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Develop while you still can

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The last week saw the United Nations General Assembly as the focal point for global affairs, with the center stage given to the confrontation between a 16-year-old Climate Activist and the Orange-hued leader of the Supposedly Free World. Aside from the liberal angst of the international media, bemoaning the callousness of the Trump Administration on the rapidly worsening climate disaster, little attention was paid to Trump’s actual speech at the UNGA. In short, he laid waste to the American commitment to liberal internationalism, proclaiming that ‘Patriots’ (read white nationalists) own the world now and the globalism was a defunct American ideology. This was brushed off yet another one of Cheeto Fuhrer’s deranged rants against the international system, but Trump is an early social media pioneer who knows how to manipulate his base. His statement at the United Nations is not merely designed to throw shade at the developing world or the EU, it’s meant to remind his supporters that he is serious about global power remaining in Caucasian hands.

As much as DC wishes to turn back the clock and select a leader that is more in-line with the institutional order after the Cold War, it is impossible for them to ignore the White Nationalism that has been strongly revived since the 2016 election on both sides of the Atlantic. The EU and the UK are experiencing the strongest surge in nativist electoral politics since the 1930s, with right-leaning parties beginning to sweep across various jurisdictions. On a darker note, several IGOs are warning of the surge in White Nationalist infiltration in the US military, paramilitary forces and mercenary groups in the Ukraine, Africa and the Middle East. The idea being that since one cannot defeat the Taliban, its best to BECOME the next incarnation of fundamentalism, but for Caucasian people. It is not true that Trump doesn’t possess a foreign policy game-plan, it’s just that the structure is crudely unpalatable to the liberal international order that is vaporizing before our eyes. The State Department piece on the “civilizational conflict” with China, is an example of this sort of crude Realist mash-up with Huntington that Trump represents. But this is a belief that is closely held by various factions within the US military, diplomatic corps and academia. But of course, no one is impolitic enough to come out and state it.

But what has this got to do with rest of the developing world? ASEAN, Africa, South Asia, MENA and the Caucus? As commentators like Parag Khanna have suggested that the developing world will simply pick and choose between the West and Beijing, selecting various aspects of technology and capital that will accelerate their own technical growth. Eventually, this hybridized growth model will supersede the bipolar rivalry and cause a developmental surge in the remaining 70% that had been left behind for so many centuries. In other word, this is liberal institutionalism with a third world slant; the global market mechanism and the need for neo-liberal growth will persuade the West and Industrial Asia’s corporate giants to continue gelling African and Asian trade routes. The technology and skills flow is unstoppable regardless of tariffs and other intellectual property shenanigans, simply as the global middle class demands it.

This is simply too optimistic and smacks of the deep regional integration of Colonial Europe before 1914. There are flaws in this perspective; connection is not development; at its best the international developmental regime had failed Africa since the 1960s and allowed egregious rent-seeking in local government. The African bright spots of Ethiopia, Uganda, Rwanda etc. have only come about after merging state development models and relatively stable governance since the end of the Cold War and with considerable obstacles remaining to their access to the EU and North America. The rising tide of nationalist thinking and the return of nativist racism as a respectable form of politics in the EU and the US, threatens to doom these bright spots in the near future. Foreign Aid, questionably administered and fraught with multiple levels of corruption in the metropole, is already drying up rapidly as “US First” policies become paramount. With the rise of a virulent form of white nationalism in the US and the penetration of mercenary forces into African conflict zones, the unrest can “accidentally” spill into any African economy that is considering aid from East Asia or China. As it is, the global media frequently labels African economies that accept a multitude of assistance from non-western sources as being “corrupt” or technically inept. Essentially, painting various African governments as know-towing to renewed colonialism. This is laughable because the older form never truly left. Think this is left-wing propaganda? Witness how the Franc Zone remains in Africa and how it guarantees industrial dependency on France while making it impossible for agricultural products led growth in the Francophone region. This is colonial dependency in all but name.

Development is typically described as an international relations issue and therefore the subject matter of external experts. In reality, these have a direct correlation with domestic race and violence issues that flow from the developing world. The sharp rise in race-based arrests, hate-crimes and economic violence in the US against black people and minorities since 2016, cannot be divorced from US foreign policy or the shifts in governance culture of Washington DC. Africa is the next frontier in industrial development and for every year that peace is maintained between the US and China, its chances improve ever more. But there is still the absence of an African developmental champion, akin to the Asian Tigers of the 1980s and 90s. The absence of an actual Wakanda, that Africans can look to with global pride that places the entire continent on the take-off trajectory. Ethiopia, Rwanda and Uganda are the best candidates so far and it is questionable that in the absence of heavy-duty Chinese investment since 2004 in all three, whether the technical progress would have been possible so far.  The techno-optimism of high neo-liberal global capital is not possible without the realist peace between the world’s two largest industrial economies. But the prospects for this are dimming with every month.

Another aspect of White Nationalist revival is its categorical denial of climate change and the environmental collapse that we are witnessing in real-time. Sustainable development is not about recycling straws or using electric cars, it is to distribute global wealth more equitably in Asia and Africa before the time runs out. Quietly as the trade war and Sino-American rivalry accelerates, the OECD is seeking to corner resources, curate technology and establish rent-seeking access to talent via corporate mechanisms. There will be a dash for polar resources in the coming five years, while rare earths access is becoming national security prerogatives in East Asia and North America.  Climate change will wipe out easy access to growth resources and endanger the health of the entire developing world, extinguishing Africa’ bright spots. The influx of mercenaries, private armies and other crime-related arms of foreign policy has ignited a series of proxy wars in African jurisdictions as means to lock-down Africa’s vast natural wealth. Once again, this is as old as Conquistadores raiding Mexico in the 15th Century. But will Africa survive a second disappointment of development, following its disappearance in the 1960s after independence? The return of racism as a respectable means of foreign policy in the West, is basically kicking away the ladder, writ large.

What remains is for the lucky few whom have escaped to engage in a fresh paradigm of growth; combat developmentalism akin to Israel, pulling in technological capital whenever it’s possible to reach. Disregarding established divides between the State and the free market by utilizing governance planning with market savvy, throwing away ludicrous divides between what is “developed” or “developing” etc. Cultural connections, history, technology and capital, all of these are now up for grabs. Witness the “left-coast” development models of Mexico, the Penang region in Malaysia; deploying diasporic networks of talent while free-riding on global manufacturing for unexpected avenues of market access; in the case of Mexico, the ubiquitous access to the Cocaine industry created a groundswell of laboratory equipment and doctoral level talent, a pharmaceutical and biotech sector blossomed unexpectedly. The international order is turning away from global capitalist growth and going into “lock-down” mode, in order to curate access to privileged few. Very soon, it will be every man for himself.

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Economy

Reforms Key to Romania’s Resilient Recovery

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Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.

Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.

The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.

Yet the road ahead remains highly uncertain, and Romania faces several important challenges.

The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.

Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.

Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.

The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.

How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?

Reforms in several key areas can pave the way forward.

First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.

Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.

Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.

Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.

Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.

None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.

Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.

I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.

First appeared in Romanian language in Digi24.ro, via World Bank

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US Economic Turmoil: The Paradox of Recovery and Inflation

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The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.

The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.

The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.

Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!

Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.

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Carbon Market Could Drive Climate Action

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Authors: Martin Raiser, Sebastian Eckardt, Giovanni Ruta*

Trading commenced on China’s national emissions trading system (ETS) on Friday. With a trading volume of about 4 billion tons of carbon dioxide or roughly 12 percent of the total global CO2 emissions, the ETS is now the world’s largest carbon market.

While the traded emission volume is large, the first trading day opened, as expected, with a relatively modest price of 48 yuan ($7.4) per ton of CO2. Though this is higher than the global average, which is about $2 per ton, it is much lower than carbon prices in the European Union market where the cost per ton of CO2 recently exceeded $50.

Large volume but low price

The ETS has the potential to play an important role in achieving, and accelerating China’s long-term climate goals — of peaking emissions before 2030 and achieving carbon neutrality before 2060. Under the plan, about 2,200 of China’s largest coal and gas-fired power plants have been allocated free emission rights based on their historical emissions, power output and carbon intensity.

Facilities that cut emissions quickly will be able to sell excess allowances for a profit, while those that exceed their initial allowance will have to pay to purchase additional emission rights or pay a fine. Putting a price tag on CO2 emissions will promote investment in low-carbon technologies and equipment, while carbon trading will ensure emissions are first cut where it is least costly, minimizing abatement costs. This sounds plain and simple, but it will take time for the market to develop and meaningfully contribute to emission reductions.
The initial phase of market development is focused on building credible emissions disclosure and verification systems — the basic infrastructure of any functioning carbon market — encouraging facilities to accurately monitor and report their emissions rather than constraining them. Consequently, allocations given to power companies have been relatively generous, and are tied to power output rather than being set at absolute levels.

Also, the requirements of each individual facility to obtain additional emission rights are capped at 20 percent above the initial allowance and fines for non-compliance are relatively low. This means carbon prices initially are likely to remain relatively low, mitigating the immediate financial impact on power producers and giving them time to adjust.

For carbon trading to develop into a significant policy tool, total emissions and individual allowances will need to tighten over time. Estimates by Tsinghua University suggest that carbon prices will need to be raised to $300-$350 per ton by 2060 to achieve carbon neutrality. And our research at the World Bank suggest a broadly applied carbon price of $50 could help reduce China’s CO2 emissions by almost 25 percent compared with business as usual over the coming decade, while also significantly contributing to reduced air pollution.

Communicating a predictable path for annual emission cap reductions will allow power producers to factor future carbon price increases into their investment decisions today. In addition, experience from the longest-established EU market shows that there are benefits to smoothing out cyclical fluctuations in demand.

For example, carbon emissions naturally decline during periods of lower economic activity. In order to prevent this from affecting carbon prices, the EU introduced a stability reserve mechanism in 2019 to reduce the surplus of allowances and stabilize prices in the market.

Besides, to facilitate the energy transition away from coal, allowances would eventually need to be set at an absolute, mass-based level, which is applied uniformly to all types of power plants — as is done in the EU and other carbon markets.

The current carbon-intensity based allocation mechanism encourages improving efficiency in existing coal power plants and is intended to safeguard reliable energy supply, but it creates few incentives for power producers to divest away from coal.

The effectiveness of the ETS in creating appropriate price incentives would be further enhanced if combined with deeper structural reforms in power markets to allow competitive renewable energy to gain market share.

As the market develops, carbon pricing should become an economy-wide instrument. The power sector accounts for about 30 percent of carbon emissions, but to meet China’s climate goals, mitigation actions are needed in all sectors of the economy. Indeed, the authorities plan to expand the ETS to petro-chemicals, steel and other heavy industries over time.

In other carbon intensive sectors, such as transport, agriculture and construction, emissions trading will be technically challenging because monitoring and verification of emissions is difficult. Faced with similar challenges, several EU member states have introduced complementary carbon taxes applied to sectors not covered by an ETS. Such carbon excise taxes are a relatively simple and efficient instrument, charged in proportion to the carbon content of fuel and a set carbon price.

Finally, while free allowances are still given to some sectors in the EU and other more mature national carbon markets, the majority of initial annual emission rights are auctioned off. This not only ensures consistent market-based price signals, but generates public revenue that can be recycled back into the economy to subsidize abatement costs, offset negative social impacts or rebalance the tax mix by cutting taxes on labor, general consumption or profits.

So far, China’s carbon reduction efforts have relied largely on regulations and administrative targets. Friday’s launch of the national ETS has laid the foundation for a more market-based policy approach. If deployed effectively, China’s carbon market will create powerful incentives to stimulate investment and innovation, accelerate the retirement of less-efficient coal-fired plants, drive down the cost of emission reduction, while generating resources to finance the transition to a low-carbon economy.

(Martin Raiser is the World Bank country director for China, Sebastian Eckardt is the World Bank’s lead economist for China, and Giovanni Ruta is a lead environmental economist of the World Bank.)

(first published on China Daily via World Bank)

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