Economic Premise
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The Economic Premise series summarizes good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank.
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Publication
How to Avoid Middle-Income Traps?: Evidence from Malaysia
(World Bank, Washington, DC, 2013-06)Malaysias structural transformation from low to middle income has made it one of the most prominent manufacturing exporters in the world. However, in the competitive global economy, like many other middle-income economies, it is sandwiched between low-wage economies on one side and more innovative advanced economies on the other. What can Malaysia do? Does Malaysia need a new growth strategy? -
Publication
A Changing China : Implications for Developing Countries
(World Bank, Washington, DC, 2013-05)Three decades of rapid growth and structural change have transformed China into an upper-middle-income country and global economic powerhouse. China's transformations over this period wielded increasing influence over the development path of other countries, either directly through bilateral trade and financial flows or indirectly through growth spillovers and terms of trade effects. Looking ahead, as China embarks on a new phase in its development journey, a phase characterized by slower but higher-quality growth, the economic landscape facing the developing world is expected to be redefined yet again. As China changes, so will its interactions with the outside world. China is expected to remain both a market and a competitor, but its changes are likely to lead to new opportunities for many and new challenges for some. Key questions in this respect are: (i) how will the level and composition of China's import demand evolve as its economy slows and rebalances; (ii) to what extent will the presumed out-migration of labor-intensive manufacturing materialize and create new opportunities elsewhere; and (iii) how quickly will China move up the value chain and redefine its competitive advantage in the global marketplace? How these uncertain long-term developments affect individual countries will depend on differences in total supply chain costs, resource availability, and innovation capability. As in the past, China's transformations are expected to put formidable pressure on countries to adapt and reform, requiring both political will and entrepreneurial capacity, in a collective race where success will be measured against a rapidly moving frontier. -
Publication
Can Open Service Sector FDI Policy Enhance Manufacturing Productivity? Evidence from Indonesia
(World Bank, Washington, DC, 2013-02)Drawing on the findings of recent research, this note examines the extent to which changes to policy restrictions on foreign direct investment (FDI) in the Indonesian service sector affected the performance of downstream manufacturers during 1997-2009. The analysis uncovers two important findings: first, that relaxing restrictions toward FDI in service sectors was associated with improvements in the perceived performance of those sectors, and second, more importantly, that this relaxation accounted for 8 percent of the total observed increase in manufacturers' total factor productivity (TFP) during this period. The results show that these TFP gains accrue disproportionately to those firms that are relatively more productive and that gains are related to the relaxation of restrictions in the transport as well as the electricity, gas, and water sectors. TFP gains are associated, in particular, with the relaxation of foreign equity limits, screening and prior approval requirements, but less so with discriminatory regulations that prevent multinationals from hiring key personnel from abroad. -
Publication
South-South Cooperation : How Mongolia Learned from Chile on Managing a Mineral-Rich Economy
(World Bank, Washington, DC, 2012-09)Mongolia's mineral-rich economy was hit extremely hard by the global downturn during 2008-9, when copper prices plunged, external demand fell, and growth collapsed. The shock exposed serious underlying weaknesses in the management of the country's natural resource wealth, particularly the lack of policies to insulate the economy from commodity cycles and real exchange rate appreciation pressures, an inadequate safety net, and poor public investment planning. These issues gained further urgency with the signing of a major copper mining deal in 2009 that further increased the country's mineral dependence. As part of its reform efforts and with the assistance of the World Bank and the International Monetary Fund (IMF), the government began an intensive south-south exchange, notably with Chile, another major copper producer, on strengthening the policy environment. The dialogue proved critical in the passage of several landmark laws within the space of a few years, including a fiscal stability law modeled after Chile, and the accompanying integrated budget and procurement and social welfare laws. These reforms will be crucial in managing the boom-bust cycle of mineral prices and mitigating Dutch disease effects by anchoring a prudent countercyclical fiscal policy, strengthening public financial management, increasing savings, and providing a fiscally sustainable social safety net targeted to the poor. -
Publication
Capital Account Liberalization : Does Advanced Economy Experience Provide Lessons for China?
(World Bank, Washington, DC, 2012-02)The initial post World War II pursuit of capital account liberalization (CAL) by advanced economies was Europe-centric, with roots in a broader political rather than economic agenda of greater European integration. In continental Europe, CAL was addressed mostly through the adoption of multilateral instruments and codes. In contrast, CAL by the United States and United Kingdom was pursued unilaterally, motivated by their status as global reserve currency issuers and global financial centers. China's situation is fundamentally different. China today has no equivalent to the European political motivation for CAL or the domestically driven financial motivation of the United States or the United Kingdom. And while China may have long-term aspirations to be a global reserve currency issuer, the extent to which it internationalizes its currency is constrained by powerful domestic economic and political interests that continue to benefit from an export-led growth model underpinned by a pegged and undervalued exchange rate, both of which are difficult to maintain with an open capital account. Alongside China's overarching concern with the maintenance of financial and economic stability, these factors imply a different path for China than paths taken by advanced economies, with significant acceleration in the gradual pace of liberalization unlikely without accelerated development of domestic constituencies that traditionally support CAL. -
Publication
East Asia and the Pacific Confronts the “New Normal”
(World Bank, Washington, DC, 2010-07)Developing East Asia is leading the global economic recovery, although performance varies across the region. In some countries, the monetary stance is already being tightened in light of emerging inflationary pressures; but it is premature to withdraw the fiscal stimulus until the global recovery is on a firmer footing. Fortunately, most countries in the region have adequate fiscal space and relatively low debt burdens. To ensure that the momentum of the recovery transitions into sustainable and inclusive growth over the medium term, the governments in the region must once again focus their attention on medium-term structural reforms. This means different policy priorities in different countries especially given the diversity of the region. In addition, the region faces two common priorities regional economic integration and climate change. Making progress on both fronts will be critical to the region's medium-term prospects. -
Publication
Subnational Debt Finance and the Global Financial Crisis
(World Bank, Washington, DC, 2010-05)This note focuses on the impact of the global financial crisis on subnational debt financing. The report approach the following questions: why is subnational debt financing important? What are the impacts of the crisis on the fiscal balance and financing cost of subnational governments (SNGs)? What explains the variations across countries in the ability of SNGs to proactively address the threat of fiscal deterioration? And, equally important, what are the long-term structural challenges facing SNGs in sustainable financing of infrastructure and social services? -
Publication
Agriculture Public Spending and Growth : The Example of Indonesia
(World Bank, Washington, DC, 2010-04)This note analyzes the trends and evolution of public spending in the agriculture sector in Indonesia, as well as its impact on the growth of agriculture during the period 1976-2006. Public spending on agriculture and irrigation had a positive impact on agriculture growth during that period, whereas public spending on fertilizer subsidies had the opposite effect. As Indonesia continues its efforts to revitalize the agriculture sector, public spending should be directed at improving the provision of public services rather than at subsidizing private inputs. -
Publication
China’s Investment in African Special Economic Zones : Prospects, Challenges, and Opportunities
(World Bank, Washington, DC, 2010-03)China's recent moves to establish special economic zones (SEZs) in several African countries can make a significant contribution to industrialization in Africa. But the success of these projects is by no means guaranteed. Meeting the objectives of both China and African countries will require an active partnership and a framework for collaboration that includes engagement from host governments, processes for phasing-in local control, communication and enforcement of standards, and support for integration with local economies.