Need for caution in granting fiscal incentives-World Bank
A leading economist from the World Bank believes that the government needs to be cautious in granting tax incentives without a fiscal guarantee as it could “do more harm than good.”
It is incredibly clear that if tax incentives are granted without a fiscal guarantee it can do more harm than good, World Bank’s Chief Economist for South Asia Hans Timmer said in response to a question posed following his address on “Global Economic Outlook and Challenges with a Focus on South Asia” at the Centre for Banking Studies, Rajagiriya on Tuesday.
He pointed out that for any government at the moment in Sri Lanka it’s an incredibly “difficult balancing” and pointed out, “I find any attempt to stimulate a domestic economy and revive investment logical.”
The signs of slow growth is said to be a global occurrence as “it’s happening everywhere in the world,” he said adding that investments globally have taken a “sudden beating” due to the “huge uncertainty in the global markets, trade wars, policy uncertainty and geopolitical tensions.”
During the discussion, he pointed out that fiscal policy is restrained in Europe and expressed concern that the current situation in developed countries will create problems in the financial markets and very loose fiscal and monetary policies will create a risk and financial problems and that will have problems even for Sri Lanka.
He noted that even with an increase in interest rates in emerging countries they find it difficult to get into financial markets and in this respect there is a real anxiety and uncertainty.
“I hope countries learn the lessons that in good time to have buffers,” the World Bank economist said adding that the important factor is to boost confidence in the economy by reviving confidence in the economy.
“This is vital when locals are not increasing buying without pouring money into the economy and must change policy that will allow others to come in and invest.”
There is a global shift towards Asia and one of the dominant countries in this region being China is currently “changing and rebalancing the economy.”
The existing level of development shows that Asia has the potential for high growth rates even as China is losing its comparative advantage in low skill labour.
In terms of labour concentration in most countries Mr. Timmer observed that a small group of people has created a preferential position in that very small sector which is what makes up the formal sector in most developed countries.
Job security and benefits of state sector employment have become attractive to most graduates who insist that they wish to join the government.
However, the incidence of low female labour participation in South Asia is a growing concern which nobody seems to take up as one of the top- most problems in the region, Mr. Timmer highlighted. In effect a large section of the working population is not contributing to the economy.
Spotlighting some of the problems within the South Asian economies, the World Bank economist identified that most of these countries are exporting only one-third of what is available to them.
In this respect, the companies within have created a comfort zone for themselves by exercising high import tariffs to protect a select few industries, it was pointed out.
The digital age and its storm in the Asian region has created space for a number of unregulated sectors to gain ground like the largely available taxi services, which Mr. Timmer pointed out needs to be recognised on how to employ safety nets and regulate this informal sector and bring them into the formal sector.
“All over the world there are lots of apps connected to markets that create great opportunity to jump to new development with this technology,” he said.
In addition, the economist noted there are opportunities to also change the development model as the region poses increasing prospects for higher growth and challenges in new urban planning for those entering the thriving cities of Asia.