This is the central message of a report World Bank staff prepared as an input to the G20 Los Cabos summit held from June 18-19. The summit comes at a precarious time for the world economy. The Euro Area is facing a relapse into recession, with potentially large losses of output with global repercussions if current risks to stability and growth are not addressed forcefully. Recovery in other advanced economies is weak and faltering. Growth is also slowing in emerging economies that have been the drivers of global growth in recent years. Against this background, the Bank report, entitled Restoring and Sustaining Growth, conveys the following main messages:
- G20 policy actions since the onset of the global financial and economic crisis have had a dominant focus on short-term crisis response. Economic stabilization is certainly a priority, and current risks to stability in the global economy, especially those in the Euro Area, call for firm actions to restore confidence. However, short-term stabilization only buys time and will not produce robust growth unless accompanied by key structural measures. More attention needs to be paid to reforms that remove structural impediments to growth and to investments that boost productivity. Growth is essential to a durable resolution of fiscal and debt-sustainability problems; austerity alone is not enough and the pace of fiscal consolidation needs to be carefully calibrated.
- The current slowdown in advanced economies is not just a cyclical phenomenon, but rather has deeper structural roots, including challenges arising from a changing pattern of competitiveness and comparative advantage in the global economy. Addressing these challenges requires structural reforms and investment in new sources of growth.
- Emerging economies have posted impressive growth but face a challenging agenda in sustaining the growth momentum, including implementing domestic reforms and adjusting to an external environment marked by lower advanced economy growth and more volatile capital flows. For economies with large and persistent external imbalances, rebalancing demand and facilitating related structural change are important for sustaining growth.
- Sustained reform and structural change are essential for middle-income countries to renew the drivers of growth and avoid “middle-income traps”. Countries that have successfully transitioned from middle- to high-income status typically have shown stronger performance on structural transformation, productivity growth, human capital development and innovation, openness, and avoidance of large external and internal imbalances.
- The World Bank’s Doing Business and Enterprise surveys show much progress in reforms to improve the climate for private investment, but also point to the need for further reforms to remove barriers to investment and competition, including in several G20 economies.
- Infrastructure is a crucial part of the foundations for growth. At the current juncture, an increase in infrastructure investment can also provide a welcome boost to demand and generate positive international spillovers. In emerging and developing economies, incremental infrastructure investment needs amount to about $1 trillion a year in the medium term. The agenda spans promoting public-private partnerships and innovations in mobilizing financing as well as strengthening the project pipeline (including regional projects) and institutional capacities.
- Growth is central to meeting the jobs challenge—and sustaining support for sometimes difficult structural reforms. Labor market and other structural reforms can enhance the employment impact of growth. The specifics of the jobs agenda vary considerably across countries—for example, from aging societies to those with high youth unemployment and from urbanizing to agrarian economies.
- Progress on trade reform would impart a much-needed fillip to global growth. While open protectionism has been resisted relatively well, resort to less transparent trade restrictions has increased, with the largest increase being in South-South restrictions. The G20 needs to show more leadership on multilateral trade reform and trade capacity building.
- The “greening” of growth presents both challenges and opportunities. Green policies are necessary for environmental sustainability but can also provide important co-benefits in terms of growth and employment generation and open new avenues for innovation.