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Improving productivity key to unleashing sustainable growth in Central America

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The six Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama) can increase the productivity of their economies and workforce and recover from the largest economic recession in their history —caused by the pandemic and exacerbated by hurricanes Eta and Iota— and move towards a strong and sustainable economic growth, according to a new World Bank study.

The report Unleashing Central America’s Growth Potential released today, highlights that these countries can boost their economies through a series of reforms in key areas. These include reducing costs and barriers to trade; boosting investment in human capital, innovation, and physical and digital infrastructure; attracting private investment through improving business environment and the quality of institutions, and a greater inclusion of women and young people in the labor market.

The study reviewed the performance of Central America during the last three decades and found that, although between 1991 and 2017 the region’s economy grew 4.5% per year on average —besting the rest of Latin America and the Caribbean—, this economic growth was achieved with little productivity growth.

Due to rapid growth of the working-age population during that period, the increased number of workers accounted for two-thirds of the economic growth achieved. Given that a steep decline in the growth of the working-age population is expected, a further increase in productivity (defined as a greater ability of firms and the workforce to produce more and better goods and services) will be essential to sustain strong growth going forward.

“Now is the moment to rethink the future of Central America and introduce strategic reforms to benefit current and future generations with more economic opportunities and prosperity,” said Michel Kerf, World Bank Director for Central America and the Dominican Republic. “The pandemic has significantly affected economic growth and reduced fiscal space in the region. However, the resumption of global trade and the recovery of the United States and China create opportunities to attract new domestic and foreign investments and increase the volume and value of Central American exports, which can boost sustainable and inclusive growth, with greater creation of good jobs and poverty reduction.”

The pandemic pushed Central America into its greatest economic contraction. However, global trade of goods has recovered, prices of commodities are stable, remittances are higher than a year ago and the regionalization of global value chains towards North America is accelerating, which bodes well for the Central American economies.

Key areas for policy reforms identified in the study include:

Reducing costs and barriers to intraregional trade and with Mexico: trade costs are high in Central America, with tariff-equivalent trade costs at 74%. Transportation costs are also high, at US$0.17 per ton-kilometer, above those of US$0.06-0.11 in sub-Saharan Africa and US$0.02-0.05 in advanced economies. It is estimated that full implementation of the World Trade Organization’s (WTO) Trade Facilitation Agreement can reduce trade costs by 15.5%, increasing intraregional trade by 61% and the region’s GDP by 4.3% by 2030. Extending these reductions to Mexico would increase trade between Central America and Mexico by 130% and Central America’s GDP by 6.7% by 2030.

Investing in human capital and in coverage and quality of physical and digital infrastructure: reducing knowledge and skills gaps will strengthen the workforce’s productivity, flexibility, and innovative capacity. It will also allow modern industries intensive in high-skilled workers such as information and communication technology to grow, as well as less skill-intensive industries such as tourism. It is also necessary to boost investment to close gaps in coverage and quality of physical and digital infrastructure, as poor infrastructure hinders economic growth, exacerbates poverty and inequality, and exposes some countries to natural disasters.

Attracting private investment through improving the business environment and the quality of institutions: large investment projects are needed, but these require clear rules, capable institutions, fiscal availability, and partnerships with the private sector.

Modernizing labor laws to adapt them to hybrid situations in the post-pandemic era and attract the jobs of the future, facilitating mobility between companies and sectors and labor formalization, and promoting greater participation of women and young people in the labor force are also needed.

The study includes six reports that analyze the growth factors, constraints, and opportunities for each country and a regional report that examines themes common to Central America.

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Post-COVID-19, regaining citizen’s trust should be a priority for governments

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coronavirus people

The COVID-19 crisis has demonstrated governments’ ability to respond to a major global crisis with extraordinary flexibility, innovation and determination. However, emerging evidence suggests that much more could have been done in advance to bolster resilience and many actions may have undermined trust and transparency between governments and their citizens, according to a new OECD report.

Government at a Glance 2021 says that one of the biggest lessons of the pandemic is that governments will need to respond to future crises at speed and scale while safeguarding trust and transparency. “Looking forward, we must focus simultaneously on promoting the economic recovery and avoiding democratic decline” said OECD Director of Public Governance Elsa Pilichowski. “Reinforcing democracy should be one of our highest priorities.”

 Countries have introduced thousands of emergency regulations, often on a fast track. Some alleviation of standards is inevitable in an emergency, but must be limited in scope and time to avoid damaging citizen perceptions of the competence, openness, transparency, and fairness of government.

 Governments should step up their efforts in three areas to boost trust and transparency and reinforce democracy:

 Tackling misinformation is key. Even with a boost in trust in government sparked by the pandemic in 2020, on average only 51% of people in OECD countries for which data is available trusted their government. There is a risk that some people and groups may be dissociating themselves from traditional democratic processes.

 It is crucial to enhance representation and participation in a fair and transparent manner. Governments must seek to promote inclusion and diversity, support the representation of young people, women and other under-represented groups in public life and policy consultation. Fine-tuning consultation and engagement practices could improve transparency and trust in public institutions, says the report. Governments must also level the playing field in lobbying. Less than half of countries have transparency requirements covering most of the actors that regularly engage in lobbying.

 Strengthening governance must be prioritised to tackle global challenges while harnessing the potential of new technologies. In 2018, only half of OECD countries had a specific government institution tasked with identifying novel, unforeseen or complex crises. To be fit for the future, and secure the foundations of democracy, governments must be ready to act at speed and scale while safeguarding trust and transparency.

 Governments must also learn to spend better, according to Government at a Glance 2021. OECD countries are providing large amounts of support to citizens and businesses during this crisis: measures ongoing or announced as of March 2021 represented, roughly, 16.4% of GDP in additional spending or foregone revenues, and up to 10.5% of GDP via other means. Governments will need to review public spending to increase efficiency, ensure that spending priorities match people’s needs, and improve the quality of public services.

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Sweden: Invest in skills and the digital economy to bolster the recovery from COVID-19

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Sweden’s economy is on the road to recovery from the shock of the COVID-19 crisis, yet risks remain. Moving ahead with a labour reform to facilitate adaptation in a fast-changing economic environment, and investing in digital skills and infrastructure, will be crucial to revive employment and build a sustainable recovery, according to the latest OECD Economic Survey of Sweden.

The pandemic triggered a severe recession in Sweden, despite mild distancing measures and swift government action to protect people and businesses. GDP fell by less than in many other European economies in 2020, thanks to reinforced short-time work, compensation to firms for lost revenue and measures to prop up the financial system, but unemployment still rose sharply. Solid public finances provided room for further stimulus in 2021 to buttress the recovery.

 The Survey recommends maintaining targeted support to people and firms until the pandemic subsides, then focusing on strengthening vocational training and skills and increasing investment in areas like high-speed internet and low-carbon transport. Addressing regional inequality, which is low but rising, should also be a priority as the recovery takes hold.

 The Survey shows that Sweden has been among the most resilient OECD countries in the face of a historic shock. Yet, like other economies, it faces challenges from demographic changes and the shift to green, digital economies. Investments in education and training, and labour reforms along the lines negotiated by the social partners, will support job creation and strengthen economic resilience. Building on Sweden’s leadership in digital innovation and diffusion will also be key for driving productivity.

 After a 3% contraction in 2020, interrupting several years of growth, the Survey projects a rebound in activity with 3.9% growth in 2021 and 3.4% in 2022 as industrial production resumes and exports recover. The recovery in world trade is bolstering the Swedish economy, however the country remains vulnerable to potential disruptions in global value chains.  

The pandemic has aggravated a mismatch in Sweden’s job market, with unfilled vacancies for highly qualified workers coinciding with high unemployment for low-skilled workers and immigrants. The public employment service needs strengthening to provide better support to jobseekers, including immigrants and women, and labour policies should strike the right balance between supporting businesses and workers and supporting transitions away from declining businesses towards growing sectors.

A rising share of youths and older people in the population, especially in remote areas, is affecting the finances of local governments, which provide the bulk of welfare services. Strengthening local government budgets and ensuring equal welfare provision across the country will require providing tax income to poorer regions more efficiently and raising the economic growth potential across regions through investments in innovation. Improving coordination between government entities and reinforcing the role of universities in local economic networks would help achieve that aim.

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Fewer women than men will regain work during COVID-19 recovery

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Generations of progress stands to be lost on women and girls' empowerment during the COVID-19 pandemic. Photo: ILO

Fewer women will regain jobs lost to the COVID-19 pandemic during the recovery period, than men, according to a new study released on Monday by the UN’s labour agency.  

In Building Forward Fairer: Women’s rights to work and at work at the core of the COVID-19 recovery, the International Labour Organization (ILO) highlights that between 2019 and 2020, women’s employment declined by 4.2 per cent globally, representing 54 million jobs, while men suffered a three per cent decline, or 60 million jobs. 

This means that there will be 13 million fewer women in employment this year compared to 2019, but the number of men in work will likely recover to levels seen two years ago. 

This means that only 43 per cent of the world’s working-age women will be employed in 2021, compared to 69 per cent of their male counterparts. 

The ILO paper suggests that women have seen disproportionate job and income losses because they are over-represented in the sectors hit hardest by lockdowns, such as accommodation, food services and manufacturing. 

Regional differences 

Not all regions have been affected in the same way. For example, the study revealed that women’s employment was hit hardest in the Americas, falling by more than nine per cent.  

This was followed by the Arab States at just over four per cent, then Asia-Pacific at 3.8 per cent, Europe at 2.5 per cent and Central Asia at 1.9 per cent. 

In Africa, men’s employment dropped by just 0.1 per cent between 2019 and 2020, while women’s employment decreased by 1.9 per cent. 

Mitigation efforts 

Throughout the pandemic, women faired considerably better in countries that took measures to prevent them from losing their jobs and allowed them to get back into the workforce as early as possible. 

In Chile and Colombia, for example, wage subsidies were applied to new hires, with higher subsidy rates for women.  

And Colombia and Senegal were among those nations which created or strengthened support for women entrepreneurs.  

Meanwhile, in Mexico and Kenya quotas were established to guarantee that women benefited from public employment programmes. 

Building forward 

To address these imbalances, gender-responsive strategies must be at the core of recovery efforts, says the agency. 

It is essential to invest in the care economy because the health, social work and education sectors are important job generators, especially for women, according to ILO. 

Moreover, care leave policies and flexible working arrangements can also encourage a more even division of work at home between women and men. 

The current gender gap can also be tackled by working towards universal access to comprehensive, adequate and sustainable social protection. 

Promoting equal pay for work of equal value is also a potentially decisive and important step. 

Domestic violence and work-related gender-based violence and harassment has worsened during the pandemic – further undermining women’s ability to be in the workforce – and the report highlights the need to eliminate the scourge immediately. 

Promoting women’s participation in decision-making bodies, and more effective social dialogue, would also make a major difference, said ILO. 

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