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The sustainable infrastructure imperative: Financing for better growth and development
Investing in sustainable infrastructure is key to tackling three simultaneous challenges: reigniting global growth, delivering on the Sustainable Development Goals (SDGs), and reducing climate risk. Transformative change is needed now in how we build our cities, produce and use energy, transport people and goods, and manage our landscapes. And the challenge is urgent, according to the 2016 New Climate Economy Report.
Following the milestone achievements of 2015 – including the ambitious global goals set for sustainable development and its financing in Addis Ababa and New York, and through a landmark international agreement on climate action in Paris – the challenge is to now to shift urgently from rhetoric into action.
Infrastructure underpins core economic activity and is an essential foundation for achieving inclusive sustainable growth. It is indispensable for development and poverty elimination, as it enhances access to basic services, education and work opportunities, and can boost human capital and quality of life. It has a profound impact on climate goals, with the existing stock and use of infrastructure associated with more than 60% of the world’s greenhouse gas (GHG) emissions. Climate-smart, resilient infrastructure will be crucial for the world to adapt to the climate impacts that are already locked-in – in particular, to protect the poorest and most vulnerable people. Ensuring infrastructure is built to deliver sustainability is the only way to meet the global goals outlined above, and to guarantee long-term, inclusive and resilient growth.
A comprehensive definition of infrastructure includes both traditional types of infrastructure (everything from energy to public transport, buildings, water supply and sanitation) and, critically, also natural infrastructure (such as forest landscapes, wetlands and watershed protection). Sustainability means ensuring that the infrastructure we build is compatible with social and environmental goals, for instance by limiting air and water pollution, promoting resource efficiency and integrated urban development and ensuring access to zero- or low-carbon energy and mobility services for all. It also includes infrastructure that supports the conservation and sustainable use of natural resources, and contributes to enhanced livelihoods and social wellbeing.
Bad infrastructure, on the other hand, literally kills people by causing deadly respiratory illnesses, exacerbating road accidents and spreading unclean drinking water, among other hazards. It also puts pressure on land and natural resources, creating unsustainable burdens for future generations such as unproductive soils and runaway climate change.
The challenge is urgent: the investment choices we make even over the next 2-3 years will start to lock in for decades to come either a climate-smart, inclusive growth pathway, or a high-carbon, inefficient and unsustainable pathway. The window for making the right choices is narrow and closing fast, as is the global carbon budget. The time is ripe for a fundamental change of direction. Today’s low interest rates and rapid technological change mean that this is an especially opportune moment for sustainable infrastructure-led growth, and for investing in a better future.
The world is expected to invest around US$90 trillion in infrastructure over the next 15 years, more than is in place in our entire current stock today. These investments are needed to replace ageing infrastructure in advanced economies and to accommodate higher growth and structural change in emerging market and developing countries. This will require a significant increase globally, from the estimated US$3.4 trillion per year currently invested in infrastructure to about US$6 trillion per year.
The Global Commission has found that it does not need to cost much more to ensure that this new infrastructure is compatible with climate goals, and the additional up-front costs can be fully offset by efficiency gains and fuel savings over the infrastructure lifecycle. But many of these solutions require higher up-front financing, with the savings and other benefits accruing later. To deliver these solutions at scale, financing and investment have to be mobilised and better deployed from a multitude of different domestic and external sources, including national and local governments, multilateral and other development banks, private companies and institutional investors. International financing will be particularly important to support this transition in developing countries.
The global South will account for roughly two-thirds of global infrastructure investment (or about US$4 trillion per year) and can lead in building new sustainable infrastructure that “leapfrogs” the inefficient, sprawling and polluting systems of the past. Developing countries, such as those in Asia and Africa, need infrastructure to improve access to basic services, drive development and meet the needs of rapidly-urbanising populations and an expanding middle class. Resource-rich countries that rely on natural capital need to manage, maintain and enhance ecosystem goods and services. Many advanced economies, meanwhile, have to replace and upgrade power transmission and distribution systems, long-neglected bridges, water and sewerage pipelines, mass transit systems and other infrastructure.
Transformative change is needed now in how we build our cities, transport people and goods, produce and use energy, and manage our landscapes. Globally, at least 60% of infrastructure investment over the next 15 years will be made in the energy and transport sectors.i To transform the energy sector, it is estimated that investments in oil, coal and gas must decrease by about one-third by 2030, while investments in renewables and in energy efficiency must increase by at least a similar proportion if we are to keep global average temperature rise below 2°C.
We need to increase both the quantity and the quality of infrastructure investment, but major barriers persist. These include unfavourable policies and investment regulations, a lack of transparent and bankable project pipelines, inadequate risk-adjusted returns, a lack of viable funding models and often high transaction costs. Unlocking finance for sustainable infrastructure will require coordinated reforms across policies, institutions and practices in financial markets.
More money alone won’t do the job. Concerted action in four, inter-linked areas can together help us overcome these barriers and build the sustainable infrastructure of the 21st century. Governments will play a leading role in shaping and directing action across these areas. The Global Commission emphasises the particularly catalytic role that multilateral, regional and bilateral development finance institutions, as well as national development banks, can play in supporting countries and enabling a virtuous circle of action on sustainable infrastructure. In order to reach the scale of investments needed, however, the private sector will have an increasingly significant part to play in infrastructure investment.
First, we must collectively tackle fundamental price distortions – including subsidies and lack of appropriate pricing which leads to poor infrastructure investment decisions – to improve incentives for investment and innovation, and to generate revenue. The Global Commission on the Economy and Climate has repeatedly emphasised the importance of phasing out fossil fuel subsidies (which amounted to around US$550 billion in 2014) and other distorting subsidies and tax breaks, such as those for water use, company cars and parking, and access to natural resources. Evidence is building of how successful reforms can free up scarce government revenues for other priorities, such as protecting poor households and managing the transition for affected sectors. For example, these savings can be channelled into programmes that benefit poor people, through better targeted income support and social safety nets, through investments in pro-poor infrastructure such as off-grid renewable energy solutions and energy efficiency, etc.
In the last three years, almost 30 countries have initiated or accelerated reforms of their fossil fuel subsidies, with many taking advantage of low oil prices to do so. Egypt, for instance, raised fuel prices by 78% in 2014 and plans to double them over the next five years; Canada has phased out several subsidies to oil, gas and mining, including ending targeted support to tar sands production; Indonesia raised gasoline and diesel prices by 33% in 2013 and another 34% in 2014; and India eliminated diesel subsides in October 2014 after incremental hikes. Given that subsidies to energy and fuel often particularly benefit middle- and high-income households, reforms can be progressive and channelling the savings into the right areas can benefit the poorest and most vulnerable in society.
While there is momentum, further reform is needed in both developed and developing economies. Both the G7 countries and North American leaders recently set a deadline of 2025 to phase out their fossil fuel subsidies. Other countries, including the G20, should follow suit. Many international institutions (such as the IMF, OECD, World Bank and IEA) have shown important leadership on this and are supporting progress in countries around the world.
The Global Commission also continues to emphasise the fundamental importance of strong, effective and rising carbon prices as a necessary condition for inclusive and low-carbon growth, in line with the Paris Agreement. Current pricing schemes collectively cover only about 12% of global GHG emissions, but a number of countries and companies have recently stepped up action, including through energy pricing reforms that effectively send a price signal to shift to cleaner energy solutions. Around 40 countries have implemented or scheduled carbon pricing. China, for example, will establish a national emissions trading system in 2017, expected to be the largest in the world. France adopted a carbon tax on transport, heating and other fossil fuels in 2014, and Vietnam took action in 2015 to adjust taxes, including on transport fuels, to better reflect their carbon content. Similarly, over 1,000 companies have now adopted an internal carbon price or plan to do so soon. Corporate leaders with pricing already in place include major consumer staples companies, such as Nestlé and Unilever; car brands, such as Mazda and General Motors; energy companies, such as Shell and BP; and financial giants, such as Barclays.
Second, we must strengthen policy frameworks and institutional capacities to deliver the right policies and enabling conditions for investment, to build pipelines of viable and sustainable projects, to reduce high development and transaction costs, and to attract private investment. Countries need a well-defined and appropriately designed pipeline of bankable, sustainable projects. But the capacity to develop and implement projects is low because of underlying issues such as poor planning, lack of mandate, skills shortages, inadequate regulatory frameworks for public-private partnerships and implementation, and weak enabling policy environments. Governments and development finance institutions are already working to expand capacity, but much more is required, including increased concessional finance for project preparation, and strengthened support for implementation within a broader policy reform process (such as measures to tackle inefficiencies, improve governance and combat corruption) which reaches beyond central government agencies to cover subnational and local-level entities.
Overall, governments have to make a greater effort to “invest in investment” – to improve public infrastructure planning, management, governance and policies. At the same time, to ensure sustainability over the long term, investment plans and project selection must better reflect environmental and social sustainability criteria. Governments should develop and implement procurement processes that incorporate sustainability criteria and are systematic and consistent in approach.
A stable and predictable policy and regulatory environment can attract investment in infrastructure, supported by stronger enabling environments for business, for example by enhancing competition, trade policies and corporate disclosure. Of particular importance is the need to strengthen governance frameworks, including anti-corruption measures. Public-Private Partnerships (PPPs) can help, if implemented well, to secure private engagement in sustainable infrastructure investment. Improving the institutional and regulatory frameworks for PPPs – including the transparency and credibility of processes for selection and agreement on projects, consistency of policy and implementation, and standardisation of contracts and documents – is essential to boost investor confidence and attract the scale of investment needed.
Clear national, subnational and sectoral development strategies, with accompanying infrastructure and investment plans, are essential to guide long-term public and private investments. Leadership will be needed to monitor progress and ensure that these plans promote low-carbon and climate-resilient development, reflect the financial realities of each country, and are aligned with their Nationally Determined Contributions to achieve the 2°C goal in the Paris Agreement.
In addition to national strategies, governments must also develop and implement sectoral plans that align with climate goals. Building support for these will not always be easy, especially given potential resistance from powerful incumbents who benefit from business-as-usual. The rapid transformation needed in the energy sector to meet climate goals is particularly challenging.
These transition plans should include both measures to ensure that clean energy solutions are economically attractive and affordable, and those that will better reflect the true costs of coal and other fossil fuels. The Global Commission welcomes the establishment of a Just Transition Centre that is initiated by the International Trade Union Confederation (ITUC) with emerging partnerships with business and civil society, focused on dialogue between governments, employers, workers and civil society around how to ensure a “just transition” towards including at national and sectoral levels.
Third, we must transform the financial system to deliver the scale and quality of investment needed in order to augment financing from all sources (especially private sources such as long-term debt finance and the large pools of institutional investor capital), reduce the cost of capital, enable catalytic finance from development finance institutions (DFIs), and accelerate the greening of the financial system. The scale of financing requirements for sustainable infrastructure calls for a strengthening of resources from all sources: public and private, domestic and external. It will involve regulatory action, policies, better governance frameworks and business practices to harness capital markets and the financial system to deliver sustainable development.
Public finance, whether through domestic resources or through development finance, will remain fundamental to the provision of infrastructure, including by playing a catalytic role in attracting private finance. In developing and emerging economies, about 60–65% of the cost of infrastructure projects is financed by public resources, while in advanced economies this figure is around 40%.
National budget allocations to support sustainable infrastructure investment are essential and should increase. This will often include the use of revenues that countries raise themselves, for example through taxes, or other finance they are able to raise, including through bonds, loans, or through development finance institutions. Fossil fuel subsidy reform and carbon pricing, emphasised above, can also be important sources of capital for sustainable infrastructure. And whatever the source of financing, ensuring effective public spending, including through strong, transparent and green public procurement practices, can allow scarce public resources to achieve more.
Beyond public financing, there is real need to significantly scale up private financing to meet our infrastructure requirements. But there are real challenges in tapping adequate private investment and in bringing down the high costs of finance. Banks and local financial institutions are well suited to provide long-term debt finance in the construction phase. There is also much greater scope to attract institutional investors through equity offerings and the development of local capital markets, including for “take-out” finance (where securitisation of initial debt occurs to make it long-term and attractive to institutional investors). Take-out finance can also help free up capital for more projects over time, since banks are able to sell a part of their loans to a third party and reinvest the money as projects become operational.
DFIs, including Multilateral and Bilateral Development Banks, can play a pivotal role in pioneering and scaling up financing models for sustainable infrastructure that can crowd in private finance. This is especially true in developing countries and in emerging economies, which often face prohibitively high costs of capital due to high perceived risks. In addition to the development and wider deployment of risk mitigation instruments, DFIs can play a role through the use of blended finance more generally (including concessional and non-concessional finance, and dedicated climate finance), and help create more viable and replicable financing models and tools (e.g. for credit enhancement and risk mitigation). Successful instruments and platforms should be replicated and scaled-up. There is also a need to emphasise the “development” role of DFIs, paying particular attention to the needs of less developed countries for whom the challenges of preparing, financing and executing sustainable infrastructure projects are particularly acute, rather than operating like commercial banks when assessing infrastructure investment risks.
A number of DFIs are stepping up their investments already, including through measures to expand their capital base, blend finance from different sources and leverage private and other investment in sustainable infrastructure. They are also partnering with countries to strengthen policies, institutions and capacities to reliably deliver domestic resources and ensure a solid pipeline of bankable projects tailored to national priorities. The New Development Bank (BRICS Bank), for example, has recognised the imperative around sustainable infrastructure and is demonstrating initial leadership in this area. In April 2016, it launched its first four investments, worth US$811 million, all for clean energy projects. In July 2016, it announced its plans to issue green bonds worth approximately US$450 million. Other important steps are being taken by a number of DFIs, in particular to help crowd in other sources of finance.
There is increasing potential to mobilise green finance to bolster support for low-carbon and climate-resilient infrastructure through new tools and approaches like green bonds and green infrastructure. The green bond market reached US$42 billion in 2015. HSBC, working with the Climate Bonds Initiative, predicts that the amount could more than double this year. With the right approach, green bonds can be powerful instruments and play a tremendous role in facilitating sustainable infrastructure investment and growth.
While these examples are promising, further action is required to shift the financial system to support investment in sustainable infrastructure, including through the use of equity offerings, appropriate risk mitigation and development of local capital markets to provide the large sums that will be needed for take-out finance. Establishing some forms of infrastructure as a distinct asset class could also help make it a standard part of investment portfolios and unlock access to large pools of capital, such as from institutional investors.
Fourth, we must ramp up investments in clean technology research and development (R&D) and deployment to reduce the costs and enhance the accessibility of more sustainable technologies. Investing in new technologies and practices can make them significantly cheaper and accelerate deployment, reducing upfront financing needed for sustainable infrastructure in both advanced and emerging economies. It can also help overcome the advantages enjoyed by incumbent technologies and make investing in new technologies less risky.
Over the next 15 years, when key infrastructure systems will be built and locked in for decades, a pressing challenge is to deploy existing state-of-the-art technologies and business models or those that can rapidly be demonstrated at commercial scale, even as we also invest in next-generation technologies for the longer term.
The Global Commission welcomes the recent launch of several promising collaborative multi-partner global initiatives that aim to boost R&D and deployment with climate change as a central theme. Mission Innovation, launched at COP21 in Paris, brings together 21 members as of August 2016 – including the world’s five most populous countries: China, India, the United States, Indonesia and Brazil – that have committed to doubling public investments in clean energy research over the next five years. Similarly, the new Breakthrough Energy Coalition brings together 28 major individual investors with a collective net worth of more than US$350 billion to provide capital for research on high-risk but promising clean energy technologies. And the Low Carbon Technologies Partnership initiative brings together 150 companies and 70 partners to develop and implement concrete actions that go beyond business-as-usual to tackle climate change.
Better public and private support at scale, public-private initiatives and enhanced international cooperation including in the private sector will be essential to accelerate the innovations of the future and their rapid deployment. Time-bound public investment in the deployment of and access to new existing low-carbon and climate-resilient technologies will be essential to open new markets and overcome incumbent technology and actor advantages.
The four actions outlined here together set out the beginnings of a roadmap for financing sustainable infrastructure in the new climate economy. A number of the Recommendations of the Global Commission on Economy and Climate agreed in 2014 and 2015 are still relevant today and essential to this agenda. In addition, as indicated above, the Global Commission has identified a number of further priority actions that can help to rapidly shift investments toward sustainable infrastructure.
Ramping up investment in sustainable infrastructure is the growth story of the future. The Global Commission finds that investing in sustainable infrastructure can boost growth and global demand in the short term, a priority for today’s economic and financial decision-makers. Over the medium term, it can spur innovation, creativity and efficiency of energy, mobility and logistics. It can help to lay the foundation for sustainable industrialisation. And it underpins the only sustainable, long-term growth path on offer, bringing with it a means to increase living standards, promote inclusion and reduce poverty. While the challenges and opportunities vary in different parts of the world, investing in sustainable infrastructure is in the collective global interest as well as in the self-interest of individual countries, whatever their stage of development.
If we act now and act together to finance sustainable infrastructure, better growth, better development, and a better climate are within our reach.
The sustainable infrastructure opportunity
The year 2015 was a landmark one for sustainable development and climate change.
The world set ambitious goals through the Addis Conference on Financing for Development in July 2015, the adoption of the 2030 Agenda and the Sustainable Development Goals (SDGs) in September, and by reaching a landmark international agreement on climate action at COP21 in Paris in December. This new global agenda has mobilised the support not only of national leaders, but also of mayors, business leaders, investors, civil society and citizens. Now the task is to quickly turn that momentum into on-the-ground action to implement the Paris Agreement, achieve the SDGs, and reignite global economic growth.
Sustainable infrastructure is crucial to all three goals. Investing in it can support inclusive growth, enhance access to basic services that can reduce poverty and accelerate development, and promote environmental sustainability.
For growth: Boosting investment in sustainable infrastructure can stimulate demand at a time when many economies are struggling. The International Monetary Fund (IMF) estimates that for advanced economies, investing an extra 1% of GDP in infrastructure will yield, on average, a 1.5% increase in GDP within four years. In emerging and developing economies, where infrastructure is often inadequate, the benefits for productivity and growth can be even greater, particularly if the investments are accompanied by reforms that increase institutional capacity for better planning and stronger budget processes and rules to guide public spending. Beyond the immediate boost to growth, investment in sustainable infrastructure can spur innovation and efficiency in key systems such as energy, mobility and logistics. Since the economic and financial crisis that started in 2008, governments have responded with a number of monetary, fiscal and structural policy reforms to boost growth. While important, these have not yet fully delivered the scale and quality of growth desired. The divide between the poorest and the wealthiest continues to grow in many countries, and large gaps persist in basic infrastructure and related services in a number of countries. Awareness is rising of the role that boosting investment in sustainable infrastructure can play to complement and bolster other reforms to deliver better long-term, sustainable and inclusive growth. The pace of action must be accelerated to realise these opportunities.
For inclusive development: Infrastructure is key to the delivery of a number of essential services. It provides a foundation for much of the SDGs’ vision for inclusive development. Infrastructure is directly addressed in SDG 9, which calls for resilient infrastructure and sustainable industrialisation. It is key to achieving multiple other goals, such as SDG 6, for instance, on clean water and sanitation and SDG 7 on affordable, reliable, sustainable and modern energy for all. Those basic components, in turn, make it possible to achieve SDG 8 on sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all. Sustainable infrastructure is also central to SDG 11 on safe, resilient and sustainable cities. And natural infrastructure is crucial to SDG 2 on ending hunger and to SDG 15 on protecting forests and biodiversity and combatting desertification.
For the climate: Infrastructure underpins all the major sources of greenhouse gas emissions: our energy systems, transport systems, buildings, industrial operations and land use. The existing stock of infrastructure and its use are associated with more than 60% of the world’s total greenhouse gas (GHG) emissions. The types of infrastructure we build – coal power plants vs. wind farms and solar arrays, for example, or mega-highways vs. public transit systems – will determine whether we stay on a high-carbon growth path or move towards a climate-smart future. Investing in sustainable infrastructure is thus critical to achieving SDG 13 on combating change climate and its impacts. Not only will it determine GHG emission levels, but it is crucial for resilience: infrastructure can help us withstand climate change impacts and extreme events, or it can increase vulnerability, particularly for the poor. Countries that are still building much of their basic infrastructure, such as in much of Africa and parts of Asia, have a major opportunity to build climate-smart from the outset, often at no or little additional cost, and avoid costly retrofitting later. They have an opportunity to lead the way on green development, leapfrogging some of the inefficient infrastructure developments that are now proving costly in other countries.
Growth, development and climate action are inextricably tied. Development is impossible without growth, and growth is pointless unless it lifts up the poorest. Climate change threatens both growth and development. If we don’t take ambitious action now, it is estimated that up to 720 million people could fall back into poverty by 20505 and the costs of adaptation could reach US$500 billion dollars per year, unravelling development gains to date.6 The future impacts of climate change on poverty relate to today’s policy choices. World Bank research shows that rapid, inclusive and climate-informed development, including sustainable infrastructure, can prevent most short-term impacts whereas immediate pro-poor, emissions-reduction policies can drastically limit long-term consequences.
Infrastructure can be the pillar upon which we base our growth, development and climate action, or it can crumble beneath us. If we want a prosperous, climate-resilient future, we must invest in sustainable infrastructure; it is the growth story of the future.
The world will invest more in infrastructure over the next 15 years than our entire current stock. To meet demand, which will rise further because of a growing population, faster urbanisation and advances in technology, the world needs to invest about US$90 trillion in infrastructure between now and 2030 – roughly doubling current global investment levels. While the next 15 years are critical, the investment choices we make even over the next 2-3 years will start to lock in for decades to come either a climate-smart, inclusive growth pathway, or a high-carbon, inefficient and unsustainable pathway. This is our chance to ensure that we build more infrastructure and the right kinds of infrastructure, to support economic, social and climate goals.
A key insight of Better Growth, Better Climate, the 2014 flagship report of the Global Commission on the Economy and Climate, was that low-carbon and resilient infrastructure does not need to cost much more than the “business-as-usual” alternatives. The report showed that a shift to low-carbon infrastructure would increase investment needs by as little as 5%, and those higher capital costs could potentially be fully offset by lower operating costs – for example, from reduced fuel use.
The first key step is to change how we finance infrastructure, to reflect the new global realities and show results on the ground. That is the focus of this report.
The approval of the SDGs and the signing of the Paris Agreement have made it clear that the transition to a sustainable, climate-resilient future is already under way. The challenge now is to ensure that it benefits all countries at all stages of development.
Achieving that is a task not only for governments, financial institutions and businesses, but for citizens as well, who not only use infrastructure, but also fund it through their taxes, pensions and personal investments. Already, individuals are making more informed decisions, joining shareholder movements and citizen groups to learn more about where their money goes and seeking to influence the direction of public and private investments alike. The awareness, involvement and support of individual citizens is crucial to enable the actions that will drive sustainable infrastructure investment.
» Download: The Sustainable Infrastructure Imperative: Financing for Better Growth and Development (PDF, 6.38 MB)
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Global wheat and rice harvests poised to set new record
Lower prices for staple grains more than offset by rising sugar and dairy prices in FAO Food Price Index
Global food markets will likely remain “generally well balanced” in the year ahead, as prices for most internationally-traded agricultural commodities are relatively low and stable, FAO said today.
The benign outlook, especially for staple grains, is poised to lower the world food import bill to a six-year low, according to the Food Outlook.
Record global production forecasts for this year’s wheat and rice harvests, along with rebounding maize output, are helping keep inventories ample and prices low. Worldwide cereal production in 2016 should rise 2 569 million tonnes, up 1.5 percent from the previous year and enough to further boost existing inventories.
The value of total food imports is expected to fall 11 percent in U.S. dollar terms in 2016 to 1.168 trillion, as lower bills for livestock products and cereal-based foodstuffs more than offset higher bills for fish, fruit and vegetables, oils and particularly sugar. However, the decline is expected to be slower for economically more vulnerable nations, many of which have depreciating local currencies.
Bumper crops
FAO raised its forecast for global wheat production to 742.4 million tonnes, led by increases in India, the U.S. and the Russian Federation – which is poised to overtake the European Union as the grain’s largest exporter. Total wheat utilization is projected to reach 730.5 million tonnes, including a big jump in use of lower-quality wheat for animal rations.
Global rice production is predicted to expand for the first time in three years, increasing 1.3 percent to an all-time high of 497.8 million tonnes, buoyed by abundant monsoon rains over Asia and sizable increases in Africa. Coarse grain output is seen rising 1.8 percent on the year, buoyed by record crops in the U.S., Argentina and India.
Cereal prices are drifting lower on the backs of the expected hefty supply. Wheat and maize futures on the Chicago Board of Trade have both dropped more than 16 percent since the start of the year, while quoted rice prices are at their lowest level since early 2008.
Production of cassava, a dietary mainstay in Africa where per capita consumption is above 100 kilograms annually, is also projected to grow 2.6% this year to 288 million tonnes. However, China’s shift to drawing down its maize stockpile for domestic industry and feed has curbed international prices and trade flows for cassava.
Soybeans and other oilcrops could reach an all-time production high this year, thanks to record US yields, although demand is expected to grow even faster. In the livestock sector, dairy markets are also expected to return to general balance in 2016 after a long period of excess supply, but tightening milk availabilities in the EU triggered the largest monthly rise in dairy prices in many years.
Stagnant world meat output in 2016, twinned with rising international demand for pigmeat and poultry, especially from East Asian markets, continues to lend support to meat prices.
Global fish production, meanwhile, is forecast to expand by a below-trend 1.8 percent this year to 174 million tonnes, as aquaculture output is expected to expand by 5 percent and wild-caught fish output to decline by 0.9 percent, due in part to El Nino’s impact on Pacific sardines, anchovetas and squid.
Food Price Index
The FAO Food Price Index, also released today, averaged 170.9 points in September, up 2.9 percent from August and 10 percent from a year earlier.
The increase was driven by a 13.8 percent monthly jump in the FAO Dairy Price Index, partly as a result of a sharp jump in butter prices benefiting exporters in the EU, where dairy output is declining.
The FAO Sugar Price Index rose 6.7 percent from August on the back of unfavorable weather in the Centre South main producing region in Brazil.
Palm oil prices also rose, helped by low stock levels in both exporting and importing countries, as did those of soy and rapeseed oil, lifting the FAO Vegetable Oil Price Index by 2.9 percent for the month.
The FAO Meat Price Index was unchanged from August.
The FAO Cereal Price Index, meanwhile, slipped 1.9 percent from the previous month and is 8.9 percent below its year-earlier level.
The FAO Food Price Index is a trade-weighted index tracking international market prices for the five key commodity groups. Its current level is the highest since March 2015. The sub-index for cereals is now at its lowest in a decade in deflated terms.
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COMESA Summit will address integration challenges
The top decision making organs of the Common Market for Eastern and Southern Africa (COMESA) are scheduled to begin meeting, Monday 10 October 2016 in Antananarivo, Madagascar ahead of the 19th Heads of State Summit on 18-19 October 2016.
Top on the agenda will be discussions on how to address challenges that Member States face in domesticating decisions taken by the Council of Ministers on the implementation of COMESA regional integration programmes at the national and regional levels.
Hosted under the theme “Inclusive and sustainable industrialization,” the debate will also address the productive constraints that inhibit inclusive and sustainable transformation of the region; from low productivity economies that rely on export of unprocessed primary commodities with either little or no value addition, to high competitive economies that produce and export value added products.
Between 800 – 1,000 delegates comprising policy makers in governments, leaders of the regional business community, development partners, regional economic communities and strategic continental institutions will attend.
The chair of COMESA H.E. Hailemariam Desalegn, the Prime Minister of Ethiopia will handover over the leadership of the regional organization to the President Madagascar H.E. Hery Rajaonarimampianina at the close of the Summit on 19th October 2016.
The leader and experts will review the status of market integration in the region with a focus on how member States are implementing the COMESA Free Trade area (FTA). Currently, 16 out of the 19 member States have joined the FTA with DR Congo being the latest to enlist mid this year.
The outstanding non-tariff barriers will also feature with focus on those that are remaining. Latest reports indicate that 96 percent of the NTBs reported to the COMESA Secretariat have been resolved and States involved are negotiating on how to eliminate the rest.
The implementation of the decisions that have made by the Council of Ministers in the past which member States have not yet domesticated will be addressed. The meetings will be seeking to establish the challenges member States face with a view to assist them.
Some of these include the Protocol on Gradual Relaxation and Eventual Elimination of Visas (Visa Protocol) which have been ratified by all Member States but the implementation has been slow. The same applies to the Protocol on Free Movement of Persons, Services, Labour and the Right of Establishment and Residence (Free Movement Protocol).
Other decisions expected from the policy organs meetings will be on the how to energize the implementation of the Tripartite Free Trade Area. Launched in June 2015 in Egypt, 17 countries out of the 26 in COMESA, the East African Community and the Southern African Development Community have so far signed the agreement but none has ratified.
The COMESA Council of Ministers which meets on 13-14 October 2016 is expected to provide policy direction on how to hasten the pace of the implementation of the tripartite agreement.
Before the Summit, key policy organs will begin their meetings, Monday October 10, 2016 at the same venue. The first to kick-off will be the Intergovernmental Committee that will bring together Permanent or Principal Secretaries designated by each of the 19 Member States. It is responsible for the development of programmes and action plans in all fields of co-operation except in the finance and monetary sector. Owing to its heavy workload, this meeting will run for three days.
It will be followed by the Council of Ministers’ meeting on 14 -15 October 2016 which will give way to the Heads of State Summit. In between there will be the COMESA Business Forum that brings the private sector to discuss issues pertinent to the business community in the region. Ministers of Foreign Affairs will meet to discuss security issues.
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Priority trade policy actions to support the 2030 Agenda, transform African livelihoods and contribute to gender equality
Priority Trade Policy Actions to Support the 2030 Agenda and Transform African Livelihoods
In September 2015, world leaders adopted the 2030 Agenda for Sustainable Development, including 17 Sustainable Development Goals, with the first calling for the eradication of extreme poverty. This new transformative agenda took effect in 2016. The Agenda 2063: The Africa We Want was adopted in 2013 and provided the basis of Africa’s input into the SDGs. The result is a global development agenda that is mutually supportive and consistent with Africa’s own development agenda.
The Millennium Development Goal of halving poverty between 1990 and 2014 was met for all developing regions except for Africa, where the absolute number of people living in poverty increased. At the same time, the continent as a whole recorded impressive growth significantly above the global average, albeit mostly driven by a commodity boom. Africa’s key challenge is to make its relatively high growth inclusive and employment-intensive so that it does not worsen inequality and helps lift people out of poverty. With the subsequent fall in commodity prices and a more uncertain outlook for growth, current projections suggest that the region is unlikely to eliminate poverty by 2030. A new approach is needed.
This think piece focuses on the transformative role trade policy offers in this regard. Trade performance in Africa has to date been suboptimal. Intra-African trade – which has significant potential to facilitate successful economies of scale, diversification and value addition – is underperforming. The think piece identifies the main challenges in building poverty-reducing trade – these include high trade costs, commodity dependence, weak productive capacities, slowing global trade and economic growth, and a global trade regime that falls short of what is needed for Africa.
The piece recommends a set of priority trade policy actions that are needed to address these challenges and shape trade so that it contributes to poverty reduction in Africa. National actions call for agricultural transformation, industrial development and integration of African firms into global value chains through reducing constraints to trade for small and medium-sized enterprises (SMEs); trade facilitation measures; efficient and effective services; and lowering protection on imported intermediate products. These actions are needed to provide the supportive domestic microeconomic conditions for Africans to benefit from trade opportunities. At the regional level, the piece highlights the potential diversification, employment and income gains from intra-African trade and the need for timely implementation of the African Union’s Boosting Intra-African Trade Action Plan, Continental Free Trade Area and Continental Customs Union. Internationally the call is for assistance to mobilise African’s productive capacity to compete and trade under preferential agreements and to increase Aid for Trade allocations to regional projects, trade facilitation and services, which are all key to unlocking structural transformation and poverty reduction in Africa.
Challenges to ensuring poverty-reducing trade and growth in Africa
Having not achieved the MDG on poverty reduction, Africa is starting on the back foot. Attaining the poverty-related objectives of the 2030 Agenda will be even harder. This reflects challenges to ensuring poverty-reducing trade and growth on the continent related to the national, regional and global context, but also specific policy challenges.
National and Regional Challenges
Poverty reduction in Africa has been constrained by domestic and regional factors such as rapid population growth, high unemployment (particularly for youth and women), inadequate access to energy and cross-border infrastructure (particularly in rural areas), high levels of inequality, including gender disparities, and in some instances prolonged episodes of political instability. The continent is also susceptible to shocks that have reversed development gains and significantly hit productive capacities and potential economic activity. The Ebola outbreak in Liberia, Sierra Leone and Guinea, for example, is expected to result in serious reversals in efforts to reduce poverty and generate decent jobs and food security for at least the next five years (UNECA et al. 2015). These challenges are reflected in a range of SDGs, demonstrating how deeply embedded the poverty challenge is within the 2030 Agenda but also in national realities.
Trade policy is key to overcoming these challenges. High population growth is expected to continue over the SDG-period, but expanding trade can help African countries to harness the demographic dividend through creating productive externally oriented job opportunities. Closer trade ties can help to incentivise political stability, peace and productivity. Gender-sensitive trade policies are key to securing productive opportunities and decent incomes for women. Regional trade holds particular promise. Intra-African trade is the lowest of all intracontinental trade, but bold regional integration plans are expected to reduce intra-African trade constraints, helping to boost trade on the continent, and diversify Africa’s production and export base.
Global Challenges
Global trends and trade and investment partnerships impact poverty outcomes. Recent estimates suggest that 44 percent of the output fluctuations of Africa excluding North Africa since 1998 are explained by external factors – namely gross domestic product (GDP) growth in G7 countries and China, oil and non-oil commodity prices, and borrowing costs for emerging economies in international capital markets (Brookings Institution 2016).
For much of the MDG period, Africa maintained high growth rates, even in the face of large external shocks such as the 2008 global financial crisis. However, this was largely fuelled by high commodity prices, which intensified commodity export dependence and inequalities. The narrowing of the economic base in many commodity-dependent countries, combined with recent developments in the global economy, suggest Africa’s rate of growth will slow in the years ahead. The World Bank revised its 2016 growth projection for Africa down from 4.2 percent in January 2016 to 2.5 percent in June 2016 (World Bank 2016a).
Global growth is expected to moderate due to slower growth in emerging markets and stagnation in Europe. This will constrain Africa’s foreign exchange inflows from exports and remittances, and may trigger protectionist measures. The World Trade Organization (WTO) projects growth in the volume of world trade to remain sluggish in 2016 at 2.8 percent (WTO 2016). Conditions in international financial markets are tightening, which risks reducing investment and business activity in Africa. Interest rates in the United States are anticipated to increase on expectation of inflationary pressures. This has already exerted pressure on African countries’ balance of payments and currencies. Weak demand has contributed to broad reductions in commodity prices since 2011, and they are expected to remain low in the short to medium term. This has negatively impacted Africa, as a heavily commodity-dependent continent, and contributed to additional currency depreciation pressures.
These global trends make poverty reduction in Africa more difficult – not only through the immediate effects of reduced export earnings and incomes, but also through the long-term impacts of reduced capital accumulation and business investment on growth and employment. They also present opportunities, however. Low commodity prices will make it more challenging for African countries to earn export revenues unless they diversify, providing incentives for value addition and a more inclusive trade and growth model. Export diversification will be aided by the export competitiveness effect of weak currencies.
The Changing Trade Policy Landscape
The international trade landscape will influence how well Africa can take advantage of welfare-enhancing trade opportunities. Very little has been achieved under the multilateral Doha Development Agenda trade negotiations and there is a broad consensus that, overall, the outcomes of the 2015 WTO 10th Ministerial Conference were suboptimal.
Slow progress in multilateral negotiations has contributed to a significant increase in the number of regional trade agreements (RTAs) and an emergence of mega-regional trade agreements (MRTAs) between large trading powers over the last decade. Modelling exercises by UNECA indicate that, if implemented as currently planned, the three main MRTAs – the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP) and the Regional Comprehensive Economic Partnership (RCEP) – will result in loss of market share by African countries through preference erosion and competitiveness pressures.4 Africa would see its total exports reduce by US$3 billion (0.3 percent) by 2022 compared to the baseline scenario without MRTAs, as exports to RCEP countries decrease by over US$10 billion while exports to other regions would increase by about US$7 billion. Although this trade diversion effect is relatively small, impacts beyond trade diversion could cause a bigger hit to African countries. For example, Africa’s exports to RCEP (essentially India and China) would fall by 5.4 percent, with the reductions concentrated in exports of industrial products, creating an additional challenge to efforts to establish stable supply relationships with rapidly growing markets and structurally transform African economies (Mevel and Mathieu 2016).
Shifts towards greater reciprocity in trade agreements are also expected over the next decade. The recently agreed Economic Partnership Agreements (EPAs) between the European Union (EU) and regional African groupings call for the partial and gradual asymmetric opening of African markets to EU imports. The liberalisation is asymmetric, involving more EU access to African markets, given that EU markets are already relatively open to African products. Some EU-originating goods would be granted more favourable treatment in African countries than products from other African countries, since average tariffs on intra- African trade remain high. In 2025, the African Growth and Opportunity Act (AGOA) covering preferential trade between Africa and the United States is also expected to be succeeded by an agreement with a more reciprocal structure.
UNECA’s modelling suggests that implementation of new EPAs in West Africa and the Eastern and Southern Africa (ESA) region would see a significant influx of EU exports to African countries in almost all sectors (especially in industrial goods), a reduction in intra-African trade, and tariff revenue loss (19.3 percent in West Africa). The agreements could have both positive and negative effects: cheaper industrial inputs from the EU would reduce local manufacturing production costs and help to drive structural transformation in African countries, but rapid full liberalisation also risks reducing the competitiveness of some local producers, potentially undermining efforts to industrialise, diversify and transition out of developing economy status if the necessary adjustments are not managed well. West Africa and ESA’s export gains to the EU would be concentrated in just a few agricultural sectors and benefit non-LDCs which currently have less access to EU markets. LDCs instead see quasi-null or negative export variations due to increased competition with West African and ESA’s non-LDCs, which risks undermining LDCs’ poverty-reduction efforts.
Reducing Non-Tariff Trade Costs
Preferential market access is important, but reducing the non-tariff trade costs faced by importing and exporting African firms is an even more important policy challenge. These costs inhibit firms from importing the inputs needed to be competitive, reduce the returns they reap from engaging in exports and reduce their ability to create employment. They also increase average consumption costs for the poor, constraining improvements in food security, health and productivity.
Trade costs are much higher than prevailing tariff rates and are particularly high in Africa excluding North Africa. Africa’s cost of trading with the world was 283 percent in ad-valorem tariff equivalent in 2013, higher than that of all other regions except Central Asia, which has a higher share of landlocked countries. These high trade costs reflect cumbersome domestic customs requirements and inadequate internal and cross-border infrastructure. The average African country ranks in the worst-performing 25 percent of all emerging and developing countries in terms of costs of border processing and document requirements.
Cross-border collaboration to design and implement regional energy and transport infrastructure projects has increased but falls short of what is needed to fill Africa’s deficit. The 51 projects identified under the Priority Action Plan as part of the African Development Bank’s Programme for Infrastructure Development in Africa (PIDA) were considered technically and financially achievable – the cost of annual outlays representing 1 percent of Africa’s GDP up to 2020. Implementation progress has been slow, however, due to a lack of clarity on the institutional architecture and the responsibility of different parties for execution, and inadequate discussion of public-private partnerships (PPPs) and private investment options, despite these being a priority of the programme.
Over half of exporting and importing firms in African countries covered in a recent survey were affected by non-tariff measures (NTMs). The most affected are small companies and companies in the agrofood sector which are impacted by sanitary and phytosanitary regulations. This is important because understanding and managing the business environment and NTMs is particularly difficult for SMEs, and SMEs are key to channelling trade and growth into jobs for poor people.
The costs of trading in services are also high. Most African countries for which data are available rank in the top (more restrictive) half of World Bank’s 104-country Services Trade Restrictions Index. Ethiopia, Zimbabwe, Egypt and the Democratic Republic of the Congo rank in the top 10 (UNECA 2016). Reducing these costs is important because research has shown the services sector to have a strong poverty-reducing effect across 60 countries, including 29 in Africa excluding North Africa.
Building Productive Capacities for Value Addition
Africa’s exports of primary commodities as a share of total exports increased in recent years – from 76 percent a decade ago to 82 percent in 2010-2012 – partly driven by the global commodities boom. Domestic value addition is still limited by an inadequate supply of productive capacities. Africa contributed only 2.2 percent to global trade in value added in 2011 and mainly participates in global value chains (GVCs) at lower rungs of the ladder. Low levels of value addition and Africa’s reliance on commodities constrain poverty reduction through reducing aggregate income, creating a more unequal income distribution (favouring commodity owners), and reducing the returns to labour supply.
The continent’s export structure will need to change to ensure productive jobs and poverty-reducing trade. Global and regional reductions in trade costs, new technologies and the emergence of GVCs and trade in tasks have created a wide range of industrial products and services that are now tradeable. This provides a crucial opportunity for labour-abundant Africa to attract investment in higher value-added export sectors such as agro-processed goods, textiles, leather, wood furniture and financial services.
Africa will find it difficult to harness these trading opportunities without investments in human capital and technological capabilities. A recent African Capacity Building Foundation study highlights the need for critical, technical and sector-specific skills for the implementation of Agenda 2063 and estimates that the Agenda’s first Ten Year Implementation Plan period will require 1,611,042 more agriculture scientists and researchers and 7,441,648 more engineers to support the work required. A poorly skilled and educated labour force is the top supply bottleneck underscored by global executives when considering manufacturing investments in Africa and constitutes a barrier to investment in skills-intensive service sectors. Investments in human capital are key to addressing multidimensional poverty, through productive employment creation, enhanced returns to labour and improved education outcomes more generally.
Ensuring Equal Opportunities to Benefit from Trade
Trade impacts different population groups differently, not least because it can result in the contraction of some sectors and the expansion of others. Without redistributive mechanisms or sufficient labour mobility and options for redeployment and re-skilling, adjustment costs can be large and the gains from trade severely skewed. The poor face constraints that make mobility difficult, and this at the same time reduces their ability to benefit from new poverty-reducing trade opportunities. Among these constraints are limited access to land, capital, markets and education and training, which are crucial to investing in activities for trade, particularly at higher levels of the value chain. Rural dwellers, informal workers and women are disproportionately affected by these constraints, which are inefficient and reduce the total gains and poverty-reducing effect of trade. It is no coincidence that poverty rates among these groups are significantly higher than national averages in Africa. Creating the conditions for mobility to be achieved will be a crucial challenge for policymakers seeking to harness trade to contribute to poverty reduction (World Bank Group and WTO 2015).
The 2030 Agenda and the Potential Contribution of Trade to Gender Equality
The ambitious goals laid out in the United Nations 2030 Agenda for Sustainable Development capture the intrinsic importance of gender equality and women’s economic empowerment. The challenge is steep. Women are less likely to participate in the paid and formal economy, and when they do they are largely concentrated in vulnerable and low-paying jobs and sectors. Women generally earn less than men for the same jobs and skill levels and they disproportionately bear the burden of unpaid household work and care. These disparities matter, including for growth prospects. Women’s economic empowerment and gender parity influence national competitiveness. Ultimately, gender equality is fundamental to whether societies thrive.
While gender gaps in economic opportunities are well established and there is an accepted understanding of trade and gender issues, with some evidence from case studies, there is very little generalised evidence about the trade-gender inequality relationship. The challenges that women face in economic activity are also extremely varied. Women entrepreneurs run around 31 percent of firms, but these are predominantly small in scale and so disproportionately affected by burdensome non-tariff barriers to trade. Women operating as informal cross-border traders often face opaque and inaccessible regulations, as well as corruption and abuse at border crossings. Small enterprises in general, and particularly women, often face difficulties accessing finance, including finance for trade. As employees, sectoral patterns of trade determine whether trade increases opportunities for female workers relative to male workers. Women have gained from employment in export-oriented labour-intensive manufacturing (for example, garments and textiles) and from trade in services (like tourism), although under working conditions that may not be better than other sectors of the economy. Competition from trade can, but may not always, lead companies to invest in technology that benefits women, and to reduce wage dis crimination.
The challenge of meeting the 2030 Agenda’s gender equality goal applies as much to wealthy as to poorer countries. Policymakers seeking to use trade policy to enhance women’s economic opportunities and gender equality face a range of further challenges and options. In the short term, governments could prioritise assessing the impact of trade liberalisation on women’s participation in trade-exposed sectors and could shape trade adjustment assistance to expand women’s economic opportunities. In the medium term, government procurement, within the bounds of international obligations, could be oriented to source from women entrepreneurs within and outside traditional sectors, boosting demand at scales that could enable women to trade internationally. Importantly, governments could prioritise trade facilitation efforts that would reduce the fixed costs of trade that disproportionately affect small businesses and therefore women’s businesses. Regional trade agreements are opportunities for encouraging cooperation around gender equality. In parallel, governments will also need to address key structural barriers to gender equality, including eliminating legal constraints and barriers to access to finance.
Introduction
International agreements to ensure gender equality are not new. The United Nations Convention on the Elimination of All Forms of Discrimination against Women includes Article 3 on ensuring the “full development and advancement of women,” and there are several relevant International Labour Organization (ILO) Conventions, dating from the 1950s through to the Maternity Protection Convention (2000, No. 183), and the Decent Work for Domestic Workers (2011, No. 189).
The SDGs provide a catalyst for action. Goal 5, to achieve gender equality and empower all women and girls, and the associated targets capture significant global consensus around an ambitious agenda. The concrete targets, listed in the Annex, include commitments to recognise unpaid work, to give women equal rights to economic resources, and to enhance the use of enabling technology. Women’s economic empowerment is also part of other goals, including the achievement of “full and productive employment and decent work for all women and men” (Target 8.5) and doubling the “agricultural productivity and incomes of small-scale food producers, in particular women” (Target 2.3). It is thus a crucial means of achieving a range of sustainable development objectives. Similarly, progress towards other SDG targets, like achieving universal access to safe and affordable drinking water (Target 6.1) and ensuring equal access for women and men to technical, vocational and tertiary education (Target 4.3) could help to enable women to participate in economic opportunities.
Trade is a recurring theme in the 2030 Agenda, even if there is no specific goal directed at trade per se. Several areas relate to trade, including increasing Aid for Trade support for developing countries and significantly increasing developing country exports, in particular with a view to doubling the share of least developed countries by 2020 (SDG 17) (WTO 2016; see also Tipping and Wolfe 2016). The Addis Ababa Action Agenda, which is integral to the 2030 Agenda, explicitly links trade and gender equality in paragraph 90: “Recognising the critical role of women as producers and traders, we will address their specific challenges in order to facilitate women’s equal and active participation in domestic, regional and international trade.” This paper addresses some of these challenges.
Trade can contribute to gender equality and sustainable development. The relationship may also work in the other direction. Levels of gender equality affect how competitive a nation is. We can broadly map this relationship using the World Economic Forum’s Global Competitiveness Index and the United Nations Development Programme’s Gender Inequality Index. Figure 1 highlights the strong correlation across countries – such that higher levels of gender equality are associated with higher levels of national competitiveness – suggesting potentially positive synergies, as well as negative relations at lower ends of the spectrum.
At the same time, there is intense debate about the distributional effects of trade. Academic investigations into the labour market impacts of international trade typically differentiate workers by their educational attainment or skills. Gender is a further dimension in which the impacts of trade liberalisation can be expected to differ, given the systematic differences in whether and where women and men tend to work. International trade may amplify or work to offset existing patterns of inequality in women and men’s participation in economic activities. Understanding such linkages is complex, as underlined by Bussolo and de Hoyos (2009) and others. More broadly, gender inequality intersects with other inequalities – such as poverty, geography, ethnicity and race or caste – in shaping economic opportunities. While it is important to recognise and take account of these different factors where possible, the focus of this short piece is on gender.
This piece focuses on women’s economic empowerment. Women’s economic opportunities are of course only one dimension of the gender agenda – there are major challenges on various other fronts, including freedom from violence, health, and participation in decision-making. Economic opportunities are nonetheless integral to gender equality and women’s empowerment, given the evidence of how access to good paid work can expand the well-being and choices not only of women themselves, but also their families. There are also major gains associated with expanding women’s economic opportunities which can accrue to firms, communities and economies as a whole. Woetzel et al. (2015) recently estimated these gains to amount to some US$28 trillion globally.
It is therefore important to understand whether and how trade policy can contribute towards greater equality of opportunities in the labour market. This note explores ways in which trade and trade policy can enhance gender equality in economic opportunities, and help to overcome such structural barriers as discrimination and occupational segregation. Evidence shows that while increased trade can increase economic opportunities, existing inequalities, including in terms of pay and conditions, persist. We therefore also look at ways in which complementary policies can help to maximise the potential gains from trade, and minimise its potential costs.
The above think pieces are part of a series of papers developed by ICTSD that explore the contribution that trade and trade policy could make to key objectives of the 2030 Agenda for Sustainable Development adopted by members of the United Nations in September 2015. The series is designed to help policymakers, in particular, to think through the role of trade policy in the implementation of this ambitious global agenda.
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Tackling “non-tariff measures”, the new frontier for global trade
Some 96% of world trade is affected by “non-tariff measure”. Meeting these formidable, complex and often opaque rules requires financial and technical resources, which means that the smallest and most vulnerable companies and countries pay the heftiest price.
In 2016, the growth of world trade will be at its slowest since the financial crisis of 2008, reports the World Trade Organization (WTO). Despite the increased protectionism that followed the crash, traditional trade barriers, such as tariffs, are at historical lows. Despite this, the flow of goods and services between countries remains one of the most important drivers of job creation and prosperity, and its sluggish pace is prompting anxiety.
The real untapped potential for further trade growth lies in regulation. Some 96% of world trade is affected by at least one regulation, often referred to as a “non-tariff measure”, or NTM. Meeting these formidable, complex and often opaque rules requires financial and technical resources, which means that the smallest and most vulnerable companies and countries pay the heftiest price.
This is especially true for exporters from the 48 least developed countries, who lose an estimated $23 billion a year – that’s 15% of their exports, which far exceeds the loss incurred by remaining tariffs – because they are unable to comply with non-tariff measures.
While these measures and other regulations are legitimate, the sheer number of them continues to fragment trade. And we can expect the importance of regulation – particularly when related to public health, safety and the environment – to increase in the future, increasing costs to trade as they do so.
This chart shows the percentage by which exports from each of the 48 least developed countries into advanced, G20 countries would increase if not affected by non-tariff measures (in red) and traditional tariffs (blue).
![NTMs](http://unctad.org/en/NewsImages/2016-10-05_NTMs_800x307.gif)
For the LDCs denoted with * the effects result from sample predictions
A new frontier for trade
It isn’t easy for politicians and policy-makers to tackle the issue. Protests against trade deals quickly erupt if governments are perceived to be endangering the good of the public or the environment for better trade deals. This is the new frontier in the global trade agenda.
Trade policy cannot question the right of countries to protect their citizens and promote sustainable development. But trade policy can, and must, guide how countries exercise this right.
The manner in which a country implements its regulatory choices, and the way it operates its regulations, is not a free-for-all – especially when it frustrates the attainment of sustainable development through trade by other countries, particularly the poorest countries.
To move in this direction, five concerted actions are critical:
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The transparency of existing regulations needs to be increased. UNCTAD is leading an international effort to collect and freely disseminate comprehensive data on currently imposed non-tariff measures. This data covers 80% of world trade and further data collection is underway, particularly in Africa. These efforts go hand-in-hand with capacity building.
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The international trade community should increasingly embrace international standards. This will simplify unnecessary regulatory hurdles, especially for developing countries. By some estimates, African exporters of textiles and clothing lose up to 50% of their potential export earnings because European Union regulations differ from the international standards set by the International Organization for Standardization. By promoting the use of international standards at home, countries also help their companies to integrate into global value chains. And since international standards usually embed global best practices, the increased uptake of such standards can help promote sustainable development.
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Meanwhile, regional trade blocs should push for more regional regulatory convergence, finding common answers to address their regulatory needs. A recent UNCTAD study of the South American free-trade bloc MERCOSUR showed that international standards can bring almost twice the gains of regulatory convergence. Strikingly, the welfare gains would also be far higher for MERCOSUR if its key trading partners, such as the EU, simultaneously converged to international standards. Regional regulatory convergence should therefore be seen as a stepping stone for global convergence.
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Countries can and should do much better in avoiding unnecessary red tape for trade in national regulatory processes. Rules and guidelines exist on this issue, by the WTO and the OECD for example. But the effective and efficient application of these principles is broadly missing.
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Regulatory measures disproportionately affect trade in developing countries, so we need to strengthen their participation in international standard-setting bodies. Technical cooperation and capacity building needs to be increased to help these countries comply with regulatory requirements and reduce procedural obstacles.
Trust issues
Despite repeated promises by governments that potential trade deals will not compromise on public health or environmental protection, many remain suspicious. The backlash against globalization and a growing mistrust of elites mean that the argument of “trust me, it won’t happen” is not winning a lot of hearts and minds.
To be credible, a different approach is needed. More of the same, in terms of simply reducing barriers and other trade restrictions in a rather linear fashion, is no longer going to cut it politically. Nor is it even appropriate in the case of most non-tariff measures, considering that their objectives are legitimate. Such measures cannot be traded off for trade efficiency.
Managing regulatory measures differently, without putting in question their legitimate objectives, means that we can keep trade open and push future trade growth while protecting citizens, and the environment too. Only then, combined with complementary policies, can we ensure that trade retains both its credibility and its rightful place as one of the most important drivers of jobs and incomes.
Joakim Reiter is Deputy Secretary-General, UNCTAD. This article first appeared on the World Economic Forum Website on 29 September 2016 under the title ‘5 ways to make global trade work for developing countries’.
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tralac’s Daily News Selection
The selection: Wednesday, 5 October 2016
Mukhisa Kituyi: ‘African trade integration most exciting whenever it creates more jobs’ (UNCTAD)
Africa is widely noted for its low levels of intra-regional trade, but in fact the levels are much higher when North Africa is removed from the analysis, Dr Kituyi said. In East Africa, intra-regional trade is closer to 26%, the same level as in Latin America. Meanwhile, preparations continue for the CFTA, bringing together more than one billion people in 54 African countries with a combined gross domestic product of more than $3.4 trillion. Dr Kituyi said the CFTA was unlikely to happen in 2017 as originally planned, but the target had helped to move the project forward. "I had the privilege to visit 16 African presidents to talk to them about the CFTA and I am satisfied that a large number of the political leadership believes in the future and the need for African integration."
Financial Times 2016 Africa Summit: keynote address by Dr Akinwumi Adesina (AfDB)
Africa is still the second fastest growing destination in terms of foreign direct investments, second only to the Asia-Pacific region. Foreign direct investments inflows to Africa are projected to reach $55-60 billion in 2016. The value of announced FDI investments in Greenfield projects totaled $29bn in the first quarter of 2016 - 25% higher than the same period in 2015. The FDI inflows are also becoming more diversified. Of the $71.3bn of Greenfield announcements in 2015, the focus has mainly been in infrastructure such as electricity and transport ($37bn), manufacturing, food and beverages and automotives ($19bn). Africa must develop a “high industrial readiness index” by accelerating investments in other critical infrastructure such as roads, ports and rail, aviation and ICT, which will position it as a competitive destination of choice.
Jim Yong Kim: Automation could disrupt the pattern of traditional economic path in developing countries (LiveMint)
“In large parts of Africa, it is likely that technology could fundamentally disrupt this pattern. Research based on World Bank data has predicted that the proportion of jobs threatened in India by automation is 69%, in China it is 77% and in Ethiopia, the percentage of jobs threatened by automation is 85%,” he said. “Now, if this is true, and if these countries are going to lose these many jobs, we then have to understand what paths to economic growth will be available for these countries and then adapt our approach to infrastructure accordingly,” Kim said.
Featured trade policy commentaries:
Joshua Setipa: ‘Why AGOA remains critical to Lesotho’s development’ (AfDB): Lesotho is one of the countries that has benefitted and continues to benefit immensely from the AGOA programme, and in particular its textile and apparel industry. For Lesotho, the AGOA Forum came not too long after the country had gone through an eligibility review process for 2016, which determined its continued eligibility. But what would a withdrawal of AGOA benefits mean in practical terms for Lesotho? [The author is Lesotho’s Minister of Trade and Industry]
Faizel Ismail: ‘Why there’s an urgent need to revive the Doha round of trade talks’ (The Conversation): The only way to ensure that the world creates a legitimate and secure world trading system is to rebuild the WTO based on fair trade, balanced rules, inclusivity and transparency. The next opportunity to do this will be when trade ministers meet again at the 11th WTO Ministerial Conference at the end of 2017. They should gun to revitalise the Doha round. But how should we understand this failure? And how can the situation be resolved?
Dirk Willem te Velde: ‘Five win-win ways to ensure the UK’s new trade policy works for developing countries’ (ODI): Alongside its negotiation with the EU, the UK also has the opportunity to announce a series of win-win trade options in the mutual interest of the UK and the (poorest) developing countries, and this doesn’t have to wait until Brexit negotiations have concluded. Here are five win-wins that I presented at an ODI event at the Conservative Party Conference:
DRC flags an intention to join the EAC (Daily News)
President Magufuli revealed at the press briefing that President Kabila had asked him to allow his country to join the EAC, currently made up of six member states. “I have informed his Excellency President Kabila to follow procedures for his country to be admitted, it can start to participate as an observer. It is a known fact that DRC has been trading with many members of the EAC,” Dr Magufuli, who also doubles as Chairman of EAC, said. Once DRC submits formal application to join the EAC, President Magufuli pledged to submit the request to his fellow leaders of the EAC for deliberations.
Rwanda: Cabinet reshuffle sees new Ministry of Trade, Industry and EAC affairs (New Times)
The EAC affairs docket has also been scrapped as an independent ministry, and merged with the Ministry of Trade and Industry to form the Ministry of Trade, Industry and EAC affairs, with François Kanimba retained as the minister. Emmanuel Hategeka who had been Permanent Secretary @RwandaTrade for 7 years was appointed National Coordinator of Northern Corridor. Amb. Valentine Rugwabiza, former Minister for East African Community affairs, moves to New York as Rwanda’s Permanent Representative to the UN.
Zimbabwe: CZI, cross-border traders in exports deal (NewsDay)
The Zimbabwe Cross-Border Traders’ Association and the Confederation of Zimbabwe Industries are finalising a business linkage agreement which will put more focus on locally-produced goods with a potential to increase exports. The manufacturers will use the cross-border traders to market their goods outside the country. ZCBTA secretary-general Augustine Tawanda told NewsDay last week the deal would allow cross-border traders to reduce their dependency on imported goods. Tawanda said the small-scale traders would become “runners” for industry, marketing or exporting goods produced by local manufacturers.
Inaugural Zambezi Basin Stakeholders’ Forum (27-28 September, Windhoek: brochure (pdf), update
ECOWAS Court orders Dasuki’s release, imposes N15 million fine on Nigerian government (Premium Times)
The Court of the Economic Community of West African States, ECOWAS, on Tuesday declared the arrest and detention of former National Security Adviser, Sambo Dasuki, as unlawful and arbitrary. The court also held that the further arrest of Mr. Dasuki by government on November 4, after he was granted bail by a court of law, amounts to a mockery of democracy and the rule of law.
Ethiopia: 2016 Article IV Consultation (IMF)
Box 2 - Export dynamics and diversification: Over the past 15 years Ethiopia’s merchandise export revenue grew at 13.3% on average. This strong performance stems from volume expansion (15.1% annually), as prices decreased by 2.3% annually. However, export growth - both price and volume - remains highly volatile, due to concentration on agricultural commodities exposed to price and weather shocks. To reduce export volatility and increase revenue, policies aim at diversification across products and destination countries. Also, diversification has development spillovers, as less innovative firms follow in the wake of pioneer entrants. As a result, one third of 2015 export revenue comes from markets where Ethiopia was not present 15 years ago. FDI has flowed to horticulture and light manufacturing, and non-traditional exports account for more than 10% of total exports. For example, flower exports expanded from $440,000 and 5 destinations in 2004 to $225 million and 59 destinations now.
Sudan: 2016 Article IV Consultation (IMF)
Box 1 - Tax revenue mobilization: Sudan’s tax revenues are among the lowest in low- and lower-middle income countries. Tax revenues represented only 6.3% of GDP compared to 12% of GDP on average in fragile LLMICs in 1995–2015. With little improvement over the period, this gap has been increasing. Tax collections have yet to adjust to the loss of oil revenues following the secession of South Sudan. Oil revenues, which averaged 8% of GDP in 1995–2011, financed the bulk of government expenditure and made it unnecessary to raise tax collections. After the secession, oil revenues (including transit fees and transfers from South Sudan) dropped to 2.2% of GDP in 2012–15, and are expected to drop further to less than 1% of GDP in 2016 on account of low global oil prices. At the same time, despite efforts to strengthen tax administration, tax revenues increased only marginally in percent of GDP in 2015 due to low imports and an overvalued official exchange rate. This limited the available fiscal space and constrained pro-growth investment and poverty-reducing social spending. Sudan’s tax revenue is lower than expected at its income level.
Egypt to join TIR (IRU)
Egypt has endorsed the TIR system to boost its regional and international trade flows. Following a series of meetings held by IRU in Cairo, Egypt’s Technical Committee for Trade and Transport Facilitation has unanimously pledged to begin preparation for accession to TIR.
Egypt, South Africa sign MoU on investment cooperation (ECN)
South Africa and Egypt have committed to boost investment and trade between the two countries. The commitment was made in Egypt during the signing of a MoU on investment cooperation between Investment South Africa and its counterpart, General Authority of Investment and Free Zones. The MOU is designed to conduct an effective and efficient programme geared towards the promotion and facilitation of cooperation of investment activity within high valued added sectors. The MoU was signed by Ambassador Sadick Jaffer on behalf of Investment SA and Chief Executive officer of GAFI, Mr Mohamed Khodeir.
Making power affordable for Africa and viable for its utilities (World Bank)
Examination of the financial viability of power sectors in 39 countries in Sub-Saharan Africa shows that only two countries have a financially viable power sector, and only 19 cover operating expenditures. Quasi-fiscal deficits average 1.5% of gross domestic product. If operational inefficiencies can be eliminated, power sectors in 13 countries become financially viable. In the remaining two-thirds of the countries, tariffs will likely have to be increased even after attaining benchmark operational efficiency.
The cost of air pollution in Africa (pdf, OECD)
First, air pollution is of significant and increasing concern for the continent. Building on the methodology of the OECD Environment Directorate for OECD countries, China and India, the paper provides new, critical evidence on the cost of premature deaths in Africa attributable to air pollution. Between 1990 to 2013, total annual deaths from ambient particulate matter pollution (APMP, mostly caused by road transport, power generation or industry) rose by 36% to around 250 000, while deaths from household air pollution (HAP, caused by polluting forms of domestic energy use) rose by 18%, from a higher base, to well over 450 000. For Africa as a whole, Roy estimates that the economic cost of premature deaths caused by each of these sources of pollution surpasses those associated with unsafe sanitation or underweight children. Second, the human and economic costs of air pollution might explode without bold policy changes in Africa’s urbanisation policies. This makes it all the harder to reach regional and global sustainable development goals. [The analyst: Rana Roy] [The cost of air pollution: strengthening the economic case for action (World Bank)]
Competition and innovation in land transport (pdf, OECD)
The main trend in transportation markets at present is their increasing digitalisation, which is changing the way transport services are offered. The sourcing of data is evolving quickly, largely via the proliferation of handheld devices, such as smartphones, and automobile-based devices (e.g. portable navigation devices, in-vehicle navigation devices and connected vehicles). Around 80% of vehicles in Europe and North America are expected to be two-way connected by 2018.4 Mobile sensor-generated data has already given rise to the development of new business models. In 2015, approximately three billion apps relied on location-based data. Competition agencies are likely to face a number of challenges brought about by these developments.
WTO panel to discuss India’s paper on trade facilitation agreement in services on Oct 6
The consequences of the global trade slump
UNCTAD: Estimating the impact of trade specialization and trade policy on poverty in developing countries
Said Adejumobi: Africa development challenges are heavily under-researched
East Asia and Pacific Economic Update (pdf)
Who are the poor in the developing world?
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Adesina urges African countries to seize new investment opportunities
Speech by AfDB President Akinwumi Adesina at the Third FT Africa Summit in London, 3 October 2016
Good morning everyone. I am delighted to be here today with you all at this Third Financial Times Africa Summit 2016. It is great to see such an array of global thought leaders and partners in the development of Africa in this room today.
I wish to especially thank Lionel Barber, Editor of the Financial Times and the Board of Financial Times for the invitation to speak at this Summit.
As President of the African Development Bank – Africa’s Development Bank of choice – nothing excites me more than sharing my perspectives on Africa: a continent of great hope and opportunities.
African economies have shown impressive economic growth rates over the past ten years, averaging over 5 percent. This growth is largely attributed to macroeconomic stability, improved business and investment environment, better economic governance and political stability. The growth has, however, been driven by export of primary commodities.
The strength of the economic growth in Africa – the commodity price boom – also happens to be the weakness of African economies. After almost a decade of unprecedented high growth, many African countries have experienced a slowdown in recent years with the fall in commodity prices and a much weaker global economic environment.
As a result, economic growth rate in Africa has slowed to 3.6%.
The slower growth has triggered a wave of commentaries that the Africa rising story is over. That may be a convenient narrative for Afro-pessimists, but the facts do not support the premise that ‘Africa rising’ is over.
Despite the economic headwinds, African economies are still growing above the global average of 3.2%. Africa’s growth rate is much higher than the 1.7% growth of the Eurozone or the 2% growth rate in the US – yet no one is saying the EU or the US have collapsed.
Yes, even in these challenging times, the African Development Bank estimates show that 21 African countries are expected to grow above 5% in 2016. And an additional 19 countries are projected to grow at between 3% and 5%.
Things look even better when we take a regional perspective. Real GDP growth rate in East Africa is expected to be about 6.4% – the highest in Africa. West Africa is projected to grow at 4.3%, Central Africa at 3.9%, North Africa at 3.3%, with the slowest growth being in Southern Africa, largely due to recent economic challenges facing South Africa.
The evidence is clear: while overall growth is slower than expected, Africa is not falling apart. African economies are resilient!
Africa is still the second fastest growing destination in terms of foreign direct investments, second only to the Asia-Pacific region. Foreign direct investments inflows to Africa are projected to reach $55-60 billion in 2016. The value of announced FDI investments in Greenfield projects totaled $29 billion in the first quarter of 2016 – 25% higher than the same period in 2015.
The FDI inflows are also becoming more diversified. Of the $71.3 billion of Greenfield announcements in 2015, the focus has mainly been in infrastructure such as electricity and transport ($37 billion), manufacturing, food and beverages and automotives ($ 19 billion).
Africa is also a fast growing market. By 2050, Africa will have the combined population of China and India today. Rapid urbanization and growth in the middle class population – estimated to increase from the current 350 million to close to 1.1 billion by 2060 – means that Africa would be a huge consumer market. Consumer spending in Africa is projected to double to $1.4 trillion by 2020. And recent McKinsey Report “Lions on the Move II” shows household consumer spending will rise to $2.1 trillion by 2025, while business to business spending is estimated to rise to $3.5 trillion by 2025.
Without any doubt, the African market will help to boost global growth: Africa cannot be ignored.
African governments are also making improvements in business reforms to attract more private sector investments. World Bank’s “Doing Business 2016 Report” showed that Sub-Saharan Africa accounted for more than 30% of the regulatory reforms in the world during 2014 and 2015. In fact, Sub-Saharan Africa was well ahead of Europe and Central Asia – a phenomenal achievement!
But to fully unlock these potentials in Africa, there is need to address a number of challenges that limit growth. Africa’s huge infrastructure gap still makes the cost of doing business high in several countries.
The biggest problem is electricity. About 45% of private firms in Africa see lack of electricity and the high cost of power as one of the major constraints to doing business.
Africa cannot develop in the dark. We must solve Africa’s electricity challenge – and do so, quickly.
That is why the African Development Bank has launched a New Deal on Energy for Africa. Our goal is to support governments and the private sector to accelerate the achievement of universal access to electricity over the next ten years. The Bank will be investing $12 billion in the energy sector over the next ten years. We expect to leverage an additional $45-50 billion into the energy sector.
The success of the M-KOPA in Kenya (and they are in this hall today) is one of the bright spots on this. They have succeeded in connecting over 400,000 homes to their pay-as-you-go solar systems in Kenya, Uganda and Tanzania. Scaling up M-KOPA to do ten times what it is doing today and further scaling that up 30 times across Africa, will connect 75 million people to off-grid systems within ten years. That is absolutely possible.
As Africa solves its power problem, it will open up great opportunities for industrialization. Africa must industrialize and add value to what it produces – and position itself to compete better in global value chains. New opportunities are emerging especially in light manufacturing, as global firms look for new locations for sourcing. With rising industrial wages in China, light manufacturing companies are looking for new locations for their global value chains.
Africa must develop a “high industrial readiness index” by accelerating investments in other critical infrastructure such as roads, ports and rail, aviation and ICT, which will position it as a competitive destination of choice. That way, it will take advantage of its abundant labor and much lower wage rates to attract labor-intensive light manufacturing global firms.
Success, however, will depend on putting in place sound industrial development policies. Some may say that industrial policies are often directed at picking winners. Well, who wants to pick losers? The role of a developmental state in supporting industrialization in Africa is therefore crucial.
Just look at the example from Ethiopia, with the rapid growth of its leather and apparel industries. With smart policies, Ethiopia is attracting top global firms and rapidly emerging as Africa’s top exporter of garment and leather products. Similarly, Morocco is making great inroads in expanding its automobile industry, which has become a major source of its exports.
But we must also take advantage of agriculture. The opportunities in Africa’s agriculture sector remain immense. There is absolutely no reason why Africa is a net food importing region, spending over $35 billion importing food. If nothing is done, this will rise to $110 billion by 2020.
Africa must feed itself – and Africa must become a global powerhouse in food and agriculture. With 65% of all the arable land left in the world to feed 9 billion people by 2050, Africa will have to feed the world.
And we must take agriculture as a business. To help unlock Africa’s potential in agriculture, the African Development Bank will invest US$ 24 billion in the agriculture sector over the next 10 years. That is 440% above our current level of investment in the sector. We will focus our support on promoting agro-allied industrialization, value-addition and export diversification.
But financing all of these will take significant amounts of resources. To meet financing needs, in an environment of declining foreign reserves, several countries have gone into the international capital markets to borrow. The number of countries with sovereign credit rating from Moody’s, Fitch or Standard & Poor increased from 10 in 2013 to 21 by 2014. During 2013-2015, African countries issued a total of about $21 billion worth of sovereign bonds. That is much higher than $5.9 billion in 2009-2012. Many were oversubscribed, showing investor confidence in African economies.
There has been a slow down of recent in terms of issuances of Eurobonds, especially due to rising interest rates and currency depreciation that raise the cost of debt service.
But let me be clear: African countries are not in a debt crisis. They have liquidity challenge. With debt to GDP ratio of 21% in 2015, the risk of debt distress in Africa is still low and is broadly manageable.
Greater focus will be needed to broaden the tax base in several countries, given that tax to GDP ratio in Africa remains low, at about 15%. African countries will need to tap into the growing pools of funds in domestic capital markets, with pension funds estimated at $334 billion, sovereign wealth funds of $162 billion and remittances worth over $62 billion.
Greater use should also be made of local currency bond issues. The integration of the financial markets will help to deepen investments across the region. That is why the African Development Bank set up the Africa Financial Markets Initiative to help integrate the stock exchanges across Africa and support local currency bond issues.
Regional integration is especially important to help Africa reduce its exposure to external economic shocks. Intra-Africa trade still accounts for only 15% of total trade in Africa. Greater regional trade will open up huge opportunities for industrial specialization. Investments in regional infrastructure will go a long way boost trade and economic activities. Free movement of people will also accelerate the integration of labor markets and promote more competitive service industries. For Africa must not always look outside: it must look increasingly within itself to build wealth.
So, let me summarize the way forward for Africa.
First, we must get the narrative right: African economies remain strong and resilient. Africa is not falling apart.
Second, African economies need to diversify more rapidly to reduce their exposure to commodity price volatilities.
Third, to boost growth, we must work to solve Africa’s infrastructure deficit – especially electricity.
Fourth, Africa represents the big market of the future to help pull global growth rates higher in future.
Finally, to achieve this, greater private sector investments and regional trade will be needed to further boost economic growth and development of Africa.
There is no doubt in my mind that I will see many of you in Africa, doing business, contributing to the development of the continent: the continent of hope and immense opportunities.
The African Development Bank looks forward to working with you.
Thank you for your kind attention. God bless you all.
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Why there’s an urgent need to revive the Doha round of trade talks
Fifteen years ago the Doha round of trade negotiations was launched, creating much needed hope that the multilateral trade system carved under the banner of the World Trade Organisation (WTO) would at last be made to work for the benefit of all members.
But those hopes remain dashed. Negotiations have run into the ground, with no progress being made since December 2008. And there are no signs of a resolution. This must rank as a major crisis and a threat to world peace.
The Doha round of trade talks was the ninth since the creation of the General Agreement on Tariffs and Trade (GATT) which was set up in 1947. The GATT, precursor to the WTO, was the brainchild of the US and UK. The Doha round was the first to end in failure.
The GATT arrangement was deficient in many ways. It failed to open the markets of the rich countries to the agriculture and textiles products produced in poor countries. It nevertheless provided the world with a basic framework for the multilateral trading system. It succeeded in preventing trade competition between nations from descending into conflict on the scale of the First and Second World Wars.
Trade tensions between nation states that could lead to conflict are once again beginning to sharpen. This is particularly the case given the multi-polar world that has emerged in the 21st century and the rise of emerging countries, such as China, India and Brazil.
Added to this is the selfish attitude of the European Union and the US which continues to undermine the multilateral system.
The only way to ensure that the world creates a legitimate and secure world trading system is to rebuild the WTO based on fair trade, balanced rules, inclusivity and transparency. The next opportunity to do this will be when trade ministers meet again at the 11th WTO Ministerial Conference at the end of 2017. They should gun to revitalise the Doha round.
But how should we understand this failure? And how can the situation be resolved?
Why the Doha round collapsed
The underlying reason for the collapse of the Doha round has been increased protectionism in both the US and the EU. This has been matched by formidable new alliances between developing country alliances in the WTO which have provided a real countervailing negotiating power to the US and EU.
The US economy has undergone dramatic changes since the launch of Doha. Big business lobbies have emerged to pressure the US on trade, including an increasingly aggressive competitive services sector and increasingly protectionist agriculture and manufacturing sectors. The EU has also seen a marked rise in the power of its agricultural lobby.
A second significant trend of the new millennium has been the increasing share of world trade of developing countries. Three decades of consistent growth propelled by foreign direct investment in Chinese manufacturing turned China into the “the manufacturing workshop of the world”.
China’s participation in world trade took a dramatic turn after its accession to the WTO in 2001. Its share of world exports grew from 2.5% in 1993 to 10.3% in 2010 to make it the largest exporting country in the world ahead of Japan, Germany and the US.
At the same time the US’s share of world exports fell from 13% in 1993 to 8.4% in 2010.
Business lobbies and US strategists began to fear the continuing growth of China’s manufacturing prowess, fuelling protectionist sentiments.
The new trends in the global economy and the interests of US business lobbies led the US negotiators to take a new approach to negotiations, principally by abandoning the understanding that required all the Doha list of issues to be negotiated and concluded at the same time.
At the launch of the Doha round negotiators had agreed to work on the principle that “nothing was agreed until everything is agreed”. The new approach of the US negotiators was to argue in favour of prioritising a “small package of issues”.
In addition, it argued that several major emerging market countries would need to make more concessions if the Doha round was to succeed. These included China, India, Brazil, Argentina, Indonesia and South Africa.
The unravelling of the Doha round began in earnest at the WTO ministerial conference held in Bali, Indonesia in December 2013. There the US persuaded the WTO members to agree to a small package of issues. In addition, it persuaded a group of about 23 out of 164 WTO members to negotiate the further liberalisation of services trade.
By the time of the last WTO ministerial meeting, held in Nairobi in December 2015, the Doha round was effectively “dead”.
Way forward
The Nairobi ministerial meeting ended with some progress on specific issues, including a commitment by developed countries to finally eliminate export subsidies in agriculture. But the ministers were divided on the vexed issue of the future of the Doha round and how to revitalise the multilateral trading system.
The current trajectory of the US and the EU towards mega-regional trade deals, such as the Trans-Pacific Partnership Agreement (TPP), is taking the world down a dangerous and highly risky path. These will further marginalise small and poor countries. In addition they threaten to impose new and burdensome rules on these fledgling economies.
Developing countries have long held that the trade arrangements under GATT/WTO are biased against their interests and that they have created an imbalanced system.
To break the current deadlock, the US and the EU must recognise that the main objective of the multilateral trading system is to provide security and stability in world trade rather than advance the interests of specific business lobbies.
China, India, Brazil and other significant developing countries, such as South Africa, also have to recognise that they need to prioritise the needs of the least developed countries and small and vulnerable economies.
Both groups must commit to working together to prevent the re-emergence of protectionism, and strengthening of the rules based trading system, in a way that is fair, development oriented and inclusive. This is the only basis to resolve the current crisis in the multilateral trading system and create a more secure and peaceful world.
This article was adapted from a presentation made by Professor Faizel Ismail to the United Nations University (UNU)-WIDER Development Conference on Responding to crises in Helsinki on 23-24 September 2016. The session was titled Reforming global trade from a world of crisis.
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3rd Meeting of the Continental Free Trade Area Negotiating Forum (CFTA-NF) kicks off in Addis Ababa
The 3rd Meeting of the CFTA Negotiating Forum kicked off on Monday, 3 October 2016 at the AUC Headquarters in Addis Ababa, Ethiopia.
On behalf of H.E. the Commissioner for Trade and Industry, the Director for Trade and Industry of the African Union Commission, Mrs. Treasure Maphanga welcomed the participants to the meeting and recalled the major milestones in the negotiations so far, including the outcome of the last negotiating forum and the Kigali Summit decision on the CFTA.
During the next five days, Member States are expected to consider and adopt Terms of Reference (TOR) for the remaining Technical Working Groups; and to consider and adopt the Modalities for the CFTA Negotiations in trade in goods and trade in services. She seized the opportunity to inform Member States of some very important events on the CFTA programmed during the last quarter of 2016.
Mrs. Maphanga reported on implementation of the last negotiating forum recommendations and with regard to the Kigali Summit decision stated that “The African Union Commission is working with AU Member States, RECs and partners including UNECA and UNCTAD to ensure the implementation of these decisions”.
She also informed the meeting that the Department of Trade and Industry will support the AU Member States in conducting the CFTA negotiations through the established CFTA Support Unit. The Unit, led by Mr. Prudence Sebahizi, the Chief Technical Advisor on the CFTA and Head of the Unit, is expected to provide secretarial and technical support to the meetings of the CFTA Negotiating Institutions as well as other negotiations support structures established by the Member States.
Mrs. Maphanga concluded by emphasizing the objective of the meeting and said: “We expect that this meeting of the CFTA Negotiating Forum will agree on the modalities for tariff liberalization, modalities for negotiations of trade in services agreement as well as establish the remaining Technical Working Groups.”
The Meeting is chaired by Mr. Sayed Elbous, Senior Advisor to the Minister of Trade and Industry Ministry of the Republic of Egypt.
Chief negotiators of AU Member States and representatives of COMESA, EAC, UMA, ECOWAS, CEN-SAD, ECCAS, AUC and UNECA are attending this meeting.
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The gender dimensions of services and global value chains
The Gender Dimensions of Services
The service sector makes a substantial contribution to GDP, providing jobs, crucial inputs and public services. In 2014 the service sector accounted for almost 71 percent of global GDP (World Bank 2015). Services are key to promoting inclusive growth – they provide jobs for the poor, form the backbone of the economy, and offer key opportunities for growth through trade. Through output growth and productivity gains, services have the potential to contribute more to economic growth, job creation, and poverty reduction than manufacturing.
Globally, services account for almost 50 percent of female employment, and as demonstrated in this paper, service sector competitiveness can contribute to gender equality indirectly through the economic growth channel, and directly through the consumption and employment channels. Enhanced competitiveness of the service sector can therefore play an important role in the achievement of Sustainable Development Goal (SDG) 5, gender equality, in terms of the empowerment of women and girls. With the right policies and regulation in place, the service sector can also contribute to achievement of SDG 8, decent work and economic growth, by generating more productive and higher paid employment opportunities and decent work for both men and women.
By improving the economic performance of the domestic services sector and providing new export opportunities, trade in services can be an important mechanism for enhancing the competitiveness of the service sector. However, as demonstrated in this paper, gender inequalities that manifest themselves in economic transactions, relations, and institutions also affect women’s participation in services, which reduces the competitiveness of the sector and, more importantly, limits the ability of women to benefit from the opportunities created by service exports and service sector growth. Services liberalisation can also carry particular risks for women, and appropriate regulation and complementary policies need to be put in place to ensure that liberalisation delivers the expected benefits in terms of inclusive growth. Through an analysis of the service sector in general, and four specific service industries – tourism, information and communications technology, financial services, and domestic, health and social care – this paper provides an in-depth analysis of the gender-based constraints faced by women in accessing employment and business opportunities in trade in services, and the wider service sector.
Finally this paper recommends a set of policies that support equal access to the benefits of services growth for both genders, and create an inclusive policy and regulatory environment that reduces the gender-based constraints faced by women wage workers and entrepreneurs in the service sector. These relate to capacity building and improving access to productive resources for women, the provision of enabling and empowering policies and regulation for women workers and entrepreneurs in services, and mainstreaming gender in services-related trade policy and aid for trade interventions. A final recommendation relates to greater engagement with the private sector in terms of shifting the organisational culture of businesses concerning pay, working conditions, and the quality of work offered to women.
Gender equality is very much a human rights issue – as 50 percent of the population, women have the right to participate fully in economic, social, and political life. Enhancing women’s access to opportunities in services not only enhances gender equality, but also makes economic sense, as it improves productivity, efficiency and the competitiveness of the economy, leading to more inclusive growth and better development outcomes for all.
Linkages
Service Sector and Gender Equality
The service sector is a key component of a thriving economy. It contributes to economic growth, drives job creation, and provides crucial inputs and public services for the economy. A competitive service sector contributes to development in four key ways: through output growth and productivity gains; through effects on employment and national incomes; through effects on the range and quality of services, including key social services and business services; and by diversifying the economy and offering a source of competitive and comparative advantage in terms of trade. Services are thus key to promoting inclusive growth – they provide jobs for the poor, form the backbone of the economy, and offer key opportunities for growth through trade. In fact, services have the potential through output growth and productivity gains to contribute more to GDP growth, job creation, and poverty reduction than manufacturing.
Various studies have found a strong positive correlation between economic growth and improvements in gender equality both on a cross-country comparative basis and on a time-series basis for particular countries. As a key driver of economic growth, the service sector can therefore indirectly improve gender equality outcomes. As countries develop and household incomes grow, families are more willing to allocate resources to the education and health of girls. The creation of more jobs through growth allows for the entry of more women into labour markets, and ultimately contributes to changes in social norms and perceptions about gender roles, improving women’s legal, social, and economic status.
Beyond the general economic impact, services also affect women as producers and consumers through the employment and consumption channels. The service sector generally employs more women. Development of the service sector can therefore be an important driver of job creation for women, if they have the required skills. Ghani (2010) finds that countries where services account for a higher share of employment have higher female labour force participation rates. By providing an independent source of income, employment in the service sector can provide women with a higher status, both in their households and in wider society, increasing their decision-making power. The presence of employment opportunities for women in the service sector can also result in women being more highly valued socially and economically, with the perceived returns on investment improving attitudes and incentives towards girls’ education. Wage employment can also be an important source of self-confidence for women by expanding their social opportunities and life choices.
Through the consumption channel, more competitive service sectors can result in lower prices, more choices, and better quality service. In most developing countries, women assume a disproportionate share of family and community-support responsibilities. An improvement in the availability and price of vital services can reduce the domestic and social care burden on women, freeing them up to engage in formal employment. In particular, provision of affordable childcare services is strongly correlated with women’s participation in the labour force. In Colombia the provision of community-based childcare services increased the probability of mothers’ employment by 25 percent, particularly among low-income women. Provision of adequate services that improve mobility, such as public transportation, can also aid gender equality in employment and education. Improved transportation services and infrastructure in Afghanistan, for example, has significantly improved female school attendance. Lower prices of services can also affect discretionary household incomes, allowing families to invest in the education and health of girls, which might otherwise have been a secondary priority. Improved provision of health and sanitation services can specifically support the achievement of SDG 3, which includes a target on universal access to sexual and reproductive healthcare, and SDG 6, which highlights the needs of women and girls in sanitation.
Trade in Services and the Gendered Structure of the Economy
Trade in services can be an important driver of service sector development and economic growth. However, the gendered structure of the economy means that the distributional outcomes of trade can vary by gender, as men and women are affected differently by changes in trade patterns and volumes. Liberalisation of trade in services has the potential to generate substantial increases in employment opportunities for women. There is strong evidence that liberalisation of services in Asia increased participation of women in exports of services such as back-office processing and call centres and increased mobility of women to provide services such as education, health, or professional services abroad. The vast majority of service firms in all countries are micro and small-scale entrepreneurs and services trade can create important opportunities for these entrepreneurs to enter global value chains and e-commerce, provided they have a supportive regulatory and policy environment. By generating new opportunities in wage labour and production, trade can also enhance women’s economic independence, including their propensity to save and invest. For example, women employed in the services sector abroad make a significant contribution to remittances received by developing countries, because they are likely to save more and to remit a larger proportion of their earnings back to their home country than men.
However, trade in services liberalisation also carries potential risks for the domestic services sector. Opening up the service sector to international firms risks displacing less competitive domestic service providers, leading to loss of employment and downward pressure on wages. How this will impact on women will depend on whether the sectors they are engaged in (as wage workers or entrepreneurs) either expand or contract. Micro and small-scale services firms, often owned by women, tend to have lower productivity and might be at particular risk. In the longer term, trade in services liberalisation has the potential to increase productivity of domestic firms as well as more affordable and high-quality services for consumers. However, certain categories of workers, particularly low-income, women and informal sector workers, have fewer assets and capabilities to absorb the adjustment costs associated with trade in services liberalisation. Due to entrenched gender norms and their lower educational attainment, women workers may find it particularly hard to retrain and find employment in sectors that expand.
Wage rates in export-oriented sectors are generally higher, potentially raising incomes for women employed in trade in services. There is some evidence from developed countries that increased international trade diminishes the gender wage gap in high-skilled industries. However for certain labour-intensive products and services, where international price competition and price elasticity of demand are high, gender wage gaps have been a source of competitive advantage. Under the competitive pressure to reduce costs of production, some international firms pursue an active strategy of feminisation of the labour force. According to Seguino (2000) gender-based wage gaps were critical in attracting investment and expanding exports for a number of semi-industrialised, export-oriented countries, thereby contributing significantly to trade-led economic growth. In these cases, producers used existing gender inequalities in the form of the wage gap to cut costs, inadvertently creating new forms of inequalities by employing women in low-paid, low-skilled jobs in export sectors, with few opportunities for advancement and accumulation.
In the longer term, this type of export strategy based on gender inequality is unsustainable. First of all, labour-intensive export industries tend to be footloose, ready to move operations to other locations where costs of production are lower. In addition, in the long term gender wage gaps will lead to lower export prices and a deterioration of terms of trade, creating balance of payment issues for countries using gender wage gaps as a source of export competitiveness. The use of gender inequality as a source of competitive advantage also contravenes international labour standards and conventions as set out by the International Labour Organization (ILO). Increasingly, the greater awareness and brand sensitivity of consumers discourage the purchase of products that reflect exploitative working conditions and discrimination, and will make such practices unacceptable with time.
On the consumption side, opening up the service sectors can also benefit host countries by improving the quality and reducing the prices of services. However, complementary government policies may be required in order to broaden access to these services. Liberalisation of public services is a particularly sensitive topic for many developing countries, which fear that the entry of private providers will reduce the provision of essential services for the most poor and vulnerable consumer groups, including women. As the primary users of public services, women are more likely to suffer if essential services are reduced or their prices rise. Putting in place regulation relating to pricing practices and codes of conduct and targets in terms of widening access to services can prevent a worsening in inequalities in access to basic resources and services for the poor and for women, though in certain cases cross-subsidisation of essential services may still be required.
Finally, trade in services, such as tourism, can also be an important source of foreign exchange and government revenue, which in turn may enhance the capacity of government to provide key economic and social investments such as education, roads, and health facilities that particularly affect women. Similarly, remittances from service workers abroad have been a vital source of savings and investment for resource-strapped economies, also having a positive impact on the foreign exchange reserves of recipient countries. Revenues from imports and exports of goods and services play a critical role in the new Financing for Development Agenda in terms of mobilising financial resources for meeting development objectives. The effect of increased government spending on women will depend on the extent of redistributive policies undertaken by the government and the types of public investments made. However as raised by the Overseas Development Institute (ODI) in a recent publication, evidence on the effects of government trade revenues on low-income households through increased social spending is still very weak and more research is required in this area.
Gender Equality as a Source of Service Sector Competitiveness
The Organisation for Economic Co-operation and Development defines women’s economic empowerment as their capacity to participate in, contribute to, and benefit from growth processes in ways that recognise the value of their contributions, respect their dignity and make it possible to negotiate a fairer distribution of the benefits of growth. The core of empowerment lies in the ability of a woman to control her own destiny. This implies that to be empowered, women must have equal capabilities (such as education and health) and equal access to resources and opportunities (such as land, capital, and employment). They must also have the agency to use those rights, capabilities, resources, and opportunities to make strategic choices and decisions through independence in the household and community, leadership opportunities and participation in political institutions. For women to exercise agency, they must have security and live without the fear of coercion and violence.
There is a strong instrumental rationale for greater inclusion of women in the economy, including the service sector. Greater labour force participation of women can be a source of competitive advantage for the economy, but also contribute to more inclusive growth, including improving distributional dynamics and well-being within households. Countries that provide more equitable economic opportunities for women are more competitive in the global economy. According to a recent McKinsey report, advancing women’s equality in terms of labour force participation could add as much as US$12 trillion, or 11 percent to global annual GDP by 2025. Women’s access to employment and education opportunities greatly reduces the likelihood of household poverty, and women are known to reinvest up to 90 percent of income earned in their families and communities, creating positive outcomes for the education and health of future generations.
There is a strong positive correlation between women’s participation in the labour force and economic growth. Gender gaps in employment explain a large extent of the growth differential between regions over time, with the Middle East, North Africa, and South Asia particularly lagging behind. Unequal access to employment opportunities results in distortions in the allocation of talent to skilled and unskilled positions through the incidence of “adverse selection,” slowing down economic growth and lowering the competitiveness of the service sector. For example, elimination of gender-based segregation in specific sectors and occupations could increase output by 25 percent in some countries through better allocation of women’s skills and talent. Similarly, discriminatory laws, lack of access to services and resources such as land, credit and technology, and childcare and domestic responsibilities impede female entrepreneurship and reduce their productivity, constraining the growth potential of their businesses and the output of the service sector and economy as a whole. For example, if women farmers had the same access as men to inputs such as land and fertilisers, agricultural output in developing countries could increase by as much as 4 percent. Entrenched gender norms and limited access to productive resources and training can also prevent both women wage workers and women entrepreneurs from entering expanding service sectors.
Figure 1 showcases some of the pathways between increased gender equality and poverty reduction and growth. The diagram shows that increases in female earnings can reduce current poverty and stimulate short-term growth through higher consumption expenditure, while also reducing future poverty and stimulating long-term growth through higher savings. The consumption and savings channels create a multiplier effect that reverberates across the economy in terms of further employment, investment, and economic growth. Rising incomes and more domestic consumption can drive the growth of the service sector, and thereby enhance its competitiveness on the global stage.
At the same time, equal access to educational opportunities for girls and women allows for greater accumulation of skills and expertise in the labour force and thus raises the growth potential of the economy, as educated women can undertake higher-value economic activities. Greater decision-making power for women over household resources and family size has the potential to enhance the human capital of the next generation, as children benefit as a result of more spending on food and education. The service sector is more skill-intensive than other sectors, and by improving human capital and productivity of labour for current and future generations, gender equality in terms of educational attainment can contribute to service sector competitiveness. In an increasingly competitive global economy, it is high-skill, high-productivity services that have the most potential to contribute to long-term sustainable economic development through trade. Greater gender parity in terms of access to education and training can ensure that women are part of a high-skilled workforce and are able to take advantage of the opportunities created by trade. The decline in fertility associated with greater gender equality can also have profound economic impacts, creating a “demographic dividend” that reduces dependency and increases per capita outputs, contributing to economic growth.
The evidence cited above creates a strong rationale for ensuring women’s equitable participation in the global processes of growth, including in the opportunities created by trade in services. However, gender equality is also very much a human rights issue: as 50 percent of the population, women have the right to participate fully in economic, social, and political life. Access to employment, equal wages, education, technology, knowledge, markets, finance, and a favourable policy and regulatory environment enables women to access economic opportunities and take control over their own lives, both within and outside the domestic sphere. However, as has been demonstrated in this section, greater gender equality also makes economic sense, as it enhances productivity, efficiency, and the competitiveness of the economy, leading to more inclusive growth and better development outcomes.
The Gender Dimensions of Global Value Chains
This paper seeks to integrate gender into the global value chain (GVC) framework, to assess the gender dimensions of integration and economic and social upgrading in GVCs, and to offer GVC-related policy recommendations that support economic and social development.
Policymakers are increasingly turning to GVCs as a means of driving development, including generating employment and raising incomes. Access to and benefits from participation in GVCs are closely related to gender issues. The opportunities associated with GVCs differ for men and women as a result of gender-based segregation and constraints that exist to different degrees in all societies. Not seeing these inequalities is problematic from a gender equality perspective and can hinder the broader effectiveness of trade and development policies. Taking gender issues into account and addressing them is critical to harness the potential for GVCs to contribute to both sustainable economic and social goals.
The prominent role female workers play in many export-oriented industries integrated in GVCs often leads to claims that GVC participation results in positive development benefits for women in developing countries. But overall female employment share says nothing about the nature and quality of the work, the implications of how women and men participate in chains, and what this means for the type of integration into GVCs and economic and social upgrading prospects. An increase in employment opportunities for women often contributes to female empowerment, but this does not necessarily lead to reduced inequalities, such as gender segregation in types of occupations and activities, gender gaps in terms of wages and working conditions, and gender-specific constraints in access to productive resources, infrastructure, and services. The case literature reviewed in the paper shows that such gender-specific dynamics and outcomes exist in GVCs and are an important additional dimension of power relationships that span the local, national, and global level.
Policies have to take these issues into account to ensure that both men and women can access GVCs, improve their positions, and gain from upgrading.
First, as a basis for policy interventions, a gendered GVC analysis is essential as this improves understanding of the roles men and women play in these chains, how access to and exclusion from particular activities differ by gender, and the gender-intensified constraints and opportunities in GVCs.
Second, trade-related policies should mainstream gender aspects. Leveraging multilateral trade interventions, such as Aid for Trade, is particularly effective to help countries mainstream gender issues into trade support through information sharing, capacity building, and targeting aid programmes at areas where women are concentrated and/or face particular challenges.
Third, actions by all GVC actors, including governments, lead firms, industry associations, trade unions, and NGOs should be leveraged. Particularly, lead firms can play a pivotal role, as their production and sourcing policies may reinforce gender issues. These firms can drive change by including a gender lens to their employment, training, sourcing, and corporate social responsibility policies, as well as supporting their suppliers to adopt gender-sensitive policies.
Fourth, complementary policies focusing on overcoming gender-based segregation and constraints embedded in laws or in socially constructed gender norms need to be aligned with trade-related policies. Most important are improving access to information and networks for women; increasing access to training, as well as finance, and productive resources for women; and reducing the burden of reproductive work on women.
The above papers were produced under ICTSD’s Programme on Development and Least Developed Countries (LDCs) as part of a project focused on global value chains which is aimed at empowering LDCs and low income countries to effectively utilise value chains to achieve sustainable and inclusive economic transformation.
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IMF sees subdued global growth, warns economic stagnation could fuel protectionist calls
Global economic growth will remain subdued this year following a slowdown in the United States and Britain’s vote to leave the European Union, the IMF said in its October 2016 World Economic Outlook.
“Taken as a whole, the world economy has moved sideways,” said IMF chief economist and economic counsellor, Maurice Obstfeld. “We have slightly marked down 2016 growth prospects for advanced economies while marking up those in the rest of the world,” he said.
The report highlighted the precarious nature of the recovery eight years after the global financial crisis. It raised the specter that persistent stagnation, particularly in advanced economies, could further fuel populist calls for restrictions on trade and immigration. Obstfeld said such restrictions would hamper productivity, growth, and innovation.
“It is vitally important to defend the prospects for increasing trade integration,’’ Obstfeld, said. “Turning back the clock on trade can only deepen and prolong the world economy’s current doldrums.”
To support growth in the near term, the central banks in advanced economies should maintain easy monetary policies, the IMF said. But monetary policy alone won’t restore vigor to economies dogged by slowing productivity growth and aging populations, according to the new report. Where possible, governments should spend more on education, technology, and infrastructure to expand productive capacity while taking steps to alleviate inequality. Many countries also need to counteract waning potential growth through structural reforms to boost labor force participation, better match skills to jobs, and reduce barriers to market entry.
The world economy will expand 3.1 percent this year, the IMF said, unchanged from its July projection. Next year, growth will increase slightly to 3.4 percent on the back of recoveries in major emerging market nations, including Russia and Brazil.
Advanced economies: U.S. slowdown, Brexit
Advanced economies will expand just 1.6 percent in 2016, less than last year’s 2.1 percent pace and down from the July forecast of 1.8 percent.
The IMF marked down its forecast for the United States this year to 1.6 percent, from 2.2 percent in July, following a disappointing first half caused by weak business investment and diminishing pace of stockpiles of goods. U.S. growth is likely to pick up to 2.2 percent next year as the drag from lower energy prices and dollar strength fades.
Further increases in the Federal Reserve’s policy rate “should be gradual and tied to clear signs that wages and prices are firming durably,” the IMF said.
Uncertainty following the “Brexit’’ referendum in June will take a toll on the confidence of investors. U.K. growth is predicted to slow to 1.8 percent this year and to 1.1 percent in 2017, down from 2.2 percent last year.
The euro area will expand 1.7 percent this year and 1.5 percent next year, compared with 2 percent growth in 2015.
“The European Central Bank should maintain its current appropriately accommodative stance,” the IMF said. “Additional easing through expanded asset purchases may be needed if inflation fails to pick up.”
Growth in Japan, the world’s number 3 economy, is expected to remain subdued at 0.5 percent this year and 0.6 percent in 2017. In the near term, government spending and easy monetary policy will support growth; in the medium term, Japan’s economy will be hampered by a shrinking population.
Emerging market growth expected to accelerate
In emerging market and developing economies, growth will accelerate for the first time in six years, to 4.2 percent, slightly higher than the July forecast of 4.1 percent. Next year, emerging economies are expected to grow 4.6 percent.
However, prospects differ sharply across countries and regions.
In China, policymakers will continue to shift the economy away from its reliance on investment and industry toward consumption and services, a policy that is expected to slow growth in the short term while building the foundations for a more sustainable long-term expansion. Still, China’s government should take steps to rein in credit that is “increasing at a dangerous pace’’ and cut off support to unviable state-owned enterprises, “accepting the associated slower GDP growth,” the IMF said.
China’s economy, the world’s second largest, is forecast to expand 6.6 percent this year and 6.2 percent in 2017, down from growth of 6.9 percent last year.
“External financial conditions and the outlook for emerging market and developing economies will continue to be shaped to a significant extent by market perceptions of China’s prospects for successfully restructuring and rebalancing its economy,’’ the IMF said.
Growth in emerging Asia, and especially India, continues to be resilient. India’s gross domestic product is projected to expand 7.6 percent this year and next, the fastest pace among the world’s major economies. The IMF urged India to continue reform of its tax system and eliminate subsidies to provide more resources for investments in infrastructure, education, and health care.
Sub-Saharan Africa’s largest economies continue to struggle with lower commodity revenues, weighing on growth in the region. Nigeria’s economy is forecast to shrink 1.7 percent in 2016, and South Africa’s will barely expand. By contrast, several of the region’s non-commodity exporters, including Côte d’Ivoire, Ethiopia, Kenya, and Senegal, are expected to continue to grow at a robust pace of more than 5 percent this year.
Economic activity slowed in Latin America, as several countries are mired in recession, with recovery expected to take hold in 2017. Venezuela’s output is forecast to plunge 10 percent this year and shrink another 4.5 percent in 2017. Brazil will see a contraction of 3.3 percent this year, but is expected to grow at 0.5 percent in 2017, on the assumption of declining political and policy uncertainty and the waning effects of past economic shocks.
Countries in the Middle East are still confronting challenging conditions from subdued oil prices, as well as civil conflict and terrorism.
Overarching policy challenge
Given the still weak and precarious nature of the global recovery, and the threats it faces, the IMF underscored the urgent need for a comprehensive, consistent, and coordinated policy approach to reinvigorate growth, ensure it is distributed more evenly, and make it durable. “By using monetary, fiscal, and structural policies in concert – within countries, consistent over time, and across countries – the whole can be greater than the sum of its parts,” Obstfeld concluded.
» Download: World Economic Outlook October 2016: Subdued Demand – Symptoms and Remedies (PDF, 7.16 MB)
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IMF Executive Board 2016 Article IV Consultation with Ethiopia
On September 26, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ethiopia.
Ethiopia’s macroeconomic outturn during the past year 2015/16 has been adversely affected by a severe drought and the weak global environment. As a result, output growth is estimated to have slowed down in 2015/16 to 6.5 percent. The slowdown was mitigated by effective and timely policy responses to the drought, and buoyant industrial and services sectors. Stability-oriented macroeconomic policies, including drought-related food imports, curbed inflationary pressures, with overall inflation receding to 6 percent in July 2016. A supplementary budget helped address the social costs of the drought, while keeping the general government deficit at 3 percent of GDP. However, the external current account deficit, estimated at 10.7 percent of GDP, remained wide.
Export revenue stagnated due to weak international commodity prices, despite increases in export volumes and diversification to new export markets. Savings on fuel imports were more than offset by increased drought-related food imports and other imports. Remittances and FDI posted strong growth, helping to limit the deterioration of the external position. The foreign reserve buffer is less than 2 months of import coverage. The 2015/16 foreign borrowing requirement of the non-financial public sector is estimated at 5 percent of GDP, a significant reduction compared to the recent past. Public and publicly-guaranteed debt is estimated to have been 54.2 percent of GDP in June 2016, of which 30.2 percent of GDP corresponds to external debt.
Over the medium-term, growth is projected to recover to within the 7.3-7.5 percent range, reflecting the growth-oriented reforms envisaged in the recently adopted second Growth and Transformation Plan (GTP II). Public investment is projected to moderate, while private investment is projected to increase gradually, aided by better access to credit and anticipated improvements in competitiveness. Inflation is projected to remain at around 8 percent, consistent with the authorities’ price stability objective, supported by supply expansion and the monetary policy stance. The general government deficit is envisaged to hover at around 3 percent of GDP, with expenditure policies focused on capital and poverty-reducing programs. Export revenue is forecast to expand throughout the medium-term, underpinned by more stable commodity prices, competitiveness gains on account of key ongoing projects in logistic infrastructure, and greenfield FDI. Import growth is projected to remain robust and the current account deficit is projected to remain high, declining gradually over time.
Staff Report
Recent economic developments
In October 2015, Ethiopia's authorities launched the second five-year Growth and Transformation Plan (GTP II), setting medium-term economic and social policy priorities (Annex IV). Ethiopia has had an impressive track record of growth and poverty reduction in recent years, with GDP growth averaging 10.1 percent in 2010/11-2014/15,4 about 8 percent GDP per capita growth. Poverty has declined markedly and inequality, with a Gini index of 30 percent, is low by international and Sub-Saharan Africa (SSA) standards. However, income per capita is still low at US$590, only slightly over one-third of the SSA average. The key GTP II goal is for Ethiopia to become a lower middle-income country by 2025, through average annual real growth of 11 percent in 2015/16-2019/20. While the public sector will continue playing an important role, the GTP II places a key emphasis on private sector development and FDI, particularly in building an export-oriented manufacturing sector. As in past national plans, growth targets are underpinned by envisaged rapid structural transformation and investments in energy generation, transportation, and infrastructure to boost productivity and competitiveness.
The Ethiopian economy coped well with a difficult 2015/16 year, when the country faced two adverse exogenous shocks. Overall economic growth is estimated at 6.5 percent, placing Ethiopia once again among the world’s fast-growing economies. This strong growth performance represents, however, a slowdown relative to last year due to the impact of the “El Niño”-related drought and a drastically weaker global environment, epitomized by the near 12 percent fall in the U.S. dollar value of world merchandise trade in 2015.
Targeted policies, buoyant industrial and service sectors, and increased agriculture resilience, helped to maintain growth momentum. Official data including the Central Statistical Agency (CSA) crop production survey estimate an increase in grain production by 2.9 percent in 2015/16 (versus 7.5 percent in 2014/15), while other sources had pointed to a less favorable outcome. While the drought spared most export crops and mainly affected low-productivity regions, the social costs were large. Timely government interventions and food aid, coupled with improved agricultural practices, technology, and rural infrastructure, appear to have limited the economic impact of the drought relative to earlier drought episodes, including by helping to increase production in less-affected areas. Indirect indicators point to strong growth in industry (particularly construction and manufacturing) and services (notably trade, freight and passenger transportation, telecoms, tourism and hospitality, and financial intermediation).
The current account gap remained wide, owing to a weak external environment and imports of drought-related food, inputs, and capital goods – despite lower fuel import costs. The current account deficit is estimated (as of July 2016) at about US$7.4 billion (10.7 percent of GDP), broadly unchanged in U.S. dollars from last year. Export revenue stagnated as significant merchandise export volume growth (7.7 percent) was offset by sharp declines in Ethiopia’s export prices (16 percent for coffee, 33 percent for oil seeds, and 6 percent for gold). Import savings from lower fuel prices were more than offset by drought-related food, inputs and capital goods imports. Remittances posted strong growth (28 percent), as did FDI (44½ percent). The foreign reserve cushion, at 1.9 months of imports at end-June 2016 (unchanged from previous year), remains thin.
Inflationary pressure was contained by imports and cross-regional redistribution of domestic market purchases of foodstuffs – supported by a restrictive monetary policy stance. From an 11.9 percent peak in September 2015, headline inflation receded to 7.5 percent by June 2016, and 6 percent in July – in line with the National Bank of Ethiopia (NBE) inflation objective, driven by food price moderation. Base money grew broadly in line with the NBE target of 16 percent, despite a recent increase in net credit to the government, and the growth of credit to the non-government sectors moderated since December 2015. The NBE acquired a US$1 billion external liability by end-2015, which eased foreign exchange availability, financed increasing food and other imports, and temporarily boosted reserves. Financial intermediation has continued to advance at a fast clip with a 25 percent annual growth of bank deposits, supported by a 19 percent increase in bank branches (in the 12 months to December 2015).
The fiscal stance was appropriately supportive, aiming at minimizing the economic and social impact of the drought. Tax revenue collection of the federal government is expected to be broadly in line with the annual budget plan, benefiting from good execution of direct and import taxes, while falling short in domestic VAT collection. On the spending side, the supplementary budget approved in December 2015 contained appropriations for food security, agriculture, and investments – funded by Oil Stabilization Fund surpluses (reflecting a limited pass-through of lower fuel import costs into domestic prices). The general government deficit is estimated at 3 percent of GDP. The total borrowing requirement of the non-financial public sector represented about 5 percent of GDP, a significant decline relative to recent years.
Policy implementation was consistent with outstanding Fund advice in some areas, but less so in others. Notably, the GTP II incorporates a focus on competitiveness, private sector development and FDI. The new Public-Private Partnerships (PPPs) legal and regulatory framework reform and Small and Medium Enterprises (SMEs) financing schemes will support private sector participation. The newly established Ministry of Public Enterprises’ mandate for improved governance, and tax system reforms will strengthen public sector efficiency. Fiscal and monetary policies remained consistent with macroeconomic stability. However, Fund recommendations on interest rates, exchange rate, and financial sector policies are yet to gain momentum, including: (i) allowing for flexible determination of the interest rates, (ii) improving market functioning and price setting mechanism for the exchange rate and increase exchange rate flexibility, and (iii) phasing out the requirement that private banks invest in NBE bonds a 27 percent of their credit (to finance the Development Bank, DBE). Follow up on technical assistance (TA) recommendations to improve data quality and coverage has been mixed.
Medium-term outlook and risks
Growth is expected to rebound to 7.5 percent in 2016/17, as the weather-dependent agriculture normalizes, and remain at this level over the medium term, supported by strong GTP II growth-oriented reforms. Inflation is projected to hover around 8 percent through the medium term, buttressed by more stable commodity prices and an appropriate monetary policy stance. Exports of goods and services should pick up substantially in the medium term from the current low base, reflecting the coming online of key infrastructure projects close to completion (in electricity generation and export logistics) and pay-offs from domestic investment and greenfield FDI. Import growth will remain moderate in 2016/17 as emergency food imports are phased out, but is likely to be strong thereafter, as waning public import-intensive investment is replaced by private sector imports. Thus, the current account deficit is projected to remain high and decline only gradually in the medium term.
Against a generally positive outlook, the high current account deficit and a potential export under-performance (should adverse global conditions prove protracted) are the key downside risks (Box 1). Additional external demand weakness and upturns in global risk aversion could hinder the current account improvement and financing, and hence output and debt sustainability. However, the risk of disorderly external stress episodes is mitigated by the high proportion of official bilateral and multilateral external debt (much of it concessional), a closed financial account, and the use of the borrowed funds for export-enhancing investment projects with expected high returns – increasing repayment capacity. On this basis, and assuming no further borrowing beyond existing plans, the Debt Sustainability Analysis (DSA) currently assesses the risk of debt distress at moderate, but the extended large breach of the debt to export ratio is of increasing concern. Over the medium-term, financing constraints on private sector development, weak export growth, slow implementation of revenue mobilization reforms, potential deterioration of bank assets quality in the wake of rapid credit growth and higher pace in acquisition of external liabilities are the main risks. Ethiopia remains vulnerable to climate change and droughts.
Box 1. Ethiopia: Investing for Development
The marginal product of public capital in Ethiopia is above most peers, but the increasing relative scarcity of private capital calls for private sector development. Based on staff panel estimations of Cobb-Douglas production functions using data from IMF and WEO databases, and the Penn World Table, the marginal product of public capital (0.42) in Ethiopia is significantly larger than the median of LICs (0.18) – consistent with a relatively good Public Investment Management Index. Large public investments during more than a decade, however, have made private capital comparatively scarce, raising its marginal product and supporting the GTP II new focus on eliciting private investment and FDI.
Model-based estimates point to large growth effects of infrastructure investment. A version of the open-economy Debt, Investment, and Growth (DIG) model developed by Buffie et al. (2012), has been calibrated to the Ethiopian economy. The model simulates the public investment under the GTP II and ascertain the approximate size and time profile of their effects on growth, current account, private investment and debt. An alternative and more cautious investment path could result in more sustainable outcomes – less crowding out of private investment and consumption and lower current account deficit and public debt – with longterm gains in growth and consumption preserved. Decelerating public investment could help Ethiopia to cope with the short-term challenges associated to external imbalances and GTP II financing requirements. The model also highlights the importance of efficiency in public investment implementation and the risks of surges in the cost of external financing.
Authorities’ views
The authorities estimated growth in 2015/16 and medium-term output and export growth potential higher than staff. The authorities emphasized rising export volumes, completion of key infrastructure projects, notably in energy generation and transportation, and measures to elicit export-oriented FDI, including commitments by international businesses to locate in the new industrial zones. In their view, these factors argued for two-digit medium-term growth potential, supported by export revenue growth of 32 percent in 2016/17 and about 17 percent subsequently, and continued strong remittances and FDI. Nonetheless, while seeing less downside risks than staff, the authorities concurred on the need to reduce the external deficit; take measures to ensure debt sustainability, consistent with the DSA moderate rating; and, should external revenue disappoint, adopt import-dampening policies.
Policies for resilient growth
Despite sustained growth, the bottleneck of the Ethiopian economy remains its large savings-investment gap and associated external borrowing requirement. The current account deficit of the last two years, at about 7½ billion dollars and over 10 percent of GDP, is not sustainable. In the short term, macroeconomic policies should be geared towards reducing the external current account deficit and its attendant risks. To this end, the authorities’ objective of rapidly rising exports is the first best option. However, at the same time, imports and large-scale public investment projects with substantial external borrowing requirements need to be paced according to the actual export performance. Specifically, public sector imports need to be curbed in the short term aiming at reducing demand for external credit. This would allow building up the foreign reserve buffer and avoid volatility in foreign exchange availability. Reaching the authorities’ ambitious five-year GTP II growth objectives and sustained investment rates of almost 40 percent of GDP without aggravating external imbalances will require mobilizing domestic resources and raising domestic savings, particularly in the public sector – the main user of external borrowing.
In the medium- and long-term horizon, mobilizing and attracting domestic and foreign private sector resources, as envisaged in the GTP II, will require challenging reforms. After strong public sector-led growth under the GTP I, the authorities’ objectives for the current phase of Ethiopia’s economic development call for manufacturing expansion accompanied by rapid improvements in competitiveness, economic diversification, and the investment and business climate. This, in turn, requires fostering market competition within an increasing number of economic areas, including financial, credit, and investment markets; and expanding the allocation of resources to the private sector, such as credit and foreign exchange. It also requires increasing the efficiency and transparency of the public sector, including the tax system, public financial management processes, and public enterprise governance and financial management. Important steps in this direction, guided by the GTP II, are already in train – but will need to be scaled up and sustained.
A. Fiscal Policy
The budgetary policy stance has been broadly appropriate, in response to the drought-related needs; however, curbing the external deficit will require tighter policies going forward. The relatively expansionary fiscal policy stance in recent months was appropriate to mitigate the transitory agricultural supply shock, associated adverse hysteresis effects, and spillovers to the rest of the economy; and to minimize social costs. However, fiscal expenditure restraint in the implementation of the 2016/17 budget, including under-execution of nonessential lines, and subsequent years should take priority as supply improves, aiming at curbing the public borrowing requirement. The de facto fiscal anchor is the budget deficit, which the authorities target at about 3 percent of GDP over the medium term. However, reducing external imbalances and shifting savings and financing resources to private sector development would be aided by a gradual reduction of the fiscal deficit from its current level by about ½ percentage point of GDP per year over the medium term, underpinned by revenue expansion.
Decisive tax reforms are needed to support the ambitious GTP II targets for revenue mobilization. The recently passed income tax law simplifies procedures, updates tax brackets, and improves the tax appeals process. Also, the newly introduced invoice-based taxation of imports is an important step in modernizing customs procedures and trade facilitation. However, achieving the GTP II objective of over 17 percent tax-to-GDP ratio by 2019/20 necessitates additional tax policy reforms, including the introduction of a property tax and review of existing tax expenditures and incentives. Property taxes have low distortive effects and, if allocated to sub-national levels of government, would reduce intergovernmental transfers. Annual review of tax expenditures would allow phasing out those that are no longer cost-effective, while reducing tax complexity and the accumulation of tax loopholes. Regarding tax administration, measures need to focus on improving taxpayer coverage and enforcement, including by updating and maintaining the taxpayer register; using risk-based compliance monitoring; and improving IT systems, data quality, and their use.
Prioritizing public investment, while protecting pro-poor outlays, would enhance fiscal sustainability and efficiency. Given limited resources, public expenditure policy should focus on critical infrastructure and priority areas. Ongoing reforms of the PPPs legal framework provide an opportunity to improve public sector efficiency and private sector development, while attracting foreign resources. The envisaged new PPP framework, however, should be based on cost-benefit analysis and minimize fiscal risk.
Comprehensive and upgraded fiscal reporting would support macroeconomic management and accountability. Upgrading government accounting to 2001 Government Finance Statistics Manual (GFSM) standards is an urgent task. Policymaking as well as public understanding of policies would benefit from more comprehensive fiscal reporting covering budgetary institutions jointly with extra-budgetary accounts (such as the Oil Stabilization Fund, Privatization Fund, Industrial Development Fund, Road Fund, and use of Eurobond proceeds).
B. Monetary and Financial Sector Policies
A more flexible monetary policy framework would facilitate policy implementation. The NBE uses reserve money, foreign exchange sales, and other direct monetary policy instruments with a view to keeping inflation near 8 percent. The NBE is considering revamping the primary market and introducing a secondary market for government securities – and eventually, possibly for other instruments – to develop interbank market operations. These initiatives and an increased role of indirect monetary policy instruments could substantially benefit policy implementation and liquidity management. They could encourage commercial banks to manage more actively their liquidity positions (through market transactions, rather than via direct access to the NBE’s liquidity facilities), and enhance price discovery mechanisms and risk allocation.
The authorities are making commendable progress in mobilizing domestic savings through rapid expansion of financial access and inclusion. Deposit mobilization and bank branch expansion are deepening financial intermediation and funding growth-promoting credit. The authorities’ private sector development objectives would be aided by rebalancing the public sector credit demand towards the private sector to avoid its crowding out. Also, development of market-based incentives for mobilization and allocation of savings will require positive real interest rates – facilitated by the NBE’s progress in achieving lower inflation. Efficiency and growth gains will eventually exceed the increased public sector borrowing costs. In the short term, however, higher interest rates will need to be accompanied by fiscal and public sector measures to accommodate the associated higher financing costs. The current means of financing the Development Bank (DBE) – now through banks mandatory purchases of NBE bonds – should be replaced by less distortive mechanisms, including through the budget.
A sound financial sector is critical for the mobilization and efficient allocation of savings. Aggregate capital and profitability ratios of commercial banks do not indicate emerging vulnerabilities; and the system-wide NPL ratio remains low, below the statutory benchmark of 5 percent – although the lack of underlying detailed bank data preclude the assessment of individual bank vulnerabilities. There have occurred sporadic liquidity shortages, and the aggregate liquidity ratio is now close to the statutory minimum of 15 percent. While the rapid pace of financial deepening is welcome, strengthening the supervisory and regulatory environment is necessary to ensure that lending standards do not deteriorate. Risks related to credit exposures and their concentration should be assessed through regular stress-testing of commercial banks’ balance sheets. Although not a deposit-taking institution, the ongoing supervisory attention to high NPL ratios in the DBE is warranted – since it could affect confidence or become a fiscal liability. Strengthening the AML/CFT framework, in line with the Financial Action Task Force standard, will also contribute to the soundness of the financial sector.
C. Fostering Competitiveness through Structural Transformation
Export diversification and upward shifts in the value-added chain are key items in the authorities’ reform agenda. Nascent export lines (leather, apparel, textile, flowers, electricity) and expansion to new markets point to good prospects, supported by substantial cost differentials. However, export revenue still depends heavily on commodities, hindering income growth and amplifying volatility. Ongoing policy initiatives aim at developing additional export lines with a focus on manufacturing and export-processing activities, notably with the creation of new industrial parks. These provide investors with simplified procedures, tax advantages, and preferential access to credit and foreign exchange. Eventually, however, the industrial park environment will need to be integrated more fully into the local value chain to generate all its potential of positive spillovers into the wider economy. Also, progress in reducing trade barriers and enhancing the customs’ trade facilitation role beyond industrial parks would increase competitiveness. The authorities are also launching other regulatory and administrative reforms aiming at improving the investment environment.
An overvalued real effective exchange rate poses headwinds for exporters and understates the true economic cost of imports. Staff assess the birr to be overvalued by 20 to 40 percent (Annex III). Allowing for a more flexible exchange rate determination, aiming to gradually eliminate misalignments, would bring the real effective exchange rate in consonance with fundamentals and reduce foreign exchange market shortages.
Also, a more flexible exchange rate policy could be instrumental in developing new export lines and entering new markets (Box 2). Staff research on Ethiopia’s export dynamics, based on product-by-product disaggregated data, indicates that the (country-by-country) real exchange rate plays a crucial role in entering new markets – although significantly less so in increasing revenue from already established markets, which are mainly traditional commodities. As a consequence, the real appreciation of the Birr can pose an impediment to the emergence of a competitive manufacturing exporting sector – and more generally to the export of non-commodity products with high domestic value-added facing price competition. Thus, exchange rate policies aiming to eliminate currency misalignments could play an instrumental role in achieving the authorities’ export diversification objectives. Higher import costs for the public (and private) sector would partly have a desirable dampening effect on imports’ demand – in line with a policy to reduce external imbalances – and partly would need to be absorbed through savings in other items; and in the longer term would be compensated by growth effects.
Higher foreign reserves would enhance the resilience of the economy (Annex II). Ethiopia remains vulnerable to commodity price and weather shocks. Reducing the current account deficit and expanding foreign reserve cover – aiming to eventually reach the standard of 5-7 months of imports – would forestall potentially disorderly import compression in the event of future shocks.
The new policy agenda for public enterprises aims at streamlining the sector, improving its governance and efficiency, and raising its profitability. The centralization of public enterprise management under a newly created ministry with this mandate is a valuable first step in this direction. The authorities are encouraged to implement expeditiously their plans to focus on 10-15 key public enterprises while privatizing the rest, strengthen their financial disclosure and transparency, and manage them on a commercial basis.
Box 2. Ethiopia: Export Dynamics and Diversification
Over the past 15 years Ethiopia’s merchandise export revenue grew at 13.3 percent on average. This strong performance stems from volume expansion (15.1 percent annually), as prices decreased by 2.3 percent annually. However, export growth – both price and volume – remains highly volatile, due to concentration on agricultural commodities exposed to price and weather shocks.
To reduce export volatility and increase revenue, policies aim at diversification across products and destination countries. Also, diversification has development spillovers, as less innovative firms follow in the wake of pioneer entrants. As a result, one third of 2015 export revenue comes from markets where Ethiopia was not present 15 years ago. FDI has flowed to horticulture and light manufacturing, and nontraditional exports account for more than 10 percent of total exports. For example, flower exports expanded from US$440,000 and 5 destinations in 2004 to US$225 million and 59 destinations now.
Staff analyses, based on disaggregated trade data (UN Comtrade), throw some light on the relative impact on export sales of two competitiveness factors: structural competitiveness, as measured by five indices from the Doing Business indicator, and the real exchange rate (RER). These factors are measured by market-specific trade-weighted indices of Ethiopia’s strength versus competitors.
The results indicate that the relative quality of logistics is key in improving export performance; and that the RER significantly facilitates entry in new markets – such as the abovementioned case of flower exports. In markets where the “time it takes to export” index moved against Ethiopia (relative to competitors), exports fell significantly (first column). Similarly, the quality of Ethiopia vs. competitors’ trade logistics influences the probability of Ethiopia’s entry into new markets (third column). The RER seemingly matters little when it comes to expanding exports in existing markets (mostly commodities), but it is significant for entry into new markets (third column). Therefore, ongoing improvements in infrastructure, such as the new railway link to Djibouti harbor, are likely to boost exports. But also, Ethiopia could gain a foothold in new products and markets by reducing the substantial real exchange rate misalignment.
Alternative Scenario
Implementation of staff’s recommended policies could reduce Ethiopia’s external vulnerabilities and ease financing constraints, while at the same time support achievement of sustainable long-term growth. The implications of these policies would be: (i) a lower current account deficit and a stronger exports performance, owing to timely implemented structural reforms and measures aimed at fostering external competitiveness, including exchange rate flexibility; (ii) a more sustainable debt trajectory, as a result of spreading out low-return large-scale investments over time and reducing State Owned Enterprises’ (SOEs) borrowing requirements; (iii) higher foreign exchange reserves, thus reducing volatility in foreign exchange availability; (iv) higher tax revenue, with a view to closing the fiscal gap in the medium term; and (v) stronger domestic savings with a view to narrowing the savings-investment gap, and larger accumulation of financing for investment in the long term – facilitated by higher real interest rates. The growth trajectory will be lower initially (reflecting slower imports of capital goods), but higher in the medium run, as macroeconomic stability will be enhanced, and mobilization of domestic resources improved. It would also minimize the risk of externally-induced economic stress episodes. This is consistent with staff research (Box 1) indicating the need to elicit private investment and the positive role that a moderation in the pace of public investment could play in this regard.
The authorities envisage a substantially faster export and output expansion. Correspondingly, their assessment of future imbalances and associated risks to the baseline is more subdued that staff’s. They agreed on the need to reduce the current account deficit in the short term – mainly through the expected export expansion – as well as on policies to mobilize domestic resources and foster competitiveness and private investment. They also concurred, however, that in a hypothetical scenario of protracted progress in export gains, policies to re-profile import demand would be considered.
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Estimating the impact of trade specialization and trade policy on poverty in developing countries
This paper investigates the impact of trade specialization on poverty in developing countries. The findings show that trade specialization reduces poverty but only under specific patterns and policy conditions. In all developing countries manufacturing exports contribute to poverty reduction, whereas for low income countries the share of agriculture exports has additional poverty reduction effects.
Agriculture constitutes a key sector in most low-income economies and is generally the primary source of income in rural areas, both directly by crop production and indirectly through on-farm and off-farm employment in agriculture-related industries. Moreover, for low income countries, moving out from commodities into agriculture would lead to a poverty-reducing scenario, as the agriculture sector has more potential spillover effects and backward linkages than enclave type of commodities exports.
Poverty is multi-dimensional and thus cannot be treated in a simplistic way. The benefits from trade are not automatic and policies are needed as a complement, to address both the welfare impacts and the factors that affect a country's trade specialization and productive capacity. As the UN and development partners move forward with the post-2015 global development agenda, the right policy approach is needed to strengthen productive sectors and diversify export profiles to accomplish the sustainable development goals (SDGs) in general, and in particular the goals related to improved livelihoods, jobs and productive capacity, trade and enabling the global trading environment for sustained and inclusive development. Further research should focus on understanding the distributional impacts of trade and trade policy, looking at broader measures of trade policy, notably Non-tariff barriers.
Introduction
Trade can play an important role in the development process; however the linkages can be direct or indirect and the benefits are not necessarily instantaneous. International trade can impact welfare directly, in a number of ways, via changes in relative factor and good prices, factor movements, and the nature of technological change and knowledge spillover. Trade policy has the potential to generate benefits in terms of both resource allocation and economic growth. But trade policy is not neutral and trade liberalization is unlikely to produce widespread beneficial results for all countries.
In the short run, trade liberalisation can put great stress on certain actors in the economy, and in the long run open regimes may leave some behind in poverty. Many studies suggest that globalization has been associated with rising inequality and that the poor do not always share in the gains from trade. The links between trade, trade policy, and poverty depend on a range of factors including a country’s domestic policies and institutional capacities. For instance, Chang et al (2009) observe that although trade openness appears to, on average, be beneficial for economic growth the effect varies considerably across countries. Importantly, complementary reforms can boost the growth effects expected from pursuing a more open trade regime.
The literature on trade, trade policy and poverty is voluminous but studies focusing on low income countries are scarce. This paper aims to contribute by analyzing the link between trade specialization and poverty with special focus on low income and least developed countries. The paper also analyses the relative impact of trade policy measures on poverty dynamics. Looking at poverty incidence by specialization patterns, for example, LDCs that specialize in food and agriculture have higher poverty ratios than countries specializing in manufactures (Figure 1). Fuel exporting LDCs have lower poverty incidence than their peers, regardless of the chosen poverty line or period of time, mostly due to the income value of their exports and lower financial constraints.2 Moreover, there is evidence that the poorest and most vulnerable countries face more challenges in adjusting to openness in comparison to countries that have achieved a relatively more sophisticated level of industrialization.
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AUC holds Services Sector Development Programme (SSDP) Workshop for Member States and RECs
The African Union Commission Department of Trade and Industry, opened the Service Sector development workshop at the African Union Commission Headquarters on 1 October 2016.
The main objective of this workshop is to review and enrich the Service Sector Development Programme (SSD) and to build capacity of Member States and RECs in tailoring the SSDP to their respective jurisdictions.
The Service Sector Development Programme is designed to; address the need for a strategic approach to service sector development; help strengthen the capacity of AU officials to negotiate trade in services; promote the engagement of the private sector as an active voice in the discussion.
At the opening session, Mrs. Treasure Maphanga, Director of Trade and Industry highlighted that “Services are a key determinant of competitiveness of manufacturing export and crucial for the industrial and manufacturing development of African countries, as well for boosting agricultural productivity”
Mrs. Maphanga expressed her appreciation to USAID, UNDP, EU, ILEAP, GIZ and Commonwealth secretariat for their support on the compendium of the case studies on “Services Exports for Growth and Development”.
She concluded her speech by reminding the room: “With experiences around this room at Member State and REC level, I believe that at the end of this workshop, we shall have learnt some best practices that will trigger reforms in our respective jurisdictions.”
AU Member States, COMESA, EAC, as well as International organizations and UN agencies such as AUC, UNECA, TRALAC, and UNCTAD attended the workshop.
Background
There is consensus between, researchers, policy makers and private sector that economic transformation cannot be achieved with a lagging services sector. The evidence produced has changed the traditional growth trajectory where Services came at the latter part of the economic development.
The value of trade in services, when taken from a value added perspective, may be approaching half of world trade exports (45% OECD) and half of African exports (UNECA 2015) and that reduction in supply chain barriers like Customs Administration, Transport, Communication infrastructure and services could increase world GDP over 6 times more than the removal of all tariffs (WEF-WB 2013).
Services industries continue to drive FDI growth and LDCs remain key services investment destinations despite of fall in other sectors like manufacturing. Specifically for Africa we know that for example in 2012, services accounted for 70% of FDI projects in 2012 (up from 45% in 2007 (EY)), limited manufacturing base has given rise to the movement of workers in Africa into services from Agriculture (World Bank 2014) and services employ an average 47 per cent of the workforce in the 12 African countries.
The Share of services in overall output rose by 3.2% between period 2001-2004 to the period 2009-2012 and this was highest among exporters of manufactured goods (UNCTAD 2015). This evidence points to the fact that services are key determinant of competitiveness of manufacturing exports and crucial for the industrial and manufacturing development of African countries, as well as in boosting agricultural productivity.
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Largest ever World Wildlife Conference hailed as a ‘game changer’
CITES CoP17 marks a major shift towards stronger protection for wild animals and plants from over-exploitation and illegal trade; 51 proposals accepted, five rejected, six withdrawn
Following two weeks of marathon negotiations, world governments today adopted a suite of groundbreaking decisions on regulating legal, sustainable and traceable trade in wildlife. This included strengthened actions to combat illicit wildlife trafficking, higher protection to entire groups of species, targeted demand reduction strategies for illegally traded wildlife, and agreement on closer engagement with rural communities.
The triennial two-week summit of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) closed here today with Secretary-General John E. Scanlon describing the 17th meeting of the Conference of the Parties (CoP17) as “The most critical meeting in the 43-year history of CITES has delivered for the world’s wildlife.... a game changer that will be remembered as a point in history when the tide turned in favor of ensuring the survival of our most vulnerable wildlife.”
The CITES CoP17 was the largest ever meeting of its kind with 152 governments taking decisions on 62 species-listing proposals submitted by 64 countries. In total, over 3,500 people attended the meeting, which also recorded the highest number of side events and intense media interest from every region of the world.
The Johannesburg meeting ended a day early, with high levels of consensus and a focus on implementing decisions on the ground. The outgoing Standing Committee Chair, Øystein Størkersen described CITES as an exceptional model for how to give expression to international agreements.
John E. Scanlon, CITES Secretary-General said: “CoP17 adopted decisions that saw wildlife firmly embedded in the agendas of global enforcement, development and financing agencies that have the capacity and technical expertise to help ensure implementation of the Convention on the front lines, where it matters most – with the CITES management and scientific authorities, as well as customs officials, rural communities, businesses, police, prosecutors and park rangers.
“Notable successes included decisions to bring new marine and timber species under CITES trade controls, continuing a trend from CoP16 where countries turned to CITES to assist them along the path to sustainability in oceans and forests. It was not just the well-known species that were on the agenda, the pangolin and many lesser known species also came under the spotlight.”
Erik Solheim, Executive Director of the United Nations Environment Programme, who attended the opening of CoP17, said: “Protection of endangered species is paramount when it comes to preserving our natural heritage. The CITES conference saw a strong desire from countries to ensure that we are mounting a defense for plants and animals, big and small. Illegal trade of everything from the helmeted hornbill to the hundreds of species of rosewood severely damages our planet, and it's only through the international cooperation we’ve seen under CITES that we can prevent it.”
The Johannesburg conference was marked by agreement on measures to improve sustainable trade in a number of species, including the queen conch, humphead wrasse, sharks, snakes and African wild dog as well as a large range of timber species, such as bubinga and rosewoods, and the African cherry and agarwood.
Parties also recognized several conservation success stories, including that of the Cape mountain zebra, several species of crocodiles and the wood bison, which were all by consensus downlisted from Appendix I under CITES to Appendix II in recognition of their improved conservation status.
There was fresh impetus to further safeguard threatened wild animals and plants with added protection for the African grey parrot, Barbary Macaque, Blaine’s fishhook cactus, elephant, pangolin and saiga antelope; and well-targeted enforcement measures agreed to combat illegal trade for specific species. These included the African grey parrot, African lion, cheetah, helmeted hornbill, pangolin, rhino and totoaba.
Multiple new animals and plants were also added to CITES Appendices for the first time, and hence will come under CITES trade controls. These decisions affect a large number of mammals, marine and timber species as well as many reptiles and amphibians and include more than 350 species of rosewood, devil rays, silky sharks and thresher sharks.
“CITES is now seen as an indispensible tool for achieving the Agenda 2030 and Sustainable Development Goals,” observed Scanlon who also thanked South Africa’s Minister of Environmental Affairs, Dr Edna Molewa for hosting the Ministerial meeting on the topic of CITES and the Sustainable Development Goals.
CoP17 saw a number of firsts, including, the first ever:
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Resolution on corruption and wildlife crime;
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Decisions on cybercrime and wildlife crime;
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Resolution on strategies to reduce the demand for illegally traded wildlife,
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Resolutions affecting the helmeted hornbill and snakes;
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Decisions on targeting the illegal fishing of and trade in totoaba, and the related illegal killing of the vaquita;
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Resolution and decisions on youth engagement in CITES; and
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Decisions on rural communities engagement, providing a greater voice for local people in managing wildlife.
It was also the first meeting where the European Union was participating, and voting, as a Party to the Convention.
Some other notable outcomes include:
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The rejection of a Decision-Making Mechanism (DMM) for a future trade in ivory;
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An agreement to close domestic markets in ivory where they contribute to poaching or illegal trade;
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The rejection of all proposals to change the protection of Southern African elephant populations;
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Stricter monitoring and regulation of hunting trophies to bring them under trade control measures, including recommending conservation benefits and incentives for people to conserve wildlife;
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A decision to conduct a study to improve knowledge on regulation of trade in the European eel, and to look more broadly at all Anguilla eels;
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An agreement to undertake specific work on marine turtles to understand the impact of international trade on their conservation status;
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The introduction of a captive breeding compliance process to check the authenticity of specimens described as captive bred;
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Acceptance of the National Ivory Action Plans as a tool for those Parties mostly affected by illegal trade in ivory, including source, transit and destination countries, to build their capacity in addressing illegal trade and ensuring compliance with the commitments they make under the plans;
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A decision to undertake studies in legal and illegal trade in lion bones and other parts and derivatives;
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A request to review all species listed on Appendix I to identify what measures are needed to improve their conservation status;
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Improvements to processes to ensure that wildlife trade is sustainable, legal and traceable; and
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Agreements on process to improve traceability and identification of CITES-listed species.
Changes to the CITES Appendices, Resolutions and Decisions enter into force 90 days after the CoP.
“It was here in Johannesburg that rural community voices and the voice of the world’s youth came into the heart of the meeting room to be heard by decision makers from across the world. It has been a truly wonderful CoP from every perspective for which we extend our deepest gratitude to the Government and the people of South Africa,” concluded Scanlon.
The 17th Meeting of the Conference of the Parties to the Convention was held from 24 September to 4 October 2016. It was attended by over 2,500 participants from governments and numerous observer organizations. COP18 will be held in 2019 in Sri Lanka.
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tralac’s Daily News Selection
The selection: Tuesday, 4 October 2016
The WTO’s Eleventh Ministerial Conference (MC11) will be held in Buenos Aires in December 2017
Featured tweet, @sdonnan: Astonishing number cited by @JimYongKim. 85% of jobs in Ethiopia vulnerable to replacement by automation. Ugh...
2016 Ibrahim Index of African Governance
Sustainable Economic Opportunity is the IIAG’s lowest scoring and slowest improving category. However, 38 countries – together accounting for 73% of continental GDP – have recorded an improvement over the last decade. The largest progress has been achieved in the sub-category Infrastructure, driven by a massive improvement in the indicator Digital & IT Infrastructure, the most improved of all 95 indicators. However, the average score for Infrastructure still remains low, with the indicator Electricity Infrastructure registering a particularly worrying decline in 19 countries, home to 40% of Africa’s population. Progress has also been achieved in Rural Sector sub-category.
After 40-year slump, TAZARA charts new turnaround strategy (IPPMedia)
According to TAZARA managing director Bruno Ching’andu, the highest haulage ever achieved was 1.3 million tonnes and 2.8 million passengers in the 1977/78 and 1982/83 financial years respectively. The built-in capacity is 5 million tonnes and 3 million passengers per annum. Last week, TAZARA’s management announced that the authority needed about $250 million in short-term and $1.2 billion in long-term investment, with MD Ching’andu telling The Guardian that the money would be invested in company rolling stock (locomotives, wagons and passenger coaches); rehabilitation of TAZARA workshops, quarries and the concrete sleeper plant, railway track, signaling and telecommunications and human capital development. And now it transpires that China is ready to come to TAZARA’S rescue – if only as part of a bid to prevent its original pet project from going down the drain altogether. [TAZARA stakeholders set to meet in Beijing]
Kenya: Gloves off as sugar regulator vows bitter war against cartels (Daily Nation)
The sugar directorate has put on boxing gloves vowing to kick out cartels distorting the supply chain, and who have been blamed for the recent surge in retail prices. The directorate says a web of tightly-knit middlemen who have exclusive rights to buy sugar for distribution, are controlling the price at retail outlets. The move follows the recent increase in consumer prices of sugar with a kilogramme retailing at an average of Sh135 from Sh120 two months ago. The Sugar directorate has now ordered factories to sell the commodity directly to farmers, youth and women groups, reversing the long-standing tradition where millers have only been dealing with a handful of distributors.
Why supermarkets in Uganda should meet quality marks (Daily Monitor)
Recently, Uganda National Bureau of Standards awarded Nakumatt (U) Ltd’s chain of Supermarkets an international quality mark: International Standards Organisation (ISO) 9001-2008 certified. The standards body claims Nakumatt met customer, statutory and regulatory requirements applicable at both international and national level before it was awarded the ISO 9001-2008 certification. This means Nakumatt is the only retail supermarket in Uganda that has achieved this certification whose scope covers the retailing of household and consumer goods in Uganda.
Competition policy special feature: a selection of papers prepared for forthcoming UNCTAD, OECD conferences
Enforcement of competition policy in the retail sector: competition issues in the food retail chain (pdf, UNCTAD): From a regulatory perspective, conventional competition-related analysis of supermarket dealings with suppliers remains anchored in the view of supermarkets as merchants. Such analysis presents supermarkets as buyers of grocery products and equates buyer power for large volumes with lower purchase prices. Competition law addresses abuses of a dominant position and anti-competitive practices, yet most reported unfair trade practices do not fall under competition law, as most actors are in a strong but not dominant position. Some countries are thus currently adopting different solutions to alleviate the problem, including by extending the application of consumer protection legislation to business-to-business relationships or by using a variety of approaches, most of which are regulatory, while others are based on self-regulatory initiatives among market participants. In regulatory terms, the last few years have been a period of considerable change. [Intergovernmental Group of Experts on Competition Law and Policy (19-21 October, Geneva): conference documentation]
Big data: bringing competition policy to the digital era (pdf, OECD): This paper on “Big Data” represents the first step in a broader work stream of the OECD Competition Committee on Competition, Digital Economy and Innovation. In November 2016, the OECD will be holding a hearing discussion on Big Data to explore the implications on competition authorities’ work and whether competition law is the appropriate tool for dealing with issues arising from the use Big Data. As such this background paper aims to take a broad view of the topic and to present as many angles as possible in order to identify and discuss the most important channels through which Big Data may affect competition policy and competition law enforcement. [Note: prepared for 126th meeting of the Competition Committee, 29-30 November]
Defining geographic markets across national borders: background paper by the Secretariat (pdf, OECD): This paper seeks to underline the importance of a well-designed approach to geographic market definition, as well as the need to consider all available evidence rather than rely on one particular tool or indicator. Further, there is a pressing need in increasingly globalised markets for competition authorities to share information as well as experience in order to inform market definition decisions. [Note: background paper for Session III at the 124th meeting of the OECD Working Party No. 3 on Co-operation and Enforcement on 28-29 November]
Independence of competition authorities: background paper by the Secretariat (pdf, OECD): This paper discusses the major elements which ensure a stronger independence of competition authorities, such as structural independence from government, operational/functional independence as well as organisational and financial independence. It will focus, however, solely on independence from political pressures and will not address the equally important principle that competition authorities should also be independent from business interests. [Note: this document serves as a background paper for Session III at the 15th Global Forum on Competition, 1-2 December]
Second Africa Oil Governance Summit: communiqué ((26-27 Sept, Accra, ACEP)
Recommendations on promoting regional integration: African governments should increasingly involve their citizens in the implementation of the African Mining Vision which has been adopted as the blueprint for Africa’s natural resource development. We further demand that relevant stakeholders should make efforts to mainstream the Vision into local policies and laws. The development of Africa’s natural resources should promote regional integration through the development of shared infrastructure, shared institutional and regulatory capacity, and harmonized policies and legislations.
Why there is greater need for Africa to embrace intra-African trade (IPPmedia)
The aim of the workshop, organised by the AU Commission in Johannesburg, was to chart out the key elements of a continental agribusiness strategy, discuss modalities for tripling intra-African trade and create a continental apex agribusiness structure to oversee the growth of of the sector throughout Africa. Stakeholders, who included seed companies, women enterprise organisations, youth organisations trading companies, cooperatives, farmers, processors and agribusiness consulting firms, reached agreements in the three areas of strategy, trade and apex body formation as follows: Agribusiness Strategy, Intra Agricultural Goods Trade, Agribusiness Apex Body. During the presentation on Boosting Intra-African Trade in Agricultural Commodities and Services, Dan Acquaye, executive director of Agri-Impact Consult, described the difficulties being faced by Africans In the exports markets, giving example of the effects of EPA negotiations and other regulatory compliance occasionally being imposed on the traders.
East African Community: first financial sector development and regionalization project (World Bank)
Project description: The development objective of the project is to help countries formulate a regional approach to financial inclusion, further legal and regulatory, harmonize and build institutional capacity to manage the increasingly integrated financial sector in the EAC. The proposed Additional Financing seeks $10.5m over a three year implementation period, so that the project will have had a cumulative life of 8 years and 8 months when it closes on September 30, 2019. [Project documentation]
Tanzanian firm wins Sh927m award for 2007 post-poll loss (Business Daily)
One of Tanzania’s largest consumer goods dealers, Modern Holdings East Africa (Masafi), has won a Sh927m compensation for a consignment it lost during the 2007-2008 post-election violence in a landmark case that could open a floodgate of similar suits against the Kenyan government.
Strong shilling hurting Kenya’s exports in region (Business Daily)
The Kenyan shilling is nearly 20% overvalued against the dollar in real terms rendering the manufacturing sector uncompetitive in the regional export markets, economists at Renaissance Capital say. “The overvaluation is a cause for the low export to GDP (gross domestic product) ratio in Kenya, which has not been competitive in terms of manufacturing because of the strength of the currency over a number of years. This situation, which kicked in from 2006-2007, and since then the shilling has stayed strong relative to many other currencies,” said Renaissance Capital global chief economist Charles Robertson. Rencap analysis shows that Kenya’s ratio of exports to GDP has fallen consistently over the years, going from 21.6% in 2011 to 16.9% in 2014.
COMESA-EAC-SADC Tripartitite: Climate Smart Agriculture workshop
The symposium provided a forum for researchers, policy makers, farmers and private sector to deliberate on emerging CSA innovations that have the potential to enhance farm level productivity, national and regional food and nutrition security. This is in addition to increasing adaptive capacity of smallholder farmers, improving landscape and farm level resilience, optimizing policy formulation, and reducing emissions from agricultural systems in the COMESA-EAC-SADC region. The symposium also provided a platform for dialogue on scientific evidence a contribution to the African Alliance on CSA Vision 25X25. [2nd Africa Climate Smart Agriculture Alliance: Annual Forum, 11-13 October, Nairobi]
FAO stresses role of trade in food security and climate change adaptation
Declining prices could thwart international efforts to eradicate hunger and extreme poverty unless steps are taken to guarantee decent incomes and livelihoods for small-scale producers, the United Nations agriculture agency said today. Mr Graziano da Silva pointed to the potential of trade in contributing to global food security and better nutrition, specifically underlining its potential role as an “adaptation tool” to climate change – countries that are projected to experience decreasing yields and production due to climate change will have to resort to the global markets to feed their populations. But the Director-General also noted that increased openness to trade can also bring risks. If not well managed, it “can undermine local production and consequently the livelihoods of the rural poor,” he said.
World Economic and Social Survey 2016: Climate change resilience - an opportunity for reducing inequalities
Speaking to reporters at UN Headquarters in New York on the launch of the report, the UN Assistant Secretary-General for Economic Development Lenni Montiel said: “Persistent inequalities in access to assets, opportunities, political voice and participation, and in some cases, outright discriminations leave large group of people and community disproportionally exposed and vulnerable to climate hazards.” He added that through transformative policies, the government can “address the root causes of inequalities, to reduce the vulnerabilities of people to climate hazards, building their longer term resilience.”
China’s foreign trade still faces big downward pressure: Xinhua (Reuters)
China’s foreign trade still faces big downward pressure despite some improvement in August, Xinhua news agency reported on Tuesday, citing Shen Danyang, a spokesman for the Ministry of Commerce. "Difficulties facing China’s foreign trade are not short term, the downward pressure on foreign trade is still big and uncertain and unstable factors are increasing," Shen was quoted as saying. "We cannot be blindly optimistic about China’s imports and exports and the situation is still complex and grim."
In loan to Afreximbank, China’s Eximbank makes first guarantee outside of China
Kenya close to deal with Afreximbank
Bitange Ndemo: Nairobi-Mombasa highway - an opportunity to embrace inclusivity
Uganda: Implications of the World Bank loan suspension
Zimbabwe: Forensic audit unearths massive corruption at Zimra
Zimbabwe: Grain imports boost NRZ volumes
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Progress in African governance over last decade held back by deterioration in safety and rule of law, Mo Ibrahim Foundation reports
Almost two-thirds of African citizens live in a country in which safety and rule of law deteriorated in the last ten years
The 2016 Ibrahim Index of African Governance (IIAG), launched on 3 October 2016 by the Mo Ibrahim Foundation, reveals that improvement in overall governance in Africa over the past ten years has been held back by a widespread deterioration in the category of Safety & Rule of Law.
The tenth edition of the IIAG, the most comprehensive analysis of African governance undertaken to date, brings together a decade of data to assess each of Africa’s 54 countries against 95 indicators drawn from 34 independent sources. This year, for the first time, the IIAG includes Public Attitude Survey data from Afrobarometer. This captures Africans’ own perceptions of governance, which provide fresh perspective on the results registered by other data such expert assessment and official data.
Over the last decade, overall governance has improved by one score point at the continental average level, with 37 countries – home to 70% of African citizens – registering progress. This overall positive trend has been led mainly by improvement in Human Development and Participation & Human Rights. Sustainable Economic Opportunity also registered an improvement, but at a slower pace.
However, these positive trends stand in contrast to a pronounced and concerning drop in Safety & Rule of Law, for which 33 out of the 54 African countries – home to almost two-thirds of the continent’s population – have experienced a decline since 2006, 15 of them quite substantially.
This worrying trend has worsened recently, with almost half of the countries on the continent recording their worst score ever in this category within the last three years. This is driven by large deteriorations in the subcategories of Personal Safety and National Security. Notably, Accountability is now the lowest scoring subcategory of the whole Index. Without exception, all countries that have deteriorated at the Overall Governance level have also deteriorated in Safety & Rule of Law.
The improvement in the Participation & Human Rights category, found in 37 countries across the continent, has been driven by progress in Gender and in Participation. However, a marginal deterioration appears in the subcategory Rights, with some worrying trends in indicators relating to the civil society space.
Sustainable Economic Opportunity is the IIAG’s lowest scoring and slowest improving category. However, 38 countries – together accounting for 73% of continental GDP – have recorded an improvement over the last decade. The largest progress has been achieved in the sub-category Infrastructure, driven by a massive improvement in the indicator Digital & IT Infrastructure, the most improved of all 95 indicators. However, the average score for Infrastructure still remains low, with the indicator Electricity Infrastructure registering a particularly worrying decline in 19 countries, home to 40% of Africa’s population. Progress has also been achieved in Rural Sector sub-category.
Human Development is the best performing category over the last decade, with 43 countries - home to 87% of African citizens – registering progress. All dimensions – Education, Health and Welfare – have improved, although progress in the sub-category Welfare has been affected by declines in Social Exclusion and Poverty Reduction Priorities indicators.
Mo Ibrahim, Chair of the Mo Ibrahim Foundation, says: “The improvement in overall governance in Africa over the last decade reflects a positive trend in a majority of countries and for over two-thirds of the continent’s citizens. No success, no progress can be sustained without constant commitment and effort. As our Index reveals, the decline in safety and rule of law is the biggest issue facing the continent today. Sound governance and wise leadership are fundamental to tackling this challenge, sustaining recent progress and ensuring that Africa’s future is bright.”
Key findings of the 2016 IIAG include:
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Over the past decade, the continental average score in Overall Governance has improved by one point.
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Since 2006, 37 countries, hosting 70% of African citizens, have improved in Overall Governance.
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The greatest improver at the Overall Governance level over the decade is Côte d’Ivoire (+13.1), followed by Togo (+9.7), Zimbabwe (+9.7), Liberia (+8.7) and Rwanda (+8.4).
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Even if Ghana and South Africa feature in the top ten performing countries in Overall Governance in 2015, they are also the eighth and tenth most deteriorated over the decade.
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At the Overall Governance level, the three highest scoring countries in 2015 are Mauritius, Botswana and Cabo Verde, and the three most improved over the decade are Côte d’Ivoire, Togo and Zimbabwe.
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Safety & Rule of Law is the only category of the Index to register a negative trend over the decade, falling by -2.8 score points in the past ten years.
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In 2015 almost two-thirds of African citizens live in a country where Safety & Rule of Law has deteriorated over the last ten years.
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Accountability is the lowest scoring (35.1) of the 14 sub-categories in 2015.
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The continental average score for the Corruption & Bureaucracy indicator has declined by -8.7 points over the last decade, with 33 countries registering deterioration, 24 of them falling to their worst ever score in 2015.
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A large majority (78%) of African citizens live in a country that has improved in Participation & Human Rights over the past decade.
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Progress over the decade in Participation & Human Rights (+2.4 points) has been driven by Gender (+4.3) and Participation (+3.0), while Rights (-0.2) registered a slight decline.
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Six of the ten highest scoring countries in Rights have registered deterioration in the past ten years.
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Two-thirds of the countries on the continent, representing 67% of the African population, have shown deterioration in Freedom of Expression over the past ten years. Eleven countries, covering over a quarter (27%) of the continent’s population, have declined across all three civil society measures – Civil Society Participation, Freedom of Expression and Freedom of Association & Assembly – over the decade.
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In 2015 more than two-thirds of African citizens (70%) live in countries where Sustainable Economic Opportunity has improved in the last ten years.
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Digital & IT Infrastructure is the most improved indicator (out of 95) of the IIAG over the decade.
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Diversification is the lowest scoring indicator in the IIAG, and shows deterioration over the past ten years.
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40% of Africans live in a country which has registered deterioration in Electricity Infrastructure over the decade, with over half of Africa’s economy affected by this issue.
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The marginal deterioration of -0.8 points over the decade registered in Business Environment masks considerably diverging trends, with 24 countries declining, five by more than -10.0 points, and 28 countries progressing, five by more than +10.0 points.
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Niger, Rwanda, Côte d’Ivoire, Togo and Kenya have progressed by more than +10.0 points in Business Environment over the decade.
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43 countries, hosting more than four-fifths (87%) of the African population, have registered improvement in Human Development over the decade. Rwanda, Ethiopia, Angola, and Togo have increased by more than +10.0 points in Human Development over the decade.
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All 54 countries have registered progress in Child Mortality over the decade.
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Over the last ten years, the Poverty indicator has registered improvement (+7.2 points), with 29 countries, accounting for 67% of Africa’s population and 76% of Africa’s GDP, improving.
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However, the Poverty Reduction Priorities indicator has registered an average decline of -1.3 points, with 23 countries, hosting 45% of Africa’s population, declining.
Sustainable Economic Opportunity
A Decade of African Governance: Sustainable Economic Opportunity
Over the past decade, there has been a slight improvement in Sustainable Economic Opportunity (+1.8). However, it remains the lowest scoring category in 2015, achieving an African average score of 42.9 points.
The continental improvement since 2006 has largely been driven by Infrastructure (+6.5), the most improved sub-category of the IIAG, and to a lesser extent by Rural Sector (+2.6). In contrast, Business Environment (-0.8) and Public Management (-1.1) show a slight average decline.
A majority of countries (38) have shown improvement in Sustainable Economic Opportunity over the past ten years. While Morocco (+13.0) is the most improved country, Niger (+10.8), Egypt (+10.7), Togo (+10.6) and Zimbabwe (+10.5) all show notable improvements of over +10.0 points since 2006. A majority of African citizens (70%) live in countries which have seen an improvement in Sustainable Economic Opportunity in the past decade, and account for almost three-quarters (73%) of continental Gross Domestic Product (GDP).
However, only ten countries have managed to improve across all four constituent sub-categories of Sustainable Economic Opportunity: Côte d’Ivoire, Democratic Republic of Congo, Kenya, Liberia, Morocco, Namibia, Niger, Nigeria, Rwanda and Togo.
Fifteen countries have declined in Sustainable Economic Opportunity over the past ten years. Of these, Libya shows the largest deterioration (-22.4), followed by Madagascar (-9.8), Eritrea (-5.6), Algeria (-5.2) and Ghana (-4.2). Four of these countries (Algeria, Eritrea, Libya and Madagascar) show widespread deterioration, declining across all four constituent sub-categories.
70% of African citizens live in countries which have seen an improvement in Sustainable Economic Opportunity in the past decade and account for 73% of continental GDP.
Infrastructure sub-category: key findings
Infrastructure is the most improved sub-category of the IIAG, registering strong progress of +6.5 points over the past decade. Even though still achieving a relatively low score of 39.1 it is no longer the lowest scoring sub-category.
Forty-three out of 54 countries register progress, 19 of them by more than +10.0 points. Morocco (+21.2) registers the largest improvement over the past ten years, followed by Egypt (+20.3) and São Tomé & Príncipe (+19.4). Morocco is one of seven countries to show year-on-year improvement since 2006, with Cabo Verde, Comoros, Djibouti, Kenya, Niger and Swaziland.
Meanwhile, only ten countries register deterioration in Infrastructure since 2006: Sierra Leone (-13.8), Libya (-7.9), Madagascar (-7.1), Ghana (-6.9), Algeria (-2.5), Burkina Faso (-2.3), Central African Republic (-2.1), Zimbabwe (-2.1), Eritrea (-0.7) and Botswana (-0.2).
Progress in Infrastructure over the last decade has been mainly driven by considerable improvement in Digital & IT Infrastructure (+23.6), the most improved indicator of the IIAG over the decade. Fifty countries out of 54 have improved in this indicator, with 35 countries registering a year-on-year improvement. Morocco (+51.8) is the most improved country, followed by Seychelles (+47.7), Cabo Verde (+47.5), Algeria (+47.4) and Ghana (+46.6).
Transport Infrastructure (+2.8), which covers road, rail and air transport, also shows a positive trend, with 34 countries showing improvement over the past ten years. Togo (+23.4) shows the largest improvement, followed by Kenya (+23.2) and Morocco (+20.6). However, Electricity Infrastructure has shown a marginal decline (-0.4) over the past decade, with 19 countries registering deterioration.
Public Management sub-category: key findings
Public Management is the most deteriorated sub-category in Sustainable Economic Opportunity, registering a decline of -1.1 points over the decade.
The negative trend seen at the continental level conceals diverging country performance over the past ten years, with 27 countries showing improvement and 26 countries deteriorating. Zimbabwe (+18.4) has shown the largest improvement, followed by Seychelles (+14.0), Democratic Republic of Congo (+9.6), Rwanda (+7.9) and Egypt (+7.8).
Meanwhile, Libya (-29.9) has shown the largest decline, with eight other countries showing a deterioration of more than -5.0 points: Algeria (-12.1), Mali (-8.8), Madagascar (-8.8), Central African Republic (-8.8), Eritrea (-8.7), Cameroon (-8.7), Ghana (-7.7) and Gabon (-7.7).
Diversification, one of the constituent indicators of Public Management, is the lowest scoring indicator (9.7) in the IIAG in 2015 and registers a negative trend of -3.0 points over the past ten years. The majority (30) of countries have deteriorated in this indicator since 2006, while 21 countries have improved, with Mauritius (+13.2), Mozambique (+10.7) and Namibia (+5.6) showing the most notable progress.
However, Statistical Capacity (+2.6) shows a positive trend, with 30 countries registering improvement over the past ten years. The countries to show the largest improvements are Liberia (+36.2), followed by Mauritius (+33.3) and Nigeria (+30.4), who all improve by over +30.0 score points.
On the same positive note, 39 countries have improved in Revenue Mobilisation over the past ten years. Zimbabwe (+25.7) is the most improved country in this measure, followed by Mozambique (+18.8) and Seychelles (+14.3).
Oil exporters: a lost opportunity
Oil prices have slumped since 2013 by around 70% – falling from $105 a barrel to $30 a barrel. Prices are expected to fall further, hurting revenues for oil exporting countries. Even if oil prices have been volatile over the long run, between 2000 and 2013 a steady rise in the price of oil meant high revenues for oil exporting countries.
The 14 African oil exporting countries – Algeria, Angola, Cameroon, Chad, Congo, Côte d’Ivoire, Democratic Republic of Congo, Equatorial Guinea, Gabon, Ghana, Libya, Niger, Nigeria and Sudan1 – generally perform poorly. In 2015, 13 of these 14 countries register in the “Medium” or “Medium-Low” bands for Overall Governance. Even if Ghana is the only country to feature in the “Medium-High” band, it registers one of the continent’s largest deteriorations in Overall Governance over the past decade. Oil revenues accrued from the oil price boom between 2000 and 2013 have not been harnessed for the benefit of citizens.
Accounting for almost half (43%) of the continent’s economy, none of the oil exporting countries register in the “High” band in Sustainable Economic Opportunity. Only three countries feature in the “Medium-High” band (Algeria, Côte d’Ivoire and Ghana); four in the “Medium” band (Cameroon, Gabon, Niger and Nigeria); six in the “Medium-Low” (Angola, Chad, Congo, Democratic Republic of Congo, Equatorial Guinea and Sudan) and one “Low” (Libya). Moreover, ten oil exporters rank in the bottom half of Public Management and none rank in the top ten of this sub-category.
The oil exporting countries appear ill-prepared for the commodity price decline. Over the past ten years, all of them have seen a downturn in the indicator Ratio of Revenue to Expenditure. This decline is, on average, larger than for the rest of the continent. Moreover, 11 of these 14 countries rank in the bottom half of the indicator Diversification: Algeria, Angola, Cameroon, Chad, Congo, Democratic Republic of Congo, Equatorial Guinea, Gabon, Libya, Nigeria and Sudan. On average, oil exporting countries have shown deterioration in this indicator over the past ten years.
The majority (11) of oil exporters rank in the bottom half of Revenue Mobilisation, which captures a country’s domestic resource mobilisation capacity: Algeria, Angola, Chad, Congo, Democratic Republic of Congo, Equatorial Guinea, Gabon, Libya, Niger, Nigeria and Sudan. On average, the oil exporting countries have shown less improvement in this indicator compared to the rest of the continent over the past decade.
Business Environment sub-category: key findings
Business Environment is the third lowest scoring sub-category of the IIAG, achieving an average score of only 39.7 in 2015. Over the past ten years, it has shown a marginal deterioration of -0.8 points. This continental average masks considerably diverging country trends. Twenty-four countries register decline since 2006, five of them by more than -10.0 points: Madagascar (-21.7), Tunisia (-19.0), Libya (-17.6), Ethiopia (-16.4) and Sudan (-13.3). Twenty-eight countries show improvement, five by more than +10.0 points: Niger (+23.9), Rwanda (+18.4), Côte d’Ivoire (+13.3), Togo (+11.3) and Kenya (+10.4).
The sub-category’s disappointing performance is driven solely by Soundness of Banks (-21.5), the most deteriorated indicator in the IIAG since 2006. Thirty-five countries have declined in this indicator over the past ten years, with only five showing improvement: Nigeria (+4.8), Egypt (+4.3), Rwanda (+1.6), Morocco (+1.4) and Uganda (+1.2).
Meanwhile, the five remaining underlying indicators of Business Environment register improvement over the past decade. The strongest progress is registered by Investment Climate (+8.1) in which 35 countries have improved since 2006, three of them by more than +30.0 points: Benin (+50.0), Rwanda (+38.9) and Côte d’Ivoire (+33.4).
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Actions to green the financial system have doubled – but further transformation still needed
Worldwide policy actions to harness the global financial system for sustainable development have more than doubled over the last five years, but more effort is needed to turn this momentum into genuine global transformation, according to the second edition of UN Environment’s landmark report, “The Financial System We Need”.
Over the past five years, policy and regulatory measures by finance ministries, central banks and financial regulators to promote sustainable finance have risen to 217 and now exist in nearly 60 countries, the report finds.
Developing and emerging economies have focused their efforts on greening the banking sector, accounting for 70% of total measures in that sector. Developed countries have focused their action on environmental, social and governance issues by institutional investors, accounting for 92% of all measures in that sector.
Capital is also starting to shift, the report finds. The issuance of green bonds has already reached US$51.4bn this year, up from last year’s total of US$41.8bn - a fourfold increase since 2013, when issuance was below US$11bn. However, the total amount of green bonds outstanding is just 0.15% of the global fixed income market.
We are putting forward recommendations to accelerate the conversion of much of the financial system’s US$300 trillion of assets – held by banks, the capital markets and institutional investors – into sustainable financial flows,” said Erik Solheim, head of UN Environment. “The money isn’t the problem, it’s where we put it.”
2016 has also been marked by major moves at the national and international levels:
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G20 Finance Ministers and Central Bank Governors have, for the first time, agreed to scale up green finance.
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In China, President Xi and the State Council have issued guidelines to green the financial system.
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The European Commission has just announced it will develop a comprehensive European strategy on green finance.
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In India, new guidelines have been introduced to promote the expansion of the green bond market.
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In Kenya, leadership on mobile banking is providing the basis for expanding access to renewable energy.
Despite the promising trend, UN Environment emphasized the need for stronger and faster action. Globally, US$5-7 trillion a year is needed to finance the Sustainable Development Goals. China alone has a stated aim of raising US$1.5 trillion for financing green projects through to 2020; 85% of this will have to come from private finance.
UN Environment has set out five ambitious yet practical proposals that could bring the financial system into alignment with sustainable development and climate imperatives:
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Embed sustainability into long-term national plans for financial reform.
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Channel fintech developments to align finance with sustainable development.
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Use public finance for direct impact and to pioneer new markets, rules and practices.
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Ensure that policymakers and professionals understand the imperatives and risks.
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Develop common approaches to integrating sustainability into definitions, tools and standards.
The Momentum to Transformation report also sets out an initial performance framework for measuring progress towards a sustainable financial system across different countries. This tracks the policies and regulations in place, the market response and the flows of sustainable finance.
Nick Robins, co-director of UN Environment’s Inquiry, said: “Key data about the performance of the financial system and sustainable development is still lacking. This is holding back financial institutions from reallocating capital and financial policymakers from putting in place the necessary market frameworks. It’s why developing a set of shared indicators and standards is so critical.”
The report also pays specific attention to financial technology (fintech), which offers significant potential to scale up funding for sustainable development. Through advances in digital technologies – such as artificial intelligence and blockchain – tomorrow’s financial system could be far more efficient in mobilizing green finance, but that action is needed now to shape the direction of fintech.
Simon Zadek, co-director of UN Environment’s Inquiry, said: “The overlap between environment and finance is more obvious than ever. The solutions that fintech promises could not only revolutionize the financial sector but bolster global efforts to safeguard our environment.”
AUC and African private sector engage to validate continental agribusiness strategy and framework for Private Sector Apex Body
The African Union Commission in collaboration with the NEPAD Agency, opened a technical validation meeting for a Continental Agribusiness Strategy and a framework, operational structure, and implementation business plan for a continental African agribusiness apex body on 30 September 2016. The Apex Body will be one of the implementation modalities for the Agribusiness Strategy with a focus on stronger engagement of the private sector for agribusiness development on the continent.
The main objective of the meeting is to discuss and validate the Continental Agribusiness Strategy and Implementation Plan and review the outcomes of the ongoing efforts on development of the continental framework for the establishment of the Private Sector Apex Body. The meeting will further provide inputs for the development of a framework for boosting intra-African Trade in advancing the implementation of the 2014 Malabo Declaration, which was adopted by AU Heads of State and Government, and spells out seven key commitments for agricultural transformation in Africa.
Opening the meeting, AUC Department of Rural Economy and Agriculture (DREA), Senior Advisor to Commissioner Tumusiime Rhoda Peace, Ernest Ruzindaza, called for enhanced action towards the implementation of the Malabo commitments.
He noted that the role of the private sector towards the realization of the Malabo commitments is critical, emphasizing that, “one of the commitments in the Malabo Declaration which is on “Enhancing Investment Finance in Agriculture,” calls for increased involvement of the private sector, especially targeting strategic agricultural commodities value chains at national, regional and continental level.”
Engaging the African Domestic Private Sector in Agriculture
The pivotal role of the private sector in promoting agribusiness guided the development of the Agribusiness Strategy in 2012. The strategy provided a clear indication of the direction continental agencies were taking with agribusiness promotion, identified the elements to be carried forward, and outlined the institutional and thematic set-up for agribusiness and trade promotion at the various levels. Following the adoption of the Malabo Declaration, it became necessary to review the strategy and align it with the commitments made, while highlighting the critical role of the private sector in agribusiness development on the continent.
The various consultations undertaken by the AUC and NPCA as part of “Sustaining the CAADP Momentum” and the experience by AU Member States, and RECs in CAADP implementation have highlighted and underscored the need to strengthen private sector participation in CAADP implementation as part of expanding and strengthening agribusiness in African agricultural value chains.
Establishing a Continental Apex Body of African Agribusiness Actors
The CAADP Results Framework 2015-2025 places emphasis on the role of the private sector as a central catalyst and driver of inclusive agribusiness development for sustainable agricultural growth. The framework is further underpinned by a strong commitment to realise improved African agriculture performance through increased private sector investment along the continent’s agricultural value chains.
To achieve the food security and general sector expansion, development and growth desired, it has been recognized by policy makers in Africa, and continental domestic private sector actors themselves, that a strong and involved domestic private sector will be critically important toward the implementation of CAADP and the achievement of the Malabo Commitments.
The outcome of the meeting will be submitted to the AU Specialized Technical Committee (STC) on Agriculture, Rural Development, Water and Environment, in December 2016.
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People need affordable food, but prices must provide decent livelihoods for small-scale family farmers
FAO Director-General stresses the role of trade in ensuring global food security and adaptation to climate change
Declining prices could thwart international efforts to eradicate hunger and extreme poverty unless steps are taken to guarantee decent incomes and livelihoods for small-scale producers, FAO Director-General José Graziano da Silva said on 3 October 2016.
Globally, food prices are believed to be back to their long-term downward trend in real terms, as supply growth outpaces demand.
This follows the price surges experienced during the 2008-12 period and a prolonged period of volatility in food markets, Graziano da Silva told Agriculture and Trade Ministers and other government officials and experts, attending a high-level meeting on agricultural commodity prices at FAO’s headquarters in Rome.
“As policy makers, you are confronted by the challenge of keeping nutritious food affordable for the poor, while ensuring good incentives for producers, including family farmers,” he added.
“Low food prices reduce the incomes of farmers, especially poor family farmers who produce staple food in the developing countries. This cut in the flow of cash into rural communities also reduces the incentives for new investments in production, infrastructure and services,” the FAO Director-General said.
He underscored the need to consider the current decline in agricultural commodity prices in the context of the international community’s efforts to achieve the 2030 Agenda for Sustainable Development and the Sustainable Development Goals.
Make trade work for all
In a video address to the meeting, World Trade Organization (WTO) Director-General Roberto Azevêdo said that “under the right circumstances” trade provides people with opportunities to join global markets and helps to create incentives for producers to invest and innovate.
The “historic decision” struck in Nairobi in December 2015 by WTO members to eliminate agricultural export subsidies, according to Azevêdo will “help level the playing field in agriculture markets, to the benefit of farmers and exporters in developing and least-developed countries.”
For his part, Graziano da Silva pointed to the potential of trade in contributing to global food security and better nutrition, specifically underlining its potential role as an “adaptation tool” to climate change – countries that are projected to experience decreasing yields and production due to climate change, will have to resort to the global markets to feed their populations.
But the FAO Director-General also noted that increased openness to trade “can also bring risks”. If not well managed, it “can undermine local production and consequently the livelihoods of the rural poor”.
The elimination of agricultural export subsidies that affect prices in global markets could be one way to improve trade so that “it benefits small farmers in developing countries and creates prosperity in rural areas,” Graziano da Silva said.
Social protection
With demand representing one of the most powerful drivers of food prices, an essential way to make these more remunerative for producers, yet affordable for consumers, is to promote and strengthen targeted social protection programmes and other schemes such as food vouchers, the FAO Director-General said.
“The aim of these polices is to build a virtuous cycle of local production and local consumption,” he added.
To succeed, such measures need strong collaboration between the institutions responsible for agriculture, rural development, trade, the environment, nutrition, health and social security, Graziano da Silva said.
Price swings and other scenarios
To better develop future scenarios on the long-term behavior of agricultural commodity prices, Graziano da Silva said that FAO seeks to boost its modelling systems to better understand possible price swings and changes in trends and assist countries to formulate appropriate policies.
The OECD-FAO Agricultural Outlook points out the high probability that over the next 10 years some abrupt price surges may occur, mainly as a result of climate change.