Category: Slider

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.

DOWNLOAD HIGH FREQUENCY DATA TABLE

Commodity prices, food prices and hunger

Global and bilateral trade, trade costs and mobility

Capital markets, finance flows and monetary statistics

Employment and production

Others (selected)

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

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

(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 (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

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

Sherillyn Raga (Senior Research Officer, ODI)

5 July 2019

Last weekend, the G20 Leaders discussed a range of important global economic issues from innovation to climate change, among many others. Of particular interest to many, however, was how the G20 Leaders might apply political pressure to halt the ongoing US-China trade tension, given its impact in and beyond G20 member countries. This blog examines how a prolonged trade war might spillover to non-G20 low and middle income countries through lower global demand, changes in bilateral trade patterns, possible dumping and changes in relative exchange rate positions, and hence prospects for economic transformation. To address the possible consequences of the trade war, regulators should consider calibrating targeted sectoral interventions and forward-looking policy toolkits, diversifying external trade and investment partners, and building fiscal and balance of payment space moving forward.

Trade war spillover channels: short-term risks, medium-term implications

While the G20 Leaders Declaration emphasises the importance of a “free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment”, the Leaders were unable to convince Presidents Trump and Xi to end their protracted trade dispute. Given the size of these two economies, persistent trade tensions will inevitably disrupt growth and prospects of economic transformation in the following ways.

Moderated global demand and activity

A worsening of the trade war and an increase in retaliatory tariffs will drive up prices of imports and goods with intermediate imported inputs, consequently lowering US and Chinese consumption. The US and China alone are responsible for 22% of global imports and contribute 40% to global GDP.  Lower US and Chinese consumer demand will thus drive down export production and investments abroad, reducing overall global income and activity. This is reflected by the deceleration in global economic growth which coincided with the imposition of US and then Chinese tariff increases in 2018, from 3.8% in the first half to 3.2% in the second half of 2018.

The IMF estimates that the current trade spat will cost 0.5% of global GDP in 2019. If the planned US-China tariffs are extended to all traded products from both countries, the IMF expects that global output will be further reduced by 0.3% in 2020. Continued weak global performance and outlook can disrupt the momentum in high-productivity exports, foreign direct investment and global value chain (GVC) firms, thereby affecting the process of economic transformation globally.

Change in bilateral trade patterns

While the global economy will lose out in net terms from the US-China trade war, Chart 1 shows some exporters are well placed to gain temporarily. For example, US imports from Vietnam rose by 40% year on year (yy) over the year to January – April 2019, while US imports from China fell by 13% during the same period, according to the Financial Times. In particular, as of the second quarter of 2019, processing of industrial products and manufacturing is Vietnam’s fastest growing sector at 9.15% growth yy, followed by services at 6.9%, and agriculture at 2.9%–an indication of how the trade war is accelerating the movement of Vietnamese resources to high productivity sectors. Overall, the ADB estimated that if the US-China trade war escalates further, Vietnam could potentially gain up to a cumulative of 2% of GDP in the next 3 years primarily because Vietnam exports many of the Chinese products affected by the US tariffs. Cambodia’s garment manufacturers were also assessed to gain from the trade war, and this may have contributed to the 32% yy growth in the value of Cambodian export goods in 2018. While statistics are pointing to gains for Cambodia and Vietnam, analysts suggest these gains may be short-lived because of domestic risks, such as Cambodia’s high labour costs, lack of business-supporting infrastructure and relatively lower productivity as well as the risks surrounding Vietnam’s real-estate boom and higher dependency on foreign capital.

Meanwhile, China’s imports from the US sharply moderated to 0.9% growth in 2018 from 14.2% growth in 2017. China’s tariffs targeted mostly US agricultural products such that trade diversion is evident in the 63% quarter on quarter growth of China’s largely soybean imports from Brazil in the last quarter of 2018. Even prior to the US-China trade war, Brazil was a top global soybean exporter. In anticipation of added demand from China, Reuters reports that Brazil’s soy plantations have expanded by 2 million hectares, while sugar cane land have shrunk by nearly 400,000 hectares. Brazil is consequently at risk of“de-industrialisation” as a result of shifting its resources to agriculture. Since this shift is focused heavily on soybeans, the absence of vertical and horizontal diversification could make the Brazilian economy vulnerable.

China’s export oversupply and dumping in developing countries

If the changing bilateral patterns have led to the sourcing of tariff-affected imports from sources other than China and US, then who will consume American agricultural exports and Chinese intermediate manufactured goods? In the US, soybean prices have become much cheaper and those that cannot be exported are mostly stored. The government has also earmarked US$12 billion to help its farmers weather the fall-out. But what about excess supply from China?

One possibility is to offer China’s excess exports to other markets at very competitive prices, including below the price at which these products could have been sold in the Chinese market (i.e., dumping). Supply of relatively cheaper imports not only increases a country’s trade deficit, but importantly, also pushes consumers away from relatively expensive domestic counterpart products. This depresses prices in the import-competing sector, creating a trigger to lay off employees or shut down operations if firms cannot absorb the impacts of competition. This is already happening in India, where an Indian Parliamentary report from July 2018 estimated that dumping of Chinese solar panels resulted in a loss of 200,000 jobs. The report also suggested that an increase in Chinese import shipments across various sectors has forced several micro, small and medium-sized enterprises to exit the market—a setback to India’s target of stimulating its manufacturing sector to at least 25% of GDP.

Exchange rates and risks of financial market contagion

The US has a trade deficit with China (i.e., US imports more than they export to China). At least by magnitude and in the medium-term, the decline in tariff-affected US imports from China will more than offset the loss in US export revenues due to China’s retaliatory tariffs. This will narrow the US trade deficit and induce dollar appreciation. A stronger dollar will strain payment of foreign-denominated debt, especially for countries that already have high levels of debt. As of May 2019, 6 out of the 7 LICs considered to be in high debt distress and 12 out of 25 LICs considered to be at  high risk of debt distress are in Africa.

Conversely, the Chinese Renminbi (RMB) is expected to weaken with the decline of export receipts from the US. This is reflected by movements in the real effective exchange rates in July 2018 when US and China first began to raise tariffs (Chart 2). A weaker RMB makes Chinese products more competitive compared to the rest of the world[1]. This puts pressure on other emerging market currencies to depreciate, especially value chain suppliers to China and Chinese competitors. Given the high exposure of East Asian countries to China and their relatively flexible exchange regimes, currencies in the region have been able to absorb the shock and closely followed the movement of RMB against the US dollar (Chart 3).

However, if tariffs are extended to all traded products between China and US, further depreciation in East Asian currencies will dampen investor appetite for emerging market assets in general. As investors reallocate their portfolios amidst trade uncertainties, fast-moving capital would first be withdrawn from investments in high-risk markets (mostly in LICs) and moved to safe havens. In the case of South Africa, the stock market index lost more than 3% and the Rand depreciated by 4% month-on-month in May 2018 following the US’ hike in tariffs for US$200bn worth of Chinese imports. If global business optimism continues to decline, capital may also flow out from government bonds and FDIs—investments that are critical for sustaining public services and creating jobs in many LICs.

How to address the effects of the US-China trade war in the poorest economies?

An effective, rules-based international trading system would prevent such trade disputes and unfair practices. But as the G20 Summit outcome suggests, even an economically powerful group such as the G20 leaders can barely put pressure on Presidents Trump and Xi to change their respective sovereign policies on trade. With no strong signal of an end to the trade war in sight, we suggest the following approaches for low and middle income countries:

Calibrate a targeted and forward-looking policy approach. While it is tempting for developing economies to weaken their currencies to counteract possible competition or dumping, caution is important. Apart from raising exports, a weak currency also drives up import prices, and this move can be inflationary for net-food importers, a grouping which includes many countries in Africa. Public policies should support productivity-enhancing exports and manufacturing sectors that are directly affected by the trade war. Such policies could include expanding credit lines or providing incentives to sustain operations and investments in technology and skills amidst the trade war. The use of forward-looking policy toolkits such as macroprudential regulations and capital flow management are targeted approaches that can also reduce specific vulnerabilities in the financial sector.

Diversify external partners. China is increasingly becoming a major trading partner, source of FDI, and creditor to governments in African and less developed Asian countries. For these countries, it is unsurprisingly hard to manoeuvre policy options economically and politically, for example, for Uganda to raise the issue of dumping against China. One solution is to balance sources of growth, capital and trade through other bilateral and regional partners. In the case of Africa, boosting partnerships with countries and groupings beyond the US and China, including the African Union/African Continental Free Trade Area and Commonwealth is a starting point.

Build buffers. Developing countries and LICs are structurally diverse and hence external shocks affect economies differently and through various channels. Moving forward, a very effective strategy to shield a country from the unintended consequences of non-economic disturbances is to have buffers (e.g., ample foreign reserves, healthy fiscal balance position) that provide space for monetary and fiscal policies to support high productivity domestic sectors and ensure economic transformation is not derailed by unfavourable external (and in the case of this trade war, also political) developments.

[1] This scenario is more probable at least in the short-term while traders from both sides are holding decisions (e.g., whether they will relocate, divert trade, or change preferences) and government do not intervene heavily in the foreign exchange market.

Photo: Flags of the G20 nations. CC BY-NC-ND 2.0.

Dirk Willem te Velde (Principal Research Fellow, ODI)

24 April 2019

Unless Cambodia addresses a number of short- and long-term challenges related to the impact of trade, technology and China, future pathways for inclusive economic transformation are at risk. As we discuss at greater length in a new SET scoping note in co-ordination with CDRI and support by Australia’s Department of Foreign Affairs and Trade, Cambodia has been the sixth-fastest growing country in the world over the past two decades. It has reduced poverty and inequality significantly and it graduated to lower-middle-income country status in 2015. It has achieved remarkable growth in exports of garments, attracted record numbers of tourists, expanded agricultural land leading to significant exports of rice, benefited from high commodity prices and recently witnessed a construction boom. It has also shown signs of diversification into bicycles, footwear and, to some extent, maize, vegetables, sugar and palm oil. Special economic zones (SEZs) have played a crucial role in kickstarting manufacturing. However, Cambodia currently also faces major challenges to its hitherto successful growth model and these need a response. The challenges can be summarised as trade, technology and China. In the coming months, ODI and CDRI will examine the implications of digital technology for Cambodia’s future transformation in greater detail, building on our recent consultations.

Trade

Cambodia faces the removal of trade preferences in the coming year, if the EU decides to withdraw Everything But Arms preferences as a result of human rights considerations. Cambodia’s exports to the EU make up two fifths of total goods exports. Most-favoured nation tariffs in the EU are 12% on garments and between 8% and 17% for footwear, but so far Cambodia faces zero tariffs. Garments support 700,000–800,000 mostly female low-skilled jobs. Anything that affects the garment sector has direct implications for inclusive economic transformation.

Our interviews in Cambodia for the scoping paper suggest that preferences are perhaps not as important as previously considered, at least in the short run. If firms can absorb a change in minimum wages from $60 in 2010 to $182 per month currently, they may also be able to absorb the (smaller) changes in preferences. However, it is likely that a loss in preferences would lead to lower sectoral growth than would otherwise have been the case. Hence, Cambodia needs urgently to improve competitiveness by enhancing skills, improving infrastructure and streamlining regulation and licences (and in addition to improving its human rights record).

Digital technology

The digital economy is advancing rapidly globally, and low- and lower-middle-income countries will not be excluded. Cambodia aims to become a digital economy, although this may take some time. Rather than fearing the labour impact of digitalisation on labour-intensive SEZs and garment activity, Cambodia needs to harness the digital economy for its competitiveness. One core element in this is the importance of ensuring the appropriate skills are available (especially cognitive skills to undertake non-routine tasks).

Our discussions in Cambodia suggested there is no agreed policy framework within which to consider how Cambodia can prepare for a digital economy in a comprehensive way. Cambodia needs to consider the future of specific sectors and activities; who would be the main gainers and losers from this; how skills can be developed to prepare for a digital economy; and especially how the poorest can also benefit from digitalisation. Interviews with manufacturing firms suggest there is still little awareness of the changes that may come sooner rather than later.

Prime Minister Hun Sen recently held a speech at a Cambodia Development Resource Institute conference on digital transformation. He argued that actions to date include the development of the Cambodia Information and Communication Technology Masterplan 2020, the drafting of the Cambodia e-Government Master Plan, the establishment of a Data Management Centre and the promotion of a legal framework for the digital ecosystem. But there are also challenges, such as building infrastructure to support the digital sector; developing an e-payment system and logistics network; creating a digital platform and developing an ecosystem; and promoting government digitalisation, entrepreneurship, digital literacy and open data. The Supreme National Economic Council has established a working group to formulate a digital economy policy framework. Cambodia needs to act urgently to become more engaged in the digital economy.

China

Cambodia has turned to China in recent years for economic support. On the one hand, this can lead to significant benefits. China brings billions of dollars of investment to Cambodia (responsible for much more than half of foreign direct investment in recent years), catering to 2 million Chinese tourists in Cambodia; investing in hotels and casinos; investing in SEZs whose firms utilise low-cost labour and trade access in the EU and US; and offering a large market for Cambodia’s exports.

But such engagement increases dependencies and may fail to bring significant benefits for Cambodia’s economic transformation. For example, the firms in the Sihanoukville SEZ have few incentives to upgrade, and have few linkages with the local economy, posting questions related to transformation in the future. The casino economy may cater to Chinese tourists, but it is not clear how this helps transform Cambodia’s economy. Complementary policies (e.g. innovation policies, skills development, casino taxes) are crucial to ensure engagement with China supports economic transformation.

The SET programme will in the near future engage around Cambodia’s economic transformation, especially with respect to the opportunities and threats of the digital economy and the implications for policies.

Photo: The Special Economic Zone in Khan Posenchey, Phnom Penh. Chhor Sokunthea/World Bank. License: CC BY-NC-ND 2.0.