‘The LDCs should enhance their participation in the global value chain and attract investment‘

DR RATNAKAR ADHIKARI has been serving as the Executive Director of the Geneva-based Enhanced Integrated Framework (www.enhancedif.org) since October 2013, prior to which he was the Chief Executive Director of South Asia Watch on Trade, Economics and Environment (SAWTEE), a Kathmandu-based regional think-tank. He also served as a Visiting Professor at the Mid-western University, Nepal; as Senior Adviser to the National Planning Commission, Government of Nepal; Trade Programme Specialist for UNDP, Asia Pacific Regional Centre in Colombo; and Manager at the Nepal Indosuez Bank Ltd. Dr Adhikari has published extensively in the areas of trade, investment, technology, intellectual property and competition. Having completed his Masters degrees from University of Delhi, India and World Trade Institute, Switzerland, he obtained his PhD from the University of Warwick, UK. Dr Adhikari spoke to BHAGIRATH YOGI on issues related to the impact of COVID -19 on LDCs, trade and investment. Excerpts:

How have you assessed the impact of the COVID -19 on Least Developed Countries (LDCs)?

Looking at the number of reported infections and active cases, the health impact might not have been as severe as initially feared as the public health systems in the LDCs have not been overwhelmed so far unlike in many developed and developing countries. Even today, four LDCs, namely Afghanistan, Bangladesh, Ethiopia and Nepal, account for almost 80% of active cases. However, reported cases may not reflect the actual number of cases and if testing were to be accelerated, more cases would come to light. Additionally, the possibility of a second wave cannot be completely ruled out; hence, all the necessary precautions would be critical.

That said, the economic impact has been devastating. The June 2020 World Economic Outlook update of the International Monetary Fund projects global growth at -4.9% in 2020, 1.9 percentage points lower than the April forecast. WTO economists estimate that, while trade volumes will register a steep decline in 2020, they are unlikely to reach the worst-case scenario of 32% projected in April 2020. The WTO has also reported that drops in demand and supply had strongly impacted services trade, although the type and extent of the impact varies by sector and mode of supply. Services that rely on physical proximity between suppliers and consumers have been most impacted by mobility restrictions and social distancing measures imposed for public health reasons. Sectors such as distribution (especially retailing services), tourism and passenger transport have also been heavily affected. According to the UNWTO, international tourism receipts could plunge by USD 1 trillion in 2020. According to the World Bank, remittance flows to low- and middle-income countries are expected to drop by around 20% to USD 445 billion, from USD 554 billion in 2019. Similarly, UNCTAD projects Foreign Direct Investments (FDI) to fall by about 40% in 2020.

What is the EIF is doing to support the LDCs in these difficult times?

The EIF’s response to the crisis is being guided by a Business Continuity Plan (BCP), which was formulated at the start of the crisis in addition to a dedicated COVID-19 risk matrix. These have been continuously monitored and updated by the EIF through close engagement with beneficiary LDCs and implementing partners.

Updates have been regularly provided to the EIF stakeholders. 41 individual risks categorized as “very high”, “high” “medium” and “low”, are being regularly monitored, and effective measures are being put in place to mitigate them. Some of the risks, which were considered as “very high” at the beginning of the crisis, have come down to a “high” level as a result of the combination of mitigation measures being implemented, as well as the transition from the initial and critical phases of the pandemic.

As part of the BCP, a Guidance Note on the revision of work plans and budgets in the context of COVID-19 was sent to all EIF structures on the ground, which has provided some flexibilities to use allocated resources for enhancing their capabilities to work remotely and address health and sanitary problems. A review of the EIF pipeline of projects was also carried out considering the potential impacts of COVID-19.

The EIF has reinforced its engagement with partners on the BCP with a view to establishing synergies of action for even greater impact. We are currently working with partners such as the WTO, the International Trade Centre and the World Association of Investment Promotion Agencies (WAIPA) to provide more targeted support to the LDCs. Reporting on COVID-19 trade impacts in the LDCs have been ongoing through the EIF’s “Trade for Development News” platform and media engagement. An Expert Questions and Answers-series as part of the “Trade for Development News” platform was organized in partnership with UNDP, UNWTO and the Commonwealth with three live events having taken place on 13 May, 28 May and 11 June 2020. Similarly, a webinar on investment promotion in the LDCs was organized together with WAIPA on 15 July 2020.

Considering the effects of the crisis on the implementation of EIF projects, the EIF Board decided in June 2020 to allow flexibilities for the provision of additional No-cost Extensions on a case by case basis for impacted projects, as well as flexibilities for in-country project approval processes.

According to the UNCTAD, LDCs received just 1.4 percent of the global FDI inflows in 2019. As it’s likely to dip further this year, what would you suggest the LDCs to look out for the much-needed capital?

There are four ways to promote FDI in the LDCs in the context of COVID-19.

First, the LDCs should enhance their participation in the global value chain and attract investment, as foreign investors are looking for opportunities to diversify the sources of raw materials, parts and components, having learnt the hard way that relying on a single country for their supplies could be detrimental to their supply chain management. As has already been done by countries such as India and Vietnam, at least those LDCs which have already put in place relatively strong institutional arrangements, established and operated special economic zones/industrial parks, and/or have had experience in attracting FDI in the manufacturing value chain should be able to attract them. Examples include LDCs such as Bangladesh, Cambodia, Ethiopia, Myanmar, Nepal, Rwanda and Senegal.

Second, there are at least 60 fast-growing market opportunities in areas such as food; cities; energy and materials; and health and well-being – which are all linked to the achievement of the Sustainable Development Goals (SDGs). These opportunities, which can target sustainable FDI, are valued at more than USD 12 trillion annually by 2030. As countries move towards green recovery post-pandemic, there are potential opportunities for the LDCs to attract FDI in green, climate-resilient, future-proof and sustainable sectors. Select measures taken by the LDCs, even prior to the COVID-19 pandemic, that can be replicated in the present context are worth highlighting. For example, while Ethiopia has established an eco-industrial park, Rwanda provides special incentives for investments in clean energy. Efforts such as these should be replicated by other LDCs as well.

Third, many LDCs are now defying the traditional model of structural transformation. Some LDCs are taking advantage of new sources of growth in information and communications technology (ICT) services and e commerce. These provide an opportunity for the LDCs to attract FDI in the context of COVID-19, as these businesses can be managed with minimal social contacts. Some LDCs have been exporting ICT services in the recent past, which, as a percentage of total services exports, are equal to or higher than the global average of 10.5%. These include LDCs such as Afghanistan (16.1%), Bangladesh (13.6%), Burkina Faso (10.8), Nepal (18%) and Senegal (22.4%). In line with the global trend, the uptake of e-commerce has increased in the LDCs during the pandemic, with LDCs such as Cambodia, Nepal, Rwanda and Senegal blazing the trail. All of these LDCs have been supported by the EIF and UNCTAD either through the preparation of eTrade Readiness Assessments or through the development of e-commerce polices and strategies.

Finally, in order to accelerate national efforts to attract FDI in the LDCs, international cooperation would be equally important. Therefore, in line with SDG 17.5, the international community should create a Well-endowed FDI facility to support the LDCs to build and/or strengthen their capacity to attract FDI, as suggested by the Columbia Center on Sustainable Investment. This could take the form of either a stand alone support such as aid for investment, or the expansion of the remit of existing Aid for Trade Initiative to include investment.

The EIF has been supporting LDCs to promote their foreign trade. But, Landlocked LDCs face further difficulties due to their landlocked nature. How could countries like Burkina Faso, Nepal or Rwanda overcome such difficulties?

Indeed, landlocked countries, which are characterized by their lack of direct territorial access to the sea and their remoteness and isolation from world markets, face several disadvantages, which are further magnified in the case of LDCs. First, they are unable to supply goods and services to the global market in a competitive manner due to supply-side constraints, and second, they face steep trade costs due to their reliance on the efficiency of infrastructure, transport, customs, and administrative and political system of transit countries.

Therefore, the EIF support to landlocked LDCs have exclusively focused on reducing their trade costs. I would like to provide a few examples.

Burkina Faso exported USD 44 million worth of shea nuts and products to nine new markets in 2019. These exports are the latest step building upon a recent production focused project financed by the African Development Bank and implemented by the EIF National Implementing Unit. This project has generated over 148,000 metric tons of production and contributed to 6,000 new jobs, 90% of which were taken up by women.

An EIF project in Nepal supported the planting of selected medicinal and aromatic plants using indigenous knowledge and promoting their sustainable commercial cultivation. The project led to a steady increase in farmer incomes. At the end of the project, the average annual farmer income reached NPR 15,244 (approximately USD 137), which represented an 82% increase over the 2014 baseline. 42 local experts were trained on good agriculture and collection practices, and they in turn were mobilized to train 2,338 farmers (46% women) during 153 events in the field.

The EIF, working together with other partners, has contributed to the establishment of a series of cross-border market centres in Rwanda to promote more efficient and safer cross-border trade. This was particularly vital, considering the importance of cross-border trade for the country’s economy, and a particularly important avenue for poverty alleviation. The project also has strong gender dimension, as almost three-quarters of the beneficiaries of these centres are women.

Moreover, in the recent past, we have started supporting regional projects, which have helped landlocked LDCs to take advantage of the market opportunities available in their neighbouring countries. In 2019, the EIF funded an Overseas Development Institute-led study in conjunction with the East African Community (EAC) to better understand the potential uses of AgriTech in the region, including in landlocked LDCs such as Burundi, Rwanda and Uganda. Approximately 70% of agriculture workers in the EAC are women, and many are unable to earn a living wage from their labour. AgriTech has the potential to increase productivity, promote local value addition and contribute to regional integration. The study will inform policymakers in the development of equitable policies and ensure that AgriTech is used to create more inclusive agricultural value chains.

Likewise, the South Asia regional e-commerce project, implemented by UNESCAP with the EIF support, aims to build e-commerce capacity of women-owned micro- small- and medium-sized enterprises, seeks to help women entrepreneurs from landlocked LDCs such as Afghanistan, Bangladesh and Bhutan to reduce their costs by connecting directly with their international buyers. The regional approach followed by the project means that it offers opportunities to learn from women entrepreneurs from countries with substantial e commerce exposure such as Bangladesh, India, Pakistan and Sri Lanka, as well as to better exploit the regional market potential.

While rich western countries are spending trillions of dollars to revive their economy in the wake of the COVID -19, the Overseas Development Assistance (ODA) to Least Developed Countries is likely to go down further. What could be its impact on the LDCs?

Although we have not seen any evidence of this so far, ODA to LDCs, including Aid for Trade support, is likely to decline due to two main reasons. First, since ODA allocation of each country is pegged to donor countries’ Gross National Income (GNI), a reduction in their GNI means less resources available for ODA. Second, ODA is a very broad term that includes support to humanitarian, emergency, social, environment and productive areas, and if already reduced amount of ODA is to be diverted to public health emergencies, the resources available for the productive sector will be reduced. This could have a long-term negative impact on economic growth as well as employment and livelihood prospects for the LDCs.

Apart from the reduction and redirection of ODA, LDCs’ resources are also depleting due to reduced exports, FDI, remittances and tourism receipts. This situation is further compounded by the reduction and/or deferment in the collection of tax revenues, which will put these countries under severe fiscal distress.

While the deferral of debt repayment by G20 countries, based call made by international organizations such as the World Bank and the International Monetary Fund, have definitely helped the LDCs, consideration should be given to explore the possibility of debt cancellation based on the impact of the pandemic and debt servicing capacity of individual LDCs. This could release substantial chunk of resources for LDCs’ development financing.

You have been saying that the LDCs should try to turn the COVID -19 crisis into an opportunity. But, how?

We believe in not letting any crisis go to waste. While every crisis offers opportunities for countries, businesses or individuals, how much one can use them depends on their capacity and willingness. Those that are amongst the first ones to take advantage of these opportunities are the ones who recover faster. Four such opportunities are in the areas of: attracting FDI, harnessing the potential of e-commerce, undertaking trade facilitation reforms and enhancing regional integration. Since the opportunity in the area of FDI has already been discussed above, I would like to focus on three other opportunities here.

E-commerce has posted rapid growth during the pandemic due to contactless modes of transaction. Even prior to COVID-19, many LDCs had prioritized e-commerce as a means of directly connecting their firms to global and regional markets and thus making them competitive. In order to quickly identify barriers to further e-commerce development, some LDCs undertook rapid eTrade Readiness Assessments, with the help of the EIF and UNCTAD.

Following the adoption of an e-commerce strategy with the EIF support, Senegal managed to develop an e-commerce platform that provides easy access to websites of small- and medium-sized enterprises (SMEs) which sell essential goods such as medical and agricultural products within days after the onset of the pandemic. The platform not only facilitates the distribution of essential products, but also brings SMEs together and encourages more traditional businesses to participate.

In Cambodia, where EIF supported the development of E-Commerce Strategy, UNDP joined hands with the Government of Australia and Ministry of Commerce in implementing a project to accelerate the deployment of e-commerce solutions to diversify the services provided by existing online marketplaces to facilitate business continuity for essential sectors by shifting traditional business transactions online and enabling effective local retailer/consumer logistics. Two aspects of the work are particularly noteworthy; first, partnering with existing marketplaces that have proven experience in aggregating sellers and buyers; and second, leveraging idle capacity in service sectors such as the hospitality industry to service merchants/consumers through e-commerce platforms.

Undertaking trade facilitation reforms, provided that such reforms can last beyond the pandemic, can offer an opportunity for the LDCs. Indeed, COVID-19 seems to have provided them incentives to introduce some quick win measures to facilitate trade as well to take steps towards paperless trade. For example, Nepal has put in place a system for the release of customs consignment for essential goods within two hours of submission of documents at the customs point, besides exempting duties on 17 categories of medical goods, health materials and equipment. Moreover, the Government of Nepal decided to accept copies of required documents and to provide for the possibility of attaching documents online, thus removing the requirement to present original documents during the lockdown period.

Finally, the opportunity for regional cooperation is enormous. Several regional bodies have launched regional or cross-regional initiatives in response to the COVID-19 pandemic, predominantly to mitigate the public health impact, although some have gone beyond this to strengthen collaboration in the economic sphere. For example, serious border delays in East Africa due to the testing of truck drivers for the virus prompted the EAC to take actions at the regional level. The regional COVID-19 surveillance system for trucks and their crews has been a tool to help mitigate the disruption of domestic, regional and global supply chain systems serving the region.

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