Jodie Keane (ODI)| Enhancing resilience within global value chains: the implications of COVID-19 for climate change adaptation and mitigation policies

The increase in global trade in recent decades, through the expansion of production networks and the integration of newly industrialised economies within global value chains (GVCs), has contributed to unprecedented reductions in poverty and historically unparalleled socioeconomic progress. However, severe environmental costs, and other losers within specific industries, have accompanied these socioeconomic gains. Even without consideration of climate change, the coronavirus crisis has laid bare the fragility of global supply chains and of the nature of relationships with suppliers in poorer countries. With a few lead firms (buyers and traders) typically controlling access to end markets, suppliers have reduced market power, which limits their capacity to adapt to demand shocks. Reduced inventory management as a result of just-in-time delivery has presented visceral limitations during the coronavirus pandemic.

Jodie Keane (Senior Research Fellow, ODI)

20 May 2020

The increase in global trade in recent decades, through the expansion of production networks and the integration of newly industrialised economies within global value chains (GVCs), has contributed to unprecedented reductions in poverty and historically unparalleled socioeconomic progress. However, severe environmental costs, and other losers within specific industries, have accompanied these socioeconomic gains. Even without consideration of climate change, the coronavirus crisis has laid bare the fragility of global supply chains and of the nature of relationships with suppliers in poorer countries. With a few lead firms (buyers and traders) typically controlling access to end markets, suppliers have reduced market power, which limits their capacity to adapt to demand shocks. Reduced inventory management as a result of just-in-time delivery has presented visceral limitations during the coronavirus pandemic.

In view of the vulnerabilities exposed – such as shortages, the inability to source relevant equipment, imposed export restrictions and so on – many policy-makers are adapting trade policy to emphasise ‘resilience’. Within this debate, although diversification is a recognised means to reduce risks, it comes at a cost. Hence, inducing domestic production in selected sectors is now being advocated as a form of ‘strategic autonomy’; calls to regain industrial sovereignty are getting louder. The shortening of GVCs, either reducing the contribution of foreign value added or decreasing the number of stages of production, could accelerate if policy matches the rhetoric of policy-makers (e.g. subsidies to bring production back home).

As policy-makers seek to enhance resilience by reducing dependence on external suppliers, there are risks that poor countries will lose access to markets that provide vital footholds out of poverty. Coupled with the effects of climate change, the post-COVID-19 trade landscape could become even more challenging for poor countries to navigate. This blog discusses the implications of the COVID-19 crisis in relation to trade within GVCs given the looming climate change crisis, focusing on the following questions: How can resilience within GVCs be enhanced? What can we learn from the current disruption, to enhance the climate resilience of GVCs? What are the implications of the shortening of GVCs for climate change adaptation and mitigation efforts?  

Building resilience within GVCs: where do you start?

Diversification of supply sources requires deeper and wider production networks, including at the regional and domestic levels. Lead firms typically make decisions in this regard based on the nature of the technology involved, the ability to codify information and producer capabilities, as well as on issues such as contract enforcement capacity, comparative costs of production and so on. While some developed countries are seeking to reduce their dependence on a single source country, in view of the implications of COVID-19, developing country suppliers typically struggle with the power dynamics inherent within those GVCs driven by one or a few buyers. What has been alarmingly exposed during this global pandemic is just how fragile these relationships are: some of the poorest countries in the world have been battling with multinational firms to ensure contracts are fulfilled and payment is made for goods produced and already in transit.

Developed countries taking back control of stages of GVCs in order to enhance resilience may further accentuate these power asymmetries, which could increase the risks for developing country suppliers in view of future shocks, including climatic shocks. For many developing countries, enhancing resilience means not only confronting the severe economic vulnerabilities that arise as a result of a lack of export diversification and dependence on a few firms to access end markets, but also adapting now to an increasing susceptibility to environmental shocks.

Globally, it is now recognised that these shocks are increasing as temperatures rise. Overnight, productive structures can be, and have been, wiped out. Given weak infrastructure, the costs of trade are rising, which is negatively compounding efforts to diversify economically. These aspects of persistent economic vulnerability for least developed countries and small vulnerable economies will worsen unless efforts to ramp up Nationally Determined Contributions to emissions reductions are secured at the forthcoming COP26 – postponed to early 2021.

While diversifying and solidifying GVCs in some sectors, including strategic stockpiling where necessary, forms part of the move towards building resilience in the developed world, many developing country producers lack the economic clout to achieve similar objectives. Despite the stalemate at the WTO (as well as challenges in view of the recent resignation of the WTO DG), it is imperative that members charged with the obligation to secure open and resilient value chains consider how best to achieve this in an inclusive and sustainable way. Just as firms have disclosed their COVID-19 risks, now is the time to get real about climate risks.  

What are the implications of the shortening of GVCs for climate change policy?

Notwithstanding the economics of the debate, re-shoring of specific GVC activities by countries that are committed to the Paris Agreement must now be undertaken within a carbon budget. Emissions trading schemes were designed because undertaking emissions reductions and associated costs are cheaper in developing than in developed countries; it is also typically cheaper for production to take place in developing countries, and the recycling of comparative advantages provides a vital foothold out of poverty, if successfully managed.

The reasons for supply chains becoming more domestic rather than more regional – with an estimated ‘erosion’ in globalisation (i.e. a reduction in the average length of supply chains since 2012) of 52 km per year – may be either structural, related to the digital transformation or a result of production becoming closer to consumers. These trends can contribute to emissions reductions, for example through reduced transportation (using subsidised fuel). COVID-19 is surely accelerating trends towards the increased use of digital technology, which can assist in the reduction of carbon emissions. But until our sources of energy change dramatically towards more renewable forms, these trends could be a lose–lose for development and trade and carbon emissions reductions; more evidence is needed to assess the overall implications of movement towards shorter GVCs.

Concluding remarks

This year was meant to see achievement of a multilateral trade deal and enhanced commitments to limit anthropogenic climate change. Instead, we have experienced the steepest decline in both global trade and emissions of modern times. Decisions on trade and climate have been delayed while more immediate action has been sought on securing the finance to react to the global pandemic; major accomplishments have been achieved regarding international collaboration to develop a vaccine; some of the poorest in the world have secured debt forgiveness. Some WTO members have announced important increases in Aid for Trade resources to help poor countries adapt to the trade shocks unleashed.

But the provision of support to firms adapting to COVID-19 in the developed and developing world must heed the warnings regarding the next environmental crises. Firms will be forced by their shareholders and rating agencies to think about the resilience of their GVCs, as well as by governments and consumers to reduce associated carbon emissions. Support to firms should now entail provisions to enhance their environmental resilience. The current crisis has provided the global economy community with more opportunity to get the right frameworks in place ahead of COP26 and as we enter this last decade of action for the advancement of the 2030 Agenda.

Photo: Carbon emissions from factories. John Hogg/World Bank. CC BY-NC-ND 2.0

Monetary policy and financial stability in Africa during COVID-19.

African countries will not only see a contraction in economic activity, but also a likely resurgence in financial instability. African central banks have lowered interest rates and reserve rations, bought government bonds, and provided additional liquidity, but in some countries, there are now limits to more action (e.g. lower interest rates).
Ensuring both financial stability and increased economic activity in Africa needs careful monitoring and additional steps.

Phyllis Papadavid and Dirk Willem te Velde, May 2020

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The cost of COVID-19 for Africa is considerable. The IMF, the World Bank, UNECA and ODI all forecast economic costs of at least 5% of GDP in 2020. More than 20 million jobs will be lost. Foreign portfolio flows are fast receding; remittances and FDI are slowing considerably. African countries will not only see a contraction in economic activity but also resurgence in financial instability, driven in part by the need for (and in some cases the shortfall in) liquidity and monetary stimulus.

An EABC survey suggests major reduction in cash flow in East Africa varying by sector: tourism (92%), logistics (75%), retail and real estate (60%), financial (50%) and other sectors (25–50%). In April 2020, in Kenya, the seven largest banks restructured loans worth KSh 176 billion or 6.2% of the industry’s total gross loan book, including tourism (31%), real estate (17.2%), building and construction (17%) and trade (12.4%). The share of non-performing loans (NPLs) in the total loan book rose to a high 12.7% in February 2020 from 12% in December 2019. Defaults are growing in the manufacturing, energy and household sectors. The NPL ratio is above a five-year average of 8.2%, meaning that banks are cautious of new lending.

Photo: Workers at the Akuapem Rural Bank in Mamfe, Ghana. Jonathan Ernst / World Bank Licence: (CC BY-NC-ND 2.0)

Dirk Willem te Velde (ODI) | Using high frequency data to monitor the economic impacts of crises

Dirk Willem te Velde (Principal Research Fellow, ODI)

18 May 2020

A multitude of trackers cover policy responses to COVID-19 but when it comes to up-to-date monitoring of actual social and economic impacts there appears to be a gap. Impact data are not collected systematically and in a comprehensive manner. Obtaining access to reliable, good quality statistical data for the poorest countries is a challenge; it is even more difficult to monitor economic data in real time or at high frequency and with a short time lag.

ODI has monitored a range of macroeconomic crises (e.g. the global financial crisis, the Eurozone crisis and crises related to oil prices and food price hikes) using economic data. This work provides lessons with regard to what high frequency data can be used to monitor the impacts of COVID-19 globally, and specifically those on the poorest countries.

The table below presents data sources in the following areas:

  • Commodity prices, food prices and hunger;
  • Global and bilateral trade, trade costs and mobility;
  • Capital markets, finance flows and fiscal and monetary statistics; and
  • Employment and production.

High frequency data are published daily, weekly, monthly or quarterly. Some are available immediately; some come with a time lag of a few days or weeks; yet others take several months to become available. Some data include noise (rather than signal) and much variability; others are cleaned, adjusted for variability or more robust. Some data are publicly available (we focus mostly on these); others are available behind a paywall.

So far, data for commodity and food prices appear to be covered well, perhaps in part because the G20 has paid attention to monitoring these for several years. Trade data are also available but with a time lag. Data on capital markets and finance flows are available but patchy, and often behind paywalls for use by investors. High frequency data on employment and production tend to be weakest: they are not available for a few months and there are well-known challenges with such data.

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Commodity prices, food prices and hunger
   Source and frequencyComments on useHyperlinks and examples
Commodity prices (global prices)Available immediately (e.g. FT for oil/copper prices; IMF/WB weekly/monthly averages with a short time lag (a few weeks)Variable reflecting many issues such as supply/demand and othersOil price (paywall)  

IMF  

World Bank Price data (pink sheet)  

GroAgro
Food prices (domestic prices)FAO food prices, monthly (a week time lag)   IFPRI’s Food Price Monitor covers daily price data for domestic markets in India, Rwanda, Uganda and Burundi   National statistics officesLocalised data patchyFAO food price index  

IFPRI dashboard
HungerWFP, number of people with insufficient food consumption, countries with very high levels of hunger, updated daily and weeklyLimited countries now (9 African now) but 16 more planned in coming weeks; it is a forecast. Weekly snapshots for 14 countriesWFP Food Hunger Map  

WFP daily report  

Weekly snapshots
COVID cases, deathsDaily across countriesAvailable widely, commonly used sources but difficult to compare across countriesJohns Hopkins
High frequency telephone interviews around social and food security impactsMonthly updates from May 2020. Cover topics including (i) knowledge of existence of and channels of transmission of COVID-19; (ii) knowledge of and compliance with preventive measures with specific emphasis on social distancing and self-isolation; (iii) prices and access to food and non-food necessities; (iv) employment; (v) food insecurity; and (6) subjective well-being – with a focus on understanding the dynamics of economic impactsOnce available will be very valuable, for Ethiopia, Malawi, Nigeria, Tanzania, Uganda     LSMS high frequency phone surveys,
Global and bilateral trade, trade costs and mobility
   Source and frequencyComments on useHyperlinks and examples
Trade costs Baltic Exchange Dry Index Trading Economics, dailySpecific cost measure, does not cover many transport uses/modesTrading Economics
World tradeCPB world trade indicator, monthly, available with a one- to two-month time lag     IMF tracking of world trade using real-time shipping dataPartly a leading indicator, partly real data   Uses data for dry bulk, contain, vehicle, oil shipping dataCPB indicator described in FT      
IMF tracker
Bilateral tradeNational statistics office and ITC trade map (monthly data for major countries such as UK, EU, US, China and Japan available with a six-week time lag; annual data for low-income country source)   International data reported monthly with time lag (UN Comtrade)Trade data variable but long-runs are availableUK monthly trade stats  

German monthly data  

Comtrade
Mobility and entertainmentAircraft departures, bus and rail journeys; Google searches for entertainment, seated diners, retail footfall (updated daily)   Google Mobility data for retail, grocery, parks, transit, workplaces, residential visits (weekly)  Not easily available beyond reports       Google data for all countries on a weekly basisBank of England Monetary Policy Report Chart 2.26    

COVID-19 Community Mobility Reports
Capital markets, finance flows and monetary statistics
 Source and frequencyComments on useHyperlinks and examples
RemittancesCentral banks, monthly data, available with one to three months time lagCan vary much between monthsNigeria  

Kenya
Stock market prices, exchange rates, bond yieldsAvailable daily and immediately, e.g. FT or central bank    Bond prices and bond spreads (yield difference countries and safe havens such as US/German bonds)Varied sources but often subscription is needed   FT/Bloomberg often report statistics/figuresFT (paywall)
Private capital flows to emerging marketsIIF monthly updates on portfolio flow but not FDI flows, available with one to two years of lag (committed FDI data more recent)Lacks country detailsIIF
Bank lending statisticsBIF international bank lending, quarterly, available with five-month time lag BIS
Monetary statistics (central bank)Central banks maintain monthly and quarterly data on the monetary base and broad money, credit aggregates (e.g. to the private sector) and foreign assets and liabilities. Includes claims by banks on governmentQuality data on a select number of variablesKenya
Debt interest paymentsMonthly/quarterly, central bank websites, lags can be six months Kenya (Table 13)  

Nigeria debt service in 2019  
Ethiopia
Aid flowsOECD DAC   Humanitarian finance: COVID-19 Global Humanitarian Response PlanDAC (and national) data are available with long time gaps (a year) but humanitarian finance data are updated weekly; announcements are availableOCHA  

ODI donor announcement tracker
Employment and production
 Source and frequencyComments on useHyperlinks and examples
EmploymentILOSTAT provides monthly and quarterly labour force statistics (with a time lag of at least two months)Up-to-date data are patchy with respect to country coverageILO COVID-19 and labour market statistics
ProductionNational accounts, quarterly, available with six-week time lag in developed countries, or a lag of three to five months in some poorer countries   UNIDO has recent data on industrial production, e.g. for the US, China, Russia, Korea, Vietnam, Argentina, Chile, PolandData available with long time lag, and industrial production data cover few countriesUNIDO on impact of COVID-19 on manufacturing  
Others (selected)
 Source and frequencyComments on useHyperlinks and examples
Data PortalsWorld Bank, updated in an ongoing manner   Several others exist   ODI’s tracker of trackers (tba) Datasets from the World Bank

  World Bank: COVID and trade  

UN Global Partnership for Sustainable Development Data

Photo: Changes in food prices as a result of Covid-19.  John Mackedon / World Bank . CC BY-NC-ND 2.0

Donor responses to COVID-19: country allocations

We examine IMF, World Bank and European Commission country allocations in response to the COVID-19 pandemic. IMF allocations cover around 1–1.5% of GDP whereas World Bank allocations are worth 0.1% of GDP. Whereas only a small portion of total funding is dedicated to loan facilities, grants and debt relief for the poorest economies, overall donors allocate more (as a share of GDP) to poorer countries. The IMF allocates more to countries that are more dependent on exports and remittances and to countries expected to see output cut the most. However, donors do not allocate more resources to countries with less health spending or that are overall more vulnerable

Sherillyn Raga and Dirk Willem te Velde, May 2020

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The confirmed number of coronavirus cases reached 3.5 million on 4 May, affecting 187 countries. The global economy is projected to contract by 3% (or 5% less than was forecast only four months ago). World trade may fall by up to 32%. The African region may witness its first recession since the 1970s.

The financing gaps in poorer countries have increased and, as these countries cannot afford a stimulus, they turn to donors. Already by 3 April, more than 90 countries had requested support from the IMF. This note provides an overview of donor responses since the outbreak, financial instruments, the regional coverage of funding and country allocations.

Photo: World Bank Group President in a press conference with the IMF Managing Director to address the economic challenges posed by coronavirus.. World Bank / Simone D. McCourtie. Licence: (CC BY-NC-ND 2.0)

A global action plan for developing countries to address the coronavirus crisis: Southern perspectives

Developing countries face the deepest recession in a generation. Complying with lockdown guidance in developing countries will be very challenging, given the level of informality and the state of poverty and health capacities. The G20 and UN need to address shortcomings to enable inclusive, collective and coherent global leadership. Urgent actions required to address the health and socio-economic costs include global actions plans on aid and finance, trade and food security, and free flows of knowledge and mobility of health workers.

Lorena Alcázar Valdivia, Debapriya Bhattacharya, Andrea Ordóñez, Tausi Kida, Dirk Willem te Velde, April 2020

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COVID-19 reached the poorest countries with a time lag but now they are facing multiple shocks. Commodity prices, especially oil prices, have fallen steeply, global demand for their products has gone down sharply, tourism receipts have reduced markedly and retail outlets and restaurants are closed, leading to massive global supply chain problems. In addition, the coronavirus has now reached most countries, resulting in lockdowns in developing countries, leading to a further slowdown (some estimate by 2–3% of annual GDP each month). While countries around the world, primarily developed ones, plan for stimulus packages to confront the crisis, many developing countries lack the fiscal space to implement such measures.

Developing countries face additional constraints owing to the level of informality, poverty and refugee numbers. Most poor people cannot afford not to try to engage in economic activities, as they will face starvation otherwise. The poor are often the least resilient to shocks, and if they lose urban jobs they will need to return to rural areas. There are heightened fears of the coronavirus reaching refugee camps. The coronavirus shock will thus hit the poor hardest. Estimates suggest the number of malnourished and acute hungry will double by the end of this year, from 800 million to 1.6 billion and from 130 million to some 260 million, respectively.

Photo: Covid-19 testing. World Bank / Henitsoa Rafalia. Licence: (CC BY-NC-ND 2.0)

The COVID-19 pandemic in the Caribbean: exposing existing economic vulnerabilities

The Caribbean faces an unprecedented economic shock from COVID-19 as demand for its major export service (tourism) has collapsed.
In response, many countries have initiated fiscal stimulus packages, some with support from international donors. However, many countries in the region are already heavily indebted and, while the effects of the current shock must be mitigated, more systemic issues also require tackling. Countries should avoid increasing their debt service obligations and instead secure debt for resilience swaps in order to build resilience to natural disasters, confront the imminent threat of climate change and build the climate-resilient infrastructure needed to boost trade and export diversification. G20 members must acknowledge the need for specific measures to assist small states to adapt to the global pandemic; this includes the role of remittances, for which costs of transfer must be reduced.

Deodat Maharaj, April 2020

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The COVID-19 pandemic is once more providing eloquent testimony on the vulnerability of the Caribbean to shocks, affecting every single economy in the region and trading partners. It is exposing acute economic vulnerabilities in Caribbean economies and requires both a coordinated response to deal with immediate effects and a need to tackle systemic issues related to the international trade and finance architecture.


The Caribbean region is among the most vulnerable on the planet to shocks, including those associated with natural disasters and climate change. This is because of its high concentration on a limited number of export sectors to drive growth. The region is arguably the most tourism-dependent of the globe and will see massive losses in this sector, affecting millions of lives and livelihoods. This comes after a stellar performance last year, with 31.5 million stay-over arrivals (half of them from the US). The drastic reduction in tourism will have a major adverse impact, not just on big business but also on taxi drivers, small shop owners, artistes, small-scale suppliers to hotels and the hundreds of thousands who work in hotels across the Caribbean. There is a risk of a greater number of Caribbean people falling into poverty.

Impacts of hurricane Maria in Dominica. Tanya Holden/DFID. Licence: (CC BY-NC-ND 2.0)

Can the digital economy help mitigate the economic losses from COVID-19 in Kenya?

The digital economy is playing a key role in Kenya’s response to the pandemic, with opportunities rising in the sectors of (i) digital and digitally deliverable services; (ii) e-commerce; and (iii) online work.
As businesses shift online and people work from home, there is a rise in demand for digital services, particularly cloud computing services; however, less than 25% of MSMEs use cloud computing, compared with over 40% of large Kenyan firms. Digitally deliverable services can offer new employment opportunities but less than 50% of firms in the services sector in Kenya- barring IT and transport- have a website. E-commerce is taking off, with increasing demand for Fast-Moving Consumer Goods, entertainment electronics and productivity tools.

Karishma Banga, April 2020

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As of 20th April 2020, there are 281 COVID-19 cases in Kenya, and there have been 14 deaths. A number of measures are in place to reduce the spread of the virus, including suspension of air travel (except cargo flights), closing of borders, curfew and asking businesses to work from home. ODI’s report on Economic Vulnerabilities to Health Pandemics puts Kenya in the top seven low- and middle-income countries most vulnerable to direct adverse economic losses owing to COVID-19 outbreak; its main exports – horticulture and tourism – are very elastic in demand. Shutdowns in China, the US and Europe, notably in the apparel, machinery and footwear subsectors, are hitting manufacturing global value chains, with traditional sectors in Kenya such as the cut flower industry also take a beating. The services sector, which is the biggest contributor to economic growth in Kenya, is directly affected in terms of reduced income and employment. Overall, services contributed roughly 3 percentage points to an estimated 5.6% GDP growth in 2019.

Photo: Increased use of ICT during the coronavirus pandemic. Simone D. McCourtie / World Bank. Licence: (CC BY-NC-ND 2.0)

The role of trade in recovering from the COVID-19 crisis

Trade lies at the core of the global current economic crisis; it will be also the cornerstone of the global recovery. The use of protectionist measures will put the recovery at risk and must be avoided.
There is a need to rethink the operation of value chains during the recovery to prepare them for crises in the future. Stimuli provided by developed countries will contribute to the global recovery if they are adopted fairly. The government share in the economy is rising. Flexibilised procurement rules will contribute to the recovery. Developing countries will need more and better-targeted support to maintain and restart their productive capabilities.

Max Mendez- Parra, April 2020

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Management of the COVID-19 pandemic is generating an unprecedented economic crisis. The depth of the crisis remains to be seen but it is by far one of the sharpest ever recorded. All countries are simultaneously being affected, with no one country able to provide any countercyclical demand.

Trade has plummeted, a result of the fall in economic activity, travel bans and lockdowns. The WTO forecasts a fall in global trade of between 13% and 32% in 2020. The fall in commodity prices paints a very dramatic picture of the effect on exports from developing countries; where export of services are also likely to be impacted.

Many countries are exacerbating the situation created by fall in trade by restricting exports of certain items (medical supplies, protective equipment, drugs) with the aim of supporting local efforts to address the pandemic. In this context, countries are adopting controversial and, in some cases, unsuitable measures to address the emergency. Such responses may be ineffective, inefficient and damaging to other countries’ responses.

Photo: International Airport in Kathmandu, Nepal during the coronavirus crisis. Narendra Shrestha/ Asian Development Bank. Licence: (CC BY-NC-ND 2.0)

A G20 safe and resilient supply chain action plan

The coronavirus crisis has laid bare the fragility of global supply chains that link G20 and poorer countries. Supply chains covering medical supplies, agricultural products and garments provide access to critical imports for G20 and other countries and generate important job opportunities in poorer countries.
A G20 supply chain action plan consisting of a package of trade, migration, finance, aid and business measures will benefit G20 and poorer countries. The UK should lead a dialogue suggested by the B20 and convene buyers, factories and a targeted range of countries around a targeted set of supply chains (medical supplies, food products, garments).

 Stephen Gelb, Jodie Keane, Max Mendez-Parra and Dirk Willem te Velde, April 2020

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With most of the world currently under lockdown, it is very challenging to keep critical supply chains open. When the coronavirus emerged in China, it shut down many supply chains, affecting electronics, garments and other products. And when the rest of the world also went under lockdown, in Europe and the US many retailers shut, leading to massive declines in consumer demand. Retailers and well-known brands have cancelled orders of garments from their supplier factories in many developing countries. Some have refused to pay suppliers for orders placed, and in some cases do not even pay for work already completed under existing orders but not yet shipped, although some, like H&M and M&S, have treated factories and workers in supply chains a little better. Cancellations by European brands have badly damaged countries such as Bangladesh dependent on garment and footwear exports. There are also global shortages of essential goods, in particular personal protective equipment (PPE). Getting access to ventilators, hand sanitisers, masks and gowns is critical to health and care workers’ safety. Consumers globally have also witnessed empty shelves in supermarkets and major disruptions to food supplies.

Photo: The use of hand sanitiser as a precautionary measure against coronavirus. World Bank / Ousmane Traore. Licence: (CC BY-NC-ND 2.0)

How can the European Union help developing countries address the socioeconomic impacts of the coronavirus crisis?

The EU’s response package of aid, development finance, trade and business should be a crucial part of a more ambitious G20 action plan that addresses the socioeconomic cost of coronavirus in developing countries.
The EU should step up, fast-track, front-load and leverage its aid and development finance, and foster coordination

San Bilal and Dirk Willem te Velde, April 2020

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With the global economy going into a steep recession, developing countries are facing considerable financing shortfalls. The UN Conference on Trade and Development warns of a $2.5 trillion finance shortfall; Asian forecasts are down by 5–10 percentage points; Africa is already facing major impacts. The UN Secretary-General has called for a $2.5 trillion fund for developing countries. African finance ministers have called for $100 billion. The average fiscal stimulus in Europe so far (12% of gross domestic product) is 15 times higher than in the poorer African countries (0.8%) – as the latter cannot afford it. This note discusses EU actions to support developing countries to address the coronavirus crisis

Photo: Loan repayment schedule. Simone D. McCourtie / World Bank. Licence: (CC BY-NC-ND 2.0)

The coronavirus pandemic and the governance of global value chains: emerging evidence

Global value chains (GVCs) had already begun to shorten after the Global Financial Crisis; the coronavirus outbreak may intensify this process, affecting the trade and development trajectories of some suppliers. Relaxing competition policy to support purchases and maintain supply by UK retailers should be accompanied by policy measures to support developing country producers; many face drastic reductions in orders and prices, which will prompt bankruptcies and induce new firm-level reorganisation. Lead firms have a duty of care towards their employees and the countries in which they operate; UK-led GVCs should stand by their employees across the value chain, in line with other social commitments. Development partners can do more to support links in the GVC; some lead firms are already supporting diversification efforts related to COVID-19; trade-related adjustment support should be provided.

Jodie Keane, April 2020

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Unlike the 2008/09 Global Financial Crisis, which preceded the Great Recession, COVID-19 is both a Keynesian demand shock and a supply shock. In addition to the transmission of a collapse in demand, supply shocks will occur because economic activity itself must stop to contain the spread of COVID-19. There is no historical parallel to this in modern times.

Comparative developing country case studies during the GFC showed how value chain governance – between firms and as influenced by governments – mediated vulnerability to the exogenous trade shock and its transmission. The effects will depend on the fiscal and monetary policies of governments and private sector/consumer behaviour within the country as well as across and between countries. Understanding these systems and their interaction is crucial to effective risk management. This is why the relationships between buyers and suppliers within global value chains (GVCs) matter.

Photo: Current scene in a market place in Kenya. World Bank / Sambrian Mbaabu. Licence: (CC BY-NC-ND 2.0)

Trade in services and the coronavirus: many developing countries are at risk

The pandemic, travel bans and lockdowns are reducing demand for transportation and travel services. Communications and internet commerce services are increasing. Exports of services in many developing countries are above the global average (as a share of total trade), putting them at even greater risk.
Measured exports of services tend to be concentrated in travel and transportation, which are already in decline. Ethiopia, Mauritius and Morocco may be particularly hit through this channel, as 44%, 33 and 25%, respectively, of their combined goods and services exports are vulnerable. Travel exports in Cambodia represent 17% of GDP.

Max Mendez- Parra, March 2020

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The coronavirus pandemic has already led to major economic and social impacts across the world. In many developing countries, the fall in commodity prices is having a very strong effect. Moreover, the fall in demand is affecting other exports, such as those of manufactures. Trade in services appears to be being overlooked in considerations of the implications of the lockdowns on economies. Lack of good data makes it harder to understand the importance of services in trade. This note discusses how the lockdowns could affect trade in services. It also assesses the vulnerability of many developing countries based on the importance of services in their exports and on the composition of the most affected sectors in their exports.

Photo: Trade activity in a port in Cambodia. Chhor Sokunthea/ World Bank. Licence: (CC BY-NC-ND 2.0)

Development finance institutions and the coronavirus crisis

Development finance institutions (DFIs) are mandated by their shareholders to provide finance to the private sector (usually at commercial terms, but subsidised implicitly), crowd in private sector finance and have a development impact.
While DFIs aim to be additional to the market, they have not been sufficiently counter-cyclical in past crises. That has to change, as poor country firms and their workers face major hardship now. Today’s crisis is larger than those in the past. We suggest shareholders provide regulatory and financial space for DFIs to fast-track new investments, allow for some repayment postponements and announce a Bounce Back Better facility, to save companies and workers from bankruptcy and to protect previous transformation efforts so that the bounce-back is faster and better.

Stephany Griffith-Jones and Dirk Willem te Velde, March 2020

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Developing countries are facing considerable financing shortfalls as the global economy is going into a steep recession. Immediate challenges exist with regard to financing firms and workers in the poorest countries, including in Africa. If these firms collapse, and others stop investing, some of the major engines of a country’s transformation path may not survive, and will start shedding jobs. Traditional trade finance solutions that emerged during the 2008 global financial crisis will not solve these problems, as there is little trade now.

Development finance institutions (DFIs, such as IFC, CDC, FMO and DEG) provide finance (loans, equity, guarantees) and technical assistance to the private sector in low- and middle-income countries. The majority shareholders are governments. The mandates of DFIs usually combine provision of finance on commercial terms, additional to the market, earning a financial return and contributing to development.

DFIs should be more counter-cyclical in the current crisis. This may involve them abandoning conservative lending practices, if shareholders allow potential future losses on a portion of DFI portfolios. This is urgently needed, as businesses across the developing world are, or are at risk of, going under. A subsidised Bounce Back Better facility will have major returns in protecting workers and investments. It may facilitate future higher payments by businesses, if it leads to quicker growth.

Photo: Empty street in Nairobi, Kenya. World Bank / Sambrian Mbaabu. Licence: (CC BY-NC-ND 2.0)

The coronavirus pandemic and small states: a focus on Small and Vulnerable Economies

The global coronavirus pandemic has struck at a time when Small and Vulnerable Economies (SVEs) were already facing weak trade growth, with year-on-year trade growth already negative by Q3 2019 for the Caribbean region. Tourism exports could be halved in 2020, with major economic repercussions, with losses that could range between 4% and 26% of gross domestic product, varying by SVE. The value of stimulus packages announced so far by selected SVEs amounts to between 0.03% of GDP (Antigua and Barbuda) and 2.6% of GDP (Fiji), compared with 8% on average by G20 members. Data availability is scarce and assessments are partial, yet we need ongoing tracking of impacts.

Jodie Keane, March 2020

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Unlike the 2008/09 global financial crisis (GFC), which preceded the Great Recession, COVID-19 represents both a Keynesian demand shock and a supply shock. In addition to the transmission of a collapse in final and effective demand, an endogenous supply shock will occur because economic activity itself must stop to make it possible to contain the spread of COVID-19. There is no parallel for this in modern times. The interaction between the above shocks and economic effects depends on governments’ fiscal and monetary policies and private sector/consumer behaviour within each country as well as across and between countries. The provision of major financial stimuli along with social safety nets and actions taken by ‘socially responsible’ firms will be pivotal to avoid dire social effects. But not all countries are in a position to respond, especially Small and Vulnerable Economies (SVEs), a number of which have been hit by a series of major economic shocks in recent years. This note discusses the channels through which SVES will be affected, focusing on tourism and remittances.

Photo: Scenic view of a beach in Tonga. Asian World Bank. Licence: (CC BY-NC-ND 2.0)

Trade and the coronavirus: Africa’s commodity exports expected to fall dramatically

The prices of commodities have fallen by between 9% (coffee) and 61% (oil) since the start of the year mainly because of the fall in global demand generated by the current lockdowns. African countries are extremely exposed to commodity price swings, as half of their merchandise exports is concentrated in 10 commodities. Africa could lose between US$ 36 billion and US$ 54 billion in export revenue. For some countries, this could be as high as 20% of their gross domestic product. Oil exporters such as Nigeria, South Sudan and Angola may see their export revenues falling by more than 20%.

Max Mendez- Parra, March 2020

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The coronavirus pandemic is having notable economic and social effects across the world. Even in countries where the disease has not yet affected a large number of people, the impacts are beginning to be seen. Trade appears to be particularly affected as countries enter into lockdowns and economic activity stops. While trade statistics are not yet available, the evolution of commodity prices and the exposure of many African countries suggest the effects of the crisis will be severe.

Photo: Port in Tema, Ghana. Jonathan Ernst / World Bank. Licence: (CC BY-NC-ND 2.0)

Three proposals to support African garments workers during the coronavirus crisis

US and European orders for garments have ceased, with effects rippling throughout value chains, affecting factories in Asia and Africa. Their workers face extreme hardship.
We explore three options to protect such workers during this recession in an African context: (i) a worker subsidy scheme (ii) a subsidised training package to retain workers and manufacturing capabilities (iii) retooling of garment factories to produce garments to satisfy medical needs.
Each option requires different commitments from buyers, factories, workers, the public sector and donors.

Dominic McVey and Dirk Willem te Velde, March 2020

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Exports of African textiles and garments have grown rapidly over the past decade. Exports from African Growth and Opportunity Act (AGOA)-eligible countries to the US have nearly doubled, from $790 million in 2010 to $ 1.5 billion in 2019, with Kenya one of the largest suppliers and Ethiopia the fastest growing. Unfortunately, US orders are considerably down following store closures, and operations in African factories could cease to operate within weeks.

If nothing is done, factories in Kenya would find it too expensive to pay their workers during uncertain times. They could be forced to close and implement lay-offs. Workers in Ethiopia will leave factories, even if they received subsidised pay. But in other contexts, factories with the right networks and capabilities may be able to retool.

This note provides three proposals to support garment workers in African countries who may lose their jobs in two to three weeks time. The proposals may have applicability in other sectors but need to be tailored to the specific context.

Photo: Factory workers producing shirts at Sleek Garment Export, in Accra, Ghana Dominic Chavez /The World Bank. Licence: (CC BY-NC-ND 2.0)

A $100 billion stimulus to address the fall out from the coronavirus in Africa

African leaders and the global community urgently need to agree a $100 billion financial stimulus for sub-Saharan Africa to address the fall-out from the coronavirus crisis. This is just 2.3% of the value of global stimulus packages announced so far, and worth 5.6% of sub-Saharan Africa GDP in line with the global average of stimulus to GDP of 5.1%. A stimulus with appropriate financial instruments will protect the most vulnerable livelihoods from the crisis. African countries need to step up and donors need to support them.
The G20 should coordinate a major financial stimulus, and part of this should support Africa.

Dirk Willem te Velde, March 2020

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Sub-Saharan Africa is facing at least a $100 billion balance of payment shortfall in 2020 compared with what was previously forecast. The coronavirus crisis is still unfolding, and impacts are only slowly becoming clearer. But there will be considerable declines in trade revenues and financial flows this year, as well as other effects. All of this needs detailed examination, and the effects will differ markedly by country. Previous ODI SET analysis has examined which countries are most at risk to a global slowdown. Estimates also face uncertainty depending on the spread of the coronavirus in Africa itself, and there is separate analysis ongoing.

Trade

At current oil price levels, net oil exports will fall by at least $35 billion (the costs are $30 billion following the halving of the oil price, but prices have dropped by more). Other exports (and imports) of goods and services will also decline. There will be other effects. International tourism revenues were some $35 billion in 2018, and most of this is at risk this year. Transport services are under threat (e.g. ships not docking in Mombasa). IATA estimates that African airlines lose $4.4 billion this year. Countries will be affected differently.

Photo: Dar Es Salaam Port, Tanzania. Rob Beechey /The World Bank. Licence: (CC BY-NC-ND 2.0)

Economic impacts of and policy responses to the coronavirus pandemic: early evidence from Africa

Dirk Willem te Velde, March 2020
This note marks the beginning of the monitoring of economic impacts (trade, finance and other impacts), social impacts and impacts on government revenues in Africa and considers early economic policy responses in Africa. Previous analyses centred on vulnerability assessments and aggregate impacts. It suggested that Kenya, Zambia, Rwanda, Sudan and Ghana are the African countries most vulnerable to the pandemic. Previous analysis also suggested that Africa was likely to be hit by at least $100 billion in economic costs (or 5% of gross domestic product) this year as a result of the crisis. Beyond this headline number, several detailed impacts are now becoming clearer. Considerable effects (across trade, finance, employment, prices, government revenues, stock prices, exchange rates and bond yields) have already become visible; they differ markedly by country, but overall paint a bleak picture. Data availability is limited and assessments are partial, yet ongoing tracking is needed to inform policy responses. Over time, more systematic analysis will become available.

Dirk Willem te Velde, March 2020

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African countries will be hit hard by the coronavirus pandemic. ODI’s vulnerability assessment paper, published when the virus first emerged in China, suggested that Angola, Congo, Sierra Leone, Lesotho and Zambia were the countries most exposed. Taking into account ability to respond and resilience more widely (e.g. Ethiopia and Ghana have high debt), the most vulnerable countries included Kenya, Zambia, Rwanda, Sudan and Ghana.

Africa is likely to be hit by at least $100 billion in economic costs (or approximately 5% of gross domestic product (GDP)) this year as a result of the coronavirus crisis. Beyond this headline number, several detailed impacts are already becoming clearer. The G20 is hammering out its stimulus packages; African countries need to step up their economic response too, and the G20 could help them. The purpose of this note is to examine early evidence on actual economic impacts (trade, finance and other impacts), social impacts and impacts on government revenues and considers economic policy responses in Africa. 

Photo: Flower kiosk in Nairobi, Kenya. Luigi Guarino/The World Bank. Licence: (CC BY-NC-ND 2.0)

Jodie Keane (ODI) | Securing a climate-compatible trade regime and supporting sustainable economic transformation

The world is facing major climate change challenges. A number of important international discussions and negotiations are planned for 2020 that relate to trade and the environment. These include discussions around the 12th World Trade Organization (WTO) Ministerial and under the United Nations Framework Convention on Climate Change (UNFCCC), as well as deliberations by Commonwealth Heads of Government and Ministers as part of the United Nations Conference on Trade and Development. The decisions taken, avoided, blocked or misconstrued in these fora will influence how the international support architecture that governs trade and the environment supports or hinders inclusive and sustainable economic transformation.

Jodie Keane (Senior Research Fellow, ODI)

19 March 2020

The world is facing major climate change challenges. A number of important international discussions and negotiations are planned for 2020 that relate to trade and the environment. These include discussions around the 12th World Trade Organization (WTO) Ministerial and under the United Nations Framework Convention on Climate Change (UNFCCC), as well as deliberations by Commonwealth Heads of Government and Ministers as part of the United Nations Conference on Trade and Development. The decisions taken, avoided, blocked or misconstrued in these fora will influence how the international support architecture that governs trade and the environment supports or hinders inclusive and sustainable economic transformation.

Introduction

Existing structures of production, consumption and transportation must be radically transformed to avert a global rise in temperatures beyond 2°C by 2050, to affect how and what we trade within global value chains and their processes of production. The international support architecture must urgently support these processes in order to secure climate-compatible trade and development strategies for the advancement of environmentally sustainable structural economic transformation.

This blog explores the issues and sticking points regarding securing ‘climate-compatible trade and development’ in view of important discussions this year. It explores the issues regarding advancing sustainable structural economic transformation. It identifies sectors at risk and reasons for this. It outlines the imperative of securing climate-compatible trade and development strategies to boost export diversification. And it concludes with key policy issues for consideration in 2020.  

The international dynamics

The Sustainable Development Goals, adopted by Heads of Government in 2015, call for the following:

Take urgent action to combat climate change and its impacts (Goal 13)

Double the least developed country share in global exports by 2020 (Target 17.11)

Increase Aid for Trade support for developing countries, in particular least developed countries, including through the Enhanced Integrated Framework (Target 8.a)

Progress on these goals will be under increased scrutiny this year in view of major international events and given the ‘early harvest’ of some SDGs sought by 2020, including Target 17.11.   

The Agenda for forthcoming discussions at the 12th WTO Ministerial could include a statement on trade and the environment to signal high-level political commitment to a multilateral trading system that better supports environmental sustainability. However, while it is true that much goodwill must be garnered at the highest political levels, bolder actions on multiple fronts are urgently required in order to avert the current climate crisis.

On the carbon emissions front, Nationally Determined Contributions must be dramatically increased at COP26 in order to achieve the Paris Agreement and zero carbon by 2050. The implications of more ambitious measures – recognised by the UNFCCC framework as having trans-boundary effects through the trade mechanism – must be seriously taken up by WTO members, either collectively or through like-minded approaches (e.g. through open plurilateral negotiations). Bridging UNFCCC and WTO frameworks means viewing climate and trade not as foes but instead as very important and close friends.

The scale of the task ahead is formidable. Emissions reductions commitments need to quadruple to limit global temperature rise to 1.5°C above pre-industrial levels. Many developing country governments are unlikely to take on such commitments where these are considered diametrically opposed to their traditional trade and development objectives.  

Currently, levels of finance available through the Green Climate Fund fall well short of the total cost of implementation of climate action plans for 80 developing countries that have specified their financing needs (as part of the Paris Agreement) at an estimated $5.4 trillion – the order of magnitude of the total amount spent on energy subsidies every year in the world. 

There are continued questions around how new sources of climate finance, traditional official development assistance and Aid for Trade could and should work together in order to support developing country-led trade and development strategies that upgrade environmental, social and economic outcomes. This is despite all parties to the Paris Agreement – 183 countries as of November 2018 – being committed to ‘making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’ (Article 2.1c); with continued silence as to how to reconcile the issues regarding how commitments will affect trade.   

How to secure climate change-compatible trade and development that boosts structural economic transformation? 

ODI’s SET programme defines economic transformation as a continuous process of: 

  • moving labour and other resources from lower- to higher-productivity sectors (structural change) and
  • raising within-sector productivity growth.

Climate change is directly linked to patterns of economic transformation and will increase the urgency with which labour must move from low-productivity agriculture into higher-productivity sectors. Opportunities to release labour and other resources from lower-productivity activities into others include horizontal and vertical economic diversification, defined as:

  • horizontal export diversification (extensive margin) into completely new export sectors
  • vertical diversification (intensive margin) out of primary into manufactured exports.

Adaptation to the physical effects of climate change and related regulatory effects will affect both of these strategies. New strategies at the country level need to be designed, to increase the resilience of existing productive structures, to move into new products and services related to global climate change mitigation efforts and to make full use of rights provided by the international trade regime. 

These strategies include relieving the current deadlock in liberalising trade in environmental goods and services; considering new lists based on science; bringing into the WTO discussions around accounting for carbon and related monitoring, reporting and verification frameworks within specific sectors; and securing an outcome on fisheries subsidies negotiations at the Ministerial, which could secure momentum to address fossil fuel subsidies. Momentum at the multilateral level is crucial. If the system cannot deliver, in this last decade of action to advance the 2030 Agenda, critical reflection is required on what new types of partnerships, coalitions and likeminded action groups are necessary. 

Sectors at risk from climate change

The risks of inaction are getting higher and certain patterns of economic transformation are becoming impossible. Sectors most at risk from both the physical and the regulatory changes involved in climate change are also those on which developing countries rely for economic and social development. The most vulnerable countries to climate change are typically those with the least diversified exports. These tend to be the lowest-income countries, since export diversification tends to rise with incomes. Entry into low-skilled manufacturing sectors (e.g. garments) through the expansion of the GVC mechanism over recent decades has provided one major pathway out of poverty, for millions. Now, border carbon adjustment measures pose very real risks to such conventional trade and industrial development strategies. 

Facilitative rather than punitive measures that encompass broader economic social and environmental upgrading strategies are urgently required. Some examples include:

  • Oil, gas, coal: matching with carbon capture and storage technologies
  • Energy-intensive trade goods: supporting renewable energy deployment through Aid for Trade; ensuring recognition of equivalent emissions reduction schemes
  • Tourism: supporting carbon offsetting markets and carbon accounting for destination countries; ensuring the aviation industry addresses its own carbon footprint
  • Agriculture: recognising the important role of good agricultural practices in carbon sequestration; ensuring the maritime industry addresses its own carbon footprint.   

Consultations on market-based approaches to reducing greenhouse gas emissions, such as carbon pricing schemes, carbon clubs and border carbon adjustment measures between private and public sector actors, are underway (e.g. led by International Chambers of Commerce). Getting lead firms on board is crucial to address arising risks and threats to conventional trade and development strategies. However, different strategies will be needed to ensure public policy frameworks can induce the shifts required in private sector behaviour. The top 15% of firms typically account for the lion’s share of international trade. It is important to understand how value chain governance can influence who bears the ultimate risks and costs of compliance through movement towards greener production and consumption standards. This requires consideration of how donors can best support environmental in tandem with social and economic upgrading and the effective design of carbon reductions-related standards.   

While the economics of climate change have changed dramatically in recent years through the availability of lower-cost technologies, in particular the reducing costs of solar energy (important considering that electricity accounts for around a quarter of carbon emissions), governments and private sector actors still need much more support in their mobilisation. This includes technical assistance on the ground related to project and risk assessment, not so dissimilar to the more general needs of trade-related infrastructure within the broader Aid for Trade framework; an enhanced environmental facility may be needed.

Concluding remarks

Trade is a key transmission channel of the effects of climate change, which will transcend borders. Effectively acting in response to crises (as the unfolding of the coronavirus now demonstrates) requires governments to act in concert; learn from each other; share information; sustain open trade; and support markets through financial stimuli. All of these actions can help address the climate change emergency; some of them can be initiated now in order to slow, and avert, the climate crisis and induce sustainable structural economic transformation. The numerous important international trade and environment fora this year can help put countries on an inclusive and sustainable economic transformation path.

Photo: Wind turbine farm in Tunisia.  Dana Smillie  / World Bank. CC BY-NC-ND 2.0

Phyllis Papadavid and Sherillyn Raga (ODI) | The eco and West Africa’s economic transformation

West Africa started the decade with plans for the eco – its newest single currency. It was announced that, in 2020, the 74-year old CFA franc would be replaced in the 8 member states of West African Economic and Monetary Union (WAEMU).[1] This blog identifies three key risks for the eco and its links to prospects for economic transformation – those of devaluation, shocks and debt.

Phyllis Papadavid (Research Associate, ODI) and Sherillyn Raga (Senior Research Officer, ODI)

5 February 2020

West Africa started the decade with plans for the eco – its newest single currency. It was announced that, in 2020, the 74-year old CFA franc would be replaced in the 8 member states of West African Economic and Monetary Union (WAEMU). This blog identifies three key risks for the eco and its links to prospects for economic transformation – those of devaluation, shocks and debt.

The eco’s devaluation risk  

The eco will signal greater regional independence. France’s Board representation at the Central Bank of West Africa (BCEAO) will be withdrawn. And WAEMU members will no longer keep half of their reserves at the French Treasury. However, there will still be a crucial link to Europe, given the eco’s euro peg. To support West Africa’s economic transformation, the eco needs to be a stable store of value.

There are two probable sources of devaluation risk. The first is the likely market assessment that the eco is overvalued and at an uncompetitive level for WAEMU countries, given the euro’s trade-weighted value. To the extent that it is overvalued, there is a risk that the BCEAO would devalue from the level of the current CFA franc. This would provoke inflation. The 50% devaluation of the CFA franc in 1994 led to an average inflation spike of 28% in WAEMU countries.

A second source of devaluation could come from the BCEAO’s credibility being tested. This could stem from France’s loosened supervision; from the fact that a date has yet to be set for the eco’s introduction, preventing market positioning; or from opposition to the peg from the policy makers of the larger economies, such as Ghana. If fiscal discipline is also judged to be insufficient, this will pressure the eco and prompt BCEAO intervention.

Amid devaluation risk, the BCEAO has a balancing act to perform, which includes ensuring exchange rate stability and facilitating liquidity. Both are essential to sustained economic transformation. For example, the former will prevent losses to early-stage export manufacturing industry owing to excessive currency fluctuations. Equally, credit provision (in the form of access to finance and low borrowing costs) is crucial to support investment in new industry.

The eco’s vulnerability to shocks 

The BCEAO’s capacity may be limited by WAEMU economies’ vulnerability to shocks, particularly when it comes to commodity prices. Most of these countries are oil importers but commodity (mineral and agricultural) exporters. To take one example, an oil price decline would improve member countries’ trade positions. However, a persistent oil price decline, coinciding with lower global demand and commodity prices, would not augur well. The CFA franc typically shows sensitivity to these shocks (Figure 1).

Figure 1. The CFA franc tend to move with global commodity prices

Source: IMF data on exchange rates and commodity prices

WAEMU’s vulnerability to commodity price shocks could mean that reserves are tied up in a precautionary liquidity cushion. As things stand already, recent estimates suggest that, at 4.3 months, WAEMU economies’ import cover is below the 5.8 considered appropriate by the IMF. The case of Nigeria is illustrative. Despite its natural wealth, adverse price shocks coupled with a naira peg meant reserve depletion (and FX rationing) at the expense of Nigeria’s economic transformation and diversification away from oil.

Similarly, the BCEAO may have to defend the eco through selling foreign reserves via open market operations. As with many emerging market central banks, the BCEAO could also increase its policy rate or banks’ reserve requirements to mitigate depreciation. But there is an opportunity cost in holding up reserves that could have been employed in productive investment. Moreover, a tighter monetary stance, via higher reserve requirements, would curtail bank funding to the productive sector.  

A problematic pegged exchange rate regime with limited foreign reserves is a familiar one in the case of Papua New Guinea (PNG). PNG is an oil and commodity exporter and operates an Australian dollar currency peg. During the 2014 oil price decline, its reserves declined by 29% as it defended the kina. Eventual FX rationing limited financial transactions and firms’ production, particularly those that required imported inputs. There was minimal to no economic transformation: in 2014, the financial services and manufacturing industries contracted by 16% and 1%, respectively. 

The eco’s fiscal convergence risks 

Realising the vision of the Economic Community of West African States (ECOWAS) for economic and monetary union has been a bumpy journey. In 2000, ECOWAS created a roadmap for a single currency by 2020. Although the first phase was to introduce the eco by 2015 in the West African Monetary Zone (WAMZ), comprising The Gambia, Ghana, Liberia, Nigeria and Sierra Leone and Liberia, this was abandoned owing to insufficient economic convergence. With the eco now due to launch in WEAMU economies in 2020, there is still a desire for its usage across ECOWAS – but convergence remains a problem.

Economic convergence will be key for the eco. And there is likely to be little of it. ECOWAS convergence criteria include a budget deficit limit of 3% of GDP, an inflation rate cap of 5%, a debt-to-GDP ratio of 70% and exchange rate fluctuation within a +/-10% band. As of December 2019, only Togo had met these. Inflation has not converged and is as high as 24% in Liberia. When it comes to fiscal convergence, not only have targets been missed (Figure 2) but also the IMF assessed The Gambia, Cabo Verde, Ghana and Sierra Leone as in debt distress in 2019.

Figure 2. Most ECOWAS countries do not meet the fiscal deficit criteria

Source: 2019 IMF Fiscal Monitor Report

Looking ahead

As Europe’s experience has shown, political partnership is important for monetary and economic union. ECOWAS leaders have expressed the belief that, as countries meet convergence targets, an ever wider union will emerge. However, in practice, there has been little real cohesion. WAMZ heads recently released a joint communiqué expressing concerns over WAEMU’s eco adoption. And the region’s two big economies are at odds: Nigeria indicated that it was not ready for an ‘ECOWAS eco’ in 2020, while Ghana is keen. An Extraordinary Summit of WAMZ heads of government will be held soon. A commitment to follow WAEMU and plan for eco adoption would be positive. Crucially, an ECOWAS central bank could promote the financial stability that is crucial for economic transformation. One way would be to reduce political influence from any country pursuing high-risk policy, such as excessive debt financing. A commitment to a stable (and eventually freely floating) regional eco, low inflation and fiscal discipline would improve investment ratings and promote investment inflows geared towards greater economic transformation.

Photo: CFA Francs from Benin. Arne Hoel / World Bank / World Bank. CC BY-NC-ND 2.0

ECONOMIC VULNERABILITIES TO HEALTH PANDEMICS: WHICH COUNTRIES ARE MOST VULNERABLE TO IMPACT OF CORONAVIRUS

Sherillyn Raga and Dirk Willem te Velde, February 2020

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Growth and economic transformation pathways are subject to a range of shocks that will affect economies in varying ways. In the past we have examined the impact of shocks such as financial crises, the eurozone crisis, or a slowdown in China. Health emergencies can also have major economic impacts on low and middle income countries and we examine these in this paper.

On 28th January 2020, the WHO declared a public health emergency of international concern around Novel Corona Virus 2019, following previous emergencies around H1N1 (2009), Ebola in West Africa (2014), Polio (2014), Zika (2016) and Ebola in DRC (2019). At this stage it is difficult to understand the precise impact of the latest virus, but it has already claimed the lives of more than 360 people (as of 3 February 2020) and has disrupted travel.

This paper assesses the possible vulnerabilities and impacts in low and middle income countries to the effects of this outbreak. Much of the outbreak is currently centred around China with the affected areas effectively being under lock-down. This will affect the Chinese economy and beyond. Many countries in South East Asia and Africa are increasingly dependent on economic links with China for their growth and economic transformation.

Photo: Economic impact due to air travel restrictions as a result of health pandemic. Arne Hoel/The World Bank. Licence: (CC BY-NC-ND 2.0)

 

Arkebe Oqubay | Explaining Asia’s economic transformations.

Asia’s economic transformations hold crucial lessons for latecomer countries, including those in Africa. Deepak Nayyar’s latest book, Resurgent Asia, convincingly demonstrates the fundamental importance of technological development, learning and industrialisation in Asia’s transformational journey from developing to industrialised economies. The book also illustrates the essential role of the state as leader, catalyst and supporter of Asia’s transformation, albeit with different roles in different sectors, countries and development stages.

(based on blog published first by UNU-WIDER)

Arkebe Oqubay ( ODI Distiguished Fellow)

30 January 2020

Asia’s economic transformations hold crucial lessons for latecomer countries, including those in Africa. Deepak Nayyar’s latest book, Resurgent Asia, convincingly demonstrates the fundamental importance of technological development, learning and industrialisation in Asia’s transformational journey from developing to industrialised economies. The book also illustrates the essential role of the state as leader, catalyst and supporter of Asia’s transformation, albeit with different roles in different sectors, countries and development stages. Openness works well for industrialisation and transformation only when complemented by strategic actions and industrial policy.

A trilogy on Asia’s transformation

Deepak Nayyar — economist, thinker, leading scholar — has written yet another splendid book. Resurgent Asia: Diversity in Development, together with the excellent Asian Transformations: An Inquiry into the Development of Nations (2019), recently edited by Nayyar, and an earlier path-breaking book, Catch Up: Developing Countries in the World Economy (2013), form a trilogy of scholarly work on Asia. The significance of Resurgent Asia lies in its timing, coming as it does 50 years after the publication of Myrdal’s Asian Drama: An Enquiry into the Poverty of Nations (1968) – a seminal, if pessimistic, book on Asia’s prospects for development written after a decade of research.

Asia is undoubtedly the most dynamic region of our time. It has witnessed a phenomenal transformation, with profound implications for the global economy in the 21st century. According to Nayyar’s historical analysis, Asia accounted for more than two-thirds of total global manufacturing output in the mid-18th century but this had gone down to a meagre 7% in the late 19th century. Resurgent Asia is a bold and insightful analysis of the resurgence that has taken place over the last half century. The analysis is supported by a comparative review of sub-regions — East, Southeast, South and West Asia — and an in-depth enquiry into the diversity of development in 14 economies — China, South Korea and Taiwan in East Asia; Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam in Southeast Asia; Bangladesh, India, Pakistan and Sri Lanka in South Asia; and Turkey in West Asia — accounting for four-fifths of Asia’s population and income.

The book is written in a lucid and reader-friendly style. It analyses the economic and social transformation of the continent and the process of catch-up in Asia’s most dynamic economies (such as China and South Korea), highlighting the diverse paths they have taken in their development. Yet, despite such diversity, there are discernible patterns, pointing to substantive analytical lessons that emerge from the Asian development experience.

A multidimensional analytical approach

The richness of Resurgent Asia lies in the multidimensional analytical approaches through which the author unravels the continent’s transformation. The analysis is underpinned by (i) theoretical understanding, (ii) conceptual clarity, (iii) a historical perspective, (iv) empirical evidence at Asian, sub-regional and country levels, (v) consideration of the underlying drivers and (vi) critical issues in development. The book also looks forward, considering the future of Asia over the next quarter-century, without falling into the trap of prophesising.

The book emphasises two important messages – that there is no prescribed path or magic wand, or even an ‘Asian model’; and that latecomers travelling along their own paths have the opportunity to catch up. Unlike Myrdal’s Asian Drama, which epitomised the European perspective, Resurgent Asia is written from the Asian point of view. The political economy approach is based on ‘the premise that economic problems cannot be studied in isolation but must be situated in their wider historical, social, and political context’, without overlooking the role of government and politics, while amplifying the analysis of underlying economic and social factors.

The implications of Resurgent Asia

Key theoretical arguments examined in the book include the relationship between structural change and growth; the importance of synergies and complementarities of sectors for sustained growth and structural transformation; and the idea that the system is only as strong as the weakest link in the chain. Nayyar adduces empirical evidence to show the vital role of industrial transformation and industrial policy, and questions the notion of international openness as the key driver of Asian transformation. He convincingly demonstrates the fundamental importance of technological development, learning and industrialisation in Asia’s transformational journey from developing to industrialised economies. Nayyar also illustrates the essential role of the state as leader, catalyst and supporter of Asia’s transformation — although the role varies across sectors, countries and development stages.

Resurgent Asia, through scrutiny of Myrdal’s work, explores the strong scholarly tradition of the development economists of the 1960s and 1970s. Although Myrdal emphasised an interdisciplinary approach, and the importance of political and historical perspectives, as well as understanding the values and subjectivity of the researcher, he was no doubt a victim of the European perspective. Resurgent Asia unequivocally exposes the error of hasty predictions or prophecies that scholars make based on observed trends, which invariably tend towards the pessimistic. Optimism is also an important lens (a ‘beam in the eye’) – rooted in the belief that the human race has a strong survival instinct and is a powerful force for transformation.

Lessons for Africa

Resurgent Asia also has significant relevance for Africa. First, it shows that countries can transform their development trajectory, bringing about fundamental socioeconomic transformation and economic catch-up within the space of one to two generations. Underdevelopment and poverty is not a destiny.

Second, the Asian experience shows that diversity in development paths is the rule rather than an exception. African countries should discover and pursue their own economic development paths, based on their own specific conditions and contexts, among which the legacy of colonial rule is significant.

Third, both the standard Afro-pessimism view advocated by influential scholars and the African-dummy research approach, which denies African diversity, are erroneous. Finally, African policy-makers and scholars should note that the state’s developmental role and industrial policies are essential to sustained growth and fundamental structural transformation. As for all latecomers, policy learning by government and technological learning by firms are key ingredients for economic catch-up.

Among the additional insights that Resurgent Asia brings are issues related to colonialism, openness and inclusiveness. First, the decline and fall of Asia was attributable to colonialism and imperialism. Unlike countries in Latin America and Africa, most Asian countries have a long history of well-structured states and cultures, which colonialism did not entirely destroy. The political independence that restored their economic autonomy and enabled them to pursue national development objectives has been an important underlying factor motivating their drive to catch up.

Second, economic openness has supported development in Asia when it has taken the form of strategic integration with, rather than passive insertion into, the world economy. Openness – a necessary but not sufficient condition – has been conducive to industrialisation only when combined with effective industrial policy.

Third, development outcomes in Asia have varied greatly across countries and between people. The massive reduction in absolute poverty might have been even greater had it not been for the rising economic inequality among people and across regions. Only development that is inclusive, that creates employment and reduces inequality, can lead to economic growth in Asia that will be sustainable over the next 25 years.

Latecomer advantage and ‘newness’

History shows that economic miracles occur in the least expected regions and countries: as the classical political economist Frederick List (1841) underlines, ‘no nation has been so misconstrued and misjudged as respects its future destiny and its national economy as the United States of North America, by theorists as well as by practical men’. The US political economist Thorstein Veblen (1915) reminds us ‘The German industrial system was some two-and-a-half or three centuries in arrears … Germans are new to this industrial system.’ Contrary to the conventional view, backwardness is not only a disadvantage but also an advantage. Gerschenkron (1952) highlights ‘the development of a backward country may, by the very nature of its backwardness, tend to differ fundamentally from that of an advanced country’, because the ‘relative backwardness’ (the degree of backwardness and industrial potential of each county) ‘diverges in terms of variations in the pace of the development or the rate of industrial growth, productive and organizational structures of industry, the application of institutional instruments, “spirit” or “ideology”’.

Resurgent Asia sets a high bar for new contemporary publications on Asia and broader development economics research. It is required reading for policy-makers, researchers and students, particularly in emerging and developing countries. Policy-makers will benefit from the lessons drawn, which take full account of the complexity of development endeavours. Researchers will appreciate Nayyar’s methodology, with its integration of economic theory, empirical evidence and policy analysis, always situated in historical perspective. This book is a most welcome contribution to development economics.

Photo: A city park in Tianjin, China. Yang Aijun / World Bank. CC BY-NC-ND 2.0

Linda Calabrese (ODI)| Reflecting on the China-trade- industrialisation nexus in Uganda

Our recent analysis  on industrialisation in Uganda confirms that Museveni is right to focus more on attracting investors from China, but Uganda’s exports need to diversify more and need to go beyond primary products to China.

Linda Calabrese (Research Fellow, ODI)

16 January 2020

Our recent study on industrialisation in Uganda supports President Museveni’s focus on attracting investors from China, but Uganda needs to diversify its exports  beyond primary products.

During a recent meeting between Uganda’s President Yoweri Kaguta Museveni and China’s high-ranking diplomat Yang Jiechi, President Museveni encouraged China to buy more agricultural goods from Africa. President Museveni has often encouraged African exports, especially in relation to China. In the past, he argued that Uganda imports too much from China, including goods that could be produced locally – and he encouraged African countries to produce and export more to China.

This is part of a broader narrative put forward by President Museveni, aiming to achieve an overall trade surplus with the rest of the world. The Government of Uganda has taken several steps in this direction, towards a development model hinting at import substitution, as the Buy Uganda Build Uganda policy attests.

The Government of Uganda wants Ugandan firms and entrepreneurs to produce locally and to use as many domestic inputs as possible. This means making shoes from Ugandan leather, or furniture from Ugandan wood, but also focussing on certain sectors, namely agroprocessing and extractives, based on domestically produced agricultural and mineral goods.

This has a rationale grounded in geography, as we discussed in our study on industrial development in Uganda. Uganda is a landlocked country, with high costs of transport that make imported goods quite expensive. Industrialising by using domestic goods would allow the country to save a lot of money in transport costs. However, this translates into an industrialisation model that is narrowly focussed on a few selected products, and excludes other pathways, such as global and regional value chains.

What role does China play in this story? This is two-fold one – as part of both the trade and industrialisation story.

On trade, China is the biggest source of Uganda’s imports, providing 15% of all imported merchandise in 2017 (followed by the UAE and Kenya). China exports to Uganda much more than Uganda exports to China. Uganda has consistently had a negative trade balance with China since at least the mid-1990s. While China exports a diversified mix of goods (electronic goods, garment,  footwear and machinery) to Uganda, 90% of Uganda’s exports to China are agricultural goods, comprised mostly of leather and skins.  

China provides duty-free, quota-free access to its market to least-developed countries such as Uganda. Most of the goods Uganda exports the most to the rest of the world which include coffee, tea and gold can therefore already be imported into China at 0% tariffs.

In terms of industrialisation, China is an important player in Uganda’s economic development. President Museveni repeatedly invited Chinese investors to come to Uganda, and these invitations were responded positively by investment in the country’s manufacturing sector, including the recent establishment of an electronics assembly plant near Kampala. In addition to China, investors from other emerging markets and from the rest of East Africa are also involved in the Uganda’s manufacturing.

Based on this, we can ask: is President Museveni’s call for a closer engagement with China the correct one?

Uganda should definitely aim to export more, but there are two caveats. The first one is about the trade surplus. For Uganda to have a trade surplus might not be necessary in the short term. Uganda receives remittances and aid from abroad, that help cover its import bills even if the exports fall short. Moreover, imports are very important for a country aiming to industrialise and therefore it may not be wise to try to reduce them at all costs.

Secondly, President Museveni called for more exports to China (and not just any country). Of course, exporting more would be better, but Uganda should not try to export the same agricultural products (as President Museveni seems to suggest). Instead, it should aim to diversify its export basket. Ugandan businesses should try toproduce and export a wider range of goods, including manufactured ones.

The goods that Uganda could realistically produce at this stage (garment, footwear, small electronics, packaging etc.) are already produced by China efficiently and at lower costs. Or they are too bulky (e.g. furniture and construction materials) to be shipped to China and remain competitive given the transport costs.

This is the situation faced by many developing countries, including those geographically closer to China (e.g. Cambodia). Despite having similar duty-free, quota-free access to China, the US and Europe, these countries mostly export to the latter. It is likely that Uganda would face a similar situation. Therefore, the best strategy for Uganda would be to aim to diversify its exported goods –  and not to mainly focus on China as an export market.

Then there is the issue of industrialisation. If we agree that Uganda should produce and export a wider range of goods, this is crucial. To expand its production, Uganda may need to import more machinery, equipment and materials. This call for more imports, rather than less – but it does not matter, if it is beneficial for exports to grow as well.

To promote industrialisation, we have seen that President Museveni is inviting investors from many countries, including explicit invitations to Chinese investors. Together with India, China is the main investor in the country. We do not have disaggregated data to confirm whether Chinese firms invest more than others in Uganda’s manufacturing sector. However, in the whole of Africa, we know that while the largest investors (US, UK and France) focus their investments on the extractive and financial sectors, Chinese companies invest heavily in extractives and construction, but also, to a smaller extent, in manufacturing. President Museveni decided appropriately to engage with investors from China. He could also extend the invite to other emerging markets and regional investors that can add value to and enhance Uganda’s produce and exports.

The Government of Uganda’s strategy to transform the economy, create jobs and improve livelihoods should focus on transforming production and raising exports, aiming for European and African markets, rather than only Chinese. Uganda would need to look beyond agribusiness and extractives, and consider whether the country can be a more active participant in global and regional value chain production. The Government of Uganda could increase its efforts in investment and local production promotion and aftercare, as well as in building better infrastructure to attract and work with other investors from China and India.

 


Photo: A marketplace in Kampala, Uganda. Arne Hoel / World Bank . CC BY-NC-ND 2.0

 

Industrial development in Uganda

The Ugandan economy has experienced sustained growth since the 1990s. During the same period, Uganda has seen some degree of economic transformation, with the industrial and services sectors growing compared with the agriculture sector. However, the manufacturing sector has remained stagnant. This has been accompanied by low levels of job creation, diagnosed as ‘jobless growth’ (MGLSD, 2018).

This is a challenge for Uganda, as its rapid population
growth requires large-scale job creation to absorb new entrants into the labour
market. The Supporting Economic Transformation (SET) programme has estimated
that, between 2015 and 2030, Uganda needs to create 650,000 new jobs annually
(or 1,780 jobs each day) to employ its people (SET, 2018). Large-scale employment
creation can be achieved through labour-intensive manufacturing.

This report aims to review the framework for industrial
policy in Uganda and to assess its potential to support the development of
manufacturing. It looks at the policies and institutions in charge of supporting
the manufacturing sector.

Linda Calabrese, Frederick Golooba-Mutebi and Maximiliano Mendez-Parra, December 2019

The Ugandan economy has experienced sustained growth since the 1990s. During the same period, Uganda has seen some degree of economic transformation, with the industrial and services sectors growing compared with the agriculture sector. However, the manufacturing sector has remained stagnant. This has been accompanied by low levels of job creation, diagnosed as ‘jobless growth’ (MGLSD, 2018).

This is a challenge for Uganda, as its rapid population growth requires large-scale job creation to absorb new entrants into the labour market. The Supporting Economic Transformation (SET) programme has estimated that, between 2015 and 2030, Uganda needs to create 650,000 new jobs annually (or 1,780 jobs each day) to employ its people (SET, 2018). Large-scale employment creation can be achieved through labour-intensive manufacturing.

This report aims to review the framework for industrial policy in Uganda and to assess its potential to support the development of manufacturing. It looks at the policies and institutions in charge of supporting the manufacturing sector. We focus on manufacturing because other activities classified under the industrial sector (construction and mining) require separate discussions and different policy tools.

Photo: Farmer in Uganda supporting the country’s agricultural productivity and contributing to its GDP. Stephan Gladieu / World Bank . Licence: (CC BY-NC-ND 2.0)

Economic transformation and poverty

Vidya Diwakar, Alberto Lemma, Andrew Shepherd and Dirk Willem te Velde, December 2019

Economic transformation (ET), the continuous movement of resources (such as labour and capital) from low- to higher-productivity activities, is crucial for sustained job creation and a more resilient economy, but little attention is paid to the detailed mechanisms by means of which ET relates to the poorest and most vulnerable people in society. This paper describes the main channels through which ET links to poverty, including through production patterns involving the poor directly or indirectly, consumption by the poor and other routes, including government services and context more generally. There are many direct and indirect ways through which ET supports the livelihoods of the poorest in society, but there may also be unintended effects that exclude benefits because of gender, ethnicity or other factors (unless complementary actions are implemented).

Vidya Diwakar, Alberto Lemma, Andrew Shepherd and Dirk Willem te Velde, December 2019

Economic transformation (ET), the continuous movement of resources (such as labour and capital) from low- to higher-productivity activities, is crucial for sustained job creation and a more resilient economy, but little attention is paid to the detailed mechanisms by means of which ET relates to the poorest and most vulnerable people in society. This paper describes the main channels through which ET links to poverty, including through production patterns involving the poor directly or indirectly, consumption by the poor and other routes, including government services and context more generally. There are many direct and indirect ways through which ET supports the livelihoods of the poorest in society, but there may also be unintended effects that exclude benefits because of gender, ethnicity or other factors (unless complementary actions are implemented).

The paper proposes the use of a range of indicators to better understand which transformation pathways are more poverty-reducing.

Photo: Farmers harvest their crops in the field near Kisumu in Kenya. Peter Kapuscinski / World Bank . Licence: (CC BY-NC-ND 2.0)

Dirk Willem te Velde(ODI) |Industrialisation in a digital era

The Industrial Development Report 2020 (IDR 2020) by UNIDO, ‘Industrialization in a Digital Age’, is spot on when it points to the centrality of building more industrial or productive capacities, as this will help in engaging better with the digital economy. This builds on our past findings in Africa and supports our preliminary findings in Cambodia, where we recently held a consultation. It is also a message to take to Africa Industrialisation week in November 2019.
The plight of industrialisation is often overlooked when countries move to a digital economy. Some countries are wrongly advised that manufacturing is yesterday’s strategy. This new UNIDO IDR corrects that narrative.

Dirk Willem te Velde (Principal Research Fellow, ODI)

11 November 2019

The Industrial Development Report 2020 (IDR 2020) by UNIDO, ‘Industrialization in a Digital Age’, is spot on when it points to the centrality of building more industrial or productive capacities, as this will help in engaging better with the digital economy. This builds on our past findings in Africa and supports our preliminary findings in Cambodia, where we recently held a consultation. It is also a message to take to Africa Industrialisation week in November 2019.

The plight of industrialisation is often overlooked when countries move to a digital economy. Some countries are wrongly advised that manufacturing is yesterday’s strategy. This new UNIDO IDR corrects that narrative.

The IDR 2020 points to several digital divides in production and use, between and within countries and across sectors. It sees ADP (advanced digital production) technologies operating as islands in a sea of firms without many capabilities. This will indeed be a key trend to watch for the future. Adair Turner posited in a lecture last year there would be very few high-productivity jobs by 2100, with lots of low-productivity jobs around them (‘hollowing-out’ of skills). This seems to be true within developed countries. Could the same concentration and specialisation happen between richer and poorer countries? Our findings on robots in Africa, such as that the share of world robots sales attributed to Africa is 10 times lower than its share in gross domestic product, point to digital divergence not convergence.

This represents a major risk to catch-up. Is catch-up a thing of the past without targeted corrective action? In his comments (at the back of the IDR2020), Rodrik argues that ADP technologies can enable faster catch-up, but without capabilities, skills and institutions they raise barriers to convergence by laggards.

Digitalisation is gathering pace differently across countries, with many differences across productive sectors too. The IDR 2020 points to the different levels of digital innovation across manufacturing, with the garments and food sectors lagging far behind electronics and automotives. The effects across major economic sectors are even larger. Our work in Cambodia and Kenya suggests that, while services apps like digital payment systems (such as Wing and Pi Pay in Cambodia) or transport apps (including tuk tuk apps) are taking hold rapidly, and agricultural apps are also gradually being implemented (BlocRice and Agribuddy), there are ongoing concerns around innovation in manufacturing.

Another digital divide is around impact. Not only do the digital laggards install and use less digital technology, but also the above ODI evidence suggests they get less out of it in terms of productivity (3% versus 11% manufacturing productivity impact for low- versus middle-income countries for the same 10% increase in internet penetration). Lack of complementary action and skills reduces the impact of digital technology. Again, such evidence points to the need for urgent corrective action. Our previous work has suggested a two-pronged approach of building industrial capabilities and preparing rapidly for the digital transformation. IDR 2020  presents three policies: framework conditions, creating demand and strengthening capabilities.

Digital transformation may not benefit all, or everyone to the same extent. Distributional effects matter. The IDR 2020 suggests ADP technologies are associated with net benefits. This is likely to be true. But it does not mean there are no losses/losers and we do need to think about the vulnerable groupings along the digitalisation path. We recently discussed (in a 4 November meeting in Phnom Penh) our draft report ‘Fostering an Inclusive Digitalisation in Cambodia’, which argues for five actions, taking into account the political economy of digital transformation: (i) transform manufacturing innovation; (ii) provide skills for the future; (iii) promote a digital start-up economy for an inclusive economy; (iv) protect the most vulnerable groups in the digital economy; and (v) promote a public sector that leads by example.  

All of this demands a lot from government and private sector actors. Unfortunately, this does not always appear to work out. During the launch of IDR 2020, I argued that for effective industrial policies, governments require leadership skills, coordinating capacities and iterative approaches. They also need to lead by example and embrace e-governance so that firms do not need to suffer uncertain conditions around taxes or licences. Not every country can become an Estonia in two decades’ time, but they can try to make advances. Cambodia has regrettably regressed on some UN digital governance indices.

Laggards (in terms of countries, sectors or firms) have a window of opportunity. Many countries missed the manufacturing boat when China industrialised, and they certainly do not now want to miss out on the benefits of digital transformation. It is better to have a less employment-rich manufacturing sector, but with spill over effects for jobs in other sectors, than to have no manufacturing sector at all. This is a crucial and urgent message for middle income countries such as Cambodia that already have a sizeable manufacturing workforce, as well as for those African countries that still need to build up manufacturing.

Photo: Cambodia’s garment industry.  Chhor Sokunthea / World Bank . CC BY-NC-ND 2.0