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Deeper Participation in Global Value Chains Will Strengthen Recovery of the Philippine Economy

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Post-pandemic, the Philippines has more opportunities to deepen its participation in global value chains (GVCs) especially in business clusters like industrial, manufacturing, and transportation; technology, media, and telecommunications; and health and life sciences. Addressing constraints to participation in these GVCs will boost the recovery, resilience, and competitiveness of the Philippine economy.

A new World Bank report – A New Dawn for Global Value Chain Participation in the Philippines – launched today said there are global trends favoring the country’s chances to succeed in GVCs, among them the increasing use of automation and artificial intelligence, the rise of services in manufacturing demanding higher labor skill, and the efforts by companies during the COVID-19 pandemic to diversify suppliers.

GVCs are international production sharing arrangements where manufacturing and assembly of products take place in multiple countries, with each step in the process adding value to the end-product. Through GVCs, countries trade more than products; they trade know-how and collaborate, boosting growth and creating jobs within their borders.

“Greater participation in global value chains can be a powerful driver for productivity and growth, enabling countries to leap-frog their development process as seen in many countries in East Asia,” said Ndiamé Diop, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand. “Countries that embrace GVCs are able to leverage their strengths in specific tasks and roles in manufacturing and services and export at scale, enabling them to sustain growth, create more jobs, and reduce poverty faster.”

The report says that the Philippines, for instance, can capture bigger shares in the electronics and electrical parts and components GVCs by attracting foreign investments in design capacity so that more value added is captured and manufacturing is retained and expanded in the country. There are also bigger opportunities for business process outsourcing (BPO) companies to move up the ladder by providing value added services like analytics. This can be achieved through a 3-pronged strategy:

  • Strategic reorientation:  Mobilize key stakeholders to build opportunities from accelerated digitalization, automation and robotization for the electronics and BPO sectors for which the Philippines is known for.
  • Bundling: Capitalize complementarities across clusters; diversify electronic and electrical intermediate goods into electric vehicles, medical equipment, and others; add analytics to the voice service sector; and expand the voice service sector into telemedicine, pharmacovigilance, and patient care services.
  • Sequencing: Upgrade BPO to KPO (Knowledge Process Outsourcing) as a key steppingstone to an integrated telecommunication cluster; anchor health and life sciences businesses on telehealth and pharmaceutical multinational companies while further developing the life science subsector; and expand intermediate goods in the three industrial, manufacturing, and transportation subsectors (electronics, automotive, aerospace) which have increasing commonalities.

According to the report, the country needs to overcome some “structural constraints” to take advantage of on-going trends in GVCs. These constraints include restrictions on foreign direct investments (FDI) in various sectors of the economy and scarcity of advanced science, technology, engineering, mathematical skills, among others.

To attract FDIs, the Philippines passed amendments to the Foreign Investments Act, easing restrictions to foreign participation in the economy; Retail Trade Liberalization Act lowering the minimum paid-in capital requirement for foreign retailers, and the Public Service Act opening selected industries such as telecommunications, airline, maritime, and rail transport to foreign investments; among other reforms.

“Timely implementation of these legislations is essential for the Philippines to attract investors looking for alternative production sites as transnational companies adjust to the challenges posed by pandemic,” said Souleymane Coulibaly, Lead Economist and Program Leader for Equitable Growth, Finance, and Institutions Practice Group for Brunei, Malaysia and the Philippines.

Given fiscal space constraints, the report says that partnership with the private sector may be needed to raise the financing required to fill the country’s infrastructure gap, focusing on connectivity – digital as well as physical – and secure access to a competitive and clean energy supply.

To boost advanced skills in the Philippines, the government needs to accelerate its innovation strategy, according to the study. In 2019, Congress enacted Republic Act no. 11293 or Philippine Innovation Act to support education, training, and research and development to foster innovation, internationalization, and digitalization. The implementation rules and regulations were published in February 2020. Accelerating the implementation of this strategy could help to create a Silicon Valley type of environment in which cities and clusters of cities host engineers, technicians, doctors, and nurses working in various business clusters in the country.

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Philippines: Reducing Inequality Key to Becoming a Middle-Class Society Free of Poverty

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Policies that support employment and workers, raise education quality and improve access, boost rural development, and strengthen social protection can reduce inequality, thus enhancing Filipino peoples’ chances for improving their well-being.

In a report titled “Overcoming Poverty and Inequality in the Philippines: Past, Present, and Prospects for the Future” released today, the World Bank said that the Philippines has made important gains in poverty reduction. Driven by high growth rates and the expansion of jobs outside agriculture, poverty fell by two-thirds—from 49.2 percent in 1985 to 16.7 percent in 2018. By 2018, the middle class had expanded to nearly 12 million people and the economically secure population had risen to 44 million.

Yet inequality remains high: the top 1 percent of earners together capture 17 percent of national income, with only 14 percent being shared by the bottom 50 percent. With an income Gini coefficient of 42.3 percent in 2018, the Philippines had one of the highest rates of income inequality in East Asia.

“The Philippines aims to become a middle-class society free of poverty by 2040, but we know from global experience that no country has managed to make this transition while maintaining high levels of inequality,” said Ndiamé Diop, World Bank Country Director for Brunei, Malaysia, Philippines, and Thailand. “Inequality of opportunity and low mobility across generations wastes human potential and slowdown innovation, which is crucial for building a competitive and prosperous economy that will in turn improve the well-being and quality of life of all Filipinos.”

The report highlights that the expansion of secondary education, mobility to better-paying jobs, access to basic services, and government social assistance have started to reduce inequality since the mid-2000s. However, unequal opportunities, slow access to tertiary education among low-income households, inequality in returns to college education, and social norms putting the heavier burden of childcare on women has slowed down the narrowing of inequality in the Philippines.

Despite the strong recovery of growth and the labor market, COVID-19 pandemic has partly reversed decades-long gains in reducing poverty and inequality in the Philippines. It halted economic growth momentum in 2020, and unemployment shot up in industries that require in-person work. In 2021, the national poverty rate rose to 18.1 percent despite government assistance.

Recovery in the Philippines is uneven across the income distribution and the poorest who suffered the most from COVID have yet to fully recover their incomes. With food prices going up, many families coped by reducing their consumption, including eating less. These coping strategies can have serious consequences on the health and nutrition of children in these vulnerable households.

The report says that inequality starts even before birth and is perpetuated over the life cycle. It starts with maternal nutrition and health during pregnancy. Differences continue into childhood, where disparities in access to health care, proper nutrition, safe drinking water, sanitation, and quality education determine the extent to which a child’s human capital develops.

“Inequality shapes outcomes later in life, such as employment opportunities and income, which in turn influence how much support adult Filipinos are able to provide for their children to help maximize their potential,” said Nadia Belhaj Hassine Belghith, Senior Economist with the East Asia Poverty Global Practice covering Thailand and the Philippines who led the study.

The report says that policy priorities to reduce inequality in the Philippines can be structured around three themes, including healing the pandemic’s scars and building resilience, setting the stage for a vibrant and inclusive recovery, and promoting greater equality of opportunity.

Healing pandemic’s scars will require promoting greater vaccine booster uptake, overcoming the learning loss due to COVID-19, strengthening social assistance, unemployment insurance programs for the informal sector, and taming inflation.

Setting the stage for vibrant recovery entails reskilling of workers, promoting entrepreneurship, increasing the participation of women in the labor force, and raising the productivity of agriculture.

Promoting greater equality of opportunity entails increasing access to quality health care, increasing equality of opportunity in education, and improving access to quality housing, among others. Equality of opportunity needs to target the lagging regions and other people disadvantaged in accessing these because of the circumstances of their birth.

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Germany in secret talks to buy Iranian oil: report

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An Israeli paper has claimed that Germany is in “secret” talks with Tehran to buy Iranian oil as part of its efforts to wean itself off Russia’s energy supplies.

The Jerusalem Post quoted the chief economist for the partially state-owned bank LBBW in the southwestern German state of Baden-Württemberg as saying that Germany is engaged in secret talks with the Islamic Republic to buy Iranian oil.

“Intensive talks are already being held behind the scenes with Venezuela, Iran or Algeria to cover Germany’s oil and gasoline needs,” said Moritz Kraemer, the chief economist of the Landesbank Baden-Württemberg (LBBW).

Bernd Wagner, a spokesman for LBBW, told the Jerusalem Post that “as a matter of principle, LBBW does not conduct any Iran-related business.”

When asked about Kraemer’s statement about secret talks with Iran, Wagner said, “There seems to be a misunderstanding. The chief economist is talking about the national economy, not about LBBW’s business. We have a very clear distinction here.”

No official announcements have so far been made about the alleged secret talks between Tehran and Berlin. But tensions have been on the rise between the two sides over German officials’ statements regarding Iran’s internal developments. 

On Monday, the Iranian foreign ministry summoned the German ambassador to Tehran, Hans-Udo Muzel, over German Chancellor Olaf Scholz’s “meddlesome” remarks about Iran.

“Following the meddlesome and irresponsible statements of the German chancellor towards the Islamic Republic, Hans-Udo Muzel the German ambassador to Tehran was summoned to the foreign ministry on Monday,” the Iranian foreign ministry said in a statement.

The statement added, “During the session, the director general of the west European affairs of the foreign ministry condemned the irresponsible statement of the German official. He conveyed strong protest of the Islamic Republic of Iran about Germany’s destructive approach towards the domestic developments of Iran to the German envoy.”

It continued, “The foreign ministry official said the German side should bear the consequences of the continuation of such non-constructive statements and acts on the future of the mutual ties. He stressed that the Islamic Republic of Iran is monitoring the stances and actions of the other sides with dignity and grandeur, taking into account its national interests, and will give them proportionate responses.”

The statement concluded, “The German ambassador, for his part, said he will convey the message of the Islamic Republic of Iran to his government at the earliest. During the meeting the formal notice of protest of the Islamic Republic was handed over to the German ambassador.”

Tehran Times

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India’s Urban Infrastructure Needs to Cross $840 Billion Over Next 15 Years

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A new World Bank report estimates that India will need to invest $840 billion over the next 15 years—or an average of $55 billion per annum—into urban infrastructure if it is to effectively meet the needs of its fast-growing urban population. The report, titled “Financing India’s Urban Infrastructure Needs: Constraints to Commercial Financing and Prospects for Policy Action” underlines the urgent need to leverage more private and commercial investments to meet emerging financial gaps.

By 2036, 600 million people will be living in urban cities in India, representing 40 percent of the population. This is likely to put additional pressure on the already stretched urban infrastructure and services of Indian cities – with more demand for clean drinking water, reliable power supply, efficient and safe road transport amongst others. Currently, the central and state governments finance over 75 percent of city infrastructure, while urban local bodies (ULB) finance 15 percent through their own surplus revenues.

Only 5 percent of the infrastructure needs of Indian cities are currently being financed through private sources. With government’s current (2018) annual urban infrastructure investments topping at $16 billion, much of the gap will require private financing. 

“Cities in India need large amounts of financing to promote green, smart, inclusive, and sustainable urbanization. Creating a conducive environment for ULBs, especially large and creditworthy ones, to borrow more from private sources will therefore be critical to ensuring that cities are able to improve living standards of their growing populations in a sustainable manner,” said Auguste Tano Kouamé, Country Director, World Bank, India.

The new report recommends expanding the capacities of city agencies to deliver infrastructure projects at scale. Currently, the 10 largest ULBs were able to spend only two-thirds of their total capital budget over three recent fiscal years. A weak regulatory environment and weak revenue collection also adds to the challenge of cities accessing more private financing. Between 2011 and 2018, urban property tax stood at 0.15 percent of GDP compared to an average of 0.3-0.6 percent of GDP for low- and middle-income countries. Low service charges for municipal services also undermines their financial viability and attractiveness to private investment.

Over the medium term, the report suggests a series of structural reforms including those in the taxation policy and fiscal transfer system – which can allow cities to leverage more private financing. In the short term, it identifies a set of large high-potential cities that have the ability to raise higher volumes of private financing.

“The Government of Indiacan play an important role in removing market frictions that cities face in accessing private financing. The World Bank report proposes a range of measures that can be taken by city, state, and federal agencies to bend the arc towards a future in which private commercial finance becomes a much bigger part of the solution to India’s urban investment challenge,” said Roland White, Global Lead, City Management and Finance, World Bank, and co-author of the report. 

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