The Global Economic Prospects forecasts that 2023 will see the lowest growth rate in three decades, with the exceptions of 2009 (the global financial crisis) and 2020 (the COVID-19 pandemic). Moreover, the recently released Falling Long-Term Growth Prospects has warned that the slump in the global economy’s long-term growth rate can risk a “lost decade,” limiting countries’ abilities to combat poverty and tackle climate change. The World Bank Group’s sobering forecasts are consistent with the views of business leaders around the world, among whom the share of pessimists has increased in the last few months. Multiple bank failures over the past few weeks have caused turmoil in the banking sector and rekindled fears of a financial crisis. The high hopes, shared by many, for a strong post-pandemic economic recovery may not now materialize. Bad news about growth is always alarming—low growth implies poverty and vulnerability; these in turn can lead to social unrest, political crises, and crime and violence.
Facing a slump in growth and the possibility of a recession, the traditional macroeconomic response is through fiscal and monetary expansionary policies. For many countries, however, this may not be feasible in the current context. Expansionary fiscal policy is severely limited by public debt crises that affect many developing and advanced countries. Whether driven by low economic activity (and therefore low public revenues) or increased public spending (to support impacted households and businesses), the COVID pandemic spiked public debt around the world (see Figure 2). High debt implies that a large share of public resources is directed toward interest payments, curtailing the capacity to obtain additional debt financing, which may also be too expensive. In these circumstances, the “fiscal space” for governments to fashion a fiscal response may simply not exist.
Expansionary monetary policy would counter efforts to bring inflation down in developing and advanced countries. Whether caused by supply factors (for example, disrupted global supply chains) or demand factors (for example, excessive liquidity), inflation has substantially increased and is a major concern for people and policymakers alike (see Figure 3). Again, the “monetary space” for governments to generate a monetary response to growth slowdown may not be currently feasible.
For most, if not all, countries, the private sector is the engine of economic growth. Whether countries around the world escape the impending slump or not will ultimately depend on how private enterprises and consumers act over the next few months and years.
A critical ingredient of private sector activity is private investment. It is one of the main mechanisms through which entrepreneurs bring about innovation, job creation, and linkages with the rest of the economy. While public investment is important, private investment represents, on average, three-quarters of total investment in developing countries. Private investment is driven by expectations of risks and returns at the economy, sector, and firm levels and, to a large extent, these expectations are determined by how propitious the business environment is. Worryingly, private investment as a share of GDP declined in most regions after the 2009 global financial crisis (see Figure 4). Can this trend be reversed?
A crisis is an opportunity riding a dangerous wind, says a popular Chinese proverb. Crises can present opportunities by revealing areas of weakness, incentivizing policy action, and unifying minds on the need to reform. If the country withstands the “dangerous wind” of economic shocks, crises can beget reforms. It is well known that, in the aftermath of the 2009 global financial crises, governments introduced stricter financial prudential regulations. It is less well-known that many governments around the world also embarked on major reforms to improve the ease of doing business (see Figures 5 and 6).
For the private sector to come to the rescue as the world confronts the impacts of the pandemic, a robust set of reforms geared towards improving the business environment is needed in both developing and advanced countries. In this regard, the trends before the pandemic were not particularly promising. Take, for example, business regulatory quality—all developing country regions, except for East Asia and the Pacific and Europe and Central Asia, had more countries worsening than improving in regulatory quality with respect to the global trend (see Figure 7).
The list of needed reforms is long in almost every country and, in some countries, overwhelmingly so. Yet, the sheer number of required reforms is not necessarily a major obstacle. The lack of insightful international benchmarks for policy reforms, however, is. This is where the World Bank can make a difference. Among the many valuable initiatives that conduct private sector diagnostics, I would like to underscore the new and improved World Bank Group projects that target the business environment.
The forthcoming Business Ready project (both global and sub-national), the expanding Enterprise Surveys program, and the improving Women, Business, and the Law report all attempt to provide not only the orientation of reform but also details of what should be reformed for the private sector to recover in times of crises and grow sustainably at all times.
Source : World Bank
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