BRIEF

Growth

September 21, 2017



Context

Poverty has been falling sharply in the developing world, with the number of people living in extreme poverty falling to 10.7 percent for the first time in 2013. There is a consensus among development professionals that economic growth has been the single most important instrument for this decline in poverty in developing countries.

Rising economic growth provides the basis for expanding incomes and employment and also the resources needed by the government to finance programs for social uplift. Such growth is most effective when it is (a) inclusive in the sense it provides opportunities to all segments of society -- the poor, marginalized and disadvantaged; the middle class; and the wealthy -- to participate in the growth process, and (b) sustainable in ensuring that it only takes from nature what is required and does not disadvantage future generations. Rising growth leads to prosperity, which in turn enhances the well-being of people.

But high growth does not necessarily provide opportunities to every segment of society – particularly to the poor and disadvantaged – to engage in the growth process and benefit from it. Also, high growth does not always safeguard the environment.

The World Bank Group recognizes that while the pace of growth is important, the patterns of growth that protect the environment and emphasize increased opportunities for the poor and marginalized groups, including women and youth, can make growth more robust and sustainable.


Strategy

While there is no perfect model of a growth strategy that can be replicated or simply transplanted from one country to another,  policy research work done in the past – most notably the 2008 work of the Commission on Growth and Development that produced “The Growth Report” – provides information on a set of policies that may be relevant to countries looking to sustain high growth. Ultimately a country must assess its own specific circumstances and decide which of the existing policy and institutional constraints demand immediate attention and which ones can be addressed later.

World Bank economists covering all member countries,  follow specific methods to examine potential sources of economic growth within a country and better understand its drivers.  They work together with countries to fix specific aspects of their economy or grow in a particular way.  Specifically they may provide advice on:

  • How can a country industrialize?
  • How can a country avoid the middle income trap?
  • How can exports be boost or trade diversified?
  • How can jobs be create?
  • How can a country promote environmentally sustainable inclusive growth?

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.  

Economists use a range of tools to do these analyses.  Some of them are listed below:

  • 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.

Results

On a daily basis, Bank economists engage with developing countries to works with them to stimulate strong, sustainable and inclusive growth.

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.  

  • Kazakhstan – The Economy has bottomed out: What’s Next?  - Kazakhstan’s economy continued to suffer from a protracted slowdown in global oil prices and weak domestic demand. Real GDP growth declined from 1.2 percent in 2015 to 1 percent in 2016. In the medium term, Kazakhstan’s economic growth is projected to pick up slowly, but to remain much lower than before 2014. Real GDP rates will hover around 3 percent in 2017 to 2019.
  • Ethiopia’s Great Growth Run (November 2015): This report concluded that Ethiopia has witnessed rapid economic growth, with real gross domestic product (GDP) growth averaging 10.9% between 2004 and 2014, which is lifting the country from being the second poorest in the world in 2000 to becoming a middle income country by 2025, if it continues its current growth trajectory.