economic growth averaged 6.1 percent a year during 2004–12. But sustaining strong growth in Georgia will require new policies that help support high investment from domestic sources and sustained, rapid productivity growth in the tradable sectors.