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China’s Economic Recovery Picks Up but Risks Remain- Report

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Following a sharp decline in the first quarter of 2020, economic activity in China has normalized faster than expected, aided by an effective pandemic-control strategy, strong policy measures and buoyant exports. While swift, the recovery has been uneven, with domestic demand recovering more slowly than production, and consumption more slowly than investment, according to From Recovery to Rebalancing, the December 2020 edition of the World Bank’s China Economic Update, released today.

The report projects economic growth in China to slow sharply to 2 percent in2020 before rebounding to 7.9 percent in 2021, as economic activity broadens to private investment and consumption, in response to improved consumer and business confidence and better labor market conditions.

Risks to China’s economic recovery are high but broadly balanced. On the downside, recurrent COVID-19 flareups could continue to disrupt economic activity, despite efforts to suppress the spread of the virus. The COVID-19 shock has also accentuated preexisting and interconnected vulnerabilities of corporate, bank and government balance sheets. which will weigh on China’s growth. The global environment is expected to remain challenging and highly uncertain. Persistent bilateral tensions with major trading partners over trade and technology will continue to pose risks to a sustained recovery, especially since external imbalances have resurfaced as a result of the COVID-19 shock and ensuing recovery. On the upside, a swift and widespread rollout of an effective vaccine would boost consumer and business confidence and support stronger growth.

The global environment remains highly uncertain and this calls for an adaptive policy framework. A premature policy exit and excessive tightening could derail the recovery,” said Martin Raiser, World Bank Country Director for China. “The withdrawal of fiscal support should proceed gradually, but the focus should shift from traditional infrastructure to more social spending and green investment.”

Market-oriented structural reforms, complemented with fiscal measures to rebalance the economy towards more domestic demand and especially consumption would help avoid a further decline in potential growth, reduce external imbalances and lay the foundation for a more resilient and inclusive economy. Reducing inequality in incomes and access to social services, including through further liberalization of the hukou system would support the rebalancing to consumption.  

The report highlights how China’s reform agenda is intrinsically linked to its spatial transformation. While regional disparities in output, labor productivity, and income across provinces and between urban and rural areas in China have narrowed since the mid-2000s, this convergence was driven by a surge in investment in lagging regions. Mounting financial imbalances and debt, and diminishing returns make further investment-driven convergence unsustainable.

“To rebalance the economy from investment to more innovation- and services-driven growth, China will need to embrace the growth potential of its most developed and innovative metropolitan areas and city clusters,” said Sebastian Eckardt, World Bank Lead Economist for China. Such a shift will need to be accompanied by fiscal policies to ensure more equitable public service delivery and increased investment in human capital for people living outside urban areas and coastal provinces.”

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Global Economy’s “Speed Limit” Set to Fall to Three-Decade Low

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The global economy’s “speed limit”—the maximum long-term rate at which it can grow without sparking inflation—is set to slump to a three-decade low by 2030. An ambitious policy push is needed to boost productivity and the labor supply, ramp up investment and trade, and harness the potential of the services sector, a new World Bank report shows.

The report, Falling Long-Term Growth Prospects: Trends, Expectations, and Policies, offers the first comprehensive assessment of long-term potential output growth rates in the aftermath of the COVID-19 pandemic and the Russian invasion of Ukraine. These rates can be thought of as the global economy’s “speed limit.”

The report documents a worrisome trend: nearly all the economic forces that powered progress and prosperity over the last three decades are fading. As a result, between 2022 and 2030 average global potential GDP growth is expected to decline by roughly a third from the rate that prevailed in the first decade of this century—to 2.2% a year. For developing economies, the decline will be equally steep: from 6% a year between 2000 and 2010 to 4% a year over the remainder of this decade. These declines would be much steeper in the event of a global financial crisis or a recession.

“A lost decade could be in the making for the global economy,” said Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics. “The ongoing decline in potential growth has serious implications for the world’s ability to tackle the expanding array of challenges unique to our times—stubborn poverty, diverging incomes, and climate change. But this decline is reversible. The global economy’s speed limit can be raised—through policies that incentivize work, increase productivity, and accelerate investment.”

The analysis shows that potential GDP growth can be boosted by as much as 0.7 percentage points—to an annual average rate of 2.9%—if countries adopt sustainable, growth-oriented policies. That would convert an expected slowdown into an acceleration of global potential GDP growth.

“We owe it to future generations to formulate policies that can deliver robust, sustainable, and inclusive growth,” said Ayhan Kose, a lead author of the report and Director of the World Bank’s Prospects Group.“A bold and collective policy push must be made now to rejuvenate growth. At the national level, each developing economy will need to repeat its best 10-year record across a range of policies. At the international level, the policy response requires stronger global cooperation and a reenergized push to mobilize private capital.”

The report lays out an extensive menu of achievable policy options, breaking new ground in several areas. It introduces the world’s first comprehensive public database of multiple measures of potential GDP growth—covering 173 economies from 1981 through 2021. It is also the first to assess how a range of short-term economic disruptions—such as recessions and systemic banking crises—reduce potential growth over the medium term.

“Recessions tend to lower potential growth,” said Franziska Ohnsorge, a lead author of the report and Manager of the World Bank’s Prospects Group. “Systemic banking crises do greater immediate harm than recessions, but their impact tends to ease over time.”

The report highlights specific policy actions at the national level that can make an important difference in promoting long-term growth prospects:

Align monetary, fiscal, and financial frameworks: Robust macroeconomic and financial policy frameworks can moderate the ups and downs of business cycles. Policymakers should prioritize taming inflation, ensuring financial-sector stability, reducing debt, and restoring fiscal prudence. These policies can help countries attract investment by instilling investor confidence in national institutions and policymaking.

Ramp up investment: In areas such as transportation and energy, climate-smart agriculture and manufacturing, and land and water systems, sound investments aligned with key climate goals could enhance potential growth by up to 0.3 percentage point per year as well as strengthen resilience to natural disasters in the future.

Cut trade costs: Trade costs—mostly associated with shipping, logistics, and regulations—effectively double the cost of internationally traded goods today. Countries with the highest shipping and logistics costs could cut their trade costs in half by adopting the trade-facilitation and other practices of countries with the lowest shipping and logistics costs. Trade costs, moreover, can be reduced in climate-friendly ways—by removing the current bias toward carbon-intensive goods inherent in many countries’ tariff schedules and by eliminating restrictions on access to environmentally friendly goods and services.

Capitalize on services: The services sector could become the new engine of economic growth. Exports of digitally delivered professional services related to information and communications technology climbed to more than 50% of total services exports in 2021, up from 40%in 2019. The shift could generate important productivity gains if it results in better delivery of services.  

Increase labor force participation: About half of the expected slowdown in potential GDP growth through 2030 will be attributable to changing demographics—including a shrinking working-age population and declining labor force participation as societies age. Boosting overall labor force participation rates by the best ten-year increase on record could increase global potential growth rates by as much as 0.2 percentage point a year by 2030. In some regions—such as South Asia and the Middle East and North Africa—increasing female labor force participation rates to the average for all emerging market and developing economies could accelerate potential GDP growth by as much as 1.2 percentage points a year between 2022 and 2030.

The report also underscores the need to strengthen global cooperation. International economic integration has helped to drive global prosperity for more than two decades since 1990, but it has faltered. Restoring it is essential to catalyze trade, accelerate climate action, and mobilize the investments needed to achieve the Sustainable Development Goals.

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Economic Diversification Away from Oil is Crucial for the Republic of Congo

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Economic diversification away from oil is crucial for reversing recent economic setbacks in the Republic of Congo and put the country on a pathway to long-term prosperity, says the World Bank in its latest Country Economic Memorandum report on the country.

The cost of over-reliance on oil has been painfully apparent in the past decade. A seven-year recession, induced by the end of the last oil-boom cycle, has led to a dramatic drop in income per capita, shrunk the size of the economy and weakened long-term growth prospects. While oil prices have surged more recently, returning Congo’s economy to growth in 2022, the current development model is unlikely to deliver sustainable economic growth and productive jobs going forward.

Attaining sustainable development in Congo urgently requires efforts to diversify national assets, focusing on stronger institutions, development of human and physical capital, and a more balanced exploitation of natural resources, says the report, titled Congo’s Road to Prosperity: Building Foundations for Economic Diversification.

“Congo’s oil-driven growth model has run its course. In order to achieve its aspiration for a more diversified and inclusive model, it is crucial for Congo to strengthen its policy ambition and accelerate efforts to transition to a people-centered, diversified economy,” said Korotoumou Ouattara, World Bank Resident Representative for the Republic of Congo.

The report highlights the urgency of diversification actions. Congo’s oil production is expected to decline in the medium term due to the depletion of oil reserves and reduced external demand from the global transition to a low-carbon economy. While oil accounts for 40% of GDP, the sector employs only a fraction of the country’s workforce, with three-quarters of Congolese employed in the informal sector. Underinvestment in health, education, and physical infrastructure, as well as weak government institutions underscore the limits of fossil fuel-driven growth and the importance of economic diversification.

It identifies ways in which Congo can achieve its economic diversification objectives and recommends policy reforms and investments in the following priority areas:

  • Remove barriers to competition by curbing state-owned enterprises’ market dominance, encouraging private sector participation in the electricity and telecommunications sectors, and modernizing competition law and enforcement capacity.
  • Accelerate digital transformation by enabling private sector participation, developing regulatory and legal support for digital financial services and facilitating digital technology adoption, and building digital skills.
  • Improve the supply of reliable electricity by restoring profitability, invigorating regulation, and investing in transmission and distribution.
  • Enhance trade competitiveness and diversification by cutting tariffs, reviewing non-tariff measures, concluding regional trade negotiations, and strengthening local markets.
  • Improve logistics efficiency by scrutinizing public-private partnership contracts and adopting unified information technology for maritime trade.
  • Support ecotourism development by improving regulation and allocating funding to protect natural assets, strengthening regulatory and enforcement agencies, and expanding transport infrastructure and marketing.

“The recent oil price volatility is a strong reminder of the need for Congo to reduce its exposure to the boom-bust cycles of global commodity markets. Urgent policy actions to develop the non-oil sector, enable the private sector, and strengthen government institutions can help catalyze growth for a prosperous, resilient and sustainable future,” said Vincent Belinga, lead author of the report.

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Solar Mini Grids Could Sustainably Power 380 million People in Africa by 2030

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Solar mini grids can provide high-quality uninterrupted renewable electricity to underserved villages and communities across Sub-Saharan Africa and be the least-cost solution to close the energy access gap on the continent by 2030.

Climate action efforts can tap solar mini grids that offer a lower greenhouse gas emission alternative compared to diesel-fueled systems and kerosene-based appliances. The World Bank’s Mini Grids for Half a Billion People: Market Outlook and Handbook for Decision Makers notes that to realize the full potential of solar mini grids, governments and industry must work together to systematically identify mini grid opportunities, drive costs down, and overcome barriers to financing.

“Kenya has deployed mini grids to serve communities that are not connected to the main grid,” said Mr Davis Chirchir, Cabinet Secretary Ministry. “Currently we have about 62 mini grids that are fully operational and 28, which are under construction. We hope to deploy more mini grids to close the energy access gap and ensure universal access to electricity by 2030.”

In Sub-Saharan Africa, 568 million people still lack access to electricity. Globally, nearly 8 out of 10 people without electricity live in Africa. At the current rate of progress, 595 million Africans will remain unconnected in 2030.

“While Africa remains the least electrified continent, it also has the biggest potential for solar mini grid deployment,” said Gabriela Elizondo Azuela, Manager of the World Bank’s Energy Sector Management Assistance Program (ESMAP). “Solar mini grids can reach populations today that would otherwise wait years to be reached by the grid.  They have the potential to transform the power sector in Sub-Saharan Africa. Through World Bank operations and advice to governments, ESMAP is helping take mini grids from a niche to a mainstream solution.”

The deployment of solar mini grids has markedly accelerated in Sub-Saharan Africa, from around 500 installed in 2010 to more than 3,000 installed today, and a further 9,000 planned for development over the next few years. This is the result of falling costs of key components, the introduction of new digital solutions, a large and expanding cohort of highly capable mini grid developers and growing economies of scale. In Africa, mini grids are on track to provide power at lower cost than many utilities. The cost of electricity produced by mini grids could be as low as $0.20/kWh by 2030, making it the least-cost solution for more than 60 percent of the population.

Important progress has been made in several African countries to accelerate the deployment of mini grids. In Nigeria, for example, a market-driven approach to mini grid development under the World Bank-supported National Electrification Project has catalyzed the deployment of more than 100 new solar-powered mini grids. In several countries such as Ethiopia and Zambia, new regulations and policy directives are making mini grids more attractive for private sector investment. In Kenya, a combination of geospatial planning, favorable policies and regulations, and a robust business model based on public-private partnership is underpinning the World Bank-supported Kenya Off-Grid Solar Access Project, which is targeting almost 150 new mini grids in areas with low electricity access rates.

Further acceleration is needed, however, to meet Sustainable Development Goal 7 (SDG7). Powering 380 million people in Africa by 2030 will require the construction of more than 160,000 mini grids at a cumulative cost of $91 billion. At the current pace, only around 12,000 new mini grids serving 46 million people will be built by 2030 at a total investment cost of approximately $9 billion.

The World Bank has committed more than $1.4 billion to mini grids over the next seven years, through 38 projects in 29 countries. The investment plans of the World Bank’s portfolio include the deployment of 3,000 mini grids by 2029, with the expectation of bringing electricity to more than 13 million people. This investment commitment is expected to crowd in more than $1 billion of co-financing from private sector, government, and development partners. In countries where the World Bank has an investment commitment in mini grids, the Bank’s investment represents on average about 25 percent of the total investment in mini grids in each country from governments, the private sector, and development partners.

Produced by the World Bank’s Energy Sector Management Assistance Program (ESMAP), the book, the Mini Grids for Half a Billion People: Market Outlook and Handbook for Decision Makers, identifies five market drivers that would help the mini grid sector achieve its full market and development potential:

  1. Reducing the cost of electricity from solar hybrid mini grids to $0.20/kWh by 2030, which would put life-changing power in the hands of half a billion people for just $10 per month.
  2. Increasing the pace of deployment to 2,000 mini grids per country per year, by building portfolios of modern mini grids instead of one-off projects.
  3. Providing reliable electricity service to customers and communities would generate the demand for 3 million income-generating appliances and machines and expand services at 200,000 schools and clinics.
  4. Leveraging development partner funding and government investment to “crowd in” private-sector finance, potentially raising $127 billion in cumulative investment from all sources for mini grids by 2030.
  5. Establishing enabling mini grid business environments in key access-deficit countries through light-handed and adaptive regulations, supportive policies, and reductions in bureaucratic red tape.

The handbook is the World Bank’s most comprehensive and authoritative publication on mini grids to date.

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