The literature on growth convergence and divergence is vast and deep. Some have argued that divergence is persistent. Lant Pritchett in his paper, “Divergence, Big Time” has argued that backwardness appeared to carry severe disadvantages that generated long-term divergence between growth in per capita incomes of developing countries compared to rich countries. Others have found evidence in favor of convergence. Arvind Subramanian, in his paper, “The hyperglobalization of Trade and its Future”, has argued in favor of convergence, since the number of developing countries experiencing catch-up has more than trebled (from 21 to 75 countries) and the rate of average catch-up has doubled from 1.5 percent per year to over 3 percent. However, what has been overlooked in this debate is the role that agriculture, manufacturing and services have played in growth convergence/divergence. Which of these sectors have played a bigger role in growth convergence?
Jason Furman, appointed by President Barack Obama as the Chairman of the Council of Economic Affairs, spoke yesterday at the World Bank about inclusive growth in the US. Furman said that average income for the bottom 90% grew strongly across all OECD countries starting in the 1950s, but has flattened in the US since the ‘70s. Furthermore, Furman added that capital income contributes more to overall inequality towards the upper end of the American income distribution.
Furman also pointed out that starting in 2000, labor share in US income started falling, largely because of globalization.
The following post is the first in a series exploring 'internet for development,' the theme of the World Bank's upcoming World Development Report 2016.
Why should we invest in internet access in developing countries when there are more important problems like providing clean toilets? That was one of the questions posed to Vint Cerf following his recent presentation on Emerging Internet Trends that will Shape the Global Economy here at the World Bank. Vint is one of the “Fathers of the Internet”. In the 1970s he was part of a small team that developed the protocols and standards that guide the open, global communication system that we all rely on every day. Today he is Google’s Chief Internet Evangelist and a preeminent thinker about the current state and future of the internet.
Vint’s presentation was the second seminar organized by the World Development Report 2016 (WDR): Internet for Development. This World Development Report (WDR) will look at the impact of the internet – in a broad sense – on businesses, people and governments. And it will evaluate policies in the information and communication technology (ICT) sector and in complementary sectors that will help countries receive the highest social and economic returns from those investments. In his wide-ranging talk and in a meeting with the WDR team, Vint touched on all of those issues. Here are a few of his thoughts.
Last week I had the privilege—and pleasure—of delivering a lecture series at the KDI School of Public Policy and Management. The KDI School is an educational arm of the Korea Development Institute, Korea’s leading and highly regarded economic policy think tank. I was much impressed by the KDI School’s program, which aims to foster leadership in economic development and public policy. Course participants are drawn from a variety of public institutions in emerging and developing economies. The School’s philosophy places a strong emphasis on the sharing of development experience among participants, peer learning, and dissemination of best practice. Korea’s own development history is rich in lessons for public policy, which the program seeks to share with participants drawn from across the globe. The School has positioned itself as an international hub for sharing knowledge on development among policymakers and practitioners, and its mission receives generous support from the Korean Government.
A big idea can be rejected. It might be illegal. It might mean political suicide. In the words of Marcelo Giugale, the World Bank’s director of Economic Policy and Poverty Reduction Programs for Africa, challenging conventional wisdom isn’t always easy. But in the realm of big ideas, the risk is part of the reward.
Is bigger always better? Economists have long debated what size firms are more likely to drive business expansion and job creation. In industrial countries like the United States, small (young) firms contribute up to two-thirds of all net job creation and account for a predominant share of innovation. (Source: McKinsey, Restarting the US small-business growth engine, November 2012). In developing countries, evidence from Ethiopia, Ghana and Madagascar shows that the vast majority of small operators remain small, and so are unlikely to create many decent jobs over time [Source: World Bank, Youth Employment, 2014]. By contrast, ‘big’ enterprises are seen as the best providers of employment opportunities and new technologies.
The difference in role and performance of small firms in developing and industrial countries reflects to a large extent their owners’ characteristics. In the US, small firm owners are generally more educated and wealthier than the average worker, while the opposite is true in most developing countries. This point was emphasized by E. Duflo and A. Banerjee in their famous book ‘Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty’ (Penguin, 2011). Most business owners in developing countries are considered to be ‘reluctant’ entrepreneurs; essentially unskilled workers that are pushed into entrepreneurship for lack of other feasible options for employment.
This is also very much a reality in Tanzania where small business owners have few skills and limited financial and physical assets. Of the three million non-farm businesses operating in the country, almost 90% of business owners are confined in self-employment. Only 3% of business owners possess post-secondary level education. As a result, their businesses are generally small, informal, unspecialized, young and unproductive. They also tend to be extremely fragile with high exit rates, and operate sporadically during the year. Put simply, most small businesses are not well equipped to expand and become competitive.
Over the last few years, Brazil’s growth has significantly decelerated. Accompanying this slowdown, a change in commentary on Brazil’s economic future has emerged, and is reflected in a recent ratings downgrade of Brazilian sovereign paper and an overall much-bleaker growth outlook both for the near and medium term.
In a new 'Economic Premise' note, Philip Schellekens and I examine three contributing factors to this change in sentiment: macroeconomic management, the external environment, and microeconomic fundamentals. Among these, we argue that the relative lack of progress on the microeconomic reform agenda has been far more detrimental to the growth outlook than either the credibility cost of recent macroeconomic management or the negative influence of a less supportive external environment.
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.