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Further reforms in Japan needed to meet the challenges of population ageing and high public debt

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The Japanese economy is undergoing the longest expansion in its post-war history, marked by strong job creation and business investment. Government policy must overcome the intertwined challenges posed by rapid population ageing and high government debt to ensure sustainable and inclusive growth for future generations, according to a new report from the OECD.

The latest OECD Economic Survey of Japan looks at the factors behind the faster growth achieved in recent years, as well as the deep changes expected from the projected decline in the labour force. The Survey projects growth of about 0.75% this year and next, in the context of current trade tensions and slower economic growth in China that risk disrupting private sector investments and global value chains.

The Survey, presented in Tokyo by OECD Secretary-General Angel Gurría, discusses the need for fundamental labour market reform to make the most of Japan’s human resources in the context of a shrinking labour force. It also looks at how Japan can ensure fiscal sustainability in an ageing society, which is putting upward pressure on spending.

“The Japanese economy has been supported by the three arrows of Abenomics – bold monetary policy, flexible fiscal policy and structural reforms,” Mr Gurría said. “Reforms that adapt public finances and the labour market to a much older society are urgently needed to ensure fiscal sustainability and continuing prosperity in the future.”

With Japan’s population projected to remain the oldest in the OECD, the Survey underlines the need for wide-ranging labour market reforms for a shrinking workforce. A shift to more flexible employment and wage systems based on performance rather than seniority would enable Japan to better utilise its human capital, including women and older persons, the Survey said. This should include abolition of firms’ right to set the mandatory retirement at age 60, reducing the link between seniority and wages, and renewed focus on measures to remove obstacles to employment, to increase women’s access to childcare, and to allow them to play a greater role in the workforce.

With the rising number of elderly putting increasing pressure on public spending, further efforts will be needed to stabilise Japan’s public debt, which at 226% is already the highest in the OECD. A comprehensive fiscal consolidation plan – covering specific spending cuts and tax increases, including a further gradual rise in the consumption tax – will improve fiscal sustainability.

Healthcare reforms, notably taking long-term care out of hospitals, improving preventive medicine and increasing the use of generic drugs, are urgently needed to limit spending. Tax and pension reforms will also be required.  

Boosting labour productivity will be another key to offsetting the impact of a smaller workforce. Policy should specifically seek to reduce the productivity gap between large firms and small and medium-sized enterprises.

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Economic Diversification Can Create More and Better Jobs in Ghana

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Ghana’s economic growth has been strong over the past decade, with annual GDP per capita growth at 4.4 percent between 2006 and 2017. Growth however has been heavily concentrated in the natural resources and commodities sectors which has had an impact on how and where jobs can be created, according to a World Bank report, entitled “Economic Diversification Through Productivity Enhancement.”

 “About 40 percent of the employed work in non-wage agriculture and most urban workers are in low-productivity informal jobs, primarily in the services sector”, said, Pierre Laporte, World Bank Country Director. “The need for economic diversification is therefore urgent for the creation of more and better jobs. Increasing productivity of firms is critical to accelerate job rich growth”.

The report analyzes the main challenges for economic diversification. Ghana’s productivity levels are relatively high in the African context, although they lag behind most other lower-middle- and middle-income countries. The report highlights key constraints for firms to engage in productive activities, such as: (i) access to finance; (ii) access to well-located services, and affordable industrial land; and (iii) access to qualified labor, which is particularly important for firms operating at the technological frontier.

 “Growth comes through structural change – a shift of economic activities and employment from low to high productivity areas would help to overcome Ghana’s economic concentration and challenges related to job creation” said Michael Geiger, World Bank Senior Economist and co-author.

Capital accumulation has been a driving force for economic growth over the past decade. Increasing the capital stock is good news for an economy that is trying to address its infrastructure gap and has ambitious goals to catch-up economically. Capital accumulation in Ghana was realized through strong increases in investments concentrated in a few, natural resource sectors. In order to broaden Ghana’s economic endowment, investments need to benefit more sectors in the economy.

To create a pathway to a more diversified economy, the report suggests taking advantage of short-term wins in promising sectors for growth such as agribusiness, chemicals, textiles, processed resources through upgrading of existing production and product differentiation. It calls for interventions to lay the foundation for economic activity to flourish, such as human capital and physical infrastructure development, bettering the business enabling environment by removing some of constraints to productivity growth, and addressing structural issues to attract more foreign direct and domestic investments.

The report concludes that a more diverse economy could help reduce economic volatility from commodity cycles and offer new opportunities for more people to benefit from strong economic growth.

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Income Growth Sluggish for Malaysian Youth, Lower- Income Households

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Slowing income growth among lower-income households and younger workers has contributed to perceptions of being “left behind”, according to the 21st edition of the World Bank’s Malaysia Economic Monitor, launched here today.

Although median incomes continue to outpace inflation, income growth rates for low-income Malaysians slowed between 2014 and 2016. Moreover, wage growth for younger and less-educated workers has been sluggish, persistently trailing the earnings of older and better-educated workers, according to the report.

Median employment income for younger workers aged between 20 and 29 grew at an annual rate of 2.4 percent, compared to 3.9 percent for those 40 to 49 years old over the same period. The increase in the monthly absolute earnings gap between these two age groups has been more pronounced, more than doubling from RM529 in 2004 to RM1,197 in 2016 (all amounts adjusted for inflation). This signifies a growing wage divide and wage stagnation for the youths.

The report highlighted varying purchasing power in different parts of the country, poor financial planning, household indebtedness, and unaffordable housing as other key factors affecting living costs.

“The cost of living is a concern which extends beyond prices. Those on lower wages spend their income to pay for essentials – rent, transportation, food – and in the end, they find not much is left for the month. The challenge for policymakers is that different solutions are needed to cater to different groups with different needs,” said YB Datuk Seri Saifuddin Nasution Ismail, Malaysia’s Minister of Domestic Trade and Consumer Affairs. “The National Action Council on Cost of Living was established so that efforts by different ministries and government agencies can be formulated, consolidated and discussed under one roof. This timely report by the World Bank also serves to inform efforts to better serve the people.”

Amidst global uncertainty, the report notes that Malaysia’s growth continues to be sustained with GDP projected to expand by 4.5 percent in 2020, largely driven by the expected expansion of private consumption of 6.5 percent and despite weaker-than-anticipated investment and export growth in recent months.

Given the outlook, preserving fiscal space will be vital to mitigate the impact of any shocks. More can be done to raise government revenue, forecasted to be at 15.2 percent of GDP in 2020, without affecting low-income households, in key areas such as making personal income taxes more progressive and broadening consumption taxes. This will help create fiscal space for development and social spending to boost shared prosperity.

“More than ever, we need to scale up investments in people to encourage sustainable, inclusive economic growth. Malaysia can make policy decisions to combat inequality and improve the lives and opportunities of the poorest,” said Mara Warwick, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand. “The report draws on strong evidence to identify high-impact policies with a proven record of building shared prosperity and improving people’s access to services and long-term development opportunities.”

Alleviating cost of living pressures demands a mix of short-term measures and long-term policies, according to the report. Short-term measures should strengthen social safety nets, while over the long run, greater coordination across agencies and implementation of structural reforms to foster greater market competition and accelerate productivity would help lift real incomes for all.

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Inequality threatening human development

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Despite global progress in tackling poverty, hunger and disease, a “new generation of inequalities” indicates that many societies are not working as they should, the UN Development Programme (UNDP) argues in its latest report released on Monday. 

The 2019 Human Development Report (HDR) states that just as the gap in basic living standards is narrowing for millions of people, inequalities surrounding education, and around technology and climate change, have sparked demonstrations across the globe. 

Left unchecked, they could trigger a ‘new great divergence’ in society of the kind not seen since the Industrial Revolution, according to the report. 

“This Human Development Report sets out how systemic inequalities are deeply damaging our society and why,” said Achim Steiner, the UNDP Administrator. 

 “Inequality is not just about how much someone earns compared to their neighbour. It is about the unequal distribution of wealth and power: the entrenched social and political norms that are bringing people onto the streets today, and the triggers that will do so in the future unless something changes. Recognizing the real face of inequality is a first step; what happens next is a choice that each leader must make.”  

‘Inequality not beyond solutions’ 

Mr. Steiner added crucially that “inequality is not beyond solutions”. 

The human development approach views “richness” as going beyond the idea that economic growth will automatically lead to development and wellbeing. 

It focuses on people, and their opportunities and choices.   

UNDP research shows that in 2018, 20 per cent of human development progress was lost due to the unequal distribution of education, health and living standards. 

“What used to be ‘nice-to-haves’, like going to university or access to broadband, are increasingly important for success, but left only with the basics, people find the rungs knocked out of their ladder to the future,” said Pedro Conceição, Director of the HDR Office at UNDP. 

Invest in education, productivity, public spending 

The report recommends revamped policies in the areas of education, productivity and public spending. 

As inequality begins even before birth and can accumulate through adulthood, investing in young children’s learning, health and nutrition is key. These investments must continue throughout life as they have an impact on earnings and productivity in the labour market. 

UNDP observed that countries with a more productive workforce generally have a lower concentration of wealth at the top, which is enabled by policies that support stronger unions, the right to a minimum wage, social protection and which bring more women into the workplace. 

The report further highlights the role of taxation, which cannot be looked at on its own.  Rather, fair taxation should lie behind policies that include greater public spending on health, education and greener energy alternatives. 

Beyond today 

As the UNDP chief noted, “Different triggers are bringing people onto the streets — the cost of a train ticket, the price of petrol, demands for political freedoms, the pursuit of fairness and justice. This is the new face of inequality”. 

Looking to the future, the report asks how inequality might be viewed years down the line, especially in relation to  “two seismic shifts” that will shape the next century. 

Those are the climate crisis, and the progress of the technological transformation that includes renewables and energy efficiency, digital finance and digital health solutions. 

The report calls for opportunities to be “seized quickly and shared broadly”. 

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