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Improving the skills of Chileans would boost productivity and inclusive growth

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Chile’s economy is strengthening and wage growth picking up. The country should now address the challenge of improving people’s skills, particularly among women and low-skilled workers, in order to boost productivity, innovation and inclusive growth, according to a new OECD report.

Getting Skills Right: Chile says that Chile has made significant progress in education participation and quality in the past decades but more than one in two adults have poor literacy and numeracy skills, according to the OECD Survey of Adult Skills.

Even university-educated Chileans perform, on average, below the OECD mean for high school graduates. Differences among socio-demographic groups, notably between men and women, by educational attainment and across age groups, are also sharper than in most OECD countries.

The report finds a significant mismatch between the level and type of skills acquired in education and those in demand in the labour market. Skills mismatches are relatively high in Chile, with workers more likely than in other OECD countries to have lower literacy than needed by their jobs and to work in a job unrelated to their area of study.

A skilled workforce will be important to ensure that Chile can innovate and adopt new technologies, according to the report. A better use of skills will help translate higher skills into productivity gains. Boosting skill levels will also foster inclusiveness by helping increase the labour market participation of women and improve job quality for the low-skilled, many of whom work in the informal economy.

The report highlights the importance of quality adult learning to upgrade and maintain the skills of people already in the labour force. It recommends the introduction of an effective system for the recognition of prior learning, to better signal the skills of job applicants and reduce mismatch.

The study also recognises that skills may only be part of the solution for some groups: women’s weak labour force participation in Chile is likely to be strongly related to the difficulty of reconciling work and family life. Better services to support women’s labour market participation would help make the best use of women’s skills.

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Amid Multiple Crises, Major Transformation of Commodity Markets Is Underway

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Global commodity markets are being reshaped in lasting ways as a result of COVID-19, the war in Ukraine, and the impacts of climate change—a transformation that is likely to have profound implications for developing economies over the coming decades, a new World Bank study has found.

The study, Commodity Markets: Evolution, Challenges, and Policies, offers the first comprehensive analysis—encompassing all major commodities—of how these markets evolved over the past 100 years and the directions they are likely to take over the next 30. It predicts that growth in overall global demand for commodities is likely to decelerate as population growth slows and developing economies mature, although demand for some commodities is likely to rise.

Moreover, the transition to cleaner energy is likely to be challenging. Demand for metals necessary to build the infrastructure for renewable energy and to produce electric vehicles is likely to surge in the coming decades, driving up the price of metals and delivering windfall gains for countries that export them. Although renewable energy is fast becoming the lowest-cost source of energy in many countries, fossil fuels will probably retain some of their appeal, especially in countries with ample domestic reserves.  In the short-run, with inadequate investment in low-carbon technologies—just one-third of the required level—energy demand could continue to outstrip supply, keeping prices at elevated levels.

“Amid overlapping crises over the past two years and the ongoing transition to lower carbon intensity, commodity markets are being reshaped,” said World Bank Group President David Malpass. “These changes will have major implications for growth and poverty reduction in developing economies, two-thirds of which are commodity exporters. A sound goal is for the shifts in commodity markets to encourage good outcomes for both development and environmental sustainability.”

The study also sheds new light on the causes and consequences of volatility in commodity markets, revealing a troubling insight for commodity exporters: it finds that price increases don’t materially boost economic growth for an extended period in developing countries. On the other hand, price declines tend to reduce growth significantly—and for several years.

“Boom-and-bust cycles in commodity markets are enormously disruptive to progress in developing economies—especially the poorest countries,” said Mari Pangestu, the World Bank’s Managing Director for Development Policy and Partnerships. “Still too many countries maintain an excessive dependence on exports of just a few types of commodities. The ongoing crises are a wake-up call for governments to renew their efforts to value their natural capital in a sustainable way, diversify their economies, and reduce their vulnerability to commodity shocks.”

The analysis shows that commodity-price shocks affect different commodity exporters in distinctive ways, demonstrating why policy solutions need to be tailored to reflect the specific circumstances of each country.

Policymakers can manage commodity-market shocks in at least three ways:

Fiscal, monetary, and regulatory frameworks: Governments should put in place a fiscal framework that uses periods of high prices to build rainy-day funds that can be deployed quickly in an emergency. Exchange-rate regimes need to be agile to work effectively in combination with well-defined monetary policy frameworks. Regulators should put in measures to prevent the accumulation of excessive financial-sector risks—especially with respect to capital inflows and foreign-currency debt.

Measures to moderate boom-bust cycles: Governments tend to resort to subsidies or trade protections to reduce the effects of commodity-price movements on consumers. Commodity-exporting countries often attempt to mitigate market volatility by reaching agreements to regulate supplies. History shows that such efforts usually are costly and counterproductive. A better approach is to adopt market-based risk mechanisms to limit exposure to price movements.

Economic diversification: Facing a long-term decline in fossil-fuel demand, countries that export such fuels should continue to diversify their economies. Low-income countries that depend heavily on  agricultural exports would also benefit from reforms that help expand other sectors of their economy. These efforts can be aided by building human capital, promoting competition, strengthening institutions, and reducing distorting subsidies.

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Focus on Quality Key to Effective Healthcare Reform in Developing Nations

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Funding medical care projects in low- and middle-income countries with Performance-Based Financing (PBF) increases the number of patients treated but often falls short of improving the quality of health services offered, according to a new World Bank report. 

Direct financing of frontline facilities may play a more important role in supporting impactful health financing reform, according to the Policy Research Report Improving Effective Coverage in Health: Do Financial Incentives Work? 

“There are more than six million deaths from preventable causes each year,” said Carmen M. Reinhart, World Bank Senior Vice President and Chief Economist. “We need to focus on making sure people across the developing world have access to the quality medical care they need to prosper and achieve their full potential.” 

PBF is a package intervention which relies on performance pay to health facilities and workers, with payments linked to the quantity and quality of services they deliver. It also includes autonomy, accountability, and community engagement. Government bureaucracies the world over deploy performance pay across sectors including education and health. Over the past two decades, PBF programs have been widely adopted in health with the aim of improving the stubbornly poor health outcomes in low- and middle-income countries despite sustained investments in health service delivery and service utilization. Since the late 2000s, more than US$2.5 billion has been invested in PBF projects in primary health service delivery in low-income countries, a significant departure from previous financing models, which had little link to outcomes and results.

The report finds that PBF projects produced gains in health outcomes compared with the status quo, although these gains did not necessarily result from the specific financial incentives and associated monitoring components of projects. Whereas transparency, accountability, and direct frontline facility financing produced results, the evidence from countries like Cameroon and Nigeria does not show additional benefits that outweigh the costs of performance pay to frontline workers. This is because many aspects of quality-of-care improvements are well outside the control of health workers. Evidence from several sub-Saharan African countries shows that only a third of the factors behind poor quality lie within the control of health workers, meaning the performance pay alone is not a silver bullet in this context. For example, a Nigerian program that directly funded facilities and supported autonomy and flexibility was half the cost but proved to be as effective as program that supported autonomy and flexibility, as well as including performance pay.

Impactful health financing reform might mean pivoting from performance pay while retaining other important aspects of PBF projects that do yield similar results. Health facilities can deliver better results when they have budget autonomy, flexibility, and unified payment systems, and health facilities’ budgets can be output oriented and impactful even without explicit performance pay.

The report focuses on the best policies to support effective coverage, a measure that adjusts simple coverage of care with the quality of care provided. The study covered millions of households and found that equitable access to affordable health care is not a reality for many women, men, children, and adolescents in the developing world. This is true both for basic services, such as maternal and child health, as well as for services aimed at preventing and treating the emerging threat of noncommunicable diseases. 

Estimates of effective coverage and its two components for six conditions (pregnancy, child malaria, child diarrhea, hypertension, tuberculosis, and HIV) using household survey data establish that effective coverage—and by extension, quality of care—is currently still shockingly poor for many health conditions in many environments.

Performance pay may make sense in decentralized, high-quality health systems that already support facility financing and autonomy as well as accountability and transparency. However, its potential may be more limited in centralized, under-resourced health systems that have key gaps at various points. In addition, performance pay can incentivize the provision of inappropriate, unnecessary, or irrelevant care. 

“At a time when COVID-19 pandemic has increased mortality and morbidity and caused severe disruptions to routine health services, it is extremely important to focus on the most effective reforms to improve access to high-quality health care,” said Mamta Murthi, World Bank Vice President for Human Development. “This is an unprecedented opportunity to rethink the way countries build health systems, finance them, and deliver services towards the goal of health for all.”

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Urgent Action Needed to Ensure a Resilient Energy Transition Amid Severe Global Challenges

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A special report on the state of the global energy transition, released today by the World Economic Forum indicates that urgent action is required by both private and public sectors to ensure a resilient transition as the world faces the most severe energy crisis since the 1970s. According to the report, Fostering Effective Energy Transition 2022, the urgency for countries to accelerate a holistic energy transition is reinforced by high fuel prices, commodities’ shortages, insufficient headway on achieving the climate goals and slow progress on energy justice and access.

Building on 10 years of the Energy Transition Index, an annual country benchmarking report, this special edition report, launched in collaboration with Accenture, details key recommendations for governments, companies, consumers and other stakeholders on how to progress the energy transition.

Prioritizing a resilient energy transition and diversification of the energy mix is crucial in responding to energy market volatility. To accelerate the transition to cleaner energy supply and demand, the report notes that more countries need to make binding climate commitments, create long-term visions for domestic and regional energy systems, attract private sector investors for decarbonization projects and help consumers and the workforce adjust.

“Countries are at risk of future events compounding the disruption of their energy supply chain at a time when the window to prevent the worst consequences of climate change is closing fast,” said Roberto Bocca,Head of Energy, Materials and Infrastructure, World Economic Forum. “While there are difficult decisions to be taken to align the imperatives of energy security, sustainability and affordability in the short term, now is the time to double down on action.

The report also reveals the structural barriers to balancing energy affordability, security and availability with sustainability. This is due to compounded shocks to the energy system from a post-pandemic surge in energy demand, fuel supply bottlenecks, inflationary pressures and reconfigured energy supply chains as a result of the war in Ukraine.

To navigate this challenging situation, countries must pursue diversification on two fronts – not only in the domestic energy mix in the long term but also in considering their fuels and energy suppliers in the shorter term. Most countries rely on just a handful of trade partners to meet their energy requirements and have a deficient diversification of energy sources, providing limited flexibility to deal with disruptions. The report notes that of 34 countries with advanced economies, 11 rely on only three trade partners for over 70% of their fuel imports.

“The current energy crisis reveals just how important energy is to people and the economy,” said Espen Mehlum,Head of Energy, Materials and Infrastructure Programme for Benchmarking, World Economic Forum. “It is now critical to tackle the structural risks that have become evident while also increasing momentum on climate action. Success will largely hinge on policy and investments. Prioritizing energy efficiency and ramping up investment in clean energy infrastructure, renewables, clean hydrogen and new nuclear capacity can strengthen energy system resilience and will be a win-win for reducing emissions.”

Muqsit Ashraf,aSenior Managing Director and Global Energy Business Lead, Accenture, said: “Governments need to invest in decarbonizing their energy systems while securing affordable energy supply and companies should look to adopt low-carbon technologies and energy-efficient processes. A key area of focus should be value chain and industrial decarbonization initiatives, which hold great promise for emissions reductions, particularly when they involve collaboration across multiple stakeholders, including customers, suppliers and regulators, on initiatives like circular supply networks and CO2 handling infrastructure.”

There’s also a need to protect consumers and ensure affordable access to energy

“While navigating this challenging energy and materials landscape, companies have to help protect against rising costs of living for consumers, including in transportation, utilities and electricity,” said Kathleen O’Reilly,Global Lead, Accenture Strategy. “Vulnerable populations in particular, who most feel the impact of volatile energy prices and their impact on other basic goods and services, must be a strategic focus in a transition to sustainability that is equitable in value and scalable in impact. A key facet of this involves defining financial mechanisms to help vulnerable consumers cope with economic shocks, while not reducing incentives for companies to focus on energy efficiency and adoption of sustainability services”.

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