World Development Report 2024: The Middle-Income Trap

The gender gap extends to formal entrepreneurship. Women are more likely than men to work as subsistence microentrepreneurs and earn lower profits than male microentrepreneurs. Furthermore, women are less likely than men to work in formal firms. Globally, only 23 percent of businesses are female-owned, with large variation across sectors (figure 5.11). Female-owned businesses are more egalitarian employers: although male-owned firms employ few female employees (25 percent) and even fewer female managers (6 percent), female-owned firms tend to employ males and females equally.

The gender gap in access to financial accounts (such as formal and mobile banking) is also still very large (figure 5.12). Even in countries such as Bangladesh and Nigeria, where mobile phone and mobile banking penetration have been impressive, there are still large gender gaps in financial inclusion. In Morocco, the gap is more than 25 percentage points, whereas the gap does not exist in Sweden.

Indeed, a 10 percent or higher gender gap in account ownership persists in 41 countries, and women are 37 percent less likely than men to have an account in fragile and conflict-affected situation countries. Women are also less likely than men to own a debit or credit card, have borrowed from a formal financial institution, or have borrowed to support a farm or business. It is thus not surprising that women-led businesses are more likely to identify access to finance as a major obstacle, and that there is an estimated US$1.7 trillion global financing gap.

One barrier to women gaining expanded access to finance is the continued restrictions they face in asset ownership. The property rights of women and disadvantaged groups—manifested, for example, through property and inheritance laws—also vary. Across the world, 40 percent of economies still constrain women’s property rights, denying them equal access to essential resources for financial security and economic independence. Among middle-income economies, 14 percent do not grant women equal ownership of immovable property such as real estate or land; 24 percent have unequal inheritance rights that favor sons over daughters; 25 percent do not grant equal inheritance rights to male and female surviving spouses, further marginalizing women’s and girls’ economic empowerment and autonomy; and 34 percent still do not recognize nonmonetary contributions, including caring for minor children or taking care of the family home, undermining women’s crucial roles in caregiving and domestic responsibilities.

Gender inequality is a major barrier to socioeconomic mobility and a growing middle class. Box 5.3 outlines a program of research to examine the economic growth lost to gendered barriers.

The cost of social immobility and preservation: Holding back the energies that drive creation

Elite pacts and patriarchal gender norms maintain the status quo, stunting and misallocating talent. These are costly missteps. In the United States, for example, the reduction of gender and racial barriers in educational and occupational choices between 1960 and 2010 explains 20–40 percent of the observed economic growth over that period. However, there is still room for progress: if the chance of becoming an innovator in the United States today were as high for women, minorities, and children from low-income families as for men from high-income families, innovation in the US economy would increase fourfold.

The forgone growth in some middle-income countries is likely much larger than in the United States. For example, removing barriers to entrepreneurship for women in India would double female labor force participation and raise real income by 40 percent. And globally, closing the gender gap in employment and entrepreneurship could raise the global GDP by more than 20 percent. Eliminating the gender gap over the next decade would essentially double the current global economic growth rate.

High migration costs prevent workers from locating where they are most productive. In Indonesia, reducing migration costs to levels similar to those in the United States would lead to a 7.1 percent boost in productivity. The reform of the Chinese hukou system in 2003 led to a 5 percent increase in labor productivity. Furthermore, low mobility costs can mitigate the shocks inherent to creative destruction. During the nineteenth century, the US city of Detroit grew into a thriving hub of commerce and industry largely based on the auto industry. But when the industry contracted, low mobility costs allowed workers to relocate to other production hubs in the United States. In middle-income countries, in addition to high migration costs, the costs of ineffective education systems are high because they fail to develop talent and perpetuate existing inequalities.

Box 5.3 Global Gender Distortions Index: Measuring economic growth lost to gendered barriers

In the United States, policies that reduced labor market barriers and other forms of discrimination against women and African Americans contributed up to 30 percent of post–World War II economic growth. How can today’s middle-income countries evaluate the economic dividends of progress toward equal opportunity and improved talent allocation? How can policy makers identify specific barriers within their labor markets that need to be addressed and given priority?

Researchers at Yale University’s Economic Growth Center, working under the Gender and Growth Gaps project, are developing a Global Gender Distortions Index (GGDI) to measure the losses in global economic growth stemming from gender gaps in the labor market. The GGDI links changes in gender gaps in the labor market to productivity growth through improvements in the allocation of women’s talent. Specifically, this index measures by how much the gross domestic product (GDP) of a country (or subnational unit) has grown, or could grow, from improvements in women’s labor market opportunities.

The index highlights that women often do not choose the occupation in which they have a comparative advantage because of (1) labor demand distortions that lead to a wedge between wages and marginal products and (2) differences in occupational preferences that capture factors such as social norms and other labor supply distortions. The GGDI is computed by using observed differences in women’s wages, labor supply, and employment across job type (formal versus informal) to derive an estimate of economywide productivity losses or gains. By quantifying growth losses stemming from gender inequality and distilling them into a single measure, the GGDI allows comparisons across time and locations that can inform policy decisions. It can also complement the World Bank’s Women, Business and the Law (WBL) index by measuring the aggregate consequences of de facto labor market barriers, whereas the WBL measures de jure barriers.a

In a proof-of-concept exercise, the GGDI team uses a cross-sectional analysis across Indian states for 2018 and finds that labor demand distortions are negatively related to state-level economic development.b Poorer states such as Bihar gain 10 percent in state GDP from removal of labor demand distortions, whereas richer states such as Kerala gain 4 percent in GDP. By contrast, labor supply distortions are not related to state-level GDP.

The GGDI, which will be computed for 30 countries over the next 24 months, can act as a dynamic barometer for countries and regions, providing researchers and policy makers with a valuable new resource.

The forces of preservation are holding middle-income countries back from creative destruction and growth. Creative destruction requires the development of talent, which individuals undertake when they expect economic returns and social mobility. Poor expectations of social mobility hamper talent development. Similarly, inequitable opportunities in markets and education hinder talent development and social mobility, producing a talent misallocation—a waste—with costly consequences for individuals and countries alike. These considerations suggest two main roles for policy in creative destruction: removing barriers to developing talent and actively promoting talent development (see chapter 8 for further details).