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New Policy Approach Needed for East Asia and Pacific to Achieve Inclusive Growth

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The countries of developing East Asia and Pacific – among the most successful in the world in reducing poverty and improving living standards – need to adopt a new thinking if they are to achieve inclusive growth going forward.

Growth that is inclusive – one that reduces poverty while providing upward mobility and economic security for all – will require countries to go beyond its successful “growth with equity” model, reports Riding the Wave: An East Asian Miracle for the 21st Century. Prospects for upward mobility are seen as increasingly elusive, reflecting a sense that income and wealth are becoming more concentrated while access to basic social services remains limited and often of poor quality. Achieving economic security for all is more difficult, particularly as the region faces newer challenges: rapid aging, less certain growth prospects, and greater urbanization.

Inequality is a growing concern to citizens across the region. Over 90 percent in China and over half in the Philippines think that income differences in their countries are too large. In Indonesia, almost 90 percent of the population thinks it is urgent to address inequality, while eight in ten urban residents of Vietnam worry about disparities in living standards.

It’s a historic achievement that nearly a billion people in East Asia moved out of extreme poverty in just one generation,” said Victoria Kwakwa, World Bank Vice President for East Asia and the Pacific. “But for the region to sustain inclusive growth, countries will need to address the challenges of fully eliminating extreme poverty, enhancing the prospects for economic mobility, and assuring economic security for all.”

The region has transformed from being comprised of mostly poor countries in the 1980s to a group of middle-income countries made up of varying economic classes. By 2015, almost two-thirds of the region’s population were either economically secure or middle class – up from 20 percent in 2002.

The share of the extreme and moderate poor has fallen dramatically, from almost half the population in 2002 to less than an eighth in 2015. But the percentage of individuals vulnerable to falling back into poverty – those who live with US$3.10 to US$5.50 a day – has remained constant between 2002 and 2015, at about a quarter of the population.

Policies for inclusive growth need to recognize and address the varying constraints faced by different economic classes. Policies for the remaining extreme poor need to ease their barriers accessing economic opportunities, as well as sustain broad-based growth, so as to help them move up the income ladder.  Access to services such as healthcare and infrastructure, as well as mechanisms to manage risks, will need to be improved to help the economically vulnerable. The priority for the economically secure and the middle class is to improve the provision and quality of public services, such as housing, water and sanitation. 

Three pillars can underpin the policy agenda. The first – fostering economic mobility – requires closing gaps in access to jobs and services, improving the quality of jobs, and promoting financial inclusion. The second pillar — providing greater economic security — includes bolstering social assistance systems, expanding social insurance, and increasing resilience to shocks. Strengthening institutions is the third pillar, and includes progressive taxation policies to raise resources and improvements in the effectiveness of inclusive spending programs. Better management of rapid aging and urbanization as well as enhancing competition will also help.

“The policy agenda for inclusive growth can constitute a new social contract for governments across the region,” said Sudhir Shetty, World Bank Chief Economist for the East Asia and Pacific region. “Its elements would address the needs of each economic class while remaining fiscally responsible and raising revenues in an efficient and equitable manner.”

The report uses a five-part grouping of countries and recommends tailored policies for each. Malaysia, and Thailand – ‘Progressive Prosperity’ countries that have largely eliminated extreme poverty and fostered a large middle class – can prioritize meeting the growing aspirations of the middle classes while mobilizing and using resources to address remaining disparities. China and Vietnam – ‘Out-of-poverty-into-prosperity’ countries with large swaths of their populations now economically secure or middle class – should also address the aspirations of their middle classes as well as the needs of their vulnerable populations, while also preparing for rapid aging.

Indonesia, the Philippines, and Cambodia, are described as ‘Out-of-extreme-poverty’ countries which have low levels of extreme poverty but also still small middle classes; they can prioritize improving economic mobility and integrating social protection programs. ‘Lagging progress’ countries such as Lao PDR and Papua New Guinea, with still high levels of extreme poverty, can strive to reduce poverty more quickly by investing in basic education and promoting financial inclusion while also strengthening social assistance and resilience. The Pacific Island countries are distinct and will need to focus their policies on exploiting existing economic opportunities such as tourism and fishing, leveraging labor migration opportunities, and investing in disaster mitigation and prevention.

Developing East Asia has led the world in showing how rapid and broadly shared growth can lift millions out of poverty. With these policies, countries across the region can effectively confront the new challenges they now face and achieve inclusive growth.

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Economy

Belarus: Strengthening Foundations for Sustainable Recovery

MD Staff

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The speed of economic recovery has accelerated in early 2018, but the foundations for solid growth need to be strengthened, says the latest World Bank Economic Update on Belarus.

The economic outlook remains challenging due to external financing needs and unaddressed domestic structural bottlenecks. Improved household consumption and investment activity, along with a gradual increase in exports, will help the economy to grow, but unlikely above three percent per annum over the medium term.

“The only way for ordinary Belarusians to have better incomes in the long run is to increase productivity, which requires structural change. While macroeconomic adjustment has brought stability, only structural change will bring solid growth to the country,” said Alex Kremer, World Bank Country Manager for Belarus. “Inflation has hit a record low in Belarus, driving the costs of domestic borrowing down. However, real wages are now again outpacing productivity, with the risks of worsening cost competitiveness and generating cost-push inflation.”

A Special Topic Note of the World Bank Economic Update follows the findings of the latest World Bank report, The Changing Wealth of Nations 2018, which measures national wealth, composed of produced, natural, and human capital, and net foreign assets. Economic development comes from a country’s wealth, especially from human capital – skills and knowledge.

“Belarus has a good composition of wealth for an upper middle-income country. The per capita level of human capital exceeds both Moldova and Ukraine. However, the accumulation of physical capital has coincided with a deterioration in the country’s net foreign asset position,” noted Kiryl Haiduk, World Bank Economist. “Belarus needs to rely less on foreign borrowing and strengthen the domestic financial system, export more, and strengthen economic institutions that improve the efficiency of available physical and human capital.”

Since the Republic of Belarus joined the World Bank in 1992, lending commitments to the country have totaled US$1.7 billion. In addition, grant financing totaling US$31 million has been provided, including to programs involving civil society partners. The active investment lending portfolio financed by the World Bank in Belarus includes eight operations totaling US$790 million.

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Economic Growth in Africa Rebounds, But Not Fast Enough

MD Staff

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Sub-Saharan Africa’s growth is projected to reach 3.1 percent in 2018, and to average 3.6 percent in 2019–20, says Africa’s Pulse, a bi-annual analysis of the state of African economies conducted by the World Bank, released today.

The growth forecasts are premised on expectations that oil and metals prices will remain stable, and that governments in the region will implement reforms to address macroeconomic imbalances and boost investment.

“Growth has rebounded in Sub-Saharan Africa, but not fast enough. We are still far from pre-crisis growth levels,” said Albert G. Zeufack, World Bank Chief Economist for the Africa Region. “African Governments must speed up and deepen macroeconomic and structural reforms to achieve high and sustained levels of growth.”

The moderate pace of economic expansion reflects the gradual pick-up in growth in the region’s three largest economies, Nigeria, Angola and South Africa. Elsewhere, economic activity will pick up in some metals exporters, as mining production and investment rise. Among non-resource intensive countries, solid growth, supported by infrastructure investment, will continue in the West African Economic and Monetary Union (WAEMU), led by Côte d’Ivoire and Senegal. Growth prospects have strengthened in most of East Africa, owing to improving agriculture sector growth following droughts and a rebound in private sector credit growth; in Ethiopia, growth will remain high, as government-led infrastructure investment continues.

For many African countries, the economic recovery is vulnerable to fluctuations in commodity prices and production,” said Punam Chuhan-Pole, World Bank Lead Economist and the author of the report.  “This underscores the need for countries to build resilience by pushing diversification strategies to the top of the policy agenda.”

Public debt relative to GDP is rising in the region, and the composition of debt has changed, as countries have shifted away from traditional concessional sources of financing toward more market-based ones. Higher debt burdens and the increasing exposure to market risks raise concerns about debt sustainability: 18 countries were classified at high-risk of debt distress in March 2018, compared with eight in 2013.

“By fully embracing technology and leveraging innovation, Africa can boost productivity across and within sectors, and accelerate growth,” said Zeufack.

This issue of Africa’s Pulse has a special focus on the role of innovation in accelerating electrification in Sub-Saharan Africa, and its implications of achieving inclusive economic growth and poverty reduction. The report finds that achieving universal electrification in Sub-Saharan Africa will require a combination of solutions involving the national grid, as well as “mini-grids” and “micro-grids” serving small concentrations of electricity users, and off-grid home-scale systems. Improving regulation of the electricity sector and better management of utilities remain key to success.

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Multilateral Development Banks Present Study on Technology’s Impact on Jobs

MD Staff

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Rapid technological progress provides a golden opportunity for emerging and developing economies to grow faster and attain higher levels of prosperity. However, some disruptive technologies could displace human labor, widen income inequality, and contribute to greater informality in the workforce. Tapping new technologies in a way that maximizes benefits, mitigates adverse effects, and shares benefits among all citizens will require public-private cooperation and smart public policy.

That is one of the main conclusions of a new study, The Future of Work: Regional Perspectives, released today by four regional multilateral development institutions: the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), and the Inter-American Development Bank (IDB).

The study, which was presented at a seminar hosted 19 April at the IDB in Washington, D.C., explores the potential impact of technology in global labor markets and identifies concrete actions countries can take to prepare for the changing nature of jobs and leverage the benefits of emerging technologies.

The Future of Work: Regional Perspectives analyzes the challenges and opportunities presented by artificial intelligence, machine learning, and robotics in what is known as the Fourth Industrial Revolution. Potential challenges include increased inequality and the elimination of jobs, as well as the high degree of uncertainty brought about by technological change and automation. The greatest opportunities come from gains in economic growth that can result from increased productivity, efficiency, and lower operating costs.

The study includes chapters focusing on how new technological developments already are affecting labor markets in each region.

In the case of Asia and the Pacific, ADB research shows that even in the face of advances in areas such as robotics and artificial intelligence, there are compelling reasons to be optimistic about the region’s job prospects. New technologies often automate only some tasks of a job, not the whole. Moreover, job automation goes ahead only where it is both technically and economically feasible. Perhaps most importantly, rising demand—itself the result of the productivity benefits that new technologies bring—offsets job displacement driven by automation and contributes to the creation of new professions.

“ADB’s research shows that countries in Asia will fare well as new technology is introduced into the workplace, improving productivity, lowering production costs, and raising demand,” said Yasuyuki Sawada, ADB’s Chief Economist. “To ensure that everyone can benefit from new technologies, policymakers will need to pursue education reforms that promote lifelong learning, maintain labor market flexibility, strengthen social protection systems, and reduce income inequality.”

The publication was launched with a panel discussion featuring senior officials of the four regional development banks leading the study: Luis Alberto Moreno (IDB President), Charles O. Boamah (AfDB Senior Vice-President), Takehiko Nakao (ADB President), and Suma Chakrabarti (EBRD President). They were joined by Susan Lund (Lead of the McKinsey Global Institute) and Pagés, one of the co-authors.

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