Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides - February 2014

Economists are increasingly focusing on the links between rising inequality, crisis risk, and sustainable growth. Rajan (2010) underscores how inequality intensified the leverage and financial cycle, sowing the seeds of crisis, while Stiglitz (2012) stresses the role of politicaleconomy factors (especially the influence of the rich) in allowing financial excess to balloon ahead of the crisis. Berg and Ostry (2011) document the multi-decade and multi-country evidence that greater equality can help sustain growth. This work builds on a tentative consensus in the growth literature that inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of major shocks, and thus that it tends to reduce the pace and durability of growth (Persson and Tabellini, 1994; Easterly, 2007; Berg, Ostry and Zettelmeyer, 2012).

That equality seems to drive higher and more sustainable growth does not, in itself, support efforts to redistribute. In particular, inequality may impede growth at least in part because it calls forth efforts to redistribute through the fiscal system, efforts that themselves may undermine growth. In such a situation, even if inequality is bad for growth, taxes and transfers may be precisely the wrong remedy. While the literature on this score remains controversial, the notion of a tradeoff between redistribution and growth seems deeply embedded in policymakers’ consciousness. The negative effect of redistributive policies is indeed the central theme of Arthur Okun’s famous 1975 book on the tradeoffs between efficiency and equity and on the efficiency “leaks” that efforts to reduce inequality engender.

We nonetheless see an important positive conclusion from our look at the big picture. Extreme caution about redistribution—and thus inaction—is unlikely to be appropriate in many cases. On average, across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes, unless they were extreme. And the resulting narrowing of inequality helped support faster and more durable growth, apart from ethical, political, or broader social considerations.

The world economic recovery continues, more or less as predicted. Indeed, our growth forecasts are nearly unchanged since the January 2011 WEO Update and can be summarized in three numbers: We expect the world economy to grow at about 4½ percent a year in both 2011 and 2012, but with advanced economies growing at only 2½ percent while emerging and developing economies grow at a much higher 6½ percent.
Earlier fears of a double-dip recession—which we did not share—have not materialized. The main worry was that in advanced economies, after an initial recovery driven by the inventory cycle and fiscal stimulus, growth would fizzle. The inventory cycle is now largely over and fiscal stimulus has turned to fiscal consolidation, but private demand has, for the most part, taken the baton.
Fears have turned to commodity prices. Commodity prices have increased more than expected, reflecting a combination of strong demand growth and supply shocks. Although these increases conjure up the specter of 1970s-style stagflation, they appear unlikely to derail the recovery. In advanced economies, the decreasing share of oil, the disappearance of wage indexation, and the anchoring of inflation expectations all combine to suggest there will be only small effects on growth and core inflation. The challenge will be stronger however in emerging and developing economies, where the consumption share of food and fuel is larger and the credibility of monetary policy is often weaker.

This paper probes the drivers, dimensions, achievements, and outcomes of technological innovations carried out by SMEs in the auto components, electronics, and machine tool sectors of Bangalore in India. Further, it ascertains the growth rates of innovative SMEs vis-à-vis non-innovative SMEs in terms of sales turnover, employment, and investment. Thereafter, it probes the relationship between innovation and growth of SMEs by
(i) estimating a correlation between innovation sales and sales growth,
(ii) calculating innovation sales for high, medium, and low growth innovative SMEs and doing a aggregate one-way ANOVA, and
(iii) ascertaining the influence of innovation sales, along with investment growth and employment growth on gross value-added growth by means of multiple regression analysis. The paper brings out substantial evidence to argue that innovations of SMEs contributed to their growth.

It is commonly believed that the business environment in developing countries does not allow productive technology-based entrepreneurship to flourish. In this paper, we draw on the experience of Indian software firms where entrepreneurial growth has belied these predictions. This paper argues that the business models chosen by Indian firms were those that best aligned the country’s abundant labour resources and advantages to global demand. Many potentially higher value added opportunities struggled to attain success, but the qualitative value of experimental failures and the capability gaps they exposed was invaluable for collective managerial learning in the industry. Second, the paper also shows that the presence of growth opportunities and the success of firms stimulated institutional evolution to promote entrepreneurial growth. Last we show that the distinctive aggregate contribution of entrepreneurial firms was that they outperformed business houses and multinational subsidiaries in their more productive use of available capital resources whilst achieving similar levels of growth in output and employment.

This paper attempts to analyse the economic implications of the rise of China, India, Brazil and South Africa, for developing countries situated in the wider context of the world economy. It examines the possible impact of their rapid growth on industrialized countries and developing countries, which could be complementary or competitive and, on balance, positive or negative. In doing so, it considers the main channels of transmission, to focus on international trade, investment, finance and migration. The essential question is whether, in times to come, these four countries could be the new engines of growth for the world economy. The answer is that rapid growth in China already supports growth elsewhere, so far primarily as a market for exports, while India and Brazil have the potential to provide similar support, but South Africa does not yet exhibit such a potential. In future, these countries could also provide resources for investment and technologies for productivity. The transformation and catch-up could span half a century or longer. Even so, rapid growth in these large emerging economies is already beginning to change the balance of economic power in the world.

The Development Economics Vice Presidency (DEC) seeks to increase understanding of development policies and programs by providing intellectual leadership and analytical services to the Bank and the development community. DEC is the research and data arm of the World Bank. 
Under the leadership of the Senior Vice President and Chief Economist, DEC pursues three main business lines:
Development Research (research and knowledge creation)
Development Prospects (global monitoring and projections)
Development Data (international statistics, statistical capacity building and results monitoring)

Twin drivers, the global and the digital, constantly shift the sources of market advantage, forcing companies and countries to adapt. Firm internal functions suddenly become products to be bought in the market, products that generated premium prices suddenly become commodities, and the sources of differentiation for products and production processes evolve. It is not just that there is an increased pace of change, but that the market environment is inherently less predictable.
In a sense, this chapter asks the question of how wealthy nations stay wealthy amidst radical changes in competitive markets. In the conclusion I argue that traditional tools of strategy and policy analysis will not suffice. We have to consider the place of conscious experimentation in corporate and national adaptation.

The last decade of the 20th century saw great progress in parts of the world. But it also saw stagnation and setbacks, even in countries that had previously achieved the fastest rates of economic growth. These gaping differences and sharp reversals teach us much about what contributes to development. At the center is economic growth, not just its pace but—as important—also its quality. Both the sources and the patterns of growth shape development outcomes.

In a recent report on middle-income countries, Independent Evaluation Group (IEG) found that countries and the World Bank Group have been relatively effective in the overarching priority of promoting growth and reducing poverty, but not in addressing rising inequality, governance and corruption, and environmental degradation. Similar issues were raised in IEG’s 2006 Annual Report on Development Effectiveness (ARDE). Recent reports from the United Nations and other multilateral agencies such as the Asian Development Bank also document the concerns about these aspects of distribution and sustainability connected with growth. Following the analysis in The Quality of Growth (Thomas et al. 2000), this report takes “quality of growth” to mean the type of economic growth that especially reduces extreme poverty, narrows structural inequalities, protects the environment, and sustains the growth process itself.
This is a challenging report on the development role of fiscal policy. It provides a multidimensional perspective on development—combining income growth, equity, and environmental quality. The report’s concerns are at the core of the development policy debate. The underlying analysis combines a variety of data and methodological approaches—from standard cross-country growth regressions to project data and country experiences. The report is intended to stimulate discussion in this critical area, particularly where the challenges from environmental and climate change problems, rising income inequality, energy subsidies in the face of rapidly rising energy prices, and widely uneven progress in combating poverty are becoming more serious.

There has been much debate about how much India's poor have shared in the economic growth unleashed by economic reforms in the 1990s. The authors argue that India has probably maintained its 1980s rate of poverty reduction in the 1990s. However, there is considerable diversity in performance across states. This holds some important clues for understanding why economic growth has not done more for India's poor. India's economic growth in the 1990s has not been occurring in the states where it would have the most impact on poverty nationally. If not for the sectoral and geographic imbalance of growth, the national rate of growth would have generated a rate of poverty reduction that was double India's historical trend rate. States with relatively low levels of initial rural development and human capital development were not well-suited to reduce poverty in response to economic growth. The study's results are consistent with the view that achieving higher aggregate economic growth is only one element of an effective strategy for poverty reduction in India. The sectoral and geographic composition of growth is also important, as is the need to redress existing inequalities in human resource development and between rural and urban areas.