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Sharing the wealth
Countries that enjoy a resource windfall should be prudent about distributing it all directly to their people
Angola is the second largest oil producer in sub-Saharan Africa and one of the continent’s richest countries. Yet more children under the age of five die there than in most places in the world.
Most resource-rich countries lack the types of institutions needed to manage natural resource wealth effectively, and past performance does not bode well for countries with a resource windfall. Many of their citizens face continued poverty with little prospect of a significant improvement in living conditions. Angola’s under-five infant mortality rate is a vivid example.
In recent years, high commodity prices and new natural resource discoveries have increased many countries’ resource revenues, both as a share of the budget and in percent of GDP, offering new prospects for raising the population’s standard of living (see Chart 1 - click to enlarge). But few countries stand out as good examples of effective resource wealth management. Botswana, Chile, Norway, and the U.S. state of Alaska are some exceptions.
The experience of the success stories suggests that natural resource wealth management requires a commitment to three interrelated principles: fiscal transparency, a rules-based fiscal policy, and strong institutions for public financial management. For example, Norway and Alaska are models of transparency in the way they collect and budget natural resource revenue. This transparency helps people understand the use of resource wealth and holds political leaders accountable for their decisions. Chile’s fiscal rules protect resource wealth from the vagaries of political pressure, and its strong institutions are able to manage public investment. This helps transform natural resource wealth into productive assets, including infrastructure and human capital.
Some suggest that governments should give up their resource revenue and distribute it directly to the population. There are some good arguments to support this view – and strong arguments against it. Direct distribution is not a silver bullet (Gupta, Segura-Ubiergo, and Flores, 2014).
Devil’s excrement
The weak track record of most resource-rich countries’ use of natural resource revenue supports the view that new discoveries could be as much a curse as a blessing. Why does this happen?
A resource boom can cause a currency’s real exchange rate to appreciate, which reduces the competitiveness of the country’s exports and diverts resources toward sectors of the economy that don't engage in foreign trade – what is widely known as Dutch disease. Moreover, analysts have found that resource wealth is often associated with government corruption that undermines democratic accountability. These arguments are often used to suggest that natural wealth can become a “resource curse.” This idea was captured vividly by Juan Pablo Pérez Alfonso, Venezuela’s former minister of mines and hydrocarbons and cofounder of the Organization of the Petroleum Exporting Countries, who described petroleum as the “devil’s excrement” and warned of its potential to spawn waste, corruption, excessive consumption, and debt.
Many resource-rich countries lack both robust public finance management systems to ensure the transparency and efficiency of their budget process and the checks and balances in the decision-making process that are needed to ensure an effective use of resource wealth. Without them, they have struggled to follow the positive example of countries like Botswana, Chile, and Norway.
Building strong, stable institutions takes time. In the meantime, some scholars suggest, countries should distribute their resource revenues directly to the population, to boost economic growth and improve living standards (see “Spend or Send” in the December 2012 F&D).
Various arguments support this view, chiefly the claim that distribution prevents the government from misusing resource revenues and increasing its size. Some resource-rich countries arguably would welcome some form of direct distribution of revenue, but in others it could constrain the optimal provision of public goods. Moreover, even if the goal is to limit the size of the government by limiting access to resource revenue, alternatives such as reducing taxes are probably more efficient.
Another argument focuses on the impact of taxation on accountability (Sandbu, 2006). If resource revenues were distributed to the population and taxed to finance a portion of public goods, citizens would demand greater accountability in public spending programs. But this assumes that the gains from greater government accountability outweigh the efficiency losses associated with transferring revenues to the population and then taking some back. It also does not take into account that the transfer mechanism may be afflicted by the same institutional weaknesses and corruption as those of a typical resource-rich country.
How much and to whom
Direct distribution is a way to transfer some or all resource revenue to citizens to reduce the government’s discretionary authority over such resources and foster greater accountability. Discretionary authority and accountability are linked because citizens are less inclined to demand accountability if politicians can choose who is to receive resource revenues.
Views differ on how much of the revenues to distribute. One extreme calls for passing all natural resource revenues on to citizens, while more moderate proposals – Birdsall and Subramanian (2004) proposed for the case of Iraq distributing at least half – suggest returning only a portion of revenue or even just part of the investment income from a natural resource fund. The debate over how much to distribute centers around the economic consequences of such distribution, including the impact on work incentives, household savings, and overall macroeconomic stability.
As for who should receive resource revenues, distributing resources to all citizens has the appeal of eliminating political discretion over which groups should benefit. But universal transfers can have unintended consequences – such as encouraging families to have more children, which can be avoided by limiting transfers to adults. Some argue for pursuing social goals by targeting the poorest segments of the population or imposing conditions such as children’s school attendance. These laudable goals could help galvanize support for such mechanisms. They could, however, also lead to tension between reducing the coverage by targeting a particular segment of the population – particularly the poor, whose political voice is usually weaker – and increasing accountability. Moreover, the poor are not well equipped to handle income volatility, which these mechanisms would need to address.
Some argue for direct distribution outside the budget, which is subject to government corruption. This proposal would set aside resource revenue from the budgetary accounts and subject it to scrutiny, perhaps by an independent body rather than the parliament. Collection and distribution could even fall to an institution other than the national tax agency. Proponents of this idea contend that a separate mechanism to distribute resource revenues is more credible in the eyes of the population. But however achieved, direct distribution is not a recipe for eliminating corruption. It is naive to assume that a corrupt government would agree to direct distribution to deal with the problem. And there is no guarantee that the mechanism for distribution would not suffer from similar corruption.
Speaking from experience
Alaska has implemented the best known and perhaps most successful example of a direct distribution mechanism. But it is a conservative model with a relatively small dividend amounting to only 3 to 6 percent of Alaskans’ per capita income. Just a share of Alaska’s oil revenue goes into the fund, and only the investment income from this fund is distributed – subject to a cap of 5 percent of the fund’s total market value. The fund is managed by the Alaska Department of Revenue, and strong checks and balances within the budget make it in many ways a model of transparency. The case is widely viewed as a success, but one that was clearly achieved from a position of institutional strength and transparency, not as a solution to an institutional problem.
Given the limited number of direct distribution mechanisms worldwide, a look at related policies offers insight into what does and doesn’t work. It is always risky to make inferences from related policies, but the following cases provide some lessons:
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Venezuela has established a series of social programs called misiones. One focuses on adult literacy and remedial high school classes for dropouts; another on universal primary health care; and yet others on the construction of new houses for the poor, retirement benefits for the poor, food at discounted prices, and scholarships for graduate studies. As highlighted by Rodrίguez, Morales, and Monaldi (2012), these programs are funded directly by the state oil company and are therefore run outside the budget. As such, they give increased discretionary authority to the government. Some studies suggest that these programs suffer from as much corruption and populist pressure as the budget itself – which calls into question whether direct mechanisms outside the budget circumvent corruption.
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Experience with income support programs in advanced economies highlights the plausible negative impact of direct distribution transfers on the labor supply. These programs are meant to provide basic support to households that have little or no earnings. Some of this income support is then taxed away. Such programs have been criticized for providing insufficient incentives to low-income earners to work; earned income credit programs for which only workers are eligible are one alternative.
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The conditional cash transfer programs now popular in many developing economies can also dampen the incentive to work. These programs seek to reduce poverty by providing support – in the form of a cash transfer – subject to certain conditions, such as enrolling children in school or receiving vaccinations. The objective is to break the cycle of poverty by helping the current generation while promoting investment in the future generation. Most studies have found that the impact on the labor supply is negligible if the transfer is small and the benefits are targeted to the poorest households. Programs with larger transfers and with broader coverage – including better-off segments of the population – reduce labor participation more.
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Large energy subsidies in oil-rich countries are popular because the population expects to reap benefits from the abundance of oil resources. Pretax subsidies that allow firms and households to pay less than prevailing international prices are about 8½ percent of GDP in the Middle East and North Africa region. These generalized subsidies lead to inefficient resource allocation – which hurts growth – and disproportionately benefit those who are better off, which only worsens income inequality. Despite these drawbacks, the public supports subsidies because it sees no other way of benefiting from the abundance of natural resources.
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Worker remittances – money sent home by people working abroad – place additional resources in the hands of the household sector, as do direct distribution mechanisms. Experience suggests that most remittances are used for current consumption, and their impact on long-term growth is inconclusive. This casts doubt on the claim that direct distribution does not exacerbate Dutch-disease effects because the private sector will save when it receives a windfall just as the government does.
Lessons learned
Several lessons emerge from the Alaskan experience and that of related policies.
First, the overall design of fiscal policies could include direct distribution mechanisms, starting small to limit the impact on the labor supply. Limiting the proportion of resources directly distributed would ensure enough is available to the government for the provision of critical public services, as well as to ameliorate the impact of Dutch disease – as stressed by Hjort (2006).
Second, direct distribution is just as subject to corruption as public programs, so it should not be established outside the budget.
And, finally, it is important to remember that direct distribution of resource revenues doesn’t safeguard the needs of future generations.
Before embarking on direct distribution of resource revenues, a country must prepare its fiscal framework by
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determining the level of public revenue and spending necessary to ensure domestic macroeconomic stability and sustainable external balances;
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adopting policies that mitigate the impact of volatile commodity prices on revenue;
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accounting for uncertainty in the level of natural resource production and how much revenue the economy can absorb; and
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saving resources for future generations.
Direct distribution does not obviate the need to address these issues head-on. Although some argue that shifting the burden of managing volatility to the private sector could lead to improved outcomes, there is little evidence to support such a claim. As noted earlier, evidence from remittance-receiving countries suggests that the bulk of the money received is used for consumption rather than saving. While public sector management of volatility in resource-rich countries has been far from stellar, an IMF study (2012) shows that it seems to have improved as these countries shifted from policies that reinforced changes in commodity prices between 1970 and 1999 to broadly neutral ones in the past decade.
Direct distribution can have a significant impact on income distribution. In Ghana, for example, resource revenues amount to about 5 percent of GDP. The poorest 10 percent of the population earns only 2 percent of GDP, so universal direct distribution would raise the income of that group by about 25 percent. But the distribution of resource revenues would reduce the budgetary resources available for the provision of public services, which could in turn have adverse consequences on income distribution.
Another effect of direct distribution would undoubtedly be smaller government. Shifting resources to the private sector could curtail wasteful spending in some resource-rich countries but in others it could lower public spending to the point of threatening necessary infrastructure and public goods. Total expenditure in resource-rich countries averages about 28 percent of GDP, which seems broadly in line with that in non-resource-rich economies. But there are significant differences in government size and institutional capacity across resource-rich countries (see Chart 2 - click to enlarge). The likely impact on income distribution and provision of public services only reinforces the need to start small when it comes to direct distribution.
Worth pursuing?
While the view that direct distribution leads to increased accountability is appealing, large-scale direct distribution has not been tested anywhere in the world. There is little evidence that the extreme of distributing all resource revenues to the population is effective, but a case for modest direct distribution similar to the Alaskan model could be considered.
Even judicious distribution must be implemented under an appropriate fiscal framework and on a small scale to reduce the very plausible risk that distribution will stifle the provision of critical public services, lead to a drop in labor participation, or strain the government’s administrative capacity.
Sanjeev Gupta is a Deputy Director and Enrique Flores is a Senior Economist, both in the IMF’s Fiscal Affairs Department, and Alex Segura-Ubiergo is the IMF’s Resident Representative in Mozambique.
This article is published in Finance & Development, December 2014, Vol. 51, No. 4.
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Azevêdo: Africa set to benefit from WTO breakthrough on Bali
Director-General Roberto Azevêdo, in his address to the African Union Conference of Ministers of Trade on 4 December in Addis Ababa, Ethiopia, said that African nations stand to benefit from the recent WTO decisions on the Bali agreements, including on the Trade Facilitation Agreement, which would support “your efforts at regional integration in a very practical way”. He urged African members to “engage even more” in the WTO.
This is what he said:
Good morning. I’m delighted to be here, and to have the opportunity to address you today.
I travel a lot as Director-General – pretty much all over the world in fact. But everywhere I go I get asked the same question.
People want to know about my view of the global economy – what the next big trend is going to be and where the opportunities will lie for trade and investment.
And I always give the same answer: Africa.
I talk about Africa’s dynamism – that it has the youngest population and the highest growth.
And I talk about the sense of energy and purpose that I find in every African leader or businessperson I meet.
Right now I think Africa’s potential is unmatched. And I think that trade has a crucial role to play in helping to realize this potential.
I know I’m not alone in this view.
It was notable that a recent survey of global public opinion found that it was not the people of Asia or North America who have the most positive view of trade – but the people of Africa.
And this is largely down to the leadership that ministers and policymakers – all of you – are showing on this issue.
You are taking huge strides forward in regional integration.
There is a lot of excellent work going on to lower barriers and streamline procedures so that you can trade with each other more effectively.
I have heard numerous examples of transit costs being halved, and transit times being reduced from days or weeks to just hours.
The African Union’s Action Plan for Boosting Intra-African Trade is very important here. And of course there is your work towards creating a Continental Free Trade Area.
This regional integration is totally compatible with the multilateral agenda – indeed I think this work will support wider integration into the global trading system.
The fact that intra-African trade remains just a tenth of Africa’s total trade shows that improving regional integration is critical. But it also shows that engaging at the global, multilateral level remains vital.
That’s why while you are pursuing these regional efforts, you are also making your voices heard more loudly than ever at the WTO.
The WTO gives you a seat at the global table, and I strongly welcome your engagement.
In fact, my message today is that you should seek to engage even more in the weeks to come. We are coming to a defining period in our work when it will be crucial that your voices are heard in full.
I will say more about this in a moment.
But first, I’m sure you are all aware that since July there has been an impasse in the implementation of the Bali Package which has had a paralyzing effect on negotiations across the board.
The impasse related to the political link between two issues – the Decision on Public Stockholding for Food Security Purposes, and the Trade Facilitation Agreement.
I’m pleased to say that last week – almost on the anniversary of the Bali conference – we resolved this impasse.
It was a major breakthrough for all of us.
WTO members came together in a Special General Council meeting and took three very important decisions.
First, they clarified the Bali Decision on Public Stockholding for Food Security Purposes to say that the peace clause agreed in Bali will remain in force until a permanent solution is found to that issue. This was a key issue for one member in particular.
I know food security is also a very important issue for many of you, and so I can assure you that this clarification does not substantively change what we agreed in Bali – nor does it compromise in any way the policy space that exists in the agreements today.
Second, members adopted the protocol of amendment which formally inserts the Trade Facilitation Agreement into the WTO rulebook.
This clears the path for the Trade Facilitation Agreement to be implemented and come into force.
Members will now go ahead and ratify the Agreement, following their domestic procedures.
It is estimated that the Agreement will reduce trade costs by up to 15% in developing countries.
This is particularly important for Africa where the cost of customs procedures tends to be higher – around 30% higher than the global average according to UNECA.
But, moreover, this Agreement is important for Africa because it supports your efforts at regional integration in a very practical way.
For the first time in the WTO’s history, this Agreement states that assistance and support should be provided to help developing countries achieve the capacity to implement it.
So, for those countries with less-developed customs infrastructure, the Agreement will mean a boost in the technical assistance that is available to them.
To ensure that this commitment is honoured, I worked with the coordinators of the Africa Group, the LDC Group and the Africa, Caribbean and Pacific Group at the WTO. We decided the best approach was to create a new initiative, to be called the Trade Facilitation Agreement Facility.
This Facility will ensure that LDCs and developing countries get the help they need to develop projects and access the necessary funds to improve their border procedures, with all the benefits that that can bring.
The Facility is already in place and it became operational when members took this decision last week.
And donors are already very interested and involved.
We have already received a great deal of support and interest – and we have built strong partnerships with a number of organisations in support of this work, including the World Bank.
So I urge you to look at how this Facility and the various other trade facilitation projects can support you.
Members took a third decision last week as well – which was arguably the most important of all. It concerns the WTO’s post-Bali work.
With this decision, members agreed that this work will resume immediately and that they will engage constructively on the implementation of all the Bali Ministerial Decisions.
This means taking forward:
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the decisions on agriculture and cotton,
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the monitoring mechanism, which originated from an Africa Group proposal, and
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the LDC decisions on duty-free-quota-free, the services waiver and rules of origin.
It is vital that we use the momentum we have now to take these decisions forward with the priority they deserve.
Moreover, this decision means agreeing the work programme on the remaining DDA issues.
Under the decision taken last Thursday, all 160 WTO members committed to delivering the work programme by a new target date of July 2015.
I think this is an important moment – and a real opportunity.
The big, tough issues of agriculture, services and industrial goods will all be back on the table.
I urge you to engage fully in the discussions that will take place between now and July, to ensure that the outcomes reflect your concerns.
But I would also urge you to focus a critical eye on what is important for you now.
Focus on what is truly important – and what you think is doable.
We can achieve a great deal here, but if we over-reach then we will simply get stuck once again – and I think that is the worst-case scenario for developing countries.
So please, get engaged in the discussion.
I will be here to listen to you and support you in any appropriate way that I can.
These next few months will be critical.
We are also approaching an important moment in the Aid for Trade calendar.
The Fifth Global Review of Aid for Trade will be held at the WTO in Geneva from 30 June to 2 July 2015 – and I would like to extend an invitation to you all.
I will be using the event to bring together numerous key figures – heads of agencies, donors and regional development banks – to see what more we can do to support you to build your trading capacity and further the good work that is already being done.
So please come to Geneva and take part in that meeting.
This is also an important time for the Enhanced Integrated Framework for the LDCs – of which the WTO is a key partner.
The EIF is now up for evaluation and I have been arguing strongly for the initiative to continue into a new phase so that it can continue to assist LDCs to become more active players in the global trading system. And I hope you will also lend us your support here.
So, while there is a lot of work ahead of us, I think the WTO is going into the New Year with a lot of momentum.
The breakthrough last week put the WTO back in the game. It put our negotiations back on track.
But the decisions that members took were not an end in themselves. Rather, they were a means to allow us to pursue the greater ends of:
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delivering the Trade Facilitation Agreement – and the vital support that goes with it,
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taking the other Bali decisions forward,
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and delivering the work programme to tackle the remaining issues of the DDA.
You are the leaders who can seize this opportunity – and realize the potential that I talked about at the start of my remarks.
So I look forward to your renewed and redoubled engagement in 2015.
I will be here to help you in any way I can.
Thank you.
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India to press G20 for deadline to cut remittance costs: sources
India will press the Group of 20 economies to set a two-year deadline to reduce the cost of international money transfers, two government sources said, potentially saving more than $20 billion for developing countries.
The world’s largest recipient of remittances – of about $70 billion a year – won the backing of G20 leaders last month in Brisbane to take “strong practical measures” to cut the average cost of sending money home to 5 percent.
Despite that pledge, big banks are pulling out of handling remittances over rising compliance costs. In one case, 20 remittance firms sued Australia’s Westpac Banking Corp to stop it quitting the business.
“We will demand a deadline of two years at the next G20 meeting,” one of the sources, with direct knowledge of the matter, told Reuters.
The official is part of an Indian delegation that plans to attend a meeting of G20 deputy central bank governors in Istanbul on Dec. 11-12. Turkey has just taken over the annual presidency of the G20, an intergovernmental forum.
In 2011, G20 members agreed to bring down the global average cost of remittances to 5 percent by 2014, but that deadline has been missed.
The cost of remittances from G20 countries has fallen to 8.3 percent from 9.1 percent in 2011, the World Bank estimates. That has saved nearly $30 billion for migrant families since 2010, it said in a report to the G20.
Prime Minister Narendra Modi, who attended last month’s G20 summit, is pushing for Indians to save about $3 billion a year, partly helping bridge its current account deficit, the official said.
“The money belongs to poor families of developing countries and cannot be taken away in the name of transaction fees,” said another official.
Several Indian banks have brought down costs by up to 30 percent by offering services that allow Indian migrants in the United States and Britain to send money directly from their bank account or credit card to recipients in India.
Saudi Arabia has reduced remittance costs to near 3 percent, and India is hopeful that other G20 countries would agree to set a deadline to reduce the costs.
The government estimates that about 22 million Indians live abroad, with large communities in the Middle East, the United States and Britain.
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Road to Dignity by 2030: UN chief launches blueprint towards sustainable development
Calling for inclusive, agile and coordinated action to usher in an era of sustainable development for all, Secretary-General Ban Ki-moon on 4 December 2014 presented the United Nations General Assembly with an advance version of his so-called “synthesis report,” which will guide negotiations for a new global agenda centred on people and the planet, and underpinned by human rights.
“Next year, 2015, will herald an unprecedented opportunity to take far-reaching, long-overdue global action to secure our future well-being,” Mr. Ban said as he called on Member States to be “innovative, inclusive, agile, determined and coordinated” in negotiating the agenda that will succeed the landmark Millennium Development Goals (MDGs), the UN-backed effort to reduce extreme poverty and hunger, promote education, especially for girls, fight disease and protect the environment, all by 2015.
In an informal briefing to the 193-Member Assembly, the UN chief presented his synthesis report, The Road to Dignity by 2030: Ending Poverty, Transforming All Lives and Protecting the Planet, alongside the President of the General Assembly, Sam Kutesa who also addressed delegates, describing the process of intergovernmental negotiations that fed into the report’s compilation to set the stage for agreement on the new framework at a September 2015 summit and stressing the “historical responsibility” States faced to deliver a transformative agenda.
The synthesis report aims to support States’ discussions going forward, taking stock of the negotiations on the post-2015 agenda and reviewing lessons from pursuit of the MDGs. It stresses the need to “finish the job” – both to help people now and as a launch pad for the new agenda.
In the report’s conclusion, the Secretary-General issues a powerful charge to Member States, saying: “We are on the threshold of the most important year of development since the founding of the United Nations itself. We must give meaning to this Organization’s promise to ‘reaffirm faith in the dignity and worth of the human person’ and to take the world forward to a sustainable future… [We] have an historic opportunity and duty to act, boldly, vigorously and expeditiously, to turn reality into a life of dignity for all, leaving no one behind.”
Never before has so broad and inclusive a consultation been undertaken on development, Mr. Ban told the Assembly on 4 December, referring to the consultations that followed Rio+20 [the 2012 UN Conference on Sustainable Development], adding that his synthesis report “looks ahead, and discusses the contours of a universal and transformative agenda that places people and planet at the centre, is underpinned by human rights, and is supported by a global partnership.”
The coming months would see agreement on the final parameters of the post-2015 agenda and he stressed the need for inclusion of a compelling and principled narrative, based on human rights and dignity. Financing and other means of implementation would also be essential and he called for strong, inclusive public mechanisms for reporting, monitoring progress, learning lessons, and ensuring shared responsibility.
He also welcomed the outcome produced by the Open Working Group, saying its 17 proposed sustainable development goals and 169 associated targets clearly expressed an agenda aiming at ending poverty, achieving shared prosperity, protecting the planet and leaving no one behind.
Discussions of the Working Group had been inclusive and productive and he the Group’s proposal should form the basis of the new goals, as agreed by the General Assembly. The goals should be “focused and concise” to boost global awareness and country-level implementation, communicating clearly Member States’ ambition and vision.
The synthesis report presented dignity, people, prosperity, the planet, justice and partnerships as an integrated set of “essential elements” aimed at providing conceptual guidance during discussions of the goals and Mr. Ban stressed that none could be considered in isolation from the others and that each was an integral part of the whole.
“Implementation will be the litmus test of this agenda. It must be placed on a sound financial footing,” he said welcoming the work of the Intergovernmental Committee of Experts on Sustainable Development Financing and encouraging countries to scale up their efforts.
The Financing for Development Conference in Addis Ababa next year would play a major role in outlining the means for implementation, and he stressed the “key role” national Governments would play in raising domestic revenue to benefit the poorest and most vulnerable members of society.
Official development assistance (ODA) and international public funds, particularly for vulnerable countries, would also be vital to unlocking “the transformative power of trillions of dollars of private resources”, while private investment would be particularly important on projects related to the transition to low-carbon economies, improving access to water, renewable energy, agriculture, industry, infrastructure and transport.
Implementation would also rely on bridging the technology gap, creating a new framework for shared accountability, and providing reliable data, which he called the “lifeblood of sound decision-making.”
Stressing his commitment to ensuring the best outcome from the post-2015 process, he underlined the need for States to be guided by universal human rights and international norms, while remaining responsive to different needs and contexts in different countries.
“We must embrace the possibilities and opportunities of the task at hand,” he said.
In an earlier interview with the UN News Centre Amina J. Mohammed, the Secretary-General’s Special Adviser on Post-2015 Development Planning stressed that one of the report’s main “takeaways” is that “by 2030 we can end poverty, we can transform lives and we can find ways to protect the planet while doing that.”
“I think that’s important because we’re talking about a universal agenda where we’re going to leave no one behind. It’s not doing things by halves or by three-quarters, it’s about everyone mattering… To say you don’t want to leave anyone behind is to look to see who is the most vulnerable and smallest member of the family and what is it that we’re going to have to do to ensure that they’re not left behind, because that will be the litmus test and success of what we do.”
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Xi hails ‘China’s good friend’ Zuma
Chinese President Xi Jinping on Thursday hailed visiting South African President Jacob Zuma as China’s “good friend”, months after the latter’s government refused the Dalai Lama a visa.
“President Zuma is the Chinese people’s old friend and good friend,” Xi said as he welcomed Zuma on a state visit as trade and political ties between Pretoria and Beijing grow closer.
“South Africa is the comprehensive and strategic partner of China in Africa,” said Xi, who visited South Africa in March 2013 as part of his first foreign trip as head of state.
“We are good friends and good brothers that mutually benefit each other.”
Zuma, who is accompanied by a high-profile delegation including ministers for the environment, international relations, trade and energy, transport and finance, responded by thanking Xi for his “warm hospitality” since arriving.
“For me, this is a manifestation of the friendship and solidarity that exists between the People’s Republic of China and the Republic of South Africa,” Zuma said.
China is South Africa’s single largest trading partner, while South Africa is China’s largest trading partner on the continent.
South Africa joined the BRICS bloc of developing economies with Brazil, Russia, India and China in 2011.
During the apartheid era, Zuma’s African National Congress was supported by Moscow while Beijing backed the rival Pan Africanist Congress, but in recent years South Africa has maintained a strongly pro-China foreign policy.
In the last five years Pretoria has thrice declined a visa for the Dalai Lama, the exiled Tibetan spiritual leader and Nobel Peace Prize winner.
Dozens of Nobel laureates boycotted a September meeting in Cape Town following the latest refusal, which was widely regarded as a sign of South Africa’s deference to Beijing.
Fellow laureate and anti-apartheid activist Desmond Tutu also slammed the government over the visa refusal. The meeting was forced to moved to Rome.
During Zuma’s visit, China announced the signing of a series of agreements, including a memorandum of understanding on nuclear energy cooperation between China National Nuclear Corporation and the South African Nuclear Energy Corporation.
China said that the two sides agreed a five-to-10 year strategic programme on cooperation, as well as to improve bilateral cooperation in trade and investment between China’s ministry of commerce and South Africa’s department of trade and industry.
Detailed terms of the agreements were not immediately available.
South Africa said last month it had signed a nuclear energy cooperation agreement with China, calling the deal a “preparatory phase for a possible utilisation of Chinese nuclear technology”. The deal followed similar agreements with Russia and France.
South Africa, which has one nuclear plant, is plagued by electricity blackouts and is seeking to reduce its heavy reliance on coal-fired power stations.
Electricity constraints have been blamed for limiting economic growth and productivity.
Zuma earlier held talks with Chinese Premier Li Keqiang, with Li congratulating Zuma on his re-election in May as South Africa’s president.
“You have always attached high importance to South Africa’s relations with China and you have made unrelenting efforts to grow China-South Africa relations,” Li said.
“We have always appreciated our interaction between China and South Africa. I must say that we feel very much at home,” Zuma responded.
» Read more: South Africa signs agreements of cooperation with China
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“Moving from business by necessity to entrepreneurship by choice” – The African Union Commission supports women in agribusiness
The African Union Commission is implementing a project to empower women through agricultural entrepreneurship. The project, supported by the UNDP, and implemented by UN Women through the African Centre for Transformative and Inclusive Leadership (ACTIL) – a joint programme of UN Women Eastern and Southern Africa Regional Office (ESARO) and Kenyatta University – involves a series of transformational leadership training workshops for Women in agribusiness.
Women farmers are the pillars of agriculture and food security in Africa. While millions of women in sub-Saharan Africa contribute to their national agricultural output, family food security, and environmental sustainability – as producers, resource managers, sellers, processors and buyers of food – they are still marginalized in agricultural marketing and business systems. Women in agriculture face unique challenges compared to their male counterparts: they operate smaller farms; keep fewer livestock. Women also have less access to agricultural and business information and extension services, and to credit and other financial services. They are less likely to use inputs such as fertilizers, improved seeds and mechanical equipment, and often have little influence within agricultural value chains.
In spite of the challenges there are many women that are breaking through the barriers and establishing themselves in agribusiness, as producers, processors, marketers and exporters. The African Union Commission is focusing on such women. The training aims to enhance women’s productivity, benefits from, and leadership role in agribusiness. The transformational leadership approach espoused by UN Women (ESARO) and ACTIL motivates women in agribusiness to understand the players and dynamics in their respective value chains, and to position themselves not only to seize opportunities for maximizing profits but also to mobilise other women and youth in the sector for greater impact.
This initial phase of the project benefits women and youth from Benin, Burkina Faso, Burundi, Cameroon, Cote d’Ivoire, DRC, Ghana, Kenya, Niger, Nigeria, and Uganda. The training is organized in three sessions: two sessions in English in Nairobi, Kenya, at the Africa Centre for Transformative and Inclusive Leadership (ACTIL) and one session in French at the Songhai Centre in Porto Novo, Benin. One hundred and thirty women will have benefited from the project by the end of December 2014.
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Finance for climate action flowing globally
Finance for Climate Action Flowing Globally stood at $650 Billion annually in 2011-2012, and possibly higher
Hundreds of billions of dollars of climate finance may now be flowing across the globe annually according to a landmark assessment presented on 3 December 2014 to governments meeting in Lima, Peru at the UN Climate Convention meeting.
The assessment – which includes a summary and recommendations by the UNFCCC Standing Committee on Finance and a technical report by experts – is the first of assessment reports that puts together information and data on financial flows supporting emission reductions and adaptation within countries and via international support.
The assessment puts the lower range of global total climate finance flows at $340 billion a year for the period 2011-2012, with the upper end at $650 billion, and possibly higher.
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Support from developed countries to developing countries amounted to between $35 and $50 billion annually, with multilateral development banks (MDBs), climate-related Official development Assistance (ODA) and other official flows (OOF) representing significant shares of resources channeled through public institutions
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Funding through dedicated multilateral climate funds – including UNFCCC funds ($ 0,6 billion) – represented smaller shares during the same period, and do not include the recent pledges for the Green Climate Fund amounting to nearly $10 billion.
The assessment notes that the exact amounts of global totals could be higher due to the complexity of defining climate finance, the myriad of ways in which governments and organizations channel funding, and data gaps and limitations – particularly for adaptation and energy efficiency.
In addition, the assessment attributes different levels of confidence to different sub-flows, with data on global total climate flows being relatively uncertain, in part due to the fact that most data reflect finance commitments rather than disbursements, and the associated definitional issues.
The assessment is an important contribution of the Standing Committee on Finance that enhances transparency and clarity on climate finance flows – including information on international support to developing countries.
In addition, the assessment includes a set of recommendations by the Standing Committee on Finance to the Conference of the Parties, which, among other things, include ways to strengthen transparency and accuracy of information on climate finance flows through working towards a definition of climate finance and further efforts that would enable better measurement, reporting and verification.
The assessment also recognizes the need for understanding the impacts of climate finance associated with emissions reductions and activities to boost resilience to climate change.
The 2014 Biennial Assessment and Overview of Climate Finance Flows has been prepared by the Standing Committee on Finance following a mandate by the Conference of the Parties. The 2014 report was prepared with input from a wide range of experts and contributing organizations that collect data on climate finance flows.
Christiana Figueres, Executive Secretary of the UNFCCC, said: “Finance will be a crucial key for achieving the internationally-agreed goal of keeping a global temperature rise under 2 degrees C and sparing people and the planet from dangerous climate change”.
“Understanding how much is flowing from public and private sources, how much is leveraging further investments and how much is getting to vulnerable countries and communities including for adaptation is not easy, but vital for ensuring we are adequately financing a global transformation,” she said.
“I would like to thank the Standing Committee on Finance and the numerous experts and organizations who have contributed to this important assessment. It provides a baseline and a foundation upon which future assessments and more importantly future climate action can be refined and focused,” said Ms. Figueres.
“This first biennial assessment represents a milestone of the work of the Standing Committee on Finance. It is an important information tool for Parties to the Convention that provides a picture of climate finance flows and how they relate to climate actions, including the objectives of the Convention” said Standing Committee on Finance co-chairs Diann Black Layne and Stefan Schwager.
“Going forward, the Standing Committee on Finance will contribute further to improvements in the information on climate finance flows, including through collaborations with data collectors and aggregators,” they added.
More Facts and Figures from the 2014 Biennial Assessment and Overview of Climate Finance Flows Report:
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Global total flows: Most climate finance in 2011/2012 is raised and spent at home – in developed countries 80 per cent of the funds deployed for climate action are raised domestically.
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The same pattern is seen in developing countries where just over 71 per cent comes from national sources
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Around 95 per cent of global total climate finance is spent on mitigation or cutting emissions with 5 per cent on adaptation.
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Subsidies for oil and gas and investments in fossil fuel-fired generation are almost double the global finance for addressing climate change
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Flows from developed to developing countries: Multiple sources were involved in providing funding to support climate action in developing countries ranging from Multilateral Development Banks (MDBs) and Overseas Development Assistance (ODA) to multilateral climate funds – including funds administered by the Operating Entities of the Financial Mechanism of the Convention and the Kyoto Protocol.
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For example, finance from MDBs is around between $15 and $23 billion annually; multilateral climate funds including via the GEF were about $1.5 billion, including those linked to the UNFCCC at about $0.6 billion a year.
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48 to 78 per cent of finance is reported as fast-start finance (2010-2012), in Biennial Reports (2011-2012), through multilateral climate funds, and through MDBs supports mitigation, or other/multiple objectives (6 to 41 per cent)
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Adaptation finance in the same sources ranges from 11 per cent to 24 per cent.
Notes
The assessment has tried to identify the flows to various sectors and initiatives – real precision in this area will have to await future assessments and the numbers need to be treated with caution.
Assessing investments in adaptation is particularly difficult often because they can form part of a larger project such as an investment in a port of water supply system.
Meanwhile, there is also no universal operational definition of what constitutes adaptation and in addition publicly funded adaptation actions within countries – both developed and developing – is rarely reported or available.
As a result, flows from developed to developing countries are not really known with precision.
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Watchdog gets nod to effect market studies
All recommendations made by the Competition Authority to streamline agriculture products markets must be implemented immediately, the President said Thursday.
Addressing delegates at the World Competition Day celebration, President Uhuru Kenyatta said this would boost wealth creation by farmers.
He told the Competition Authority to work closely with other government agencies in implementing the recommendations of market studies in tea, artificial insemination, seeds and sugar.
“Eradication of marketing distortions may reduce our poverty levels by a further 1.5 per cent. This is our key agenda and we have to achieve it,” he said in a speech read on his behalf by National Treasury Cabinet Secretary Henry Koskei.
FINANCIAL INCLUSION
The function was at Safari Park Hotel, Nairobi.
The President also told the Competition Authority to expedite the Product Market Regulatory Indicative Study, which it is conducting and have the findings discussed with stakeholders in February.
This will aid in modernising regulatory aspects and help in realisation of Vision 2030, he said.
The study covers telecommunications, transport, investment policy, retailing, banking, insurance and energy.
The President said the government had increased the authority’s budget to enable it conclude cases such as abuse of market dominance in telecommunications.
“These cases will go a long way in deepening financial inclusion, through easing access to mobile money transfer and also lead to consumer savings, as a result of increased competition,” he said.
He told county governments not to introduce regulations and restrictive conditions in issueing licences that could impede the proper functioning of demand and supply of products.
ACTION PLAN
The progress made so far
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Competition Authority: We dealt with 88 merger applications by June, compared with 65 the previous year, says Director-General Wang’ombe Kariuki.
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Also finalised 23 cases of restrictive trade practices, compared with 16; and 15 consumer cases compared with six in 2013.
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World Bank: An impact assessment supported by the global lender shows that the retailing trade restrictive case resulted in consumers saving about $1 million (Sh90 million), while money transfer rates fell by 67pc.
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AfDB releases report on trade finance in Africa
Trade finance is essential for international trade. This financial intermediation helps firms to manage risks inherent in international transactions, improve their liquidity and enable them to optimally invest to enhance their growth.
It is for this reason that, in 2013, the Board of the African Development Bank (AfDB) approved a US $1-billion trade finance (TF) program to support African trade and provide financing to underserved African-based financial institutions and enterprises. Despite its importance, there is a great deal we do not know about the trade finance market in Africa. This includes the size of the market, the variations across sub-regions, the scale of financing gap, the trade finance devoted to intra-African trade, the relative importance of on-balance sheet versus off-balance sheet financing, and constraints faced by banks.
The report Trade Finance in Africa seeks to fill the above information gap. It is based on a unique survey of the trade finance activities performed by commercial banks in Africa in 2011 and 2012. Our survey questionnaire was sent to approximately 900 banks on the continent. We received a high response rate, resulting in a dataset that covers 276 banks across 45 countries. All the sub-regions on the continent are represented in the survey.
We found that the size of bank-intermediated trade finance is approximately US $330 billion to US $350 billion and approximately 93% of banks have trade finance assets. This is roughly equal to one-third of total African trade. The market is not uniformly distributed across sub-regions as the average trade finance assets per bank in Northern Africa dwarfs those of the other sub-regions. The share of bank-intermediated trade finance that is devoted to intra-African trade is limited, and comprises approximately 18% (US $68 billion) of the total trade finance assets of African banks.
It should be noted, however, that the share of intra-African trade accounts for 11% (US $110 billion) of the value of total African trade. Given the estimated rejection rates of trade finance applications reported in the survey, the conservative estimate for the value of unmet demand for bank-intermediated trade finance is US $110 billion to US $120 billion, significantly higher than estimated earlier figures of about US $25 billion. These figures suggest that the market is significantly underserved.
African banks face numerous constraints in meeting the demand for trade finance. The survey reveals that the main constraints are limited US dollar availability (by far the dominant currency in international trade, and by extension, trade finance) and insufficient limits with confirming banks for confirming letters of credit. Other constraints include small balance sheets, which tends to make single obligor limits frequently binding. These constraints also suggest that the AfDB’s trade finance program, as well as those implemented by other international financial institutions, are needed and well suited to relaxing some of the most binding constraints.
Finally, the survey shows that the outlook of banks for trade finance remains positive, with 72% expecting to increase their trade finance activities in the immediate future. However, banks foresee obstacles to their trade finance portfolio growth such as low US dollar liquidity, regulation compliance, slow economic growth in some markets, and the inability to assess the credit-worthiness of potential borrowers.
Infographics
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Trade Experts in Addis to discuss the launch of the Continental Free Trade Area
The three-day Senior Officials Meeting of the 9th Ordinary Session of the African Union Conference of Ministers of Trade (CAMOT-9) opened on Monday 1st December at the African Union Headquarters in Addis Ababa, Ethiopia. The Senior Officials session is taking place to prepare for the Ministerial session which will be held on 4th and 5th December, of which will discuss, among other things; global trade and Mega Regional Trade Agreements, Declarations on WTO EPAs, AGOA and investment trends, their implications within the context of Africa’s commitment to forge ahead its integration notably towards the launch of the Continental Free Trade Area (CFTA) negotiations in 2015.
The African Union Conference of Ministers of Trade is meeting this year at a point where the Economic Report for Africa 2014 mentions that the industrialization is a “precondition for Africa to achieve inclusive and sustainable economic growth.” The report also highlights that in the past decade the contribution of manufacturing and industry to aggregate output and GDP growth has either stagnated or declined for most countries, while, the agriculture sector, which employs up to 60 per cent of the African labour force, is characterized by limited value addition, as forward linkages to industry and service sectors are weak.
In her opening statement, the AUC Director for Trade and Industry, Mrs. Treasure Maphanga, reminded the experts that as Africa meets to discuss the advancement of its regional integration agenda, the world is moving, mentioning examples of the Trans-Atlantic Trade and Investment Partnership (TTIP), a trade and Investment agreement that is presently being negotiated between the European Union and the United States, the Trans-pacific Partnership negotiations between the US and Pacific Countries, as well as the FTA which in being negotiated between China, Japan, and South Korea.
Mrs. Maphanga hence stressed that CFTA is an important opportunity to develop and harmonize regulations in a number of trade-related services sectors that will backstop the industrialization process. “As you consider the draft texts for the CFTA negotiations, we wish to remind all of us that the continent is looking for greater ambition than the Tripartite Negotiations. We are seeking to develop an agreement that enables deep integration amongst all African economies, with a focus on Boosting Intra-African Trade and implementing the Action Plan that includes Trade-related Infrastructure, Productive capacity and Trade facilitation”, suggested Mrs. Maphanga.
In his remarks on behalf of Dr. Carlos Lopes, United Nations Under-Secretary General and Executive Secretary of the Economic Commission for Africa (UNECA), Dr. Stephen Karingi, Director, Regional Integration and Trade Division, noted the robust economic growth experienced by Africa over the last decade and driven by high commodity prices had little impact on poverty eradication and had not altered economic structures.
Hence, he said, it is clear that if business as usual persists, Africa is likely to continue seeing growth that will not impact on widespread poverty levels and economic structures will likely remain the same, and that Africa’s transformation will be still born, and the risk of being caught up in the middle income trap will become real. “Therefore, as we meet here, it is my hope that our discussions will be informed by the big picture of sustainability and structural transformation of our economies,” said Dr. Karingi.
The Establishment of the Continental Free Trade Area (CFTA) was decided in the 18th Ordinary Session of the Assembly of Heads of State and Government of the African Union which was held in Addis Ababa, Ethiopia in January 2012, which will bring together fifty-four African countries with a combined population of more than one billion people and a combined gross domestic product of more than US $ 1, 2 trillion dollars.
Statements
» Statement by H.E. Mrs Fatima Haram Acyl - AU Commissioner for Trade and Industry
» Statement by Abdalla Hamdok Deputy Executive Secretary UN Economic Commission for Africa
» Speech delivered by ITC Executive Director Arancha González
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Fighting climate change and poverty at the same time
Worldwide, close to 1 billion people live in poverty on less than $1.25 per day and more than 800 million are undernourished. Many of them are on the front lines of climate change. Extreme weather and droughts can put their food and water supplies at risk, raise prices, and destroy homes and businesses that are often built at the edges of livable land. They have little resilience to the volatility or economic havoc climate change can bring.
More shocks can also pull those just above the poverty line under, threatening to reverse decades of progress toward eradicating extreme poverty. At the World Bank Group, we are working on ways to address both climate change and poverty at the same time.
As climate negotiators gather in Lima for the latest round of UN climate talks, the impact on poverty should run throughout the discussions of risks and solutions.
“We’re only beginning to see the clear impacts of climate change. As these impacts deepen, the poor will have less means to cope. Climate change will put at risk the international community’s goal of ending poverty,” said World Bank Group Vice President and Special Envoy for Climate Change Rachel Kyte.
“To protect the poor, we must invest in resilience, including social protection measures, access to insurance, natural resources restoration – everything that will help them bounce back better when shocks come,” Kyte said.
That combination of climate action and social protection is important and urgent. The recent Turn Down the Heat report warns that the world will see the effects of temperatures about 1.5°C above pre-industrial times even with concerted action to lower emissions, and much worse if emissions continue unabated, making poverty even harder to escape. Even 1.5°C of warming will bring more severe droughts and sea level rise that can flood low-lying areas and contaminate coastal cropland.
Protecting the Poor and the Planet
Policies for mitigating and adapting to climate change must be designed to protect the poor. That is why the World Bank works with client countries to analyze the impacts of climate change risks and responses on poverty.
Research underway this year and next is finding that climate-related policies paired with social policies can both reduce poverty and modernize economies that were once carbon-intensive.
British Columbia, for example, has shown how revenue from a carbon tax can provide targeted support for the poor while also reducing business and income taxes. The Canadian province created a low-income climate action tax credit that provides quarterly payments to the poor to offset higher prices. Today, British Columbia has one of the lowest income taxes in the country, a thriving economy fueled in part by green growth, and its emissions have fallen.
Similarly, governments can reduce harmful fossil fuel subsidies and use the savings to create targeted support for the poor who most need assistance when fuel prices rise. Studies have found that fossil fuel subsidies tend to be inefficient and regressive: The wealthiest 20 percent of households in low- and middle-income countries receive about six times more of the benefit than the poorest 20 percent. Building in new sources of support for the poor – such as energy credits, reduced public transit fares, or cash transfers – while phasing out harmful subsidies can provide the intended support more efficiently.
Building resilience also helps poor communities deal with the effects of climate change. Better land-use planning and improved infrastructure, for example, can reduce vulnerability to future climate change. When Hurricane Tomas hit St. Lucia in 2010, the damage cost the island nation 43 percent of GDP. The World Bank has helped St. Lucia improve data sharing to build back better, reduce future losses, and improve its disaster preparedness and capacity to respond.
Eliminating poverty and keeping it at bay as we deal with climate change requires wider use of what we already know works: well-funded social protection programs that can easily be scaled up in the event of a disaster; the data and capacity to identify the transient poor and provide them with support; and financial inclusion that allows the poor to save and borrow so they can bounce back more quickly from shocks. Access to health care and education are also important for recovering from shocks and getting out of poverty.
Opportunities in Climate Action
At the UN Framework Convention on Climate Change Conference of Parties in Lima, we will be talking about these and other policy options.
Our research has found that with smart policies and careful urban planning, the same development work needed to accommodate a growing population today, such as clean and accessible transportation systems and energy efficient buildings, can help mitigate climate change, increase resilience to its effects, and increase opportunities for the poor through new jobs and greater access to work, health care, and education.
Climate action can create new income opportunities. Many ecosystem-based adaptation and mitigation measures require labor-intensive activities, such as reforestation and land restoration. Policies that encourage green industries also create new opportunities through retraining and diversification of economic activity and trade patterns. Inclusiveness is a critical part of green growth and building livable cities.
Turn Down the Heat and the recent IPCC Fifth Assessment Report make clear that we must deal with climate now. Failing to do so will raise the costs and risks for everyone.
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Beyond tariff walls: Non-tariff hurdles in sub-Saharan Africa
It is often said that international trade is no longer a game of tariffs but rather a game of quality, standards, and compliance with the requirements of the global market. Exporters, more specifically those from developing countries, feel this the most as they struggle with what is known as non-tariff measures (NTMs) in their daily quest for international competitiveness.
NTMs are officially defined as “policy measures on export and import, other than ordinary customs tariffs, that can potentially have an effect on international trade in goods. They are mandatory requirements, rules or regulations legally set by the government of the exporting, importing or transit country”. NTMs become an obstacle to trade for exporters and importers when they are perceived to be “burdensome” by the latter. Since 2010, the International Trade Centre (ITC) has been working with the private sector from developing countries, collecting information on the various obstacles to trade faced by the business community in these countries. This project was initiated in order to increase transparency about NTMs by disseminating relevant information and by analysing the non-tariff obstacles to trade. The ultimate goal is to reduce or eliminate those barriers, thus improving the business environment. In sub-Saharan Africa (SSA), the ITC NTM Surveys have already been conducted in Burkina Faso, Côte D’Ivoire, Guinea, Kenya, Madagascar, Malawi, Mauritius, Senegal, Rwanda, and Tanzania.
Beneficiary countries are already using the findings of the ITC NTM Surveys to remove impediments to trade. To mention but a few: In 2013, Mauritian customs authorities eliminated the need for imports of rooibos tea to be cleared by the Tea Board; the Senegalese export promotion agency is considering the NTM Survey findings and recommendations in its export development strategic plan for 2014-2017; and similarly the government of Madagascar intends to integrate some of the findings into its trade policy and trade negotiations. The ITC NTM Surveys are also extensively used to inform the work of other development partners, such as in the framework of diagnostic trade integration studies, for example in Malawi.
Which are the most burdensome NTMs for African exporters?
The results of the surveys done in the ten SSA countries show that the top three NTMs identified by exporters as most burdensome are conformity assessments, technical requirements as well as rules of origin and the related certificates of origin. Other identified barriers include pre-shipment inspections and further entry formalities, charges, taxes and other para-tariff measures, including licensing or permits to export. Overall, 64 percent of the interviewed companies in SSA were reported being affected by NTMs. The figure of 64 percent found in SSA is above the average (50 percent) obtained from the total number of countries surveyed by the ITC so far. This would imply therefore that exporters and importers in this region seem to be more affected by burdensome NTMs.
In the agricultural sector, “technical requirements”, which include sanitary and phytosanitary measures (SPS) implemented to protect human, animal and plant life (e.g. requirements such as tolerance limits for residues and measures for labelling and packaging), and “conformity assessments” are perceived as the most challenging by SSA exporters. Conformity assessments refer to control, inspection and approval procedures (such as testing) which confirm that a product fulfils the technical requirements and mandatory standards imposed by the importing country. These two categories are known as SPS measures and Technical Barriers to Trade (TBT) in the NTM classification. They are inevitable for most agricultural products since they are put in place to meet public policy objectives, such as consumer protection. These product-specific, legally binding requirements are challenging predominantly in developed markets like the EU. Exporters usually complain that such regulations are particularly burdensome in their implementation process because of associated delays and high fees.
This result comes as no surprise, as the globally most widespread NTMs relate to technical factors like SPS measures. Most developed nations have strict quality and food safety standards and are increasingly introducing stringent food safety regulations. The EU, for instance, has a whole raft of regulations that require exporters from outside the EU to meet the same standards as EU members when it comes to foodstuffs. Moreover, new rules are increasingly being introduced, for example for labelling. The United States, through its own Food Safety Modernization Act (FSMA), also places extensive requirements on imports.
With TBTs increasing globally, they leave SSA exporters (including those concerned with conformity assessments) vulnerable especially due to the lack of the necessary infrastructure in their respective home countries. Furthermore, delays experienced with the home administration (e.g. at customs) have dire consequences for exports, particularly of perishable agricultural products (e.g. fresh food).
As far as manufacturing exports are concerned, technical requirements are often less important than in the agricultural sector. However, challenges from conformity assessment still stand out at 44 percent and concerns about rules of origin, i.e. the criteria used by importing countries to assess whether a product is eligible for preferential treatment, are also quite pronounced (17 percent of total NTMs reported for SSA countries). For instance, burdensome NTMs related to rules of origin were commonly reported by exporters in Côte d’Ivoire.
Who applies NTMS?
The ITC NTM Surveys suggest that, among the challenging NTMs reported by exporting companies, on average around 70 percent are applied by the partner countries and 30 percent happen at home. Comparatively, in SSA, nearly 40 percent of NTMs are reported to be applied by the home country, while about 60 percent are reported to be applied by partner countries. Therefore, if SSA countries want to boost their competiveness and establish themselves on the main stage of international trade, their national and local authorities need to address the obstacles to trade linked to NTMs occurring at home, although it is also clear that domestic efforts need to be complemented with a continued engagement with international trading partners.
The findings also show that many burdensome NTM cases are associated with partner countries with which SSA countries already have free trade agreements (FTAs) or regional trade agreements (RTAs). For example, in Guinea there were reports about customs surcharges (e.g. surtax or additional duty) imposed by Mali and Côte d’Ivoire, all of whom are members of the Economic Community of West African States (ECOWAS). 64 percent of NTM reports from Guinea concern neighbouring ECOWAS countries. We see similar results for other regions: In Tanzania, for example, an overwhelming majority (64.4 percent) of the reported cases of NTMs are applied by partners from within regional frameworks, i.e. the East African Community (32.9 percent), followed by the Southern African Development Community (31.5 percent). This indicates that there is still room for the elimination of non-tariff barriers by RTA/FTA counterparts. Tackling these obstacles could help achieve better trade integration among SSA countries.
The way forward
Problems linked with NTMs are often exacerbated for landlocked countries (such as Rwanda), where obstacles associated with transit countries are particularly severe, including in terms of weighbridge charges and delays before goods can be delivered. One significant intervention to consider is to establish a results-oriented dialogue and negotiation with regional partners or bilaterally with neighbours.
In addition to government requirements, SSA exporters sometimes face onerous standards imposed by private clients. For example, the Rwandans particularly reported Fair Trade certificates demanded by clients in the European Union, especially for Rwanda’s important coffee and tea products. The costs and delays associated with these certificates are said to cause serious hindrances for exporters.
Taken together, SSA exporters and importers report a large amount of NTMs faced in their efforts to engage in the global trading system. There seems to be consensus that technical measures, conformity assessments, different charges, rules of origin and customs procedures are among some of the most burdensome restrictions traders encounter. Hence, a number of initiatives are being launched to address these measures both internationally and domestically, but more work is needed to alleviate such constraints. For instance, there is scope for improved engagement between policy makers and their exporters and importers. Better dialogue between the different stakeholders from both private and public sectors can prepare the ground to develop effective and sustainable policies to remedy some of the concerns, as well as to clarify those instances where lack of awareness may be also one of the obstacles. Traders from a number of SSA countries indicated their desire for a one-stop shop or single window to process documentation. Others highlighted the need for a single enquiry point to obtain all the necessary documents required in destination and home markets to qualify for certifications.
Tackling such obstacles could help SSA countries take giant leaps towards improving their trade environment.
The debate surrounding NTMs is ongoing and numerous questions about their legitimacy are being raised. Even though it is generally accepted that NTMs may have the best policy intentions in terms of public health, their frequency and complexity negatively affect the trade flows of more vulnerable countries, such as those from the SSA region. Furthermore, they are sometimes perceived as protectionist measures used by governments. Regardless of their underlying motives, NTMs actually impose costs that have negative impacts on trade competitiveness, particularly for small and medium-sized enterprises (SMEs) in emerging and developing countries. Often NTMs themselves are not barriers per se, but the procedural obstacles associated with them have negative consequences for trade. The problems found impacting industries in SSA take an even more burdensome toll on trade and are more surprising at a time when individual governments and the international community are mobilizing all efforts to alleviate poverty and promote engines of growth.
Poonam Mohun is NTM Project Market Analyst, Market Analysis and Research, International Trade Centre. The views expressed herein are those of the author and do not necessarily reflect the views of the International Trade Centre or of the United Nations.
This article is published under Bridges Africa, Volume 3 - Number 10.
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Governors of Central Banks appreciate regional growth
Governors of Central Banks in COMESA Member States have appreciated the 6.6% average growth performance of the region and emphasized that such growth should be sustained and be inclusive.
In their 20th Meeting that ended Thursday 27th November 2014 in Kinshasa, Congo (DR) the Governors emphasized the importance of policies that stimulate demand and trade within the region.
According to a report of the meeting sent by the Director of COMESA Monetary Institute (CMI) Mr. Ibrahim Zeidy the Governors underscored the importance of laying a solid foundation in the medium term for a fully-fledged inflation targeting framework, in order to make the region a zone of macroeconomic stability.
“Volatility in exchange rates tend to impact on trade and subsequently on output, inflation, FDI and the investment climate in general,” they noted.
In his address to the meeting Secretary General of COMESA, Mr. Sindiso Ngwenya, underlined the need for speedy implementation of Regional Payment and Settlement System (REPSS).
“I want to urge all member Central Banks to expeditiously use REPSS for payment for their intra-COMESA transactions as it will significantly contribute to the expansion of intra COMESA trade,” he said.
His address covered strategic issues of the COMESA integration agenda including the removal of tariff and non-tariff barriers, progress report on COMESA FTA, progress report on Tripartite Arrangement, trade promotion and facilitation, strategies to move to high value addition to export products, COMESA industrial policy and COMESA activities related to extractive industries.
Mr Ngwenya emphasized the importance of member countries to get a greater share of resource rents from extractive industries and underscored the COMESA Monetary Cooperation programme that would make trade and investment easy and inexpensive.
He therefore emphasized that member countries should intensify the process of macroeconomic convergence and intermediation in the region.
The Committee of Governors of Central Banks also reviewed the activities that were undertaken by the COMESA Monetary Institute (CMI) and COMESA Clearing House (CCH) for enhancing monetary cooperation in the region and making the region a zone of macroeconomic and financial stability.
These activities included the outcome of workshops, trainings and research activities which were undertaken by CMI and activities undertaken by CCH for the operationalization of the Regional Payment and Settlement System (REPSS).
They also deliberated on challenges in the disbursement of loans by commercial banks in the region. They agreed that an Action Plan proposed by the Central Bank of Congo should be used as inputs into the existing COMESA Financial System Development and Stability Plan which was adopted by the COMESA Committee of Governors of Central Banks in 2009.
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TTIP: What are the implications for emerging powers and the international order?
The Transatlantic Trade and Investment Partnership (TTIP) currently under negotiation by the United States (US) and the European Union (EU) promises to unleash significant opportunities to generate jobs, trade and investment across the Atlantic. An independent study by the Centre for Economic Policy Research forecasts that an ambitious and comprehensive TTIP agreement could generate US$159 billion in annual economic gains for the EU, US$127 billion a year for the U.S., and boost global income by almost US$134 billion. TTIP would generate greater economic gains than would the deal on the table in the Doha Development Round.
TTIP at its core is an economic negotiation seeking agreement in three pillars. The first pillar addresses such market access issues as tariffs and rules of origin. It could result in clearer, more straightforward and transparent rules of origin arrangements that could serve as the basis for future preferential rules of origin. Clear, simple and aligned rules of origin would facilitate global trade and thus serve as a public good.
The second pillar seeks to reduce, where feasible, non-tariff barriers and to find coherence, convergence or recognition of substantial equivalence between US and EU approaches to specific regulatory issues. It could pioneer new ways for countries to ensure high standards for consumers, workers, companies and the environment while sustaining the benefits of an open global economy. Mutual recognition of essentially equivalent norms and regulatory coherence across the transatlantic space not only promise economic benefits at home but could form the core of broader international norms and standards.
The third pillar seeks common agreement on a range of norms and standards regarding such issues as investment, intellectual property rights, discriminatory industrial policies and state-owned enterprises. Some of these standards are likely to extend prevailing WTO standards (WTO-plus); others could go beyond existing multilateral norms (WTO-extra). Agreement on such issues as intellectual property, services, discriminatory industrial policies or state-owned enterprises could strengthen the normative underpinnings of the multilateral system by creating benchmarks for possible future multilateral liberalisation in the WTO. US-EU agreement on such principles, and agreement to act together to advance such norms globally, could not only take the international trading system further but establish broader political principles regarding the rule of law, human rights, labour, environmental and consumer standards.
In addition, the TTIP will not necessarily be concluded with a final document; negotiators seek a “living agreement” that is likely to consist of new consultative mechanisms regarding regulatory and non-tariff issues that can anticipate or respond to evolving innovation, economic friction due to changing legislation, or other developments in trade and technology.
Taken together, these elements underscore that TTIP is not just another trade agreement, it is a new-generation negotiation aimed at repositioning the US and European economies for a more diffuse world of intensified global competition. TTIP is about creating a more strategic, dynamic and holistic US-EU relationship that can generate jobs and growth, engage third countries more effectively, and strengthen the ground rules of the international order.
U.S. and European governments would prefer a global agreement on more open trade, but the multilateral system administered by the WTO is under challenge, especially by a number of countries that show little interest in new market-opening initiatives and do not share the core principles or basic structures that underpin open rules-based commerce.
In addition, even if the Doha Round were concluded tomorrow, it would still not address a host of non-tariff and regulatory issues related to the distinctive deep economic integration that binds the US and European economies. These non-tariff and regulatory issues, not trade, are at the heart of the TTIP. In short, TTIP is a means to energise the multilateral system while addressing issues particular to the transatlantic economy.
TTIP and rising powers
TTIP is important in terms of how the transatlantic partners together relate to rising powers, especially the emerging growth markets. Whether those powers choose to challenge the current international order and its rules or promote themselves within it depends significantly on how the United States and Europe engage, not only with them but also with each other. The stronger the bonds among core democratic market economies, the better their chances of being able to include rising partners as responsible stakeholders in the international system. The more united, integrated, interconnected and dynamic the international liberal order – shaped in large part by the United States and Europe – the greater the likelihood that emerging powers will rise within this order and adhere to its rules. The looser or weaker those bonds are, the greater the likelihood that rising powers will challenge this order.
TTIP clearly puts pressure on countries that choose to stand apart from international market-opening initiatives. According to Vera Thorstensen and Lucas Ferraz, a TTIP agreement that goes beyond simple tariff reductions could result in a 5-10 percent decline in Brazilian exports to the United States and the EU and a 4-8 percent decline in Brazilian imports from the United States and the EU. In addition, since a TTIP agreement is likely to boost US and EU competitiveness and spark additional US and EU exports, Brazil's overall share of world trade is likely to decline. In contrast, if Brazil adhered to TTIP provisions in a scenario of a 50 percent reduction of EU and US agricultural tariffs, a 50 percent reduction of Brazilian industrial tariffs and a 50 percent reduction of non-tariff barriers for all partners, Thorstensen and Ferraz calculate that Brazilian exports to the United States and the EU would increase by 67.6 percent, corresponding to US$51.1 billion, and Brazilian imports from the United States and the EU would increase by 52.9 percent, a gain of US$42.3 billion.
Additionally, North-South American commercial ties are burgeoning, and Europe’s commercial ties to Latin America are substantial. Latin American and Caribbean countries export more than twice as much to their Atlantic partners as to the rest of the world. Latin American exports to the eurozone are 40 percent more than to China. Brazil is the single biggest exporter of agricultural products to the EU. Countries that decide to lift their standards to access the world's largest and richest market are likely to see significant increases in commercial interaction; those that do not are likely to encounter significant hurdles to growth and jobs.
There are already signs that TTIP is affecting third countries. TTIP was the elephant in the room at the 2013 EU-Brazil summit; it is causing Brazilian leaders to reframe how they think of their evolving role and position. Japan’s decision to join the Trans-Pacific Partnership (TPP) arguably was due as much to the start of TTIP negotiations as to inner-Asian dynamics. With the EU now also negotiating a bilateral trade agreement with Japan, both the United States and the EU are in direct talks with Tokyo about opening the Japanese market – a goal that for decades seemed unattainable.
TTIP is lazily portrayed as an effort to confront and isolate China. Yet it is less about containing China than about the terms and principles guiding China's integration and participation in the global economy. China’s burgeoning trade with both the United States and Europe attests to US and EU interest in engaging China, not isolating it. Yet Beijing has yet to embrace some basic tenets of the international rules-based order, and has sought to translate its economic clout into military, diplomatic and political influence, for instance by holding down the value of its currency to boost its companies, leveraging its near-monopoly on rare earths to advance its strategic objectives, or directing state-owned companies not just to generate profits but to wield power on its behalf. TTIP and related initiatives such as the TPP are important instruments to help frame Beijing's choices – by underscoring China's own interests in an open, stable international system as well as the types of norms and standards necessary for such a system to be sustained. China itself has changed its position and signalled a willingness to join plurilateral talks on services. Its motivations remain unclear, but there is no denying that TTIP and related initiatives are injecting new movement and energy into efforts to open markets and strengthen global rules.
Since TTIP is not just about achieving greater regulatory coherence across the Atlantic, but also about setting global benchmarks, it is more ambitious than TPP or ASEAN’s Regional Comprehensive Economic Partnership, known as the RCEP. In fact, a successful TTIP would be a TPP-plus or RCEP-plus agreement with regard to regulatory coherence and potentially with regard to WTO-plus and WTO-extra norms. In this sense, TTIP is likely to have more impact on Asian economies than TPP or RCEP are likely to have on European economies.
Despite TTIP’s inherent potential to leverage US-EU efforts to engage rising powers on the terms of their integration into the international rules-based order, governments have not stated whether and how the eventual TTIP agreement, once concluded, might be open to others willing and able to commit to similar goals and ground rules. Framing the TTIP as an element of ‘open architecture’ accessible to others could give the United States and the EU tremendous leverage in terms of ensuring ever broader commitments to the high standards and basic principles governing modern open economies.
Long live the TTIP?
Getting a TTIP deal will be tough. Remaining transatlantic tariff barriers, especially in agriculture, often reflect the most politically difficult cases. Long phase-in periods may be needed to eliminate tariff and quota barriers completely. Some of the most intense transatlantic disagreements have arisen over differences in regulatory policy. Issues such as food safety or environmental standards have strong public constituencies and are often extremely sensitive in the domestic political arena. Responsibility for regulation is split in the EU between Brussels and the member states, and in the United States between the federal and state governments. Investment barriers, especially in terms of infrastructure and transport sector ownership, will be very difficult to change. There is considerable debate how and whether to include financial services. Also, it is questionable whether either side is prepared to gore its sacred cows on the TTIP altar – for example the Jones Act on merchant marine for the United States. The EU has already taken audiovisual services off the negotiating table. Defense trade also seems off limits. Finally, investor-state dispute settlement mechanisms envisaged under TTIP are contentious.
Nonetheless, TTIP’s potential payoff is high. The geostrategic impact of such an agreement could be as profound as the direct economic benefits. If leaders on both sides of the Atlantic grasp the moment, America’s first ‘Pacific President’ and his EU partners may well become best known for having re-founded the Atlantic partnership. If they do not, then issues of failing trust and confidence, so visible today, will continue to eat away at the relationship like termites in the woodwork.
Daniel S. Hamilton is an Austrian Marshall Plan Foundation Professor and Executive Director of the Center for Transatlantic Relations, Johns Hopkins University School of Advanced International Studies, Washington, D.C., USA.
This article is published under Bridges Africa, Volume 3 - Number 10.
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Ghana teams up with UN-backed alliance in move towards cashless economy
The Government of Ghana on 1 December 2014 took steps towards enhancing fiscal transparency and promoting the financial inclusion of its citizens by committing to a United Nations-backed initiative that supports countries’ transitions to electronic payments.
With the assistance of the Better Than Cash Alliance, which is hosted by the UN Capital Development Fund (UNCDF), the Government of Ghana will focus on transitioning forms of Government payments to electronic ones, beginning with the digitization of government workers’ salaries.
It subsequently plans to expand the use of electronic payments to the Livelihood Empowerment against Poverty (LEAP) social welfare programme in the hope that 71,000 Ghanaian households will reap the benefits of transparency, cost savings and financial inclusion.
“Ghana’s digital innovation is renowned and is reflected in this commitment to transition away from cash in all government payments. Evidence and the experience of our members show that electronic payments has great potential to increase people’s access to financial services when designed appropriately and we look forward to seeing greater inclusion in Ghana,” Dr. Ruth Goodwin-Groen, Managing Director of the Better Than Cash Alliance, said in a press release.
“There is also strong evidence to show that integrating digital payments into the economies of emerging countries such as Ghana will promote broad economic growth and individual financial empowerment.”
Funded by the Bill & Melinda Gates Foundation, Citi, Ford Foundation, MasterCard, Omidyar Network, United States Agency for International Development and Visa Inc, the Better Than Cash Alliance works with governments, the development community and the private sector to promote the use of electronic payments as a safer and more efficient form of financial transaction. Efforts aim to help people who lack access to formal financial services such as bank accounts, and who often subsist almost entirely in an informal, cash-only economy.
» Related story: Rwanda to accelerate digital payments by joining the Better Than Cash Alliance
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Update on the economic impact of the 2014 Ebola epidemic on Liberia, Sierra Leone, and Guinea
The Ebola epidemic continues to cripple the economies of Liberia, Sierra Leone, and Guinea. The crisis is resulting in flat or negative income growth and creating large fiscal needs in all three countries, as they work to eradicate the virus.
This update presents the World Bank’s most recent analysis of the economic effects of the Ebola epidemic on the three countries. All three had been growing rapidly in recent years, and into the first half of 2014. But GDP growth estimates for 2014 have been revised sharply downward since pre-crisis estimates. Projected 2014 growth in Liberia is now 2.2 percent (versus 5.9 percent before the crisis and 2.5 percent in October). Projected 2014 growth in Sierra Leone is now 4.0 percent (versus 11.3 percent before the crisis and 8.0 percent in October). Projected 2014 growth in Guinea is now 0.5 percent (versus 4.5 percent before the crisis and 2.4 percent in October).
As the epidemic continues, these economies will face a difficult year in 2015, as second-round effects kick in and investor aversion takes a further toll. 2015 growth estimates are 3.0 percent in Liberia, -2.0 percent in Sierra Leone, and -0.2 percent in Guinea, down from pre-Ebola estimates of 6.8 percent, 8.9 percent, and 4.3 percent respectively. In Sierra Leone and Guinea these growth forecasts are lower than our October estimates (7.7 percent for Sierra Leone; 2.0 percent for Guinea). In Liberia, where the epidemic may be abating and where there are some signs of economic activity picking up, the 2015 estimate is an increase on October’s (1.0 percent). These projections imply forgone income across the three countries in 2014–15 of well over $2 billion (over $250 million for Liberia, about $1.3 billion for Sierra Leone, about $800 million for Guinea).
Combining the effects on revenue and spending with cuts made to public investment to finance the response, the total fiscal impact is well over half a billion dollars in 2014 alone. Liberia has been hardest hit fiscally. Relative to pre-Ebola forecasts, revenues are down $86 million while public spending has increased $62 million, a combined impact of more than 6 percent of GDP. In Sierra Leone, revenues are down $85 million while spending has increased $43 million, a combined impact of more than 2.5 percent of GDP. In Guinea, revenues are down $93 million while spending has increased $106 million, a combined impact of more than 3 percent of GDP. Although the resulting fiscal deficits in the three countries have so far been financed by inflows from development partners, governments have also cut public investments by more than $160 million across the three countries, damaging future growth prospects.
The World Bank’s October report on the economic impact of Ebola (released at the 2014 Annual Meetings of the IMF and the World Bank) found that if the epidemic continues in the three worst-affected countries and spreads to neighboring countries, the two-year regional financial impact could range from a “low Ebola” estimate of $3.8 billion to a “high Ebola” estimate of $32.6 billion. These scale estimates of potential impact remain valid: the epidemic is not yet under control. Containment, combined with a full-fledged financial recovery effort to restart business activity and bring back investors, are now both therefore urgently needed for the region to improve on the downbeat forecasts in this update.
» Related story: Ebola: Long-term economic impact could be devastating
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Slow trade
Part of the global trade slowdown since the crisis has been driven by structural, not cyclical, factors
What’s up with world trade growth? After bouncing back in 2010 from the historic low of the Great Recession, it has been surprisingly sluggish.
Trade grew by no more than 3 percent in 2012 and 2013, compared with the precrisis average of 7.1 percent (1987-2007; see Chart 1). For the first time in over four decades, trade has grown more slowly than the global economy. Economists wonder whether this global trade slowdown is a cyclical phenomenon that will correct itself with time or is attributable to deeper and more permanent (that is, structural) determinants – and what the answer means for the future of world trade and income growth.
Cyclical or structural
Many economists argue that the global trade slowdown is mostly a cyclical phenomenon, driven by the crisis that has afflicted Europe in recent years. This view has some empirical support. The European Union (EU) accounts for roughly one-third of total world trade volumes because, by convention, trade between EU countries is counted in world trade totals. The crisis depressed import demand across Europe. Imports in the euro area – the epicenter of the crisis – declined by 1.1 percent in 2012 and increased by a mere 0.3 percent in 2013. From this point of view, if European economies recover, world trade growth should pick up again.
Cyclical components such as the crisis in Europe, however, are only part of the story. A look at the ratio of imports to GDP over the past 10 years suggests that there are longer-term components of the current trade slowdown. Although most economies recorded a stable ratio of imports to GDP after the crisis, this flatness in import shares appears to predate the crisis for China and the United States. For these two countries, import volumes as a share of real GDP have been roughly constant since 2005: a “Great Flatness” seems to have set in before the Great Recession, pointing to the presence of longer-term determinants of the global trade slowdown (see Chart 2).
Indeed, this prolonged flatness reflects something deeper: a structural change in the relationship between trade and income in the 2000s compared with the 1990s. In a recent paper (Constantinescu, Mattoo, and Ruta, 2014), we analyze this relationship for the past four decades and find that the responsiveness of trade to income – what economists call the long-term trade elasticity to income – rose significantly in the 1990s but declined in the 2000s to the levels of the 1970s and early 1980s. In the 1990s, a 1 percent increase in global income was associated with a 2.2 percent increase in world trade.
But this tendency for trade to grow more than twice as fast as GDP ended around the turn of the century. In the 2000s, a 1 percent increase in world income has been associated with only a 1.3 percent increase in world trade. Our research confirmed that there was a statistically significant change in the trade-income relationship in the 1990s compared with before and after that period.
These results suggest that since the global financial crisis, trade has been growing more slowly not only because world income growth is lower but also because trade itself has become much less responsive to income growth. The trade slowdown has roots deeper than the cyclical factors that are affecting world GDP growth. Indeed, analysis of the long- and short-term components of trade growth shows that, in contrast to the trade collapse of 2009, the current global trade slowdown is mostly driven by structural rather than short-term factors (see Chart 3).
A drunk and his dog
Studying the relationship between global trade and income is like analyzing the behavior of a drunk and his puppy dog: neither is walking in a straight line, but we nevertheless expect them to remain fairly close to each other. After all, the world is a closed economy and the magnitude of exchanges of goods and services must be related to the economic activity that takes place within it.
But the relationship between trade and income changes over time; a number of factors sometimes bring them closer together and sometimes push them farther apart. There are several possible explanations for the lower responsiveness of trade to income:
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changes in the structure of trade associated with the expansion or contraction of global supply chains;
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changes in the composition of world trade, such as the relative importance of goods versus services;
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changes in the composition of world income, such as the relative importance of investment and consumption; and
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changes in the trade regime, including the rise of protectionism leading to the fragmentation of the global marketplace.
Our analysis shows that the changing relationship between trade and income at the world level is driven primarily by changes in supply-chain trade in the two largest trading economies, the United States and China, rather than by protectionism or the changing composition of trade and income.
The composition of trade cannot fully explain the lower trade elasticity in the 2000s, because its components (that is, goods and services) have been remarkably stable in recent years. Similarly, the changing composition of demand is not an adequate explanation, because the long-term investment and consumption elasticity of trade are similar. And finally, the rise in protection has not been substantial, even in the aftermath of the financial crisis, suggesting that trade policies are playing a minor role in explaining the reduction in world trade elasticity.
A country-level analysis reveals that the United States and China both experienced significant declines in the responsiveness of trade to growth (a drop from 3.7 to 1.0 for the United States and from 1.5 to 1.1 for China). Europe, in contrast, saw virtually no change. Other regions experienced sizable changes in trade elasticity over time, but they account for a small share of global trade and hence explain little of the change in world trade elasticity.
Variations in the trade-income relationship at the regional and country level are related to the changing structure of international trade. China offers an example of the economic forces at play.
Changing chains
The increased elasticity of trade to income in the 1990s likely reflected the growing fragmentation of production across borders (Escaith, Lindenberg, and Miroundot, 2010). The information and communication technology shock of the 1990s led to a rapid expansion of global supply chains, with an increasing number of parts and components being imported, especially by China, for processing and reexportation. The resulting increases in back-and-forth trade in components led measured trade to race ahead of national income.
Conversely, the decline in China’s trade elasticity may well be a symptom of a further change in that country’s role in international production. There is some evidence that China’s international supply chains may have matured in the early 2000s, resulting in lower responsiveness of Chinese trade to GDP. This development is reflected in a fall in the share of Chinese imports of parts and components in total exports, which decreased from its peak of 60 percent in the mid-1990s to the current share of about 35 percent.
All these changes do not mean that China is turning its back on globalization. The lower share of imported parts and components in total exports does reflect the substitution of domestic inputs for foreign inputs by Chinese firms, a finding that is corroborated by evidence of increasing domestic value added in Chinese firms (Kee and Tang, 2014). But the increased domestic availability of inputs has been linked to foreign direct investment. There may also be a geographical dimension to these changes, with China’s coastal regions beginning to source relatively more from the Chinese interior because the costs of transportation and communication with the interior have declined more sharply than those with the rest of the world. Trade integration may now be taking the form of greater internal trade than international trade, but official statistics usually capture only the latter.
The reduced responsiveness of trade to income for the United States mirrors in some ways developments in China. The United States was the primary source of the boom in Chinese and other emerging market economies’ imports in parts and components and was the major destination for their exports of assembled goods. In the 1990s, as U.S. firms increasingly relocated stages of production outside the United States, trade tended to respond more to changes in income. In recent years, even if there has been no retreat from offshoring, the pace of the international fragmentation process seems to have declined. U.S. manufacturing imports as a share of GDP have been stable at about 8 percent since the turn of the century, after nearly doubling over the preceding decade and a half.
In contrast to China and the United States, the responsiveness of trade to GDP in the euro area has remained high in the 2000s. This may be a result of the continuing expansion of supply chains to eastern and central Europe from euro area countries such as Germany.
Old and new engines
Will the global trade slowdown persist? Will it have implications for world growth and for countries seeking to use trade as an engine of growth? Our findings show that the 2012–13 slowdown was driven by a structural (and, hence, more durable) change in the trade-income relationship, indicating that the phenomenon is likely to persist in the coming years. This might affect the growth potential of the world economy because trade and income are not independent of one another.
But we must also recognize that the changing long-term relationship between trade and income underpinning the trade slowdown is a symptom of changing patterns of international production. The high responsiveness of trade to growth in the 1990s reflected the increasing fragmentation of production driven primarily by the United States and China. That particular engine appears to have exhausted its propulsive energy for now. But the scope for increasing international division of labor is still strong in Europe and could be important tomorrow for regions that have not yet made the most of global supply chains, such as south Asia, Africa, and South America. The trade agenda of the Group of Twenty advanced and emerging economies has a role to play in making sure that these opportunities are not missed.
Cristina Constantinescu is a Research Assistant and Michele Ruta is a Senior Economist, both in the External Sector Unit of the IMF’s Strategy, Policy, and Review Department, and Aaditya Mattoo is Research Manager, Trade and International Integration, at the World Bank.
This article is published in Finance & Development, December 2014, Vol. 51, No. 4.
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Why Europe needs to regulate the trade in minerals
“That diamond upon your finger, say how came it yours?” asks Shakespeare’s Cymbeline. “Thou’lt torture me,” responds the villainous Iachimo, “to leave unspoken that which, to be spoke, would torture thee.” The story behind certain parts of the global trade in natural resources today, whether spoken or not, is no less a source of anguish.
Natural resources should be a major contributor to development in some of the countries that need it most. And yet, in some of world’s poorest and most fragile states, they bring just the opposite. In many of these countries, the trade in natural resources motivates, funds, and prolongs conflict and egregious human-rights abuses. Resources such as diamonds, gold, tungsten, tantalum, and tin are mined, smuggled, and illegally taxed by violent armed groups, and provide off-budget funding to abusive militaries and security services.
Consider just four African countries: Sudan, South Sudan, the Central African Republic, and the Democratic Republic of Congo. Together, these resource-rich countries account for just over 13% of the population of Sub-Saharan Africa, but some 55% of the region’s internally displaced persons (and one in five worldwide) due to conflict. But the problem is global, with similar patterns in parts of countries such as Colombia, Myanmar, and Afghanistan.
The deadly trade in conflict resources is facilitated by supply chains that feed major consumer markets, such as the European Union and the United States, with cash flowing back the other way. Natural resources, such as tin, tantalum, tungsten, and gold – all minerals that have been linked in some parts of the world to conflict and human-rights abuses – are found in our jewelry, cars, mobile phones, games consoles, medical equipment, and countless other everyday products.
There is clear consumer demand for information that will help buyers make sure that their purchases do not implicate them in appalling abuses. But the responsibility to reconcile global commerce with the protection of basic human rights does not fall first and foremost on consumers. Conflict prevention and human-rights protection are primarily the responsibility of states, and it is increasingly recognized that businesses must play their part as well.
Indeed, we are now at a critical point in what has become a global movement to stop irresponsible corporate practices from being viewed as business as usual. Since 2010, companies working in conflict areas have had a global standard at their disposal. The OECD offers guidance on how to source minerals responsibly. Developed in close collaboration with the industry, it offers “detailed recommendations to help companies respect human rights and avoid contributing to conflict through their mineral purchasing decisions and practices.”
The United Nations has also endorsed similar requirements. In 2011, the UN published a set of Guiding Principles on Business and Human Rights, according to which companies whose “operating contexts pose risks of severe human rights impacts should report formally on how they address them.”
And yet, with the exception of a few progressive industry leaders, few companies have responded to this voluntary guidance. In 2013, Dutch researchers surveyed 186 companies listed on European stock exchanges that make use of conflict minerals. More than 80% made no mention on their Web sites of what they had done to avoid funding conflict or human rights abuses. Similarly, the European Commission’s Directorate General for Trade found that only 7% of 153 EU companies refer to a due-diligence policy for conflict minerals in their annual reports or on their Web sites.
The United States has already taken the next logical step. The Securities and Exchange Commission requires companies that use tantalum, tin, gold or tungsten in their products to investigate these raw materials’ origin, and to mitigate risks in their supply chains in line with the OECD Guidance if they are found to originate in certain conflict-affected or high-risk areas. The 12 member countries of Africa’s International Conference on the Great Lakes Region have committed to similar mandatory due-diligence requirements.
That is as it should be. Responsible sourcing is a duty, not a choice. And here, the EU is lagging behind. In March, the European Commission proposed a plan under which disclosure would continue to be voluntary, meaning that the minerals that enter the EU would not be subject to mandatory checks. The proposal, furthermore, focuses exclusively on raw ores and metals, and excludes products that contain the relevant minerals, such as mobile phones, vehicles, and medical equipment.
The proposal is now being reviewed by the European Parliament and the European Council. It is crucial that both institutions seize this opportunity to strengthen the EU’s response by making disclosure and compliance mandatory and extending coverage to include finished and semi-finished products. Better regulating the trade in these resources will not itself bring peace to conflict-affected areas. But funding conflict and human-rights abuses is not an acceptable cost of doing business.
Published in collaboration with Project Syndicate.
Michael Gibb is Campaign Leader for Conflict Resources at Global Witness.
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Elumelu Foundation launches $100m program to boost African business
One of Africa’s richest businessmen, Tony Elumelu, has launched a $100 million program to support and promote entrepreneurship across the continent. Elumelu, the chairman of Nigeria-based pan-African investment group Heirs Holdings and founder of the Tony Elumelu Foundation, describes the initiative as “a $100 million endowment to encourage the maturation of African entrepreneurs.”
The program, which Elumelu first discussed publicly on the sidelines of the August 2014 U.S.-Africa Leaders Summit in Washington, is intended to help up to 10,000 budding African entrepreneurs to develop their ideas into sustainable businesses.
The foundation plans to provide 1,000 entrepreneurs a year for the next 10 years with seed capital of $5,000 and additional returnable capital of up to $5,000.
By making half of the money returnable, Elumelu hopes to encourage program participants to develop a sense of responsibility. “I want to make sure there is some spirit of accountability,” he says.
In order to be eligible for the initial $5,000 seed capital, successful applicants will have to go through a 12-week online mentoring and training program.
Parminder Vir, director of the entrepreneurship program, explains: “The business skills training program will give them tools they need to go out and physically implement the lessons they learn.”
The online program will draw on content specifically designed to address the challenges African businesses will face. “During that stage they will have mentors to help them, as well as access to a curated online library to enable them to find information that is relevant to their business,” Vir adds.
At the end of the 12 weeks, the 1,000 startups will attend a three-day forum in Nigeria. “That event will sow the seed for intra-Africa trade, for pan-Africa trade,” she says.
For Elumelu, promoting the long-term growth of intra-African trade is one of the key goals of the project. “Intra-African trade is quite low, partly because Africa was wired from colonial times to facilitate trade only with the rest of the world, and partly because of the nature of what we’re trading. We have raw materials but we don’t have the processing capacity to transform them into products that will be useful in Africa.”
The relatively low level of trade between African countries is considered one of the key factors holding back the continent’s economic development. According to a recent study, sub-Saharan Africa has the lowest level of connectedness of any region worldwide.
“We hope that the successful entrepreneurs in this program will show interest in industrialization of the continent,” Elumelu says. “That will help us produce more finished goods, which will encourage trade and also put pressure on political leaders to create economic zones, or to enable the movement of goods, people and payments that will facilitate intra-African trade.”
Elumelu and Vir believe that the long-term nature of the program will also help ensure the participants make the connections that will help them build pan-African businesses. “Over the 10 years we will build an alumni network… that will lay the foundations for generations to come,” Vir says.
Wiebe Boer, CEO of the Tony Elumelu Foundation, says he hopes the businesses supported by the program will create at least one million new jobs and generate $10 billion of new revenues.
Beyond the promise of receiving financing, mentoring and support, entrepreneurs have an additional incentive to apply: The chance of having their business noticed by Elumelu as a potential investment opportunity.
“Heirs Holdings is pan-African private investment company. If we see very promising companies that need support, we can do that – through impact investing, through pure commercial investment, through financial support, or even through wider capital raising,” he says.
Elumelu acknowledges that the program is ambitious, both in its scale and complexity, and that it’s unlikely all the entrepreneurs who join will emerge with successful businesses. “If we achieve 30%-50% success rate we will have helped significantly in helping the development of the continent,” he adds.
The application process will begin in January 2015 with the announcement of the first 1,000 participants expected by the end of March.
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Illovo seeks sweeter trade deals in Africa
Illovo Sugar has set its eyes on east and west Africa for growth as it prepares its exit from EU markets in the medium to long term, according to Gavin Dalgleish, the managing director of Africa’s biggest sugar producer.
Dalgleish said similar to the world market, EU sugar prices had continued to deteriorate as industry producers repositioned themselves for the 2017 sugar reforms.
The EU sugar industry reforms will see the EU move from being a net importer of sugar to a net exporter.
“We are getting a much lower contribution for our EU sales than we were previously, that is why we are trying to move into markets that give us better return on our sales than the EU,” he said.
In Africa, Illovo was looking at growing its footprint in Kenya, Ethiopia and west Africa. The company already operates in Malawi, Zimbabwe, Tanzania, Swaziland and Mozambique.
“Moving away from EU and maximising domestic market sales is what we [are] trying to do. This will include growing the regional market and this will involve creating pre-pack brands that we can try and position into the market and get [a] consumer pool.”
This meant that Illovo had to refresh its marketing skills base in response to the lower world prices, Dalgleish said.
“We are moving to being more dependent on sales that are in Africa.”
This would be done through expansion into the eastern and western parts of Africa.
East Africa made more geographical sense for Illovo given the company’s current footprint, Dalgleish said.
“For demographic growth, it would make sense for us to move into the fastest-growing markets in the western parts of the continent.”
For the six months to September, Illovo’s revenue declined by 5 percent to R5.9 billion as a result of a 9 percent drop in sugar production and reduced export market prices.
The group’s operating profits fell 14 percent to R1.3bn. Profits were down due to a fall in total sugar cane and sugar production, as well as the decline in EU market prices.
These results saw Illovo’s shares on the JSE close 3.63 percent lower at R26.
“We are not happy with our results. We had a very tough trading period over these six months,” Dalgleish said.
Variable weather conditions and the effects of industrial action in Swaziland and in South Africa also affected Illovo’s poor performance.
“Notwithstanding these challenges, our operations in Zambia and Mozambique are expected to achieve record sugar and cane production for the year,” he said.
Illovo’s throughput amounted to 10.7 million tons, reflecting an 11 percent decrease compared with the period last year.
The group said the season to date had been affected by variable conditions such as later summer rainfall and a very dry winter accompanied by frost damage in South Africa.
Cane production in Swaziland was affected by an industry strike and climate factors.
However, Dalgleish said in relation to full-year sugar production, Zambia had produced record production at its Nakambala factory, as well as noting operational improvement in Mozambique, which should also result in record cane and sugar production.