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Uncertainty is Certain for China’s Growing Economy

MD Staff

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Uncertainty is the enemy of markets, but seems assured for the year ahead when it comes to China’s economic outlook.

At a CCTV-2 debate, one of the first sessions of the World Economic Forum’s 13th Annual Meeting of the New Champions, panellists differed over projections for China’s growth – some sanguine, others cautious – but agreed on the challenges ahead in turbulent times.

“Trade difficulties still exist,” said Ning Gaoning, Chairman of the Sinochem Group. “But companies are prepared.” He remained bullish on growth prospects: “I’m quite optimistic,” he said. “The momentum of China’s economic growth is very strong.”

Min Zhu, Chairman of China’s National Institute of Financial Research, demurred. “In 2019, the risk has gone up, not down,” identifying the rising risk of a no-deal Brexit and its effects on financial markets as a major factor, given the likelihood of Boris Johnson becoming the next Prime Minister of the UK.

The trade dispute between the United States and China remains a major spanner in the gears of China’s economic machine. Yet, US President Donald Trump’s recent decision to allow US technology companies to sell to Huawei is a positive sign, “acknowledging that the technological supply chain cannot be disrupted,” stressed Zhu.

Further positive signals at the G20 summit in Osaka, with trade negotiations restarted and signs of consensus, may buoy markets. Yet as Ning highlighted, “Chinese companies are confronted with the challenge of changing their business models.”

Participants were reminded that China’s economy, the second largest in the world, is still growing apace and bolstering the world economy. “China is contributing more to global growth than any other country,” said Jing Ulrich, Vice-Chairman of Global Banking and Asia-Pacific at JPMorgan Chase & Co.

Yet new drivers of that growth will be needed to ensure its continued primacy.

“China is moving to a more balanced growth model, a more consumer-driven growth model,” said Joachim von Amsberg, Vice-President of Policy and Strategy at the Asian Infrastructure Investment Bank. He cited investment in infrastructure – not just domestically, but also in the wider region – as another new driver of development.

Consumption and an expanding service sector have mixed prospects: car sales have dropped in China, but the cosmetics market has grown. “I see consumption powering ahead, despite economic uncertainties,“ said Ulrich. “Chinese are opening up their purse strings; they are spending more and saving less.”

“Technology and innovation will become very important drivers of growth,” Ulrich added. “5G is not just faster, but will transform the way we live and work.” She attributed falling car sales to the changing market as consumers move to car-sharing platforms, with autonomous vehicles as a further expected disruption.

“The combination of a robust economic backdrop, technology innovation and the propensity to consume,” Ulrich summarized, “will mean that, in the next five to 10 years, China will continue to be a very strong global economic driver, not just here in Asia.”

Ning stressed China’s job creation and its R&D sector as crucial elements of growth, and claimed that the nation had “surpassed the middle-income trap.” He continued: “China enjoys stability, and our governance mechanism has optimized, so industrialization will continue to improve.”

Others were not so optimistic. Kevin Sneader, Global Managing Partner at McKinsey & Company, identified the disruptions of shifting power, demographics, populism and the environment, as well as the Fourth Industrial Revolution, as “real challenges [to] the established way of doing things.”

“China is still the biggest market in the world,” he emphasized. “The world needs China more than China needs the world.” Yet a flat-to-declining working population, changing production chains and technological disruption will shake its economic foundations.

“It’s too early to see how this will play out,” he said, adding: “The one thing that we can be certain of is that uncertainty will continue.”

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Brazil must immediately end threats to independence and capacity of law enforcement to fight corruption

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The OECD Working Group on Bribery urges Brazil, one of the founding Parties to the Anti-Bribery Convention since 1997, to preserve the full capacity and independence of law enforcement authorities to investigate and prosecute foreign bribery and corruption. Despite being recognised by the Working Group for its significant anti-corruption enforcement efforts following its previous evaluation in 2014, there are now concerns that Brazil, due to recent action taken by the legislative and judiciary branches, risks backsliding on progress achieved, that could seriously jeopardise Brazil’s ability to meet its obligations under the Anti-Bribery Convention.

The Working Group has continuously alerted Brazil since 2016 of risks posed by attempts to broaden the definition of what constitutes abuses of authority by judges and prosecutors. Despite these warnings, a Law on abuses of authority (13. 869/2019) characterised by vague concepts will enter into force in January 2020. The Working Group has also expressed concerns that, following injunctions of the Supreme Court, limitations on the use of reports by Financial Intelligence Unit, Federal Revenues and other administrative agencies in criminal investigations might seriously hamper Brazil’s ability to detect and effectively fight corruption. This, combined with other actions by the Supreme Court and the Federal Auditor’s Court that are likely to have an effect on concluded foreign bribery cases, could constitute a serious push back in Brazil’s exemplary fight against corruption.

On 12-13 November 2019, a High-Level Mission of the OECD Working Group on Bribery discussed these issues in Brasilia with Minister of the Office of the Comptroller General Wagner de Campos Rosário, Minister of Justice Sérgio Moro, Attorney General André Mendonça, Deputy Prosecutor General of the Republic Hindemburgo Chateaubriand, President of the Supreme Court José Antonio Dias Toffoli, Senator Marcos do Val, as well as with the Chair of Brazil-OECD Parliamentary Group and Leader of the Government Deputy Vitor Hugo along with members of this Group. However, the High-Level Mission could not meet as scheduled with Prosecutor General of the Republic Augusto Aras, and with the Presidents of the Commission of Constitution and Justice of both the Chamber of Deputies and the Senate.

“Despite disappointing last minute cancellations of key high level representatives, we appreciate the readiness of the Brazilian authorities to meet with us to discuss outstanding issues related to law enforcement capacity and independence in foreign bribery cases,” said Drago Kos, Chair of the Working Group on Bribery. “However, we are quite alarmed that what Brazil had managed to achieve in recent years in the fight against corruption may now be seriously jeopardised. Brazil must strive toward reinforcing its framework and legal tools to fight foreign bribery, not weaken them.”

“The OECD high-level mission is a relevant initiative, as it brings a comprehensive analysis of the landscape of the fight against corruption in the country” said Minister of the Office of the Comptroller General Wagner de Campos Rosário. “Brazil has evolved considerably in recent years in the fight against corruption. The enactment of the corporate liability law (Law 12.846/2013), the establishment of leniency agreements, and the adoption of integrity plans in federal agencies and entities are important progresses. Nonetheless, this is a continuous process of improvement and we will always be seeking to improve our controls and mechanisms to combat the evil of corruption, thereby ensuring the delivery of better quality public services to citizens.”

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Austria: Reforms will be necessary to uphold high well-being levels

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Austria stands out for its high levels of economic and social well-being. Preserving these will require reforms to improve competition in the service sector, increase access to risk capital for firms of all sizes, encourage more women and migrants into the workforce and lengthen work lives to reflect the ageing population, according to a new OECD report.

The latest OECD Economic Survey of Austria, presented in Vienna by the OECD’s Director of Country Studies Alvaro Pereira, projects GDP growth of 1.4% for 2019 and 1.3% for 2020. The 2020 projection is down from 1.6% forecast by the OECD in May, though the 2019 projection is unchanged, as recruitment bottlenecks, weakening external demand – especially from key markets Germany and Italy – and global trade tensions dampen Austria’s outlook.

The report’s key recommendations include linking the retirement age to life expectancy, which has risen steadily while Austrians are still retiring much earlier than the OECD average. The effective retirement age in Austria is notably lower than in neighbouring Germany and Switzerland. Austria’s labour participation rate is also low, especially among older women.

To increase the incentives to stay in work, the report recommends Austria do more to reduce its high levels of tax and social security on labour income, particularly for low earners, relative to most other OECD countries. This could be balanced by shifting to alternative sources of taxation such as environmental, consumption, inheritance and wealth taxes.

Reducing barriers to entry in key sectors ranging from service professions and specialist manufacturing to rail and freight transport and pharmaceutical distribution could bolster competition and economic dynamism. The small and medium-sized businesses that dominate Austria’s economy would benefit from greater access to venture capital and a better developed equity market. A reform planned by the outgoing government to address the debt-bias in the corporate tax system would help level the playing field between debt and equity financing.

The report recommends making access to quality childcare, early childhood education and all-day schooling for older children a legal entitlement throughout the country, to make it easier for new mothers to return to work and improve their career prospects. While this is a challenge given Austria’s geography, it would also contribute to more equal opportunities in the education system.

Austria has one of the highest shares of migrants in its workforce of OECD countries. This means migrants play an important role in meeting robust demand for labour yet the country also has a major challenge in trying to integrate low-skilled immigrants. Increasing the availability of language courses and adult skills training would help to address this.

The report also calls for Austria to increase its focus on environmental issues, for example by increasing carbon prices, which are low by international standards, and improving town planning to address the rising environmental impact of urban sprawl.

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Greece Can Improve Its Business Climate by Replicating Local Successes

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Greece has taken significant action to improve the business environment but entrepreneurs face different regulatory hurdles depending on where they establish their businesses, highlighting opportunities for cities to do better by learning from each other, the World Bank said in a new report, Doing Business in the European Union 2020: Greece, Ireland and Italy.

The report’s findings on Greece, released today, show that Greek cities are already European Union best performers in the area of starting a business, requiring only three procedures. But significant disparities in regulatory performance remain in the other four areas benchmarked: Dealing with construction permits, getting electricity, registering property, and enforcing contracts.

For example, trial time for a commercial dispute at the local first instance court varies from a year and eight months in Thessaloniki to just under four years in Athens. Developers in Larissa can obtain all necessary approvals to build a warehouse and connect it to utilities in less than 5 months, while their counterparts in Heraklion need to wait almost twice as much, the report finds.

“The Greek government is making progress on reforms to get business regulations right. The uneven performance among cities shows that there is still great potential for yielding gains in competitiveness” said Arup Banerji, World Bank Group Regional Director for the European Union. “We hope that this report will help policy makers and policy implementers coordinate their efforts at the national and municipal levels to create an environment for businesses to grow and function effectively.”

Of the six cities benchmarked in Greece–the capital Athens, along with Alexandroupoli, Heraklion, Larissa, Patra, Thessaloniki—none excels in all five areas measured. It is easier for entrepreneurs to start a business in Alexandroupoli and deal with construction permits in Larissa. Patra leads in the areas of getting electricity and registering property, but it lags behind in construction permitting and enforcing contracts. Thessaloniki stands out for its performance in enforcing contracts and is the runner-up in dealing with construction permits, but it ranks last in getting electricity.

“The six cities that we measured in the report have different strengths, which means Greece has an opportunity to 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.

While rankings are relative, according to the global Doing Business 2020 report, Greece would have ranked 61st out of 190 economies – 18 positions higher than its actual rank – if Athens had replicated the good practices of the best performing Greek city in each area measured.

Lessons can be learned from cities that face the most challenges. Registering the transfer of a property title at the local mortgage/cadaster office takes 12 days in Alexandroupoli and Patra and four months in Thessaloniki. Despite this delay, Thessaloniki stands out on the quality of land administration. Thessaloniki is the only city in which not only are the cadaster survey and property registration complete, but the entire territory of the municipality has been digitally mapped. The city has a state-of-the-art website providing both spatial data infrastructure and a geographic information system (GIS) portal. These apparently contradictory results—between the lag time to register and the high quality of the registration process—are perhaps expected. Thessaloniki has made the most progress in implementing the cadaster reform and in tackling the challenges it faces managing the transition.  

Doing Business in the European Union is a series of subnational reports being produced by theWorld Bank Group at the request of and funded by the European Commission. This edition also benchmarks five cities in Ireland and 13 cities in Italy, besides the six cities in Greece. The report will be published in full in December 2019. 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 Greece, carried out with the support of the Ministry of Development and Investment (formerly the Ministry of Economy and Development), is based on the same methodology as the global Doing Business report published annually by the World Bank Group.

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