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Success of China’s Belt & Road Initiative Depends on Deep Policy Reforms

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China’s Belt and Road Initiative (BRI) could speed up economic development and reduce poverty for dozens of developing countries—but it must be accompanied by deep policy reforms that increase transparency, improve debt sustainability, and mitigate environmental, social, and corruption risks, a new World Bank Group study on the BRI transportation corridors has found.

Through independent, empirical analysis, the Belt and Road Economics study is designed to help policymakers in developing countries weigh the potential benefits and risks of participating in BRI projects. It assesses the network of proposed transportation projects in about 70 countries along land and maritime BRI corridors that connect Asia, Europe, and Africa. It also provides a series of policy recommendations to help developing countries along those corridors maximize potential benefits while mitigating a variety of risks.

“Achieving the ambitions of the Belt and Road Initiative will require equally ambitious reforms from participating countries,” said Ceyla Pazarbasioglu, the World Bank’s Vice President for Equitable Growth, Finance, and Institutions. “Improvements in data reporting and transparency—especially around debt—open government procurement, and adherence to the highest social and environmental standards will help significantly.”

If implemented fully, the initiative could lift 32 million people out of moderate poverty—those who live on less than $3.20 a day, the analysis found. It could boost global trade by up to 6.2 percent, and up to 9.7 percent for corridor economies. Global income could increase by as much 2.9 percent. For low-income corridor economies, foreign direct investment could rise by as much as 7.6 percent. At the same time, the cost of BRI-related infrastructure could outweigh the potential gains for some countries.

The study, by a team of World Bank Group economists led by Michele Ruta, found that complementary policy reforms will be essential for countries to unlock BRI-related gains. Real income for BRI economies could be two to four times larger if trade facilitation is improved and trade restrictions are reduced. In addition, stronger labor-mobility and adjustment policies would ensure that gains are more equally shared.

Yet, the analysis found, BRI also entails significant risks that are exacerbated by a lack of transparency and weak institutions in participating economies. Many BRI projects cross borders, so coordination among all economies within a corridor is critical. Among the 43 corridor economies for which detailed data is available, 12—most of which already face elevated debt levels—could suffer a further medium-term deterioration in their outlook for debt sustainability. It could boost global carbon emissions by 0.3 percent—and by up to 7 percent in countries with low emissions levels.

 “BRI’s success depends on the implementation of policy measures in three broad categories: transparency, country-specific gaps, and multilateral cooperation,” said Caroline Freund, the World Bank’s Director for Macroeconomics, Trade, and Investment. “Greater transparency is necessary at all levels, from project planning to budgeting and procurement and public reporting of debt levels. For countries to benefit fully from BRI, they will need to work together. In addition, many countries need to strengthen environmental standards, adopt social safety nets, and improve labor mobility.”

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Tax revenues have reached a plateau

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Tax revenues in advanced economies reached a plateau during 2018, with almost no change seen since 2017, according to new OECD research. This ends the trend of annual increases in the tax-to-GDP ratio seen since the financial crisis.

The 2019 edition of the OECD’s annual Revenue Statistics publication shows that the OECD average tax-to-GDP ratio was 34.3% in 2018, virtually unchanged since the 34.2% in 2017.

Major reforms to personal and corporate taxes in the United States prompted a significant drop in tax revenues, which fell from 26.8% of GDP in 2017 to 24.3% in 2018. These reforms affected corporate income tax revenues, which fell by 0.7 percentage points, and personal income tax revenues (a fall of 0.5 percentage points).

Decreases were also seen in 14 other countries, led by a 1.6 percentage point drop in Hungary and a 1.4 percentage point drop in Israel. In contrast, nineteen OECD countries report increased tax-to-GDP ratios in 2018, led by Korea (1.5 percentage points) and Luxembourg (1.3 percentage points).

In 2018, four OECD countries had tax-to-GDP ratios above 43% (France, Denmark, Belgium and Sweden) and four other EU countries also recorded tax-to-GDP ratios above 40% (Finland, Austria, Italy and Luxembourg). Five OECD countries (Mexico, Chile, Ireland, the United States and Turkey) recorded ratios under 25%. The majority of OECD countries had a tax-to-GDP ratio between 30% and 40% of GDP in 2018.

Corporate income tax revenues continued their increase since 2014, rising to 9.3% of total tax revenues across the OECD in 2017. This is the first time corporate income tax revenues have exceeded 9% of total tax revenues since 2008.

In contrast, the share of social security contributions in total tax revenues continued the consistent decline seen in recent years, dropping to 26% in 2017, compared to 27% in 2009. Other tax types have not exhibited a clear trend in recent years.

This year’s report contains a Special Feature that reconciles data on environmentally related tax revenues in Revenue Statistics with the OECD Policy INstruments for the Environment (PINE) database. This exercise provides higher-quality data for policymakers and researchers in this important policy area.

The Special Feature shows that environmentally related tax revenues accounted for 6.9% of total tax revenues on average in OECD countries in 2017, ranging from 2.8% in the United States to 12.5% in Slovenia and Turkey. As a share of GDP, environmental taxes account for 2.3% on average, with country shares ranging from 0.7% in the United States to 4.5% in Slovenia. The largest share of ERTRs is derived from energy taxes, both on average and in nearly every OECD country, accounting for nearly three-quarters of ERTRs, according to the report.

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India: Step up reform efforts to increase quality jobs and incomes

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India is set for a modest recovery after a loss of momentum, as reforms to simplify taxation, lighten business regulations and upgrade infrastructure start to bear fruit. Further reforms to modernise the economy are now needed to drive the creation of high-quality jobs, as well as measures to improve public services and welfare, according to a new OECD report.

The latest OECD Economic Survey of India notes that while India has greatly expanded its participation in global trade in recent years, private investment remains relatively weak, the employment rate has declined amid a shortage of quality jobs, rural incomes are stagnating, and per-capita income varies considerably across states. 

“India is now well established as a growth champion and a major player in the global economy,” said OECD Chief Economist Laurence Boone, launching the Survey in New Delhi. “However, this slower pace of growth underlines the need to fully implement existing reforms and continue lowering barriers to trade to generate the investment and jobs India needs to raise living standards across the country.”

The Survey sees India’s GDP growth recovering to 6.2% in 2020 and 6.4% in 2021 after dipping to 5.8% in 2019 following several years of robust growth. Restoring growth to the higher levels needed to provide ample jobs and ease inequality will require accelerating the pace of structural reforms to revive investment and exports.

Improving the health of the financial sector, where the share of non-performing loans has declined but remains high, will be key to supporting investment. The Survey recommends speeding up bankruptcy procedures and improving governance in the banking sector.  

India has ramped up its participation in international trade since slashing tariffs in the 1990s. Its share of global goods and services exports reached 2.1% in 2018, up from 0.5% in the early 1990s, thanks to a strong performance in sectors like information technology and pharmaceuticals. Addressing remaining infrastructure bottlenecks by modernising ports and adding roads will be key to boosting India’s competitiveness. Reducing restrictions to services trade imposed by trading partners and by India on imports would further boost trade in services, also giving a lift to manufacturing and the general economy. OECD estimates suggest India would be the biggest beneficiary of a multilateral cut in services trade restrictions. Even without a multilateral agreement, moving alone to overhaul regulations would have a positive impact.

While many millions of Indians have been lifted out of poverty in recent years, too many have no formal employment benefits and little access to finance. Doing more to simplify complex labour laws – many of which discourage hiring by becoming binding as firms grow above stated thresholds – would help raise the share of quality jobs demanded by a fast-growing and well-educated youth population in a country where the vast majority of employment is informal.

The government has made some headway improving access to electricity, drinking water and rural roads. Housing shortages, and poor access to basic amenities, remain acute, particularly in rural areas. Population growth and urbanisation will add to housing pressures already estimated to affect some 40 million households across the country. Developing the currently small rental market could help achieve a pledge to provide a house for all Indians by 2022. Finally, mobilising more revenue from property and personal income taxes could create the fiscal space to raise spending on health, education and social transfers.

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Italian Cities Can Make Doing Business Easier By Learning From Each Other

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Local companies in Italy face varying regulations and procedures for the same business activity depending on where they establish their businesses, says a new World Bank study released today. The study highlights good practices in Italian cities that underscore opportunities for the government to do more to support entrepreneurs and firms across the country.

Doing Business in the European Union 2020: Greece, Ireland and Italy measures the business environment for small and medium-size enterprises in five areas: starting a business, dealing with construction permits, getting electricity, registering property and enforcing contracts. Thirteen cities in Italy are benchmarked: Ancona, Bari, Bologna, Cagliari, Florence, Genoa, Milan, Naples, Padua, Palermo, Reggio Calabria, Rome, Turin.

“We hope that this study will empower policy-makers and practitioners at the national and local levels with data to inform their strategies and help improve the local business regulatory environment across Italy,” said Arup Banerji, World Bank Group Regional Director for the European Union.

A different city is the best performer in each of the areas measured. It is easiest to start a business in Ancona and Milan, deal with construction permits in Cagliari, get a new electricity connection in Bologna, register property in Rome, and enforce a contract in Turin. Overall, Bologna and Milan are the two cities that registered the greatest number of best practices.

“The cities measured in the study have different strengths, which means that Italy can make improvements overall if cities learn from each other and implement successful measures,” said Rita Ramalho, Senior Manager of the World Bank’s Global Indicators Group, which produces the report.

Disparity in regulatory performance are particularly significant in the areas of getting electricity, construction permits, and contract enforcement, while starting a business and registering property are more homogenous, thanks to the nationwide launch of digital tools that streamline regulatory processes.

Time is the dimension that varies the most across the five areas. For example, resolving a commercial dispute takes 860 days in Turin, thanks to efforts started in the early 2000s to reduce case backlogs, as well as the more recent development of specialized court sections, while in Reggio Calabria it takes more than twice as long. Similarly, obtaining a new electricity connection takes two months and a half in Bologna and Rome, but three times longer in Palermo, with the main driver of variance being how long it takes to obtain excavation permits from municipalities.

Despite a number of good practices documented in the study, challenges remain. Firms across Italy still face inefficient and lengthy procedures that carry a high cost. This is particularly the case for the enforcing contracts area, the only indicator where all Italian cities perform below the EU Doing Business average.

Doing Business in the European Union is a series of subnational studies being produced by theWorld Bank Group at the request of and funded by the European Commission. This edition also benchmarks 6 cities in Greece and 5 cities in Ireland, besides the 13 cities in Italy. A first edition, covering 22 cities in Bulgaria, Hungary and Romania, was released in 2017. A second edition, covering 25 cities in Croatia, the Czech Republic, Portugal and Slovakia, was released in 2018.

The work on Italy, carried out with the support of the Minister of Economic Development, is based on the same methodology as the global Doing Business study published annually by the World Bank Group.

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