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Investing in Human Capital is Key to Sustainable Growth in GCC

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Economic growth in the Gulf Cooperation Council (GCC) region is expected to increase from 2.0% last year to 2.1% in 2019, before accelerating to 3.2% in 2020 and stabilizing at 2.7% in 2021, according to the new World Bank’s Gulf Economic Monitor released today in Abu Dhabi.

The biannual report, “Building the foundations for economic sustainability: Human capital and growth in the GCC,” commends the ongoing reforms made towards improving the business environment in the region. However, to achieve more sustainable growth, the GCC countries need to continue supporting fiscal consolidation, economic diversification, and increasing private sector-led job creation, especially for women and young people. The report also calls for accelerating human capital formation by adopting a holistic governmental strategy to improving health and education outcomes.

“Working closely with the GCC, we have seen strong political will from some countries to achieve their country Vision Plans with real, tangible outcomes on the ground,” said Issam Abousleiman, World Bank Regional Director for the GCC. “But economic transformation is a long-term endeavor, requiring steadfast, predictable implementation. While the road ahead is challenging, it is possible; and we are committed to taking this journey together.”

The GCC countries have made steady progress on implementing major reforms to attract investors and boost competitiveness, such as easing business licenses, lowering fees, liberalizing foreign ownership, and supporting women and young entrepreneurs. Much has been done in recent years to attract investments, especially in non-hydrocarbon sectors, and to encourage non-oil exports, such as reforming legislation and creating free trade zones with generous incentives for investors. But FDI inflows to the region have under-performed that of other emerging markets. A remaining agenda includes loosening foreign ownership of firms and reducing non-tariff barriers, in addition to business environment reforms, is already receiving high priority in many countries.

A vital part of the region’s economic transformation and reform agenda is human capital formation. In the World Bank’s recently published Human Capital Project (HCP), GCC Human Capital Index scores are higher than MENA’s average but lower than countries with comparable levels of income, such as Germany, Ireland and Singapore. Three of the GCC countries, KSA, Kuwait and UAE, are among the early adopters of the World Bank’s HCP, demonstrating their commitment to improving their human capital. The most pressing challenges slowing human capital formation in the GCC are related to learning outcomes and adult survival rates. Children

born today in the GCC will only attain between 58% and 67% of their full health and learning capacity and therefore potential productivity.

The report suggests four approaches to enhancing human capital in the GCC: (1) Investing in early childhood development to give children a strong learning foundation, (2) Preparing youth for the future by improving learning outcomes, linking education to labor market needs, and reducing major health risk factors like smoking, inactivity, and unhealthy diet, (3) Improving human capital of the adult population by emphasizing lifelong learning, increasing female labor force participation, reducing the skills mismatch, and preventing chronic diseases and injuries , and (4) Implementing policies to help change social norms and behaviors.

GCC Countries Outlook

Bahrain: Growth is projected at 2% in 2019, expected to reach 2.2% in 2020. Non-oil growth is expected to slow to 2.4%, due to front-loaded FBP fiscal measures and tapering mega-project investments. Growth will resume in the coming years as efficiency gains from reforms materialize.

Kuwait: Growth is forecast at 1.6% in 2019 due to OPEC+ oil output cuts in the first half of the year. The economy is expected to grow at around 3% by 2020 as higher government spending supports the non-oil sector.

Oman: Growth is projected to slow to 1.2% in 2019 as Oman’s commitment to the December 2018 OPEC+ output cut constrains oil production. There will be a one-off spike in growth to 6% in 2020 as the government plans to significantly increase investment in the Khazzan gas field. The potential boost from the diversification investment spending would continue supporting growth in 2021 and the medium term.

Qatar: Growth is expected to reach 3% in 2019, accelerating to 3.2% in 2020 and to 3.4% by 2021, as the country continues construction operations in preparation for the 2022 World Cup. In addition, higher infrastructure spending on Qatar National Vision 2030 projects aimed at diversifying the economy should help boost investor confidence.

Saudi Arabia: Growth is expected to slow moderately to 1.7% in 2019, as higher government spending offsets the impact of oil production cuts implemented in the first half of 2019. It should then recover to over 3% in 2020 as oil production cuts are reversed, and as large infrastructure projects generate positive spillovers to private sector growth.

United Arab Emirates: Growth in the UAE is forecast at 2.6% in 2019, jumping to 3% in 2020 as the country pushes infrastructure investments ahead of Dubai’s Expo 2020. Economic growth is forecast to reach 3.2% by 2021 supported by the government’s economic stimulus plans, hosting Expo 2020, and improved growth prospects in trading partners.

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Turkey: A full recovery from the COVID-19 crisis will take time

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The COVID-19 crisis has hit Turkey’s people and economy hard, accentuating pre-existing challenges such as the low share of workers in formal employment and obstacles to firm expansion. Well-designed support to households and firms that is aligned with a return to macroeconomic stability, and reforms to improve competition and labour laws, institutions and business would help to build a lasting recovery, according to a new OECD report.

The latest OECD Economic Survey of Turkey says a full recovery from the COVID-19 crisis will take time, given the blow from the drop in tourism and uncertainty over the future evolution of the pandemic, as well as Turkey’s limited welfare provisions and high levels of corporate and household debt. The crisis has put pressure on the viability of many businesses and on social cohesion, hitting informal workers, women, refugees and youths particularly hard. While a one-size-fits-all support strategy was justified during the first phase of confinements, policy support in the second wave of the pandemic should now be adapted to the varying conditions of sectors, workers, households and companies.

The pandemic has also amplified monetary policy challenges, with inflation surging further to well above Turkey’s 5% official target following interventions to shore up economic activity, bank liquidity and the Lira currency. Support to people and firms should be provided in a transparent and stable way to build investor confidence and reduce the risk of abrupt movements of capital. For example, targeted allowances for a stated period can be more effective than concessional loans and one-off transfers. Turkey should also seek to replenish foreign reserves and restore the independence of the Central Bank, the Survey says.

In parallel to the pandemic, Turkey remains exposed to geopolitical and trade risks, including the effect of the United Kingdom’s exit from the EU. As things stand, and factoring in headwinds from the second wave of the pandemic, the Survey projects Turkey’s GDP rebounding by 2.6% in 2021 and 3.5% in 2020.

“Turkey is looking at a gradual recovery from the COVID-19 crisis and risks persist for growth and well-being,” said Alvaro Pereira, OECD Director of Economic Country Studies. “The focus should be on restoring macroeconomic stability and seeing the post-crisis period as an opportunity to encourage foreign and domestic investment through stronger public governance, and to use market and labour reforms to empower businesses to grow and create quality jobs.”

Once a recovery is under way and investor confidence restored, the Survey estimates that a combination of market, institutional and education reforms could lift GDP per capita by 1% per year over the coming years. Market liberalisation reforms should include removing anticompetitive regulatory barriers in product markets, increasing labour market flexibility and reducing corporate income tax, while institutional reforms should improve public governance and the formalisation of business activities.

While the dynamism of Turkey’s business sector, and the country’s strong entrepreneurial spirit and youthful workforce, have been an asset through the COVID-19 pandemic, the majority of Turkish firms are very small and have limited capacity to weather a protracted slowdown. Significant parts of the business sector rely on informal or semi-formal practices in employment, corporate governance, financial transparency and tax compliance. Easing overly stringent regulations on product and labour markets and simplifying business and tax systems would make it easier for young firms to grow and move to the formal sector. A modernized and more efficient business sector would also help firms to emerge stronger from the crisis.

In terms of labour reforms, cutting non-wage labour costs, shifting part of the cost of social protection to sources other than payroll contributions, making statutory minimum wages affordable for low-productivity firms, and modernising regulations for temporary as well as permanent contracts would stimulate the creation of formal jobs once the recovery takes hold.

Education reforms should seek to enhance adult skills in a country which ranks among the highest in the OECD for qualification mismatch, with 43% of the working population either over-qualified (29%) or underqualified (14%) for their job. Investing more in Research & Development and in digital technology and infrastructure would also raise growth prospects.

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Call for Closer Policy Collaboration on Artificial Intelligence

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A recent APEC Business Advisory Council (ABAC) report revealed that artificial intelligence (AI) has a role to play in mitigating both the short and long-term effects of the COVID-19 pandemic on APEC economies.

From automated health diagnostics in hospitals to smart recruitment processes in organizations, the report, titled Artificial Intelligence in APEC, finds that this technology is creating new, previously unforeseen jobs, products and services that will contribute to the post-COVID-19 economic recovery.

“As we release this report, APEC economies are facing the twin threats of a global pandemic and an economic crisis that will leave its mark on our communities for years to come,” said Dato’ Rohana Tan Sri Mahmood, Chair of the 2020 APEC Business Advisory Council.

“How APEC economies address the accelerated rise of the digital economy and leverage new technologies like AI is one of the most pressing issues of our time,” she added.

The report also examines how AI is being adopted and applied across the region and makes key recommendations calling for closer policy collaboration between business and governments.

Of the surveyed APEC economies, the report found that most already have plans, policies or programs devoted to driving or supporting AI ecosystems. In fact, the report highlights some of the AI-related innovation already underway across the region, including finding ways to help patients suffering from locked-in syndrome to communicate with the world by a team of engineers at a university in the Philippines.

Another notable innovation will benefit the farming industry. A Japanese corporation is trying to improve the efficiency of farming by automatically aggregating and analyzing sensor data and satellite images to provide farmers with farm management recommendations. In addition, a group from New Zealand developed AI-powered crocodile-spotting drones to keep swimmers safe in Australian rivers, among others.

“AI technologies have the potential to significantly impact businesses and communities across our economies,” Dato’ Rohana explained. “We believe that APEC can serve as an effective forum for member economies to collaborate on ways to maximize the benefits of AI and promote inclusive growth while ensuring its use in a responsible and ethical manner,” she added.

According to the report, recognizing this technology and all its capabilities is a central component of an economy’s forward-looking policy for growth, productivity and job creation, highlighting that the potential of AI extends beyond economic benefits and includes tools to address complex issues such as poverty, inequality, climate change, healthcare and ways to cope with effects of the pandemic.

As AI becomes more widely accepted, adopted and used for innovation, the report suggests that APEC policymakers will need to draft new policies, revise existing ones, confront new questions, address new needs and reassess its impact.

“With the cooperation of the public and private sector, a coordinated future of AI will increase the Asia-Pacific region’s competitiveness and further facilitate regional integration,” the report notes.

Artificial intelligence, already well on its way to transforming the Asia-Pacific, drives social and economic growth across all key sectors. However, the pandemic, and the ensuing focus on economic recovery, brings a renewed sense of urgency to discussions around AI usage. 

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Global Economic Outlook 2021: Rebound will drive growth at record speed

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The global economy is projected to grow in 2021 by around 5% in market exchange rates – the fastest rate recorded in the 21st century – returning the global economy in aggregate to pre- pandemic levels of output by the end of 2021 or early 2022.

The predictions published today in PwC’s Global Economy Watch for 2021 – From the Great Lockdown to the Great Rebound – highlight key themes for 2021 linked to a wider reset for economies, skills and society. 

Growth will return, but be uneven and be contingent on a successful and speedy deployment of vaccines and continued accommodative fiscal, monetary and financial conditions in the larger economies of the world.  Another key theme will be how the push for recovery and growth could synchronize green infrastructure investment, creating a turning point in the fight against climate change. 

Growth will return but be uneven 

Despite projected expansion of 5% in market exchange rates this year, the predictions caution that the next three-to-six months will continue to be challenging, particularly for the Northern Hemisphere countries going through the winter months as they could be forced to further localised or full economy-wide lockdowns (as recently displayed in the UK). 

Output in some advanced economies, for example, could contract in Q1 and growth overall is more likely to pick up in the second half of the year, when it is expected that large advanced economies will  have vaccinated at least two thirds of their population.

Barret Kupelian, senior economist at PwC, said:“While it’s good news that the global economy in aggregate is likely to be back to its pre-crisis levels of output by the end of 2021 or early 2022, a distinguishing feature of the Great Rebound is that it will be uneven across different countries, sectors and income levels. For example, the Chinese economy is already bigger than its pre-pandemic size, but other advanced economies ‒‒ particularly heavily service based economies like the UK, France and Spain or those focused on exporting capital goods, such as Germany and Japan ‒‒ are unlikely to recover to their pre-crisis levels by the end of 2021.”

In economies such as the UK, France, Spain and Germany, growing but lower levels of output are projected to push up unemployment rates, with most of the jobs affected likely to be those at the bottom end of the earnings distribution, thus exacerbating income inequalities. 

Barret Kupelian, senior economist at PwC, added: “Once the virus is under control, policymakers’ attention will need to focus on laying the foundations for sustainable and inclusive growth with particular focus on creating jobs and pushing the green economy agenda. Business leaders need to plan now both in terms of growth and investment, including upskilling of their existing workforce as a key aspect.”

A synchronised push for green infrastructure 

The environment will be an important focus for 2021 and is already being positioned as an opportunity for accelerating the business and policy transition to net zero. Significant investment and policy shifts related to the Paris Climate Agreement are expected in 2021 in the major trading blocks including the US, China and the EU. 

Green bonds, which are used to directly finance environmental projects, currently make up less than 5% of the global fixed income market. In 2021, total green bond issuance will increase by over 40% to top half a trillion US dollars for the first time. In addition, investor appetite for Environmental, Social and Governance (ESG) funds will continue to increase and could account for up to 57% of total European mutual funds by 2025. 

Globally, the analysis points to electricity production from renewables continuing to gather momentum, with solar photovoltaic (PV) capacity likely to grow at rapid rates on the back of growing capacity in the EU, India and China. If current trends continue, solar PV capacity is on course to surpass natural gas in 2023 and coal in 2024 in the global electricity sector.

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