Social welfare functions that assign weights to individuals based on their income levels can be used to document the relative importance of growth and inequality changes for changes in social welfare. This method is applied in a new working paper by David Dollar, Tatjana Kleineberg, and Aart Kraay. They find that, in a large panel of industrial and developing countries over the past 40 years, most of the cross-country and over-time variation in changes in social welfare is due to changes in average incomes. In contrast, the changes in inequality observed during this period are on average much smaller than changes in average incomes, are uncorrelated with changes in average incomes, and have contributed relatively little to changes in social welfare.
Philippe Aghion, Harvard economics professor and director of Industrial Organization at the Centre for Economic and Policy Research (CEPR) delivered a lecture at the Bank on April 17 on 'What do we Learn from Shumpeterian Growth Theory?'
It was interesting to hear from the co-founder of the Shumpeterian paradigm about the relationship between economic growth, innovation, creative destruction, and competition. Aghion’s approach is to examine how various factors interact with local entrepreneurs’ incentives to either innovate or to imitate frontier technologies.
Last week the President of the World Bank Group launched at the Spring Meetings the report "Prosperity for All." One of the interesting areas the note reported on was the interrelationship between growth, movements in the income distribution and poverty reduction.
There are various ways of showing the impact of growth on people’s income and its interrelationship with a country’s income distribution. In comparing distributions over time, one of the more useful graphs is a Pen’s Parade (figure 1a), named after another Dutch economist as so many inequality or poverty measures are (other examples are the Theil index and Thorbecke for the Foster-Greer-Thorbecke Poverty Measure).
This paper reviews the empirical evidence on the existence of poverty traps, understood as self-reinforcing mechanisms through which poor individuals or countries remain poor. Poverty traps, understood as self-reinforcing mechanisms through which poor individuals or countries remain poor, have captured the interest of many development policy makers, because poverty traps provide a theoretically coherent explanation for persistent poverty. They also suggest that temporary policy interventions may have long-term effects on poverty. However, a review of the reduced-form empirical evidence suggests that truly stagnant incomes of the sort predicted by standard models of poverty traps are in fact quite rare. Read the entire paper here.
Recently three IMF economists published a paper arguing that redistribution is in general pro-growth (Ostry et al. 2014). The paper caused a stir as it dismisses right-wing beliefs that redistribution hurts growth. However, even people sympathetic to the ideas of inclusive growth and equality of opportunity find this finding problematic. One reason is that the authors rely on a measure of redistribution that misrepresents the true cost of redistribution in an economy. Another has to do with the omission of factors that affect positively the income growth of the poor and vulnerable, such as employment. This omission would exaggerate the importance of equality through redistribution as a source of growth and underplay the importance of structural transformation and investments directed towards sectors that use unskilled labor more intensively, and therefore have the potential to generate inclusive growth and productive employment for the poor segments of the population.
World Bank Lead Economist, Eric Le Borgne discusses the focus of new support for Jordan.
The G20 Ministers of Finance and Central Bank Governors met in Sydney over the past weekend. An important outcome of the meeting is a commitment to lift G20’s collective GDP (which accounts for about 85 percent of world GDP) by more than 2 percent above the trajectory implied by current policies over the coming five years. This will amount to over US$2 trillion more in real terms. The higher growth would help generate significant additional jobs.
The targeted increase of more than 2 percent is based on a report prepared by the IMF with inputs from the OECD and the World Bank Group (WBG). The WBG contributions were prepared by a team drawn from various units and led by the Development Economics Vice Presidency. The report finds that with a feasible set of policy reforms, an increase in growth of that order of magnitude is achievable.
The announcement comes at a time when growth is slow, unemployment is high and the economy is still suffering from already ballooning subsidies -amounting to 9 percent of GDP- that have kept Egypt’s fiscal deficit at an exceptionally high 13.7 percent of GDP. At least seven countries in the Middle East and North Africa Region —including all those in transition after the Arab Spring (such as Egypt)--are trapped in a low-growth-poor-policy loop.
Shanta Devarajan, World Bank Chief Economist for the Middle East and North Africa region, discusses the latest issue of the Quarterly Economic Brief.