The Asia-Pacific region is recovering from its worst recession in living memory. Our latest Regional Economic Outlook shows that a recovery started in the third quarter, but growth engines are not all firing with the same power across countries, leading to a multispeed recovery. (more…)
Despite a global economic crisis comparable only to the Great Depression, near-term financial stability risks have been contained with the help of unprecedented monetary policy easing and massive fiscal support across the globe. (more…)
Governments around the world are taking extraordinary measures to respond to the COVID-19 crisis. While maintaining the focus on addressing the health emergency and providing lifelines for households and businesses, governments need to prepare economies for the transition to the post-COVID-19 world—including by helping people get back to work. (more…)
The COVID-19 pandemic has pushed debt levels to new heights. Compared to end-2019, average 2021 debt ratios are projected to rise by 20 percent of GDP in advanced economies, 10 percent of GDP in emerging market economies, and about 7 percent in low-income-countries. (more…)
The COVID-19 shocks are proving to be especially challenging for fragile states. Pre-COVID, fiscal revenues were low in such countries and governments were struggling to raise them. Now, COVID-19 is hitting them hard and fiscal revenues are falling. Once the pandemic abates, restoring and further enhancing tax collection is even more important to secure debt sustainability, facilitate the post-COVID-19 recovery, and meet development financing needs in order to meet the Sustainable Development Goals. This is a formidable challenge. However, our new staff research finds that achieving sizable gains in tax collection in fragile environments is not “mission impossible.”
As our chart shows, four fragile states (Liberia, Malawi, Nepal, and Solomon Islands) achieved sizable increases in tax revenues over a decade—by between 7 and 20 percentage points of GDP. Most of these countries had introduced tax reforms when their tax revenues were far below the average for fragile states, but each went on to exceed the average, with Nepal and Solomon Islands doing so by a wide margin.
These experiences emphasize the importance of sustained tax reform efforts. In these cases, tax reforms were pursued over extended periods of time to achieve long-lasting, sizable gains. While this protracted approach may typically require political stability in order to ensure the continuity of tax reforms, it can also be achieved when administrations change, for example as we saw in Malawi.
These experiences also underscore the following lessons for tax revenue reforms in fragile states:
- Two-handed approach. Ensuring stable tax revenue yields over time requires both well-designed tax systems and effective approaches to revenue administration. In Liberia and Nepal, we found that using multiple tax policy instruments helped to boost tax collection (for instance, reducing tax exemptions, raising excise taxes, and increasing the VAT threshold).
- Potential source. Fairly targeting high potential sectors and areas—which should contribute significantly to tax revenues—can raise funds and promote fairness. Such sectors included the logging sector in the Solomon Islands and consumption (from large remittance receipts) in Nepal.
- Quick and strategic. Taking immediate reform steps can address pressing needs and build momentum, while a medium-term strategy can help to properly sequence reform measures. The reform steps, with immediate effects, could include reforming indirect taxes on goods and services, curbing exemptions, establishing a Large Taxpayers Office, and enhancing risk-based audits.
- Political commitment and international support. Sustained tax reform efforts over a long period requires strong political commitment supported by international partners. In the episodes we studied, tax reforms were often pursued with strong political will—for instance in facilitating coordination across agencies—while capacity building support from international partners also played a vital role. It is important to note, however, that political commitment is a necessary but not a sufficient condition for successful tax reform.
Last week, the President of the European Commission Ursula von der Leyen made an ambitious proposal. By 2030, the European Union would aim to reduce greenhouse gas emissions by at least 55 percent below their 1990 levels. And this is just an intermediate target. The final goal is for the EU to become climate neutral by 2050, as stated in the European Green Deal. (more…)
Small and medium-sized enterprises dominate the business landscape in the Middle East and North Africa region. These enterprises account for more than 90 percent of the region’s businesses and, in some countries, contribute as much as 50 percent of employment and 70 percent of GDP.
Yet they face impediments to growth, and their contribution to employment is below potential. In much of the region, small and medium-sized enterprises are handicapped by limited access to credit, unfavorable business environments, and talent gaps.
Digital technologies present new opportunities for these businesses to achieve faster growth. Emerging technologies and broadband internet can facilitate operational efficiencies, innovation, access to markets and finance, and can enable firms to operate remotely during lockdowns. The flexibility of remote working can help integrate women and youth in the labor market.
But so far, small and medium-sized enterprises in the region have been slow to embrace digital technologies and e-commerce, and businesses trail governments and consumers in internet usage.
As consumers rapidly shift to online shopping and increasingly prefer rapid and convenient services, smaller businesses will need to adopt digital solutions to remain competitive and survive.
Because small and medium-sized enterprises hold the key to employment generation, governments can help expedite their digital transformation by developing and implementing national strategies that address both supply and demand constraints standing in the way of digitalization.
On the supply side, priority should be given to removing barriers to competition and increasing investment in information and communications technology to ensure universal access to affordable high-speed internet. Currently, while all countries have easy access to international fiber optic networks, many maintain barriers to entry such as government monopolies or restrictions on foreign participation and network peering. These, coupled with high capital investment requirements, have slowed deployment of advanced network technologies and internet exchange points. Apart from the Gulf Cooperation Council states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (GCC), many countries have limited access to high speed broadband internet, and internet services are often slow, unreliable, and unaffordable, constraining use of the internet for business creation.
Educational and labor market reforms are needed to reduce the digital skill gaps. Digital skills are in short supply across the Middle East and North Africa region and some countries with high levels of digital expertise, such as Lebanon and Egypt, sometimes suffer brain drain to higher income countries, including the GCC. Mandating science, technology, engineering and mathematics subjects and providing technical and vocational education and training through public-private partnerships can increase supply of tech skills in the medium term. At the same time, easing labor restrictions to facilitate expatriates in highly technical areas can reduce the skill gaps in the near term.
Reforms are also needed to improve E-commerce logistics and reliability of electricity, without which the Internet cannot function. Deficiencies in E-commerce logistics—unified address systems, area codes, postal service, land and customs clearance—currently delay delivery and increase costs for online trading.
Regulatory and other reforms are also essential to facilitate development of digital financial infrastructures. Digital financial services currently do not provide a strong foundation for digital transformation as the infrastructure and instruments for accepting electronic payments—such as point-of-sale terminals, credit and debit cards—have limited penetration, and payment systems are mostly not interoperable.
Digitalization of government services and procurement can incentivize small and medium-sized enterprises to follow suit given the significant size of the public sector in most countries and the pervasiveness of making payments to, or receiving payments from, governments.
On the demand side, the digital usage gap—the disparity between people who live in areas covered by broadband but who are not using internet—is several times the coverage gap. This suggests that demand is being constrained for reasons other than the non-availability of internet access.
To increase demand for digital services, governments should develop digital literacy and awareness programs as well as foster consumer trust by strengthening frameworks for cybersecurity, digital identification, data privacy, and consumer protection. Across the region, consumers reportedly do not trust websites to handle their information and are unaware of their consumer rights. In some countries, consumers are not well equipped to adopt digital solutions as large segments of the populations are not connected to the internet and are unbanked. In parts of the region, including North Africa and Iran, ownership of smartphones and other internet-enabled devices is below the global average.
Finally, for digital benefits to materialize, the digital strategy must be underpinned by financial sector and business environment reforms, particularly strengthening financial infrastructures—credit registries and bureaus, modernized bankruptcy laws, collateral registries—and business support, all of which will help SMEs access credit.