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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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Archipelagic Economies: Spatial Economic Development in the Pacific

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A new World Bank report on the challenges facing the Pacific region’s outer island communities identifies investment in people and livelihoods as a key for inclusive economic growth.    

Archipelagic Economies: Spatial Economic Development in the Pacific looks at the challenges Pacific governments must address to provide services and infrastructure to populations spread across hundreds of islands spanning the vast Pacific Ocean. The report puts forward a series of practical steps that countries can take to overcome these challenges in a way that supports resilient and inclusive economic growth.

“Many Pacific countries are faced with significant challenges in delivering services and connecting remote, outer island communities; with difficult decisions around resources and how to best invest often limited resources into outer island communities,” said the report’s lead author, World Bank Lead Economist for Fiscal Policy and Sustainable Growth Robert Utz.

“This report aims to provide Pacific governments, development partners and decision-makers with evidence to assess options for fostering development for the people in those outer islands, so they can make stronger contributions to the larger economic development of the whole country.”   

The report identifies six guiding economic policy principles:

1)     Policy solutions that seek to achieve equitable increases in living standards need to be grounded in an understanding of the economic implications of the Pacific region’s unique economic geography.

2)     Outer islands’ development should be assessed from a spatial perspective; one that considers interactions with the country’s main island and the region beyond.

3)     A balanced approach that combines investments in urban areas to accommodate migration from outer islands to main islands with support for outer island populations is likely to achieve better welfare and equity outcomes than an approach that neglects one side or the other.

4)     Growth-enhancing investments should be guided by clearly-identified opportunities, rather than by a desire to try to equalize economic opportunities across islands.

5)     With limited scope to close the gap in economic opportunities between outer and main islands investments to promote livelihoods and human development should be given preference.

6)     Outer islands are subject to a complex political economy of intra-island and outer island-main island relationships that need to be considered in development interventions.

“This is an important and timely study,” said Denton Rarawa, Senior Economic Advisor at the Pacific Islands Forum Secretariat. “The current COVID-19 crisis has highlighted the need to address the institutional, service delivery and capacity gaps of nations across the Pacific. As we strive for greater vaccination rates and begin to think about how we’d like to rebuild after the pandemic, I believe this report has a lot to offer the future of the Pacific, especially in our efforts to leave no one behind.”   

The Archipelagic Economies report is a companion publication to the World Bank’s Pacific Possible series, which in 2017 and 2018 looked at opportunities for economic growth in Pacific Islands Countries across key sectors including tourism, fisheries, and labour mobility. 

The World Bank works in partnership with 12 countries across the Pacific, supporting 87 projects totaling US$2.09 billion in commitments in sectors including agriculture, aviation and transport, climate resilience and adaptation, economic policy, education and employment, energy, fisheries, health, macroeconomic management, rural development, telecommunications and tourism.

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Global economic recovery continues but remains uneven

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The global economy is growing far more strongly than anticipated a year ago but the recovery remains uneven, exposing both advanced and emerging markets to a range of risks, according to the OECD’s latest Interim Economic Outlook.

The OECD says extraordinary support from governments and central banks helped avoid the worst once the COVID-19 pandemic hit. With the vaccine roll-out continuing and a gradual resumption of economic activity underway, the OECD projects strong global growth of 5.7% this year and 4.5% in 2022, little changed from its May 2021 Outlook of 5.8% and 4.4% respectively.

Countries are emerging from the crisis with different challenges, often reflecting their pre-COVID 19 strengths and weaknesses, and their policy approaches during the pandemic. Even in the countries where output or employment have recovered to their pre-pandemic levels, the recovery is incomplete, with jobs and incomes still short of the levels expected before the pandemic.

Large differences in vaccination rates between countries are adding to the unevenness of the recovery. Renewed outbreaks of the virus are forcing some countries to restrict activities, resulting in bottlenecks and adding to supply shortages.  

There is a marked variation in the outlook for inflation, which has risen sharply in the US and some emerging market economies but remains relatively low in many other advanced economies, particularly in the euro area.

A rapid increase in demand as economies reopen has pushed up prices in key commodities such as oil and metals as well as  food, which has a stronger effect on inflation in emerging markets. The disruption to supply chains caused by the pandemic has added to cost pressures. At the same time, shipping costs have increased sharply.

But the Interim Outlook says that these inflationary pressures should eventually fade. Consumer price inflation in the G20 countries is projected to peak towards the end of 2021 and slow throughout 2022. Wage growth remains broadly moderate and medium-term inflation expectations remain contained.

The report warns that to keep the recovery on track stronger international efforts are needed to provide low-income countries with the resources to vaccinate their populations, both for their own and global benefits.

Macroeconomic policy support is still needed as long as the outlook is uncertain and employment has not yet recovered fully, but clear guidance is called upon from policymakers to minimise risks looking forward. Central banks should communicate clearly about the likely sequencing of moves towards eventual policy normalisation and the extent to which any overshooting of inflation targets will be tolerated. The report says fiscal policies should remain flexible and avoid a premature withdrawal of support, operating within credible and transparent medium-term fiscal frameworks that provide space for stronger public infrastructure investment.

Presenting the Interim Economic Outlook alongside Chief Economist Laurence Boone, OECD Secretary-General Mathias Cormann said: “The world is experiencing a strong recovery thanks to decisive action taken by governments and central banks at the height of the crisis. But as we have seen with vaccine distribution, progress is uneven. Ensuring the recovery is sustained and widespread requires action on a number of fronts – from effective vaccination programmes across all countries to concerted public investment strategies to build for the future.”

Ms Boone said: “Policies have been efficient in buffering the shock and ensuring a strong recovery; planning for more efficient public finances, shifted towards investment in physical and human capital is necessary and will help monetary policy to normalise smoothly once the recovery is firmly established.”

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Financing Options Key to Africa’s Transition to Sustainable Energy

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A new whitepaper outlining the key considerations in setting the course for Africa’s energy future was released today at the 2021 Sustainable Development Impact Summit. The report, “Financing the Future of Energy,” outlines Africa’s electricity landscape and financing options in context with the global drive to reduce carbon emissions.

Africa’s power sector will play a central role in the transition from fossil fuel-driven power generation to a renewable-strong energy mix. According to the whitepaper written in collaboration with Deloitte, the migration to a multi-stakeholder-oriented net-zero power grid is being driven by “the 3Ds:”

  • Decarbonization: moving from fossil fuel sources to renewables
  • Decentralization: Shifting from centrally managed generation, transmission, and distribution to decentralized systems
  • Digitalization: Leveraging digital technology to advance the transition

The report contends that new coalitions and investments with developed nations and NGOs including the World Economic Forum must coordinate and enable countries to leapfrog existing technologies and infrastructure.

“The need for digitally smarter utility platforms and sustainable development programs will guide global leaders in helping to shape equitable and inclusive recovery programs,” said Chido Munyati, Head of Africa at the World Economic Forum. “The entire continent remains vulnerable, but this whitepaper offers a view on what are viable financing options that exist today for clean energy sustainability and equitable recovery for all of Africa.

Funding will be the biggest hurdle to ensuring Africa’s sustainable transition to Renewables at scale; there are many financing solutions available,” said Mario Fernandes, Director, Africa Power Utilities and Renewables, Deloitte. “Africa’s winners will be the ones that are able to leverage what exists while creating an enabling environment for the private sector through a Renewables Energy Investment facility.”

Case studies in China and India showed that financing solutions for a clean energy transition often involve long cycles. Economic booms in these countries resulted in a significant shift in carbon emissions. Since similar economic booms are expected across Africa, the report highlights how crucial it is to anchor growth in technologies that can enable lower emissions.

While Africa’s contribution to greenhouse gas emissions from fossil fuel significantly lags behind those of other continents, it still carries a huge potential to accelerate the transition to a net-zero future. Currently, half of the continent lives without adequate access to electricity. As energy demands increase, the energy gap could be bridged through clean energy alternatives, if the financing solutions are employed now.

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