ISLAMABAD: The World Bank on Monday warned that the global economy’s “speed limit” — the maximum long-term rate at which it can grow without sparking inflation — is set to slump to a three-decade low by 2030 and advocated an ambitious policy push by national economies to boost productivity and the labour supply, ramp up investment and trade, and harness the potential of the services sector.

The report, “Falling Long-Term Growth Prospects: Trends, Expe­ctations, and Policies,” launched on Monday offers the first comprehensive assessment of long-term potential output growth rates in the aftermath of the Covid-19 pandemic and the Russian invasion of Ukraine. These rates can be thought of as the global economy’s “speed limit.”

The bank noted that nearly all the economic forces that powered progress and prosperity over the last three decades were fading. As a result, between 2022 and 2030 average global potential GDP growth is estimated to decline by roughly a third from the rate that prevailed in the first decade of this century — to 2.2pc a year.

GDP expansion is estimated to decline to 2.2pc annually

For developing economies, the decline will be equally steep: from 6pc a year between 2000 and 2010 to 4pc a year over the remainder of this decade. These declines would be much steeper in the event of a global financial crisis or a recession.

“A lost decade could be in the making for the global economy,” said Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics. The ongoing decline in potential growth has serious implications for the world’s ability to tackle the expanding array of challenges unique to our times — stubborn poverty, diverging incomes, and climate change, he said but added that this decline is reversible. The global economy’s speed limit can be raised — through policies that incentivise work, increase productivity, and accelerate investment.

The analysis shows that potential GDP growth can be boosted by as much as 0.7 percentage points — to an annual average rate of 2.9pc — if countries adopt sustainable, growth-oriented policies. That would convert an expected slowdown into an acceleration of global potential GDP growth.

“We owe it to future generations to formulate policies that can deliver robust, sustainable, and inclusive growth,” said Ayhan Kose, a lead author of the report and Director of the World Bank’s Prospects Group. “A bold and collective policy push must be made now to rejuvenate growth. At the national level, each developing economy will need to repeat its best 10-year record across a range of policies. At the international level, the policy response requires stronger global cooperation and a reenergized push to mobilize private capital.”

The report asked the economies on the national level to align monetary, fiscal, and financial frameworks as robust macroeconomic and financial policy

frameworks can moderate the ups and downs of business cycles. “Policymakers should prioritise taming inflation, ensuring financial-sector stability, reducing debt, and restoring fiscal prudence”.

These policies can help countries attract investment by instilling investor confidence in national institutions and policymaking. Also, it advised the countries to ramp up investment in areas such as transportation and energy, climate-smart agriculture and manufacturing, and land and water systems, sound investments aligned with key climate goals could enhance potential growth by up to 0.3 percentage points per year as well as strengthen resilience to natural disasters in the future.

Moreover, the economies should cut trade costs mostly associated with shipping, logistics, and regulations that effectively double the cost of internationally traded goods. Countries with the highest shipping and logistics costs could cut their trade costs in half by adopting the trade facilitation and other practices of countries with the lowest shipping and logistics costs. Trade costs, moreover, can be reduced in climate-friendly ways — by removing the current bias toward carbon-intensive goods inherent in many countries’ tariff schedules and by eliminating restrictions on access to environmentally friendly goods and services.

Also, the report advised that the governments should capitalize on the services sector which could become the new engine of economic growth through enhanced digitally delivered professional services related to information and communications technology to generate important productivity gains if it results in better delivery of services.

Likewise, the bank noted that about half of the expected slowdown in potential GDP growth through 2030 will be attributable to changing demographics — including a shrinking working-age population and declining labour force participation as societies age.

Published in Dawn, March 28th, 2023

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