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EAEU–Iran Trade and Its Prospects

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Negotiations on a full-scale free trade agreement between Iran and the Eurasian Economic Union (EAEU) are planned for the second half of 2021. The success of the current interim agreement with Iran suggests that initiating a proper FTA could indeed work. However, a number of obstacles—which have nothing to do with customs duties and trade tariffs—need to be eliminated if any possible agreement is to bear fruit. Being the parties most interested in reaching such an agreement, Iran and Russia remain the main drivers of Iran’s rapprochement with the EAEU.

A Full-Scale Agreement

Signing a full-scale free-trade agreement with Iran was hardly surprising, given the previous agreements between the EAEU and Tehran. On May 17, 2018, Iran put pen to paper on a three-year interim agreement on the establishment of a free trade area (FTA) that entered into force on October 27, 2019. Among other things, the parties agreed to launch talks on making the interim agreement permanent (with changes) no later than 18 months after it would come into effect, as well as to conclude such talks within three years of that same date.

Everything that the parties have said and done in this respect has been in accordance with the previous agreements. The decision to launch negotiations with Iran was made on December 11, 2020, and the first consultations took place on February 17, 2021, that is, somewhat less than 16 months after the FTA agreement entered into force.

Assuming everything goes to plan, the issue of a full-scale agreement should be settled before October 27, 2021. To this end, more comprehensive negotiations have been pencilled in for the second half of this year. In any case, the sides still have over a year to resolve any issues that may come up, as Minister of Energy of Iran Reza Ardakanian duly noted in early March when he said, “We’ve got some one and a half years to put things in place.” [1]

In other words, a full-scale free-trade agreement between Iran and the EAEU may not necessarily be concluded by the end of this year. Judging by what both Iran and the EAEU member states say, all the sides are interested in replacing the interim agreement with a permanent one. However, a new round of talks will surely focus on expanding the range of goods and reducing the duties even further. The parties will try to protect the interests of their domestic producers as much as possible, and it will hardly be surprising if they fail to reach a consensus straight away so that everything eventually drags out.

There is another factor that might prove a serious obstacle to cooperation between the EAEU and Iran, which is the EAEU’s ongoing FTA negotiations with Israel. The Israeli Ambassador to Russia has noted that such an agreement could be signed as early as this year. Iran has yet to comment on the matter. However, should Tel Aviv and the EAEU manage to reach agreement, there are forces within the Iranian political system that are capable of stirring up a wave of discontent, which could scupper all diplomatic efforts invested to achieve a full-scale FTA.

The rumour that Iran could be about to join the EAEU added a new dimension to this story. Tongues started wagging following the comments made by Mohammad Bagher Ghalibaf, the Speaker of Iran’s Parliament, after his trip to Moscow on February 10, 2021, which many interpreted as Tehran announcing its intentions to become a full-fledged member of the Union. A number of Russian and English publications ran with the story, discussing the prospects of such a move.

However, the Ministry of Trade and Integration of the Republic of Kazakhstan would later deny these rumours. There are certain procedures that must be followed to become a member of the EAEU, including that of submitting an application to the Chairman of the Supreme Eurasian Economic Council. “As of February 17, 2021,” the Ministry’s statement reads, “the relevant application has not been received from the Islamic Republic of Iran.”

A Pivot to the East

The very notion of rapprochement between Iran and the EAEU fits comfortably into Tehran’s strategy of pivoting to Asia and its markets. The move started to take shape back in the 2000s and was mainly motivated by economic trends, namely, the growing need in energy resources of the rapidly developing Asian economies, such as China and India. Then sanctions followed, and following the US withdrawal from the nuclear deal in May 2018 the pressure has considerably increased. All this made the Iranian elites to become disenchanted with the idea of fostering economic ties with Europe, as businesses in the EU turned out to be most sensitive to the restrictions imposed by Washington.

It would seem that cooperation with the EAEU avails Iran an opportunity to mitigate the effects of the U.S. sanctions policy. The fact that several EAEU countries are under Western sanctions certainly helps in this respect. On February 7, 2021, Roman Golovchenko, Prime Minister of Belarus, argued that the EAEU is looking to develop a mechanism for countering sanctions to give cause for optimism.

What is more, Iran is interested in abandoning the U.S. dollar in settlements and switching to national currencies. This remedy acquired even greater urgency once Iran was cut off from the SWIFT international settlement system as a result of U.S. pressure. The EAEU has repeatedly stated that it is consistently moving towards this goal. Similar comments and practices are evident in bilateral relations between individual EAEU member states and Iran.

Finally, Tehran is trying to break out of its political isolation. Rapprochement with the EAEU could thus help elevate its status on the international stage. On the whole, establishing the interim FTA with its subsequent transformation into a full-scale agreement should be viewed in the broader context of Iran’s striving to strengthen regionalism and bolster Eurasian cooperation.

As far as the EAEU interests are concerned, one should say that Iran represents serious potential for the Union’s expansion. Among the economies of the EAEU member states, observers and partners, the Iranian economy is second only to Russia’s. In terms of economic cooperation, Russia and Kazakhstan stand to benefit most from lowering tariff barriers. In addition, the project is of particular interest to Armenia, which is the only EAEU member that has a land border with Iran—currently under a partial blockade. Armenia could thus be used as a transit country for Iranian imports and exports. A free-trade agreement with Tehran would also do wonders for Moscow’s integration policy.

FTA Experience

The interim agreement on establishing a free trade area between the EAEU and Iran entered into force on October 27, 2019 and provided for a reduction in customs duties on 862 categories of goods (502 for Iranian exports and 360 for EAEU exports). The list of goods covers approximately 50% of the total mutual trade between the partners. The agreement came into effect amid a difficult time in Iran, owing to the U.S. sanctions regime and the coronavirus lockdown. Despite this, however, trade turnover between the EAEU and Iran grew to $2.9 billion in 2020, an 18% increase from 2019.

At the same time, as far as EAEU exports are concerned, we rather stand witness to their recovery to the level prior to the restoration of U.S. sanctions. It was immediately after the nuclear deal became effective and the sanctions against Iran were lifted in 2016 that exports hit a recent-year record high at $2.6 billion. While EAEU 2020 exports rose by 2% as compared to 2019, they only amounted to $1.6 billion.

A somewhat different situation could be observed in the case of EAEU imports from Iran in 2020, which grew by 51.5% as compared to 2019, surpassing $1.2 billion. This is significant, as for the previous ten years imports had not exceeded $1 billion. In other words, the Iranian economy benefited significantly more from the establishment of the FTA than the EAEU, at least during the initial stages of the deal. What is more, this had to do with non-oil sectors of Iran’s economy, as EAEU imports are primarily based on agricultural products.

At the same time, Iran occupies a relatively insignificant place in the trade balance of the EAEU countries, accounting for just 0.5% of all trade operations in the Union. Meanwhile, the EAEU countries account for approximately 3% of Iran’s trade balance.

We should also note the uneven distribution of trade between the individual EAEU countries and Iran. For example, Russia accounts for approximately 75% of all trade between the EAEU and Iran, which is around 85% of exports and 65% of imports. Kazakhstan accumulates some 10% of the total trade turnover, with its trade volume shrinking by 37% in 2020, as opposed to the trade with the EAEU as a whole. Meanwhile, the share of Belarus and Kyrgyzstan is almost next to nothing.

Relations between Tehran and Yerevan are somewhat different. Armenia makes up approximately 15% of all trade with the EAEU. Additionally, more than 25% of all EAEU imports from Iran go to Armenia. Armenia is thus a valuable partner for Iran, purchasing food and industrial products, as well as oil and gas from the country. These special relations are reflected in the fact that Iran makes up almost 9% of Armenia’s trade turnover.

Definite changes were recorded in the dynamics of trade relations following the conclusion of the interim FTA agreement. In the case of Russia, both exports and imports increased (by 19% and 100%, respectively). Meanwhile, Iran’s trade with Belarus and Kyrgyzstan remained negligible. In the case of Armenia, slight changes have taken place, with exports increasing by 1% and imports falling by 3%. Exports from Kazakhstan have dropped by 54%, while imports have increased by 32%.

In other words, the FTA serves as an incentive for Russia to foster trade with Iran. Kazakhstan has also increased its imports from the country. However, there have been no serious positive shifts with regard to the remaining EAEU countries.

Real Prospects

It would seem that trade cooperation between Iran and the EAEU will do little to alter the economic situation for its participants. For Tehran, however, the EAEU can serve as a reliable partner with stable trade ties, something that is of particular importance to a country suffering partial economic isolation. Meanwhile, Moscow—still the key driver for cultivating economic relations with Iran—sees Tehran as a potential buyer of its industrial goods. This is especially important given the fact that hydrocarbons remain at the heart of Russia’s exports around the world. Finally, as we mentioned earlier, Iran can play a special role in the development of the Armenian economy.

Expanding the FTA agreement to include additional product lines may serve as a basis for bringing the economic relations between the parties to a new level. However, a number of barriers that have nothing to with customs duties and trade tariffs still pose a major problem for the development of trade between Iran and the EAEU. On the one hand, there are objective limitations that will hardly be eliminated in the foreseeable future. For example, trade opportunities are limited by the fact that the oil sector remains the backbone of the economies of Iran, Russia and Kazakhstan. This is why the EAEU cannot offer Iran anything comparable to what China offers. Then, there is the special position that Russia occupies on the EAEU energy markets. Tehran can hardly expect to significantly increase its gas supplies to Armenia, as Russia continues to have a hold on this market. Finally, U.S. sanctions play a huge role in limiting development opportunities, and the EAEU and Iran can only partially neutralize their negative effects.

At the same time, the parties are in a position to work on removing other equally important obstacles, for example, developing a transport and logistics infrastructure and automating and digitalizing customs procedures in order to avoid delays and red tape at the borders. Receiving payment for goods remains a big problem after Iran was cut off from the SWIFT system. Much work has already been done to transition to settlements in national currencies, although it is far from complete. What is more, Iran is not a member of the WTO, and its business practices do not meet international standards in most cases.

We should also mention the specifics of doing business in Iran, which presents additional challenges when it comes to concluding and implementing agreements with foreign partners. Iran’s economic isolation and unpredictable foreign policy environment are the core reasons why it keeps such business practices. Increasing its foreign economic activity, including that with the EAEU countries, should help Iranian businesses get to grips with working under the rules that have been adopted in international trade.

In other words, a full-scale agreement between Iran and the EAEU has great development prospects. However, real prospects primarily depend on the ability of both governments and businesses to work to remove those barriers that are not connected with customs duties and trade tariffs.

From our partner RIAC

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Can e-commerce help save the planet?

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If you have logged onto Google Flights recently, you might have noticed a small change in the page’s layout. Alongside the usual sortable categories, like price, duration, and departure time, there is a new field: CO2 emissions.

Launched in October 2021, the column gives would-be travellers an estimate of how much carbon dioxide they will be responsible for emitting.

“When you’re choosing among flights of similar cost or timing, you can also factor carbon emissions into your decision,” wrote Google’s Vice President of Travel Products, Richard Holden.

Google is part of a wave of digital companies, including Amazon, and Ant Financial, encouraging consumers to make more sustainable choices by offering eco-friendly filter options, outlining the environmental impact of products, and leveraging engagement strategies used in video games.

Experts say these digital nudges can help increase awareness about environmental threats and the uptake of solutions to reduce greenhouse gas emissions.   

“Our consumption practices are putting tremendous pressure on the planet, driving climate change, stoking pollution and pushing species towards extinction,” says David Jensen, Digital Transformation Coordinator with the United Nations Environment Programme (UNEP).

“We need to make better decisions about the things we buy and trips we take,” he added. “These green digital nudges help consumers make better decisions as well as collectively drive businesses to adopt sustainable practices through consumer pressure.”

Global reach

At least 1.5 billion people consume products and services through e-commerce platforms, and global e-commerce sales reached US$26.7 trillion in 2019, according to a recent UN Conference on Trade and Development (UNCTAD) report.

Meanwhile, 4.5 billion people are on social media and 2.5 billion play online games. These tallies mean digital platforms could influence green behaviors at a planetary scale, says Jensen.

One example is UNEP-led Playing for the Planet Alliance, which places green activations in games. UNEP’s Little Book of Green Nudges has also led to more than 130 universities piloting 40 different nudges to shift behaviour.

A 2020 study by Globescan involving many of the world’s largest retailers found that seven out of 10 consumers want to become more sustainable. However, only three out of 10 have been able to change their lifestyles.

E-commerce providers can help close this gap.

“The algorithms and filters that underpin e-commerce platforms must begin to nudge sustainable and net-zero products and services by default,” said Jensen. “Sustainable consumption should be a core part of the shopping experience empowering people to make choices that align with their values.”

Embedding sustainability in tech

Many groups are trying to leverage this opportunity to make the world a more sustainable place.

The Green Digital Finance Alliance (GDFA), launched by Ant Group and UNEP, aims to enhance financing for sustainable development through digital platforms and fintech applications. It launched the Every Action Counts Coalition, a global network of digital, financial, retail investment, e-commerce and consumer goods companies. The coalition aims to help 1 billion people make greener choices and take action for the planet by 2025 through online tools and platforms.

We will bring like-minded members together to experiment with new innovative business models that empower everyone to become a green digital champion,” says Marianne Haahr, GDFA Executive Director.

In one example, GDFA member Mastercard, in collaboration with the fintech company Doconomy, provides shoppers with a personalized carbon footprint tracker to inform their spending decisions.

In the UK, Mastercard is partnering with HELPFUL to offer incentives for purchasing products from a list of over 150 sustainable brands.

Mobile apps like Ant Forest, by Ant Group, are also using a combination of incentives and digital engagement models to urge 600 million people make sustainable choices. Users are rewarded for low-carbon decisions through green energy points they can use to plant real trees. So far, the Ant Forest app has resulted in 122 million trees being planted, reducing carbon emissions by over 6 million tons.

Three e-commerce titans are also aiming to support greener lifestyles. Amazon has adopted the Climate Pledge Friendly initiative to help at least 100 million people find climate-friendly products that carry at least one of 32 different environmental certifications.

SAP’s Ariba platform is the largest digital business-to-business network on the planet. It has also embraced the idea of “procuring with purpose,” offering a detailed look at corporate supply chains so potential partners can assess the social, economic and environmental impact of transactions.

“Digital transformation is an opportunity to rethink how our business models can contribute to sustainability and how we can achieve full environmental transparency and accountability across our entire value chain,” said SAP’s Chief Sustainability Officer Daniel Schmid.

UNEP’s Jensen says a crucial next step would be for mobile phone operating systems to adopt standards that would allow apps to share environment and carbon footprint information.

“This would enable people to seamlessly calculate their footprints across all applications to develop insights and change behaviours,” Jensen said. “Everyone needs access to an individual’ environmental dashboard’ to truly understand their impact and options for more sustainable living.”

Need for common standards

As platforms begin to encode sustainability into their algorithms and product recommendations, common standards are needed to ensure reliability and public trust, say experts. 

Indeed, many online retailers are claiming to do more for the environment than they actually are. A January analysis by the European Commission and European national consumer authorities found that in 42 per cent, sustainability claims were exaggerated or false.

To help change that, UNEP serves as the secretariat of the One Planet network, a global community of practitioners, policymakers and experts that encourages sustainable consumption and production.

In November, the One Planet network issued guidance material for e-commerce platforms that outlines how to better inform consumers and enable more sustainable consumption, based on 10 principles from UNEP and the International Trade Centre.

The European Union is also pioneering core standards for digital sustainability through digital product passports that contain relevant information on a product’s origin, composition, environmental and carbon performance.

“Digital product passports will be an essential tool to strengthen consumer protection and increase the level of trust and rigour to environmental performance claims,” says Jensen. “They are the next frontier on the pathway to planetary sustainability in the digital age.”

UNEP

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2022: Small Medium Business & Economic Development Errors

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Calling Michelangelo: would Michelangelo erect a skyscraper or can an architect liberate David from a rock of marble? When visibly damaged are the global economies, already drowning their citizenry, how can their economic development departments in hands of those who never ever created a single SME or ran a business, expect anything else from them other than lingering economic agonies?

The day pandemic ends; immediately, on the next day, the panic on the center stage would be the struggling economies across the world.  On the small medium business economic fronts, despite, already accepted globally, as the largest tax contributor to any nation. Visible worldwide, already abandoned and ignored without any specific solutions, there is something strategically wrong with upskilling exporters and reskilling manufacturers or the building growth of small medium business economies. The SME sectors in most nations are in serious trouble but are their economic development rightly balanced?   

Matching Mindsets: Across the world, hard working citizens across the world pursue their goals and some end up with a job seeker mindset and some job creator mindset; both are good. Here is a globally proven fact; job seekers help build enterprises but job creators are the ones who create that enterprise in the first place. Study in your neighborhoods anywhere across the world and discover the difference.

Visible on LinkedIn: Today, on the SME economic development fronts of the world, clearly visible on their LinkedIn profiles, the related Ministries, mandated government departments, trade-groups, chambers, trade associations and export promotion agencies are primarily led by job seeker mindsets and academic or bureaucratic mentality. Check all this on LinkedIn profiles of economic development teams anywhere across the world.

Will jumbo-pilots do heart transplant, after all, economic performance depends on matching right competency; Needed today, post pandemic economic recovery demands skilled warriors with mastery of national mobilization to decipher SME creation and scalability of diversified SME verticals on digital platforms of upskilling for global age exportability. This fact has hindered any serious progress on such fronts during the last decade. The absence of any significant progress on digitization, national mobilization of entrepreneurialism and upskilling of exportability are clear proofs of a tragically one-sided mindset.

Is it a cruise holiday, or what? Today, the estimated numbers of all frontline economic development team members across 200 nations are roughly enough to fill the world-largest-cruise-ship Symphony that holds 6200 guests. If 99.9% of them are job-seeker mindsets, how can the global economic development fraternity sleep tonight? As many billion people already rely on their performances, some two billion in a critical economic crisis, plus one billion starving and fighting deep poverty. If this is what is holding grassroots prosperity for the last decade, when will be the best time to push the red panic button? 

The Big Fallacy of “Access to Finance” Notion: The goals of banking and every major institution on over-fanaticized notions of intricate banking, taxation are of little or no value as SME of the world are not primarily looking for “Access to Capital” they are rather seeking answers and dialogue with entrepreneurial job creator mindsets. SME management and economic development is not about fancy PDF studies of recycled data and extra rubber stamps to convince that lip service is working. No, it is not working right across the world.

SME are also not looking for government loans. They do not require expensive programs offered on Tax relief, as they make no profit, they do not require free financial audits, as they already know what their financial problems are and they also do that require mechanical surveys created by bureaucracies asking the wrong questions. This is the state of SME recovery and economic development outputs and lingering of sufferings.

SME development teams across the world now require mandatory direct SME ownership experiences

The New Hypothesis 2022: The new hypothesis challenges any program on the small medium business development fronts unless in the right hands and right mindsets they are only damaging the national economy. Upon satisfactory research and study, create right equilibrium and bring job seeker and job creator mindsets to collaborate for desired results. As a start 50-50, balances are good targets, however, anything less than 10% active participation of the job creator mindset at any frontline mandated SME Ministry, department, agency or trade groups automatically raises red flags and is deemed ineffective and irrelevant. 

The accidental economists: The hypothesis, further challenges, around the world, economic institutes of sorts, already, focused on past, present and future of local and global economy. Although brilliant in their own rights and great job seekers, they too lack the entrepreneurial job creator mindsets and have no experience of creating enterprises at large. Brilliantly tabulating data creating colorful illustrative charts, but seriously void of specific solutions, justifiably as their profession rejects speculations, however, such bodies never ready to bring such disruptive issues in fear of creating conflicts amongst their own job seeker fraternities. The March of Displaced cometh, the cries of the replaced by automation get louder, the anger of talented misplaced by wrong mindsets becomes visible. Act accordingly

The trail of silence: Academia will neither, as they know well their own myopic job seeker mindset. In a world where facial recognition used to select desired groups, pronouns to right gatherings, social media to isolate voting, but on economic survival fronts where, either print currency or buy riot gears or both, a new norm; unforgiveable is the treatment of small medium business economies and mishmash support of growth. Last century, laborious and procedural skills were precious, this century surrounded by extreme automation; mindsets are now very precious.  

Global-age of national mobilization: Start with a constructive open-minded collaborative narrative, demonstrate open courage to allow entrepreneurial points of views heard and critically analyze ideas on mobilization of small mid size business economies. Applying the same new hypotheses across all high potential contributors to SME growth, like national trade groups, associations and chambers as their frontline economic developers must also balance with the job creator mindset otherwise they too become irrelevant. Such ideas are not just criticism rather survival strategies. Across the world, this is a new revolution to arm SME with the right skills to become masters of trade and exports, something abandoned by their economic policies. To further discuss or debate at Cabinet Level explore how Expothon is making footprints on new SME thinking and tabling new deployment strategies. Expothon is also planning a global series of virtual events to uplift SME economies in dozens of selected nations.

Two wheels of the same cart: Silence on such matters is not a good sign. Address candidly; allow both mindsets to debate on how and why as the future becomes workless and how and why small medium business sectors can become the driving engine of new economic progress. Job seekers and job creators are two wheels of the same cart; right assembly will take us far on this economic growth passage. Face the new global age with new confidence. Let the nation witness leadership on mobilization of entrepreneurialism and see a tide of SME growth rise. The rest is easy.

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Rebalancing Act: China’s 2022 Outlook

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

After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.

The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.

The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.

Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.

In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.

Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.

None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.

First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.

Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.

A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.

Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.

In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.

Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.

While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.

In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.

However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.

First published on China Daily, via World Bank

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