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In highly uneven recovery, global investment flows rebound

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After a big drop last year caused by the COVID-19 pandemic, global foreign direct investment (FDI) reached an estimated $852 billion in the first half of 2021, showing a stronger than expected rebound.  

That’s according to the latest Investment Trends Monitor, released this Tuesday by the United Nations Conference on Trade and Development (UNCTAD).  

It shows the increase in the first two quarters in FDI, recovered more than 70 per cent of the losses stemming from the COVID-19 crisis in 2020. 

For the UNCTAD‘s director of investment and enterprise, James Zhan, the good news “masks the growing divergence in FDI flows between developed and developing economies, as well as the lag in a broad-based recovery of the greenfield investment in productive capacity.” 

Mr. Zhan also warns that “uncertainties remain abundant”. 

Global outlook  

The duration of the health crisis, the pace of vaccinations, especially in developing countries, and the speed of implementation of infrastructure stimulus, remain important factors of uncertainty. 

Other important risk factors are labour and supply chain bottlenecks, rising energy prices and inflationary pressures.  

Despite these challenges, the global outlook for the full year has improved from earlier projections. 

The growth in the next few months should be more muted than the in the first half of the year, but it should still take FDI flows to beyond pre-pandemic levels. 

Uneven recovery 

Between January and June, developed economies saw the biggest rise, with FDI reaching an estimated $424 billion, more than three times the exceptionally low level in 2020. 

In Europe, several large economies saw sizeable increases, on average remaining only 5 per cent below pre-pandemic quarterly levels.  

Inflows in the United States were up by 90 per cent, driven by a surge in cross-border mergers and acquisitions. 

FDI flows in developing economies also increased significantly, totalling $427 billion in the first half of the year.  

There was a growth acceleration in east and southeast Asia (25 per cent), a recovery to near pre-pandemic levels in Central and South America, and upticks in several other regional economies across Africa and West and Central Asia. 

Of the total recovery increase, 75 per cent was recorded in developed economies. 

High-income countries more than doubled quarterly FDI inflows from rock bottom 2020 levels, middle-income economies saw a 30 per cent increase, and low-income economies a further nine per cent decline.  

Mixed picture for investors 

Growing investor confidence is most apparent in infrastructure, boosted by favourable long-term financing conditions, recovery stimulus packages and overseas investment programmes. 

International project finance deals were up 32 per cent in number, and 74 per cent in value terms. Sizeable increases happened in most high-income regions and in Asia and South America. 

In contrast, UNCTAD says investor confidence in industry and value chains remains shaky. Greenfield investment project announcements continued their downward path, decreasing 13 per cent in number and 11 per cent in value until the end of September.  

Agenda 2030 

After suffering double-digit declines across almost all sectors, the recovery in areas relevant to Sustainable Development Goals (SDGs) in developing countries remains fragile. 

The combined value of announced greenfield investments and project finance deals rose by 60 per cent, but mostly because of a small number of very large deals in the power sector.  

International project finance in renewable energy and utilities continues to be the strongest growth sector. 

The investment in projects relevant to the SDGs in least developed countries continued to decline precipitously. New greenfield project announcements fell by 51 per cent, and infrastructure project finance deals by 47 per cent. Both had already fallen 28 per cent last year.

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People are increasingly worried about inequalities but divided on how to address them

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Photo: Arno Senoner/Unsplash

For a recovery from the COVID-19 crisis that is strong, sustainable but also fair, it will be key to tackle inequalities and promote equal opportunities. Yet while there is growing consensus that inequality is a problem, people are increasingly divided about its extent and what to do about it, according to a new OECD report.

Does Inequality Matter? says that most people are concerned about inequality. Four in five people in the OECD feel income disparities are too large in their country. People care about inequality of both outcomes and opportunities, as they perceive high income and earnings disparities as well as low social mobility. Moreover, concern over income and earnings disparities has risen in the last three decades, in line with the increase in income inequality.

People’s perceptions are not disconnected from reality. Along the lines of observed trends in income inequality, people believed, on average, that top earners earned 5 times as much as bottom earners in the late 1980s/early 1990s, while this perceived top-to-bottom earnings ratio has increased to 8 today, after having reached a peak of 10 during the Great Recession. Tolerance for inequality has also increased, though by less. Today people believe, on average, that top earners should earn 4 times as much as the bottom earners, up from 3 times in the late 1980s.

More than 6 out of 10 OECD citizens believe their government should do more to reduce income differences between rich and poor with taxes and transfers. The more people are concerned about inequality and perceive low social mobility, the higher their demand for redistribution.

However, beliefs about effectiveness of policies and determinants of inequalities matter. People are less likely to demand more redistribution if they believe that benefits are mistargeted, and they are less in favour of progressive taxation if they believe that corruption is widespread among public officials, prompting the misuse and misallocation of public benefits.

Demand for more progressive taxation is also lower where people believe that disparities are justified by differences in personal effort, rather than to circumstances beyond people’s control. For example, in 2018 in Poland 25% of people believe poverty is due to lack of effort rather than injustice or bad luck and 54% demand more progressive taxation, while in Germany that figure is 4% and 77%, respectively.

Yet, despite most people being concerned about inequality, they have strongly different beliefs about its extent and what to do about it. Within the average OECD country, one fourth of people thinks that more than 70% of the national income goes to the 10% richest households, contrary to another fourth who think that less than 30% goes to the richest households.

Furthermore, the large heterogeneity of people’s views on inequalities has grown in the last three decades, even among people with similar socio-economic characteristics. There is evidence of growing polarization: in most OECD countries there is an increasing gap between those who believe inequality is high and those who believe it is low. More unequal countries have a more divided public opinion: in Chile and the United States – two among the most unequal OECD countries – the perceptions about the extent of the top richest 10% shares diverge the most.

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Data show how the COVID-19 pandemic has hit all aspects of people’s well-being

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The COVID-19 pandemic has not only had devastating effects on physical health and mortality but has touched every aspect of people’s well-being, with far-reaching consequences for how we live and work, according to a new study by the OECD.

 COVID-19 and well-being: life in the pandemic says the virus caused a 16% increase in the average number of deaths across 33 OECD countries between March 2020 and early May 2021, compared with same period over the previous four years. Over the same time frame, survey data in the report reveal rising levels of depression or anxiety and a growing sense among many people of loneliness and of feeling disconnected from society.

 Government support helped to sustain average household income levels in 2020 and stemmed the tide of job losses, even as average hours worked fell sharply. Although job retention schemes offered workers some protection, 14% of workers in 19 European OECD countries felt it was “likely they would lose their job” within three months, and nearly 1 in 3 people in 25 OECD countries reported financial difficulties.

 The report says experiences of the pandemic have varied widely depending on age, gender and ethnicity, as well as on the type of job people do and on their level of pay and skills. The crisis also aggravated existing social, economic and environmental challenges.

 In those countries with available data, workers from ethnic minorities have been more likely to lose their jobs during the pandemic. Mental health deteriorated for almost all population groups on average in 2020 but gaps in mental health by race and ethnicity are also visible. COVID-19 mortality rates for some ethnic minority communities have been more than twice those of other groups.

 Younger adults experienced some of the largest declines in mental health, social connectedness and life satisfaction in 2020 and 2021, as well as facing job disruption and insecurity.

 Launched on the first anniversary of the new OECD Centre for Well-being, Inclusion, Sustainability and Equal Opportunity (WISE), the report offers a primer for OECD recommendations on well-being. It assesses the impact of the pandemic across the 11 dimensions identified in the OECD’s Well-being Framework – income and wealth; work and job quality; housing; health; knowledge and skills; environment; subjective well-being; safety; work-life balance; social connections; and civil engagement. It features data on inclusion and equality of opportunity, and also considers how the stocks of economic, human, social and environmental resources that sustain well-being have fared.

 The report argues that as governments move from emergency support to stimulating the recovery, they need to refocus their action on what matters most to people’s well-being.

 A key objective must be to increase the job and financial security of households, and particularly those most affected by the crisis – with a focus on the most vulnerable, on youth, women and the low skilled.  Addressing the burden of poor physical and mental health and a cross-government approach to raising the well-being of the most disadvantaged children and youth must also be prioritised. The report also stresses that actions to raise living standards and equality of opportunity must take place within the context of greening the economy: the climate and biodiversity crises, like the pandemic, require a coordinated response across public policy.

 A well-being approach, the report explains, looks at government objectives as interconnected goals, focusing on how different policies can complement each other. Such an approach encourages decision-making that simultaneously considers impacts on current well-being, inclusion, and the sustainability of well-being over time. For instance, improving long-term economic opportunities through raising child well-being, or aligning efforts to combat climate change with social and economic objectives by increasing employment and mobility for people and places left behind.

 Natural, human and social capital will need rebuilding after the crisis, the report adds. Reducing inequalities in access to, and uptake of lifelong learning, for example, will help people – especially the disadvantaged – get high quality jobs by developing training programmes that address skills gaps and emphasise digital abilities.

 Social capital – the norms, shared values and institutions that foster co-operation – has shaped communities’ responses to the pandemic. Data from across OECD countries shows that both trust in institutions and interpersonal trust influenced the effectiveness of pandemic containment. Although it has recently shown signs of weakening, institutional trust in 2020 in most OECD countries was at its highest since records began in 2006.

 The report says reinforcing trust is key to reconnecting people to their societies, and to the institutions that are meant to support them. By doing so, the well-being of citizens is improved both today and in a post-pandemic future.

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Inflation Concerns Push Up Emerging East Asia Bond Yields

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Emerging East Asia’s bond market grew 3.4% in the third quarter to $21.7 trillion, although rising global inflation and a shift in the United States (US) monetary stance weakened regional financial conditions, according to the latest issue of the Asia Bond Monitor.

Bond yields rose, currencies weakened, and risk premiums edged up amid increased global inflation and the US Federal Reserve’s announcement that it would limit bond purchases starting in November, according to the report, released today by the Asian Development Bank (ADB).

“The encouraging macroeconomic outlook and accommodative policy stances are supporting the region’s financial conditions,” said ADB Acting Chief Economist Joseph Zveglich, Jr. “However, central banks in the region may find they need to be less accommodative to keep inflation in check and to keep in step with US monetary policy changes. That said, the chance of another ‘taper tantrum’ is limited as the direction of the Federal Reserve’s stance is clearly communicated and the region’s economic fundamentals remain strong.”

Emerging East Asia comprises the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam. 

Government bonds remained the dominant segment, increasing 3.9% from the previous quarter to $13.6 trillion. The bond markets of the Association of Southeast Asian Nations (ASEAN) members—many of which suffered from the coronavirus disease’s (COVID-19) Delta variant outbreak—grew 14.4% from a year earlier to $1.9 trillion in the third quarter, compared with 12.6% and 7.6% growth in the PRC and the Republic of Korea, respectively.

ASEAN bond markets showed sound market capacity during the pandemic, evident in low bond yields amid rapid market expansion. Domestic financial institutions, particularly banks, anchored bond market functioning. At the same time, a few ASEAN central banks facilitated market liquidity and government financing via asset purchasing programs. Mid- and long-term bonds account for a majority of outstanding bonds in ASEAN bond markets, implying a relatively stable financing structure.

Sustainable bond markets in the ASEAN region plus the PRC; Hong Kong, China; Japan; and the Republic of Korea totaled $388.7 billion, remaining the largest regional sustainable bond market after Europe and accounting for 19.2% of global sustainable bond markets at the end of September. Green, social, and sustainability bonds accounted for 71.6%, 13.0%, and 15.3% of the region’s sustainable bonds outstanding, respectively. As this regional market develops, the issuer base is also diversifying from just the financial sector to other business sectors.

The latest issue of the Asia Bond Monitor analyzes the price and yield differences between labeled and unlabeled green bonds. Recent research finds that investors would pay more for labeled or certified green bonds that have better information disclosure and lower reputational risk.

The report also discusses how the Delta variant outbreak and uneven vaccination progress slowed and caused divergences in regional economic recovery; the likelihood of a “taper tantrum” repeat; and risks to the current outlook, including continuing pandemic-induced uncertainty, slow vaccination rollouts in developing countries, and supply chain disruptions.

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