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Colombia must boost digital transformation and take further steps to ensure benefits are shared by all

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Colombia has taken important actions in recent years to foster digital transformation, but more needs to be done to ensure that the opportunities and benefits of digitalisation are shared throughout the economy and across all parts of society, according to a new report from the OECD.

Going Digital in Colombia assesses the country’s current level of digital uptake and preparation, then lays out a roadmap for building an integrated digital policy framework. It suggests a range of policy proposals for enhancing connectivity, increasing adoption and use of digital technologies, fostering digital innovation, developing skills and labour market for digital economy and seizing new growth opportunities from digital transformation, as part of a National Digital Strategy for Colombia.

The report draws important links between development of a comprehensive national digital policy and key economic policy goals in Colombia, including boosting productivity, increasing skills, reducing informality in the labour market and stimulating innovation. It notes that clearer long-term priorities, a stronger focus on larger-scale programmes and better integration with other policies will be necessary to increase the effectiveness of digitalisation policies in Colombia.

“The Colombian economy has been expanding rapidly and converging to higher living standards since the early 2000s, with growth rates among the strongest in the Latin America and Caribbean (LAC) region,” OECD Secretary-General Angel Gurría said during a presentation of the report with Colombia’s Minister of Information and Communication Technologies Sylvia Constaín. “Getting digital policy right will be critical as Colombia tackles both today’s economic and social challenges and those of tomorrow. Embracing digitalisation will be the key to taking advantage of the opportunities afforded by the 21st Century economy. Colombia should develop a National Digital Strategy across the government that will drive innovation and growth while sharing the benefits across society,” Mr Gurría said. (Read the speech)

Improving digital infrastructure and uptake tops the list of OECD recommendations. The report shows that growth rates of fixed and mobile broadband subscriptions in Colombia, at 9.4% and 24.9% respectively, over the 2012-18 period, are among the highest in the OECD. Nevertheless, it also shows that Colombia’s 13.4 fixed broadband subscriptions and 52.1 mobile subscriptions per 100 inhabitants in December 2018 are the lowest in the OECD. Similarly, the 13% share of fibre connections and the average download speed (3.48 megabits per second) are lower than the OECD average, while the prices for fixed broadband baskets, while decreasing, can be up to 2.5 times those seen in the OECD.

The upcoming multiband auction in December has the potential to foster competition by levelling the playing field in the market, provided that companies that do not have spectrum in the lower frequency bands have a fair chance to obtain licenses. In addition, the auction may contribute to extending the much needed coverage in Colombia. The objective of boosting competition should be considered when the remaining parameters for the auction are set.

The government should also review import duties on handsets and lower the tax burden on telecommunication operators. Steps should be taken to preserve the independence of the new “converged regulator” for the telecommunication and broadcasting sectors, by preventing any undue pressure from the government, ensuring its financial autonomy and setting transparent and merit-based mechanisms for the appointment of its board.

Colombia is lagging behind in overall Internet usage, with 64% of individuals using the Internet in 2017, a level reached in most OECD countries in the mid-2000s, according to the report. The government should take further steps to increase adoption and use of digital technologies and reduce the digital divide between citizens, including better targeting of state funding for public Internet centres in poor and remote communities, new funding for computers and information technology in schools and small businesses and the use of tax incentives to promote e-banking. 

Progress has been made toward adapting the educational system and labour market for digital transformation, but greater investment in education, training, lifelong learning will be required to meet the challenges of the digitalised economy, according to the report.

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Weak Outlook in GCC Due to Muted Oil Prices & Global Trends

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Economic growth in the Gulf Cooperation Council (GCC) was significantly weakened in 2019 due to muted oil prices and excess oil supply, according to the new World Bank’s Gulf Economic Update released today. As a result, overall real GDP growth in the GCC is estimated to drop to 0.8% this year compared with 2% last year. While most GCC countries retained strong external positions in 2019, the ongoing slowdown in China and the continued global trade war are hindering their efforts to boost non-oil exports. Meanwhile, resurgent geopolitical risks are raising risk perceptions, which could hurt prospects for investment.

This issue of the Gulf Economic Update, titled “Economic Diversification for a Sustainable and Resilient GCC”, explores ways in which GCC countries can pursue diversification that is environmentally sustainable and resilient to global megatrend. Many countries in the region have pursued ‘traditional diversification’, meaning diversifying away from hydrocarbon production but towards heavy industries that still depend on fossil fuels. The emissions-intensive nature of ‘traditional diversification’ has increased the GCC countries’ exposure to disruptive low-carbon technologies, international policy efforts to address climate change, and negative public perceptions of fossil fuels and their derivatives.

“As GCC countries strive to diversify their economies, they should ensure that diversification strategies are aligned with environmental sustainability goals,” said Issam Abousleiman, World Bank Regional Director for the GCC. “Ensuring that the Region’s diversification efforts are climate-friendly is critical not only for environmental sustainability but also to help the GCC invest in sources of growth that are resilient to global technology and policy impacts.”

The report suggests three ways to help align diversification strategies to environmental sustainability objectives.

First, ensuring that diversification strategies take an ‘asset diversification’ approach; one that moves beyond the concept of diversifying output and broadens the composition of a country’s national wealth to include human capital, in addition to natural and produced assets.

Second, GCC countries can hedge the risks of traditional diversification by liberalizing energy and water prices, scaling up investments in renewable energy and carbon capture and storage to help mitigate the impacts of climate change. Energy subsidy reform and increased investment in renewable energy are already underway in the Gulf.

Third, the GCC must establish effective environmental management institutions and practices to ensure that the region protects its fragile ecosystem and reduces environmental cost of industry as it invests heavily in new sources of economic growth.

GCC Countries Outlook

Bahrain: Bahrain’s economy is expected to grow at a moderate rate of 2% in 2019 and average 2.3% over 2020-21, driven by the non-oil sector. Nonoil GDP growth will be driven by an increase in manufacturing output and higher levels of infrastructure spending.

Kuwait: Kuwait’s growth rate is expected to dip to 0.4% in 2019 before picking up to 2.2% in 2020, as the OPEC production cuts expire, and 2% in 2021, as the government increases spending on oil capacity enhancements and infrastructure to boost the non-oil sector.

Oman: Oman’s growth rate is projected to accelerate from an estimated 0% in 2019 to 3.7% in 2020 and 4.3% in 2021, supported by rising natural gas production. The potential boost from the diversification investment spending would continue supporting growth in the medium term.

Qatar: Qatar’s economy is projected to grow by a modest 0.5% in 2019 before accelerating to 1.5% in 2020 and 3.2% in 2021. Growth will be driven by a boost in gas production as the new Barzan Project starts operations as well as by the non-oil sector supported by the government’s investment program targeting infrastructure and real estate.

Saudi Arabia: GDP growth rate will likely slow to 0.4% in 2019 driven OPEC’s oil supply reduction drive, before rising to 1% in 2020 and 2.2% in 2021.

United Arab Emirates: GDP growth rate is projected to stabilize at 1.8% in 2019, before accelerating to 2.6% in 2020 and 3% by 2021, driven by government stimulus and a boost from hosting Expo 2020.

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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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