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Wide-ranging reforms needed to ensure Italy’s economic recovery

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Stronger, more inclusive and sustainable growth, better job opportunities and a reduction in the level of public debt in Italy require a comprehensive programme of far-reaching reforms while maintaining the important measures taken in recent years, according to a new OECD report.

The latest Economic Survey of Italy says the country’s GDP is expected to fall by around 0.2% this year before growing 0.5% in 2020. GDP per capita is broadly at the same level of 20 years ago and poverty remains high, especially among the young. Low productivity growth and wide social and regional inequalities are long-standing challenges which need to be tackled vigorously. The public debt as a share of GDP remains high, at 134%, and a source of risks.

The report says Italians generally have high levels of well-being in areas such as work-life balance, social connections and health, but not in others such as environmental quality, education and skills.

To support stronger employment and productivity growth, improve well-being, and help to put the debt-to-GDP ratio on a downward path, the Survey proposes an ambitious reform package. According to OECD simulations, by 2030, annual GDP growth would increase from 0.6% under current policies to above 1.5% if such reforms were implemented. The report identifies strengthening the effectiveness and efficiency of the public administration and justice system among the reforms proposed that would have the biggest impact on GDP.

The government’s 2019 budget rightly aims to help the poor through the new Citizen’s Income (Reddito di cittadinanza), says the report, but it will be important not to weaken work incentives so as to avoid poverty traps. The high level of the Citizen’s Income benefit – relative to other OECD countries – might discourage people from finding jobs in the formal sector, especially in regions where wages are lower. To counter this problem the report proposes to introduce an in-work benefit system and lower the Citizen’s Income benefit.

The survey adds that the effectiveness of the Citizen’s Income will depend critically on marked improvements in job search and training programmes. It welcomes the additional resources allocated to public employment services but warns that improvements will require a detailed plan to revamp their operations through more extensive use of information and technology, and profiling tools.

The report also warns that the reduction in the retirement age – to 62 with at least 38 years of contributions – though only temporary, could lower economic growth in the medium term by reducing work among older people and worsen intergenerational inequality.

The number of people in work has risen to 58% of the working age population, but Italy’s employment rate is still one of the lowest among OECD countries, especially for women. Big differences in employment rates explain much of the disparities in living standards between regions. Job quality is also relatively low. An increasing share of new jobs are temporary and the mismatch between people’s skills and the work they do is high.

Reform action taken in recent years, such as increasing autonomy and resources in schools (Buona scuola), Industry 4.0 and the Jobs Act have started to address some of the country’s challenges and it will be important not to backtrack on them. At the same time, it will be necessary to boost productivity growth by increasing competition in markets that are still protected such as local public services, enhancing administration efficiency and reducing barriers to entrepreneurship.

Presenting the report in Rome, OECD Secretary-General Angel Gurría said: “The Italian economy has many strengths. Exports, private consumption, investment flows and a dynamic manufacturing sector have driven growth in recent years while labour market reforms have helped raise the employment rate by 3 percentage points since 2015.”

“But the country continues to face important economic and social challenges,” he added. “Tackling them requires a multi-year reform package to achieve stronger, more inclusive and sustainable growth, and revive confidence in the capacity to reform.”

Without sustainable public spending and taxation policies, the room to improve infrastructure, help the poor and deliver the services people expect will inevitably narrow, the report says. Designing budgets within the EU Growth and Stability Pact, which should be implemented in a pragmatic way, would help strengthen the credibility of Italian fiscal policy and reduce its risk premium. Lower government bond yields would also help safeguard the stability of banks. The health of the banking sector has improved markedly as banks’ non-performing loans have declined and the sector is being rationalised and consolidated.

Public spending needs to become more efficient and better targeted through designing and implementing spending reviews in the budget making process. The tax system needs to be made fairer through improved voluntary compliance, avoiding repeated amnesties and fighting evasion forcefully.

With public investment having fallen as a share of GDP in recent years, the report recommends speedier implementation of the new public procurement code, which it says is well thought out. Simplifying the most complex aspects of the new code should not weaken the power of the anti-corruption authority.

To help reduce wide regional divides across Italy, improved coordination is needed between central and local bodies – whose capacity needs to be strengthened – to ensure more effective spending of regional development and EU cohesion funds. 

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Russia Among Global Top Ten Improvers for Progress Made in Health and Education

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Russia is among the top ten countries globally for improvements to human capital development over the last decade, according to the latest update of the World Bank’s Human Capital Index (HCI).

The 2020 Human Capital Index includes health and education data for 174 countries covering 98 percent of the world’s population up to March 2020.

Russia’s improvements were largely in health, reflected in better child and adult survival rates and reduced stunting. Across the Europe and Central Asia region, Russia, along with Azerbaijan, Albania, Montenegro, and Poland, also made the largest gains in increasing expected years of schooling – mainly due to improvements in secondary school and pre-primary enrollments. The report also shows that over the last 10 years Russia has seen a reduction in adult mortality rates. However, absolute values of this indicator remain high in the country with this progress now at risk due to the global Covid-19 pandemic.

Human capital contributes greatly to improving of economic growth in every country. Investments in knowledge and health that people accumulate during their lives are of paramount concern to governments around the world. Russia is among the top improvers globally in the Index. However, challenges persist and much needs to be done to improve the absolute values of Index indicators,” said Renaud Seligmann, the World Bank Country Director in Russia.

The HCI, first launched in 2018, looks at a child’s trajectory, from birth to age 18, on such critical metrics as child survival (birth to age 5); expected years of primary and secondary education adjusted for quality; child stunting; and adult survival rates. HCI 2020, based on data up to March of this year, provides a crucial pre-pandemic baseline that can help inform health and education policies and investments for the post-pandemic recovery.

Of the 48 countries in Europe and Central Asia included in the 2020 Human Capital Index (HCI), 33 are among the upper-third in the world, and almost all are in the top half. However, there are significant variations within the region.

In Russia, a child born today can expect to achieve 68 percent of the productivity of a fully educated adult in optimal health. It is at the average level for Europe and Central Asia countries and the third result globally among the countries of the same income group. There is a stark contrast between education and health subscales in Russia. While the education outcomes of the country are high and outperform many high-income peers, its health outcomes are below the global average.

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Accelerating Mongolia’s Development Requires a Shift “from Mines to Minds”

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A new report by the World Bank estimates that out of every dollar in mineral revenues Mongolia has generated over the past 20 years, only one cent has been saved for future generations. The report argues that to break this cycle, Mongolia should use its mineral wealth to invest in people and institutions, while gradually reducing its dependence on the sector.

This is particularly true as demand for key minerals is likely to tumble due to climate change concerns, a shift of investors’ preference toward sustainability, China’s ambitious goal to reduce coal consumption, and persistence of the COVID-19 shock, according to Mongolia’s Mines and Minds, the World Bank’s September 2020 Country Economic Memorandum for Mongolia.

Since the advent of large-scale mining in 2004, Mongolia’s economy has grown at an average rate of 7.2 percent per year, making it one of the fastest-growing economies in the world. Growth has translated to rapid decline – although at times partly reversed – in the incidence of poverty and improved quality of life. The report also notes that Mongolia enjoys relatively strong human capital, and its infrastructure capital has improved for the last few decades, though remains scarce given the size of the country and low population density. This performance has been made partly possible through a generous but inefficient social assistance system and a large public investment program supported by mineral revenues and external borrowing.

However, a number of enduring challenges have grown in the shadow of this success. Mongolia’s rapid growth has been obscured by its extreme macroeconomic volatility and frequent boom and bust cycles. Growth has almost entirely come through capital accumulation and the intensive use of natural capital rather than through sustained productivity growth. Meanwhile, the country has not only consumed almost all its mineral outputs, but has also borrowed heavily against them, bequeathing negative wealth to the next generation.

Instead of maximizing the benefits of its mineral wealth for diversified and inclusive growth, Mongolia has increasingly become more addicted to it. At the same time, human capital has been underutilized and institutional capital has eroded.” said Andrei Mikhnev, World Bank Country Manager for Mongolia. “Such inability to capitalize on the country’s endowments has resulted in limited diversification of outputs and exports and has further amplified its vulnerability to the swings of the global commodity markets. Breaking this gridlock calls for a fundamental shift in approach that puts investing in minds on an equal footing with mines.”

The report recommends key policy actions to build the foundation of a diversified and sustainably growing  economy. These include:

  • Implement countercyclical fiscal and monetary policies – supported through transparent fiscal rules, an independent fiscal council, a market-driven exchange rate, and a well-functioning stabilization fund – to smooth consumption over the business cycle rather than maximize current consumption.
  • Undertake bold investment climate reforms to enhance competition, secure investor rights, and create a more level playing field that enables productive firms to invest and grow.
  • Move away from the mindset of diversifying products to expanding endowments, especially in terms of better utilization of Mongolia’s young and educated, especially female, labor force.
  • Accelerate the implementation of fundamental governance reforms (especially on the government effectiveness and control of corruption) to reduce political interference, increase transparency, and improve regulatory quality throughout the economy.

“Fortunately, there are many encouraging signs of improved macroeconomic management in 2017-19, providing the new government an opportunity to advance its reform efforts,” said Jean-Pascal Nganou, World Bank Senior Country Economist and lead author of the report. “Some impressive fiscal outcomes were achieved not by introducing new reforms but by effectively implementing existing ones. They demonstrate that with the right political will and leadership, similar improvements are possible in other areas including monetary and exchange rate policy, the financial sector, the business environment, and the labor market. The new administration has, therefore, an opportunity to institutionalize these reforms and avoid policy regression in the future.”

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Nearly 9 in 10 People Globally Want a More Sustainable and Equitable World Post COVID-19

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In a new World Economic Forum-Ipsos survey of more than 21,000 adults from 28 countries nearly nine in ten say they are ready for their life and the world to change.

72% would like their own lives to change significantly and 86% want the world to become more sustainable and equitable, rather than going back to how it was before the COVID-19 crisis started. In all countries, those who share this view outnumber those who don’t by a very significant margin (more than 50 percentage points in every country except South Korea). Preference for the world to change in a more sustainable and equitable manner is most prevalent across the Latin America and Middle East-Africa regions as well as in Russia and Malaysia.

Next week’s World Economic Forum Sustainable Development Impact Summit will address the achievement of the sustainable development goals and the appetite for transformation which will drive the “decade of delivery”.

Clear majority ready for a more sustainable and equitable world

Globally, 86% of all adults surveyed agree that, “I want the world to change significantly and become more sustainable and equitable rather than returning to how it was before the COVID-19”. Of those, 46% strongly agree and 41% somewhat agree, while 14% disagree (10% somewhat and 4% strongly).

Russia and Colombia top the list of countries that strongly or somewhat agree with that statement at 94%. They are followed by Peru (93%) Mexico (93%) Chile (93%) Malaysia (92%), South Africa (91%) Argentina (90%) and Saudi Arabia (89%). The countries that are most change averse – disagreeing somewhat or strongly disagreeing with the statement – are South Korea (27%), Germany (22%), Netherlands (21%), US (21%) and Japan (18%).

Dominic Waughray, Managing Director, at the World Economic Forum said, “The Great Reset is the task of overhauling our global systems to become more equitable and sustainable, and it is more urgent than ever as COVID-19 has exposed the world’s critical vulnerabilities. But the technology to transform things tends to outpace the human will to change. In six months, the pandemic has systematically broken down this cultural barrier and we are now at a pivot point where we can use the social momentum of this crisis to avert the next one.”

Ready for significant personal change

Across all 28 countries, 72% want their lives to change significantly rather than returning to what it was like before the COVID-19 crisis (30% strongly and 41% somewhat) while the other 29% disagree (21% strongly and 8% somewhat).

Latin America stands out for its optimism, with Mexico, Colombia and Peru in the top five countries strongly or somewhat agreeing. Agreement is also high South Africa (86%), Saudi Arabia (86%, Malaysia (86%) and India (85%). By contrast, at least two out of five adults in the Netherlands, Germany, South Korea, Japan, Sweden, the US, UK and Canada long for their life to just return to how it was before the pandemic.

MethodologyThese are the results of a 28-country survey conducted by Ipsos on its Global Advisor online platform. Ipsos interviewed a total of 21,104 adults aged 18-74 in United States, Canada, Malaysia, South Africa, and Turkey, and 16-74 in 23 other countries between August 21 and September 4, 2020. Where results do not sum to 100 or the ‘difference’ appears to be +/-1 more/less than the actual, this may be due to rounding, multiple responses or the exclusion of don’t knows or not stated responses.

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