Making resource allocation as efficient in India and China as it is in the US would increase their productivity by as much as 60 percent in India and 50 percent in China, according to a new World Bank report.
"These large gains, however, would also require developing institutions and a business environment that can support a high degree of dynamism in the enterprise sector," says the World Development Report 2014 acknowledging that it's "not an easy task".
"When fuelled by competition, the enterprise sector can promote innovation by adopting new technologies and reallocating resources" through a process of "creative destruction", it says.
"Improving this dynamic process can have significant effects both on reducing the risk of prolonged recessions and on increasing aggregate productivity," adds the report titled 'Risk and Opportunity: Managing Risk for Development'.
In the face of social unrest, economic crises and more frequent natural disasters, preparation and recovery efforts by governments, communities and individuals have become increasingly essential, says the report.
"Effective risk management can provide both resilience to withstand adverse events and the ability to take advantage of development opportunities," it says calling it "a critical ingredient in the fight to end poverty".
Citing the example of the Indian financial capital of Mumbai, the report says "individuals and societies fail to tackle risk proactively for a variety of reasons, including lack of resources and information, missing markets and public goods, and even social exclusion".
"The drainage system in the Indian city of Mumbai, for example, heavily clogged by rubbish and over 100 years old, is hardly able to handle the annual monsoon rains," it noted.
Over the years, multiple proposals to improve the system have been put forth, but the city has yet to fully adopt most of them, and Mumbai remains vulnerable to flooding, the report said.
"Effective risk management in cases such as this requires identifying and addressing the obstacles that prevent people, communities, and countries from taking necessary actions," it said.
The state can also contribute to financial inclusion of the poor by providing sound financial infrastructure of institutions that facilitate financial intermediation, including payment systems, credit information bureaux, and collateral registries, the report said.
"To promote financial inclusion, the government can lead by example through innovative practices," it said citing the "interesting case" of "India's National Rural Employment Guarantee Act, which has improved outreach to poor people living in rural areas through the introduction of government-to-person payments using a bank account".
The challenge for public policy, the report said, is to provide the right incentives for people and institutions to do their own planning and preparation, while taking care not to impose risks or losses on others.