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Kazakhstan Must Rise to Challenge of Diversification, as Productivity Stagnates

MD Staff

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Kazakhstan’s real gross domestic product (GDP) growth is projected at 3.8% for 2018 – down from 4.1% in 2017 – and to stabilize at around 3% in the medium term, according to the World Bank’s latest Kazakhstan Economic Update.

The Challenge of Economic Diversification amidst Productivity Stagnation attributes this GDP growth to a better-than-expected oil sector performance, steady pick-up in the services sectors and in agriculture. Despite these developments, however, Kazakhstan’s productivity growth has been in decline recently, curtailed by limited space for private sector growth and state dominance in the economy.

“Kazakhstan has initiated a series of reforms—including civil service reforms, fiscal decentralization, judicial modernization and measures to improve the business environment—in an attempt to address key structural weaknesses,” says Francis Ato Brown, World Bank Country Manager for Kazakhstan. “The implementation of these reforms could accelerate Kazakhstan’s transition toward a new growth model with a diversified and productive economy at its core.”

According to the report, household and public consumption in Kazakhstan remains weak. Going forward, household consumption is forecast to rise only modestly, on the back of recovering real incomes. Inflation eased to 5.3% in the year ending in October 2018, down from 7.7% in the same period in 2017, despite exchange rate volatility.

The special section of the Economic Update examines the decline in productivity of Kazakhstan’s economy.

“The economy of Kazakhstan is expected to perform better, thanks to the oil sector,” says Julio Revilla, World Bank lead economist for Central Asia. “However, analysis shows that productivity will be key for sustainable and long-term growth.”

Productivity growth in Kazakhstan has declined sharply in the past few years. After growing each year since the early 2000s and contributing up to 6% to GDP growth, the latest data shows that productivity declined by 2% per year between 2014 and 2016.

The decline in productivity is attributed largely to constraints imposed on private sector development, as reflected in low rates of business entry. In Kazakhstan, a handful of players—mostly state-owned enterprises – dominate key product markets. Empirical evidence suggests that newer, smaller firms are more productive than older, larger firms. However, because of the continued protection of inefficient, large firms, the exit of less productive firms is not taking place. This suggests that critical elements of Kazakhstan’s economic transition remain incomplete.

To improve productivity growth, the Economic Update makes several policy recommendations:

  • Establish a regulatory environment that enables small and medium enterprises to emerge, grow, and attract FDI, and substantially reduce the state’s presence in the economy;
  • Apply global best practices in reducing corruption and bolstering the rule of law to make  companies in Kazakhstan more effective and adaptable;
  • Implement competition and regulatory frameworks to ensure that privatization processes reduce concentration of market power, rather than simply transfer rents from the public sector to the private sector.

This edition of the country economic update is part of a semi-annual series designed to monitor socio-economic developments in Kazakhstan and is available online

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Peru should help more young vulnerable people into work

MD Staff

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Peru’s remarkable economic growth since the 2000s and policies targeting the most vulnerable young people have helped boost the youth employment rate. Peru should now focus on improving job opportunities for low-skilled youth, young women and indigenous and Afro-Peruvian youth, according to a new OECD report.

Investing in Youth: Peru says that the youth employment rate today is higher than both the average of OECD countries and many Latin American countries. But many challenges remain.

Income inequality is high and poverty has risen recently. A large share of the youth workforce with a lack of the right skills and a sizeable informal sector hinder the transition to a more productive, better-paid and better quality jobs for Peruvian youth.

Young people with tertiary education face an even higher risk of unemployment than their less-educated peers. In 2017 their unemployment rate was 14.6%, compared to 8.7% for people with a secondary education degree and 7.3% for unskilled youth.

 The situation of limited employment opportunities for many youth also translates into low levels of well-being. Close to 34% of Peruvian youth affirm that they find it difficult, or very difficult, to get by with their present household income. This compares to an OECD average of about 20% and places Peruvian youth towards the worse-off end of Latin American and Caribbean countries.

Today’s high proportion and number of youth in the Peruvian working age population is set to decline in the near future. Without action, the opportunities to benefit from the growth dividend associated with the demographic bonus will fade away, according to the report.

To help more young people into work, the OECD recommends that Peru:

Strengthen social dialogue with unions, civil society and employers in order to improve labour market policies that reduce the dualism of the labour market between permanent and temporary contracts and encourage employers to hire young workers.

Ensure that business incentives, such as tax breaks for small firms, do not discourage them from expanding and hiring young workers.

Expand and increase the efficiency of the public employment services (PES) by strengthening recruitment and training programmes for caseworkers.

Continue efforts to increase the enrolment and learning performance of students from disadvantaged backgrounds.

Engage in ambitious policies to tackle the vulnerability of young Peruvian women.

Combat discrimination against indigenous and Afro-Peruvian youth; and

Boost job opportunities for rural indigenous youth by implementing a nationally co-ordinated strategy to help rural populations engage in new and more profitable entrepreneurial activities.

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New safety and health issues emerge as work changes

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Changes in working practices, demographics, technology and the environment are creating new occupational safety and health (OSH) concerns, according to a new report from the International Labour Organization (ILO).

Growing challenges include psychosocial risks, work-related stress and non-communicable diseases, notably circulatory and respiratory diseases, and cancers.

The report, Safety and Health at the heart of the Future of Work: Building on 100 years of experience * , is being published ahead of the World Day for Safety and Health at Work , which is marked on April 28th. It reviews the ILO’s 100 years of work on OSH issues, and highlights emerging health and safety issues in the world of work.

Currently, more than 374 million people are injured or made ill every year through work-related accidents. It is estimated that work days lost to OSH-related causes represent almost 4 per cent of global GDP, in some countries as much as 6 per cent, the Report says.

“As well as more effective prevention for established risks, we are seeing profound changes in our places and ways of working. We need safety and health structures that reflect this, alongside a general culture of prevention that creates shared responsibility,” said Manal Azzi, ILO Technical Specialist on Occupational Safety and Health.

Looking to the future, the report highlights four major transformative forces driving changes. It points out that all also offer opportunities for improvements.

First, technology, such as digitization, robotics, and nanotechology, can also affect psychosocial health and introduce new materials with unmeasured health hazards. Correctly applied it can also help reduce hazardous exposures, facilitate training and labour inspections.

Demographic shifts are important because young workers have significantly high occupational injury rates, while older workers need adaptive practices and equipment to work safely. Women – who are entering the workforce in increasing numbers – are more likely to have non-standard work arrangements and have a higher risk of musculoskeletal disorders.

Thirdly, development and climate change give rise to risks such as air pollution, heat stress, emerging diseases, shifting weather and temperature patterns that can bring job losses. Equally, new jobs will be created through sustainable development and the green economy.

Finally, changes in the organization of work can bring flexibility that allows more people to enter the labour force, but may also lead to psychosocial issues (for example, insecurity, compromised privacy and rest time, or inadequate OSH and social protections) and excessive work hours. Approximately 36 per cent of the world’s workforce currently works excessive hours (more than 48 hours per week).

In the light of these challenges the study proposes six areas on which policy makers and other stakeholders should focus. These include more work on anticipating new and emerging OSH risks, adopting a more multidisciplinary approach and building stronger links to public health work. Better public understanding of OSH issues is also needed. Finally, international labour standards and national legislation need to be strengthened, something which will require stronger collaboration between Governments, workers and employers.

By far the greatest proportion of current work-related deaths – 86 per cent – come from disease. In the region of 6,500 people a day die from occupational diseases, compared to 1,000 from fatal occupational accidents.

The greatest causes of mortality are circulatory diseases (31 per cent), work-related cancers (26 per cent) and respiratory diseases (17 per cent).

“As well as the economic cost we must recognize the immeasurable human suffering such illnesses and accidents cause. These are all-the-more tragic because they are largely preventable,” said Azzi. “Serious consideration should also be given to the recommendation of the ILO’s Global Commission on the Future of Work , that occupational safety and health be recognized as a fundamental principle and right at work.”

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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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