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The viral economy of Covid-19 and the Italian and European economy

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The economic data linked to the mass infection by Covid-19 is already very alarming.

 The Italian public health system, along with many other primary sectors of public spending, has already bore the brunt of budgetary restrictions.

Currently, the deficit we record in relation to the needs resulting from the Covid-19 infections to over 10 billion euros compared to current standard needs.

 In Italy there are 5.5 nurses per thousand inhabitants, while in the United Kingdom they are 7.9, in France 10.5 and in Germany 12.6.

 According to our nursing associations, in Italy there is already a shortage of 50,000 nurses compared to the initial standard of service.

As many as 70,000 beds have been eliminated, just when the Italian population is ageing, and there is a lack of at least 8,000 general practitioners.

 According to the Northern Regions, however, the situation is far more alarming: there is a lack of at least 35,000 doctors and some Regions have already called back into service retired doctors and young doctors who have not yet completed their specialization.

The doctors still at work, however, are aged 52 on average and hence they will retire shortly.

 The Veneto region alone has a shortage of as many as 1,300 doctors.

 The healthcare staff in Lombardy and in the other regions already hit by the Covid-19 infection has not been resting for a long time: they work in the normal daily shifts and then, at night, they are on call. This often means very hard work.

Hence we can easily imagine the mental stress, the nervousness, the lack of rest and the residual concentration of these doctors, who are always very cooperative.

 According to Bocconi’s CERGAS, the scientific observatory on healthcare economics in Italy, between 2012 and 2017, 759 hospital wards were abolished (5.6%), while there are still 3.2 beds per thousand inhabitants, compared to 6 in France and 8 in Germany.

Almost all the “small hospitals” -which, for some reason, are always considered useless spending centres by the so-called experts of the Regions and the Health Ministry – have been closed, thus putting in crisis the major hospitals, already overburdened both in terms of therapies and beds.

Furthermore, Italy has 20% of financial resources available in healthcare compared to Great Britain – which also had to face Thatcher’s anti-State policy of drastic spending cuts – 34% less than France and even 45% less than Germany.

 Why these shortages of funds? For the spasmodic implementation of “spending cuts” to be shown to the EU, like good schoolchildren.

What if we said at EU level that health spending should be outside the checks on the notorious 3% ceiling, a percentage superficially invented at the time by an expert, just to write something?

In short, every year the Italian State spends 119 billion euros on public healthcare, but our fellow countrymen pay additional 40 billion euros from their own pocket, through co-payments, etc.

 The effects can be seen.

 In Milan the waiting time for a surgery is nine months and it should also be recalled that the Covid-19 infection requires that the few resources still available are used to bear the immediate costs for the adaptation of health facilities to the coronavirus emergency.

Nevertheless, the shortcomings persist: since 2010, in Italy, there has been a lack of 5.4% doctors, of 4.3% nursing staff and of 9.1% other staff.

The miracle is that, even today, everything is working at its best, thanks to the quality and professionalism of the people operating in the Italian healthcare sector.

 Whoever experiences a health system like Italy’s, does not forget it. Just recall the case of Mark Hinkshaw, or of the American writer who was saved by the doctors of the Cardarelli hospital in Naples and told her story it in an article in the New York Times.

 Now, however, there is a problem. How can we increase funding for the Italian National Health Service(NHS) without exceeding the budget ceiling that the EU authorities impose on us?

Currently the funding sources for Italy’s NHS are the health units’ own revenue, i.e. co-payments or intramoenia revenue; the Regions’ general taxation, i.e. the Regional Tax on Productive Activities (IRAP) – as is already provided for its healthcare share – and the additional regional tax to IRPEF, i.e. the personal income tax.

 If the amount of these taxes or fees is lower than the minimum calculated on an historical basis, there will be the supplement of the Guarantee Fund pursuant to Article 13 of Legislative Decree 56/2000.

As to the healthcare share, the resources coming from IRPEF and IRAP are paid to the Regions on a monthly basis.

 The State Budget finances what remains unpaid by the National Health Service, through the co-payment and sharing of Value Added Tax (VAT) and through the National Health Fund.

In 1980 the NHS cost 9.3 billion lire and accounted for 4.7% of GDP. Currently it costs 117 billion euros and accounts for 6.8% of GDP.

 If this continues, the NHS shall be privatised, to the delight of insurance companies, which are floundering in a commercial crisis and are looking for other business, as well as the private healthcare sector which, however, paradoxically, is mainly funded by the public.

Clearly the NHS privatisation is the ultimate goal of many politicians and lobbies.

 With the increase in poverty, in Italy, this would be the recipe for an unprecedented social clash.

Nowadays the NHS is funded by general and regional taxation, but IRPEF and IRAP are always insufficient, like VAT. It is also funded by regional taxation itself, i.e. the transfer of the health cost burden from companies to households (due to the crisis, the IRAP share decreases), and by the now long-standing deficit spending.

 The first (fiscal) consolidation took place in 2006 and the NHS has already accumulated debt for a nominal value of 98.9 billion euros, equal to 149.4 discounted.

Hence what can be done to rescue all the social healthcare facilities? Considering UK Prime Minister Johnson’s latest proposals, a medium-term debt instrument dedicated to healthcare may be issued both in Italy and Great Britain. Currently the securities market is dominated by a very low average interest rate. Probably it is time to try.

 Orthe systems may be integrated, by proposing the exchange of doctors, nurses, but above all patients, between the two countries. With a non-monetary calculation of expenses. This will be the core to preserve public health in Europe or in the European civilized countries.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

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The Flawed Fabric of Pakistan’s Economic Policymaking

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Finally, the fiscal year ended after a tortuous ride from rate hikes to regime change to near-bankruptcy. Even the end node of this chapter was a bang of inflation. According to the data released by the Pakistan Bureau of Statistics (PBS), the Consumer Price Index (CPI) measured inflation breached through a 14-year ceiling – stricking at 21.3% in June – sailing on the back of subsidy withdrawals, petroleum levies, high energy tariffs, and basically, everything demanded by the IMF. Two days earlier, the Finance Ministry forecasted the June inflation to range between 14.5-15.5%. The jump in the CPI of June (over May) was 6.3% – the highest monthly rise in the history of Pakistan. Typically, the central banks intervene to harness the inflationary pressures as such. However, the State Bank of Pakistan (SBP) has already been tightening the screws since September, cumulatively raising the policy rate by 675 basis points. Still, inflation is far from even remotely under control. One should wonder if the SBP has actually lost the ability to regulate prices and correct external imbalances?

The straightforward answer is no; the SBP is still in control. For instance, study the currency valuation in the global forex market. Despite a modest recovery in the rupee in the past few weeks, it has rapidly shed value against the greenback. However, the deterioration is in tandem with the global inflationary outlook and reactionary policies enacted by the major economies. The hawkish tune adopted by the US Federal Reserve is the key to understanding this dynamic. The fed has been aggressively hiking the policy rate since late March – cumulatively raising the short-term rate by 150 basis points in three months. The increment of 75 basis points last month was the most aggressive rate hike since 1994. As similar rate increases are expected throughout the second half this year, other currencies (primarily belonging to developing or frontier markets) are rapidly losing value against the US dollar. The Japanese yen, for instance, is down to record low levels against the greenback despite being the monetary unit of the world’s third-largest economy. Thus, the deterioration in the Pakistani rupee (and resulting inflation) is not entirely due to the inefficacy of our national monetary policies.

The depreciation effect in the rupee is exacerbating due to high global commodity prices influenced by the Russian invasion of Ukraine. The subsequent western sanctions have skyrocketed the global energy prices that have even flared the US inflationary pressures to the highest point since the 1970s. Pakistan has faced the brunt through excessive dollar outflows for imports of expensive petroleum products, premium RLNG cargoes, and inflated staple commodities. In the outgoing fiscal year, the import bill loomed around the historically-high figure of $65 billion against mediocre export receipts. About one-fourth of the import bill anchors to imports of crude and petroleum derivatives from the international market. As a result, the trade deficit skewed over $48 billion; the current account deficit breached the budgetary target to settle at around $16 billion (over 4% of GDP). This economic hodgepodge slumped the rupee by record 30% in the outgoing fiscal year. And despite transient recoveries, the currency is projected to further deteriorate by an average of 5-6% in the FY22-23.

The war in Ukraine is grinding, seemingly unending. The resulting economic outlook is bleak – not just for Pakistan but the rest of the world. The curiosity should pique then, and one should question: how should Pakistan cruise through this strenuous period? There is no simple answer but to persevere. However, subtle hints of control are discernible in the latest auction of sovereign debt securities by the government of Pakistan. The recent auction of T-bills reveals cues regarding the perception of the SBP. The government raised Rs 1.732 trillion (against a target of Rs 800 billion) by auctioning the three-month T-bills at a cut-off yield of 15.23% – slightly lower than the 11-year high yield of 15.25% in the mid-June auction. The modest fall of two basis points was due to the unconventional liquidity injection earlier by the SBP of Rs 491.7 billion to the commercial banks via a 77-day long Open Market Operation (OMO) at a rate of 13.85%. It was the most enduring OMO in the history of Pakistan, perhaps aimed to narrow the gap between the policy rate and the cut-off yields as the preceding 63-day OMOs failed to cool down the commercial lending rates. Thus, the SBP was trying to signal that the policy rate has peaked i.e. the current rate of 13.75% is apt to maintain economic stability without destroying business confidence.

Ultimately, I believe the gap is still broader than the traditional variance – between T-bill yields and the policy rate – of under 100 basis points. Therefore, I expect a modest rate hike of 50 basis points when the Monetary Policy Committee (MPC) convenes on 7th July. I hope for clear cues, fact-based reassurances of economic stability, and a workable roadmap toward an expansionary schedule. There is no doubt that the regional high policy rate is harming the export sector. However, a ban on certain imports and the new super tax introduced on virtually every business sector is more damaging to the welfare of Pakistan’s economy. Thus, we should question the fiscal policies of Pakistan alongside the monetary decisions of the SBP. While the SBP tightens the screws, the federal cabinet should devise complementary frameworks instead of countering the effect to bag an electoral agenda. Banning imports when exports are contingent on imported goods is blasphemy of economic principles. Overtaxing businesses when the lending rates are spiraling sky-high is murdering national financial viability and stability. And obsequiously bowing down to every condition laid out by the IMF without any regard for public tolerance is quite simply bad governance. Hence, we may somehow survive this road to a global recession. However, without a structured (and balanced) approach to economic policymaking, I’m afraid we are paving our very own path toward eventual doom.

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An Assessment on China’s Inflation Trend and Outlook

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In the quarterly meeting of its monetary policy committee, the People’s Bank of China (PBoC) repeatedly mentioned price stabilization in its policy statement. The trend of inflation in China is not only becoming a restrictive factor for monetary policy to support stable growth, but has also increasing impacted its economic recovery. This has also aroused worry in the market that with changes in the international situation, inflation will exceed the central bank’s 3% policy target, which could trigger passive adjustments in the policy or even hyperinflation in extreme cases.

Despite the spike in global inflation levels, inflation in China has remained relatively stable in recent years without significant fluctuations. Yet, as the international situation changes, what will happen to inflation in China? Will there be a situation of high inflation as in developed countries? As this is not only related to the process of economic recovery in the second half of the year, but also to the direction of future macro policy adjustments, it has been an issue of concern for the country’s policymakers.

When it comes to the issue of global inflation, researchers at ANBOUND have noted that high inflation in developed countries such as the United States and Europe may cause short-term outbreaks of aggregate demand under the post-pandemic monetary stimulus. In addition, there is also an imbalance in energy sources brought about by rising geopolitical risks. Factors like the restructuring of supply and demand during the pandemic and carbon reduction development policies have also brought long-term effects. Such circumstances would mean that economies with high dependence on energy and with heavy service industries have to face the threat of high inflation. Inflation in the United States was 8.6% in May, while the United Kingdom saw a record high of 9%, and the latest data showed that the inflation level in the eurozone reached 8.6% in June. There is the risk that the inflation problem is getting out of control, which forces major central banks in Europe and the United States to adopt tightening policies like raising interest rates and shrinking balance sheets to deal with the risks brought by inflation at the expense of economic slowdown or recession.

Price Changes in China and in the United States

Source: Eastmoney.com, chart plotted by ANBOUND

Although China’s inflation did increase in the second quarter, the moderate rise in inflation did not form a fundamental constraint on the country’s economic development and monetary policy. This is mainly because its economic cycle is different from that of Europe and the United States. While China is also affected by external factors, the lack of domestic demand in the economy is still the main reason for changes in inflation. At the same time, the COVID-19 outbreaks in developed areas of the country in the first quarter of this year have had a great impact on China’s production and life, while the recovery of consumer and service demands has not seen a retaliatory rebound. Therefore, the recovery of demand as a whole requires a certain process. In the case of insufficient effective demand, it would be difficult for domestic inflation to change rapidly.

When it comes to the aspect of supply, it should be pointed out that China’s policies have placed a lot of emphasis on energy security and bulk commodities. This has essentially guaranteed the supply of resources, thus avoiding the occurrence of hyperinflation caused by externally imported inflation. As far as the domestic industry is concerned, China itself has a relatively complete industrial chain and supply system, which has also minimized the disturbance to production and supply caused by uncertain factors brought about by the adjustment of the global supply and industrial chains. On the one hand, through the monopoly of state-owned enterprises in industrial upstream, China has basically maintained the crude oil import channel even under the circumstance of crude oil price fluctuations. On the other hand, the coal-electricity linkage is used to maintain the stability of the electricity price of enterprises as much as possible. Although a large number of power generation enterprises have suffered losses, and there has also been the issue of “power cuts” in some places, the overall electricity price is still in a stable state. This greatly alleviates the impact of energy price fluctuations on business production.

Due to fluctuations in international energy and commodity prices, the increase in production prices as a “global factor” has continued for quite some time for China. The country’s PPI level will remain high for a long time from 2021. However, the widening of the scissors gap between PPI and CPI has not resulted in a short-term sharp increase in final consumer prices. Thanks to the continuous improvement of the production efficiency of enterprises, some of the pressure of rising costs has been absorbed. Meanwhile, in most traditional fields, under the situation of overcapacity, flexible production buffers the pressure of rising upstream prices, accelerates industrial integration, and passively achieves “de-capacity”.

In the iron and steel industry, where the problem of overcapacity is more prominent, since the outbreak of the pandemic, the price of crude steel products has not fluctuated much. At the same time, some leading enterprises are also accelerating the integration, which has alleviated the impact of fluctuations in energy prices and iron ore prices on the industry. This, in turn, has also eased the cost pressure on downstream enterprises. All these factors signify that the commodity price is continuously digested through the industrial chain, and finally, the terminal price is protected from the upstream influence.

In addition, the PBoC has always emphasized a “prudent” monetary policy, adhered to the policy of matching the growth rate of money and social financing scale with nominal GDP, and not over-issuing money. This in effect keeps the domestic money supply stable, which is the main factor for the basic stability of the RMB exchange rate and the stable domestic short-term price level. There is a clear difference between the environment within China and the international environment, which contributes to the overall stability after the COVID-19 outbreaks ended.

As the PBoC put forward the overall consideration of “stabilizing prices” and “stabilizing employment”, its focus should be on avoiding hyperinflation caused by food, energy, and supply chain constraints. This is especially true when it comes to “imported inflation” brought about by the uncertainties such as increased geopolitical risks and international capital flows. It is worth noting that the price of pork, which is the main component of the CPI, has undergone some changes in the context of the shifts in the pig cycle and the increase in food import prices, which may impact food prices and inflation trends. However, this change is more of a cyclical factor. According to the current situation of production and demand in China, when the industrial chain is complete and the logistics system is stable, it is unlikely that there will be an overall imbalance of supply and demand. This means that domestic inflation may rise moderately as the economy recovers, but there will be no hyperinflation.

Under the current situation, researchers at ANBOUND believe that among the triple pressures of demand contraction, supply shock, and weakening expectations, the main contradiction facing the Chinese economy is still demand contraction. Macro policy adjustments, including monetary policy, still need to focus on “stabilizing growth”. Only by stabilizing aggregate demand can employment issues and structural problems be solved. As far as monetary policy is concerned, it is still necessary for China to maintain a “moderately loose” tone to provide an appropriate monetary environment for economic recovery and stability. Of course, the issue of inflation cannot be completely ignored, but the coordination of other industrial policies and market supervision policies is needed to stabilize the supply chain, sustain a complete domestic production system, and maintain a balance between supply and demand, so as to effectively promote market recovery and sustainable growth.

Final analysis conclusion:

Inflation is not only a problem that major economies have to face, but also a potential risk factor in China’s economic recovery. For now, insufficient domestic effective demand is still the main factor restraining inflation. In the short term, China’s complete industrial chain, stable supply system, as well as its restrained monetary policy will play an important role in alleviating inflation. However, in the medium and long term, with the intensification of the international energy crisis and the surge in global inflationary pressure, the country still needs to be alert to the risk of high inflation.

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Economic Restructuring Key to Coping with Risks in China’s Economy

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Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze, Yusha Li*

Just over two years after the COVID-19 pandemic caused the deepest global recession since World War II, the global economy continues to face a series of acute shocks. The war in Ukraine has not only led to a humanitarian crisis but is also having substantial effects on commodity markets, trade flows, inflation, and financial conditions which have deepened the slowdown in global growth.

As a result, the world economy is expected to experience its sharpest deceleration following an initial recovery from global recession in more than 80 years, as highlighted by the World Bank’s “Global Economic Prospects” report published on June 7. Global growth is projected to slow down from 5.7 percent in 2021 to 2.9 percent in 2022 with activity declining markedly in the eurozone, which has closer economic links with Russia, and US growth slowing to less than half of 2021, reflecting sharply higher energy prices, tighter financial conditions, and persistent supply disruptions.

The global context will also weigh on China’s outlook in 2022, by sharply reducing export growth and dampening confidence amid heightened geopolitical tensions. This is expected to exacerbate the slowdown caused by recurrent COVID-19 outbreaks in some places and related lockdowns in parts of China which have disrupted supply chains and significantly weakened household and business activity. Following a strong 8.1 percent rebound in 2021, the World Bank expects China’s growth to slow to 4.3 percent this year. This rate of growth is below the economy’s potential-the sustainable growth rate of output at full capacity.

Our forecast reflects the sharp deceleration in activity in the second quarter of 2022 that took place despite policy actions to cushion the economic slowdown. With the easing of pandemic controls in Shanghai and Beijing, and barring any major COVID-19 outbreaks, growth momentum is expected to rebound in the second half of 2022, helped also by additional policy stimulus announced by the State Council, China’s Cabinet, last month. The normalization of domestic demand conditions, however, is expected to be gradual and will only partly offset the economic damage caused by the pandemic in the earlier part of the year.

While China has the macroeconomic policy space to react to domestic and external headwinds, our latest “China Economic Update” argues that policy makers face a dilemma between keeping COVID-19 under control and supporting economic growth. Indeed, stimulus policies are less effective in places where pandemic restrictions remain in place. Yet letting COVID-19 spread would likely hurt growth even more.

Over the medium term, greater efforts are needed to shift away from the old playbook of investment-led stimulus to boost economic growth because high levels of indebtedness of corporations and local governments will limit the effectiveness of policy easing and increase financial stability risks.

To address these balance sheet constraints, policymakers could shift more of the stimulus onto the balance sheet of the central government. They could also direct public investment toward the greening of infrastructure. Recent announcements seem to go in this direction.

Also, fiscal support could shift beyond tax relief for enterprises to target measures to encourage consumption directly. For example, the wider use of consumption vouchers could lift consumer spending in the short term in places where COVID-related restrictions have been lifted. Reforms to strengthen automatic stabilizers such as unemployment insurance and other social safety nets could also help increase consumption, particularly among the poor and vulnerable that have a lower propensity to save.

China’s housing market downturn in the midst of the recent global deceleration exemplifies the limits to past stimulus efforts. For over two decades, China’s real estate sector has grown at a remarkable pace and become a principal engine of economic growth. As of end-2021, total real estate investment stood at 13 percent of GDP, compared with 5 percent in OECD member states. If one takes into account inputs along the supply chains, the real estate sector drives around 30 percent of China’s GDP. A disorderly adjustment in the real estate sector would thus have major economic consequences.

Our report provides specific recommendations for dealing with these risks. In the short term, ensuring adequate liquidity and carefully monitoring the health of the financial sector to avoid spillovers remain key. Over the medium term, several structural reforms would put the real estate sector on a sounder footing.

China’s inner cities could be made denser, more productive and more livable through changes to urban planning that move away from the past extensive model of urbanization. This would need to be implemented in conjunction with fiscal reforms to expand the revenue base of cities beyond land sales.

At the same time, financing options for real estate developers would need to be broadened through the expansion of project-based financing or the greater participation of institutional investors such as “Real Estate Investment Trusts”. In addition, a robust and predictable framework for debt resolution and corporate insolvencies would help reallocate capital from troubled developers.

Finally, further liberalization of the financial system would expand the range of investment options for households and reduce the propensity to buy and hold empty properties as investment vehicles.

Despite the current challenging environment, China’s economic policies to support a rapid recovery should remain geared toward tackling the country’s structural challenges. Rebalancing demand toward consumption, improving capital allocation and labor mobility, and greening China’s development model would help ensure that future growth is stable, inclusive and sustainable.

*Ibrahim Chowdhury is World Bank senior economist for China; Ekaterine T. Vashakmadze is World Bank senior country economist; and Yusha Li is a World Bank economist.

First publish on China Daily / World Bank

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