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Weak and Unequal Recovery: Advanced Countries Need a New Growth Model

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The World Economic Forum today issued a report proposing a shift in economic policy priorities to respond more effectively to the insecurity and inequality accompanying technological change and globalization. The Inclusive Growth and Development Report 2017 concludes that most countries are missing important opportunities to raise economic growth and reduce inequality at the same time because the growth model and measurement tools that have guided policymakers for decades require significant readjustment.

The Report finds that annual median incomes declined by 2.4% or $284 per capita across 26 advanced economies between 2008 and 2013 (or most recent period available). Developing countries fared much better, with median incomes rising by an average of 10.7% or $165. However, 23% of them experienced a decline in median per capita income of 9%, as compared to 54% of advanced countries experiencing a decline of an average 8% or $1044 per person equivalent to $2,505 per average household.

The Report argues that sustained, broad-based progress in living standards, a concept that encompasses income as well as economic opportunity, security and quality of life, should be recognized by policymakers as the bottom-line objective of national economic performance rather than GDP growth. It proposes a new policy framework and set of measurement tools to guide the practice and assess the performance of countries accordingly.

Inclusive Development Index (IDI). The report ranks countries based on 12 Key Performance Indicators of inclusive development. Providing a more complete measure of economic development than GDP growth alone, the Index has three pillars: Growth and Development, including GDP growth, labour force participation and productivity, and healthy life expectancy; Inclusion, including median household income, poverty and two inequality measures; and Intergenerational Equity and Sustainability, including adjusted net saving (including natural capital depletion and human capital investment), demographic dependency ratio, public debt and carbon intensity.

51% of the 103 countries for which these data are available saw their IDI scores decline over the past five years, attesting to the legitimacy of public concern and challenge facing policymakers regarding the difficulty of translating economic growth into broad social progress. In 42% of countries, IDI decreased even as GDP per capita increased. A chief culprit was wealth inequality, which rose in 77% of economies by an average of 6.3%.

Some countries rank significantly higher in the IDI than GDP per capita, suggesting they have done a relatively good job of making their growth processes inclusive, including countries as diverse as Cambodia, the Czech Republic, New Zealand, South Korea and Vietnam. By contrast, others have significantly lower IDI than GDP per capita rankings, indicating that their growth has not translated as well into social inclusion; these include Brazil, Ireland, Japan, Mexico, Nigeria, South Africa and the United States.

According to Richard Samans, Member of the Forum’s Managing Board, “There is a global consensus on inclusive growth, but it has been far more directional than practical. To respond more effectively to social concerns, economic policy needs a new compass setting, broad-based progress in living standards, and a new mental map in which structural reform is reimagined and reapplied to this task, with chief economic advisers and finance ministers prioritizing it every bit as much their traditional focus on macroeconomic, financial supervisory and trade policy.”

New Framework or “Growth Model.” The Report suggests that 15 areas of structural policy and institutional strength together constitute the underlying “income distribution system” of modern market economies and are the crucial tools available to policymakers to strengthen economic growth and social inclusion in tandem. It argues that rising inequality reflects mainly “a lack of attention to this policy ecosystem rather than an iron law of capitalism.” Moreover, for many countries such a reimagined process of structural reform encompassing both demand- and supply-side elements also offers the best hope for boosting economic growth given their limited monetary and fiscal policy space in the aftermath of the 2008-09 financial crisis.

The Report also includes policy metrics — 140 Policy and Institutional Indicators across the 15 policy domains that have the potential to drive both stronger growth and wider social inclusion. These permit countries to benchmark their institutional strength and policy incentives in these areas against their peers.

Education and Skills Development – access; quality; equity

Basic Services and Infrastructure – basic and digital infrastructure; health-related services

Corruption and Rents – business and political ethics; concentration of rents

Financial Intermediation of Real Economy Investment – financial system inclusion; intermediation of real economy business investment

Asset-building and Entrepreneurship – small business ownership; home and financial asset ownership

Employment and Labour Compensation – productive employment; wage and non-wage labour compensation

Fiscal transfers – tax system; social protection

An Agenda for Global Inclusive Growth. Based on its findings, framework and tools, the Report proposes a coordinated international initiative to combat the prospect of secular stagnation and dispersion (chronic low growth and rising inequality) by placing progress in median living standards – people – at the heart of national policy and global economic integration:

· Major economies to undertake mutual effort to address their structural weaknesses within this Framework with support of OECD and other international organizations, potentially by expanding and reprioritizing the G20 Enhanced Structural Reform Agenda, launched during China’s recent presidency.

· All countries experiencing labour market challenges related to the Fourth Industrial Revolution to set national investment targets and public-private implementation strategies across five areas of human capital formation: active labor-market policies (training); equity of access to quality basic education; gender parity; non-standard work benefits and protections; and school-to-work transition. Data indicate few countries are well positioned.

· International financial institutions to embrace this reformulation and reprioritization of structural economic policy in their public signaling, country advice, and development cooperation programs as well as catalyze a scaling of blended, public-private financing of sustainable infrastructure – crucial for attainment of the SDGs — by shifting from direct lending to risk mitigation, co-investment, aggregation and project development.

· Trade and investment cooperation to be refocused from the negotiation of formal new norms such as free trade agreements to the facilitation of trade and investment activity within as well as among countries, particularly in respect of SMEs, services and value chains, encouraging convergence around best practices and standards to reduce frictions and boost development impact, while increasing capacity-building assistance for these purposes.

The Report was developed as part of the Forum’s multistakeholder System Initiative on Economic Growth and Social Inclusion and includes written contributions from five international organizations, three companies and one G20 government highlighting their contributions to this challenge.

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Action on Trade is Necessary for Businesses to Unlock Net Zero Targets

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For businesses to reach their emission targets, the global trading system needs to adapt, and businesses are calling for the change.

These are the main findings of the Delivering a Climate Trade Agenda: Industry Insights Report released today by the World Economic Forum, in collaboration with Clifford Chance.

The six-month study is based on research and interviews with global companies, across sectors including transport, energy, manufacturing, and consumer goods. The objective of the research process was to identify necessary changes to the current global trade system and how to better incentivize and accelerate decarbonization. The resulting study outlines eight key actions that, if taken by governments and businesses, could make global trade a better enabler of climate action.

Sean Doherty, Head of International Trade and Investment said: “Traditionally, trade and climate policy-making has happened in separate silos. The urgency of the climate crisis calls for us to break down these silos through public-private cooperation in order to accelerate emissions reductions while achieving prosperity for all. The good news for policy makers is businesses are ready and willing to support this change.”

Jessica Gladstone, Partner at Clifford Chance said: “International trade will play a key role in achieving a just transition to a low-carbon sustainable global economy. Businesses stand ready to lead in this transition, but governments can support by ensuring the right legislative and regulatory structures are in place. Our report explores global and domestic policy actions that can create climate-friendly trade that is fair, transparent, and has technology and innovation at its core.”

Interviews revealed the following ways for trade to support businesses to decarbonize and grow sustainably:

  • Tariff reductions on key goods
  • Addressing non-tariff distortions in parallel
  • Phasing out fossil fuel subsidies
  • Building coherence around carbon-based trade policies
  • Supporting trade in digital and climate-related services
  • Encouraging climate-smart agriculture
  • Aligning trade agreements with climate commitments
  • Facilitating green investment

The chart below provides examples of how the global trading system can through continued dialogue between governments and the private sector put trade to the service of climate action.

The report includes a jointly-authored foreword by the World Trade Organization (WTO) Director General Ngozi Okonjo-Iweala and the United Nations Framework Convention on Climate Change (UNFCCC) Executive Secretary welcoming the insights from business. Major intergovernmental meetings will be held under both organisations in the last quarter of this year.

Business can take steps to encourage alignment of trade rules with climate action. The Forum is today launching a two-year work programme – titled Climate Trade Zero – to support public and private exchange on these issues as part of building a more sustainable trading system.

Many companies also recognized that the transition is taking place at different speeds and levels of intensity across countries and sectors. Interviewees highlighted the importance of providing support and incentives to developing countries, and to supply chain partners in developing countries, to undertake the investments necessary to reduce their emissions.

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Appliance standards and labelling is highly effective at reducing energy use

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Policies that introduce minimum efficiency performance standards and energy-consumption labelling on appliances and equipment have led to reduced power consumption, lower carbon emissions, and cost savings for consumers, according to analysis published today by the IEA and the 4E Technology Collaboration Programme (4E TCP).

The report’s findings are drawn from nearly 400 evaluation studies covering 100 countries, including those with the longest running and strongest appliance policies, such as China, European Union, Japan and the United States.

“The findings from the study are important as they provide evidence that standards and labelling are highly effective policy instruments that bring benefits to consumers as well as lower emissions and lower energy demand,” said Brian Motherway, the Head of Energy Efficiency at the IEA.

The study shows the policies have had significant positive impacts:

  • In countries with long-running policies, appliances are now typically consuming 30% less energy than they would have done otherwise.
  • In the nine countries/regions for which data were available, such programmes reduced annual electricity consumption by a total of around 1 580 terawatt-hours in 2018 – similar to the total electricity generation of wind and solar energy in those countries.
  • The programmes that have been operating the longest, such as those in the United States and the European Union, are estimated to deliver annual reductions of around 15% of their current total national electricity consumption. This percentage increases each year as more of the older, less-efficient stock is replaced with equipment that meets new higher efficiency standards.
  • These energy savings represent a significant financial boon for businesses and householders. In the United States alone, utility customers are now economising USD 60 billion each year, or USD 320 per customer.
  • Also, the United States, European Union and China together are avoiding annual CO2 emissions of more than 700 million tonnes, equivalent to the total energy-related emissions of Germany.
  • Well-designed policies encourage product innovation and lead to economies of scale, which reduces the cost of appliances even without accounting for the efficiency gains. For example, in Australia the sticker price of appliances has typically fallen 40% over the last 20 years, while average energy consumption has fallen by a third.

“The message is simple: expanding standards and energy efficiency labelling programmes makes the energy transition challenge easier, more affordable and become a reality,” said Jamie Hulan, the Chair of the 4E TCP.

The IEA will continue to collaborate with 4E TCP to enhance and promote the use of such policies. 4E TCP is an international platform for fourteen countries and the European Union to exchange technical and policy information focused on increasing the production and trade in efficient end-use equipment.

Ahead of this November’s COP26 Climate Change Conference, the IEA is working with the UK Government via the Super-Efficient Equipment and Appliance Deployment (SEAD) initiative to coordinate and improve international action on product energy efficiency. The United Kingdom is leading the COP26 Product Efficiency Call to Action, which aims to double the efficiency of key global products by 2030, initially focusing on four key energy-consuming products: air conditioners, refrigerators, lighting and industrial motors systems. The IEA is supporting the implementation of this work and helping expand the number of countries ready to make this commitment.

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Global economy projected to show fastest growth in 50 years

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The global economy is expected to bounce back this year with growth of 5.3 per cent, the fastest in nearly five decades, according to the UN Conference on Trade and Development (UNCTAD).

In its new report released on Wednesday, the agency said that the rebound was highly uneven along regional, sectoral and income lines, however.  

During 2022, UNCTAD expects global growth to slow to 3.6 per cent, leaving world income levels trailing some 3.7 per cent below the pre-pandemic trend line. 

The report also warns that growth deceleration could be bigger than expected, if policymakers lose their nerve or answer what it regards as misguided calls for a return to deregulation and austerity. 

Differences in growth 

The report says that, while the response saw an end to public spending constraints in many developed countries, international rules and practices have locked developing countries into pre-pandemic responses, and a semi-permanent state of economic stress. 

Many countries in the South have been hit much harder than during the global financial crisis. With a heavy debt burden, they also have less room for maneuvering their way out through public spending. 

Lack of monetary autonomy and access to vaccines are also holding many developing economies back, widening the gulf with advanced economies and threatening to usher in another “lost decade”. 

“These widening gaps, both domestic and international, are a reminder that underlying conditions, if left in place, will make resilience and growth luxuries enjoyed by fewer and fewer privileged people,” said Rebeca Grynspan, the secretary-general of UNCTAD. 

“Without bolder policies that reflect reinvigorated multilateralism, the post-pandemic recovery will lack equity, and fail to meet the challenges of our time.” 

Lessons of the pandemic 

UNCTAD includes several proposals in the report that are drawn from the lessons of the pandemic. 

They include concerted debt relief and even cancellation in some cases, a reassessment of fiscal policy, greater policy coordination and strong support for developing countries in vaccine deployment. 

Even without significant setbacks, global output will only resume its 2016-19 trend by 2030. But even before COVID-19, the income growth trend was unsatisfactory, says UNCTAD. Average annual global growth in the decade after the global financial crisis was the slowest since 1945. 

Despite a decade of massive monetary injections from leading central banks, since the 2008-9 crash, inflation targets have been missed. Even with the current strong recovery in advanced economies, there is no sign of a sustained rise in prices. 

After decades of a declining wage share, real wages in advanced countries need to rise well above productivity for a long time before a better balance between wages and profits is achieved again, according to the trade and development body’s analysis. 

Food prices and global trade 

Despite current trends on inflation, UNCTAD believes the rise in food prices could pose a serious threat to vulnerable populations in the South, already financially weakened by the health crisis. 

Globally, international trade in goods and services has recovered, after a drop of 5.6 per cent in 2020. The downturn proved less severe than had been anticipated, as trade flows in the latter part of 2020 rebounded almost as strongly as they had fallen earlier. 

The report’s modelling projections point to real growth of global trade in goods and services of 9.5 per cent in 2021. Still, the consequences of the crisis will continue to weigh on the trade performance in the years ahead. 

For director of UNCTAD’s globalization and development strategies division, Richard Kozul-Wright, “the pandemic has created an opportunity to rethink the core principles of international economic governance, a chance that was missed after the global financial crisis.” 

“In less than a year, wide-ranging US policy initiatives in the United States have begun to effect concrete change in the case of infrastructure spending and expanded social protection, financed through more progressive taxation. The next logical step is to take this approach to the multilateral level.” 

The report highlights a “possibility of a renewal of multilateralism”, pointing to the United States support of a new special drawing rights (SDR) allocation, global minimum corporate taxation, and a waiver of vaccine-related intellectual property rights.  

UNCTAD warns, though, that these proposals “will need much stronger backing from other advanced economies and the inclusion of developing country voices if the world is to tackle the excesses of hyperglobalization and the deepening environmental crisis in a timely manner.” 

For the UN agency, the biggest risk for the global economy is that “a rebound in the North will divert attention from long-needed reforms without which developing countries will remain in a weak and vulnerable position.”

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