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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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Korea: Keep supporting people and the economy until recovery fully under way

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Korea has limited the damage to its economy from the COVID-19 crisis with swift and effective measures to contain the virus and protect households and businesses. Support for workers and the export-dependent economy should continue, given falling employment and the risk of prolonged disruption to trade and global value chains, according to a new OECD report.

Thanks to the government’s prompt response to the pandemic, Korea is experiencing the shallowest recession among OECD countries. However, the recovery will be slow and uncertainty remains high, says the latest OECD Economic Survey of Korea. The Survey recommends continuing economic support measures to households and business until a recovery is fully under way, while ensuring that fiscal plans preserve long-term fiscal sustainability. Income support should be targeted to low-income households, and skills training should be offered even beyond the crisis to help vulnerable people who lost their job find employment in new areas.

Sound public finances mean there is room for fiscal stimulus. The Survey suggests focusing investment in some of the areas featuring in the recent Korean New Deal, such as 5G telecommunication and artificial intelligence. Reforming regulations, cutting barriers to competition and encouraging innovation could help to diffuse new technologies through the economy and lift productivity.

The Survey projects a rebound in activity after the sizeable drop in the first half of 2020, with a 0.8% contraction in 2020 and 3.1% growth in 2021, absent a resurgence of the pandemic. While domestic-oriented activity is normalising gradually, the global recession is holding back exports and investment. A second global wave of infections would delay the recovery: GDP would then contract by 2% in 2020, and growth reach only 1.4% in 2021.

Further disruptions in world trade and global value chains would hurt the Korean economy, which depends heavily on exports and is deeply integrated in global value chains. In addition, the COVID-19 crisis is creating financial risks, notwithstanding a wide range of policy interventions, as rising unemployment and loss of income affect debt reimbursement by households and small businesses, while uncertainty increases financial market volatility.

The Survey examines the looming pressures of an ageing population, with Korea’s old-age dependency ratio set to be the highest of any OECD country by 2060. It notes that the share of elderly people in relative poverty – defined as living on less than half of the median household income of the total population – is the highest among OECD countries. It recommends further increasing the basic old-age pension and focusing it on people in absolute poverty, as well as addressing high unemployment among disadvantaged groups and the wide gender wage gap. Along with stronger social protection, easing labour market regulations would promote productivity and reduce labour market duality.

A Survey chapter on the digital economy looks at the potential to boost productivity and well-being by building on the country’s outstanding digital infrastructure and IT technology and addressing digital skills gaps and the digital gap between large and small firms. The Survey recommends building on the system of regulatory sandboxes – where regulatory obligations can be partly waived to encourage innovation in products or business models – to improve product market regulations. It also recommends facilitating the use of telemedicine to boost productivity and well-being.

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MDBs’ Annual Climate Finance Passes $61 Billion

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Climate financing by seven of the world’s largest multilateral development banks (MDBs) totaled $61.6 billion in 2019, with $41.5 billion (67%) in low- and middle-income economies, according to the 2019 Joint Report on Multilateral Development Banks’ Climate Finance.

In addition to its traditional focus on low- and middle-income countries, the 2019 report expands the scope of reporting for the first time to all countries of operations.

Some $46.6 billion, or 76% of total financing for the year, was devoted to climate change mitigation investments that aim to reduce harmful greenhouse gas emissions and slow down global warming.

The remaining $15 billion, or 24%, was invested in adaptation efforts to help countries build resilience to the mounting impacts of climate change, including worsening droughts and more extreme weather events from extreme flooding to rising sea levels.

The report combines data from the Asian Development Bank (ADB), the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Inter-American Development Bank Group, the World Bank Group and—for the first time—the Islamic Development Bank, which joined the working group in October 2017. In 2019, the Asian Infrastructure Investment Bank also joined MDB working groups, and its data is presented separately in the report.

Additional climate funds channeled through MDBs—such as from the Climate Investment Funds, the Global Environment Facility Trust Fund, the Global Energy Efficiency and Renewable Energy Fund, the European Union’s Funds for Climate Action, and the Green Climate Fund—also play an important role in boosting MDB climate financing. In 2019, the MDBs reported a further $102.7 billion in net climate cofinancing from public and private sources. This raised the total climate activity financed by MDBs in 2019 to $164.3 billion.

“The growing flow of MDB climate finance shows our joint resolve to take on climate change and, in the face of the coronavirus disease (COVID-19) pandemic, it is more important than ever to ‘build back better’ in a low carbon and climate resilient way,” said the Director General of ADB’s Sustainable Development and Climate Change Department Woochong Um. “The report shows that climate finance provided by and through the MDBs is providing increasing support for these needed transitions.”

In 2019, ADB committed almost $7.1 billion in climate finance (more than $5.5 billion for mitigation and $1.5 billion for adaptation). This included $705 million from external resources, including multilateral climate funds. Further, ADB mobilized $8.8 billion of climate cofinancing.

The report shows that the MDBs are on track to deliver on their increased climate finance commitments. In 2019, the MDBs committed their global annual climate financing to reach $65 billion by 2025—with $50 billion for low- and middle-income countries—and that MDB adaptation finance would double to $18 billion by 2025. The MDBs have reported on climate finance since 2011, based on a jointly developed methodology for climate finance tracking.

The 2019 Joint Report on Multilateral Development Banks’ Climate Finance is published in the midst of the COVID-19 pandemic, which has caused significant social and economic disruption, temporarily reducing global carbon emissions to 2006 levels.

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Public Transport Can Bounce Back from COVID-19 with New and Green Technology

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Public transport must adapt to a “new normal” in the wake of the coronavirus disease (COVID-19) pandemic and adopt technologies that will render it more green and resilient to future disasters, according to a new report by the Asian Development Bank (ADB).

The report, Guidance Note on COVID-19 and Transport in Asia and the Pacific, details the profound impact of the pandemic on transport, as swift lockdowns forced millions this year to work from home overnight, schools to shift to e-learning, and consumers to flock to online shopping and food delivery.

While public transit may have been previously perceived as a mostly green, efficient, and affordable mode of travel, initial trends in cities that have re-opened have indicated that public transit is still considered to be relatively unsafe and is not bouncing back as quickly as the use of private vehicles, cycling, and walking.

“The two key challenges ahead are addressing capacity on public transport to maintain safe distancing requirements, and how best to regain public confidence to return to public transport,” said Bambang Susantono, ADB Vice-President for Knowledge Management and Sustainable Development. “In the short term, more effort is needed to reassure public transport users of safety and demonstrate clean and safe public transport. In the longer term, technological advances, big data, artificial intelligence, digitalization, automation, renewables and electric power can potentially offer fresh innovations to tackle changing needs, giving rise to smarter cities.”

While drastic lockdown measures around the world have brought world economies to their knees, satellites have recorded data on how the concentrations of CO2 and air pollutants have fallen drastically, bringing clear blue skies to many cities.

But as cities have reopened, traffic levels have increased. For example, Beijing traffic levels, by early April 2020, exceeded the same period in 2019. If this trend is seen on a wide scale, it could set back decades of effort in promoting sustainable development and more efficient means of urban mobility.

The report says there is a short window of opportunity for cities to promote the adoption of low-carbon alternatives to lock-in the improved air quality conditions gained during the peak of the pandemic lockdown. Public transport can play an important role through more active promotion of clean vehicles, provision of quality travel alternatives in public transport, and a better environment for non-motorized modes such as walking and cycling to enhance overall health and wellbeing.

The confidence of passengers on public transport should be restored through protective measures such as cleaning, thermal scanning, tracking and face covering, the report says. Further study to explore how protective and preventive measures can be stepped up to allow relaxation of safe distancing requirements would help mitigate capacity challenges. A possible future trend may be consolidation of services and rationalization of routes to better serve the emerging travel demand patterns and practices.

As countries enter the “recovery” phase, further preventive and precautionary operating measures and advanced technology should be implemented to enable contactless processes and facilitate an agile response. Demand management measures can facilitate crowd control in public transport systems and airports. As a complementary measure, non-motorized transport capacity could be expanded to absorb spillover demand from public transport.

Since mass public transport is the lifeblood of most economies, government policies and financial support are essential during this period, to enable public transport operators to stay viable and continue to support the movement of passengers and goods in a sustainable way.

For ADB, which committed last year $7 billion to the transport sector, behavioral trends linked to COVID-19 may require a review of the short-term viability of passenger transport and operational performance to meet changing demand for public transit systems. “Regardless of the COVID-19 pandemic it is clear that developing Asia will continue to have a large need for additional transport infrastructure and services,” the report concludes. “It would take several years before the projects currently in the pipeline would be operational and much can happen during these years.”

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