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Iraq: Structural Reforms Critically Needed to Manage a Multi-Faceted Crisis

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Faced with a combination of acute shocks which the country is ill-prepared to manage, Iraq’s economic outlook has markedly worsened over the past 6 months. GDP growth is projected to contract by 9.7 percent in 2020, down from a positive growth of 4.4 percent in 2019, making it the country’s worst annual performance since 2003, according to a new World Bank report released today.  

The Spring 2020 edition of the Iraq Economic Monitor, “Navigating the Perfect Storm (Redux)” discusses the recent economic and policy developments and highlights some of the main macroeconomic policy challenges facing the country. The report finds that Iraq’s pre-existing conditions going into this crisis limit its ability to manage and mitigate the socio-economic impact resulting from low oil prices, reduced oil production quotas and disruptions due to the COVID 19 lockdown measures. Iraq’s highly oil-dependent and state-owned economy impedes the creation of the needed private sector jobs for a predominantly young population. Furthermore, the growing discontent over poor service delivery, rising corruption, and lack of jobs persists and is coupled with political impasse over the formation of a new government.

Fiscal discipline and Economic diversification through more private sector participation are critical to reduce Iraq’s vulnerabilities to external shocks,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “A reform oriented and growth enhancing program will help sustain the reconstruction efforts and preserve the positive improvements achieved in the electricity and agriculture sectors over the past year.  Such a program is also key to create the much-needed jobs for the youth and help restore the confidence of Iraqi citizens.” 

The unsustainable stimulus package introduced since last October – including a rising public sector employment, lower retirement age, and various transfers – coupled with weaker oil revenues are expected to have detrimental fiscal effects. In case oil prices stabilize in the low-30s and no reform measures are taken, the budget deficit would exceed 29 percent of GDP in 2020 and gross financing needs would reach US$67 billion (over 39 percent of GDP).

Under this situation, financing options might be limited. Heavy reliance on local financing can crowd-out the available liquidity for private sector credit and weaken the balance sheet of the Central Bank of Iraq creating pressures on inflation and the exchange rate. At the same time, access to international markets may prove to be difficult given global market conditions and Iraq’s weak macro-framework. 

With this context, it has become critical for Iraq to embark on a comprehensive forward-looking economic reform agenda to enable private sector led growth, diversification and job creation. Such a program could be based on two pillars: i) Tackling cross-cutting impediments to private-sector led diversification through fiscal sustainability and economic governance, financial sector reforms, business environment reforms, Improving human capital outcomes, as well as social protection and labor system reforms; and ii) Improving governance and promoting private sector participation in selected productive sectors like agriculture and agri-food Industries, electricity and gas.

The Iraq Economic Monitor also includes a Special Focus section that highlights the importance of digital transformation for Iraq and the urgency behind it. The benefits of a robust digital economy are numerous. Leveraging the digital economy will help Iraq improve economic opportunities, particularly for its youth, and thus address the demands of citizens.

The digital transformation of the Iraqi economy will require economic reforms and longer-term development priorities along the five pillars of the digital economy framework by ensuring affordable access to high-speed internet, achieving widespread adoption of cashless payments, delivering digital government services and improving access to data, upskilling youth with technological know-how, and scaling up the digital entrepreneurship ecosystem. An example of the relevance and urgency of digital transformation has recently materialized with the deployment of innovative digital solutions in the fight against the COVID 19 pandemic across the globe. 

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Development

Principles for Strengthening Global Cooperation

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Global leaders are advocating for cooperation to be the new compass for international relations and have released a set of seven Principles for Strengthening Global Cooperation. The World Economic Forum’s Global Action Group, comprised of senior members of government, business, civil society, and the expert community, developed the principles.

Børge Brende, President of the World Economic Forum, convened the Global Action Group in virtual meetings beginning in June 2020. François-Philippe Champagne, Minister of Innovation, Science and Industry of Canada; Sigrid Kaag, Minister for Foreign Trade and Development Cooperation of the Netherlands; Tarō Kōno, Minister in charge of Administrative Reform of Japan; Tito Mboweni, Minister of Finance of South Africa; Dina Powell McCormick, Global Head, Sustainability and Inclusive Growth, Goldman Sachs; and Kent Walker, Senior Vice-President, Global Affairs, Google,co-chaired the group.

The seven principles call for prioritizing peace and security, equity, gender equality and sustainability because each of these is advanced by and is needed to advance global cooperation. Their absence can cause deep fractures as highlighted by the Global Risks Report 2021 released earlier this week by the Forum.

The seven Principles for Strengthening Global Cooperation:

  • Strengthen global cooperation
  • Advance peace and security
  • Re-globalize equitably
  • Promote gender equality
  • Rebuild sustainably
  • Deepen public-private partnerships
  • Increase global resilience

“Having leaders articulate the importance of working with one another – at a moment that so clearly calls for greater unity but lacks it – can serve as a vital step in rechannelling momentum in the right direction,” said Børge

Brende, President of the World Economic Forum. “The direction we need to head is toward greater dialogue, coordination and collective action. Only in this way can we shape a more equitable and sustainable recovery and increase our future resilience.”

Members of the Global Action Group

Mohammed Alardhi, Executive Chairman, Investcorp Holding

John R. Allen, President, The Brookings Institution

Niels Annen, State Minister for Foreign Affairs of Germany

Thomas Bagger, Head, Foreign Policy Division, Office of Presidential Affairs of Germany

Thomas Buberl, Chief Executive Officer, AXA

Mevlüt Çavuşoğlu, Minister of Foreign Affairs of Turkey

Mathias Cormann, Candidate of the Government of Australia for Secretary-General of the Organisation for Economic Co-operation and Development

Ivo Daalder, President, The Chicago Council on Global Affairs

Jeroen Dijsselbloem, Chairman, Dutch Safety Board

Jeffrey D. Feltman, Senior Fellow, United Nations Foundation

Fu Ying, Chairperson, Center for International Security and Strategy, Tsinghua University

Orit Gadiesh, Chairman, Bain & Company

Arancha González Laya, Minister of Foreign Affairs, European Union and Cooperation of Spain

Samer Haj Yehia, Chairman of the Board, Bank Leumi Le-Israel

Jane Harman, Director, President and Chief Executive Officer, The Woodrow Wilson International Center for Scholars

Mohammed Al-Jadaan, Minister of Finance, Economy and Planning of Saudi Arabia

Ann Linde, Minister of Foreign Affairs of Sweden

Susana Malcorra, Dean, IE School of Global and Public Affairs, IE University

Luis Alberto Moreno, Member of the Board of Trustees, World Economic Forum

Vali R. Nasr, Professor of International Relations, Paul H. Nitze School of Advanced International Studies (SAIS), Johns Hopkins University

Patrick Odier, Chairman of the Board of Directors, Bank Lombard Odier & Co.

Maxim Oreshkin, Aide to the President of the Russian Federation

Suresh Prabhakar Prabhu, Indian Prime Minister’s G20 Sherpa

Ayman Al Safadi, Deputy Prime Minister and Minister of Foreign Affairs and Expatriates of the Hashemite Kingdom of Jordan

Kevin Sneader, Global Managing Partner, McKinsey & Company

Achim Steiner, Administrator, United Nations Development Programme (UNDP)

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Net-Zero Challenge: The Supply Chain Opportunity

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The commitment to tackling climate change is accelerating in all sectors of society, with net-zero pledges from companies, cities, states, and regions doubling in the past year. Decarbonizing supply chains is a major opportunity for companies to put these commitments into practice.

New research published today by the World Economic Forum and Boston Consulting Group (BCG) shows how tackling supply chain emissions can be a game changer in the global fight against climate change. Net-Zero Challenge: The Supply Chain Opportunity analyzes the top eight global supply chains that account for more than 50% of global greenhouse gas emissions and finds that end-to-end decarbonization of these supply chains would add as little as 1% to 4% to end-consumer costs in the medium term.

The report breaks down the major sources of emissions along each of the eight major supply chains—food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services, and freight. It assesses the key levers to reduce emissions in each supply chain and shows that many can be easily deployed today and cost very little to implement. The report also points to the global nature of many supply chains, enabling companies to support decarbonization across borders and in countries where governments do not yet prioritize climate action.

The opportunity for impact is especially high for consumer-facing companies, whose supply chain emissions far outweigh their direct emissions from manufacturing. These companies can use their buying power to push for rapid decarbonization and help fund the transition by co-investing with upstream raw-material producers, which struggle to finance the transition alone.

For example, while it costs a steel producer significantly more to make zero-carbon steel, raw input materials like steel account for such a low proportion of end-consumer prices that a zero-carbon car is only about 2% more expensive for the buyer in the medium term.

The report points to nine major actions that CEOs should take today to address supply chain emissions, including:

  • Building a robust view of emissions with supplier-specific data and setting ambitious targets for emissions reductions
  • Redesigning products and reconsidering geographical sourcing strategies to optimize for CO2
  • Cofunding abatement measures and educating suppliers on how to implement low-carbon solutions
  • Engaging in industry ecosystems to share best practices and create a demand signal for green products
  • Aligning incentives internally to ensure that decision makers focus on lowering emissions

Quotes

Nigel Topping, the UNFCCC’s high-level climate action champion, said: “Supply-chain decarbonization will be a ‘game changer’ for the impact of corporate climate action. Addressing Scope 3 emissions is fundamental for companies to realize credible climate change commitments.”

Dominic Waughray, managing director, World Economic Forum, said: “This important report shows how companies have the opportunity to make a huge impact in the fight against climate change by also decarbonizing their supply chains. The interaction between governments and companies to seize this opportunity is an important one. We welcome more leaders to join and help build momentum on this important agenda.”

Patrick Herhold, a report coauthor and managing director and partner at BCG’s Centre for Climate Action, said: “The argument that costs are a major barrier to reducing emissions is increasingly flawed—around 40% of the emissions across the eight major supply chains we analyzed can be eliminated with measures that bring cost savings or are at costs of less than €10 per ton of CO2 equivalent. Increasing process efficiency and the use of recycled materials, as well as buying more renewable power, provides companies with major climate gains at very low costs.”

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Driving Growth Using ‘Practical Wisdom’: Japan’s Perspectives

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In response to the COVID-19 crisis, the World Economic Forum has taken an initiative to create a more sustainable and resilient world. Further to the regular dialogues held on managing the crisis and shaping a positive post-COVID world, the Regional Action Group for Japan (RAGJ), a community of leaders engaged with the World Economic Forum, published a report “Driving Growth Using ‘Practical Wisdom’: Japan’s Perspectives”

The report suggests that the country should create a well-structured, forward-thinking society based on sustainability, inclusivity and resiliency through four pillars: attitude, business culture, economy, and the global collaboration framework. The report also suggests that Japanese leaders can implement the concept by drawing on the country’s “practical wisdom,” or its long tradition of practicing stakeholder-based capitalism, sustainable business models, disaster resilience, and the championing of environmental values.

“There is an urgent need for global stakeholders to cooperate in simultaneously managing the direct consequences of the COVID-19 crisis. It is of great significance for the World Economic Forum that Japanese leaders came together to propose what it takes for the country, as well as for the international community, to improve the state of the world. Japan’s perspectives, laid out in the report, are one of the first responses to our call to present a vision of that guides us through the post-COVID future,” said Makiko Eda, Chief Representative Officer, World Economic Forum, Japan.

“The current crisis requires us to revisit the status quo of every aspect of society. At the same time, it presents us with a unique opportunity to accelerate necessary reforms to shape a better future,” said Nobuhiro Hemmi, Partner and Chief Strategist, Deloitte Japan, who supported the organization of the discussion of the RAGJ. “Capitalizing on this momentum, Japanese leaders are committed to making long-lasting impacts to society while fostering engagement with the public and communities around the world. I hope that the report serves as a catalyst in implementing ‘great resets’ that help shape the post-COVID future,” he added.

The report proposes that Japan draws on its “practical wisdom” in its effort to resetting four areas:

Attitudes: To address systemic challenges such as sustainability and climate change, leaders must abandon wishful thinking that such a task will be easy. Three approaches should help this shift: sharing a greater sense of urgency among officials, businesses, and the public; accelerating necessary reforms for a long-lasting impact on public trust; and addressing unresolved issues to usher in a new era for Japan.

Business Culture: Leaders should transform their own businesses’ behavior, moving the focus away from their own successes in favor of contributing to the common good. Three steps are proposed: growing truly purpose-driven businesses for long-term value generation; upgrading community and environmental solutions via digital leapfrogging; and promoting diversity and inclusion to revitalize the leadership.

Economy: Japanese leaders must transform the economy system, shifting the emphasis away from shareholders to stakeholders. Three measures should support the shift: redefining economic success; striking a shareholder-stakeholder balance to reframe economic focus; and shifting investor focus from short-term returns to long-term value creation.

Global collaboration framework: Japan must rebuild the bonds of global cooperation by growing out of its traditional role as a rule-follower and becoming a rule-shaper. This is made possible by three approaches: adjusting or adopting rules to create a new era of cooperation; renewing global trade systems; and serving as a great mediator for transnational cooperation.

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