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Financial development to formalize economies

30. September 2022 - 21:22

By Salvatore Capasso, Franziska Ohnsorge, Shu Yu

Informal economic activity is widespread around the world. On average, such activity accounts for about one-third of output, and informal employment captures almost one-third of total employment (Figure 1). It undermines revenue collections, stunts productivity, hinders investment, and traps some of the most vulnerable workers in low-paying, unproductive employment. For policymakers in countries with widespread informality, it is a formidable challenge.

Figure 1. Informality around the world

Sources: Elgin et al. (2021).

Note: Bars are simple averages. “EMDEs” stands for emerging marking and developing economies. Informal output is proxied by dynamic general equilibrium (DGE) model-based estimates in percent of official GDP. Self-employment, a common proxy for informal employment, is in percent of total employment. World averages between 1990-2018 are in orange.

Underdeveloped financial systems have often been identified as a potential cause of informality but the direction of causality has been difficult to pin down. Financial development can influence the benefits and costs of informal economic activity undertaken by firms and households. Firms in the informal sector are typically characterized by small scale, low capital-to-labor ratios, lack of investment, low productivity, a low propensity to implement new technologies, and unskilled managers. By influencing firms’ investment strategies, financial development promotes the transition of informal firms into the formal sector and, ultimately, encourages capital accumulation and productivity improvements.

Plenty of empirical evidence shows that financial development is correlated with lower informality. Many empirical studies have found a robust and significant result, for different sets of countries, time periods, and definitions of financial development and informality, and controlling for numerous factors: Greater financial development is associated with less informality (Figure 2).

Figure 2. Financial development and informality

Sources: Ohnsorge and Yu (2022).

Note: Bars show simple averages for EMDEs over the period 2010-18. “High informality” (“Low informality”) are emerging market and developing economies (EMDEs) with above-median (below-median) dynamic general equilibrium (DGE)-based informal output measures. “Bank branches” measures the number of commercial bank branches per 100,000 adults. “ATMs” measures the number of automated teller machines (ATMs) per 100,000 adults. “Private credit” measures domestic credit to private sector in percent of GDP. “Account ownership” is the percentage of survey respondents (aged 15 and above) who report having an account (by themselves or together with someone else) at a bank or other financial institution, or report personally using a mobile money service in the past 12 months. *** indicates group differences are not zero at 10 percent significance level.

From correlations to causality

But is it financial development that lowers informality or vice versa? The literature is divided on this question.

Several theoretical studies have identified the various channels that may give rise to a negative relationship between financial development and informality, with causality that may be running in either direction. These studies essentially compare the costs of operating informally, such as more costly access to external financing, with the benefits, such as avoiding regulatory and tax compliance burdens.

The main notion behind most of the studies arguing for a causal link from financial development to informality is that, in the presence of information asymmetries, informal firms and workers face a higher cost of credit since they are more opaque to external creditors. High financing cost, in turn, reduces the attractiveness of formal-sector activity. As financial markets develop, the cost of credit decreases, and formal-sector activity becomes more attractive. And yet, there are also arguments to support the idea that the causality runs from informality to lower financial development. Specifically, more pervasive informality lowers aggregate investment and this, in turn,  is accompanied by shallower capital markets.

This approach shows that greater financial development indeed lowers informal sector activity. This causal link is stronger in countries with greater trade openness and capital account openness.

In our new study, we employ an instrumental variable approach to show that the direction of causality runs from greater financial development to lower informal-sector activity. Specifically, the approach exploits one aspect of financial development that is likely to be most relevant for the vast majority of informal workers and firms: relationship banking. Relationship banking requires close interactions between the bank and the borrower and typically also requires the presence of bank branches where these relationships can be established and nurtured. Inspired by a large body of literature that documents the link between domestic and foreign banking sector development, we use the strength of branch networks in geographically close countries as an instrument for financial development.

This approach shows that greater financial development indeed lowers informal sector activity. This causal link is stronger in countries with greater trade openness and capital account openness (Figure 3). The findings are robust to the use of alternative indicators of informality and financial development.

Figure 3. The impact of bank sector development on informality

Sources: Capasso, Ohnsorge, and Yu (2022)

Note: Bars show estimated coefficients for commercial bank branches (used as a proxy for bank sector development) when regressing against DGE-based informal output as a share of official GDP. “High (low) trade openness” are countries where trade flow (i.e., imports plus exports) as a share of GDP is above (below) median. Commercial bank branches are per 100,000 adults and instrumented by the average number of bank branches in the region (excluding the country under consideration; discounted by distance). Data are between 2004 and 2018. *** indicates that the coefficients are significant at 10 percent significance level.

Policy promise

For policymakers, this is a promising finding. Our results suggest that efforts to strengthen financial development, which are typically undertaken for reasons unrelated to informality, may also be an effective tool to lower informality.

A wide range of policy tools has been identified to foster financial development and financial inclusion. Such policies have often aimed at increasing domestic savings and investment, reducing poverty, and reducing financial vulnerabilities. They have included, among many others, measures to strengthen credit registries; broaden mobile payment and banking systems; digitize transactions and records; and increase competition among financial service providers while strengthening regulation and supervision. Our results show that such policies can also increase the attractiveness of operating formally, in part by removing information asymmetries and reducing financing costs. Hence, financial development can be an effective part of a broader policy agenda to reduce informality.

      
Kategorien: english

Building Bridges? PGII versus BRI

29. September 2022 - 19:03

By Elizabeth C. Losos, T. Robert Fetter

The recently launched Partnership for Global Infrastructure and Investment (PGII)—a G-7 initiative to mobilize $600 billion in loans and grants for sustainable, quality infrastructure projects in developing and emerging economies—aims to provide much-needed investment toward achieving global development goals. G-7 leaders are not hiding their secondary motivation: regaining some of the influence that advanced democracies have yielded to China over a decade of its infrastructure investment through the Belt and Road Initiative (BRI). The level of funding pledged by PGII demonstrates a serious commitment to addressing the infrastructure needs of low- and middle-income countries, potentially on par to match that of BRI.

PGII is distinctive not just for the quantity of pledged investment, but also the quality. In launching PGII, the G-7 leaders repeatedly stated their goal to support “quality infrastructure” projects, that is, economically viable projects with transparent disclosures and low environmental, social, and governance (ESG) risks. Implied—and at times overtly stated—in this PGII characterization is its sharp contrast to BRI projects. The G-7 is betting that such investments will be more attractive to host-country governments than what China has been offering. Some past BRI projects gained international attention for environmental hazards, labor violations, corruption scandals, public protests, and unsustainable debt burdens in recipient countries. By offering quality, transparent investment opportunities, G-7 nations hope to build soft power in low- and middle-income countries.

There is a second reason that quality infrastructure is a fundamental component of PGII: Quality projects with low ESG risks are needed to attract private sector investors, which are key to PGII’s financing model. G-7 governments are not in a position to compete with China’s BRI through public spending. Due to rapidly expanding ESG investment funds, private-sector institutional investors—such as pension and insurance funds—have literally hundreds of billions of dollars available that could be invested in sustainable, low-risk investments. Yet these institutional investors have difficulty identifying “bankable” sustainable infrastructure projects with acceptable levels of risk in developing countries.

To attract private sector investments, the governments of the United States, Australia, and Japan are creating a quality infrastructure certification initiative called the Blue Dot Network (BDN). A BDN certification aims to provide a globally recognized certification—akin to a “Good Housekeeping Seal of Approval”—for infrastructure projects with low ESG risks, high debt transparency, and sustainable economic returns. The G-7 is banking on this certification of high-quality and low-ESG risks to provide the assurance that private investors need to attract them into PGII public-private partnerships.

It is not just governments that want to create global standards to attract private sector financing. A group of public- and private-sector financial institutions have joined forces to develop another initiative, FAST-Infra (Finance to Accelerate the Sustainable Transition-Infrastructure), which shares the goal of developing a global sustainable infrastructure label to de-risk private sector infrastructure investing. FAST-Infra’s Sustainable Infrastructure Label and BDN Certification standards can and should reinforce each other in the quest to crowd in more private sector investments to sustainable, quality infrastructure investments in developing and emerging economies.

So, what is the chance that PGII—with its high-quality standards and private sector investors—will draw developing and emerging economies into Western partnerships at the cost of their alliances with China? In other words, can PGII rebuild Western soft power by outcompeting BRI? Not likely. Several factors minimize the head-to-head competition.

First, while PGII’s pledged price tag is impressively large, there are no assurances that G7 governments will be able to make good on their commitments over five years, especially given current political volatility within most of the G-7 countries. Furthermore, these governments have no real control over whether the private sector will actually invest their share—which comprises the majority the PGII pledge—or that they will select sustainable projects. Additionally, the high-quality attributes that make the projects attractive also restrict the number and breadth of projects that can meet PGII’s requirements. Finding a sufficient supply of bankable projects without compromising standards will likely depend on substantial G-7 investments in technical assistance and capacity development—which is far from given.

Finally, even if the PGII initiative is able to mobilize the full $600 billion pledged, this sum is not likely to deter or displace Chinese investments. The infrastructure gap in developing countries is enormous, on the scale of tens of trillions of dollars. There is plenty of need and room for both. Most borrowing countries are eager to have multiple options. Thus, PGII versus BRI is a false dichotomy.

Ironically, if successful, PGII could achieve something potentially more meaningful than initially intended through its competition with BRI: a race to the top in quality infrastructure investments. While the Western narrative alleges that BRI investments are low quality and saddle countries with unsustainable debt, the reality is that China has already began evolving the quantity and quality of its infrastructure lending three years ago. In 2019, China dramatically diminished its overseas infrastructure investments, especially pulling back on the high-risk projects. That year at the BRI International Forum, President Xi Jinping emphasized his commitment to a “Green BRI.” The drivers of this change were manifold, including internal economic pressures, decreasing foreign currency reserves, and pressure from negative international publicity. The bottom line is that China could not continue to underwrite high-risk loans that were financially and politically costly.

China is still in the nascent stages of reimagining the Belt and Road version 2.0. The BRI International Green Coalition—a quasi-public entity that partners with international development and environmental organizations—issued a series of infrastructure investment guidelines starting in December 2020 known as the Green Development Guidance (GDG), including an environmental classification system (the “Traffic Light System”) that codes projects as green (beneficial), yellow (acceptable), or red (unacceptable) based on project characteristics and mitigation measures. These GDG standards fall far short of Western standards being pursued by BDN and FAST-Infra. Most significantly, GDG focuses solely on environmental impacts, leaving social and governance risks unaddressed. Their ultimate goals, however, are complementary and potentially compatible.

To date, the Green BRI remains mostly a paper concept, though the central government and many ministries are gradually incorporating voluntary guidance to Chinese lenders that promotes infrastructure projects that minimize climate, biodiversity, and pollution impacts. For China to credibly establish its newfound commitment to international environmental norms, it will need to proactively release information on which of its projects have sought GDG oversight and how they have scored. Currently, there is no way to track how many BRI projects seek classification according to the GDG, or how many BRI projects have been judged green, yellow or red. There is also no requirement in the Guidance for an independent auditor to verify BRI developers’ claims. Decision-making by the BRI remains opaque, and there are no real-time statistics available to measure the actual change in investment portfolio. (Of course government statistics would still need to be verified—perhaps by the organizations that currently compiles information on Chinese-funded projects such as AIDDATA or Boston University Global Development Policy Center.

If G-7 countries take serious action to fulfill their PGII commitments with its focus on high-quality, low-ESG risk infrastructure projects, China may respond by amplifying and improving its newly developed standards, as outlined in the GDG. As Guo Hai, a researcher at the Institute of Public Policy at the South China University of Technology, recently noted, “… China’s economy has a history of needing external forces to bring in reforms. Biden’s new plan might not be a bad thing for China’s [Belt and Road Initiative] or its domestic market.” This would be a race to the top that could benefit all parties.

      
Kategorien: english

Inclusion, inequality, and the Fourth Industrial Revolution (4IR) in Africa

23. September 2022 - 15:09

By Louise Fox, Landry Signé

Adoption of Fourth-Industrial-Revolution (4IR) technologies in sub-Saharan Africa could bring not only substantial economic growth and welfare benefits, but also social and economic disruption, including widening inequality if countervailing policies are not adopted, as discussed in our recent report. With a high share of the labor force working informally—a trend expected to continue for several decades—Africa’s education and industrial policies need to strike a balance between encouraging private investment needed to create new formal jobs using advanced technology and ensuring that all new labor force entrants have the basic skills and infrastructure to make an adequate living.

Much has been written about the current and potential disruptive effects in advanced economies, of the suite of new technologies called the Fourth Industrial Revolution (4IR)—a group of technologies that fuse digital, biological, and physical innovation in applications such as advanced robotics using artificial intelligence, CRISPR digital gene editing, and the networks of sensors and computers called the Internet of Things. Studies estimated that globally in the manufacturing sector alone, 4IR technologies could create 133 million jobs by the end of 2022, but displace 75 million jobs, leading to a net gain of 58 million jobs.

Researchers have demonstrated that in the U.S., the skill-bias of technological change in the production sphere disproportionately affected routine and middle-skilled occupations, creating an asymmetry of opportunities, earnings, and income between lower and highly educated workers, and exacerbating inequality trends. However, the researchers also argue that economic policies over the past decade could have moderated these effects instead of amplifying them.

Despite this experience, the skill bias of 4IR technologies has led to recommendations, from international finance institutions and private think tanks, that African countries should urgently move to create more high-level STEM skills in their future workforces. While there is no doubt Africa will have to continue to upgrade the skills of its future labor force, the question is, how should this upgrading be organized and financed equitably?

Sub-Saharan Africa countries already spend about 4.5 percent of their GDP on education (including both public and private expenditures), but in many countries, education systems are often inadequate to meet the needs of current students, much less for those about to enter the system. Of total education spending, 1 percent of GDP (22 percent of the total) goes to higher education, with a gross enrollment of less than 10 percent. The African Union is suggesting that member countries spend another 1 percent of GDP on developing STEM skills at the secondary and post-secondary levels. In today’s fiscal environment, private sector and global partnerships will be needed.

The rapidly growing labor supply and the challenges of structural transformation suggest that most new entrants to the labor force will find work as low-skilled or semi-skilled employees or working for themselves and their families (on farms or in informal microenterprises); they will not work as software developers or digital engineers. To be more productive, these young people need better access to (i) higher quality primary and secondary education, including development of problem solving and foundational digital and STEM skills, and (ii) access to cheaper mobile phones and tablets, mobile internet, and digital services to develop their farms and businesses. Providing an inclusive job creation platform for these workers through public investment in foundational skills and in internet access should remain the spending priority for governments.

Low within-country income inequality is not just an intrinsically desirable economic characteristic; it helps support economic growth and development in a variety of ways. More equal countries are more politically stable, less likely to be fragile or erupt into violence or civil conflict. They also show more resilience in the face of external shocks. Leaving large sections of the population behind actually lowers future economic growth by stifling the potential of aggregate demand and the increased consumer appetites of a growing middle class to fuel growth, while reducing support for needed public investments to sustain development.

Inequality has been on the rise in many sub-Saharan Africa countries. Five of the top ten most unequal countries in the world are in sub-Saharan Africa. Africa cannot afford to let technology exacerbate this trend. Policies to contain or reduce inequality involve action across sectors and policy domains, and ensuring equal access to quality education and other human capital development services is a good start. Other policies and programs needed to counter a possible rise in inequality in the 4IR context, include:

  1. Incentivizing the provision of lower cost ICT services, so that they will be accessible to households and businesses outside of capital cities (including by expanding coverage of the energy grid.)
  2. Additional policies to reduce the gender gap in access to and use of mobile phone and internet services.
  3. Continuing to expand the coverage of mobile banking and other fintech services, including the development of interoperable payment systems within countries and across the continent.
  4. Avoiding the temptation to subsidize the adoption of non-essential labor-saving technologies in the private sector.

Meanwhile, aggressive policies to attract more private investment in tertiary education, to meet projected needs for high-skilled labor will be critical.

The experience of the OECD countries, especially the U.S., suggests that 4IR technology is not an inherently benign change agent. Unequal employment and earnings outcomes have been observed. African countries cannot—and should not—avoid 4IR technology given the potential to accelerate economic transformation in Africa. However, countries should also consider their options for increasing inclusion, especially in countries where the level of inequality is already high. Some factors—such as the labor saving, skill bias of these technologies—are outside of African countries’ control. But economic policies can still guide economic development toward greater equality.

Want to know more?  Tune in to Louise and Landry’s webinar at Brookings Africa Growth Initiative on Monday September 26, 2022 @ 11:00 am -12:15pm ET (GMT-5). Register here

      
Kategorien: english

Biden should embrace the UN’s Sustainable Development Goals

22. September 2022 - 15:01

By Amb. Elizabeth Cousens, Anthony F. Pipa

      
Kategorien: english

Keeping the ‘Leave No One Behind’ agenda alive

20. September 2022 - 17:00

While the sustainable development goals and their anchoring promise to “leave no one behind” may feel increasingly out of reach amid the COVID-19 pandemic, rising poverty, food shortages, armed conflict, natural disasters, and other crises, there is still reason for optimism when we look at the ground-level innovations and efforts of many actors on the frontlines of tackling extreme poverty and deprivation.

One organization that has had immense impact over many years is BRAC, originally launched in 1972 as the Bangladesh Rehabilitation Assistance Committee. In a recent book, “Hope Over Fate: Fazle Hasan Abed and the Science of Ending Global Poverty,” and in an accompanying Brookings blog post, author Scott MacMillan describes the life of BRAC founder Sir Fazle Hasan Abed and the people whose lives BRAC has touched over the years.

To help honor Abed’s legacy and elevate the ongoing importance of the “Leave No One Behind” policy agenda, the Center for Sustainable Development (CSD) at Brookings will convene a public panel discussion on Thursday, October 6.  Scott MacMillan will discuss key insights from his book, followed by a panel discussion and audience Q&A with distinguished panelists Elizabeth Cousens (president and CEO of the UN Foundation), Alexia Latortue (assistant secretary for international trade and development, U.S. Treasury), and CSD Senior Fellow Homi Kharas, moderated by CSD Director and Senior Fellow John W. McArthur.

      
Kategorien: english

American leadership in advancing the sustainable development goals

19. September 2022 - 19:32

On Monday, September 19, the Center for Sustainable Development at the Brookings Institution and the United Nations Foundation cohosted the fourth annual “American Leadership in Advancing the Sustainable Development Goals” event on the sidelines of the U.N. General Assembly.

Building on gatherings in 2019, 2020, and 2021, this in-person event showcased local leadership, innovation, and commitments from communities across the United States to advance sustainable development domestically and around the world.

As the world approaches the halfway point on the Sustainable Development Goals, this year is an opportunity for U.S. leaders from across sectors to reflect on progress made and to understand what more is needed heading into 2030.

      
Kategorien: english

Emerging technologies and the future of work in Africa

19. September 2022 - 18:50

Creating meaningful employment opportunities for Africa’s youth is already a major development policy issue. Given Africa’s population bulge and the surge of young Africans expected to enter the job market over the next two decades, it will undoubtedly remain a concern. Recent research has heralded emerging technologies in the Fourth Industrial Revolution (4IR) as a game changer that can accelerate economic transformation of developing countries. African governments are being advised to organize and invest for this revolution by building labor force skills.

While adoption of 4IR technologies in sub-Saharan Africa could bring substantial economic growth and welfare benefits, it could also bring social and economic disruption—creating an asymmetry of opportunities, earnings, and incomes between lower and highly educated workers—and exacerbating inequality trends. What countervailing policies should African policymakers adopt to strike a balance between creating an enabling environment for private investment needed to create jobs using advanced technology, and ensuring that all new labor force entrants have the basic skills and infrastructure to make an adequate living?

Also, just how likely are African producers to adopt the new technology? Thus far, Africa’s adoption of new productive technology has been slow, because of the high costs and because many technologies do not sufficiently address the unique barriers to increasing productivity and profitability that confront African producers.

On September 26, 2022, the Brookings Africa Growth Initiative (AGI) will host a discussion on the new report,“From subsistence to disruptive innovation: Africa, the Fourth Industrial Revolution, and the future of jobs” with authors Louise Fox and Landry Signé. As part of the discussion, the authors will seek to answer the following questions:

  • What are the current and potential benefits of 4IR technology for economic transformation in Africa?
  • Just how likely are African producers to adopt the new 4IR technology, given the long-standing obstacles to technological adoption?
  • What are the consequences for inclusive development and future employment, if Africans fully embrace the deployment of 4IR technology?

After a discussion with the authors, Justice Tei Mensah (Office of the Chief Economist, Africa Region at the World Bank) will provide comments and distill the key policy options for African countries as they navigate this new era of emerging technologies and the future of work in Africa.

Viewers can submit questions for the panelists by emailing events@brookings.edu or via Twitter at #Africa4IR.

      
Kategorien: english

Rebooting global cooperation is imperative to successfully navigate the multitude of shocks facing the global economy

16. September 2022 - 13:50

By Brahima Coulibaly

Rebooting global cooperation is imperative to successfully navigate the multitude of shocks facing the global economy September 16, 2022 Rebooting global cooperation is imperative to successfully navigate the multitude of shocks facing the global economy

By Brahima Sangafowa Coulibaly

There have been very few moments in history when the world faced a confluence of global shocks and crises: from the lingering COVID-19 pandemic, threat of widespread food and energy insecurity, a surge in inflation, looming crises of development financing and sovereign debt, high risk of a global recession, climate crisis, to the geopolitical crisis. While seemingly unrelated, these challenges reflect shortfalls in multilateral cooperation and coordination in a world that is increasingly interdependent. As such, successfully navigating the multitude of shocks will entail considerably stronger global cooperation and radically reforming the multilateral system.

As world leaders gather at the 77th Session of the United Nations General Assembly and at International Monetary Fund (IMF)/World Bank Annual Meetings in October, strengthening global cooperation should be a top priority.

The COVID-19 crisis

Long before the COVID-19 pandemic, the deficit in multilateral cooperation was palpable. Growing discontent with globalization has been associated with the failure of the multilateral system to stem the tide of rising inequality, social fragmentation, job insecurity associated with technological change, and offshoring in advanced countries, among others. The rising disillusionment with the multilateral approach has prompted bilateral deals or groupings of like-minded or geographically proximate countries.

Just as countries were turning inward, the COVID-19 pandemic highlighted the necessity of a global effort to eradicate the virus.

Just as countries were turning inward, the COVID-19 pandemic highlighted the necessity of a global effort to eradicate the virus. That necessity was largely ignored as countries implemented anti-COVID measures unilaterally, including border closures and other restrictive policies. The lack of cooperation is also reflected in the differentiated policy stimulus to manage the pandemic. While advanced economies (AEs) deployed on average 20 percent of their GDP in stimulus, that number was 5 percent for emerging market (EMEs), and a meager 2 percent for low-income countries (LICs).

The Special Drawing Rights (SDRs), which represent perhaps the single most important instrument in the global financial system’s toolkit to respond to global shocks, were not approved until 18 months into the pandemic. With the distribution of the SDRs linked to country quotas, the countries most in need of support received only $21 billion or 3 percent of the $650 billion in SDRs, and the IMF is relying on the goodwill of AEs to either donate or loan their SDRs. The lack of adequate resources along with inequitable access to vaccines resulted in an asynchronized global economic recovery. Indeed, even before Russia’s invasion of Ukraine, the economic recovery around the world was highly uneven. To date, while the vaccination rate exceeds 75 percent in AEs, it is only 30 percent in LICs, well below the threshold to achieve herd immunity.

The global value chain and inflation crises

Global value chains turbocharged globalization, and economies have become highly dependent on them. An estimated 70 percent of international trade involves global value chains, as services, raw material, and parts and components cross borders—often numerous times. For all the benefits, global value chains make the global economy vulnerable to disruptions or delays in production in any country participating in the value chains or in transport and shipping logistics. The uncoordinated response to the pandemic, along with the repurposing of some factories to produce essential goods for domestic consumption, disrupted global value chains. The release of pent-up demand, particularly for goods, from the nascent recovery in the advanced economies against the backdrop of shortfalls in supply due to labor shortages, continue to clog and disrupt value chains, such as obstructions to shipment and transport logistics, which generated significant price pressures and caused a broad-based increase in inflation. These price pressures emerged before the Russian invasion of Ukraine and were exacerbated with further disruptions to food and energy markets.

Global value chains turbocharged globalization, and economies have become highly dependent on them.

Global interest rates, financing for development, and looming sovereign debt crises

The increase in inflation rates to levels not seen in decades in most countries, notably in AEs where the economic recovery from COVID-19 was more consolidated, prompted major central banks to begin raising interest rates even as the recovery remains fragile elsewhere. The higher interest rates triggered large capital outflows from emerging market and developing economies (EMDEs). With one-third of low-income countries’ sovereign debt contracted on variable interest rate, the increase in global interest rates is raising the debt service costs, adding to fiscal pressures and, more generally, constraining options for development financing.

To be sure, the sovereign debt buildup in low-income countries precedes the pandemic. It began in the aftermath of the Global Financial Crisis of 2008/09 as fiscal balances deteriorated and countries took advantage of the ultra-low interest rate environment to issue government debt. The reach-for-yield behavior by global asset managers facilitated access to private capital markets for sovereign debt for LICs, in many cases, for the first time. However, the devastating impact on the economies exacerbated the debt buildup and, by some estimates, about 60 percent of all LICs are now either in or at risk of debt distress.

Global cooperation to establish a Debt Service Suspension Initiative (DSSI) has been helpful in alleviating the fiscal pressures on LICs but it expired in late 2021, and the newly established Common Framework for debt restructuring has run into operational challenges. Although some countries—Chad, Ethiopia, and Zambia—have submitted requests for debt treatment, the process has run into protracted negotiations with creditors—notably China and the private sector. The expiration of the DSSI will add an estimated $10.9 billion in debt service cost for LICs this year. Calls for global solidarity to extend this initiative have so far been unsuccessful.

The increase in global interest rates is raising debt service costs, adding to fiscal pressures and, more generally, constraining options for development financing.

Overseas development assistance (ODA), an important source of financing for LICs, is in jeopardy. Unplanned expenditures on defense, refugees, and other humanitarian needs in Europe, are squeezing resources for ODA from some large donors. For example, as Germany boosted its defense budget amidst the Russia-Ukraine war, it proposed a 12 percent reduction in development aid, with cuts as deep as 50 percent for U.N. agencies such as the World Food Programme. Similarly, reductions are in the offing in the U.K., Norway, among other countries.

This environment presents a perfect fiscal storm for developing countries and will, undoubtedly, impact their ability to finance development agendas and sustain progress on the Sustainable Development Goals. Already, an estimated 75 million additional people have fallen into extreme poverty since the onset of the pandemic. Reductions in health and education budgets will have both short- and long-term adverse impacts on human capital development and the economies.

Geopolitical, food, and energy crises

The Russian invasion of Ukraine in late February 2022 could not have come at a worse time for the global economy. It was a culmination of unresolved issues in global cooperation since the fall of the Berlin Wall and the dislocation of the Soviet Union. While it is unclear whether a “better” or more reasonable form of global cooperation could have deterred Russia from invading Ukraine, stronger cooperation, particularly on security matters, may have reduced the odds of the Russia-Ukraine crisis.

It remains unclear when and how the war will end. What looks increasingly certain is that the war signals the beginning of a new world order. Many countries in the Global South are concerned about the prospects of another “Cold War” era with acute tensions between a Western bloc and a heterogenous bloc consisting of China, Russia, and a few other countries. Such concerns led the Southern African Development Community to reaffirm its position of non-alignment, and other countries, including India, have also refrained from taking sides in the conflict. The invasion has been divisive. It has already dealt a severe blow to global cooperation. Tensions are palpable in global organizations and processes such as the United Nations and the G-20.

Russia’s invasion of Ukraine has wreaked havoc on global energy and food markets as well as caused further disruption to the global supply chains.

Invasion has wreaked havoc on global energy and food markets as well as caused further disruption to the global supply chains. Consequently, countries around the world are experiencing an energy crisis that is adding to the inflationary pressures, and many countries in the developing world also face food insecurity. The difficulty in gaining access to fertilizers due to the disruption in Ukraine, a major producer alongside Russia and Belarus, portends future food shortages and higher food prices for the vulnerable countries if proactive corrective measures are not taken.

Climate crisis

Many countries’ policy responses to the higher energy cost have included relaxing restrictions on the use of fossil fuels. The relaxation of these restrictions, while understandable, challenges the global aspiration to phase out or phase down fossil fuels. Beyond the short term, it is conceivable, and even likely, that the crisis can be a catalyst for faster transition toward renewable energy. However, that is yet to be seen. The biggest blow to the climate agenda stems from the geopolitical tensions and their impact on global cooperation. The joint Glasgow declaration by the U.S. and China—the world’s largest emitters of CO2—to enhance climate actions in the 2020s, including the reduction of methane emission, was a welcome boost to global cooperation and ambitions.

Notwithstanding some progress over the past decades, collective action to address the looming climate crisis has fallen significantly short.

Notwithstanding some progress over the past decades, collective action to address the looming climate crisis has fallen significantly short, and there is growing consensus that the next years present a critical last-chance window of opportunity to ramp it up at all levels. Given divisions between the U.S. and China on the Russia-Ukraine crisis and, importantly, the heightened tensions surrounding Taiwan, it is unclear whether cooperation between the two countries can be strong enough to sustain their joint commitment to climate mitigation. It is encouraging that U.S. climate envoy John Kerry urged Beijing to resume talks even as geopolitical tensions escalated.

The imperative of rebooting global cooperation

Just as the deficit in global cooperation and coordination contributed to or amplified the multitude of shocks that the world is currently grappling with, restoring and strengthening global cooperation will be crucial to successfully navigate these challenges.

First, the global community must sustain its efforts to complete COVID-19 vaccine distribution and ensure that a critical mass of the global population is vaccinated. As long as one country lags, the world will remain at a risk of another variant that is potentially deadlier and immune to current vaccines. In addition, global value chains remain vulnerable to additional lockdowns such as the case in China demonstrates.

Second, policymakers should prioritize cooperation and coordination to fully restore global value chains and address the transport and shipping logistics that are impeding global commerce. Supply shortages will subside as a result and, along with them, price pressures for core goods and inflation. The containment of inflation and inflation expectations will, at a minimum, slow the pace of monetary policy tightening in AEs if not outright stop or reverse the rate increases, which will help contain the debt servicing costs and the risks of sovereign default in LICs.

It is time for a radical reimagination of the multilateral system to strengthen global cooperation commensurately.

Third, the G-20 should reinstate the DSSI until at least the Common Framework is fully operational. The unpleasant experiences of Chad, Zambia, and Ethiopia could deter other countries from requesting sovereign debt treatment under the framework. The issue of holdout creditors has always been a thorny one in debt restructurings. With strong support from its major shareholders, the IMF has the option lend into arrears to the requesting countries, which will incentivize recalcitrant creditors to compromise.

Fourth, beyond these immediate actions, policymakers should seize the opportunity to radically reform the global governance system. One compelling proposal to fix the global financial architecture is outlined in a brief produced for the G-20 to set up a Global Liquidity Insurance Mechanism, a market-based facility that will institutionalize and broaden access to short-term foreign exchange liquidity for EMDEs. The Brookings Institution’s Global Economy & Development program has also compiled essays with proposals from experts in the Global North and Global South to significantly reform the multilateral system.

The interconnectedness of seemingly unrelated shocks that the world economy currently faces highlight one main reality: The more interconnected the world becomes, the more likely it is that the shocks will be either global in scale or reverberate worldwide. It is time for a radical reimagination of the multilateral system to strengthen global cooperation commensurately. It must be an approach that is built on strong global leadership as the U.S. exemplified in the aftermath of World War II. Will the world’s leaders seize the opportunity and step up to the challenge? Only time will tell.

About the Author Brahima Sangafowa Coulibaly Vice President and Director – Global Economy and Development Acknowledgments The author acknowledges without implicating, very useful comments from Kemal Dervis. Wafa Abedin provided outstanding research support. Related researchEssays on a 21st century multilateralism that works for all

This collection of essays addresses some of the most pressing questions and needs for international cooperation in the years ahead.

articleStrengthening the global financial safety net by broadening systematic access to temporary foreign liquidityBrahima S. Coulibaly and Eswar Prasad present a proposal to provide short-term liquidity to emerging market and developing economies that face balance of payment stresses due to global shocks. © 2022 The Brookings Institution       
Kategorien: english

Resolving debt crises in developing countries: How can G-20 countries contribute to operationalizing The Common Framework?

12. September 2022 - 21:50

By Kathrin Berensmann, Mma Amara Ekeruche, Chris Heitzig, Aloysius Uche Ordu, Lemma Senbet

      
Kategorien: english

Caren Grown

9. September 2022 - 20:59

By Jeannine Ajello

Caren Grown is a senior fellow in the Center for Sustainable Development at the Brookings Institution. She is an internationally recognized expert on gender issues in Development. From 2014-2021, she served as global director for gender at the World Bank Group and then as senior technical advisor in the Macroeconomics, Trade, and Investment Global Practice.

Prior to joining the World Bank, she was economist-in-residence and co-director of the Program on Gender Analysis in Economics at American University in Washington, D.C. Over the course of her career, Grown held several senior positions, including as senior gender advisor at the U.S. Agency for International Development, where she led the development of the agency’s gender equality policy; senior scholar and co-director of the Gender Equality and the Economy program at the Levy Economics Institute at Bard College; and director of the poverty reduction and economic governance team at the International Center for Research on Women.

Grown’s books include “Taxation and Gender Equity,” co-edited with Imraan Valodia; “The Feminist Economics of Trade,” co-edited with Irene Van Staveren, Diane Elson, and Nilufer Cagatay; and “Trading Women’s Health and Rights: The Role of Trade Liberalization and Development,” co-edited with Elissa Braunstein and Anju Malhotra. She co-authored “Taking Action: Achieving Gender Equality and Empowering Women” with Geeta Rao Gupta and “Development, Crises and Alternative Visions: Third World Women’s Perspectives” with Gita Sen. Her articles have appeared in World Development, Journal of International Development, Feminist Economics, Health Policy and Planning, and The Lancet. She is a member of the editorial boards of Development Policy Review and Feminist Economics. She was a founding member of Data 2X and the International Working Group on Gender and Macroeconomics (GEM-IWG).

Throughout her career, she developed and co-led several large research projects, including the UNU-WIDER program on aid effectiveness and gender equality, the three-country Gender Asset Gap Project (based at the Indian Institute of Management in Bangalore, India), and the seven-country Taxation and Gender Equality Project (based at American University and University of KwaZulu Natal).

She holds doctoral and master’s degrees in economics from the New School for Social Research and a Bachelor of Arts in political science from the University of California, Los Angeles.

      
Kategorien: english

The SDGs will need action, bonding, and ritual: Lessons from collective intelligence

9. September 2022 - 17:09

By Jacob Taylor

In a recent report on the state of the world’s 17 Sustainable Development Goals (SDGs), the U.N. Secretary General did not mince his words: “An urgent rescue effort is needed … to get the SDGs back on track.” Three years into a global pandemic and related social and economic crises, a projected 75-95 million more people are living in extreme poverty, hundreds of millions of children have missed out on critical education, and global energy-related CO2 emissions are on the rise again in a world riddled by violent conflict and deepening geopolitical division.

The SDGs—which embody the world’s foremost economic, social, and environmental ambitions to be achieved by 2030—were no easy fix to begin with. Not because solutions and resources to achieve the SDGs do not exist, but because the SDGs are challenges that must be addressed together. Go-it-alone approaches will not cut it: Technical advances and financing required within each SDG must be coupled with policies and politics that manage tradeoffs across all the goals to ensure that no one is left behind. Getting the SDGs back on track will require nothing short of a global collective effort—by all and for all.

Getting the SDGs back on track will require nothing short of a global collective effort—by all and for all.

Yet, the world’s existing capacities to forge international cooperation, represent citizen interests, and spark new forms of collaboration and innovation for planetary sustainability and societal well-being are clearly not measuring up to the scale and urgency that a rescue effort for the SDGs demands.

A biologist or behavioral scientist might suggest that what’s needed to rescue the SDGs is collective intelligence. Collective intelligence refers to the ability of a system to perform at levels greater than the sum of its individual parts. Ants in a colony, neurons in a nervous system, or musicians in an ensemble produce impressive collective-level feats that no individual ant, neuron, or musician can achieve alone. Intelligent collectives, in turn, provide an environment in which individuals can survive and thrive.

Collective intelligence for the SDGs would require the global system—made up of traditional sovereign-based institutions of international cooperation as well as an increasingly diverse ecosystem of subnational, civil society, and private-sector actors—to perform at levels greater than the sum of its parts to drive progress within each of the 17 SDGs and across all goals at once.

3 ingredients for collective intelligence to achieve the SDGs

Three “ingredients” from the emerging science of human collective intelligence may be useful for policymakers and practitioners who are working to get the SDGs back on track. In brief, action is needed to catalyze collective intelligence, bonding is required to sustain it, and ritual can be used to scale it.

Action

Biological systems have a bias toward action. Living systems act first and learn by doing. Humans are no exception: In sport, when a cricket ball (or baseball) is hit into the air, an intelligent outfielder acts first by moving toward a best guess of where the ball will land, and updates that initial prediction on the run until the catch is made.

There is no shortage of action in the global system, but, unlike a highly trained athlete, global action is not directed intelligently toward global goals.

Built for aligning national interests (not initiating global-scale action), institutions based on national sovereignty—from the U.N., the World Bank, to the IMF—are not moving fast enough on key issues like climate and poverty. Meanwhile, emerging networks of philanthropies, companies, and local community leaders are increasingly demonstrating capacity and flexibility to drive technical breakthroughs like vaccine development, deliver critical services like direct cash transfers, or mobilize new coalitions for a green energy transition. But absent global-level coordination, these actions will likely fall short of global-scale impact needed to achieve the SDGs.

Spurring global-scale action toward the SDGs will require whole-of-society coordination at every scale at which society self-organizes. At the global level, Anne-Marie Slaughter and Gordon LaForge recently proposed using the SDGs to establish “impact hubs” to drive action that integrates the capacities of legacy sovereign-based institutions with those of more flexible civil society and private sector actors. An impact hub for climate action (SDG13) could bring together the U.N. Environment Program with the Global Covenant of Mayors for Climate and Energy to spur new partnerships and programs for green energy or nature-based solutions at the municipal level. In a similar vein, John McArthur has proposed mapping a full range of global multilateral actors and SDG issues as a “matrix” within which cross-functional coalitions can drive action within each SDG and coordinate across all SDGs.

Action to catalyze collective intelligence for the SDGs must be coupled with learning. This means establishing more direct connections between specific SDG actions and standardized metrics of SDG progress. Beyond official national-level review processes for the SDGs, promising examples of efforts to increase the scale and precision of SDG action and learning have emerged, such as the proliferation of unofficial SDG implementation review processes—e.g., “Voluntary Local Reviews” and even “Voluntary University Reviews”—initiated by local leaders. More solutions like these can help fill gaps of geographic coverage, timeliness, and disaggregation, and help support increasingly intelligent action for SDG progress.

Bonding

If action is key to catalyzing collective intelligence, bonding is the glue that sustains it. When individuals act together in families, teams, and communities, they bond—physically, emotionally, and mentally—and more closely bonded collectives perform better together. Bonds give individuals stable and reliable access to the support and intelligence of other individuals. When an entire team or community is bonded, the collective itself becomes a “supermind”—a rich source of support and intelligence that all members of the collective can access.

As the importance of bonding for collective intelligence becomes clearer, there is a growing consensus that new approaches to coordinating SDG action globally must start locally, within bonded teams and communities. As Slaughter has pointed out in earlier work, impact hubs for global-scale action would work best if the basic units of action were diverse yet bonded teams of stakeholders and experts focused on achieving discrete and time-bound tasks. Embedding close-knit teams within a broader network—a “team of teams”—could help foster an optimal balance between strong ties for getting stuff done and weak ties for knowledge-sharing, serendipity, and creativity.

Consistent with this logic, over the past several years the 17 Rooms initiative has been experimenting with ways to catalyze SDG action and bonding within teams and communities at multiple scales. In each 17 Rooms process, participants gather into working groups (or “Rooms,” typically one per SDG) to identify practical next steps that Room members themselves can advance together in 12-18 months. Communities across the globe, from universities to municipalities, nations, and now even entire international regions have been experimenting with 17 Rooms as a way to foster local progress on SDG priorities. By encouraging each Room to focus on collaborative actions that are “big enough to make a difference, but small enough to get done” within a broader process in which all SDG issues get a seat at the table, the long-term aim is to help catalyze and sustain collective intelligence for the SDGs within any community at any scale.

Ritual

Scaling collective intelligence for the SDGs to the global level will require ritual. Across cultures and throughout time, humans have engaged in shared rituals. Many anthropologists view rituals as social technologies for collective intelligence—shared practices and gatherings that promote societal norms and enhance collective function. For example, rituals help publicly recognize and celebrate behaviors that are important for a given culture: Enduring the pain of walking on hot coals is a hard-to-fake signal of commitment to one’s community; daily prayer reinforces connection to the religious group identity. At the same time, rituals provide a shared space to publicly contest or play with social norms (think Mardi Gras or Carnival), helping collectives adapt and change over time.

The Olympics are the best example of a global-scale shared ritual in the modern era. The Olympics recognize and promote the types of individual-level (e.g., dedication, physical mastery, and athleticism) and collective-level (e.g., patriotism and peaceful international exchange) behaviors that facilitate a system of nation-states with competing interests. While not free from controversy and politics, Olympic events are run according to agreed-upon rules and transparent and verifiable metrics for success.

The SDGs need shared rituals to transform SDG actions within bonded communities into broadly recognized norms and practices. Of all national constituencies, Japan is leading the way when it comes to the promotion of shared rituals for the SDGs, with companies, schools, cities, and prefectures all compelled to embrace the SDGs, at least in spirit if not yet in tangible actions.

But the SDGs transcend sovereign-based interests and demand solutions that surpass the capacity of sovereign actors alone. They are global challenges that demand global rituals.

What if a new global Olympiad—an SDG Olympics—could meet this demand by providing a platform for teams to pursue specific time-bound “quests” for impact with each SDG. As key drivers of action and bonding, local communities (e.g., municipalities), could be the representative unit of the SDG Olympics in place of nations. Transparent and verifiable performance metrics could provide the basis for competition between local communities within each SDG and across all goals. If done right, an SDG Olympiad could help elevate frontier SDG actions of high-performing, close-knit teams to the level of shared norms and values for all members of the global collective to aspire to.

For policymakers and practitioners gearing up for an SDG rescue mission, a focus on collective intelligence—meaning strategies that catalyze action, sustain bonding, and foster rituals for the SDGs—may be our best hope to get the SDGs back on track.

      
Kategorien: english

Anti-corruption’s cutting edge: New directions in beneficial ownership transparency

23. August 2022 - 20:02

New directions in beneficial ownership transparency—focused on establishing the actual owners or beneficiaries of entities—have emerged as a critical driver of progress in combating corruption. The importance of beneficial ownership transparency was highlighted during the Summit for Democracy in December 2021 and reflected in the commitments of multiple nations. Efforts to establish national legislative and regulatory regimes for beneficial ownership examine key questions of how to advance accuracy and approach the accessibility of beneficial ownership registries for key stakeholders. No mere technocratic endeavor, reforms in beneficial ownership transparency promise to provide a critical missing link in efforts to promote financial transparency and integrity in the modern fight against corruption.

On September 7, the Brookings Institution will convene in person and also stream online a seminar to address the role of beneficial ownership transparency in combating corruption and explore ways to advance commitments on beneficial ownership transparency in the lead-up to the second Summit for Democracy in 2023 and beyond. Brookings Senior Fellow Norm Eisen will moderate a fireside chat with Mária Kolíková, minister of justice of the Slovak Republic, who will speak to Slovakia’s experience as one of the first countries to implement a public beneficial ownership register, and Elizabeth Rosenberg, assistant secretary for terrorist financing and financial crimes at the U.S. Department of the Treasury, who will offer reflections on the anti-corruption landscape, including beneficial ownership transparency. Following the fireside chat, Jonathan Katz of the German Marshall Fund of the United States will moderate a panel discussion with several experts from civil society and the private sector to highlight challenges and opportunities for beneficial ownership transparency reform globally.

Viewers can submit questions for speakers by emailing events@brookings.edu or via Twitter at @BrookingsGov by using #BrookingsLTRC

      
Kategorien: english

Can open-source technologies support open societies?

12. August 2022 - 21:05

By Victoria Welborn, George Ingram

Introduction

In the 2020 “Roadmap for Digital Cooperation,” U.N. Secretary General António Guterres highlighted digital public goods (DPGs) as a key lever in maximizing the full potential of digital technology to accelerate progress toward the Sustainable Development Goals (SDGs) while also helping overcome some of its persistent challenges. 

The Roadmap rightly pointed to the fact that, as with any new technology, there are risks around digital technologies that might be counterproductive to fostering prosperous, inclusive, and resilient societies. In fact, without intentional action by the global community, digital technologies may more naturally exacerbate exclusion and inequality by undermining trust in critical institutions, allowing consolidation of control and economic value by the powerful, and eroding social norms through breaches of privacy and disinformation campaigns. 

Just as the pandemic has served to highlight the opportunity for digital technologies to reimagine and expand the reach of government service delivery, so too has it surfaced specific risks that are hallmarks of closed societies and authoritarian states—creating new pathways to government surveillance, reinforcing existing socioeconomic inequalities, and enabling the rapid proliferation of disinformation. Why then—in the face of these real risks—focus on the role of digital public goods in development?

As the Roadmap noted, DPGs are “open source software, open data, open AI models, open standards and open content that adhere to privacy and other applicable laws and best practices, do no harm, and help attain the SDGs.”1 There are a number of factors why such products have unique potential to accelerate development efforts, including widely recognized benefits related to more efficient and cost effective implementation of technology-enabled development programming. 

Historically, the use of digital solutions for development in low- and middle-income countries (LMICs) has been supported by donor investments in sector-specific technology systems, reinforcing existing silos and leaving countries with costly, proprietary software solutions with duplicative functionality and little interoperability across government agencies, much less underpinning private sector innovation. These silos are further codified through the development of sector-specific maturity models and metrics. An effective DPG ecosystem has the potential to enable the reuse and improvement of existing tools, thereby lowering overall cost of deploying technology solutions and increasing efficient implementation.

Beyond this proven reusability of DPGs and the associated cost and deployment efficiencies, do DPGs have even more transformational potential? Increasingly, there is interest in DPGs as drivers of inclusion and products through which to standardize and safeguard rights; these opportunities are less understood and remain unproven. To begin to fill that gap, this paper first examines the unique value proposition of DPGs in supporting open societies by advancing more equitable systems and by codifying rights. The paper then considers the persistent challenges to more fully realizing this opportunity and offers some recommendations for how to address these challenges.

Why DPGs Matter to Open Societies

While the narrative around DPGs has often migrated to their open-source aspects, it is important to acknowledge the relative openness of a product does not necessarily define the extent to which it serves the public good. Open-source products can just as easily be deployed by a private actor for commercial purposes. Likewise, open-source software is not necessarily better or worse at creating the privacy protections and other necessary safeguards for building trust in digital solutions. In other words, leveraging DPGs to support open societies is less about the individual technology solution and more about how the technology is designed, deployed, and governed. This fact is amplified when DPGs are deployed as inputs into digital public infrastructure.  

To understand how and the extent to which DPGs have the potential to support more open societies, it is important to acknowledge the broad spectrum of ways in which DPGs are deployed—ranging from highly niche digital services to foundational digital platforms upon which other digital products and services are built.2  DPGs across this spectrum can enable more efficient development programming, but it is an input into the foundational platforms—most notably digital identity, payments, and data exchange, referred to here as digital public infrastructure (DPI)—that DPGs have an opportunity to play a formative role at societal scale.

During consultations with global experts from the technology industry, government, donors, and civil society, a number of common themes emerged that highlighted how DPGs, when leveraged as inputs into DPI, can contribute to open societies.3

Equal opportunity to participate. Open societies are characterized by equal opportunity to participate in social interactions and access services. While the internet began as a publicly managed network with an open-source ethos that encouraged participation, collaboration, and experimentation, much of what is available online today is limited by proprietary systems and copyright protections, making it increasingly challenging and costly to access information and participate in digital spaces.4 The “open” characteristics of DPGs represent an opportunity to create common standards for accessibility, ensuring more equitable access to systems and more readily available data. When these features are applied in the creation of DPI, essential services become more equitable. For example, during the COVID-19 pandemic, the need and business case for efficient and effective health services validated the necessity for trustworthy DPI. 

Agency. Open societies are characterized by self-determination—the opportunity to represent oneself in society and determine if and how to change one’s role in society. In establishing DPI, this sense of agency begins with systems that consider local context and need.  The world of geopolitics is not binary. Most countries want choices, and thus will resent and reject “either/or” options. Countries are looking for a package of digital solutions at the right price. The DPG community of governments, companies, and civil society organizations committed to open-source, citizen-centric digital solutions need to develop digital platforms that can be adapted to local needs and priorities, but have safeguards built in to ensure data privacy and prevent abuse by public and private operators.

Open-source solutions are becoming more available and governments are becoming more familiar with this option, giving them the choice to potentially transition away from the primary reliance on commercial vendors. This unlocks the ability for governments to have more decisionmaking power and agency over the technologies they choose, as well as a say in how it is developed, deployed, and governed. While government agency over digital platforms does not necessarily equate to individual agency in digital spaces, it is a prerequisite in order for individuals to exert preferences or accrue benefit.

By instituting a strong DPI strategy with clear accompanying policies, countries can set the rules of the game allowing for better, more interoperable digital solutions. Additionally, DPGs enhance the opportunity for countries to collaborate on common tools thereby reducing some of the challenges associated with either reliance on commercial vendors or maintaining custom code bases.5

Choice. Open societies are characterized by competitive markets that bestow choice to individuals, entrepreneurs, and small businesses. LMICs are looking for safe and effective digital solutions that do not force them to take sides in geopolitics, and all at the right price. Furthermore, decentralization is a key component of DPGs and enables DPI to be built in ways that mitigate the risk of private monopolization of core essential social systems. When decentralization is leveraged in the way that products are developed, it facilitates innovation, prevents monopoly, and circumvents authoritarian control. 

Trust. Open societies are characterized by transparent institutions and governments accountable to their citizenry. While private technology providers can be valuable collaborators in the DPG ecosystem—contributing experience and technical expertise—the private sector is not always equipped to deliver public sector outcomes.6 In some cases, this is true because of misaligned incentives (e.g., prioritizing commercial gains over public benefit). In other instances, this is true because governments are not organized or resourced to deploy private solutions in ways that further national development objectives. Too often, reliance on private solutions leads to vendor lock-in and exacerbates risks of misuse or abuse of digital solutions and their resultant data. By creating common standards, ensuring adherence to privacy laws, and explicitly designing for development outcomes, DPGs have the potential to align DPI with human rights and governance frameworks that enhance trust in technology and data use. 

Countries are only one election away from a drift toward authoritarianism. The goal should be security by design—governance safeguards from misuse and data privacy need to be designed into the structure of the software. Trust is essential to the acceptance and use of digital solutions, but many populations do not trust the institutions that control them. Trust through data privacy must be built into the design of the software.

For example, data access permissions are fully integrated into the technology design choices of Estonia’s X-Road, the country’s data exchange infrastructure, to effectively automate compliance with data sharing policies. Furthermore, the transparency by design features of X-Road enable citizens to understand when, why, and by whom their data is being accessed—a key safeguard that not only provides individuals insights into the movement and use of their data, but also creates a mechanism for recourse in the case of errors or misuse.

Challenges

As noted above, the ability to leverage DPGs to fully realize these potential benefits requires additional testing and validation. Fortunately, the consultations that informed this paper also revealed increasing consensus around the persistent challenges to pursuing these opportunities. 

Lack of clear regulatory frameworks. Software development can roughly be broken down to the following lifecycle: development,  testing, deployment, and maintenance/iteration. When it comes to countries’ DPI, many currently find themselves in the development phase despite the lack of global standards to help govern DPI. Now is a critical moment as more and more countries are beginning to develop and adopt these technologies. Not only to ensure that the principles of transparency, inclusion, and data security are embedded in the technologies, but to also regulate that each stage of the lifecycle meets international standards so that transnational adoption and scalability can be better achieved. 

Local capacity constraints. As governments increasingly seek to build DPI, the broader ecosystem must also be ready to receive this technology. Investment must be made in the capacity of public, private, and civil society, specifically through the training of local talent, to implement, integrate, maintain, and own their country’s DPI. For example, as open-source software operates principally on a voluntary basis, a greater volunteer base must be ready and able to support the development, maintenance, and iteration of core DPG platforms. Local capacity development can be extended to governments, system integrators,8 and the greater workforce in the awareness of and propensity to adopt these technologies to the actual building of these technologies and keeping revenue streams and solutions local. As this capacity development grows, particularly looking at civil society and government, then adequate measures of accountability and watchdogging can take place. A healthy civil society is crucial in overseeing that the tenets of openness are being upheld to govern data and effectively deliver services in order to monitor that the technologies are not being abused or used to exploit sensitive information.  

Sustainability of investments. Open-source technologies can be challenging for donors to properly invest in due to their core principle of decentralization. The disparate nature of open-source communities poses a risk to long-term sustainability as maintenance requires centralized funding, support, and governance. Due to the current funding models, for the products that do secure funding, they produce too many disconnected, unsustainable products. Both the marketplace and donor models encourage the development of hundreds of new digital solutions and support the early stages of their implementation but not their long-term maintenance. Of all of the various digital health solutions, only a very few have been sustained over 20 years. The solutions that have been successful over the long haul are marked by sustained investment by a core group that has remained true and stable and by a continuous loop of learning and iteration. However, defining success is still subjective. This is because standards currently do not exist to measure or landscape digital infrastructure globally, proving reliable measurement and analysis of “good” DPI to also be non-existent.9 

Fragmentation. The existing ecosystem of support for DPGs is fragmented and fractured among bilateral and multilateral donors, private foundations, civil society organizations, and for-profit companies, so there is a lack of focus on a few key platforms. This fragmentation not only hurts the whole DPI landscape, it also hurts individual countries. The lack of established standards and inconsistent principles greatly hinders scalability and the speed of adoption and implementation. When these technologies are not designed in a manner of scalability and adequate interoperability, low- and middle-income countries suffer. This interoperability provides an opportunity for adoption at an affordable cost as countries are not required to build a system from scratch, or rely on a potentially untrustworthy third party to build their system. As DPI and DPGs house some of the most sensitive personal data, building transparency into the systems and international standards that govern these technologies is critical.  

Recommendations

As in other aspects of development and public policy, there is no one-size-fits-all solution, and the answer generally rests with finding the right balance in melding the strengths of various options. It has been noted that donors are in one of the best positions to shape the success of these technologies and to facilitate the quality of their impact. Donor organizations bear a significant amount of  responsibility for advancing the ethical use and health of digital technology, ensuring that access and equity are designed in public interest technologies, and that both governments and the public trust these technologies. 

  • Commit to safeguards and inclusion. There is a need for donors to counter the narrative that the public sector cannot be trusted to design and govern technical solutions in the interest of people. The public sector has proven examples of developing and maintaining public interest technology securely and without abuse and exploitation. It is critical that donors familiarize themselves with country examples, as well as the vernacular and operations of DPGs, especially open-source organizations that may be atypical recipients for traditional donor funds. Where there are gaps in definitions, it is also critical that donors take the lead in co-creating these definitions with local technologists to ensure that cohesion and scalability in both the work and the investments are further possible. It is also crucial that donors are aware how technology must be designed with inclusion at its center.  
  • Develop global norms and principles. Digital solutions can only be designed in a way that bolsters open societies if they are based on a set of agreed-upon norms and principles. Furthermore, as more governments begin to choose DPI and open-source solutions, guidance on developing local regulations, as well as a shared global framework to provide commonality from the financing phase of these technologies and throughout the development lifecycle is critical to 1) allow for transnational and sustainable collaboration, in the spirit of open source, and 2) to ensure that a public interest is at the core of DPI. The DPG Charter, a multistakeholder campaign to mobilize and celebrate commitments to make DPGs a more viable option for DPI, is a step in the right direction. The DPG Charter is consultative and co-created, and thus can set the basis for coalescing stakeholders in order to develop shared norms, frameworks, and impact metrics. This will not only serve as an important tool for governments and civil society watchdogs, but also for donors and the private sector in evaluating trustworthy and sustainable investment. 
  • Invest in local capacity development. The digital ecosystem is too important to be left solely to governments, which alone runs the risk of bureaucratic delay, lack of political vision, and autocratic abuse. It also cannot solely rely on the private sector, which runs the risk of monopoly control, concentration of wealth, and rent capture. This is where an investment in local talent, both civil society and local technologists, is crucial to ensure the maximum effectiveness of these technologies. For sustainable capacity development, donors should not only target government training, but also work with local universities to ensure that the local workforce is also prepared to address this need. 
  • Coordinate sustainable investment for open-source technologies. It is well agreed that the funding structure that serves the open-source community does not necessarily best benefit the broader community. There are emerging ideas on what the best solution may look like, but there is consensus that a new structure should focus on the principles of greater transparency and coordination. This format can take a variety of models, but one example of a possible solution involves a dedicated fund that adheres to these principles. A DPG foundation would ideally pool sources from both public and private investment and would focus on a few key digital solutions over the long-term, providing a cost savings of up to 40 percent. This funding model would not only more reliably sustain long-term investment, but would also help to address many of the challenges addressed through the shared development of common building blocks, libraries, architectures, and reducing duplication.10
Conclusion

DPGs and DPI move us away from siloed software solutions and, if robustly developed and maintained, offer unlimited replicability and interoperability that avoid costly reinvention. Looking at the four phases of a traditional product life cycle, it can be assumed that DPGs for DPI are currently in the first phase of market development; this assumption is made because of the continued novel introduction of these technologies to communities they intend to serve, along with governments being made aware of their benefits. As with all new technologies, it is the early adopters who are leading the charge, governments like India who are using DPGs and DPI to enhance economic, social, and political development. That being said, it is during the market development phase of the product life cycle that there are expected to be challenges that will need to be accounted for and solved.

Based on experience and research, our assumption is that these challenges can be better managed if the technologies are developed with proper safeguards, specifically following the principles of inclusion, privacy, transparency, and trust. These principles can help to serve as a North Star in working to contribute to building open, trustworthy, and collaborative societies that produce inclusive services for the benefit of all nations and peoples.

Disclosure: The United Nations Foundation is a donor to the Brookings Global Economy and Development program.

The Brookings Institution is a nonprofit organization devoted to independent research and policy solutions. Its mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations for policymakers and the public. The conclusions and recommendations of any Brookings publication are solely those of its author(s), and do not reflect the views of the Institution, its management, or its other scholars.

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Kategorien: english

The economic significance of intra-African trade—getting the narrative right

12. August 2022 - 20:35

By Andrew Mold

Abstract

Hardly a presentation is made (or a paper written) on the topic of the African Continental Free Trade Area (AfCFTA) without starting with a lamentation about how intra-African trade is “abysmally low” compared to other continents, with the commonly cited figure of around 16 percent of total exports, compared with 59 percent in Asia and 69 percent in Europe. This paper argues that intra-African trade has greater economic significance than commonly believed.

To make its case, the paper starts with a theoretical and empirical review of the drivers of trade growth globally, highlighting the role played by regional trade agreements. Because of econometric and methodological errors, earlier studies purportedly showing that previous regional integration efforts on the continent were ineffective are wrong: Recent research points to these agreements boosting intra-African exports by 27 to 32 percent on average. Moreover, contrary to received wisdom, there is nothing out-of-the-ordinary in the existing levels of intra-regional trade; indeed, by some metrics, parts of Africa display a stronger degree of trade integration than comparable regions elsewhere in the world.

Finally, the paper provides a recalculation of the intensity of intra-African trade, taking into account structural economic differences and the prevalence of informal cross-border trade, to arrive at a set of new estimates. For non-oil resource-intensive and landlocked countries, the average share of exports already destined to the African market is as high as 38 to 42 percent of total trade, respectively. The paper ends by arguing that, as AfCFTA implementation begins, it is time to change the narrative and to start to ‘talk up” intra-African trade.

Download the full working paper

 

      
Kategorien: english

The AfCFTA Country Business Index: Understanding private sector involvement in the AfCFTA

11. August 2022 - 20:26

By Stephen Karingi, Wafa Aidi

The narrative around a successful African Continental Free Trade Area (AfCFTA)—its potential to increase intra-African trade by 15 to 25 percent, or $50 billion to $70 billion—is promising, but if African businesses do not efficiently utilize this landmark agreement, its ultimate success will be limited. Since the private sector is directly involved in cross-border trade, it is a major stakeholder and beneficiary of the AfCFTA. Thus, to better understand how African businesses are approaching the AfCFTA and, more importantly, how the AfCFTA can best support those businesses through trade, the United Nations Economic Commission for Africa (ECA) created the AfCFTA Country Business Index (ACBI). 

The ACBI is a new AfCFTA-focused, ease-of-doing business index and is based on a robust theoretical framework and data collection process. It enables relevant policymakers to identify bottlenecks in intra-African trade at a country level, which informs the barriers impeding effective AfCFTA implementation from the perspective of the private sector. It aims to inform African policymakers on the trade barriers and guide AfCFTA national strategies. The ACBI aims to ensure that the African Continental Free Trade Area delivers on its projected sustainable development promises, especially for women-owned and small- and medium-sized businesses (SMEs).  

The ACBI captures three dimensions relevant to the understanding of the AfCFTA and related negotiations:  

  1. The ease of trading goods across Africa;
  2. Firm awareness and use of African free trade agreements (FTAs) and the AfCFTA;
  3. Business environment related to trade in services, intra-African investment, intellectual property rights, and competition policy.

For a robust discussion of the ACBI’s methodology, see the bottom of this blog.   

Top ACBI findings: How do African businesses perceive trading within Africa? 

The first round of the ACBI (which covered the seven countries of Angola, Côte d’Ivoire, Gabon, Kenya, Nigeria, Namibia, and South Africa) reveals several important trends in the understanding and utilization of the AfCFTA by African businesses. Here are the key findings: 

Overall, the businesses surveyed reported feeling neutral toward their country’s environment for trading and investing goods across African borders, i.e., on average, firms feel neither positive nor negative on the ease of doing business within Africa (Figure 1). Given that these seven member states have deposited their instruments of AfCFTA ratification, the bottleneck seems not to be on the legal side, but rather in the lack of enterprise support for identifying strategic interests and market opportunities to ensure that the private sector can fully benefit from the AfCFTA. 

Notably, the survey also reveals that perceptions related to trade in goods (Figure 2) constitute significant challenges to trading within the continent. Some of the most commonly identified bottlenecks include unauthorized charges (bribery at a country’s border posts or along transport routes) and other charges on trade (additional customs, border and product surcharges, price controls, reference prices, additional variable charges on goods, statistical taxes, import license fees, etc.). 

Firms appear to have positive perceptions of the sanitary and phytosanitary measures and technical barriers—implying that these measures do not constitute an impediment to intra-African trade. This finding is notable given that some experts have argue that these measures and barriers often constitute a main constraint to Africa’s trade competitiveness and international trade. 

Concerning “awareness and use of the FTAs,” the survey found that most firms were highly aware of their country’s participation in different regional economic communities, but less informed of their country’s participation in the AfCFTA (Figure 3). In other words, African businesses do not have a clear understanding of the AfCFTA mechanisms of operation and market opportunities at the continental level. 

Importantly, the surveyed firms most often named compliance with an FTA’s rules of origin requirements, which determine how exported goods shipped to a country may qualify for free or preferential import tariffs, to be the most binding constraint to trading. Businesses often face difficulties in conforming to these rules, and their complexity can be particularly onerous for informal traders. The rules of origin need to be simple, practical, and business-friendly to enable African businesses to optimize the trade gains expected from the AfCFTA. At the same time, rules of origin must lead to a transformation process that generates value through intellectual property gains and/or new jobs. 

Regarding “the commercial environment,” companies largely report being neutral in their perception of investment, competition, and intellectual property rights policies embedded in the AfCFTA. One possible explanation is that the AfCFTA protocols governing these policies are still under negotiation. For this reason, negotiators and African governments should prioritize finalizing the design of implementation strategies concerning concrete measures to facilitate access to African markets, reduce the services costs, and harmonize regulations related to the business environment. 

Finally, perceptions around trading differ widely between male-owned and female-owned businesses as well as between SMEs and large companies (Figure 5). For example, female-owned firms and SMEs more often cited trading across borders as a major challenge to growing their businesses. This finding aligns with the literature: Female-owned businesses are, on average, more negatively impacted by tariff and nontariff barriers.   

Conclusion and recommendations 

ECA intends for the ACBI to be a monitoring and evaluation tool for African countries to understand and address the challenges encountered by businesses in their countries when implementing the AfCFTA. The active involvement of the private sector is vital for informing AfCFTA National and Regional Strategies and, thus, realizing the expected benefits of the AfCFTA. Rolling out the ACBI in all African countries will support the AfCFTA implementation by identifying the main trade restrictions at country and regional levels. It is equally important to build strong partnerships with national and regional business associations to support the ACBI rollout and share best practices across countries and subregions. 

The ACBI findings make a significant contribution to Africa’s development blueprint Agenda 2063 and to the 2030 Agenda for Sustainable Development by identifying bottlenecks in trade regimes that need to be addressed to ensure more inclusive trade under the AfCFTA. Indeed, the ACBI results pinpoint the importance of complementing the AfCFTA with specific trade facilitation policies to ensure more inclusive trade under the AfCFTA.  

In Africa, most medium, small, and micro enterprises are women-owned. It is therefore important to ensure a conducive national but also continental regulatory framework that allows them to participate in an efficient, effective, and competitive way. Thus, African countries should design specific policy responses to support inclusive implementation of the AfCFTA.  

Moreover, an important and immediate action point is to raise awareness on the AfCFTA opportunities and its mechanisms of operation both at national and continental level. This ultimate objective can be achieved through deeper engagement with the private sector and business associations when developing country and regional AfCFTA implementation strategies and through wider dissemination of these implementation strategies once completed to create the required ecosystem for businesses.  

ACBI approach and methodology: An index driven by private sector perceptions 

The ACBI is different from other doing business and integration indexes as it 1) is based on the perceptions of the private sector gathered through primary surveys instead of secondary data and 2) focuses on Africa’s integration by targeting businesses based in trading (and investing) within Africa. It is the first index based on a robust methodological framework and data collection process that translated the businesses opinion on the trade constraints under the AfCFTA. The dimensions on which the ACBI focuses (see Table 1) are closely linked to AfCFTA negotiations and outcomes, all of which focus on deepening integration across the continent.  

Table 1. ACBI dimensions and subdimensions  Objective  Subdimension Goods restrictiveness and costs  Assess the extent to which businesses view the trade in goods as significant challenges to intra-African trade Tariff barriers Customs Technical barriers to trade Sanitary and phytosanitary measures Specific limitations Additional charges Fraud and corruption African FTA knowledge and use Determine business views on the ease of use of FTAs and on awareness of the AfCFTA Awareness of African FTAs Ease of use of African FTAs Access to information on African FTAs FTA rules of origin Commercial environment Understand the private sector perceptions of the barriers on investment, services business environment including competition policy and intellectual property rights Investment Trade in services Cost of services Intellectual property rights Competition policy

Source: ECA based on ACBI survey

The ACBI survey is based on a minimum targeted sample of 50 completed responses in each country and primarily undertaken through online channels, with telephonic and face-to-face interviews supplementing as needed. 

Firm perceptions are collected through a perception ranking (Likert) scale, ranging from 0 to 10. The index, dimension, and subdimension scores aggregate these perception scores to provide an aggregate score for each country, ranging from 0 to 10, where a higher score implies that a country is perceived by businesses in that country to be “performing” better in addressing trade, investment, and integration issues in Africa.    

For the ACBI, each dimension is equally weighted within the index, and each subdimension is equally weighted within each dimension. As a perceptions index, the results can be interpreted based on firm perceptions of various aspects relating to trading and investing across African borders.  A score of 5 reflects a neutral perception (i.e., on average firms feel neither positive nor negative about the specific area). A score below 5 indicates that, on average, firms have a negative perception toward the area of interest. Conversely, a score above 5 suggests that firms are positively regard that area’s impact on their business, or their ability to trade, and invest across borders.  

Note:  

This contribution represents the personal opinions of individual staff members of United Nations Economic Commission for Africa (ECA) and is not meant to represent the position or the ECA or its members, nor the official position of any staff members. 

The authors would like to acknowledge various contributors to the ACBI work namely Mama Keita, David Luke, Komi Tsowou, Jamie MacLeod, Yash Ramkolowan, Jean Moolman, Thomas Yapo, Matthew Stern, Linton Reddy, Baneng Naape, Kendall Rÿnders, Jenni Jones, and Micaela Mooloo.  

      
Kategorien: english

Social and development impact bonds by the numbers

9. August 2022 - 16:00

By Emily Gustafsson-Wright, Izzy Boggild-Jones, Onyeka Nwabunnia, Sarah Osborne

Since 2014, Brookings has developed and maintained a comprehensive database on the global impact bonds market. The below data represents a snapshot from that database updated each month.

For further Brookings research on impact bonds, visit our Impact Bonds Project page.

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Kategorien: english

Roundtable discussion on understanding trends in proliferation and fragmentation for aid effectiveness during crises

8. August 2022 - 22:27

This roundtable discussed aid effectiveness, proliferation, and fragmentation in light of the newly published World Bank report: Understanding Trends in Proliferation and Fragmentation for Aid Effectiveness During Crises. World Bank Vice President for Development Finance, Aki Nishio, presented key findings of the report, followed by a panel and open discussion, moderated by Senior Fellow Homi Kharas and attended by a variety of participants from Brookings, the World Bank, nonprofits, and academia. Panelists included:

  • Shreekrishna Nepal – Secretary for the Ministry of Social Development in Nepal
  • Belinda Archibong – David M. Rubenstein Fellow at Brookings and assistant professor of economics at Barnard College, Columbia University
  • Andrew Rogerson – Senior Research Associate at ODI

Over the last two decades, the increase in Official Financial Flows (OFF) from developed countries to developing countries has been accompanied by an increase in donors and donor agencies. The number of donor agencies nearly tripled from 194 in the period 2000-2004 to 502 in the period 2015-2019. This proliferation is felt by recipient countries, many of whom now have more than 60 donor entities to manage. Additionally, a greater share (three out of four) of OFF funded projects are being implemented by entities other than the recipient governments, such as the donor government, private sector institutions, multilateral organizations, and others. At the same time, the size of individual donations has decreased, with the average size of Official Development Assistance grants being roughly cut in half from 2000 to 2019.

Collectively, these trends raise concerns around aid effectiveness and transaction costs for recipient countries. Mr. Nepal confirmed the greater workloads and difficulties that may result from relying on a multitude of donors. He expressed the challenge of obtaining funding for broad budget support, as opposed to earmarked project support. Donors increasingly want to fund projects where they can “stake their flag” and receive credit, leaving fewer funds to the discretion of recipient countries on how they will be used. Archibong commented on the potential consequences of fragmented health aid, for example, during public health crises when liquidity is necessary. Rogerson posed various questions surrounding the ideal aid infrastructure and discussed the use of cash transfers for social protection in crises.

By publishing this report, Nishio hopes to get the issue of aid effectiveness, proliferation, and fragmentation back on the international agenda after about 10 years since the last global forum at Busan. Pooled funding has been widely acknowledged as a solution to these issues, but adoption has been low. It is also worth noting that the trends have not been as present for multilateral channels of aid as bilateral, leading discussants to encourage greater use of channels like IDA. There was an acknowledgement by participants that a diversity of donors has certain benefits, particularly for funding innovation, and that these trends mask a great diversity of country outcomes. The participants discussed how future work could use country case studies to better understand the impact of aid proliferation and fragmentation on recipient countries.

> View full list of roundtable participants

      
Kategorien: english

Is the Sri Lankan debt crisis a harbinger?

4. August 2022 - 19:09

By Shanta Devarajan, Homi Kharas

      
Kategorien: english

Chinese investment in Afghanistan’s lithium sector: A long shot in the short term

3. August 2022 - 22:09

By Lilly Blumenthal, Caitlin Purdy, Victoria Bassetti

Speculation is mounting that China will take advantage of the power vacuum created by the 2021 U.S. withdrawal from Afghanistan and seek dominance over that country’s mineral resources, particularly its lithium deposits. These resources play a key role in the global energy transition away from fossil fuels and toward renewable resources. Given its global role in exploiting critical minerals, China’s possible activities in Afghanistan raise both security and good governance challenges to the West. In this piece, we unpack several reasons to be skeptical of near-term Chinese-led investment in Afghanistan’s lithium sector while outlining the broader geopolitical interests that may be driving China’s moves in this space.

Concern by the United States and its allies about China’s potential push into Afghanistan’s mining sector is well-founded. China is diplomatically and commercially poised to make additional moves in Afghanistan. Beijing is well positioned to strike mining deals with the Taliban. It has kept its diplomatic mission running in Kabul, hinted that it may formally recognize the Taliban government, and voiced opposition to international sanctions against Afghanistan— though has stopped short of trying to lift them. Foreign Minister Wang Yi even made a surprise visit to the country in late March, the highest-ranking foreign official of any country besides Pakistan and Qatar to do so after the Taliban’s rise to power. He denounced “the political pressure and economic sanctions on Afghanistan imposed by non-regional forces.”

Chinese-Afghan mining deals theoretically make sense. Chinese mining companies could provide the Taliban with much-needed cash to soften the blow of a crippling international sanctions program, which has sparked an economic and humanitarian crisis. In exchange, Beijing would get access to a new, bountiful source of minerals critical to the government’s ongoing decarbonization efforts.

Chinese dominance across critical mineral supply chains poses a strategic challenge to the U.S. and Europe’s green energy transition. The lithium found in Afghanistan is a crucial component of large-capacity batteries for electric vehicles and clean-energy storage systems. Copper, nickel, cobalt, and rare earth elements are also found in Afghanistan, all of which are crucial to the energy transition. China already controls a significant share of mineral processing capacity and is stepping up downstream investments to maintain its control over these and other minerals.

Chinese dominance across critical mineral supply chains poses a strategic challenge to the U.S. and Europe’s green energy transition.

Perhaps aware of the challenge, Washington has recently made moves to bolster its own energy resources. Notably, President Joe Biden invoked a Cold War statute, the Defense Production Act, to boost U.S. production of minerals and metals necessary for electric vehicles  and clean-energy storage systems.

Chinese inroads in Afghanistan also present global governance and corruption questions. Even before the Taliban took control, Afghanistan was plagued by poor governance, marked by a lack of transparency, weak rule of law, and high conflict. In the wake of the American exit, a pro-democracy/anti-corruption force, though heavily flawed, has vanished from the scene. The effect of China’s entrance—potentially as a partner in trillion-dollar business deals—cannot be predicted. But in other countries, China has played an ambiguous role in anti-corruption efforts at best.

Corruption has plagued Afghanistan before. When states are unable to implement transparency, accountability, participation, and other complementary mechanisms— as mentioned in our Leveraging Transparency to Reduce Corruption TAP-Plus framework— there is a greater risk that citizens will not see the economic development benefits of natural resource rents.

In practice, however, American anxiety surrounding China’s potential moves in Afghanistan’s mining sector may be misplaced, for now. Large-scale Chinese development of Afghanistan’s mining sector is improbable, at least in the short term. There are major commercial and operational barriers, as well as regulatory and security challenges. It seems unlikely Beijing would make an aggressive, high-risk lithium play in Afghanistan when other projects in its pipeline are easier to develop and in less risky jurisdictions.

The Taliban sits on largely unexplored but potentially significant natural resource wealth

Afghanistan’s significant but largely unexploited mineral reserves are valued at an estimated $1-3 trillion. However, that estimate does not consider the extraordinarily high cost of accessing the reserves. A 2019 Afghan mining sector map estimated that the country’s reserves include critical resources for the energy transition, like 2.3 billion metric tons (MTs) of iron ore, 30 million MTs of copper, and 1.4 million MTs of rare earth materials. The country is also believed to have significant stores of lithium, potentially rivaling those of Bolivia, which currently has the world’s largest reserves.

Afghanistan’s recent acute economic decline has driven questions about how the country may leverage untapped mineral wealth. The country is currently facing a devastating humanitarian crisis, exacerbated by inflation, millions of dollars in lost income, and the collapse of the country’s banking sector following the Taliban’s takeover. In 2021, the International Monetary Fund warned that Afghanistan’s GDP could contract by up to 30%. Given the surging demand for lithium, there has been speculation that selling the untapped reserves may offer the Taliban an opportunity to forge legitimate connections with international actors and secure a steady stream of legal income.

The Taliban already derives revenue from mining – but commercializing lithium will be difficult

There is already artisanal and small-scale mining in Afghanistan, most of which is informal and unregulated, taking place outside of the country’s formal fiscal and regulatory regime. Mining was a main source of revenue for the Taliban— as well as for Daesh, local militias, and warlords – throughout the U.S. war in Afghanistan. The Taliban established income streams from a relatively diverse portfolio of minerals, comprised of bulk commodities (e.g., coal), industrial minerals (e.g., talc and chromite), and more traditionally “lootable” high-value-per-weight minerals that are easy to get to market (e.g., gold and gemstones, notably emeralds, rubies, and lapis lazuli). The group is estimated to have earned between $200 million and $300 million from mining, its second-largest revenue stream following narcotics. This income was sourced through a combination of direct mining income, collecting quasi royalties and protection payments from miners, and transit tolls.

However, as things currently stand, the Taliban cannot commercialize Afghanistan’s mining sector, including lithium, without outside help. The Taliban’s mining portfolio is mostly comprised of minerals that can be mined and/or processed with limited capital and technology. Gemstones and gold are mined by artisanal and small-scale miners from surface or near-surface deposits using relatively rudimentary processes, but mining and processing lithium is capital- and technologically- intensive and will therefore require outside investment.

Chinese-led development of Afghanistan’s lithium is unlikely in the short term

Western investors are unlikely to invest in Afghanistan’s lithium sector given the sanctions risk. The leading candidate to step forward is China, which has long pursued strategic dominance in the lithium-dependent battery storage segment of the green energy revolution. Reuters reported that, as of 2019, “Chinese entities now control nearly half of global lithium production and 60 percent of electric battery production capacity.”

China has maintained a tricky yet friendly relationship with the Taliban since their takeover. Unofficially, China has been “speaking with the Taliban for many years.” In July, a month before Kabul officially fell, Taliban leadership welcomed the prospects of Chinese aid and reconstruction: “China is a friendly country, and we welcome it for reconstruction and developing Afghanistan… If [the Chinese] have investments, of course, we will ensure their safety.” In November 2021, representatives of several Chinese companies reportedly conducted on-site inspections of potential lithium projects in Afghanistan.

Yet, there are several reasons to be skeptical of near-term Chinese-led investment in Afghanistan’s lithium sector.

  • Development of a large-scale lithium mine would require substantial investment. There is a high degree of uncertainty regarding the geological survey of the country’s lithium reserves. Commercial development would first require substantial investment in a survey and exploration program. Much of the existing geological information dates to the Soviet era and may be an overestimation of existing reserves. The U.S. also performed high-level mapping of mineralized areas in Afghanistan during the U.S. occupation, but there remains uncertainty around the extent of probable reserves. Moreover, it would likely be logistically challenging, time-consuming, and costly to mine and export products from Afghanistan, a landlocked country with limited transport and power infrastructure. Production and transportation overhead would be significant. Commercial production would likely take at least 15 years to achieve, as an optimistic estimate, but it could take longer.
  • China strategically employs fiscal, regulatory, or security concerns to stall developments and prevent alternative investment. For instance, China has dragged its feet on existing Afghan mining developments. In November 2007, a state-owned Chinese company won the right to develop Mes Aynak, a large copper mine in Logar province. The company, China Metallurgical Group (MCC), agreed to invest $3 billion, which includedbuilding a plant to process the copper in-country, developing a railway to Torkham on the Pakistani border, and constructing a power plant to provide energy to the mine site, the surrounding areas, and the city of Kabul. However, development stalled due to security challenges, contract disagreements between MCC and the Afghan government, and concerns about impacts on cultural heritage. China is negotiating with the Taliban to start production at the Mes Aynak site, but the timeline remains unclear.

Simultaneously, state-owned China National Petroleum Corp. is discussing revamping the Amu Darya oil and gas project development. There are also rumored to be other ongoing conversations between the Taliban and Chinese investors, including those related to lithium. There is limited information regarding which companies might be considering lithium investment and where, making it hard to disentangle substance from speculation. To date, no deals have materialized. This suggests that while China is willing to acquire concessions, its primary interest may be blocking other players’ access to these resources.

  • China has recently made several lithium plays elsewhere. Notably, in the last five years, Chinese companies have made significant investments in Latin America and Africa. In 2019, the Bolivian government chose a Chinese consortium, Xinjiang TBEA Group Co Ltd, as its strategic partner on multiple lithium projects valued at $2.3 billion. Chinese companies made several major acquisitions in Argentina’s lithium sector last year, including Zijin’s $770 million takeover of Neo Lithium Corp. Ganfeng Lithium took over Bacanora Lithium with a $391 million cash offer in 2021, gaining control of the Sonora lithium project in Mexico, while China’s BYD Chile won a major lithium extraction project in Chile in early 2022. Zijin also recently launched a lithium exploration project in the Democratic Republic of the Congo (DRC).

As others have noted, it is hard to see why China would make an aggressive short-term play in Afghanistan’s lithium sector – given the pipeline of projects and opportunities that would be much easier and less risky to develop. With the exception of the DRC, in all of these examples, Chinese companies have sought out advanced projects in jurisdictions with a mining track record.

China is likely playing a long game to advance its broader geopolitical interests

Beijing is no doubt aware that any significant mining development in Afghanistan faces serious obstacles in the short term due to insecurity and corruption. An alternative read of the situation is that China is using the potential of investments, including in lithium mining, as one of many bargaining chips with the Taliban to build strong relations and advance its broader geopolitical interests. Chinese bids for concessions may also be a strategic move to preempt other countries from investing in Afghanistan’s mining sector, sealing off other players’ concessions to maintain its own market dominance.

Beijing has been clear that it wants regional stability and the Taliban’s help achieving it.

It is more likely that Beijing is developing relationships to retain an option for large-scale development down the line while waiting to see how Afghanistan’s politics and commercial lithium markets shake out. China’s goal of maintaining stability in Afghanistan and broader regional security in Central Asia, where it has made substantial investments in energy and infrastructure projects as part of its Belt and Road Initiative, is important to safeguard and link its economic investments. The Belt and Road Initiative covers the China-Pakistan Economic Corridor, a series of construction projects throughout Pakistan that includes the development of a large international port at Gwadar, via rail, road, and pipelines.

Beijing has been clear that it wants regional stability and the Taliban’s help achieving it. Foreign Minister Wang has said China supports an inclusive government that incorporates non-Taliban factions, advances moderate domestic and foreign policies, and cracks down on terrorist groups. On the latter point, Beijing has made it clear that the Taliban must cut ties with terrorist groups as a condition of further relations and investment, particularly the Tehrik-i-Taliban Pakistan and the Turkistan Islamic Party (TIP), a Uyghur militant group that repeatedly targets China. The Taliban appears to be considering Beijing’s demands in this respect and in late May relocated TIP fighters away from the Chinese border. However, China remains cautious. For example, China may be hesitant to use its full powers in the U.N. Security Council to dismantle the sanctions regime against Afghanistan because it may not trust the Taliban to fully restrain the TIP.

Overall, the viability of large-scale mining development may well hinge on Afghanistan’s longer-term political and economic trajectory. The government is plagued by divisions, and hard-liners appear to be winning an internal power struggle, evident in a series of draconian actions in late March that rolled back freedoms in the country – including barring older girls from secondary school. China would likely tolerate a hard-line government if it is stable. However, in the current context, donors are less likely to provide assistance beyond basic humanitarian aid, making it challenging for the Taliban to address mounting security and economic challenges.

Beijing’s short-term calculus may change if China’s projects in Latin America do not come to fruition, or if logistical barriers subside and the economic and humanitarian situation stabilizes in Afghanistan. For now, however, there remains a high degree of uncertainty as to whether China will make a serious effort to develop Afghanistan’s lithium reserves.

      
Kategorien: english

The role of regional economic communities in implementing the African Continental Free Trade Area

3. August 2022 - 6:30

By Andrew Mold, Aloysius Uche Ordu

Andrew Mold, chief of regional integration for Eastern Africa at the United Nations Economic Commission for Africa, explores aspects of the continent’s economic integration agenda under the African Continental Free Trade Area (AfCFTA), arguing that low estimates of intra-African trade can be misleading and exploring how the region’s individual regional economic communities will be central to the agreement’s implementation.

Foresight Africa podcast is part of the Brookings Podcast Network. Subscribe and listen on AppleSpotify, and wherever you listen to podcasts. Send feedback email to podcasts@brookings.edu.

      
Kategorien: english

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