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Agriculture Is Creating Higher Income Jobs in Half of EU Member States but Others Are Struggling

MD Staff

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Half of EU member states have leveraged the Common Agricultural Policy (CAP) to significantly reduce poverty and drive higher incomes in farming, while other countries are still lagging, according to the latest World Bank study.

The ‘Thinking CAP’ report details how new investments and services in farming, reinforced by the EU’s flagship agriculture policy, can drive down poverty and transform agriculture into a sector which can provide higher paying jobs for those who farm.

Hungary, Slovakia, Estonia, Denmark and the Netherlands are all examples of member states that have successfully modernized their agricultural sectors by providing advisory services, roads, secure property rights and access to education and health services in rural areas. Others, such as Bulgaria, Portugal, Romania, Slovenia and Greece, still have some way to go in reducing poverty and ensuring that agricultural work pays. They can do so by improving the basic conditions for a successful agricultural sector, which would improve the results of the financial investments available under the CAP. Other remaining member states fall in between these two categories – achieving a successful transformation or lagging behind.

“Agriculture and poverty in half of the member states of the EU no longer go hand-in-hand. It’s clear that the income gap between agriculture and other sectors is narrowing and in some countries, such as the Netherlands, agricultural work can pay more than jobs in other sectors,” says Arup Banerji, Regional Director for the European Union Countries at the World Bank. “Today, about half of EU member states recognize that farming can boost shared prosperity, while the other half still has some work to do to provide the basic conditions to bring about necessary structural changes.”

The World Bank report shows that the EU CAP is associated with improving employment conditions in farming. Decoupled payments – annual payments based on how much land a farmer uses – and the co-financing of on-farm investments do show clear links with improvements in agriculture. For instance, in the newer member states agricultural labor productivity growth increases from 3.1 percent to 4.7 percent per year with a 10 percent increase in this type of CAP spending. However, there are certain categories of subsidy – known as coupled payments, which reward farmers for producing a particular crop or livestock— for which the report could find no such association. In the past, these coupled payments also led to extreme overproduction and price distortion on global markets.

“Some countries are running before they can walk by issuing payments to farmers who don’t have the necessary infrastructure to effectively bring their products to market or to make the best use of their investment,” said Rogier van den Brink, Lead Economist at the World Bank. “However, the processes the CAP has put in place are impressive. The CAP casts a very wide net and reaches farmers in every far-flung corner of the EU. Because of this, improvements in the CAP along the lines of the recommendations outlined in our report will further strengthen its role as a powerful instrument of structural transformation.”

Going forward, the report says the monitoring of CAP funds should focus on delivering tangible results rather than confusing bureaucratic processes. This would also encourage the co-financing of private investment into CAP-supported projects which are in the public interest such as environmentally sound practices, organic farming and animal welfare.

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China needs further reforms to make growth sustainable, greener and more inclusive

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The Chinese economy continues to slow as it rebalances, with headwinds including trade frictions and the weakening global economy undermining exports and creating new uncertainties. Policy should focus on long-term strategies to move the economy towards greater domestic consumption and services, enhancing economic efficiency and ensuring that future growth is sustainable, greener and more inclusive, according to a new report from the OECD.

The latest OECD Economic Survey of China looks at the factors behind the economic slowdown as well as policies that can boost the quality of future growth and ensure that it is more equitably distributed. Despite the slowdown, the Survey projects growth above 6% this year and next, and sees continuing convergence with more advanced economies.  

The Survey, presented in Beijing by OECD Deputy Secretary-General Ludger Schuknecht, underlines the rising financial risks from high corporate debt and recommends that China prioritises the creation of a single product and labour market to boost productivity and inclusiveness.

“China continues to be the major driver of world economic growth and convergence with advanced economies continues, despite the slowdown,” Mr Schuknecht said. “Yet China is at a crossroads, facing serious domestic and external challenges to maintaining its strong position over the long-term. Policy should seek to ensure a better functioning economy that delivers stable and inclusive growth for all.”

The Survey underlines the need for more balanced trade and investment. Policy should aim to further lower import tariffs and dismantle non-tariff barriers and barriers on the entry and conduct of foreign firms, in particular requirements to form joint ventures or transfer technology.

While much has been done to address financial risks, China’s ongoing fiscal stimulus should avoid directing credit to state-owned enterprises and local governments, the Survey said. Debt ceilings should take into account sub-national government revenues.

Prudent fiscal policy should channel funds to areas where returns are highest, such as education, health and social security systems, while avoiding misallocation of capital by allowing banks to better price risks. Risk perception could be sharpened by orderly defaults. The quality, coverage and timeliness of fiscal reporting can be improved, the Survey said.

The Survey sees wide scope to improve efficiency across the economy, notably by reducing the internal barriers that hinder product market competition and labour mobility. Strengthening the rule of law, restricting the power of administrative departments and providing clear and detailed implementation rules limiting their discretionary powers would reduce protectionism at the local level. Anti-monopoly rules and enforcement can be strengthened and public procurement processes could be made more transparent, technology-neutral and open to all players.

Other measures to boost economic efficiency highlighted by the Survey include stronger protection of intellectual property rights; gradual removal of implicit guarantees to state-owned enterprises, allowing them to default; and reduction of state ownership in commercially-oriented, non-strategic sectors.

To ensure equal opportunities, the Survey recommends China to distribute more evenly high-quality education and health care in order to reduce incentives to move to mega-cities. Gradually easing restrictions on access to public services for city residents without the hukou (residency permit) and eventually delinking service provision from the hukou would also help improve equity. Centralised financing of key spending items, such as wage bills in education and health, reforms to the floor and ceiling for social security contributions and wider tax reform should be pursued.

To make growth greener, the Survey suggests China enforce environmental regulations more strictly, raise fines for polluters and boost environmental taxation, particularly on fossil fuels. Putting an end to the construction of coal-fired power plants and increasing investment in pollution treatment facilities, urban water treatment and rural sanitation is also necessary.

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Bhutan’s Economy to Moderately Grow in 2019 and 2020 on Strong Hydropower and Tourism Outlooks

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Economic growth in Bhutan is forecast to strengthen moderately, buoyed by the industry and services sectors, according to a new Asian Development Bank (ADB) report.

The Asian Development Outlook (ADO) 2019, ADB’s flagship annual economic publication, forecasts the economy to grow at 5.7% this year and 6.0% in 2020. This is following the slipping of growth for a second year running to 5.5% in fiscal year (FY) 2018 on slower hydropower construction and temporary decline in electric power production.

“The expected commissioning of the Mangdechhu hydropower plant, strengthening of private spending, and increased government spending following the formation of a new government to implement the Twelfth Five-Year Plan will greatly contribute to growth,” said ADB Country Director for Bhutan Ms. Kanokpan Lao-Araya. “Inflationary pressure is anticipated following the recent announcement of expected pay rise of the public servants in Bhutan. A downside risk to growth forecasts would be any further delay in commissioning or lower-than-expected production capacity of the Mangdechhu hydropower plant.”

Inflation is expected to rise moderately from 3.6% in FY2018 to 3.8% in FY2019 before edging up to 4.0% in FY2020 as initial benefits from India’s goods and service tax (GST) taper and Indian inflation trends higher. Lower international oil price forecasts will help keep inflation at bay, but the planned revisions to civil service salaries and minimum wage might push up inflation, once implemented.

Current account deficit will continue to narrow further to a forecast of 16.9% of gross domestic product in FY2019, mainly on declining imports with the slowing of hydropower construction and a 6-month hiatus in capital expenditure as the country transitioned to a new administration. It is expected to shrink further in FY2020, as higher imports because of the picking up of government investment is offset by high export revenue from the full-year operation of the Mangdechhu hydropower plant.

Strengthening domestic resources toward better funding of development remains a challenge. With the expected graduation of Bhutan from the United Nations’ least developed country status in 2023, access to concessional official development assistance will increasingly be limited. Reforms have been undertaken to strengthen the mobilization of revenues to fund development. These include the creation of a stabilization fund to ensure even distribution of expenditure, a GST regime which is planned to be adopted in 2020, and reforms on provision of fiscal incentives. Fiscal incentives have been costly for the government with forgone revenue amounting to 17% of tax collected in 2017 only. Reduction of fiscal incentives, particularly tax reforms could be explored to raise government revenues, discourage the entry of footloose opportunists, while not deterring investors who see solid business opportunities in the country. Further, Bhutan needs to simplify the provision and administration of incentives without compromising the level of investment. As a complement to revenue reforms, public financial management needs further strengthening to ensure the proper collection and administration of revenue.

ADB has been supporting Bhutan since 1982, with strong emphasis on renewable energy production, transport connectivity, and key urban infrastructure projects. ADB has committed loans totaling $534.06 million, grants worth $269.22 million, and technical assistance amounting to $53.75 million for Bhutan. In 2018, it approved four projects, including two grant projects focusing on human resource development, particularly on skills and health development. Overall assistance aims to help generate revenue, support inclusive growth, and promote environmental sustainability.

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SMEs turning to alternative financing instruments as growth slows in bank lending

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Small and medium-sized enterprises (SMEs) are turning to non-bank financing sources at a faster pace than in the past, as bank lending to them has risen less than expected given today’s favourable credit conditions and business environment.

Financing SMEs and Entrepreneurs 2019: An OECD Scoreboard finds that online peer-to-peer lending and equity crowdfunding increased significantly in 2017, especially in countries with small markets. China, the United Kingdom and the United States continued to have the biggest online alternative finance markets for businesses. Venture capital investments were up in most countries, and the number of SME listings expanded by more than 13% in 2017, with total SME market capitalisation up 16.7%.

SMEs and entrepreneurs constitute the backbone of OECD economies, accounting for 60% of total employment and 50-60% of value added. They are key to strengthening productivity, delivering inclusive growth and helping economies adapt to changes like the digital transition, ageing populations and the changing future of work. This eighth annual edition of the OECD’s SME financing Scoreboard provides data on debt, equity, asset-based finance and financing conditions in 46 countries and an overview of policy measures to ease SMEs’ access to finance.

“Uptake of alternative financing instruments by SMEs is growing like never before, while bank lending to SMEs is growing less strongly. We need to monitor these developments closely to ensure that SMEs are well-equipped to invest and contribute to productivity growth,” said OECD Secretary-General Angel Gurría, launching the Scoreboard in Washington alongside Chilean Central Bank Governor Mario Marcel on the margins of the IMF/World Bank Spring meetings.

“Policy makers around the world have a key role to play to increase SME access to a diverse set of financing instruments. We are glad that the policy initiatives of the government of Chile are successfully strengthening access to credit and equity for SMEs, and reducing payment delays,” said Governor Marcel.

The 2019 Scoreboard finds that asset-based financing also grew, with leasing and hire purchase activities up by a median rate of 6.2%.

SME loans grew at a median of close to 5% in a majority of middle income countries in 2017, while SME lending stagnated in the United States and the United Kingdom, and fell in European countries most affected by the financial crisis over the same period.

Credit conditions and interest rates remained favourable. The median value of the average interest rate charged to SMEs fell for the 7th year in a row, and SME bankruptcies dropped for the fourth consecutive year in 2017. On the other hand, some segments of SMEs continued to face difficulties in accessing finance. This is the case in particular for micro-enterprises, innovative ventures, start-ups and young firms.

Countries continued to do more to foster SME access to bank and alternative sources of finance by adapting regulations and introducing targeted policies to support Fintech. Credit guarantees, the most widespread instrument to ease SMEs’ access to finance, have been expanded in scale and volume, and better targeted to specific firms. The OECD is working to further expand the evidence base on SME access to finance and support governments in improving their policies in this area.

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