Why in News?

• The World Bank, recently, published a report titled “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies”.
• The report offers the first comprehensive assessment of long-term potential output growth rates in the aftermath of the COVID-19 Pandemic and the Russian invasion of Ukraine.

What’s in today’s article?

• About the Report (Key Highlights, Reasons for Slowdown, About India, Suggestions, etc.)

Key Highlights of the Report:

• The report “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies” is published by the World Bank.
• The report uses a comprehensive database of multiple measures of potential growth.
• It examines trends in potential growth and its drivers, global and regional prospects for potential growth and investment over the 2020s, and a range of policy options to lift potential growth.
• It documents three major findings –
  • First, there has been a protracted, broad-based decline in potential growth and its underlying drivers.
    • Major adverse shocks also reduce potential growth by leaving a lasting impact on these drivers.
  • Second, the slowdown in potential growth is expected to persist for the rest of this decade.
  • Third, while they are significant challenges confronting emerging market and developing economies (EMDEs), they are not insurmountable.
    • It is possible to reverse the slowdown in potential growth and chart a sustained, sustainable, and inclusive growth path by implementing ambitious, broad-based and forceful policies at the national and global levels.

Reasons for the Slowdown:

• The biggest reason for the slowdown is that the EMDEs are in the midst of a prolonged period of weakness.
• The following table shows a broad-based decline over the past two decades whether a country belongs to EMDEs or the middle-income countries (MICs) or the low-income countries (LICs).
• 
• The World Bank has looked at a whole set of fundamental drivers that determine economic growth and found that all of them have been losing power.
• These fundamental drivers include things like –
  • Capital accumulation (through investment growth),
  • Labour force growth, and
  • Growth of total factor productivity (which is the part of economic growth that results from more efficient use of inputs and which is often the result of technological changes) etc.
• Not surprisingly then, the potential growth rate is expected to decelerate further.

Observations about India:

• Even though India has also lost its growth momentum over the past two decades, it is and will likely remain a global leader when it comes to growth rates.
• India falls under the South Asia Region (SAR), which is expected to be fastest growing among emerging market and developing economies for the remainder of this decade.
• To be sure, India accounts for three-fourths of the SAR output.
  • SAR includes countries like Afghanistan, Pakistan, Sri Lanka, Nepal and Bangladesh etc.
• Economic activity in the SAR rebounded strongly from the recession caused by the COVID-19 pandemic, expanding by 7.9 percent in 2021.
• Output in the region is on track to grow by about 6.0 percent a year between 2022 and 2030, faster than the 2010s annual average of 5.5 percent.

What can be done to boost potential Global Growth?

• The report highlights specific policy actions at the national level that can make an important difference in promoting long-term growth prospects.
  • Align monetary, fiscal, and financial frameworks –
    • Robust macroeconomic and financial policy frameworks can moderate the ups and downs of business cycles.
    • Policymakers should prioritize taming inflation, ensuring financial-sector stability, reducing debt, and restoring fiscal prudence.
  • Ramp up investments –
    • Transportation and energy, climate-smart agriculture and manufacturing, and land and water systems.
    • In the above mentioned areas, sound investments aligned with key climate goals could enhance potential growth by up to 0.3 percentage point per year.
  • Cut trade costs –
    • Trade costs—mostly associated with shipping, logistics, and regulations—effectively double the cost of internationally traded goods today.
    • Countries with the highest shipping and logistics costs could cut their trade costs in half by adopting the trade-facilitation and other practices of countries with the lowest shipping and logistics costs.
  • Capitalize on services –
    • The services sector could become the new engine of economic growth.
    • Exports of digitally delivered professional services related to information and communications technology climbed to more than 50% of total services exports in 2021, up from 40%in 2019.
  • Increase labor force participation –
    • About half of the expected slowdown in potential GDP growth through 2030 will be attributable to changing demographics.
    • This change includes a shrinking working-age population and declining labor force participation as societies age.
    • Boosting overall labor force participation rates by the best ten-year increase on record could increase global potential growth rates by as much as 0.2 percentage point a year by 2030.
  • The report also underscores the need to strengthen global cooperation.
  • International economic integration has helped to drive global prosperity for more than two decades since 1990, but it has faltered.
  • Restoring it is essential to –
    • Catalyse trade,
    • Accelerate climate action, and
    • Mobilize the investments needed to achieve the Sustainable Development Goals.