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Global economic activity is picking up with a long-awaited cyclical recovery in investment, manufacturing, and trade, according to Chapter 1 of this World Economic Outlook. World growth is expected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018. Stronger activity, expectations of more robust global demand, reduced deflationary pressures, and optimistic financial markets are all upside developments. But structural impediments to a stronger recovery and a balance of risks that remains tilted to the downside, especially over the medium term, remain important challenges. Chapter 2 examines how changes in external conditions may affect the pace of income convergence between advanced and emerging market and developing economies. Chapter 3 looks at the trend in the declining share of income that goes to labor and the root causes. Overall, this report stresses the need for credible strategies in advanced economies and emerging market and developing ones to tackle a number of common challenges in an integrated global economy.

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Chapter 1 : Global Prospects and Policies

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With buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade, world growth is projected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018. But binding structural impediments continue to hold back a stronger recovery, and the balance of risks remains tilted to the downside, especially over the medium term. With persistent structural problems—such as low productivity growth and high income inequality—pressures for inward-looking policies are increasing in advanced economies. These threaten global economic integration and the cooperative global economic order that has served the world economy, especially emerging market and developing economies, well. Against this backdrop, economic policies have an important role to play in staving off downside risks and securing the recovery, and a renewed multilateral effort is also needed to tackle common challenges in an integrated global economy.

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Chapter 2 : Roads Less Traveled: Growth in Emerging Market and Developing Economies in a Complicated External Environment

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Chart Data 2.1 Contribution to Global Growth and Consumption
Chart Data 2.2 Emerging Market and Developing Economies, Relative Income in Purchasing-Power-Parity Terms
Chart Data 2.3 Distribution of Income per Capita in EMDEs in the 1970s and the 2010s
Chart Data 2.4 Change in Real Income per Capita in EMDEs Relative to the United States over Decades
Chart Data 2.5 Elasticity of Medium-Term GDP per Capita Growth in EMDEs with Respect to External Conditions
Chart Data 2.6 Average Contribution to GDP per Capita Growth
Chart Data 2.7 Relative Average Contribution to GDP per Capita Growth among External Conditions Variables
Chart Data 2.8 Average Contribution of Terms of Trade to GDP per Capita Growth, by Groups of Economies
Chart Data 2.9 Variance of GDP per Capita Growth Accounted for by Each External Conditions Variable
Chart Data 2.10 Contribution of Other Common Factors to GDP per Capita Growth and Selected Global Variables
Chart Data 2.11 Growth Episodes in EMDEs, 1970-2015
Chart Data 2.12 Cumulative Growth during Episodes, 1970-2015
Chart Data 2.13 Normalized GDP per Capita during Growth Episodes and Their Aftermath, 1970-2015
Chart Data 2.14 Cumulative Growth Rate of Real Income per Capita during Episodes versus Average Growth Rate of Real Income per Capita during 1970–2015
Chart Data 2.15 Event Analysis: Persistent Accelerations and Reversals, 1970–2015
Chart Data 2.16 Event Analysis: Persistent and Nonpersistent Accelerations, 1970–2015
Chart Data 2.17 Change in the Probability of Occurrence of Growth Episodes, 1970–2015
Chart Data 2.18 Domestic Attributes across Persistent Accelerations and Reversals, 1970–2015
Chart Data 2.19 Change in Marginal Effect of External Conditions When Domestic Attributes Improve
Chart Data 2.20 Actual and Projected External Conditions for Emerging Market and Developing Economies
Chart Data 2.1.1 Decomposition of Selected Emerging Market Economies by Province
Chart Data 2.2.1 Capital Inflows and Industry Growth, 1998–2010
Chart Data 2.3.1 Value Added in China’s Final Demand
Chart Data 2.3.2 Relative Changes in Country Exposures to China’s Final Demand
Chart Data 2.3.3 Sector Composition of Value Added in China’s Final Demand
Chart Data 2.3.4 Sector Composition of Commodity-Exporting Economies’ Foreign Value Added
Chart Data 2.4.1 EMDEs: Current Account Balance by Group and Net Capital Inflows by Type
Chart Data 2.4.2 Distribution of EMDEs’ Average Current Account Balances, 2000–16
Chart Data 2.4.3 Correlation between Capital Flows and per Capita Real GDP Growth
Chart Data Annex
2.1.1
Correlation between Country-Specific External Conditions Variables and Global Variables over Time
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2.2.1
Changes in Levels of Selected Variables Relative to the United States
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2.4.1
Persistent Acceleration Episodes by Region
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2.4.2
Reversal Episodes by Region
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2.5.1
Change in the Odds Ratio of Occurrence of Growth Episodes, 1970–2015
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2.5.2
Change in the Odds Ratio of Occurrence of Growth Episodes by Subsamples, 1970–2015
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2.5.3
Change in the Probability of Occurrence of Growth Episodes (Marginal Effect) Using Seven-Year Durations, 1970–2015
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2.5.4
Change in the Probability of Occurrence of Persistent Accelerations (Marginal Effect) by Type of Acceleration, 1970–2015
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2.6.1
Change in the Probability of Occurrence of Growth Episodes (Marginal Effect), 1970–2015
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2.6.2
Reversals: Change in the Marginal Effect of External Financial Conditions When Selected Domestic Attributes Improve

Emerging market and developing economies have become increasingly important in the global economy in recent years. They now account for more than 75 percent of global growth in output and consumption, almost double the share of just two decades ago. The external environment has been important for this transformation. Terms of trade, external demand, and, in particular, external financial conditions are increasingly influential determinants of medium-term growth in these economies as they become more integrated into the global economy. The still-considerable income gaps in these economies vis-à-vis those in advanced economies suggest further room for catch-up, favoring their prospects of maintaining relatively strong potential growth over the medium term. Yet, the findings show that steady, sustained catch-up growth is not automatic and exhibits episodes of accelerations and reversals over time. Moreover, with the global economy in the midst of potentially persistent structural shifts, emerging market and developing economies may face a less supportive external environment going forward than they experienced for long stretches of the post-2000 period. Nevertheless, these economies can still get the most out of a weaker growth impulse from external conditions by strengthening their institutional frameworks, protecting trade integration, permitting exchange rate flexibility, and containing vulnerabilities arising from high current account deficits and external borrowing, as well as large public debt.

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Chapter 3 : Understanding the Downward Trend in Labor Income Shares

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This chapter documents the downward trend in the labor share of income since the early 1990s, as well as its heterogeneous evolution across countries, industries, and workers of different skill groups, using newly assembled data for a large sample of advanced and emerging market and developing economies. The chapter then analyzes the forces behind these trends. Technological progress, reflected in the steep decline in the relative price of investment goods, along with varying exposure to routine-based occupations, explains about half the overall decline in advanced economies, with a larger negative impact on the earnings of middle-skilled workers. In emerging markets, the labor share evolution is explained predominantly by the forces of global integration, particularly the expansion of global value chains that contributed to raising the overall capital intensity in production.

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Statistical Appendix

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