2015/FDM2/004 Session: 1 The Challenge of Inclusive Growth: Making Growth Work for the Poor Purpose: Information Submitted by: World Bank Group Finance and Central Bank Deputies Meeting Cebu, Philippines 10 September 2015
The Challenge of Inclusive Growth: Making Growth Work for the Poor Asia Pacific Economic Cooperation Finance and Central Bank Deputies Meeting Mactan Shangri-la, Cebu, Philippines September 10, 2015 Rogier van den Brink Lead Economist and Program Leader World Bank Group, Philippines
Overview Global trends: making the existing challenges more difficult Inequality: new challenge Good governance: making transparency and accountability work Building coalitions for structural reform: a role for APEC 2
Global Trends: Making the Existing Challenges More Difficult
Global goal to reduce extreme poverty to a 3% headcount by 2030: The challenge is now more difficult Global poverty in 2030 at $1.25 per day (2005 PPP), assuming unchanged inequality Scenario Headcount (percent) Number of poor (million) Average income growth of 4% p.a. in each country 3 252 Each country sustains avg per capita growth during past 20 years 6.8 573 Each country sustains avg per capita growth during past 10 years 4.8 405 Each country sustains avg per capita growth during past 10 years (survey-based growth) 6.7 565 Source: World Bank, 2014, A Measured Approach to Ending Poverty and Boosting Shared Prosperity 4
Inclusive growth challenge: More than growth Growth may be necessary but is not sufficient to ensure poverty reduction How broadly based growth is i.e., how pro-poor the distribution of growth is also matters as does how resilient growth is and the extent to which poor and vulnerable households are protected from shocks increasing value-added per worker in agriculture Raising the returns to labor the main asset of the poor by moving workers out of agriculture to higher value-added activities in manufacturing and service Putting in place appropriate social protection schemes and raising human capital endowments 5
Recent economic and policy developments Global growth has been downgraded since January New downgrades expected Global growth in 2015: 3.0% 2.8% Growth in developing countries: 4.8% 4.5% Growth in high income countries: 2.2% 2.0% Source: World Bank Global Economic Prospects 6
The normal pattern of economic transformation Before economic transformation takes off, agriculture: Large shares in economic output and the labor force But the share in economic output less than its share in the labor force Lower productivity of labor than in industry and services But key role in livelihood provision and poverty reduction Industrial growth takes off: Industry, and in particular manufacturing, increases its share in the economy Pulls labor out of agriculture more or less rapidly This transformation is now taking longer and longer, because manufacturing has become less labor-intensive Service sector takes over: In advanced economies, this transformation will reduce the shares of agriculture in GDP and in the labor force to very small numbers Not many examples of productivity growth and employment expansion in services Sources: Kuznets and Chenery, and Timmer, 2009 7
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2010 2011 Cambodia China Indonesia Lao PDR Malaysia Mongolia Philippines Thailand Vietnam Chile Mexico Peru Percent of population Annualized growth (%) of mean per-capita consumption Several countries in East Asia: Successful first phases of structural transformation 90 80 70 60 Extreme poverty ($1.25 a day)* 12 10 Shared prosperity (selected APEC countries) Annualized growth of mean per-capita consumption and income of the bottom 40% and of the total population*** 11.8 10.1 Bottom 40% Total population 50 40 30 20 10 8 6 4 2 0 6.3 2.7 7.9 7.2 3.5 3.5 2.2 1.5 3.3 2.4 0.6 0.6 4.6 4.1 5.4 1.4 3.9 2.8-0.3 0.0 5.4 8.1 0-2 East Asia and Pacific Developing World Total Sources: *PovcalNet (Accessed Jan 26, 2015) **Global Database of Shared Prosperity (GDSP) a Percentage of regional population explained by countries included in GDSP. Population data as of 2011 taken from PovcalNet (Last accessed Jan 26, 2015) b Percentage of countries where bottom 40% growth is positive and greater than growth of total population. Note: Annualized growth in income/consumption computed only for those countries where the latest household survey and there is a comparable survey (5 +/-2) years prior to the latest survey. 2008-11 2005-10 2011-13 2007-12 2007-09 2010-12 2009-12 2009-12 2010-12 2006-11 2006-12 2007-12 *** Sources and notes: World Bank EAP staff estimates. Philippines data is based on the income welfare aggregate (corresponding to the official welfare). All other countries use consumption data. China data is only available as grouped data. For more information go to the EAP Poverty Portal: eappoverty 8
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Structural transformation: China lifted 600 million people out of poverty. Agriculture: first poverty responder Manufacturing is the second: 300 million people moved from farms to factories 2.5 Marginal product of labor in relation to total across sectors in China 2 2 nd industry to services 1.5 1 The 1 st transformation from agriculture to industry 0.5 0 Agriculture Industry Services Source: Urban China 2014 9
Agriculture GDP growth originating in agriculture benefits the poor more. Source: Ligon and Sadoulet, 2007. Background paper to the WDR 2008 (see website). Based on data from 42 countries (1983-2003). 10
700 Manufacturing: Global trade in a new era? Actual and Trend Import Volume (Index, 1980 = 100) 2.5 Long-Run Trade Elasticity (Estimates of elasticity) 600 500 400 300 200 Historical trend Actual 2.0 1.5 1.0 0.5 100 1995 98 01 04 07 10 13 0.0 1970-1985 1986-2000 2001-2013 Sources: World Bank, Constantinescu, Mattoo and Ruta (2014) Note: Left panel: The post-crisis trend level growth is assumed to be equivalent to the average growth rate during 1980-2008.Using this, the trend level for 2014 is rebased to 100. Hence, bars below or above 100 show deviations from trends in 2014; Right panel: Each bar represents the long-run elasticity estimated from a cointegration model between imports and GDP 11
Tariff reform largely done non-tariff reforms more difficult, includes regulatory cooperation Improve: information availability, simplification of documents, automated processes, border procedures, good governance Border and behind-the-border procedures now constraints (includes regulatory cooperation and addressing impacts in other countries) Non-tariff measures: myriad of licenses, permits and certificates This is especially constraining for SMEs, which are key for job creation High trade costs (ad-valorem tariff equivalents) - 100 200 300 400 Laos Philippines Cambodia Singapore Indonesia Malaysia Thailand Vietnam Australia-New Zealand Japan Korea, Republic India China European Union United States Source: EAP Economic Update, April 2014 Change in trade costs (ad-valorem tariff equivalents) 2010-11 versus 2000-01 Vietnam Thailand Singapore Cambodia Malaysia Indonesia Laos Philippines Dialogue Partners of which, China European Union United States -30% -20% -10% 0% 10% 20% Source: EAP Economic Update, April 2014 12
Can services take over from manufacturing as new jobs engine? old manufacturing export-driven growth strategies are becoming less effective (technology, trade) 13
Despite significant unilateral liberalization, services protection persists - including in some of the most dynamic countries World Bank Database covers 18 services sectors of 103 countries (of which 79 are developing) Source: Borchert, Gootiiz and Mattoo (2013) 14
Protection also persists in some of the most vital sectors - particularly transport and professional services Services trade restrictiveness index by sector and region: 10 20 30 40 50 60 70 0 GCC SAR MENA EAP AFR LAC OECD ECA Financial Telecom Retailing Transportation Prof.Services Note: 103 countries included. 15
Inequality: New Challenge
Constant 2011 international $ Average income levels in APEC are converging Latin America is on average richer, but developing East Asia, and in particular China, is rapidly catching up. 16000 GDP Per Capita 14000 12000 10000 8000 6000 4000 2000 0 Latin America East Asia Source: World Bank 17
Poverty in East Asia East Asia has seen significant poverty reduction over the past decade. 45% 40% 35% 30% 25% 20% 15% 10% 5% Proportion of population living on less than USD 1.25 a day Cambodia Indonesia Lao PDR Philippines Thailand Vietnam 0% 2002 2004 2006 2008 2010 2012 Source: World Bank 80% 70% 60% 50% 40% 30% 20% 10% Proportion of population living on less than USD 2 a day 0% 2002 2004 2006 2008 2010 2012 Source: World Bank Cambodia Indonesia Lao PDR Philippines Thailand Vietnam 18
Inequality in East Asia: mixed record Gini coefficients in ASEAN countries 0.44 Cambodia Indonesia Lao PDR Philippines Thailand Vietnam 0.42 0.40 0.38 0.36 0.34 0.32 0.30 0.28 2002 2004 2006 2008 2010 2012 Source: World Bank 19
Inequality in East Asia % If the top 10 percent is taken out, on average the Gini falls by 10 percentage points GINI coefficient in selected East Asian countries Source: World Bank 20
Average Annual Growth Rate of Real Per Capita GDP of Population in Lowest Quintile (Period Average) Need to reduce inequality to support growth Relationship between national income growth and the income growth of the poorest quintile 10% 8% Thailand: 1987-92 Malaysia: 1997-04 6% Lao PDR: 1997-02 Indonesia: 1984-90 Vietnam: 2002-08 Viet Nam: 1997-02 Malaysia: 1984-92 Cambodia: 2002-07 4% Thailand: 1992-99 Thailand: 1999-04 Lao :2002-08 Malaysia: 1992-977 2% Philippines: 2000-06 Indonesia: 2002-09 Lao PDR: 1992-07 Indonesia 1996-02 Indonesia: 1990-6 0% -2% 0% 2% 4% 6% 8% -2% -4% Malaysia: 2004-09 -6% Average Annual Growth Rate of Real Per Capita GDP (Period Average) Source: World Bank 21
Good Governance: Making Transparency and Accountability Work
Infrastructure needs by region Asia is one of the regions with a massive infrastructure need. USD billions 23
Percent of GDP Percent of GDP Percent of GDP Need to raise tax revenues Take the Philippines: massive investment deficit Spending on health, education and infrastructure is lower than in some neighboring countries. Infrastructure spending needs to go to 5 percent of GDP. Low spending has contributed to weak health outcomes and lower quality of education, and substantial transportation bottlenecks. Substantially more revenues are needed to sustainably ramp up spending. Public Expenditure 5 Infrastructure 3 Health 6 Education 4 5 3 2 4 3 2 1 2 1 1 0 0 0 Source: WDI and ADB estimates Notes: Education and health figures are from 1995 to 2012 (Some countries have missing values for certain years.). Infrastructure data is from 2008 to 2012. 24
Citizens will demand more transparency in return for paying more taxes: Building the public s trust in institutions data.gov.ph over 600 government data sets are now public 25
Policy makers, service providers and citizens: the transparency and accountability triangle Source: World Development Report (2004) 26
Building Coalitions for Structural Reform: A Role for APEC
Fostering broad-based coalitions to support structural reforms Structural reforms, say increased competition, often face strong opposition from vested interests And the public needs to develop trust in public institutions The challenge is in fostering a broad coalition of stakeholders, led by committed leaders, which supports a reform package, because they anticipate that inclusive growth makes everybody better off in the long run, even if some will face losses in the short run These coalitions can form at many levels, including regionally, and around many themes APEC can play a significant role 28
Summary Global trends short and medium-term Making the challenge more difficult Structural transformation: Essential for inclusive growth, but difficult to get right, no short cuts and more difficult now Inequality: New challenge Reducing inequality is good for growth Good governance: Policy makers, service providers and citizens: need to build trust in institutions Need broad-based coalitions for structural reforms: A role for stakeholders Including 29
APEC! Rogier van den Brink Lead Economist and Program Leader World Bank Group, Philippines