ESWATINI Country Economic Memorandum: In search of the drivers of inclusive growth May 2024 1 Acknowledgements • The Eswatini Economic Memorandum “In the search of the drivers of inclusive • The team jointly worked with Ministry of Economic Planning and Development growth” was co-led by Jacques Morisset (Lead Economist, Equitable Growth, (MEPD) and Central Bank. The team worked closely with Sifiso Mamba (Chief Finance, and Institutions Program Leader); Javier Baez (Poverty Lead Economist, MEPD); Nombuso Tsabedze (Principal Economist, MEPD); Mcebo Economist); Marko Kwaramba (Senior Economist) and Dumisani Ngwenya Zikalala (Principal Economist, MEPD) and Welcome Nxumalo (Principal Economist, (Economist). Central Bank). The team extends gratitude to the Eswatini cabinet members, who • The report benefitted from inputs by World Bank experts, including (by provided feedback during the cabinet retreat. alphabetical order): Ajai Nair (Senior Financial Sector Specialist ); Anne- • The team is grateful to the two peer reviewers, Yutaka Yoshino (Economic Adviser) Elisabeth Sarah Costafrolaz (Digital Development Specialist); Bernard Aritua and Jakob Engel (Senior Economist), for their useful comments. The collection of (Lead Transport Specialist); Carolina Diaz-Bonilla (Senior Poverty Economist); international best practices was made possible by the contributions from Marc Bekele Debele (Sector Leader for Sustainable Development and Schiffbauer (Lead Economist), Marc Forni (Lead Urban Specialist); Nadia Rocha Infrastructure); Consolate Rusagara (Finance, Competitiveness and Innovation (Lead Economist); and Jean-Christophe Maur (Senior Economist). Practice Manager); Elizabeth Ninan (Human Development Program Leader); Hartwick Tchale (Senior Agriculture Economist); Karla Gonzalez Carvajal • The report was finalized under the collective guidance and leadership of Satu (Transport Practice Manager); Marc Schrijver (Senior Financial Sector Kahkonen (Country Director), Marie-Francoise Marie-Nelly (former Country Specialist); Michael Ehst (Senior Private Sector Specialist); Nadia Taobane Director); Hassan Zaman (Equitable Growth, Finance, and Institutions Regional (Senior Energy Specialist); Olive Umuhire Nsababera (Poverty Economist); Director); Asad Alam ( former Regional Director); Asmeen Khan (Operations Omowunmi Ladipo (Governance Practice Manager); Paul Seaden (Senior Manager), Marco Hernandez (Macroeconomics, Trade, and Investment Practice Digital Development Specialist); Smita Kuriakose (Lead Private Sector Manager); Pierella Paci (Poverty Practice Manager), Ikechi B. Okorie (Resident Specialist); and Steven Michael Pennings (Senior Economist). Assistance was Representative), and Wakhile Mkhonza (Senior Operation Officer). 2 provided by Nani Makonnen and Simangele Batiti Nkambule. Key messages 1 Eswatini has underperformed over the past twenty years as demonstrated by its low growth trajectory and limited inclusion since 2000. 2 Adopting a new comprehensive strategy that accumulates more physical and human capital, while ensuring a more efficient and inclusive use of these resources, will be critical for Eswatini to meet its development aspirations. 3 Economic theory and experiences from aspirational peer countries (Singapore, Mauritius, Estonia and Costa Rica) emphasize five mutually reinforcing drivers to boost inclusive growth: (i) a dynamic and innovative private sector; (ii) a skilled and healthy workforce; (iii) finance for the private sector; (v) digital and physical connectivity to enlarge markets; and (v) a more effective government. 4 Jump starting these drivers will require bold changes in policies and innovative approaches to achieve immediate results and create momentum for reforms. 5 Building on its existing economic base, fostering a modern service sector could be a game changer, especially digital services and tourism that are in high global demand and offer the strongest prospect of productivity gains and job creation locally. 3 Why this report? This report intends to be an input into the government’s strategic vision and policymaking to help move Eswatini closer to its ambitious objective of boosting inclusive growth and becoming an upper middle-income economy by: • Carrying out diagnostics on past economic performance and undertaking forecasting analysis for potential future growth trajectories while uncovering binding constraints and realistic opportunities. • Using a conceptual approach based on well established methodologies (Box 1) and benchmarking analysis with a set of aspirational peer countries (Box 2). • Emphasizing a growth strategy underpinned by greater investment, productivity, innovation, inclusion and government effectiveness. • Drawing lessons from the policy experience of countries that faced similar challenges, including some that graduated or are close to graduating from upper middle- to higher-income status. This report does not cover key aspects that are addressed in parallel studies (e.g., regional integration) or require greater attention in future research (sectoral development strategies or the political economy of reforms). 4 Box (1): The Underlying conceptual approach of this report This report is anchored on four complementary methodologies: 1. The analysis is guided by a mix of conceptual approaches to diagnose economic growth performance: i. Growth decomposition (Solow and Shapley) to assess the role of factor (capital and labor) accumulation and efficiency gains (productivity growth). ii. Evaluating the process of economic transformation to gain understanding of the reallocation of resources across sectors as the country urbanizes (Romer, Henderson) and within sectors (Lewis, Kuznets). iii. Growth diagnostics for the identification of the most bindings constraints (Hausman et al). iv. The role of institutions (Acemoglu, Rodrik). 2. Estimation of different future potential growth trajectories (WB’s Long Term Growth Model) to bring a forward-looking perspective. 3. Case studies comprising countries that have been able to avoid the middle-income trap in recent years to illustrate how such gains can be jumpstarted in Eswatini while taking into consideration the country’s opportunities and constraints. 5 Box (2): Benchmarking selection Eswatini, with a GNI per capita of $3,800, ranked 122nd and was distant by $666 from the upper middle–income status and $10,045 from the high-income threshold in 2022. Its GNI per capita growth averaged 1.5% in real terms over the past 10 years (2013-2022). Aspirational peer countries Four countries were selected to inspire Eswatini’s government in their quest to meet its ambitions: two upper-middle economies (Mauritius and Costa Rica) and two high-income economies (Estonia and Singapore). All of them are small by geographical area, have achieved close to zero poverty ($2.15/day international poverty line) and have relatively low inequality. • Estonia ranked 35th in terms of GNI per capita and classified high income in 2022. • Mauritius ranked 69th in terms of GNI per capita and distant by $3,085 from the high-income threshold in 2022, while its real GNI per capita growth averaged 1.7% over the past 10 years. • Costa Rica ranked 64th in terms of GNI per capita and distant by $1,175 from the high-income threshold in 2022, while its real GNI per capita growth averaged 1.6% over the past 10 years. • Singapore ranked 10th in terms of GNI per capita and classified as high income since 1987. 6 Roadmap 1. Why should Eswatini 3. Which drivers will help 5. Concluding remarks reinvigorate its drivers Eswatini move toward of growth while high-income status while ensuring greater sharing the benefits more inclusion? broadly? 2. Why has Eswatini’s economy underperformed since the 2000s? 4. How to jump start these drivers? 7 1. Why should Eswatini reinvigorate its drivers of growth while ensuring greater inclusion? 8 Eswatini has been long trapped in a path of low growth, high poverty and high inequality … GDP growth is on a downward trend and Poverty reduction has slowed and remains high in systematically below middle-income country average comparison to the average in middle-income countries Percent (5 year moving average) Poverty headcount ratio at $2.15 a day (2017 PPP) (% of population) 9 60 8 40 7 20 6 MI average 0 5 2000 2009 2016 4 Lower-middle-income (average) Eswatini World (average) 3 Eswatini average 2 And the country’s level of inequality is among the 1 highest in the world 0 Gini index, 2018 or earlier 2019 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020 2021 2022 80 Eswatini 60 Lower-middle-income real GDP growth 40 Middle-income real GDP growth 20 Eswatini real GDP growth 0 United… Micronesia… Iran,… Russian… Upper-middle-income real GDP growth Nigeria Bolivia Brazil Norway Denmark Spain Montenegro Zimbabwe Bangladesh Indonesia Samoa Ecuador Hungary Burkina Faso Slovenia Poland Maldives Mali Mongolia Switzerland Lithuania Tajikistan South Sudan Argentina South Africa Note: The poverty rate is based on the international poverty line which is set at $2.15 per day (2017 PPP). The Gini index measures the extent to which the distribution of income among individuals or households deviates from a perfectly equal distribution. Source: World Development 9 Indicators (WDI) database. ...with disparities in access to services which limit the productive capacity of the poor... Between 2010 and 2016, poverty declined more in relatively richer Education access is uneven. Children from rural areas and poorest urban areas, worsening the urban-rural divide. Disparities in access deciles are more likely to drop out before completing school. to services are striking. Likelihood (%) of accessing the first and final grade of each education level by location Poverty rate (%) % of population with access to services (2016/7) and wealth status 100 93 92.2 89.7 80 73.1 70.1 80 74.3 70.3 60 66.1 31.1 60 40 20 19.6 40 0 20 Urban Rural 0 2009/10 2016/7 Improved water Improved sanitation Electricity Urban Rural Disparities also reflect income levels, with access being lowest among the poorest deciles. Access to services, by deciles, 2016 Improved water Improved sanitation Electricity And overall vulnerability is high: 60% of the population is exposed to at least one climatic shock (heat, flood, drought or cyclone). Note: Based on EHIES 2016/17 Source: WDI database, EHIES 10 … and under the current trajectory, Eswatini will not reach its development aspirations. • With the same trajectory of the last 16000 GNI per capita, (current US$) decade, the country will become an 14000 2022 HIC threshold upper middle-income country by 2030, 12000 10000 but the poverty rate will change little, 8000 staying at over 70 percent. 6000 2022 UMIC threshold 4000 • The country will not meet policymakers’ 2000 aspirations of becoming a developed 0 2010 2040 2041 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2042 2043 2044 2045 2046 2047 2048 2049 2050 economy in the medium to long run. • By 2050: Poverty headcount ratio at $6.85 a day (2017 PPP) (% of population)* • GDP per capita will be $7,475, slightly 100 And poverty ($6.85 line) will remain prevalent 46% over half of the 2022 high-income 80 70% country threshold ($14,116). 60 • At 46%, the poverty rate (measured at 40 $6.85 per day) will remain high 20 0 Baseline (Business-as-usual) Note*: The poverty line is the one defined by the World Bank to facilitate international comparisons. Source: Long-term Growth Model. 11 2. Why has Eswatini’s economy underperformed since 2000? 12 The anatomy of the under-performance Low and declining GDP OUTCOME growth and persistent poverty and inequality Limited economic High and increased SYMPTOMS Stagnating base has narrowed vulnerability to standards of living over time shocks Low human Declining and Insufficient Low Inefficient UNDERLYING Incomplete Low Lagging capital uneven investment in preparedness fiscal policy structural agglomeration access to accumulation productivity productive to climate and FACTORS transformation effects gains capital infrastructure and risks institutions utilization 13 2.1 Three symptoms of the under-performance 14 The economy has been built on a limited productive base, which has even narrowed over time… Both the public and external sectors Heavy reliance on few manufacturing Marginal contribution of physical capital have not contributed to economic niches, which have lost steam over time. accumulation to economic growth. growth in recent years. 100% 2.6% Total factor productivity 100% 90% 2.6% 10 Capital stock 0.11 2.5% Labor 80% 0.44 GDP growth 80% 2.5% 8 Contribution to GDP growth, percent 70% 0.36 0.30 2.4% Share in GDP Contribution to GDP growth 60% % variation 60% 6 2.4% 50% 0.62 2.3% 40% 40% 4 1.12 2.3% 0.81 30% 0.31 0.40 0.32 0.31 2.2% 2 20% 0.31 20% 2.2% 0.27 0% 10% 2.1% 0 -0.10 -0.29 0% 2.1% -20% -0.32 2001-05 2006-10 2011-15 2016-22 -2 Primary Manufacturing -40% -4 Non manufacturing Services 2000 2004 2002 2006 2008 2010 2012 2014 2016 2018 2001-05 2006-2010 2011-15 2016-19 Private sector Public Sector External sector Manufacturing Growth (%) Note: The statistical discrepancies were omitted for Note: Net taxes were omitted for clarity clarity Source: Central Statistics Office, World Bank, Penn World Table (PWT10). Note: The colors in the third chart show the contribution of each factor and productivity to the change in GDP in each period. 15 Standards of living are stagnating, … Growth in real income per capita is trending lower. Life expectancy remains lower than in 1990s despite a rebound after the HIV-AIDS shock. Emalangeni Percent 40000 6 Years 35000 5 70 30000 65 25000 4 60 20000 3 55 15000 2 10000 50 5000 1 45 0 0 40 35 Real GDP per capita Growth in real GDP per capita (decade average) Life expectancy at birth, total Female Male Slow economic mobility (missing middle class) across Poverty level is much higher than predicted by Eswatini's income groups between 2000 and 2016. income per capita. 0.6 0.58 90 0.48 80 0.5 Extreme poverty rate Population in millions 0.41 2000 70 0.4 0.34 2016 60 0.3 50 40 Eswatini 0.2 0.16 30 0.07 0.09 0.1 0.04 20 0 0 10 0 Extreme poor Poor ($2.15- Vulnerable ($6.85- Middle class ($15- Rich (above $80) 0 (below $2.15) $6.85) $15) $80) 6.5 7.5 8.5 9.5 10.5 11.5 12.5 LN (GDP per capita, PPP, US$) 16 Source: World Development Indicators, World Bank (2024), Poverty and Inequality Platform. … and the economy is highly vulnerable to shocks. The cost of economic volatility: High GDP growth volatility has even • One standard-deviation increase in GDP volatility can cut around 1.3 percentage points of the growth rate (Hnatkovska and Loayza increased in recent years . (2004)). • Disproportionate negative impacts on the poor who have less resources to cope with shocks – i.e., the poorest villages are more Trade shocks are magnified by the country’s “small affected by droughts. economy” status : • High dependance on imported food and 12 Volatility: energy which are subject to volatile prices 2000-05: 0.52 (consumer goods account for 42% of imports) 2006-10: 0.58 10 2011-15: 0.52 • High dependance on South Africa (68% of 8 2016-2022: 1.53 exports and 72% of imports) 6 Health shocks: • COVID, HIV/AIDS 4 Climate shocks: • Since 2000, the country experienced 4 severe 2 0 droughts, 3 floods and 2 storms -2 Political shocks: • 2021 social unrest 2002 2013 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014 2015 2016 2017 2018 2019 2020 2021 2022 Real GDP (%) Source: Central Statistics Office, World Bank. 17 2.2 Eight underlying factors Incomplete Low Declining and Insufficient Lagging access Low gains in Climate risks Inefficient fiscal structural agglomeration uneven investment in to human capital While policy and weak transformation effects productivity physical capital infrastructure Improvements in moderately institutions Low value added Low urbanization gains Only half of the Lower access to education and vulnerable to Governance in the service for a middle- Both total and domestic electricity and health outcomes climate risks, the indicators are sector and income country labor investment rate water services have not been lack of systematically excessive with low productivity typically compared to sufficient to preparedness lower than peers concentration on economic and growth on the reported by middle income create a skilled has magnified undermining the a few products population decline, while middle income countries, with and healthy the cost effectiveness of and markets. density gains are countries, significant workforce associated with fiscal policy concentrated in leading to a disparities droughts and manufacturing decline in the between rural floods value of the and urban areas country’s stock capital 1 | Incomplete structural transformation translates into low returns in services and … At a similar pace as lower middle-income countries, Eswatini is gradually shifting its output and employment But the move toward employment in services has failed to generate away from agriculture to services. big gains for workers due to low levels of productivity in the sector. Structural transformation, 2000-2021 Eswatini vs Mauritius, 2009-2019 100 90 Agriculture Industry Services 80 70 Change in employment share between 2000 and 2019 Percent of total 60 50 Eswatini -0.09 -0.05 0.14 More workers in services in both 40 Mauritius -0.05 -0.16 0.21 countries 30 20 Value added per worker (1= average value for industry) 10 0 Big productivity 2000 2021 2000 2021 2000 2021 2000 2021 Eswatini 0.43 1.00 0.59 gains in Mauritius, while Lower middle income Eswatini Lower middle income Eswatini Mauritius 0.55 1.00 1.45 small in Eswatini Employment Value added Agriculture Industry Services Source: World Development Indicators, Central Statistics Office. 19 … limited economic and export diversification. Compared to the previous decade, Eswatini’s economy has become less Manufacturing output is highly concentrated … and exports are dominated by few complex, worsening 10 positions in in food and beverages, dominated by a larger products and the number of the Economic Complexity Index (ECI). player (Coca-Cola ) ..., destinations is low and shrinking. ECI ranking Food and beverages share of manufacturing Exports (% of total) production -2021 100 80 90 60 40 80 20 0 70 2015 2016 2017 2018 2019 2020 2021 2022 Other 60 Wood and articles of wood 46th Textiles and textile articles 63rd out of 133 50 Products of chemical or allied industries Prepared Foodstuffs; Beverages; Tobacco countries 63rd 40 Number of countries exported to 140 30 120 100 80 20 60 2000 40 10 20 0 2000 2022 2000 2022 2000 2022 2000 2022 2000 2022 2000 2022 2000 2022 2021 0 Eswatini Mauritius Costa Rica Croatia South Estonia Eswatini Mauritius Costa Rica Croatia Estonia Singapore South Africa Africa Sources: Harvard Growth Lab, World Development Indicators, World Integrated Trade Solution, and MIT. 20 2 | Weak agglomeration effects as the result of low levels of population and economic density Eswatini urbanization rate is about 20% lower than Population density is low, except within and around the predicted by its income per capita. capital city, which is itself small. 105 SIngapore Share of population living in urban areas, percent 90 Costa Rica 75 Estonia 60 45 Mauritius 30 Eswatini 15 0 550 6,050 66,550 GDP per capita, PPP (constant 2017 international $) Sources: World Development Indicators, ourworldindata. 21 3 | Declining and uneven productivity gains Total Factor Productivity was a key contributor to GDP Labor productivity, while low and declining, is a key contributor to growth, but gains declined significantly since mid-2000s. modest GDP growth. Decomposition of Growth in per capita Value Added Eswatini, SWZ (2000-2021) 6.0 (percentage points) Annual Change 4.0 2.0 0.0 -2.0 Eswatini Eswatini Eswatini Eswatini 2000-2021 2000-2005 2005-2012 2012-2021 Total=2.3% Total=3.0% Total=2.9% Total=1.6% Productivity Employment Rate Participation Rate Demographic Change Except for manufacturing, productivity gains are negative While inter-sectoral gains in productivity are negligible. across all sectors and types of firms (2007-2016). Contribution of change in productivity (value added per worker), by country and major sector 12% 8% 4% 0% -4% -8% -12% Domestic Large Exporters Overall Services Manufacturing Nonexporters Medium Small 22 Sources: World Development Indicators, World Bank Enterprise Surveys, CEM Country Scan and PWT 10. 4 | Insufficient investment in physical capital Domestic private investment is half that of the levels reported Net FDI inflows have declined to less than 1% of GDP, which is by lower- and middle-income countries. below the average for lower middle-income countries. 40 12 Foreign direct investment, net 10 Gross fixed capital formation 30 Eswatini Lower-middle-income countries (average) inflows (% of GDP) 8 6 20 (% of GDP) 4 10 2 0 0 -2 2001 2018 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2019 2020 2021 -4 Private investment Public investment 2015 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016 2017 2018 2019 2020 2021 2022 Lower-middle-income countries (average) Middle-income-countries (average) The efficiency of investment is still at par with other comparators The value of the stock of physical capital was lower in 2019 than in (ICOR). 2000, while it more than doubled in several aspiring countries. 20.0 19.6 18.0 16.8 16.0 Mauritius 113.0% 14.0 12.0 9.0 10.0 8.2 8.0 Costa Rica 139.1% 8.0 6.6 6.6 6.8 5.5 5.5 5.6 6.1 4.9 6.0 3.3 3.2 4.0 2.4 2.0 Estonia 174.9% 0.0 Costa Rica Mauritius Lower-middle- Eswatini Upper-middle- Estonia Singapore South Africa Eswatini -0.9% income income -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0% 200.0% 2000-2010 2011-2019 % variation in real terms between 2000 and 2019 23 Sources: World Development Indicators, IMF Investment and Capital Stock dataset. 5 | Infrastructure access is lagging and uneven Infrastructure access has improved but significant gaps Spatial disparities between urban and rural areas are closing remain in water, electricity, and sanitation services compared but remain large for water and sanitation services. with lower middle-income countries and global averages. 100 100 93 2010 2017 92.2 89.8 90 90 2000 2021 80 78.2 80 % of population 70 74.3 72 60 70 65.4 66.1 50 % of area population 40 60 57.6 54.6 30 20 50 10 40 0 32.3 World World World World Eswatini Eswatini Eswatini Eswatini Lower middle income Lower middle income Lower middle income Lower middle income 30 25.2 20 10 0 Individuals using the People using at least Access to electricity People using at least Eswatini Urban Rural Eswatini Urban Rural Internet basic drinking water basic sanitation services services Access to improved water source Access to improved sanitation facilities Source: World Development Indicators, EHIES 2009–10 and 2016–17. 24 6 | Not enough gains in human capital to provide the skills needed for productive jobs Eswatini ‘s human capital index is too low for its level of The gap in education outcomes remains large compared with development, 2020 (*). lower middle-income countries. 0.9 65 Human Capital Index, scale 0-1 0.8 Secondary school enrollment 0.7 60 0.6 55 0.5 50 (net), % 0.4 45 Eswatini 40 0.3 0.2 35 0.1 30 0.0 25 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2018 500 5000 50000 GDP per capita, PPP (constant 2017 international $) Eswatini Lower Middle Income Note: (*) some figures have been updated, including for Eswatini Small labor productivity gains by international standards, Unemployment is three times higher than the average in 2000-20. lower middle-income countries, 2022. 4.5% 4.3% 30 4.0% Unemployment rate, % 3.3% 25 3.5% Average % per year 3.0% 20 2.5% Gap= 17.9% 15 1.9% 2.0% 10 1.5% 5 1.0% 0.5% 0 0.0% Eswatini Lower-middle-income countries Higher-middle-income countries (average) (average) Eswatini Lower middle income countries Source: World Development Indicators. 25 7 | Increased climate vulnerability exacerbated by weak risk management capacity Eswatini is moderately exposed to climate shocks (57th out Eswatini experiences extreme weather events, including of 185 countries) but is relatively unprepared (145th) to droughts. Most of its population, particularly in rural areas, cope with them. depends on rainfed agriculture and livestock farming for income and consumption, worsening an already high rate of food insecurity among the population. Impact of the 2015/16 El Nino drought 30% 33% Eswatini 3% -60% Drop in maize % of rural households Value of assistance (% Impact on food price production receiving emergency of total consumption) food assistance 26 Source: ND-GAIN Country Index, World Bank Social Assistance Programs and Household Welfare in Eswatini 2021. 8 | Persistent weakness in institutions, … Corruption and regulatory quality have deteriorated between Eswatini’s institutional performance is lagging aspirational 2005 and 2021 even if other indicators improved marginally. countries in all indicators by a wide margin, 2021. Government Government Effectiveness Effectiveness 100 50 80 40 Political Stability 60 Regulatory Political Stability / 30 Regulatory Quality / Non-violence 40 Quality Non-violence 20 20 10 0 0 Voice and Voice and Rule of Law Rule of Law Accountability Accountability Control of Control of Corruption Corruption 2005 2021 Eswatini Estonia Costa Rica Mauritius South Africa 27 Source: World Bank Jobs Tool, Worldwide Governance Indicators Box (3): Worldwide Governance indicators The Worldwide Governance Indicators (WGI) aggregate data from more than 30 think tanks, international organizations, nongovernmental organizations, and private firms across the world. The data reflect the diverse views on governance of many stakeholders, including tens of thousands of survey respondents and experts. These data sources are rescaled and combined to create six aggregate indicators, representing broad dimensions of governance for over 200 countries and territories. The scores range from -2.5 (weak) to 2.5 (strong) governance performance. The six indicators are: (i) Voice and Accountability captures perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media. (ii) Political Stability and Absence of Violence/Terrorism: measures perceptions of the likelihood of political instability and/or politically motivated violence, including terrorism. (ii) Government Effectiveness: captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. (iv)Regulatory Quality: captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. (v)Rule of Law: captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. (vi)Control of Corruption: captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests. Source: Daniel Kaufmann and Aart Kraay (2023). Worldwide Governance Indicators, 2023 Update (www.govindicators.org), Accessed on 1/15/2023. 28 … contributed to limited efficiency of fiscal policy Fiscal and debt sustainability at risk with increased public debt. Allocative inefficiency with too much spending on the wage bill. 45 Public wage bill 35 14 50 25 12 15 40 10 5 8 30 -5 6 20 -15 4 10 2 0 0 External (% of GDP) Public debt (% of GDP) Eswatini Regional Structural Aspirational Domestoic (% of GDP) Fiscal deficit (% of GDP) Percent of GDP Percent of public expenditure (rhs) Percent of public revenues (rhs) Excessive reliance on SACU creates volatility in public revenues. Fiscal inefficiency with low value for money in social services as the government spends a lot for relatively low outcomes. 40 35 0.95 30 0.85 25 20 0.75 15 0.65 HCI 10 0.55 5 0.45 0 0.35 0.25 SACU receipts (% of GDP) Total Revenue (% of GDP) 2 7 12 17 22 Education and Health spending/GDP 29 Source: World Development Indicators and Eswatini Ministry of Finance 3. Which drivers can help Eswatini move towards high-income status while sharing the benefits more broadly? 30 Box (4): Brief overview of the Long-term Growth Model tool The LTGM tool, developed by the World Bank, was used to project Eswatini’s long-term growth and poverty scenarios. Following the Solow-Swan growth model, the growth building blocks of the LTGM are: i) savings, ii) investment and iii) productivity. The model also analyzes human capital, demographics, the external sector (external debt, FDI, CAB) and labor force participation by gender. The tool can be used to: • Project GDP per capita growth and poverty under different scenarios. • Assess the contribution of different drivers on growth and poverty. • Quantify how much factor accumulation and TFP gains are needed for Eswatini to become a HIC by 2050. • Benchmark Eswatini with aspiring countries. Further details found at: https://www.worldbank.org/en/research/brief/LTGM 31 3.1 A comprehensive growth strategy is urgently needed … GNI per capita-US$ • Eswatini will not meet its aspirations by maintaining 15000 the status quo or by adopting unidimensional growth strategies. 10000 5000 • By simulating four different scenarios, the country will 0 remain distant from the 2022 HIC threshold by 2050 and 4 out of 10 households will still be in poverty. Baseline (Business-as-usual) Historical Data (3yr centered moving average) High income threshold Scenario 1: Business as usual (same trajectory as the past Combined strategy (Human capital + Productivity + private investment) 10 years) Upper-middle-income threshold Scenario 2: Business as usual with productivity Poverty headcount ratio at $6.85 a day (2017 PPP) (% of improvement (average annual productivity growth 1.9%) 100 population) 80 60 Scenario 3: Business as usual with substantial boost in 40 (private) capital investment (from 10.7% of GDP in 2022 to 20 21.4% in 2050) 0 2025 2045 2022 2023 2024 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2046 2047 2048 2049 2050 Scenario 4: Business as usual with an increase in human Scenario 1-baseline Scenario 2- productivity capital (up by one percentage point by 2050) Scenario 3-private investment Scenario 4- human capital 32 Source: World Bank Long-term Growth Model. … to meet the country’s high aspirations. By combining the three strategies: investment + human capital + productivity, the country could cross the 2022 HIC threshold and cut poverty by half in 2048. GNI per capita-US$ Poverty headcount ratio at $6.85 a day (2017 PPP) (% of 18000 population) 16000 90 14000 80 12000 70 10000 60 8000 50 6000 40 4000 30 2000 20 0 10 0 2049 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2050 Baseline (Business-as-usual) Historical Data (3yr centered moving average) Baseline (Business-as-usual) HIC Threshold Combined strategy (Human capital + Productivity + private investment) Combined strategy (Human capital + Productivity + private Upper-middle threshold investment) 33 Source: World Bank Long-term Growth Model. 3.2 A framework to guide a comprehensive strategy to enhance inclusive growth OBJECTIVES DRIVERS/DETERMINANTS ECONOMIC BACKGROUND • Saving propensity by economic agents Investment in • Saving allocation between physical and other assets Tobin-Solow (2003) physical capital • FDI attraction • Credit multiplier • Education and training outcomes Investment in • Health outcomes Human capital project human capital • Nutrition improvements (World Bank) • Innovation • Skills Productivity led growth • Market efficiency Loayza-Kim (2019) • Infrastructure • Institutions 34 3.2.1 Which drivers will enhance investment in physical capital? 35 Box (5): The extended Tobin-Solow Approach A simple application to Eswatini, 2002-2019 (% of GDP) • Tobin’s portfolio-selection theory is based on the view that investors balance their portfolios between high-risk, high- 2002-21 2002-05 2006-10 2011-15 2016-19 return investments with safer ones. RESOURCES AVAILABLE • The domestic investment rate in physical capital is determined Domestic savings 17.5 21.6 14.5 18.1 16.8 by: (i) how much revenue is saved by economic agents; and (ii) Private savings 19.5 23.4 13.7 19.1 23.5 what is the allocation of their savings between investments in physical capital, financial assets, and external assets. Public savings -2.0 -1.8 0.8 -1.0 -6.7 Public debt 1.0 -2.0 0.1 1.1 5.1 • Economic agents can complement their savings by borrowing Bank credit 2.0 2.4 0.8 2.0 3.6 from domestic and external markets. ALLOCATION OF RESOURCES • This approach also emphasizes the indirect relationship Physical assets 14.8 19.4 15.6 12.4 13.12 between the accumulation of financial assets and investment Private investment 7.9 13.2 7.7 6.6 6.5 in physical capital through the intermediation of the financial Public investment 6.9 6.1 7.9 5.8 6.6 system. An increase in deposits can be used by banks to Monetary assets 2.5 1.7 3.6 2.2 2.2 finance projects and boost investments in physical capital (credit multiplier). Other assets 3.2 1.0 -3.1 6.6 10.1 • The same portfolio approach can be applied to foreign FOREIGN INVESMENT investors, who balance their projects between the risk-returns FDI inflows (net) 1.7 1.2 2.6 1.1 0.7 across countries. Source: for a description of J. Tobin approach, see “James Tobin: An Appreciation of His Source: World Development Indicators and IMF Contribution to Economics”, by Willem H. Buiter, The Economic Journal, Vol. 113, No. 491, Features (Nov. 2003), pp. F585-F631 (47 pages)://www.jstor.org/stable/1830402?seq=1 36 Breaking down the challenge Finding #1: Finding #2: Finding #3: Finding# 4: Finding #5: Public savings declined Public investment Private investment The domestic financial Foreign investors are sharply, while private remained constant, as declined as households sector only marginally losing interest savings remained the decline in public and businesses shifted contributed to domestic relatively high savings was from capital to non- investment compensated by capital assets additional borrowing Less than 10% of Only 1/2 of available FDI inflows declined private savings is held Public borrowing resources was used from 2.2 % of GDP in The government in domestic banks increased by 5.1% of by the private sector 2006-10 to 0.7% of dissaved by 6.7% of because of high GDP between 2016 to accumulate GDP in 2016-19. GDP per year in 2016- transaction costs, and 2019. physical assets in 19. inappropriate 2016-19, down from instruments, and 2/3 in 2002-05. perceived risks. The main recipient of Private saving private savings in While capital recovered from 19.1% recent years were deepening doubled to 23.5% of GDP in “other assets”, since 2000, banking 2016-19 after a including capital credit still accounts decline in the early outflows, real estate, for only 27 % of GDP 2010s. and financial in 2016-19. instruments. 37 Benchmarking highlight gaps in four critical aspects of capital investment 1 Low public savings 3 Insufficient FDI 2 Little allocation of private savings toward capital assets 4 Marginal contribution of the financial sector to the economy All figures are in % of GDP over the period 2010-2020 Red= worst performer; orange= mid-performer; green =top performer Eswatini Costa Rica Estonia Mauritius Singapore Savings 16.4 14.4 27.4 11.9 45.3 Private 20.4 19.6 27.8 11.1 41.8 Mobilization Public -3.9 -5.2 -0.4 0.8 3.4 Borrowing 5.4 9.5 -0.8 11.9 1.7 Physical assets 14.5 18.7 26.3 19.5 25.2 Private 7.1 18.2 24.3 16.8 27.4 Use Public 7.0 0.4 1.9 2.7 -2.2 Monetary assets 2.4 1.9 2.5 2.4 12.0 Other assets 6.9 3.4 -2.1 -4.0 9.7 External FDI 1.2 5.1 6.3 3.2 22.5 Finance Banking credit 21.4 55.1 72.4 99.0 106.9 Source: IMF, World Bank. 38 3.2.2 Which drivers will enhance investment in human capital? 39 Box (6): The Human Capital – taking a life cycle approach Early Childhood School age children Youth to adulthood (Pregnancy to age 5) (Ages 6-17) (Ages 18 and older) Assess nutrition, health, education and training outcomes across the life cycle ‘stages’ 40 Human capital challenges across the life cycle • 1 out of 4 children under the age of 5 are • Access to primary education is near • Pipeline of students entering post- stunted; universal but only 48 percent of those secondary education and training (PSET) who start school are expected to small given high secondary drop out rate. • Only 28% of children aged 3-5 years complete upper secondary education. have access to Early Childhood Differences in completion by income • Training opportunities for those who drop Education and Care services; level (30 percent vs 75 percent). out of school are limited • 80% of children aged 3-5 years were not • Quality of learning is also a concern. 1 • Insufficient focus on TVET and Work- developmentally on track on numeracy in 4 students fail English, Maths, Siswati Based Learning (WBL)- this is 1.7% of and literacy (MICS, 2014), with big and Science in junior secondary public education spending compared to differences between children from low education. 21% for university education income and high-income households; • TVET needs to offer diverse courses • Urgency to address retention of • Adolescent fertility rates are high (70 students (grants for poor families, (digital, green, STEM related), training births per 1000 girls) compared to 44 per reproductive health programs) and linked to firm level needs 1000 girls for LMICs, which has adverse quality of learning. • Overall unemployment rate at 33%; impacts for children’s health outcomes Youth, women higher unemployment and mothers’ socio-economic outcomes. • School curriculum needs to meet the needs of today’s society- digital and • 1 of 4 adults have HIV/AIDS; rising NCDs- green skills. high morbidity affecting productivity Large proportion of orphans (16% of 0-17yr olds) – due to HIV/AIDS exacerbated by COVID 41 Benchmarking highlight three gaps in critical aspects of human capital 1 Low infant and adult survival rates 2 High stunting rate among children 3 Low school attainment Red = poor performer; orange = medium performer; green = top performer Survival Schooling Test Survival rate Fraction of Overall probability to years assessment from 15-60 children Human age 5 under 5 NOT Capital stunted Index* Eswatini 0.946 11 440 0.60 0.745 0.48 Costa Rica 0.99 13.1 429 0.92 0.94 0.63 Estonia 1.0 13.5 543 0.90 0..99 0.78 Mauritius 0.98 12.4 473 0.86 0.86 0.62 Singapore 1.0 13.9 575 0.95 0.95 0.88 42 Source: World Bank Human Capital Project database. Note:*Figures are being updated, including for Eswatini. 3.2.3 Which drivers will enhance productivity led growth? 43 Box (7): The Loayza-Kim (2010) analytical framework Based on an extensive literature review, Kim and Loayza (2019) identify five main and inter-related determinants of economic productivity, which explain about 40% of variation in productivity across countries. • Innovation, to create and adopt new technologies, which is captured by the following indicators: Public and private expenditure on R&D as a percentage of GDP as an indicator of the effort to create new technologies ; and the number of patent applications by residents and nonresidents and the number of scientific and technical journal articles as indicators of the outcome of R&D activities. • Education, to spread these new technologies throughout the economy and to develop the capacity of the workforce to assimilate them. They choose the following indicators: Government expenditure on education as percentage of GDP as an indicator of public investment in foundational human capital; the shares of population aged 25 and over with completed secondary education and with completed tertiary education as indicators of educational attainment among workers; and a standardized international test score – a single average of scores in math, science, and reading on the Programme for International Student Assessment (PISA) – as an indicator of educational quality. • Market efficiency, to promote the effective and flexible allocation of resources across sectors and firms, which is measured by the World Bank Doing Business scores as an indicator of output market efficiency, which measure the regulatory environment in terms of ease for firms to start a business, trade across borders, register property, get credit, and the like, the International Monetary Fund (IMF) Financial Development Index as an indicator of financial market efficiency, which measures the level of financial development by including the size and liquidity of financial markets, ease for individuals and firms to access financial services, and the ability of financial institutions to provide services at low costs with sustainable revenues, and a composite index, using factor analysis, consisting of minimum wage (% of value added per worker), severance pay for redundancy dismissals (weeks of salary), and the share of women in wage employment in the nonagricultural sector from World Bank databases. • Infrastructure, to support and facilitate the economic activity of households, businesses, and markets. For a subcomponent index for infrastructure (Infra), we select fixed-telephone and mobile subscriptions (per 100 people); the length of paved roads (km per 100 people) (International Road Federation 2017a, 2017b); electricity production (kw per 100 people); and access to an improved water source and improved sanitation facilities (% of population). • Institutions, to defend property rights, and to safeguard basic civil right. The World Bank Worldwide Governance Indicators that include measures of voice and accountability (citizens’ participation in selecting their government and freedom of expression); control of corruption (the extent to which public power is exercised for personal gain); government effectiveness (the quality of public services and policy formulation and implementation); political stability (the absence of politically motivated conflict); regulatory and quality and the rule of law. https://documents1.worldbank.org/curated/en/130281557504440729/pdf/Productivity-Growth-Patterns-and-Determinants-across-the-World 44 Breaking down the challenge TFP growth has faded in the recent past and the level of Eswatini’s TFP growth underperformed in the 2010s. productivity remains relatively low. TFP growth (decade average, percent)* 4.0 4 2000-2009 2009-2019 3 3.0 2 2.0 1 1.0 0 0.0 -1 -1.0 -2 1980s 1999s 2000s 2010s -2.0 Eswatini Costa Rica Estonia Mauritius Singapore TFP level (2017 =1) TFP growth (percent) Note*: Based on PWT10 data. Labor productivity improvements lag that of aspirational Labor productivity has been concentrated in manufacturing peers and the middle-income country aggregate. while it largely stagnated in other sectors. 45 Source: World Development Indicators, PWT 10, Eswatini Systematic Country Diagnostic (2018). Box (8): Productivity decomposition • Solow decomposition The approach follows a standard production function (e.g. Pennings, 2020), represented in the formula below, where at time t, Y is gross domestic product (GDP), A is the total factor productivity, K is the capital stock, and hL is effective labor used in production, decomposed as h being the adjustment for labor quality and L being the number of workers. β is the labor share. 1−β β Yt = At K t (hL)t • Shapley decomposition The decomposition examines whether structural change is growth-enhancing (with labor moving from low- to high-productivity sectors) or growth reducing. The analysis first decomposes GDP per capita growth into output per worker (labor productivity), changes in employment, and demographic structure both at the aggregate level and by sectors. Labor productivity growth is then decomposed into within sector and between-sector productivity changes—the latter of which is further split into static gains (or losses) in productivity (due to labor shifts from below- to above- average productivity level sectors (or vice versa) and dynamic gains (or losses) in productivity (due to relocation of workers from below- to above-average productivity growth sectors) (or vice versa). Next, it aims to identify the sources of output per capita growth by computing the contributions from changes in within-sector productivity, inter-sectoral productivity (static and dynamic), employment rate, and demographic structure. Source: World Bank CEM Country Scan 2.0. 46 Benchmarking identifies four gaps in critical elements of productivity 1 Slow innovation 2 Insufficient skills 3 Limited connectivity 4 Weak institutions Red = score below 50; orange = score between 50 and 80; green = score above 80 Values shown correspond to the index for each of the five categories. Innovation Skills Market Connective Institutions efficiency infrastructure Eswatini 4 22 54 31 47 Costa Rica 8 55 61 52 72 Estonia 29 82 76 71 84 Mauritius 5 41 72 84 76 Singapore 70 93 94 65 92 Source: Long-term Growth Model, World Development Indicators. 47 3.3 Bringing all the results together leads to the identification of five key drivers MAIN RESULTS FIVE KEY DRIVERS Drawing from cross country analysis, • Too little public savings to generate fiscal space for additional public investment. boosting Eswatini’s inclusive growth • Private investment on the decline because of the allocation of savings toward requires special attention to the Investment in non-capital assets. following drivers: physical capital • Insufficient FDI inflows. • Insufficient development of the financial sector with limited credit available for 1. Promoting dynamic firm businesses. creation and growth, productive investment and adoption of technologies. • Retention of students and quality of learning in school is a challenge with not 2. Developing skills in the labor enough students doing science and mathematics. force to better respond to the • Training opportunities for those who drop out of school are limited. demand from firms and to Investment in increase labor earnings through • Too many people going to university education and not enough to TVET, but human capital productivity gains. quality, access and relevance of TVET needs to improve. • Links between training provision & firms needs to be strengthened. 3. Developing more effective and • High levels of morbidity of adults (HIV/AIDS, NCDs) affecting their productivity. inclusive financial services, especially for small and medium firms. • Low innovative dynamic sector. 4. Enhancing connectivity to • Skills shortage. enlarge markets through Productivity • Underdeveloped and little inclusive financial sector. trade, transport and • Insufficient connective physical and digital infrastructure to enhance agglomeration digitalization. led growth effects. 5. Upgrading public sector • Limited governance effectiveness. performance. Igniting these five drivers is expected to improve upward economic and social mobility In sharp contrast with aspiring countries, Eswatini has not These five drivers will help the poor and generated significant upward mobility across income groups, especially through the expansion of the middle class. vulnerable groups to climb the income ladder by: Percentage change in share of total population Fostering a more dynamic private sector, 61% • especially micro and small enterprises, which is a pre-condition for more robust growth and job 21% 31% creation. Without many more jobs, poverty 7% 4% and inequality will remain entrenched. • Ensuring that the poor can participate in the -11% -3% -4% growth process through equitable human -22% capital development policy (even coverage -28% -32% -41% and quality of service delivery across groups of people and places) to meet the demand for Eswatini (2000-16) Estonia (2000-21) Costa Rica (2000-21) Mauritius (2012-17) skills and improved access to financial services. Extreme poor and poor (below $6.85 per day) Vulnerable (beween $6.85 and $14 per day) Middle class (between $14 and $80 per day) • Reducing spatial inequalities between rural and urban areas and boosting the economic density of cities. Source: World Bank poverty database. 49 4. How to ignite these drivers 50 4.1 The policy challenge • Boosting faster and inclusive growth should be the anchor of policymaking in Eswatini. The challenge for policymakers is to trigger the virtuous circle by which an initial improvement in determinants/drivers leads to higher productivity, which in turn leads to better determinants/drivers. As emphasized earlier, Eswatini will have to do it in an inclusive way given its high level of inequality. • The recent economic literature has emphasized two basic principles that could be applied by Eswatini in its quest toward productivity-led growth: • Pursue catalyst reforms or ideas that create short-term gains for the largest possible number of people: This can gather political alliances for reform, including among the elite, and reduce resistance to change. Along those lines, Eswatini can get inspired by successful countries that have been able to jump-start the reform process by promulgating ideas that do not necessarily require a lot of financial resources. A selected number of case studies are presented here using the World Bank comparative advantage to get involved in over 150 countries around the world. • Prioritize to build momentum; need to account for limited absorptive capabilities in the government and local economy: Recent economic theory and the experience, including from fast growing countries, show that starting with a strong and focused program on a few selected sectors or policy areas creates a momentum in favor of reforms to account for the limited absorptive capabilities in the government and local economy. 51 A framework for action KEY DRIVERS IDENTIFIED GUIDING POLICY PRINCIPLES ACTIONS/CRITERIA • Encouraging dynamic firm creation and growth, • Get inspired by successful productive investment, practices in other middle- and technology Catalyst reforms income countries adoption/innovation. • Developing a skilled and healthy labor force. • Improving access to • Focus on firm and job creation finance. Prioritization • Exploit existing and potential • Enhancing connectivity and comparative advantages integration to enlarge • Match potential global markets. demand with the country’s • Promoting government assets and advantages effectiveness and transparency. 52 4.2 A menu of catalyst reforms DRIVERS GOOD PRACTICES / CATALYST IDEAS COUNTRIES 1. Dynamic firm creation and • Enhancing FDI spillovers to domestic firms Costa Rica, Vietnam • Supporting small firms in terms of product accreditation and certification to reach Peru growth, productive investment, export markets and technology • Reducing regulatory entry barriers including through digitalization and formalization Ecuador, Moldova adoption/innovation • Developing an industrial complex to reduce transport and logistical costs and generate Morocco linkages • Opening transport services and lifting restrictions to trade in services Philippines • Boosting female employment in labor-intensive activities Bangladesh 2. Improved skills in the labor • Using independent employment service providers South Africa • Promoting partnerships with companies through Workplace-based Learning (WBL) Germany force programs India, Nigeria • Skill development by reaching informal firms 3. Improved access to finance • Strengthen secured transaction framework and establish electronic collateral registry Ghana • Providing partial credit guarantee for loans to MSMEs Chile for the private sector • Catalyzing patient capital for start-ups and high-growth potential SMEs Jordan/Morocco • Establishing an infrastructure Credit Guarantee to leverage private funding source Nigeria 4. Enhancing connectivity to • Creating spatial planning platforms in urban areas Asian cities • Developing integrated spatial, urban mobility and aviation development through urban USA enlarge markets opportunity zones – for tourism, services sector India • Reforming trade soft infrastructure (behind the borders reforms) China (enabling inland • Improving access to and use of digital platforms as new model for service delivery poorer provinces to benefit from global supply chains) 5. Upgrading public sector • Re-aligning the government structure toward priorities Vietnam, Canada • Using IT technologies to improve government procedures and fight against corruption Vietnam, Mexico, USA performance • Creating delivery units Malaysia, Indonesia, Estonia Singapore, Georgia, 53 DRIVER 1 Encouraging firm creation and growth, productive investment, and technology adoption Challenge: With only 4.2 new firms per 1,000 inhabitants, Solutions: Eswatini lags in firm dynamism and technology adoption. 1. Foster an environment that enhances the creation and growth of innovative small businesses • Eliminate redundant administrative procedures such as permits and licenses through a “guillotine” approach. • Deepen digitalization of key government to business processes (registration, insolvency, import/export, land acquisition and use, construction, and tax Constraints: compliance). • SMEs (45% of official employment) face administrative • Create programs to facilitate high growth potential startups with access to risk hurdles and FDI is limited by restrictive financial and capital, business training and mentorship, and skills. trade policies and cumbersome administrative 2. Attract FDI and create linkages with local firms procedures. • Encourage technology transfer through appropriate tax incentives and intellectual property rights. • Incumbent firms (including SOEs) are often • Facilitate the entry of skilled workers, while promoting the transfers of protected by anti-competitive practices, creating competencies to local workers. barriers to entry and competition and reducing • Promote partnerships between foreign and local firms to develop efficient incentives to innovate. The number of SOEs has nearly supply chains through programs enhancing quality controls, adoption of standards, etc. doubled over the last decade to 49 active entities at end-2022. About one-third of Public Enterprises are 3. Encourage competition and market contestability considered as commercial entities and expected to • Implement the SOE Restructuring Framework. generate profits. • Update the competition framework to (i) spell out more strongly the competitive neutrality principles; (ii) enforce competition regulation evenly • Firms face infrastructure bottlenecks (energy, transport across all firms, including SOEs; and (iii) strengthen the power and capability and logistics, water, digital). of the competition agency to review and abolish regulations that create barriers to entry or competition (e.g., FDI caps in competitive sectors). 54 Catalyst ideas Facilitate the entry and growth of small, Attract “strategic” FDI and develop synergies with local young, and dynamic firms firms to transfer technologies and competencies. Costa Rica: A single “superstar” investor (Intel) triggered the country’s Ecuador: In 2020, the government introduced a new simplified insertion into global value chains. Within three years of Intel’s arrival, registration for small firms, available on a digital platform. Three years the country tripled its stock of FDI to $1.3 billion, with the emergence of later, about 45,000 firms were registered, or almost 2/3 of the total. backward linkages and domestic value addition among local industries. Vietnam: The government partnered with eight leading MNEs in the Moldova: About 131 permits/licenses were configured in e-Permits automotive, electronics, energy, and household appliance sectors to and made available for online application. Time spent by businesses to develop forty-five local suppliers between 2018 and 2021. Not only meet regulatory requirements was reduced from 10.7 days in 2014 to these local firms delivered better quality inputs, but they also 6.2 days in 2020 or an equivalent savings of US$13.5 million per year. discovered new clients. Peru: Strengthening the phytosanitary regulations and supervision Morocco: The creation of the Tangiers economic zone, together with system was critical in opening foreign markets for Peruvian products. As tax incentives and regional promotion policies, has catalyzed FDI a result, 157 new agricultural products have been exported to more inflows and linkages with local firms. than 20 countries. Bangladesh: The specialization of labor-intensive exports processing Philippines: New industrial zones with quality infrastructure and tax zones, with looser labor regulations, led to the creation of million of incentives for firms investing in the information technology (IT) and jobs, mainly taken by women. Female employment expanded by 4.4 % business process outsourcing (BPO) sectors led to a boom in revenue per year between 2003 and 2013 –twice the national rate. (up to US$30 billion in 2021) and in employment (1.5 million workers). 55 DRIVER 2 Strengthening skills in the labor force Challenge: Limited availability of skilled workers. Eswatini spends Solutions: relatively more on human capital, but outcomes are much lower 1. Improved value for money of public investments in than LMICs. education and skills by: Technical and vocational training is under-resourced; Work Based • Strengthening foundations of learning (Early Childhood Learning limited; University education insufficiently linked to Development, early grade reading and math). needs of labor market. • Enhancing coordination of skills development and youth employment programs. • Moving towards results-based financing of training providers (based on employment outcomes while relying on stronger Constraints: measurement). • Limited measurement of human capital outcomes (learning; • Enhancing further education and training at artisan and technician levels - particularly for school drop-outs. nutrition) 2. Stronger cooperation with the private sector by: • Existing skills and youth employment programs are • Strengthening Workplace Based Learning (WBL) programs in fragmented, preventing coordination and impact at scale SMEs and in the informal sector. • Insufficient coordination between public and private education • Open training programs with private providers focused on skills and training providers for the future (digital, green skills, STEM related fields, medical work; as well as entrepreneurship and soft skills). • Learning deficits start early and accumulate, leading to large dropouts 56 Catalyst ideas Developing smart partnerships to enhance Scaling up pilot programs in high-demand workplace-based learning (WBL) for targeted beneficiaries Philippines. The Cebu Education Development Foundation South Africa: To provide quality-training to unemployed youth, provides high quality tertiary IT education and ensures job the government partnered with the Youth Employment Service prospects for IT graduates. It contributed to the expansion of this (YES) - a private sector-driven not-for-profit company with sector, which employed nearly 1.5 million workers who are paid on experience in job placements. Since 2018, YES has worked with average three times more than the country’s GDP per capita. 1,500 sponsoring companies and 70,000 youth (58% of them female). About R3.95 billion has been injected in the economy. Nigeria: The Innovation Development and Effectiveness in the Acquisition of Skills (IDEAS) Project introduces improved and structured apprenticeship training in selected Germany: The government partnered with the private sector to trade informal clusters in close cooperation with local trade facilitate the transition from school to work by using alternative associations. but complementary WBL models. Such flexibility resulted in significant benefits not only for youth but also for enterprises. Employers report a good return on investment, saving on India: The Industry Apprenticeship Initiative (IAI) Grant Scheme recruitment costs and ensuing a better match between the was launched in 2019 to provide specific training in a selected set profiles of workers and company-specific skills requirements, and of clusters. The scheme offers grant funding to implement increased staff loyalty or reputational gains for the company. demand-driven, quality apprenticeship programs in a dual training mode provided by members of each cluster. 57 DRIVER 3 Improving access to finance for the private sector Challenge: Eswatini still lags in access to SME finance and Solutions: infrastructure finance. The allocation of credit to SMEs remains 1) Strengthen Credit Infrastructure insufficient – only 18% of small enterprises and 32 % of • Strengthen credit infrastructure by: (i) enhancing the credit reporting system through regulatory and operational medium enterprises report a loan from a bank (as compared improvements; (ii) introducing a modern secured transactions to 28 % and 41 % global average). system, including electronic collateral registry; and (iii) reform ecosystem for insolvency, including tailored approaches for SMEs. 2) Improve effectiveness of public sector initiatives SME finance Constraints: targeted at increasing access to finance for MSMEs • Supply side: (i) weak incentives for banks to finance SMEs; • (i) streamlining the development finance institutions, (ii) (ii) lack of competition from non-banks; and (iii) improving the efficiency of SME lending by introducing market- based credit enhancement products (such as credit guarantees underdeveloped credit infrastructure. schemes, or wholesale facilities) to banks and non-banks, and • Demand side: (i) high informality of SMEs, (ii) low levels of (iii) supporting the regulatory environment for new, innovative financial literacy; (iii) unreliable financial management and credit products. reporting by SMEs; and (iv) dominance of cash as a 3) Facilitate increased investment of retirement fund preferred means of payment. and insurance funds in infrastructure. • (i) strengthen domestic capacity for pipeline development • Infrastructure finance constraints: (i) weak capacity for through project preparation facilities; (ii) facilitate access to project preparation; (ii) shallow capital markets. infrastructure finance through innovative credit enhancements (guarantees, blended finance). 58 Catalyst ideas Strengthen Credit Infrastructure and improve effectiveness Leverage funding sources through innovative instruments to of partial credit-guarantee program targeting SMEs channel risk capital to crowd in private sector financing Nigeria: The Infrastructure Credit Guarantee Company Ltd. Ghana modernized its secured transaction framework and (InfraCredit) is a private company established in 2017 to attract established an electronic collateral registry managed by the institutional investors by reducing the risk associated with local- Central Bank. currency corporate and project bonds. As of December 31, 2021, eight projects had reached financial completion for the equivalent of N60.3 billion (equivalent to US$159.4 million). Chile: Access to finance for MSMEs was enhanced by a partial portfolio risk credit guarantee scheme managed by the FOGAPE. Colombia: FDN, Colombia’s development bank, has provided FOGAPE guarantees cover over 10% of the SME lending in Chile. credit enhancements to assist placement of Colombia Research finds that access to FOGAPE guarantees has positive infrastructure bonds in the international capital markets and is externalities by helping beneficiary firms increase borrowing from increasing its role as a financial advisor. It is currently supporting other banks following a loan guarantee. nine different infrastructure projects with a total investment amount of US$8.1 billion. 59 DRIVER 4 Enhancing connectivity to enlarge markets Challenge: Landlocked with low population and Solutions: economic density, Eswatini needs to enlarge its markets 1. Trade facilitation and policy and reduce cost to access them to realize economies of • Implementation of AfCFTA, WTO Trade Facilitation Agreement and scale and positive agglomeration effects. other existing trade commitments to take advantage of opportunities to develop value chains with high export potential. • Implement the National Trade Single Window and automate and streamline procedures to process trade licenses, permits and certificates Constraints: 2. Transport connectivity • Accelerate the development of regional networks (roads, railways) in • Insufficient upgrading and maintenance of connective partnership with private sector. physical and digital infrastructure within the country 3. Digital connectivity and digitalization and across borders. • Engage in reforms to promote competition and private investment • Lack of market competition in the broadband value • Continue to improve digital inclusion by connecting rural, remote and urban underserved communities through chain constrains affordability of data community connectivity initiatives and regulations that facilitate infrastructure rollout and sharing • Gaps in soft infrastructure (e.g., trade facilitation • Open digital regional market integration by: i) improving and policies) hinder movement of goods, services, people, harmonizing regulations for cross-border connectivity, data flows and capital and the ensuing efficiency gains. and digital payments, and ii) working with regional bodies such as SADC on a single digital market agenda. 60 Catalyst ideas Using new technologies to improve Developing specific initiatives to link Removing regulatory obstacles that urban planning and facilitate the poor urban communities to markets prevent trade with external partners. information flows Asian cities: The development of USA: To attract capital, create jobs, India: The deregulation of the Spatial Planning Platforms (SPP) has and lift residents out of poverty in transport sector (airlines, maritime improved data acquisition, poor urban communities, and roads) has reduced costs and interoperability, and the integration of Opportunity Zones (OZ) were created plays a large role in facilitating both various data systems, laying the in 2018 to offer investors three internal and external trade by groundwork for smarter urban specific incentives for cashing out of removing restrictions on foreign planning and management. Such their investments and putting capital ownership of ships and facilitating platforms have led to (i) improved gains to work supporting the entry of private investors (trucks, urban planning (Dhaka in Bangladesh economic development of low- containers, etc.). Logistical services or Can Tho in Vietnam); (ii) improved income communities. In two years, were further facilitated by the infrastructure asset management OZ investment reached 3,800 removal of “octroi” duties on inter- (Yunnan in China) ; and (iii) increased communities for a total of $48 billion state movement of goods. resilience to climate change (Columbo raised from roughly 21,000 individual in Sri Lanka). and 4,000 corporate investors. 61 DRIVER 5 Upgrading public sector performance Challenge: Government spending efficiency has been weak and Solutions: declining, which is visible in the implementation gap of government 1. Strengthening strategic planning and programs, outcomes and efficiency scores. coordination capabilities to underpin formulation of policy (e.g. certain industrial policies, climate change, etc.) Constraints: 2. Investing in data, digital platforms, M&E systems • Overreliance on SACU revenues. and citizen feedback loops to ensure proper use • Lack of credible commitment to transparent and effective of evidence in the formulation and implementation. implementation of public policies with the goal of promoting efficiency. • Weak PFM, including controls. • Inefficient SOEs and weak monitoring. 3. Mainstreaming open contracting and e- procurement systems that will help promote • Shortcomings in technical capacity and information/statistical gaps better value for money by increasing that limit the development of evidence-based solutions to transparency. problems 4. Commitment to a stabilization fund to improve • Weak incentive mechanisms within public administration and inter-temporal management of SACU revenues. limited internal and external evaluation to foster accountability and transparency. 62 Catalyst ideas Re-organizing the government to Introducing new technologies to facilitate inter-government align it with key objectives relationships and the timely exchange of information Vietnam: The e-portal platform was created in 2019. It Vietnam: The government was bold in reforming its institutions— allowed the online processing of administrative procedures by strengthening the Ministry of Trade—when it accelerated trade by households and businesses. As of early 2023, liberalization in the mid-1990s. It was merged with the Ministry of approximately 30% of all procedures are online, with the Industry to form the Ministry of Industry and Trade in 2007. objective to reach 50% by end 2023. Creating this institutional anchor explains well the country’s success to date as the country is today one of the most open economies in the world, with unprecedented export growth over Mexico: The use of filters in IT systems to detect the risk of the past two decades. corruption, including in agencies. USA: To fight corruption, the U.S. Securities and Exchange Canada: A comprehensive review was launched in 1994 to identify Commission (SEC) uses machine learning to identify patterns what to preserve and not what to cut in government programs. in the text of SEC filings. These patterns can be compared to This review, under the responsibility of the Prime Minister and with past examination outcomes to find risks in investment the involvement of Ministers, led to a reduction of 10 % in manager filings. As a result, staff have become five times program spending with, however, significant variations between more effective than random selection. For investment programs. Public employment was also reduced, partly through a advisors, the SEC uses machine-learning algorithms to transfer to the private sector, by about 50,000 employees. predict the presence of idiosyncratic risks for each advisor. 63 4.3 Three criteria to guide prioritization While there is not a silver bullet through which policymakers can systematically select priority areas or sectors, three guiding criteria are proposed based on economic theory and empirical evidence: 1. Labor–intensive and tradable sectors which are most likely to create productive jobs and foster innovation; 2. Globally competitive sectors as an export-led strategy appears as an imperative for a small and undiversified economy like Eswatini; and 3. Sectors with high expected regional and global demand to increase market size. 64 First criteria: Labor-intensive and tradable sectors The main objective for policy makers in Eswatini is generally to create the maximum jobs, given the exceptionally high structural unemployment rate. There are two stylized facts from economic literature and evidence that can be used: 1. Sectors with the highest employment or employment potential should be prioritized. The rationale is that this will maximize the impact on people, leading to a much-needed stronger inclusion. Indirect jobs can also be created through forward and backward linkages. (IFC Jobs Study, “Assessing Private Sector Contributions to Job Creation and Poverty Reduction,” January 2013). 2. Sectors with the highest content of tradability should also be prioritized as the labor productivity gains are often 2-3 times bigger than in non-tradables (IMF, The Level of Productivity in Traded and Non-Traded Sectors for a Large Panel of Countries, WP/15/48). 65 Ranking of labor-intensive and tradable sectors, 2022 Top-4 per column in green, top 3 aggregate in red lines Sectors Employment (L) Labor intensity (L/Y) Labor multiplier (*) Tradability 52,957 0.5 1.7 Yes Commerce 47,530 0.2 6.1 Yes Manufacturing 41,517 0.5 2.3 Yes Agriculture 23,844 0.1 No Real estate 23,498 0.2 1.9 Little Education 22,332 0.4 2.3 No Construction 19,017 0.1 - No Public administration 15,704 0.1 4.4 Yes Transport and communication 15,587 0.3 2.1 Little Health 7,406 0.2 1.6 Yes Tourism 3,055 <0.1 3.6 Yes Finance 2,621 <0.1 9.5 Yes Utilities Yes Mining 1,558 <0.1 3.9 (*) All data for Eswatini except for the labor multiplier, which corresponds to the U.S. economy, based on updated employment multipliers by the Economic Policy Institute, 2019. The job multiplier includes supplier and induced jobs created by one additional job in the sector. Source: World Development Indicators, World Integrated Trade Solution. 66 Second criteria: Globally competitive sectors A combination of three analytical, well-established approaches has been used to select specific products and industries where Eswatini is or can expect to be competitive on international markets. • The first approach attempts to identify products where Eswatini has already revealed its comparative advantage, building on the “safe” strategy that it makes sense to “push what is already working”. This is the classical methodology, developed by B. Balassa 40 years ago. • The second approach takes the view that a country should push products that are at proximity of what it is already doing well. This is the ‘product space approach’ developed by R. Hausmann and his associates. • The third approach is to get inspired by countries that have been able to escape the middle-income trap. This is the growth identification approach developed by the former World Bank Chief Economist Justin Lin. 67 Ranking of globally competitive sectors Revealed comparative advantage Product space indicates nearby opportunities Identification approach suggests that aspiring in food, chemicals, and textile. in metals (tools, tubes, machines). countries have more actively penetrated export markets and expanded their exports of services TOP-10 products TOP-10 products than Eswatini. 14 13.07 Food 7.89 Index of export penetration, 12 10 Chemicals 3.55 8 7.13 2021 6 Textile 3.24 3.37 4.24 4 2.27 2 Wood 2.91 0 Eswatini Mauritius Costa Rica Estonia Singapore Stone 2.49 Note: 1/ The index of export penetration is defined as the number of countries to which the reporter export a product divided by the number of countries importing this product that year Vegetable 0.21 12.00 10.23 Animal 0.16 Multiplication of exports in 10.00 services 2000-2021 8.00 Metals 0.15 6.06 6.00 3.96 Ore 0.15 4.00 2.91 2.00 Fuels 0.12 0.25 0.00 Eswatini Mauritius Costa Rica Estonia Singapore 68 Source: World Integrated Trade Solution and MIT. Third criteria: Sector with high-projected regional and global demand The global demand for digital services is on the rise • With few existing advantages and nearby opportunities, policy makers can consider making longer “jumps” into strategic areas with future diversification potentials. • The greatest potential for Eswatini, based on international experience of aspiring countries, would be to focus on the expansion of services. These sectors are projected with fast- increasing global and regional demand. Higher demand for eco-tourism around the world • Digital services and eco-tourism could receive greater attention: these two sectors, which are not only expected to be in high demand globally, but they have also been used by other small countries to move forward due to its strong potential to create jobs and diversify their economy. 69 Competitive services could be a game changer All aspiring countries have built their success on dynamic services in transport (Singapore), finance (Costa Rica); Travel (Singapore), and IT (Singapore). Transport services Insurance and financial services 31.8 Multiplier between 2000 and Multiplier between 2000 4.1 and 2017 2.8 2017 1.7 1.6 13.4 8.6 0.0 2.0 0.6 Singapore Estonia Mauritius Costa Rica Eswatini Costa Rica Singapore Estonia Mauritius Eswatini Travel services IT services 6.7 Multiplier between 2000 and 3.9 Multiplier between 2000 and 5.8 3.3 3.2 2.5 2017 3.4 2017 1.9 0.6 0.0 Singapore Estonia Mauritius Costa Rica Eswatini Singapore Estonia Costa Rica Mauritius Eswatini 70 Source: World Integrated Trade Solution, World Bank. Priority Sector 1: Digital Services Digital services offers a range of opportunities for growth and leapfrogging as recognized by recent strategies and the establishment of the Royal Science and Technology Park. Challenges Solutions : • Small market size and landlocked geography are both hindering • Proceed with restructuring of the incumbent factors for wide broadband adoption and growth of the digital telecom operator EPTC to increase economy. competition • In 2021, mobile broadband penetration rate was estimated at 35% • Promote regulations that facilitate (unique subscribers), while prices of services were relatively high infrastructure rollout and sharing despite the implementation of subsidized programs. • Improve the administration of the Universal Service Access Fund • Strengthen digital literacy skills through Constraints targeted training programs for teachers and • The biggest barrier to development of digital platform and students and ‘rapid skilling initiatives’ for out- affordability of digital services is limited market competition in the of-school youth and adults international connectivity and the middle miles of broadband value chain. • Increase access to funding for digital startups and connect them to public • Low government online presence due to lack of data interoperability and private procurement opportunities across agencies. • Limited development of e-commerce platforms due to unaffordability • Drive entrepreneurship ecosystem growth of data and digital devices, lack of digital skills and low uptake of digital through enhanced local/regional linkages financial services by users (two thirds of people that are covered by and expand market opportunities through broadband networks are not using the internet). the regional integration of digital markets • Insufficient supply of intermediate and advanced digital skills (lack of Source: World Bank, Digital graduates in ICT and STEM related subjects) economy diagnostic: • Innovative start-ups face difficult access to early-stage finance and Eswatini, 2023. customers. 71 Priority Sector 2: Eco-tourism Tourism has potential to contribute more in Eswatini. Currently it contributes around 2.5 percent to GDP. The potential is high with the Eswatini’s low crime rates in comparison to neighboring countries, serene landscapes, game parks, festivals and cultural richness. Challenges Proposed Solutions While the number of visitors is relatively high (~800K per 1. Sector Reforms: year), the gains for the local economy are relatively small: • Low job multiplier at the local level. • Promote community-based tourism • Little developed backward and forward linkages with • Promote nature- based tourism. local businesses and communities. 2. Sector investments • Limited contribution to foreign earnings due to low spending in the country. • Proactively bringing in private investments to manage tourism sites. • Pro-active promotion to new markets (such as Constraints Asian visitors). • Little diversification with heavy reliance on visitors from • Investment in tourism infrastructure, including South Africa. Internet connectivity, road access, and • Insufficient quality of hospitality infrastructure and services. simplified border entry. • Quality of local suppliers not at par with international • Expanding community-led tourism—through standards. improving access to capital, business and • Limited availability of local skilled employees with hospitality training, and secured land-use underdeveloped training programs. rights. • Cross border challenges for skilled employees: • Skill development programs for employees in • Visa requirements. collaboration with private operators. • Border inspections and opening hours. 72 Priority Sector 3: Agriculture/Agribusiness Agriculture contributes about 8.1 % of GDP and 12.4 %. Due to its labor intensity and potential competitiveness, it is an important source of income and jobs for rural communities and a source of export revenue for the country. Challenge: Eswatini’s agriculture faces multiple challenges, Proposed Solutions which disproportionately affect small rural farmers, while agribusiness development is excessively concentrated 1. Sector Reforms: around the sugar industry. • Enhance the capacity of the newly established Agricultural Development Fund (ADF): develop better models for co-financing, de- risking mechanisms, and blended financing options. Key Constraints • Improve land tenure security: through strengthening appropriate policy • High vulnerability to shocks due to climate change and and legal framework for better land governance, attract private sector natural disasters. participation through land consolidation/pooling arrangements, etc. • Smallholder farmers are not well-integrated into agricultural value-chains, contributing only 10 % of the 2. Sector investments agricultural output, due to low productivity, inconsistent • Strategic and transformative investments to improve farmers resilience quality of products and fragmentation of producers. to climate-change induced shocks: irrigation infrastructure, market access • Policy and institutional issues affecting land tenure infrastructure through the National Agricultural Investment Program (NAIP). security for smallholder farmers, who cultivate on Swazi Nation Land (which represents 75 % of arable land in • Value-Chain Development for strategic commodities (horticulture, grains Eswatini) with limited tenure security. and livestock/beef), through strengthening smallholder farmers organization • Limited access to finance due to limited possibilities to and partnerships – to raise productivity and quality of produce, and address provide guarantees and use de-risking instruments. fragmentation of producers. 73 5. Concluding Remarks 74 A framework to guide policies for future growth, jobs, and inclusion based on three filters Filter 1: Filter 2: Filter 3: Economic Analysis Good practices / Catalyst ideas Prioritization criteria • Facilitating the entry and growth of small, young, dynamic firms as those are generally more prone to use new technologies. Dynamic firms Attracting FDI and develop synergies with local firms to transfer technologies and • Labor-intensive competencies. tradable sectors • Developing smart partnerships with the private sector to enhance workplace-based Skills learning (WBL). • Scaling up successful pilot programs in high demand for targeted beneficiaries. • Developing specific programs targeting SMEs and the informal sector by increasing Globally digital finance services and early-stage finance. competitive Finance • Leveraging funding sources through innovative instruments, including channeling risk capital to crowd in private sector financing. sectors • Using new technologies to improve urban planning and facilitate the information flows. Connectivity • Developing specific initiatives to link poor urban communities to markets. • Removing regulatory obstacles that prevent trade with external partners. Sectors with • Re-organizing the government to align it with key objectives. high-projected • Introducing new technologies to facilitate inter-government relationships and the Governance efficiency timely exchange of information to ensure transparency. global demand • Establishing “delivery units” with well-defined mandates to enhance accountability. 75 While these drivers are essential, they are not everything … • This report provides a sense of direction for future policies as opposed to being prescriptive. • The use of three analytical filters helps identify the most important drivers of productivity growth and a series of associated specific policy objectives. While necessary, the focus on these drivers and its underlying policy reform agenda is not a fully sufficient condition. • Additional areas merit further attention: • Greater attention should be given to the mechanisms of public delivery ---Eswatini will need to step up the value for money in infrastructure (energy, water) and services (education, health) as outcomes are far below what could be expected from the quantity of resources allocated to these sectors. • Trade policies and facilitation is a priority (forthcoming study on regional integration for SACU countries and ongoing TA project on regional trade facilitation). • Further granularity is needed at the sectoral levels since designing and implementing relevant policies requires a good understanding of domestic and international markets and players (forthcoming study on regional value chains in Eastern and Southern Africa ). • Economic growth is the ability to accumulate more wealth, but increasingly it is also about the preservation of existing wealth as the result of more severe climate shocks and sustainability challenges. • The political economy of reforms must be better understood, including the potential resistance of vested interest groups and the agents of change that can catalyze the speed of implementation. 76 ANNEX Country Case Studies 77 FDI Spillovers – Costa Rica Attracting an anchor investment for structural changes Context Impact In November 1996, Intel announced a monumental decision to establish a microprocessor assembly and testing factory in Costa Rica— Costa Rica’s effort to attract and support Intel shows how even a single “superstar” investor can lead the way in triggering structural transformation of the national export profile. It was a turning point of the country’s insertion into positioning the firm at largest foreign investor in the country at the time. Intel's engagement in Costa Rica evolved over the project’s life global value chains, as well as the development of an export-oriented sector producing high-technology and to move up the value chain from assembly and testing to higher value-added operations to include Global Shared Services Centers, an sophisticated manufacturing and value-added services. Providing important “demonstration” effects, within three years Engineering Development Center for both pre- and post-silicon development, and a mega laboratory for testing new microprocessors. As of Intel’s arrival, the country tripled its stock of FDI to $1.3 billion. Its effects on the local economy were far-reaching. part of its attraction and post-investment strategy, the Costa Rican Government worked resourcefully and with a novel sense of urgency Backward linkages. Initially Intel was sourcing its key inputs for assembly and testing of microprocessors internationally. to enhance the country’s technical education, incentives law, regulation, and infrastructure to attract this “anchor investment” and But as it shifted toward higher value activities, the percentage of Intel's domestic purchases jumped from 26% in 2013 to maximize its linkages and spillovers. 69% in 2016. By 2016, services accounted for all local purchases, as Intel moved assembly and testing to Asia. The company began sourcing more specialized local services, particularly in IT and R&D, increasing from 5% in 2013 to 17% in 2016. (See Tables 1 and 2). Government Interventions Domestic Value Addition. Intel’s climb up the value chain not only increased average salaries of its worker but also Targeted proactive investment promotion and high-level Government support. In the 1990s, the Costa Rican government, in increased domestic value addition. For each dollar that Intel produced and exported, 18 cents stayed in the country (in collaboration with its Investment Promotion Agency, CINDE, engaged in highly targeted investment promotion -- courting large the form of payments for production factors and inputs produced by Costa Rican companies) in 2013, compared to 44 electronics corporations in the United States. Deliberately vying to make its way on Intel’s list of investment location opti ons, the cents in 2016. Government and CINDE demonstrated agility in showing how the country's investment landscape would adapt to meet Intel's stringent Business Culture, Standards and Knowledge Sharing. Exposure to Intel’s world-class business environment helped raise requirements. For example, recognizing Intel's concerns about potential interruptions in production, the government committed to the performance standards of its workforce and suppliers. Following Intel’s practices, the National Insurance Institute infrastructure upgrades supported directly by the President of Costa Rica at that time, including modernizing the national airport, vital (INS) created the first national Job Safety and Health Standard. There is also data indicating that the arrival of Intel and for expediting shipments. other multinationals in Costa Rica supported a more skilled labor force and fostered labor mobility from multinationals to local firms. Skills upgrading. Intel required a highly skilled labor pool for its complex operations. The government worked with Intel’s HR specialists to co-design vocational training programs. Additionally important reforms were initiated in the existing educational curricula, backed by the Ministry of Education, to meet Intel’s requirements. Supplier Networks. CINDE's role went beyond promotion efforts targeting Intel; they also worked to attract supporting industries and suppliers, to eventually transform the FDI landscape through a vibrant electronics cluster. References • Local Suppliers. In the late 1990s, Costa Rican officials, inspired by visits to Asian countries with robust Local Industry Upgrade Monge-González, Ricardo. 2017/18. Moving Up the (LIU) programs, launched Costa Rica PROVEE, a program to develop local suppliers. Spearheaded by organizations like CINDE, the Global Value Chain: The case of Intel Costa Rica Chamber of Industry, and PROCOMER (Costa Rica’s trade promotion agency), along with private sector companies like Baxter Monge-González, Ricardo and Juan Antonio Healthcare, this initiative aimed to deepen the economic impact of foreign investment through the multiplier effect and anchor Rodríguez-Álvarez. 2013. “Impact Evaluation of foreign investors via strong local supplier relationships. Intel worked with local companies to help raise their quality and cost Innovation and Linkage Development Programs in competitiveness in order to meet global standards, for example, in cardboard packaging. Costa Rica: The Cases of PROPYME and CR Provee”. IDB Working Pape • Global Suppliers. A direct consequence of Intel’s investment was the establishment of satellite offices for several global suppliers Freund, C.; Moran, R. H. 2017. Multinational beginning in 1998—providing building blocks for the budding electronics support industry. Most of these firms, under contract investors as export superstars: How emerging- to provide easily accessible technical support for manufacturing and testing equipment sold to Intel, opened a small service market governments can reshape comparative center or located an engineer at the Intel facility. These included Photocircuits, NTK, Tiros, RVSI, DEK and Pycon, among others. advantage. Working paper. (Washington DC, Peterson Institute for International Economics). When approaching suppliers, Cinde faced a "chicken or egg" dilemma: investors wanted existing suppliers, but suppliers needed a World Bank. 2006. The Impact of Intel in Costa Rica: guaranteed market. Finding that suppliers already catered to existing investors in different sectors, such as electronics and medical Nine Years after the Decision to Invest. Washington devices, for items like clean rooms and packaging, they identified these overlapping supplier relationships to target decision-makers in these firms and establish a local supplier base. 78 FDI Spillovers – Vietnam Impact The pilot Supplier Development Program proved successful in improving the performance of participating firms in Learning from a pilot supplier development program various industries. On average, suppliers' performance benchmark scores increased by 20%, indicating a significant improvement in their technical and managerial capabilities. The program also achieved notable impacts on suppliers' networking and collaboration opportunities, with a 30% increase in the likelihood of establishing new connections and exchanging information. As a result, there was a 10% increase in the number of MNE clients, which was essential in Context enhancing the suppliers' market access and growth potential. Moreover, the SDP firms were found to be more resilient Vietnam embarked on an ambitious agenda to develop global value chains (GVCs) over the past decade. The country has during the COVID-19 pandemic, experiencing shorter closures and less demand fall. Approximately 50% of the SDP had a notable success in attracting FDI, joining GVCs and increasing FDI-driven exports. The Government of Vietnam, participants became formal suppliers of MNE buyers, resulting in 38 new contracts worth USD 13.3 million. The program through the Ministry of Industry and Trade (MoIT), has implemented policies to upgrade the capabilities and technology also led to the enhancement of public support programs, with the introduction of a new coordination mechanism that of local enterprises to facilitate supplier linkages with FDI and promote access to foreign markets. Nevertheless, focuses on market orientation and facilitating collaboration between suppliers and buyers. The program's success has led Vietnam’s participation in GVCs has ample space to grow. Vietnam engages in GVCs primarily through backward to its replication with a new cohort of 50 firms, further promoting local economic development and contributing to participation, with high foreign value content in its gross exports, and low domestic value content in other countries’ sustainable growth. exports. Domestic value addition (DVA) remains low, particularly in sophisticated sectors, such as the electrical and electronic sector, in which DVA is about 38 percent. Despite its achievements, the pilot also highlights that public support for the development of GVC supplier programs requires scale. The pilot supported 45 enterprises and aims to reach 100 firms annually in the scale-up phase, which represents only a small percentage of the estimated 800,000 SMEs. Public support programs at a much larger scale are Government Interventions needed to tangibly increase the value added of domestic production in GVCs. Not surprisingly, the expansion of the To deepen Vietnam’s participation in GVCs and increase DVA, in 2018 the authorities, with support from IFC, launched a suppliers’ base is slow. Foreign investors emphasize the dearth of domestic suppliers that can meet required quality, pilot Supplier Development Program. The primary goal of the pilot program was to develop individual suppliers in quantities, delivery times, and prices. They also highlight the need for policies to assist local firms. Vietnam to a level that would enable them to establish long-term linkages with multinational enterprise (MNE) investors. The pilot Supplier Development Program supports domestic suppliers throughout the value chain in targeted sectors. It The pilot Supplier Development Program offers useful lessons for similar initiatives in other countries: helps domestic suppliers upgrade their business to meet the demands of multinational enterprises, which include quality, price, and delivery amongst others. Once they have demonstrated they can fulfill these and other requirements, they are • Alignment between government’s FDI policy and linkage strategies: FDI linkages must address multiple linked to multinationals for future supply opportunities. constraints. A clear government vision and coherent approach, especially in FDI policy and linkage strategies, is critical to provide an enabling environment for sustainable and effective supplier development programs. From 2018-2021, the program worked with eight leading MNEs in the automotive, electronics, energy, and household appliance sectors (Bosch, Canon, Datalogic, Denso, Ford, General Electric, Panasonic and Toyota). The companies were • Strong commitment from involved parties and capable lead agency: The effectiveness of FDI linkage programs identified based on their interest to source locally and to assist local companies to find business opportunities. Forty-five depend on key conditions such as strong government buy-in, committed investor and motivated/capable local local firms, with potential to be long-term suppliers, were selected to join the program based on recommendations from private sector partners, each playing an important role to achieve intended impacts. participating multinationals and various business organizations. Selection criteria included management capability and • Strong team on the ground and local presence: Gaining the trust of clients in government and the private sector commitment to improvement. Such attributes could be demonstrated through examples of having already obtained is critical and, in Vietnam, was a major reason why the program was able to continue to deliver on several industry standards, financial stability, and technological capability. activities during the worst of the pandemic. To ensure the program's success, a high-level Advisory Group was established, chaired by the Vietnam Industry Agency • Market-driven: A market-driven approach is paramount and is best incorporated in linkage programs by and comprising various industry associations and the eight participating MNEs. This collaboration brought together consulting with and involving FDI firms at all stages of the process. A detailed understanding of binding expertise and resources to create a more conducive environment for developing the supply chain, strengthening local constraints and demand-supply gaps is crucial to design the SDP. An SDP Advisory Group with the active businesses, and contributing to the country's economic growth. participation of MNEs in Vietnam provided inputs and guidance for the SDP design and implementation. In terms of its operation, the SDP pilot started with an initial business review with the selected suppliers. The review • Intensive and targeted efforts: Supplier upgrading requires long-term and intensive efforts and resources from included identifying areas for improvement and short-term actions to be implemented over the next six months. That all actors —suppliers, government, and buyers— which would be beyond normal resource expected for a was followed by a second review, which involved a more meticulous, longer-term plan for the remaining course of the traditional SME support project. Targeted support guarantees that, with limited resources, support reaches those program. The aim was to enable suppliers to meet the requirements of MNEs and develop a competitive edge. The suppliers which have the most potential to establish linkages with MNEs. business reviews were conducted on a participatory basis, with the assessors helping companies to review the best way • Well-developed ecosystem to support supplier upgrading initiatives: Development of local networks of mentors forward for their businesses. In the period between the two business reviews, the program ran a series of free workshops and industry consultants is critical for supplier development. The project put significant efforts in building up and networking events to help participating companies achieve their short-term improvement plans. Depending on the capacity of local consultants, peering them with international consultants for hands-on coaching and on-the-job implementation of such plans, half of the companies were selected for more custom-made support, including one-on-one training. In that way, local consultants were able to provide effective coaching to pilot participants. consultations. All participating companies continued to receive general assistance. 79 Support Farms – Peru Improving quality to access new markets Context PROMPERU’s role as a dedicated agency in charge of export promotion and capacity building to comply with private Peru experienced an impressive boom in high value-added agricultural exports that resulted in remarkable gains in standards also played a pivotal role. PROMPERU’s role to promote Peru’s products, inform on new trends and productivity, competitiveness, and employment. Over the past two decades, Peru has experienced a boom in requirements in international markets and provide support to firms to comply with private standards contributed to the agricultural exports, led by seasonal exports to the northern hemisphere of high-value fresh fruits and vegetables which expansion of new products and markets. The role of PROMPERU has become more important as global demand for fresh grew at an annual rate of 22.5 percent since 2000 and reached an export value of US$ 6.7 billion in 2021. Peru is the fruits and vegetables place a premium on positive social and environmental impact, usually through fulfillment of private world’s largest exporter of blueberries, grapes, and asparagus and the third exporter of avocados. This boom has standards which PROMPERU is in charge of identifying and providing support (training, financing, information) to contributed to reducing poverty in rural areas, which declined from 80 percent in 2004 to 36 percent in 2018, and even exporters. more in some areas that saw larger expansion of agricultural exports. The agricultural exporting sector provides 0.8 Private associations and partnerships between the public and private sector were key to expand agricultural exports. million formal agricultural jobs, up from 0.5 million in 2004, and supports indirectly another 0.7 million jobs, with high Supported by public entities, private firms created sectoral associations to improve coordination and capacity building productivity and incomes among firms. These sectoral associations contributed to the development of new products in coordination with universities, thanks to technology transfer, and reaching new markets working closely with PROMPERU, notably Government Interventions Northeast Asian countries in recent years. Producer associations also worked with SENASA to develop market access Private sector investment and innovation underpinned by public policy reforms and investments in public goods studies and pest risk assessments, invest in joint infrastructure, and implement the phytosanitary protocols required by facilitated the agricultural export boom. Several issues needed to be addressed for Peru to truly exploit its comparative imported countries. A private association made the key initial investments in cold logistics that allowed exports of fresh advantage in agriculture given by its biodiversity and diverse climatic conditions. First, tariff liberalization and regulatory products and to promote research and development for effective logistics chains. reforms to increase competition domestically increased agricultural productivity while an aggressive strategy of pursuing FTAs. Peru has signed 23 FTAs that cover 72 percent of world GDP and 90 percent of world trade. The landmark FTA with free trade agreements (FTAs) greatly expanded agricultural markets. Second, strengthening the phytosanitary regulations the US (2009) was followed by agreements with other important economies like China (2010), South Kores (2011), Japan and supervision system was critical in opening foreign markets for Peruvian products. Third, public investment in large- (2012), and the EU (2013). Average tariffs for agricultural products dropped from 13 percent in 2004 to 2 percent in 2019. scale irrigation projects expanded the agricultural frontier into lands reclaimed from the desert and allowed firms to achieve scale by leasing large tracks of land. Fourth, an Agriculture Promotion Law provided a favorable and flexible labor Impact/Lessons and tax regime for agricultural exporters by relaxing labor requirements on the minimum length of contracts, reducing benefits, and simplifying dismissal procedures. Fifth, private sector investment in agricultural research led to the Institutional reforms are needed to fully reap the benefits from trade openness and trade agreements. Despite the adaptation of non-native species (e.g. blueberries) and varieties more suitable for local soil and climate conditions (e.g. myriad FTAs signed by Peru in the last decades, the agricultural export boom would have not materialized without the Hass avocado) while investments in cold chain infrastructure and new cooling technologies expanded opportunities to strengthening SENASA and PROMPERU. Both agencies then used the coordination mechanisms embedded in FTAs to increase exports of fresh produce. stage frequent bilateral meetings with importing countries agencies to proactively solve market access issues. Overcoming phytosanitary barriers allowed Peru to reap the benefits from FTAs once supply conditions were Substantial investment and institutional strengthening pay off in terms of exports. Over the last two decades, SENASA addressed. Phytosanitary barriers are more important than tariffs for agricultural products as imports of fresh fruits and has implemented several public investment projects for a total amount of US$ 435 million aimed at improving its own vegetables are not authorized in most countries until a process of phytosanitary risk assessment is conducted and infrastructure and equipment, training personnel, strengthening quarantine and surveillance systems. As a result, potential mitigation measures including whether the commodity must be inspected, treated, or certified to be imported SENASA managed to introduce 157 agricultural products in more than 20 countries during this period. safely into the country without the risk of pest introduction. Peru’s experience highlights the key role of strong support Continuous work to improve market access and monitor and adapt to new buyer requirements is needed to keep organizations like the National Agrarian Health Service (SENASA), which certifies producers’ compliance with sanitary and exports growing. SENASA’s work does not end once market access for a product is achieved but continues to improve phytosanitary requirements, and the Trade Promotion Agency (PROMPERU), which promotes exports and assists with the conditions under which entry is allowed in order to reduce costs and increase the competitiveness exports. Likewise, compliance of private standards, and the importance of private sector engagement from the beginning of the reform PROMPERU is constantly monitoring foreign markets and revamping its export support services to respond to new buyer process. requirements. Strengthening the phytosanitary regulations and supervision system (SENASA) was critical in opening foreign markets for Peruvian exports. Regulatory changes put SENASA clearly at the head of the SPS system in the country while a Early engagement of the private sector in the reform process and market access negotiations is key. Most innovations concerted effort to provide it with adequate financial and human resources allow it to play a key role in the development and technology transfers that increased agricultural export supply and diversified the export basket resulted from the of the boom by acting on two fronts. The first, internally, through work with local producers to establish a pest work of sectoral associations, sometimes in collaboration with public entities. Producer associations also worked closely surveillance system and introducing effective phytosanitary processes and protocols, such as fruit fly control, that allow with SENASA from the start to design and comply with the phytosanitary protocols required by imported countries. opening foreign markets for key export products. SENASA also reinforced MSTQ standards and supported specialized infrastructure and services in the sector. The second, at an external level, through negotiation with counterparts in importing countries for the opening of markets and the provision of services linked to export (e.g., certifications of production sites, packing plants, shipping, etc.). 80 Reduce entry barriers – Ecuador Encourage informal firms through simplification and simplification Context Impact Ecuador was facing serious productivity and competitiveness challenges at the outset of the Covid pandemic. Growth in The new simplified corporation (SAS) form has become the most popular legal form for entrepreneurs since Ecuador in the early 2000s, during the oil boom, was driven by public sector activity. Notwithstanding its benefits, the implementation began in May 2020. As of September 2023, more than 43,000 S.A.S. have been registered in growth model was unsustainable and constrained private sector development. Total factor productivity stagnated, and the country, representing 71% of total companies registered since 2020. Almost 65% of the SAS have labor productivity also grew at a slower rate than wages. The high costs of labor in non-tradeable services combined with registered online. weak productivity growth resulted in a noticeable erosion in Ecuador’s competitiveness. The country’s real exchange rate, As of 2022, 29% of SAS have a woman as their legal representative, and 41% have at least one female a measure of competitiveness, appreciated more than that of other countries that benefitted from the commodity boom, shareholder. Meanwhile, more than 600 SAS have succeeded in accessing loans from banks with a current and remained appreciated after oil prices dropped. portfolio of US$136 million. The new SASs have also begun to participate in public procurement bidding Private sector firms in Ecuador are overwhelmingly young and small, and they struggle to grow over time. Most firms processes. In addition, the Internal Revenue Service (SRI) has collected around $218 million in taxes from (over 90 percent) are microenterprises, 7 percent are small, and the remaining 2 percent are either medium or large SAS alone. firms. More than 18 percent of firms in 2015 were new entrants, and nearly 40 percent were less than five years old. According to surveys conducted by the Ecuadorean government in 2022, the Simplified Stock Company Informality in Ecuador remains high compared to other countries. Unregistered firms accounted for 37 percent of total (SAS) form is popular among entrepreneurs, with 65% of respondents citing the possibility to formalize employment in Ecuador in 2011. Overall, Ecuador’s performance on most of the available informality indicators has without needing a notary as the main advantage. The reduced registration time was the main reason for remained worse than the average in the LAC region since the mid-2000s. 17% of respondents, while 12% indicated that the main reason for choosing the model was not having to go Ecuador’s regulatory environment has been a burden to the private sector during the last decade. In 2019, it took 48.5 in person to the commercial registry. Additionally, 6% said that the absence of a minimum capital days for an entrepreneur in Ecuador to start a business, almost twice the regional average, five times the average for requirement was the reason they chose to formalize under SAS. OECD high-income economies and significantly more than in countries like Chile (4 days) and Colombia (10 days). The cost The introduction of the SAS has been supported by information and training provided to the private sector. to start a business as a percentage of per capita income reached 33 percent in 2019, higher than the average for Latin Examples include the development of performance measurement reports and private sector satisfaction America and the Caribbean. Barriers to entry, exit and growth disproportionately affect young and small firms, which surveys; manuals for external users and analysts of the institution; online training courses; and an ongoing represent the bulk of Ecuador’s private sector. communication campaign to publicize the SAS, explaining its scope and benefits with a view to encouraging Government Interventions entrepreneurs to take advantage of the scheme. In 2020 the government developed and implemented a comprehensive reform which aimed to lower barriers to entry and encourage formal registration of firms, particularly SMEs. One of the main measures was the introduction of a new type of company modality (“Simplified corporation form” or SAS). The SAS is a simplified, cost-free type of company that allows one or more individuals to start a business with maximum contractual flexibility. After noting the considerable initial demand for creating these companies, in September 2020, the Superintendency of Corporations of Ecuador enabled an Electronic Creation System specifically for the SAS. The benefits of the Ecuadorian SAS include: • simplified registration process • unrestricted corporate purpose • both physical and electronic registration • flexible internal structure • the possibility of a single shareholder • optional oversight board • no minimum capital requirement to be incorporated • maximum freedom of contract • full-fledged limited liability • simple grounds for dissolution • indefinite duration • the possibility of keeping corporate and accounting books online; • optional use of intermediaries to incorporate a company and • the use of alternative dispute resolution methods With the creation of the SAS, Ecuador joined a regional trend of introducing simpler, more flexible corporate rules in regulatory frameworks, with the objective of stimulating the formal creation of new companies, especially micro and small enterprises, and of promoting the formalization of existing businesses. Other countries with similar reforms include Colombia, Chile, Mexico, and Argentina, and more recently, Uruguay, Paraguay, and Peru. Source: Government of Ecuador 81 Reduce entry barriers – Moldova Developing a simplified licenses regimes under a digital platform Context Impact Between 2000 and 2021, per capita GDP of Moldova expanded at an average annual pace of almost 5 The reform helped improved business perceptions related to the investment climate based on percent, helping the country reach about 15 percent of the EU average per capita GDP from about 3 percent business surveys conducted by the Government of Moldova. The degree in which the state was in the early 2000s. Despite strong past growth, the productivity of Moldovan workers remains low compared perceived to intervene in business activity decreased from roughly 11 percent in 2014 to 6.2 with their regional peers. Faster convergence is held back by slow labor productivity growth in manufacturing percent in 2020, the lowest value in the past 15 years. Only 11 percent of respondents reported and services. Stagnant private sector productivity growth has been caused in good part by market having difficulties in obtaining licenses in 2020. The significant decrease relative to the 21 percent inefficiencies and slow structural transformation. Policies aiming to boost productivity and job creation need reported in 2019 is expected to be linked to the implementation of the e-permit system, which to make markets more contestable and accessible, for example, by reducing barriers to firms’ entry, exit, and began implementing in 2018 and exhibited a fast acceleration in its utilization during the COVID- growth, and ensuring a level playing field. 19 pandemic. The proportion of time that management at businesses spent meeting regulatory requirements Around 2013, an assessment of Moldovan firm performance from panel data provides some indications that was reduced from 10.7 percent in 2014 to 6.2 percent in 2020. By decreasing the time that the poor business environment was having a negative impact on sales and productivity. Firm entry was managers spend dealing with business permits and other regulations, the reform helped reduce lagging as Moldova had low new business density (new business registrations per capita), compared to its the cost of doing business in Moldova by approximately US$13.5 million per year. peers. The business environment was characterized by regulatory uncertainty and high transaction costs: (a) firms faced multiple and overlapping regulatory requirements at the national and local levels involving licenses, permits, and authorizations; (b) there were over 400 permits, licenses, and authorizations; (c) indirect costs, such as waiting times for obtaining permits, reached more than 60 days per firm; (d) yet 92 percent of centrally- and locally-issued permits and licenses did not comply with the regulatory principles required by legislation; (e) moreover, business inspections created additional hurdles – around 15 separate inspections were carried out at each business each year and a majority of firms reported that the process was unfair and that they were not treated equally. Government Interventions Aiming to improve business entry and competitiveness, the Government of Moldova conducted a regulatory simplification reform of its licensing and permits regime. A stocktaking of all licenses and regulatory requirements was done and redundancies in regulations were identified. Further, by utilizing the principle of risk-based regulations, the number of business licenses was reduced by 65 percent (from 416 to 152). A digital platform for issuing business permits and licenses was launched. 131 permits/services were configured in e-Permits and are available for online application while 78 services are fully digital. User functions of the portal include online application, processing, digital ID, and digital payments. Based on system reports, on average, it takes seven days to process an application and issue a permit, as compared to 30-60 days before. The e-permit system is integrated in Government services, linked to the Government’s e- Payment system and commercial banks have mobile applications connected to MPay to enable a fully contactless process for the private sector. e-Permits was introduced just before the pandemic allowing business continuity despite Covid-19 related restrictions. 82 Connect to markets– Morocco Enhancing agglomeration effects within the Tangier-Med industrial cluster Impact Context TMSA essentially met its objective, port investments were delivered in time and easily commercialized to global Since 2003, under the royal initiative, the Tangier region has benefited from massive investments with considerable investors. Tanger Med currently host over 1000 firms for about 100,000 direct jobs, including a major anchor repercussions in terms of industrial development and foreign investment. The catalyst of this dynamic is the Port of investment in the automotive sector (Renault decided in 2008). Other manufacturing sectors include aerospace, energy Tanger Med which becomes the largest port of maritime transport of Africa, with extension Tanger Med II. Tanger Med is a (e.g. wind turbines), and light manufacturing activities (textile) which tend to migrate to other part of Morocco, given connectivity node on the main route of world trade. It is connected to Asia, Europe and North America. Tanger Med is also lack of space and rising wages in Tanger. Building on this dynamic, Morocco is seeing other major investment in the a major link between Africa and Europe, a link that plays a key role in integrating Morocco into European value chains, and Northern part of the country. PSA (Stellantis) has started another automotive cluster at Kenitra (In Between Rabat and potentially beyond. Tangiers). A replica of the TangerMed port/zone is being completed at Nador (NadorWestMed), in the East. The proactive scheme and policy have also focused on the hinterland of Tanger Med with a network of free zones, logistics The transfer of the Ferry-Ro-Ro to TM improved radically the connection with Spain for Moroccan exports (most of zones and industrial zones, and connectivity infrastructure. This approach is being replicated a little further east with the them cross the strait of Gibraltar). The container activity in TM is primarily oriented towards transshipment. The project of Nador West Med. The dynamic has resulted in groundbreaking investments (Renault for example), with TangerMed has become the de facto global shipping hub for West Africa leading to more frequencies between Morocco significant spill-over effects (e.g., automotive ecosystem) in the region and beyond. and the South. However, the active connection through the disputed Western Saharan corridor also contributes to supply chain linkages with West Africa. The administrative region of Tangier-Tétouan-Al Hoceima represents 10% of the Moroccan population and 10% of the GDP. The region accounts also for 20% of exports and 30% of FDI, illustrating the dynamics of growth. However, the The administrative region of Tangier-Tétouan-Al Hoceima represents 10% of the Moroccan population and 10% of the benefits of these dynamics are spatially concentrated in the region (not benefiting the Rif and the country as a whole). GDP but now it accounts for 20% of exports and 30% of FDI, illustrating the dynamics of growth. The impact of TMSA How to create more opportunities in more places may be the focus of a new TMSA-WBG partnership. beyond its immediate hinterland and direct jobs are not fully understood. For instance, how skills diffusion benefits other provinces, what are the untapped potential for supply chain integration with areas where land is more available Government Interventions than Tangiers (a constraint now) and salaries lower. The spillovers in the Eastern provinces (aka Rif region) of Tanger- Tanger Med consists primarily of two activities under Tanger Med Special Agency (TMSA) (i) the port of Tanger Med itself Tetouan-Al Hoceima region are very limited so far. and (ii) a cluster of industrial and logistics zones (under Tanger Med Zones, TMZ). The initiative was launched by the King The Tanger Med port is generally considered an example of a major connectivity investment which brought economic of Morocco in 2003 with the port starting operations in 2008. benefits to its hinterland. TMSA is an autonomous agency, entirely state-owned through non general budget vehicles like “fonds Hassan II” and the “Caisse de Dépôts et Gestion (CDG)”. Tanger Med owns the land and infrastructure. At the port TMSA is both the landlord Several factors may explain why Tangiers has done better as a catalyst of private investment than similar hubs. The and the port authority. Port terminal operations have been conceded (PPP) to World class operators, interested in location in Morocco and existence of an export flows to the EU explains this. Morocco has had an association investing in a transshipment hub. Overall TMSA initial investment has been about 4 billion USD. agreement with the EU since 1996, which makes the location in Morocco most conducive to take advantage of the The port of Tanger Med has three main activities: agreement. The choice of governance and the mandate of TMZ brought clarity and simplification of processes to the investors. The government also invested in the infrastructure to connect the zone to the port (critical for automotive) • The transshipment port which has two sites (TM 1 and TM2). When TM2 will be fully operational the total capacity of and more generally the port to the rest of the country: motorways (under ADM=Autoroutes du Maroc), and railway TangerMed will reach 8.5 MTEU, making Tanger Med the biggest container port in Africa and the Mediterranean. linkages. Those are important to link the plant (Renault and now Peugeot in Kenitra) to the car terminal at the port. • Export (import) of cars in specialized ships. Renault Tanger. Given topography, few activities are directly on the port site, most zones are closer to the city about 50 • Ro-Ro Ferry to primarily Algeciras (26 connections per day), mixing private vehicles and export/import trailers.). km away. Tanger Med handles 8.5 million TEU, over 450,000 cars (mostly exports and about 300,000 trailers (Ro-Ro). Enabling policies, including horizontal reform, have directly or indirectly contributed: The network of zones handled by TangerMed Zones (TMZ) subsidiary of TMSA includes: • Reforms with tax and customs and logistics which boosted competitiveness. Export oriented firms can benefit from the economic operator regime, which is applicable beyond SEZ, • Tanger free zone next to the city and the airport, which existed prior to TM • The government invested in logistics related initiatives from 2006, including through a dedicated agency: most • Renault and automotive city major logistics companies from Europe are present in Morocco. • Logistics zone next to the port • In the context of regionalism, the role of regions in promoting investment domestic or international has been re- • Two industrial parcs in Tetouan province targeting local firms and SMEs enforced (“Centre régionaux d’investissement”). Operators include Eurogate (Rotterdam), APM (Maersk) and a consortium involving CMACGM and the historical Moroccan handling company Marsa Maroc. 83 Female employment – Bangladesh Enhancing the gender dividend in labor-intensive activities Impact Context The Bangladesh economy generated more than 1.15 million new jobs per year on average since 2003, with Bangladesh experienced sustained per capita income growth and poverty reduction between 2003 total employment among the working-age population (age 15–64) growing at 2.4 percent annually. The and 2016, accompanied by strong job creation, steady structural transformation, and robust total level of employment growth was above growth of the working-age population and of the labor force productivity growth. over this period and women employment expanded by 4.4 percent per year between 2003 and 2013 – twice the national rate.. Much of this success can be attributed to increased labor incomes resulting from positive labor market developments. Bangladesh’s demographic transition, with the working-age population Moreover, employment outside the agricultural sector grew substantially faster (3.7 percent), and wage growing faster than the total population, and employment growth with wage employment growing employment grew by 5.7 percent annually— driven in particular by large-scale job creation in by 5.7 percent annually. manufacturing, mostly in urban areas. This growth in urban manufacturing jobs contributed to 4.4 percent annual growth in female employment, more than twice the rate of growth of the working-age population, A key driving factor was the large-scale job creation in manufacturing, mostly in urban areas, as the bringing millions of women into the labor force. Along with employment growth came strong income result of female employment, which expanded more than double the rate of that for the working- growth, with real wages among wage employees rising 4.9 percent annually over this period. age population as a whole, bringing millions of women into the labor force. As the apparel-specific wage premium rose, the male–female wage gap fell throughout the economy, not Government Interventions just in the apparel sector, in several countries. The falling wage gap shows that women’s wages were rising relative to men’s wages, suggesting that the entire economy may be affected by the change in a policy The government started with a collaboration in the textile/garment sector between a Korean affecting a single sector. This result is consistent with the idea that the increase in apparel exports coincides company (Youngone) and Bangladeshi company, in which knowledge and skills were transferred to with an increase in the demand for the factor used intensively in apparel— women—that may then have Bangladesh. That factory had around 250 workers who received training from experienced Korean significant long-run poverty-reducing effects. operators. Today, Kihak Sung's Youngone Corporation employs nearly 85,000 people around the More women in the labor market with a high share of wage employment world—of which 70,000 work in Bangladesh. Youngone, enlisted in the Seoul Stock Market, has an annual turnover of $3 billion dollars—and one-third of this revenue is from Bangladesh. The easing of FDI regulations and introduction of back-to-back letters of credit were complemented by the creation of new export processing zones. Moreover, the government encouraged and directed investments in RMG. It also adjusted its trade policy, so that low wages and the absence of import quotas allowed for a rapid expansion of the sector. The specialization in labor-intensive RMG exports created new and productive manufacturing jobs, many of which were taken up by women. At Bangladesh’s income level, the female employment rate usually declines with rising incomes, but it remained stable in Bangladesh. The RMG sector in Bangladesh is an example of how FDI and trade can have a transformational impact through knowledge spillovers. Source: World Bank 84 Exports in services – India Sequencing reforms tariffs, soft and hard infrastructure to reduce the cost of trade Context The transportation and logistics sector is an important enabling sector in any economy and plays a large role Impact in facilitating both internal and external trade. India has seen significant reforms in the transportation sector. The liberalization of the transportation sector has resulted in increased competition, improved Prior to liberalization, the transportation sector was heavily regulated and dominated by state-owned efficiency, and better services for consumers. It has also created new job opportunities and contributed to enterprises. However, with the introduction of economic reforms in the early 1990s, the government began the growth of the Indian economy. Specifically, as a results of the aviation reforms, currently, the largest to open up the sector to private players. This led to the entry of several private companies in the airline of the country in terms of fleet size and number of destinations, IndiGo, is a private airline employing transportation sector, including airlines, shipping companies, and logistics providers. over 26,000 personnel, including almost 4,000 pilots and close to 6,500 cabin crew. Moreover, the maritime shipping and port reforms have reduced the average turnaround time at major ports for a Government Interventions container significantly, from 8 days in 1990 to 3.5 days in 2005 (Mattoo et al. 2010). Air transportation was liberalized by removing the monopoly of Indian Airlines on running domestic routes in The reforms in backbone services sectors in India such as transportation also significantly increased the 1993-94 (Arnold et al. 2016), which led to the entry of competitors running domestic routes. Foreign direct productivity of firms in the rest of the economy, especially among manufacturing firms using these enabling investment restrictions in air transportation were also loosened, initially with a ceiling of 40 percent in 1997- services. It has been estimated that these services liberalizations raised the productivity of manufacturing 98. From 2004, private airlines were allowed to operate international routes. firms by up to 20 percent. Moreover, the increase in the productivity among manufacturing firms due to In maritime shipping, significant restrictions were removed, including the removal of state-regulated fares for reforms in the transportation were larger than the productivity increases from reforms in freight. Growth of the sector has been further facilitated by port reforms. Historically plagued by telecommunications, banking, or insurance (Arnold et al. 2016). inefficiencies, congestion, and bureaucratic red tape, India's ports underwent a significant overhaul through a The services sector liberalizations are measured by changes in an index of services restrictions. A one series of reforms initiated in the late 1990s and early 2000s (Arnold et al. 2016). While prior to the reforms, standard-deviation change in the policy index associated with telecommunications, for example, leads to a ports were mainly controlled by states, in 1997, FDI of up to 74 percent was allowed in the construction of 19 percent increase of productivity of manufacturing firms. ports and 51 percent for pier operation. Two years later, in 1999, the limit on FDI in port construction was removed entirely. Furthermore, restrictions that required shipping firms to obtain government approval for repairs at specific shipyards were removed. Restrictions on foreign ownership of ships were also removed. In road transport and logistics significant restrictions were removed as well, including the removal of requirements of vehicle registration and the removal of restrictions of foreign shipping companies on the transportation of containers from the originating location to the port. Ceilings on the issuance of permits for trucking companies were lifted, allowing for the emergence of larger companies in this sector. Logistical services were further facilitated by the removal of “octroi” duties on inter-state movement of goods. Road construction was further facilitated by laws allowing the levying of road tolls, which helped opening the door to private investment in the construction of roads. 85 Exports in services – Philippines Transforming itself as a global hub for business process outsourcing services Context Impact The information technology (IT) and business process outsourcing (BPO) industry in the Philippines has been a driver of The rapid rise of the BPO was enabled by removing restrictions to FDI into the sector. In less than a decade, the economic growth and job creation. Globally, the most commonly outsourced services are IT (54 percent), finance (44 Philippines have attracted large amounts of FDI into the BPO sector. The entry of multinational companies directly percent), payroll (32 percent), and customer services (22 percent) and the demand for outsourced services is projected to contributed to the job growth as individual back offices are typically quite large; for example, Accenture’s operations continue to grow. The Philippines has become a global hub for BPO and is the second largest provider after India. Services employed already 45,000 people in 2010, one of the largest employers in the country at the time. And many back-office in the Philippines focus on back-office functions such as human resources, IT, and finance, and customer support front- finance and accounting services operations have more than 10,000 employees each. office services. The sector has a robust voice sector (primarily call centers) but service exports also grew rapidly in medical The IT-BPO sector has become a major driver of job creation in the country. The IT-BPO sector in the Philippines added transcription, gaming, and animation. almost US$30 billion worth of revenues by 2021 and is the largest employer in the country. Employment grew from The strong growth of the IT-BPO sector was facilitated by the universal use of English. Call centers draw on previously zero in early 2000s to nearly 1.5 million workers in 2022 and is projected to expand the number of jobs to almost 2.5 underutilized labor pools (youth and female workers), hiring many young workers with high school diplomas. This large million by 2028. BPO jobs are also well paid: the average salary in the BPO sector is about three times higher than the labor force in the Philippines allows it to host big offshore services operations and to easily reduce costs for more country’s GDP per capita, reflecting the higher skills demanded by the sector. transaction-intensive activities by developing cities beyond metropolitan areas. The job growth was further facilitated by online outsourcing and job platforms which allowed smaller firms to participate. On oDesk, for example, the Philippines have the largest number of contractors in relation to their Government Interventions populations together with Bangladesh, India, Pakistan, and the United States. Investing in the quality of human capital allowed the Philippines to expand exports to higher-value services such as IT which require more trained personnel. One technology (CEDF-IT). When the association was established, Cebu had minimal presence of the IT industry. However, the association foresaw the opportunity and invested into improving quality of tertiary IT education, early IT skills development, and ensuring job prospects for IT graduates. CEDF-IT played a major role in attracting key international BPO and IT companies to the city over the last 15 years leading to development of a cluster employing 800,000 people in the Metro Cebu area. Liberalizing the telecommunications sector has raised the competitiveness of the BPO sector. For example, allowing for foreign market entry, including through greenfield subsidiaries, domestic private entity acquisition, and joint ventures, and easing criteria to obtain licenses has drastically reduced telecommunication costs since the 1990s which are a major input for the BPO sector. The Philippine business process outsourcing sector is characterized by high entry rates and is one of the most liberalized sectors in the country. It is intensive in IT-related services such as software development, animation, contact centers, and transcription. Since the early 2000s, for example, market entry by foreign firms is free as long as the foreign firm is staffed with professionals licensed to provide the service desired, mutual recognition agreement have been expanded automatically recognizing foreign licenses, and there are no separate requirements for foreign workers. By contrast, the Philippine retail sector has substantial restrictions to domestic and foreign entry, is dominated by a few incumbent firms, and only 20 percent of retail firms sell online. For example, foreign retailers that aim to establish a commercial presence need to pass prequalification procedures, meet minimum capital requirements, meet limitations to foreign equity participation, and have most of the board of directors be Filipinos. Export processing zones have provided high quality infrastructure services to firms and strong investment incentives. The authorities implemented specific programs to attract foreign example is the Cebu Education Development Foundation for Information investments by streamlining business registration, enforcing favorable regulations, and providing tax incentives. The Omnibus Investments Code consolidates the various investment incentives provided by the authorities in priority sectors such as the BPO industry, offering tax holidays, duty-free imports of equipment and machinery, and other benefits. 86 Urban opportunity zones – USA Incentivizing private investment in low-income and high-poverty communities Context U.S. investors currently hold trillions of dollars in unrealized capital gains  in stocks and mutual funds alone— a significant untapped resource for economic development. Opportunity Zones Opportunity Zones (OZ) are not the U.S. government’s first attempt to incentivize private investment in low- offer investors three specific incentives for cashing out of these investments and putting their income and high-poverty communities. However, the structure of the OZ incentive is a sharp departure from capital gains to work supporting the economic development of low-income communities. previous attempts, which have been characterized by limited uptake and geographic reach, enormous complexity, and ambiguous economic benefits. Thus, OZs are an experiment in what place-based policy can • The taxes due on any capital gains placed into an Opportunity Fund may be deferred achieve through a more decentralized, flexible, and scalable model.1 They are also an experiment in whether until December 31, 2026. an incentive linked to the tax treatment of capital gains can generate widespread and economically • Investors who keep their money in an Opportunity Fund for five years receive a 10 productive activity in low-income and high-poverty communities. percent step-up in basis on that original investment and an additional 5 percent after seven years. While many questions remain unanswered, the emerging evidence suggests that Opportunity Zones have already achieved a combination of expansive geographic reach, largescale private investment, and significant • Investors who hold their investments in Opportunity Zones for at least 10 years face economic effects that is unique in the history of U.S. place-based policy. no capital gains taxes on the new investments when they sell them. Government Interventions Impact Opportunity Zones (OZs) were designed with a simple premise: the tax code should encourage private investment in communities that are struggling to attract capital, create jobs, and lift residents out of • OZ investment reached approximately 3,800 communities from mid-2018 through 2020, poverty. Enacted by Congress in the Tax Cuts and Jobs Act of 2017, OZs were first proposed in the representing nearly half (48 percent) of the total number of designated OZ communities nationwide. bipartisan Investing in Opportunity Act, which was originally introduced in Congress in 2016. OZs For comparison, it took 18 years for New Markets Tax Credit (NMTC) investments to reach an provide federal incentives for certain types of long-term, productive investments in low-income urban equivalent number of communities. and rural communities nationwide. • OZ investment is going to communities that are substantially more economically distressed than the Opportunity Zones are low-income census tracts nominated by governors and certified by the U.S. rest of the country. Ranked from lowest to highest levels of need, they average in the 87th percentile Department of the Treasury into which investors can now make qualifying investments into new projects and enterprises in exchange for certain federal capital gains tax reductions. There are over for poverty, 81st for median household income, and 80th for unemployment. 8,700 Opportunity Zones in every state and territory. At the time of designation, 97.4 percent of these • Total OZ equity investment reached at least $48 billion by the end of 2020. This capital was raised communities qualified for OZ status according to the Treasury Department’s “low-income community” from roughly 21,000 individual and 4,000 corporate OZ investors and deployed into 7,800 Qualified (LIC) standard, while 2.6 percent qualified under the law’s provision allowing tracts adjacent to an LIC Opportunity Funds. to receive designation under certain circumstances. Fully 71 percent of Opportunity Zones communities met Treasury’s “severely distressed” definition. • OZ designation caused a “large and immediate” increase in new commercial and residential development activity such that the likelihood of investment in a given month jumped by over 20 A Qualified Opportunity Fund (QOF) is any private investment vehicle organized as a corporation or percent in designated tracts across 47 studied cities. partnership with the specific purpose of investing in Opportunity Zones. All qualifying investments must be made through QOFs in order to be eligible for the tax incentive. QOFs must register with the • Rather than crowding out local activity, OZ designations carried positive economic spillovers into Internal Revenue Service and invest at least 90 percent of their capital in qualifying investments inside neighboring communities and boosted development at a city-wide scale. • In addition to boosting Opportunity Zones communities. the supply of housing, OZ designations improved local home values by 3.4 percent from 2017 to 2020 with no observed increase in rents. 87 Skill development – South Africa Using an independent employment service providers Context Impact Youth Employment Service (YES) is a private sector-driven non-for-profit company, offering companies Thus, OZs are an experiment in what place-based policy can achieve through a more decentralized, flexible, B-BBEE recognition for investing in YES-facilitated work experience placements. The initiative addresses and scalable model. They are also an experiment in whether an incentive linked to the tax treatment of the youth unemployment challenge in South Africa by massively facilitating short-term job creation capital gains can generate widespread and economically productive activity in low-income and high-poverty and work experience for unemployed youth aiming to break the vicious cycle of unemployment and communities. lack of work experience. Since its inception, YES has worked with more than 1,500 sponsoring companies of which around 500 have Government Interventions already raised their B-BBEE level as a result of the intervention. Some 70,000 youth, 58% of them female, have so far been provided with job and work experience opportunities through the program, which With the launch of the initiative in 2018, the government (Department of Trade and Industry) issued represents an injection into the economy through allowances paid to youth of over R3.95 billion. amendments to the B-BBEE Codes, which introduces YES targets and allows for raising the B-BBEE recognition status by one to two levels if the YES targets are achieved or exceeded. Furthermore, the amendments include an improvement in the recognition of informal skills development expenditure if these are YES employees/learners. Only YES Measured Entities are eligible to benefit, i.e., YES holds the sole right of implementing the scheme. There are three different options, under which firms can sponsor employment/work experience of a young South African: (1) Companies place youth in their own company. (2) Companies cover the costs and youth are placed in host enterprises facilitated through YES implementing partners (IP) - the turnkey solution; as well as (3) Companies sponsor youth being placed in one of the three YES hubs to grow a new enterprise. At the moment, 70% of the YES job opportunities are provided through the first model and 29% through the turnkey solution, but YES plans to raise the share of youth to be catered for by implementing partners to 70 to 80%. Irrespective of which option a company chose, youth will be employed by the sponsoring firm Opportunity Zones (OZ) are not the U.S. government’s first attempt to incentivize private investment in low-income and high-poverty communities. However, the structure of the OZ incentive is a sharp departure from previous attempts, which have been characterized by limited uptake and geographic reach, enormous complexity, and ambiguous economic benefits. YES is overwhelmingly funded through fees from sponsoring firms94. Registration fees range from zero to R20,000 depending on the size of the firm; service fees depend on the package chosen: between R1,700 and R5,000 per youth for company-placed youth (Option 1) and R9,700 per youth for the turnkey option (Option 2 - placement in a host company). The YES package includes a pre-loaded smartphone for each learner, a supervisor app and a 12-months managing, monitoring and evaluation company portal. In addition, the sponsoring firm has to cover the monthly allowance for the youth of minimum R3,760 (minimum wage). The YES arrangement does not release the company from its SDL obligation and payment of UIF contributions. Since the YES-supported scheme (work experience) is not covered under PIVOTAL learning, firms cannot obtain discretionary grant funding from the learners or benefit from the Learnership Income Tax Allowance. However, they can claim the ETI benefits. Sponsoring companies can be of any size, but most are large corporations. 88 Skill development --Germany Promoting partnerships with companies through Workplace-based Learning (WBL) programs Context Impact Different models of inter-company partnerships in training has a long tradition in Germany. Partnerships between WBL increases the labour market relevance of skills development programs and the employability of their companies and special training providers are meant to jointly take over high quality training responsibility for graduates. There is ample evidence that WBL improves the quality and depth of skills development and a comprehensive occupational qualification, where employers alone would not be able to accommodate the full range is especially effective in supporting the transition from education to work. of competencies required. These partnerships are usually applied for apprenticeships and can take different forms, depending on special requirements, challenges and local conditions; the principle of sharing responsibility in training is Evidence from Europe indicates that countries with an established apprenticeship culture and high fully covered by the German Vocational Training Act. participation rates of youth in apprenticeship training, consistently experience relatively smooth transitions from school to work, low youth unemployment rates, and generally lower gaps between youth Government Interventions and general unemployment rates. Analyses of the outcomes of formal apprenticeships also clearly demonstrate that former apprentices fare better than their peers who graduate from school-based Typical forms of partnerships include: training. • Lead employer model: Small, specialized enterprises cannot cover all competencies required for a qualification WBL can also be beneficial for enterprises, providing a good return on investment. There is a general and venture into partnerships with other enterprises that can cover the remaining elements. The apprenticeship agreement that apprenticeships can be worthwhile for employers, if and when the framework contract is signed and managed by the lead employer, and usually the majority of training is conducted in the conditions are conducive, and the system is well-designed. Studies have demonstrated positive returns on lead enterprise. Selected training modules are offered by the partner(s) which benefit from the training apprenticeship training for the companies involved, including small companies, depending on design experience of the lead employer and possibly other arrangement that may improve the training quality in the factors such as the amount of the apprenticeship allowance and other costs involved in training, the partner enterprises, including for example, using workshop and training facilities of the lead employers. time of the WBL program learners spend in the workplace, the wage differential between learners and normal workers, the overall training duration and the level of government support to companies • Outsourcing of training: SMEs that cannot cover all training modules required for a qualification may outsource employing apprentices. certain parts of the training to education providers, inter-company training institutions, or also to other companies. Flexible outsourcing models are possible depending on requirements. The regular employer, who Significant long-term benefits occur, furthermore, for companies that employ learners after signs the apprenticeship contract, will cover the costs of the training that is contractually delivered by the graduation stemming from better availability of skilled labour, saved recruitment costs, better match partner. between the skills profiles of workers and company-specific skills requirements, increased staff loyalty or reputational gains for the company. The latter benefits, however, only occur if companies can and do • Training consortia: In order to improve the depth and quality of training, several enterprises team up on equal retain learners after the end of the program. In India, for example, small businesses experience footing to exchange and rotate apprentices among each other. In line with its specific expertise, competence and difficulties in retaining apprentices after graduation specialization, each partner takes over selected parts of the training. Each apprentice has a regular employer, who signs the learning contract and is responsible for the management and quality of the apprenticeship and for ensuring that the learner is provided with the full range of competencies. Training consortia are a particularly flexible partnership, which may or may not be based on formal agreements between the partners. • Training associations (“Ausbildungsverein”): These are formal training organizations that take over a range of formal functions and organizational services around apprenticeship training. Functions and services may differ. They would typically include recruitment, administration of the learning contract, payment of apprenticeship wages, quality assurance, trade test preparation, support during crises and disputes, etc. Training associations are funded through membership fees of the participating companies. Inter-company training partnerships are promoted through special programs. A recent subsidization program of the Federal Ministry of Education and Research has incentivized training partnerships and outsourcing of training during the Corona pandemic to facilitate a continuation of training in case a company has to temporarily interrupt training activities. Chambers and other competent bodies provide information and support to enterprises to access such support programs 89 Skill development – India and Nigeria Reaching to clusters The Indian IAI Grant Scheme. The Nigerian IDEAS project Context Context The Industry Apprenticeship Initiative (IAI) Grant Scheme was launched in 2019 with funding from The World Bank-funded Innovation Development and Effectiveness in the Acquisition of Skills the World Bank-assisted Skills Strengthening for Industrial Value Enhancement (STRIVE) (IDEAS) Project of the Nigerian Government aims to introduce improved and structured project. It introduces for the first time in India systematic support to business associations (called apprenticeship training in selected trade clusters throughout the country. ‘industry clusters’) for getting involved in promoting and organizing apprenticeship training among its member companies Government Interventions Government Interventions In close cooperation with local trade associations, the project delivers a comprehensive capacity development intervention package to selected informal sector clusters, including (i) organizational The IAI scheme aims to: (i) support the emergence and further development of dual apprenticeship development support to trade and cluster organizations, and support to set-up digital platforms and programs in line with labour market needs; (ii) encourage and enable SMEs to become business networks; (ii) skills upgrading training, digital literacy training, pedagogical and business providers of formal apprenticeship training; (iii) strengthen the involvement of business management training and environmental awareness creation for MCPs; (iii) supplementary basic skills, associations/industry clusters in apprenticeship training; and (iv) create capacities among theory, soft and digital skills and entrepreneurship training for apprentices, as well as foundational skills apprenticeship stakeholders (basic training providers; firm management and supervisors of training as needed; (iv) access to NSQF-based assessment and certification for formal recognition of skills apprentices; business associations) to design and implement apprenticeship training programs. to both MCPs and apprenticeship completers; and (v) business development support through mentoring, limited provision of tools and shared modern equipment, and facilitation of access to other The IAI scheme provides grant funding to selected industry clusters (ICs) to implement a pre-defined needed business development services. IAI. An IAI is a project that promotes demand-driven, quality apprenticeship programs in a dual training mode provided by members of an IC. An IAI is always under the leadership of an IC. An Impact IAI may support the introduction of any registered apprenticeable or dual trade, or alternatively new, needs-based apprenticeship programs, developed by the cluster and An impact evaluation to assess the impact of the interventions on both, the benefitting registered under the Optional Trade system (an arrangement in India that allows companies to apprentices as well as the MCPs, is ongoing run apprenticeship programs which are not designated as apprenticeable trades). In the latter case, costs to undertake needs assessments and curriculum development would be covered under the grant. In order to be eligible for grant funding, an IAI must always include a quality assurance plan, procedures for reporting on learning progress of apprentices (i.e. logbooks), and a training and capacity building plan for supervisors and managers in participating companies that will engage apprentices. Impact An impact evaluation to assess the impact of the interventions is ongoing. 90 Inclusive finance – Egypt Promoting digital payment in underserved areas Context Impact Egypt has the following barrier to electronic payment acceptance: The pilot had tangible (preliminary) results as it issued 146K prepaid cards to women and 97K (i) it has high preference for cash for retail payments and a large informal economy; pre-paid cards to men. The issuance of the pre-paid card let to a substantial increase in remittances received by women (48% increase in women remittance receivers; 48% increase in (ii) low financial/digital literacy levels and lack of trust; the number if remittances received by women; 41% increase in the value of remittances (iii) low adoption of electronic payments for key use cases bank led model for payment services, mobile received by women). network operators need to partner with banks to provide mobile wallets); (iv) banking practices and economics of acceptance (economic incentives skewed against acquirers due to Further, 122 new merchants were onboarded; there was 13% increase in POS transactions; and caps on acquiring margins, low profitability for acquirers; banks make it convenient for consumers with 49% increase in ATM transactions. The cash back incentive for digital payments was seen as very high availability of ATMs; acquiring banks do not actively recruit merchants); popular. and (v) government tax policies and incentives not working in the right direction (high import duty on Point of Sale terminals; high sales tax; and no tax incentives for merchants). Government Interventions Egypt adopted a holistic approach with a range of interventions. On a policy level the President is heading a National Council of Payments to coordinate intersectoral financial inclusion initiatives including gender strategy for financial inclusion, fintech strategy and digital initiative. On a legislative level banks are mandated to push financial inclusion; a Law was adopted to promote cashless payments for corporate and government payments; the licensing regime for fintech and e- payment activities was updated; and more. On practical level the Central Bank piloted a set of interventions in 2 provinces and make sure that there were several banks supporting this initiative. Key project pillars were: (i) setting up a financial literacy and marketing campaign; (2) design effective financial products (prepaid card); (3) develop financial incentives (cash and reward points). It was also recognized that there was need for access point (ATM. POS, bank branches and bank agents) as project enablers. The pilot had clear target: women using digital payments, in two governorates, for 1 year. 91 Inclusive finance – Brazil Trusting Open finance Context Impact More and more countries are implementing open finance, a multilateral and open data-sharing Brazil’s rapid expansion of open finance shows its potential to transform financial regime that enables all parties that meet defined requirements to exchange data, including services. Less than two years after its launch, Brazil’s open finance ecosystem reported customer data. The policy motivations for open finance range from increasing competition in over 27 million customers with 41 million accounts participating as of September 2023. concentrated financial markets by allowing new entrants to engage with consumers and their financial data more easily; to encouraging product innovation through better consumer data and enabling payment initiation; to deepening financial access and inclusion for consumers. Of those who joined: 15% were men and 7.4% were women; Government Interventions The promise of better terms of credit is currently the primary driver of open finance Brazil early success and sharp uptake can be attributed to enabling factors such as the adoption in Brazil. For those that have joined open finance, the main motivations were implementation of the interoperable, fast payments system (Pix), and a vibrant fintech market increasing their credit limits (55%) and improving the conditions of a loan (20%), (e.g., Mercado Pago, PicPay, NuBank). followed by the convenience of having a consolidated view of their accounts (14%) and As a precondition to open finance, account access and regular usage should be key better control of their finances (12%). For those who haven’t joined open finance, the considerations for impact to expand beyond higher income segments. Smartphones are main reasons were lack of awareness (31%), lack of interest (26%), and security therefore an easy and readily available channel to access open finance services and provide concerns (9%). necessary consent through an app. The existence of key open finance enablers, however, may not guarantee the current uptake will The outlook is bright as uptake has been faster than in other markets and there are continue to scale, penetrate lower-income segments, and deepen financial inclusion. A key promising use cases that are emerging that are already seeing adoption amongst element of open finance regimes is that data sharing is conditioned on customer consent. This requires customers to be aware of the option to participate in open finance and to be willing to customers. Key use cases include credit scoring, personal financial management (PFM), exchange their data for additional value, such as a lower interest rate. Among those who were personalized offers (including but not limited to, credit cards aligned with the spending willing to share data, 27% reported having joined open finance. Again, we found that women, profile of individuals, better credit limits, and discounts on specific stores), account low-income customers, and those with more limited banking use have lower adoption rates onboarding, deposits between accounts of the same individual, P2P payments using funds from different accounts, and business financial management. 92 Inclusive finance – Burkina Faso and Madagascar Access to Finance for MSMEs – portfolio guarantee Context There are currently nine PFIs participating. The portfolio partial credit guarantee is a (50-50) risk sharing facility that usually has a Madagascar multiplier of 2 but it could go to 3 or exceptionally to 4. With a multiplier of 2 and risk The Portfolio Credit Guarantee Scheme in Madagascar started in 2014 with a sharing of 50-50 1 dollar of endowment can support an amount outstanding of credit MSME window and was followed by an agriculture window in 2017 and crisis guaranteed of 4 dollars. window in 2021. It was managed by a private company licensed by the central bank. Government Interventions At the beginning there was only 1 bank participating in the scheme, today 9 PFIs (banks and MFIs) are participating. Burkina Faso Critical characteristics of the portfolio partial credit guarantee are the following: Impact (1) automaticity: each credit which meets eligibility criteria must be entered on the guarantee. This is to avoid adverse selection (meaning that participating financial Burkina Faso institutions select ‘bad’ credits to be guaranteed by the scheme; In total cumulatively 3,521 borrowers 6,934 credits for an amount outstanding (2) The participating financial institution (PFI) does the credit analysis. This means that of USD 75.5 million US dollars. It is important to note that there are 69% new there is no need for the scheme to redo the credit analysis; borrowers in the MSME window, 54% new borrowers in women window. (3) There is fast registration on the guarantee as it is a mass product; Madagascar (4) Payment of claims should happen within thirty days; For MSME window cumulatively July 2014 to May 2023, 12,375 borrowers (of which 60% are new borrowers) with 18,715 credits for an outstanding amount (5) he guarantee should be silent to prevent moral hazard; guaranteed of USD 179 million with an endowment of 12 million dollars. It is (6) It is important to have favorable treatment of capital asset ratio and provisioning. important to note that the MSME window is profitable. The Portfolio Credit Guarantee Scheme in Burkina Faso has four windows: (i) MSME; (ii) agriculture; (iii) women; and (iv) crisis. The scheme is managed by a guarantee fund licensed by the central bank. The private sector participates in its capital. 93 Inclusive finance – Sweden Access to Finance for MSMEs – early-stage finance Context Improving the business environment, strengthening the entrepreneurship ecosystem and Many of these receive support from local, regional, and national governments creating new channel of finance (away from traditional bank financing) can be catalytic (e.g. Minc in Malmö and Sting in Stockholm); (ii) innovationskontor (Innovation for MSMEs development. Early-stage capital formation by businesses and funds is often Offices). These offices, funded by Vinnova, are attached to universities and limited by the scarcity of institutional and individual investors in both businesses and provide support to commercialize academic research; (iii) Educational and funds. Networking Initiatives through organizations like Startup Sweden organize boot camps, training, and networking events that bring together entrepreneurs, Sweden is among the fastest growing European hubs by Venture Capital (VC) funding, investors, and experts. and its private equity (PE) industry is also growing. This is partly thanks to holistic approach implemented by the Swedish government over the past 20 years, combining Financial instruments tailoring: (i) Innovation Grants: The Swedish Innovation (1) policies, regulation and tax reform: (2) ecosystem development; and (3) financial Agency, Vinnova, offers various grants to startups and research projects that instruments tailoring. have the potential to lead to commercially viable companies; (ii) Investment Promotion: Almi, a government-owned company, provides financing to startups, Government Interventions ranging from the ideation phase to early growth. It offers both loans and venture Policies, regulation and tax reforms: (i) simplified regulatory processes as the Swedish capital through its subsidiary, Almi Invest; (iii) Soft Loans for Innovation Projects: Companies Registration Office (Bolagsverket) has streamlined procedures for company The Swedish government has provided soft loans (loans with better terms than registration, making it easier for entrepreneurs to start businesses; (ii) e-residency and market rates or which are interest-free) for innovation projects through work permits as the Swedish Migration Agency has made it easier for tech talent and institutions like Vinnova. (iv) Co-Investment Schemes: The government, often entrepreneurs from outside the EU to work or start a business in Sweden; (iii) promotion through Almi Invest, co-invests with private investors in startups, thereby of Internationalization: Business Sweden, an organization jointly owned by the reducing risk and stimulating more private investments. government and the industry, assists Swedish companies in expanding abroad and attracts foreign investment to Sweden; and (iv) Tax reforms such as capital gains tax which helped in encouraging investments, tax deductions for micro companies to Impact stimulate job creation and growth, R$D tax credits to incentivize investment in research The impact in Sweden as a result of the holistic approach has been enormous. and development, and employee stock options to help startups attract and retain talent. The total transaction value between 2007 – 2022 amounted SEK 1,03 trillion Ecosystem development: (i) Support for Business Incubators and Science Parks as (USD 100 billion). The number of companies invested in during this period Sweden has numerous business incubators and science parks that support startups. amounted to 6,714. 94 Inclusive finance – Nigeria Infrastructure Credit Guarantee Context Impact The Infrastructure Credit Guarantee Company Ltd. (InfraCredit) is a private company established in 2017 by GuarantCo As of December 31, 2021, eight projects had reached financial completion for the equivalent of N60.3 and the Nigeria Sovereign Investment Authority to provide credit enhancements for Nigerian local-currency debt billion (equivalent to US$159.4 million). instruments for infrastructure financing. Credit guarantees provided by InfraCredit are structured as full-wrap instruments covering 100 percent of Through these instruments, InfraCredit addresses the lack of long-term local-currency bank financing by enticing debt service payments. institutional investors (such as pension funds and insurance companies) to buy infrastructure long-term assets (bonds). These credit enhancements (guarantees) are irrevocable and unconditional. InfraCredit guarantee obligations Based on its available capital (that is, core capital, callable capital, and subordinated debt), InfraCredit’s are secured by (a) the right to reimbursement of any amount paid against the issuer under a recourse agreement par-to-capital ratio was 0.5x at the end of March 2021. between InfraCredit and the issuer, (b) a first lien on specific properties or assets of the issuer, and (c) a first floating charge over the issuer’s remaining assets under a security deed. Government Interventions Tier Type Financier Amount % Purpose The business focus of InfraCredit is on reducing the risk associated with local-currency corporate and project bonds, US$ with the purpose of mobilizing investments from Nigerian institutional investors and pension funds and deepening the domestic debt capital markets. InfraCredit maintains a local AAA credit rating from both Agusto & Co (Nigeria) and GCR Ratings (South Africa). According to both credit agencies, under current conditions, the amount of the financially sustainable credit guarantees portfolio with InfraCredit’s capital base (from global investment grade investors) is 1 Core National Sovereign 82 MM 46% about 5 to 1. With a capital base of US$178 million, the potential amount of credit guarantees in Nigerian naira (N) for capital Investment Agency the local currency capital market is equivalent to US$890 million. (NSIA) Capacity to provide To address market barriers constraining its deal flow in Nigeria, InfraCredit is working to create strategic partnerships with donors and other DFIs that could unlock new sources of early-stage capital and promote well-structured, African Finance Partial Credit bankable infrastructure projects. The goal is to bring the projects to market, thereby expanding the market for good- Corporation Guarantee for US$ quality operating infrastructure projects for institutions like InfraCredit. The effort is to create a facility that is complemented by the structuring of new financing products to support early-stage infrastructure investments such as Infraco Africa 865 MM (5 times its contingent refinancing guarantee products (to refinance construction equity and loans in local currency) and a PPP capital) guarantee product supporting offtake payments by a government agency or SOE (similar to IIGF in Indonesia). The 2 Subordin KFW 71 MM 40% interaction of the proposed facility and the new financing products will provide financial support across the full cycle ated African Development of the project and accelerate deal flow that will help scale up InfraCredit’s guarantee portfolio. Capital Bank GuarantCo and InfraCo Asia are replicating the InfraCredit experience in Pakistan. In November 2020, GuarantCo launched a private credit guarantee institution (InfraZamin Pakistan) to provide credit enhancements to tap into local currency pools of liquidity held by institutional investors in Pakistan. Shareholders (InfraCo Asia and Karandaaz) are providing a US$25 million equity contribution complemented by a contingent capital line provided by GuarantCo in 3 Callable Guarantco 25MM 14% the amount of US$50 million. Leverage of these resources could be close to 5 to 1 in the first five years, supporting an Capital issuance amount of project and corporate bonds in local currency equivalent to US$375 million. In short, Infracredit provided partial credit guarantees supporting debt in local currency to finance sustainable infrastructure. Government, Multilateral Development Banks, donors and institutional investors were able to join Tot 178MM 100% forces. This allowed Infracredit to have the capacity to provide US$ 865 million of Partial Credit Guarantees with only US$ 178 million of capital. Money that is being used to support infrastructure investment in for instance energy and al transport. 95 Rethinking the government – Canada Program review: identifying which programs are necessary and not the ones to cut Context Impact During the election campaign of 1993, all political parties emphasized economic growth and job creation as priorities, Over a three-year period (1994-1997), Canada eliminated a sizable budgetary deficit. By 1998-99, all with comparable reference to deficit reduction. Program Review decisions were implemented. Canada ran consecutive surpluses until 2007-08. The Program Review exercise was initiated in May 1994 and implemented over the following five years. This program Program Review decisions were announced in Budget 1995 and confirmed in the budget legislation, was less about ‘what to cut’ and more about ‘what to preserve’ to give Canada the comparative advantages needed to affording them legal protection. A team consisting of the Program Review Secretariat and departmental prosper in the future Program Review coordinators was established to oversee implementation. A second round of Program Review took place in 1995, focusing largely on horizontal issues that cut across departments. This would Government Interventions yield some additional measures that were announced in Budget 1996. Program Review was a broad-based exercise involving all departments and organizations reporting to a minister, and As a result of Program Review, program spending (which includes all spending except interest payments on through a minister to Parliament, including agencies. the public debt) declined in absolute terms by over 10 percent between 1994-95 and 1996-97 (See Figure). Half of these reductions were the result of changes to statutory programs, including employment insurance One of the most important characteristics of the Program Review process was the reliance on ministers and deputy benefit payments to individuals and fiscal transfers to the provinces. Some program spending, such as for ministers, equivalent to the UK’s Permanent Secretaries, as the architects of departmental reforms. Minister and aboriginal peoples and children, was increased. deputy ministers as a team were given the responsibility of coming forward with a common proposal for the future role of the department in serving Canadians, taking into account the GoC’s three-year fiscal plan. This approach Program Review had a significant impact on the size of the Public Service. Over five years, Public Service ensured a strong link between policy choice and policy implementation. employment declined by 45,000 employees, a reduction of 19 percent (see Figure).. This included 8,000 employees whose positions were transferred to the private sector, the not-for-profit sector or to other These tests served as the conceptual framework for the exercise. They were framed as six questions: levels of government. 1. Does the program or activity continue to serve a public interest? The Program Review’s success drew on lessons from earlier efforts aimed at achieving savings including 2. Is there a legitimate and necessary role for government in this program area or activity? a 1985 task force review which only saw limited expenditure reductions. This included the realization that cuts and freezes to services in an undifferentiated way have significant perverse effects. It also 3. Is the current role of the federal government appropriate or is the program a candidate for realignment with the included the recognition that efficiency measures or ‘doing more with less’ are not viable solutions to provinces? eliminate a sizable deficit. These measures may help with internal reallocations from lower to higher priorities but are not a substitute for making choices about the relative importance of government 4. What activities or program should, or could, be transferred in whole or in part to the private or voluntary sector? programs. Eliminating a large deficit requires repositioning the role of the government. 5. If the program or activity continues, how could its efficiency be improved? Effective governance of the process was key to the Program Review’s successful implementation. Three 6. Is the resultant package of program and activities affordable within the fiscal restraint? If not, what programs or committees including a steering committee of deputy ministers, a special cabinet committee, and finally, activities should be abandoned? the whole cabinet reviewed departmental proposals. The deputy ministers steering committee chaired by the head of the public service provided technical expertise and peer review of departmental proposals before sharing proposals with a cabinet committee chaired by the Minister Responsible for Public Service Renewal. The process was supported by a small secretariat of seconded officials within the cabinet office who worked with Program Review coordinators within departments. Another key lesson from Canada’s Program Review is that ambitious reforms require a broader acceptance by the public and political commitment that cuts across party lines. The government managed to build broader public acceptance of expenditure cuts by raising public awareness of the challenge posed by an unsustainable public debt and securing buy-in from political parties across the spectrum. This broader public discussion on the challenges created by the budget deficit laid the groundwork for eventual action. 96 Rethinking the government – Vietnam Creating a e-portal to accelerate administrative procedures Context Impact The Vietnamese National Public Services Portal was launched on December 9, 2019, and already By October 2023, there have over 14 million transactions completed on the e-portal or displayed nearly 300 online services and more than 6 million files processed online in 2020. The about 2/3 of all government administrative procedures over the year. project keeps on supporting the deployment across the country and improvement of the Portal, whose attendance doubles every month since its official launch. Vietnam aims to have 50% of The portal provides a ranking of performance by ministries and provincial governments (see administrative procedures handled online by 2023 as part of its efforts to increase the proportion of map). It also shares details n transaction completed on time (about ¾) and those that are people and businesses using online public services and digital platforms delayed. Under the plan, Vietnam will complete the information system for managing administrative Government procedures at the ministerial and provincial levels and integrate it into the national online public services portal and the one-stop public services system in 100% of the ministries, The portal at http://dichvucong.gov.vn consists of six components, namely national database on branches, and localities.. administrative procedures and the frequently asked questions and answers related to the procedures, on-time login and verification system to connect with ministerial and provincial-level public service portals, e-payment system, opinion section for citizens and enterprises, integrated public services of ministries, agencies and localities, and online supporting services. This platform offers 31 per cent of public services at level 4 of digitisation, allowing businesses and individuals to file official documents online, integrate them into a database, make contactless payments and receive virtual responses from government agencies. The transactions traditionally taking place between local elites and businesses are now digitally integrated into the national portal, reducing opportunities for corruption. It offers five online public services in all 63 provinces and cities, including issuance of driving licenses, announcement of promotion activities, reissuance of health insurance cards, provision of electricity services, and payment of electricity bills. To improve online public service use efficiency and encourage people to use online services, Ho Chi Minh City last year reduced fees by 50% for six kinds of services. Quang Nam has also decided to reduce fees by 50% for eight types of fees and five types of charges for those who settle administrative procedures through levels 3-4 online public services. Several relevant agencies have been tasked to prepare infrastructure and fulfil cyber security conditions to connect national databases. They have been instructed to use data for the implementation of online public services by December 2023. Ministries and agencies must work to improve the capacity and quality of services and expand connectivity, surveillance, and access control over data transmission networks by September. The government has also organised training for at least 100,000 civil servants by December to meet personnel demands. Source: Government of Vietnam 97 Urban development– Asian cities Improving spatial planning through digital platforms Impact 1.Improved urban planning. In Dhaka, Bangladesh, the World Bank supported the development of Context GeoDASH, a public geospatial data sharing, management, and visualization platform that promotes Many cities are confronted with the following challenges: interagency approaches to urban planning and disaster risk management (DRM) by facilitating the sharing of data, effort, resources, and infrastructure between agencies. The platform has been used • Lack of rudimentary data: Data that is incomplete, unavailable, and/or of poor granularity inhibits to assess the current conditions of schools regarding their infrastructure, water and sanitation cities’ understanding of service provision demand, socioeconomic and physical vulnerabilities to facilities, access to roads, and disaster resilience. Geospatial layers have also been used to produce external shocks and natural hazards, etc. cyclone risk maps intended to guide investment plans for cyclone shelters in urban and rural areas, as well as a coastal embankment improvement project focused on improving vulnerable coastal polders • Lack of data sharing, integration, and maintenance: Geospatial information has been typically to address erosion. Similarly, the World Bank is currently supporting the development of a SPP in Can collected in organizational silos; resulting in data duplication, and the use of different standards, Tho, Vietnam that will integrate spatial and non-spatial data onto a publicly accessible web portal, formats, and classifications. allowing governments, businesses, and citizens to access geospatial information for urban planning, • Lack of tools that enable data-driven analyses and planning: Digital modelling and data analysis is business services, transport and traffic management, DRM, and other applications. crucial develop interventions that optimize urban growth, especially to promote dense, low carbon, 2. Improved infrastructure asset management. In Yunnan, China, the province aimed to expand its and resilient development. highway network to facilitate economic development, but it lacked asset management systems and • Lack of digital platforms that harmonize data collection, reporting, and integration across integrated databases that could monitor road conditions and natural disasters, as well as optimize systems: Data availability, access, and interoperability between various databases and systems are road maintenance strategies. An integrated management information system was established with necessary to facilitate institutional collaboration, especially when addressing complex urbanization support from the World Bank to collect data on vehicular traffic and the performance of large issues such as disaster risk, spatial planning, and infrastructure/asset management. infrastructure projects. The data was used as feedback into decision-making and performance evaluation of highway assets. Government 3. Increased resilience to climate change. In Sri Lanka, the World Bank helped to develop RiskInfo, a Spatial Planning Platforms (SPP) are integrated data sharing platforms, that can transform analog systems public, web-based disaster risk information platform that allows for the collection, storing, to improve data acquisition, interoperability, and integration across various data systems, laying the processing, sharing, and analysis of geospatial data, including high-quality aerial imagery, risk groundwork for smarter urban planning and management. SPPs can act as a centralized data repository exposure data, historical flood maps, and land use maps. The platform is used to develop local-level that enables vertical and horizontal data sharing between different levels of governments and across multi-hazard risk maps that enhance understanding of disaster exposure, which supports disaster public and private organizations. planning and preparedness, emergency response operations, and prioritize and execute resources for recovery and financial assistance. Timely and reliable data that allows for disaster monitoring in Efficient collection and sharing of relevant data are essential for scenario planning to inform decision near or real time has allowed for more effective institutional coordination in Sri Lanka especially making in numerous applications such as urban planning, disaster risk management, public financial during an emergency response. management, transport, citizen, and business services, etc. It also reduces fragmentation and information asymmetries, which improves institutional coordination and implementation efficiency. For instance, spatial data can be layered with other data (such as poverty and infrastructure distribution) to model the drought and flood risks of its urban areas and potential physical, economic, and social impacts, allowing decision-makers to target high-risk areas with climate-resilient investments or target social safety net programs and assistance delivery mechanisms to vulnerable communities. SPPs can support governments to develop integrated land use, housing and transport plans that identify high-priority infrastructure investments in electricity distribution, public transport, road network expansion, and water supply and sanitation. Clear capital investment plans can then form the basis for a coherent financing strategy based on potential revenues. These core infrastructure investments can guide development away from risk- prone areas and sprawl toward denser, transit-oriented, low carbon cities with more green and livable areas. 98