Making Trade and Investment Work for People

NAECKen Ash, Director of the OECD Trade and Agriculture Directorate

Both the UN Sustainable Development Goals (SDGs) and the OECD New Approaches to Economic Challenges (NAEC) explicitly recognize that trade and investment are not goals in themselves, but are a means to an end. That desired end is stronger and more inclusive growth, better jobs for more people, and improved societal well-being. Trade and investment policies cannot deliver these outcomes alone, but they can contribute as part of a wider package of comprehensive structural policy reforms, designed in light of the specific situation in countries at various stages of development.

Global value chains (GVCs) account for an increasing share of world income, reflecting the high degree of economic interdependence among nations today. All countries have increased incomes associated with GVCs, in particular major emerging economies, but these benefits do not accrue automatically. The fragmentation of production across borders highlights the importance not just of open, predictable and transparent trade and investment policies, but also of effective complementary policies that enable less developed countries (LDCs) and small and medium enterprises (SMEs), in particular, to participate in and to benefit from GVCs. In brief, making trade and investment work for people requires a coherent and well integrated public policy agenda.

GVCs magnify the costs of protection. As goods, services, capital, data and people cross borders multiple times, the cumulative effect of a number of individually small costs imposes a significant burden on traders and on investors. These costs can result from explicit restrictions, such as tariffs, from inefficient or unnecessary border procedures, and from constraints on the flow of capital. Where foreign investment is a driver of export capacity, the cumulative effect may even discourage firms from investing, or maintaining investment, in the country. As a result, production facilities, technologies and knowhow, and jobs might move elsewhere.

In a world dominated by GVCs, there is a tendency for more, and more demanding, regulatory standards, driven by the imperative to ensure reliability, quality, and safety. The right to regulate and to protect consumers is not in question, but regulations should be science-based, proportionate and non-discriminatory. Any unnecessary costs imposed by excessive regulatory burden falls most heavily on SMEs and firms in LDCs, where the capacity to adapt is often limited. In too many cases, this can preclude effective participation in GVCs.

There would be no GVCs without well-functioning transport, logistics, finance, communications, and other business services to move goods and coordinate production along the value chain. Today, services represent over 60% of GDP in G20 economies, including 30% of the total value added in manufacturing goods. The supply of these services is often provided through investment, yet services markets remain relatively restricted in many countries, imposing high costs on domestic as well as foreign firms, limiting productivity growth, and constraining participation in GVCs unnecessarily.

GVCs also strengthen the case for unilateral policy reform. Domestic firms benefit from the expanded export opportunities that are often the aim of trade negotiations, but they also benefit from access to world class imports of intermediate goods and services. Opening your own markets, in particular for intermediate inputs, can benefit your own firms and workers. But the gains are even greater when more countries participate and markets for goods, services, capital, technology, data, ideas, and people are opened on a multilateral basis.

GVCs make evident the necessity of more coherent rules for trade and investment; this twin engine of development can only reach its full potential if other policy areas are also better aligned and in coordination with those on trade and investment. These areas include macroeconomic, innovation, skills, social and labour market policies among others. The nature of the enabling environment and complementary policies to accompany trade and investment opening depends on country specificities; while there is no ‘one size fits all’ policy recipe, there are a number of common ingredients.

Trade and investment opening are necessary but insufficient conditions for stimulating much needed and more inclusive growth, development and jobs. Accompanying policies that promote responsible business conduct and enable the needed public and private investments, in particular in people, in innovation, and in strategic physical infrastructure, help ensure not just that growth is realized, but that the benefits are shared widely.

Useful links

OECD work on trade

OECD work on investment

Aid for Trade: From Hong Kong to Nairobi, and beyond

AFT 10Frans Lammersen, OECD Development Co-operation Directorate

The Tenth WTO Ministerial Conference, taking place this week in Kenya, offers an excellent opportunity to take stock of the achievements of the Aid for Trade Initiative and reflect on how to continue its relevance in the changing trade and development landscape.

Ten years ago when opening the Sixth WTO Ministerial Conference in Hong Kong, Pascal Lamy lamented the absence of a magic wand to conclude the Doha Development Agenda. What proved to be magic in Hong Kong was the agreement on a mandate to operationalise aid for trade. A WTO Task Force recommended using existing mechanisms for identifying and prioritising trade-related capacity constraints in developing countries around which donors should align their support.

So 10 years on, did Aid for Trade deliver on its promise?

The Initiative created strong partnerships between developed and developing countries, between the trade and development communities, between the traditional and non-traditional donors and between the public and the private sector. These partnerships are based on a common agenda with clear objectives and reciprocal commitments.

Successive Global Reviews and Aid for Trade at a Glance reports have shown that the Initiative has raised awareness among developing countries and donors about the positive role that trade can play in promoting economic growth and development. Moreover, developing countries, notably the least developed, are getting better at articulating, mainstreaming and communicating their trade-related objectives and strategies.

As a result, cumulative aid-for-trade disbursements reached USD 245 billion and an additional USD 190 billion in other official flows, since the Initiative started in 2006. Commitments stood at USD 55 billion in 2013, an additional USD 30 billion compared to the 2002-05 baseline average. This has raised the share of aid-for-trade in sector-allocatable aid to 38% in 2013 from an average 32% during the baseline period.

But are these substantive aid-for-trade programmes also effective?

According a broad range of trade and development literature they are indeed; both at the micro and macro level. More specifically, OECD research found that one dollar extra invested in aid-for-trade generates around eight additional dollars of exports from all developing countries – and twenty dollars for the poorest countries. Results, however, may vary considerably depending on the type of aid-for-trade intervention, the sector at which the support is directed, the income level, and the georgraphic location of the recipient country.

These empirical findings are buttressed by the aid-for-trade case stories. The sheer quantity of activities described in these stories suggests that aid for trade is now central to development strategies and has taken root across a wide spectrum of countries and activities. Although it is not always easy to attribute cause and effect, the stories show tangible evidence of how aid-for-trade is helping countries build the human, institutional and infrastructural capacities for turning trade opportunities into trade flow and helping men and women make a decent living.

Despite these significant achievements, the effectiveness of the Initiative could be further enhanced through regional programmes. Deepening economic integration via regional co-operation is a key priority in the reform strategies of most developing economies. It is also actively promoted by donors. The support for and results of these programmes can be strengthened by involving Regional Economic Commissions and Regional Development Commissions to act as honest brokers to help developing countries find common ground, to offer financial incentives, to build human and institutional capacities, and to harmonise regulations.

However, what is now most important is how aid-for-trade can best support the Sustainable Development Goals. The SDGs highlight that “(…) increasing aid‑for‑trade support for developing countries, in particular the least developed (…)” would help to “(…) promote inclusive and sustainable economic growth, full and productive employment and decent work for all.”           Operationalising these objectives could be achieved through focusing the Initiative on improving connectivity, expanding the scope to services and promoting green growth.

A focus on reducing trade costswhich are highest for LDCs, SMEs and agricultural goodsprovides an operational focal point for an action-oriented aid-for-trade agenda among a broad collation of stakeholders, including the providers of South-South cooperation and the private sector. The advantages of such as a focus is also that it is neutral in the sense of benefiting not just exporters, but also importers and households, and trade in goods and services.

Service trade is important for developing countries. Services are not only an important economic sector in their own right, such as for instance tourism, which for 11 LDCs is the biggest source of foreign currencies, but also increasingly as an important input to merchandise trade and linking to global value chains. The emphasis should be on those areas that are central to promoting sustainable development, such as agriculture, energy and transport.

After the successful conclusion of COP21, aid-for-trade should support developing countries in moving to sustainable agriculture, building climate-resilient infrastructure, strengthening the supply chain of low-carbon technologies and environmental goods and services, and more generally helping developing countries with achieving green growth.

In short, to remain relevant after 10 years aid for trade should focus on the fundamental changes that are occurring in the trade and development landscape. The first WTO Ministerial Conference taking place on the African continent should provide the impetus to ensure that the Aid for Trade Initiative becomes an integral part of delivering the Sustainable Development Goals by 2030.

Useful links

OECD work on Aid-for-Trade

Aid-for-trade on the Insights blog

We need global policy coherence in trade and investment to boost growth

Investment Forum

Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20 @gabramosp

Mounting fears of another slowdown in the global economy call for bolder policy responses. Trade and investment are a case in point.

The latest WTO forecasts suggest 2015 will be the fourth year running that global trade volumes grow less than 3%, barely at—or below—the rate of GDP growth. Before the crisis, trade was growing faster than GDP. In addition, global flows of foreign direct investment (FDI) remain 40% below pre-crisis levels. If we are to achieve the ambitious Sustainable Development Goals agreed in New York in late-September, and underpin broad-based improvements in living standards, we need to reignite these twin engines of growth and we need to do it for the ultimate goal of improving people’s prospects and wellbeing.

Trade and investment have always been intertwined in business, but they have never quite come together in policymaking. In a world of Global Value Chains (GVCs), characterised by the fragmentation of production processes across countries, the interdependencies between trade and FDI are sharper. Technological improvements, reductions in transport and communications costs, and regulatory developments allow firms to combine multiple channels–- imports, FDI, movement of business personnel, licenses — to optimize their international business strategies. Businesses do not think in terms of trade or investment, but in terms of maximizing expected profitability. On the contrary, policymakers have long addressed trade and investment on separate tracks. In the face of new economic realities, policymakers need to up their game.

The symbiosis between trade and investment is more complex than ever before. Multinational enterprises (MNEs) play a key role in this relationship, with their activities driving a large share of world trade. The decision of a firm to invest in a foreign country is influenced by the ease with which it can sell its products, but also by how easy it is to source inputs from its affiliates (intra-firm trade) or independent suppliers (extra-firm trade) abroad. Hence, trade barriers become indirect barriers to investment. In addition, “world factories” make emerging trade patterns more complex, as not only goods and services cross borders, but capital, people, technology, and data do too. Without a transparent framework, it is also difficult to upgrade and upscale responsible business conduct.

Services are an increasingly critical node in the relationship between trade and investment. The WTO’s General Agreement on Trade in Services (GATS) explicitly recognizes this by defining FDI in services as one of the four ways in which services can be traded (mode 3, or ‘commercial presence’). This reflects how trade and investment interact with one another. Clearly, services will be central in any further efforts to liberalize investment and to improve the business environment. The OECD FDI Regulatory Restrictiveness Index shows that investment barriers are overwhelmingly in the services economy. Reforms in backbone services, notably digital services, transport, and logistics are key to unclogging GVCs. Domestic reforms to allow for more competition in the service sectors is also a source of growth and equality. Moreover, there is untapped potential in services value chains that could be realized if services markets were opened further. The OECD Services Trade Restrictiveness Index (STRI) provides a tool for identifying these barriers and measuring their costs, in order to prioritize and sequence reforms.

There is still no global set of rules governing investment and trade, however. Apart from GATS, two other WTO agreements—TRIMS and SCM–cover aspects of FDI, but they are not comprehensive. The OECD Codes are also a reference on capital flows, but does not address the link with the trade dynamics. The void has been filled with a complex network of nearly 3,000 bilateral investment treaties (BITs) of different quality and with different coverage.. Investors and States need certainty. A uniform regime would help, providing a consistent interpretation of the rules that apply to investment flows, taking into account the interest of all stakeholders. We urgently need a clear, coherent and coordinated approach at multilateral level. Multiplying the number of BITs further muddies the water and moves us further away from the multilateral ideal. A better way forward may be to start consolidating and replacing BITs on the road to a comprehensive multilateral framework. We also need to take a hard look at investment dispute settlement mechanisms, transparently addressing stakeholders’ legitimate concerns.

Replace BITs with what? Regional Trade Agreements (RTAs) are already providing some closer policy linkages. Over 330 RTAs contain comprehensive investment chapters, reflecting more advanced thinking of how trade and FDI interact in the real economy. These agreements also cover ‘deep integration’ disciplines that are essential to investments, such as movement of capital, business persons, intellectual property rights, competition, state-owned enterprises, and anti-corruption. New generation RTAs are not perfect, but they are taking us several steps forward in addressing the services-trade-investment-technology nexus. Being regional, however, they are not applied uniformly at a global level, and create their own overlaps and incoherence. It would therefore be useful to create clearer rules for co-existence among RTAs and mega-regional blocs. Above all, it is important to foster information-sharing on emerging practices from these negotiations, so that good practices can be diffused more widely and uniformly, and provide a pathway for multilateral convergence. In this way, RTAs and mega-regionals can become the building blocks of an integrated and truly multilateral trade and investment regime.

We are at a critical juncture, both economically and politically. The global economy needs a helping hand for recovery from the global financial crisis and to give people the improvements they expect in their daily lives. At the same time, we have both an opportunity and obligation to upgrade the policy framework to meet the changing reality of how trade and investment are conducted across the world, to enhance policy coordination, and to ensure that both have a positive impact on people’s well-being. Mega-regional agreements like TTIP and TPP are on track to deliver new frameworks over the coming months. These can be stepping stones towards the future of global trade and investment rules. As these mega-regional deals approach the finish line, the 10th WTO Ministerial in Nairobi in December is an opportunity to break the current impasse in the Doha Round. Finally, all of this is taking place as we enter a new “Post-2015” era with the new SDGs, where trade and investment are expected to do more of the heavy-lifting in global development.

Against this backdrop, the G20-OECD Global Forum on International Investment (GFII), being held on 5 October 2015 in Istanbul, back-to-back with the meeting of G20 Trade Ministers, will bring together the trade and investment policy communities—along with the business community–to reflect on the main axes of a pragmatic strategy to enhance the international regime for investment, including through closer links with trade. The agenda cannot be delayed: trade and investment decisions must go hand-in-hand in policy, just as they do in global business.

Useful links

G20-OECD Global Forum on International Investment

OECD work on International Investment Law

OECD work on Regional Trade Agreements

OECD work on Global Value Chains

OECD work on Trade Facilitation

Aid for Trade: Helping to end poverty and realise sustainable development

AfTToday’s post is from OECD Secretary-General Angel Gurría

One dollar in aid for trade generates eight dollars in extra trade for all developing countries and 20 dollars for low-income countries according to OECD calculations. These are impressive returns on investment. But these numbers do not tell the uplifting stories about the lives of men and women that have been bettered by Aid for Trade programmes, the employment generated because of trade creation and diversification, or the additional domestic and foreign investment that countries attracted.

What these stories also show is that removing the obstacles to trade and reducing trade costs allows firms in low-income countries to link up to Global Value Chains (GVCs). On the one hand, the fragmentation of production has created new opportunities for SMEs to enter global markets as components or services suppliers, without having to build a product’s entire value chain. On the other hand, SMEs participation and upgrading in GVCs is far from automatic. Opportunities for SMEs are large, but so are the barriers they must overcome.

The fifth Global Review of Aid for Trade takes place at a watershed moment. Before the end of the year we need to define and agree on the post-2015 development agenda. The scope and ambition of the emerging Sustainable Development Goals (SDGs) offer a unique opportunity for ending poverty, protecting our environment, and realising sustainable development for all.

Trade costs matter for development

International trade is an important enabler to achieve the SDGs, but high trade costs prevent a large number of developing countries from fully exploiting the opportunities that the global market offers. Consequently, they fall short of realising the employment, development and growth potential from trade.

The joint OECD/WTO report Aid for Trade at a Glance 2015 presented today at the Global Review of Aid for Trade clearly shows that while producers in low-income countries are often competitive at the farm and factory gate, they are priced out of the international market because of cumbersome border procedures, poor infrastructure, lack of finance and complex standards. High trade costs have detrimental effects on comparative advantage, especially for small and medium-sized enterprises in general and those in low-income developing countries in particular.

Facilitating trade

The WTO Trade Facilitation Agreement creates a significant opportunity to reduce trade costs and enhance participation in the global value chains that increasingly characterise international trade today. Improvements in trade facilitation is one of the policy areas with the highest estimated impact on foreign input sourcing decisions.

We calculated that the implementation of the Trade Facilitation Agreement (TFA) could reduce worldwide trade costs by between 12.5% and 17.5%. And for those that do more, the benefits are even greater: countries which implement the TFA in full will reduce their trade costs by between 1.4 and 3.9 percentage points more than those that do only the minimum that the TFA requires. The opportunities for the biggest cost reductions are greatest for low and lower middle-income countries.

What is needed now is the ratification of the Agreement to ensure that these potential benefits become a reality. The OECD has put in place a tool that allows countries to monitor and benchmark their trade facilitation performance, prioritise areas for action and mobilise technical assistance and capacity building in a targeted way.

Development finance for building trade capacities

Furthermore, substantial resources are available to assist countries implement the TFA. Donors that report to the OECD have already disbursed some $1.9 billion in Aid for trade facilitation since 2005. Commitments now stand at $668 million, an eight-fold increase in donor support. According to an OECD/WTO survey, even more is support is forthcoming. At today’s meeting the OECD will present more country-specific data on the benefits of Trade Facilitation as well as on transparency of donor support.

More generally, since the start of the Initiative, donors have disbursed $264.5 billion for financing Aid for Trade programmes, with commitments doubling and now standing at $55 billion. In addition, $190 billion in trade-related other official flows was disbursed. Furthermore, providers of South-South trade-related support are also helping developing countries reduce high trade costs.

Joining forces to achieve more

Designing effective solutions for cutting trade costs requires close collaboration between the public and the private sector, including to identify the most distorting trade costs, how best to reduce them, and how to use the different development finance instruments offered by a wide range of providers effectively.

Reducing trade costs for inclusive, sustainable growth is an agenda where the private sector has much to offer and the development community much to learn. Collaboration between the public and the private sector in developed and developing countries will maximise the contribution of trade in delivering the sustainable development outcomes that are envisaged in the emerging SDGs.

Well-designed Aid for Trade interventions can be effective in reducing trade costs in areas that partner countries and donors prioritise, such as infrastructure, trade facilitation and non-tariff measures like product standards. Furthermore, this need not contradict overarching green growth objectives; on the contrary aid for trade may actually promote these objectives.

Developing countries and their partners are taking the reduction of trade costs seriously. Action in this area builds on solid practical and theoretical foundations and, most importantly, will help achieve the proposed SDGs.

Download the 30 page pocket edition of Aid for Trade at a Glance 2015: Reducing Trade Costs for Inclusive, Sustainable Growth.

OECD work on Aid for Trade

Transport, trade and tourism

ITF SummitTo mark the opening of the International Transport Forum’s Annual Summit, today’s post is by the Summit’s keynote speaker Pravin Krishna, Chung Ju Yung Distinguished Professor of International Economics and Business at Johns Hopkins University

We live in exciting times. Globalization is deepening at a very rapid rate. In the last decade and a half, international trade in goods has nearly tripled and international tourism has nearly doubled in magnitude. Increased connectivity has led to globally fragmented production processes.

We are now more internationally connected in our economic interactions. We have a better appreciation of the peoples of different countries and their cultures through our travels. We have greater economic prosperity and a greater civilization through these interactions. A large part of this is due to the availability of transportation systems and the increased efficiency of their operation over time.

I will address three broad issues of the complex and multidimensional triangular relationship between transport, trade and tourism.

First, the crucial importance of transportation in generating economic gains, and the concerns about the effects of globalization on poverty and inequality.

Transport networks have obviously provided the backbone for the process of globalization. And, study after study has shown that improved access to transportation infrastructure can be beneficial at the local, national and the international levels. Research from the World Bank has shown that reducing delays at borders in an exporting country by 1 day, through improved trade facilitation, increases exports by 1 percent and that a 10 percent improvement in the quality of transport infrastructure would result in a 10 percent increase in trade, which suggests a very significant impact of improved transportation logistics on trade.

Going beyond the straightforward consequence of lower transport costs for trade flows; there seem to be other productivity benefits as well. For instance, following the Golden Quadrilateral project, which upgraded a central highway network in India, we observe an increase in size of the most productive firms and reduction in the size of the least efficient firms, signaling improvements in allocative efficiency in the economy.

In my own research, I have investigated a rather different set of issues concerning trade, poverty reduction and the availability of transport networks. The claim is often made that exposure to globalization may lead to greater levels of poverty and inequality. However, by looking across various regions within India, comparing regions which are proximate to ports and transportation networks with those that are not, we actually found the opposite. Without trade openness, poverty reduction is actually lower in geographically remote areas due to their lack of exposure to international markets (Krishna, Mitra and Sundaram, 2010). This is important for countries where persistent poverty is a major policy issue. Access to transport networks should clearly be an important part of equitable progress and poverty alleviation strategies.

Second, despite the obvious infrastructure gaps in transportation in large parts of the world, the question of whether to invest more in transport and in what forms, can only be answered in its specific context.

While we generally believe that there is a positive effect of infrastructure on output and productivity, it is not always the case that the benefits of additional infrastructure outweigh the costs. It is, of course, only with productive spending that value is created. Indeed, after surpassing certain thresholds in infrastructure levels, the marginal productivity of infrastructure declines. And, there is some evidence that the productivity of public capital has been declining in advanced economies. As transport networks have become more complete, the average impact of additional segments has been lowered.

Furthermore, the link between infrastructure and growth is much weaker when we measure infrastructure supply using pecuniary measures such as public investment flows. And there is a good reason for this: namely the lack of a close correspondence between public capital expenditure and the provision of infrastructure services, owing to inefficiencies in public procurement and outright corruption (Pritchett, 2000).

Evidence of waste of public resources can cost governments dearly in terms of lost credibility and trust on the part of citizens, even for well-designed projects. In rapidly growing India, the intense struggles of the current government, which is attempting to push through legislation on land acquisition to advance its infrastructure agenda, against a backdrop of long-standing cynicism about public capital expenditure, bear testimony to this fact.

Third the nature of change is complex, and while trade and tourism have grown steadily, this has not taken place in a uniform manner.

Over the last few decades, the center of global production activity has begun to shift back from the West to Asia, and in recent years especially towards China, which has become an important venue for offshore production. But many variations and uncertainties remain. Businesses looking for low-cost export platforms in Asia are increasingly considering countries such as Thailand, Indonesia and Vietnam. Indeed, even Mexico is possibly returning back to favor for many US based manufacturers.

These shifts raise important questions.

For instance, how is freight demand expected to evolve over time? On the one hand, demand could increase dramatically due to rising wealth and rising trade. On the other hand, changes in energy prices, in trade patterns and in economic geography, could affect the origin, destination and mode of traffic, possibly decreasing demand in particular segments and modes. Are our transport networks capable of flexibly adapting to these changes in demand and usage? Are there alternative infrastructure strategies that allow both efficiency and flexibility of response to changing demand?

The demographics of the planet are rapidly changing. A decade or two from now, populations in the United States, Japan, Europe and even China are likely to be significantly older than today. This may, in turn, alter demands for tourism and transportation. However, enhancements in information and communication technologies and other trends such as the movement of aging citizens to urban, pedestrian-friendly areas may mitigate the need for changes to be made in supply. It is unclear which way this will go and by how much.

Interestingly, other parts of the world will be getting younger. For instance, it is estimated that over 30 percent of India’s population, roughly 400 million people, are under 15 years of age and that, going forward, about 1 million young Indians will join the labor force each month, many in urban areas.

These are big trends and they are relatively easy to forecast. But how well do we understand the impact they will have on transportation? And how prepared are we for those challenges?

In addressing these issues, institutional gaps may be as large a problem as infrastructure gaps. Lack of co-ordination between transportation and tourism ministries, for instance, may yield mismatches in mutual expectations of both supply and demand. Similarly, with international trade, infrastructural improvements need to go hand in hand with other behind-the-border reforms, as bottlenecks may lie as much, for instance, in poor customs facilitation, as in poor transport infrastructure.

Long range planning has an outlook of 20-30 years, but is often largely a linear projection based on current relationships between economic and demographic patterns – much like the Times of London forecast in 1894, that given the growth rate of horse carriages, every street in the city of London would be buried under nine feet of horse manure by 1950! These linear projections may be the single greatest weakness of policy making for transport today. A wide range of technological, demographic, social and economic changes will likely affect demand and supply patterns in the future.

These changes and their impacts are not as well understood as we would like. But I am sure that the collective talent of the ITF Summit audience is very well equipped to address them, today and in future research.

Useful links

Pravin Krishna, Devashish Mitra and Asha Sundaram, 2010, “Trade, Poverty and Lagging Regions in South Asia,” in The Poor Half Billion in South Asia, Ejaz Ghani, ed., Oxford University Press

Lant Pritchett, 2010, “The Tyranny of Concepts: CUIDE (Cumulated, Depreciated,Investment Effort) is Not Capital”, Journal of Economic Growth, 5 (4): 361–84

Free ebooks from ITF

Institutions, Interconnectedness, and Inclusiveness: Three “I”s for better lives in Eurasia

Photo courtesy of H.E. Ms. Ingrid BROCKOVA , Permanent Representative of the Slovak Republic to the OECD
Photo courtesy of H.E. Ms. Ingrid BROCKOVA , Permanent Representative of the Slovak Republic to the OECD

Today’s post is by Marcos Bonturi, Director of the OECD Global Relations Secretariat

The world has had its eyes riveted on the tensions in Ukraine. The rest of the Eurasia region in particular is facing important economic and political challenges as a result of these tensions.

The region, at a crossroads between Russia, China, India and Europe, has had some success in the past couple of decades in transitioning from a planned to a market economy. Countries have enacted sweeping reforms to diversify their economies, improve the business climate and attract foreign direct investment. As a result, from 1995 to 2013, regional gross output more than doubled from USD 144 billion to almost USD 360 billion[1]. International investors have flocked to the region – between 1997 and 2013, net inflows of foreign direct investment increased more than six-fold, at an annual average rate of 12.4%[2]. During the financial crisis the region managed to maintain a strong GDP growth rate, which in 2013 was as high as 4.5%[3]. This upward growth trend has brought the majority of Eurasia countries into the middle income country bracket[4] and lifted about 32 million people out of poverty over the past decade[5] . Growth has been buttressed in many countries by access to vast natural resources – the Eurasia region holds mineral supplies of gold and bauxite, more than 125 years of gas reserves[6], 35 years of oil reserves[7] and 10% of the world’s agricultural land[8].

Yet international experience has shown that strong economic growth and generous resource endowments alone are not enough to guarantee social peace and prosperity, especially in a region as diverse as Eurasia. Since the collapse of the Soviet Union, the economic development of the region has been underpinned by rising commodity prices which have attracted investment in resource-rich countries such as Azerbaijan, Kazakhstan, Mongolia, Turkmenistan and Uzbekistan. This trend has made economies of the region highly susceptible to fluctuations in commodity prices and increased their dependence on the export of natural resources. It has also led to disparities in income per capita between resource-rich countries and resource-poor countries. While some resource-poor countries such as Armenia, Belarus, Georgia, Moldova and Ukraine have acquired middle-income status thanks to the industrial legacy of the ex-Soviet Union, others such as Afghanistan, Kyrgyzstan and Tajikistan are unable to exit the lower income brackets despite growing trade with their resource-rich neighbours.

To unlock sustainable peace and prosperity in the region, countries will need to widen their approach to economic reform and tackle three underlying obstacles to their development: institutions, interconnectedness and inclusiveness.

First, Eurasian countries need to strengthen their institutions and improve governance, both in the public and private sectors. Burdensome administrative processes, insufficient transparency and broad-based corruption – especially in the resource-rich economies –undermine public trust in institutions and stifle economic growth across the region. While for the low-income countries, building basic institutions and helping firms access financing is the most urgent priority, the middle-income economies of the region need to improve their regulatory frameworks to cut red tape and increase efficiencies. Innovation policies that heighten productivity will help the resource-rich countries diversify their economies and build a less commodity-dependent growth model.

Second, countries of the region need to boost their interconnectedness to regional and global markets.

Strengthening trade links, keeping markets open, investing in infrastructure, and integrating into global value chains are priorities across the region. For the resource-poor countries, this is especially critical as stronger linkages to global value chains will bring access to new markets, technologies and know-how, and drive job creation at home. Greater connectedness will also help the resource-rich countries diversify their economies and attract investment to the non-extractive sectors. Establishing mutually beneficial trade linkages with regional “heavyweights” can also help solidify relationships with powerful neighbours.

Third, governments must take action to ensure that rising national wealth is not highly concentrated in the hands of few, but is shared more equitably among all citizens. With inequalities and youth unemployment on the rise across the region, a first step to foster inclusive growth will be to reform Eurasia’s education and training systems, which often date from the Soviet era. Governments will also need to encourage a more transparent and open dialogue between the public and private sectors and reduce barriers to small- and medium-sized enterprise development, drivers of job creation and innovation.

The OECD stands ready to support countries in Eurasia to design and implement reforms that will enhance their transparency, inclusiveness and integration in the global economy, and ultimately pave the way for a peaceful and prosperous future for all of the region’s citizens.

The OECD’s Eurasia Competitiveness Programme was established in 2008 to help the Eurasia region overcome these transition challenges, develop more vibrant and competitive markets, and uncover its vast potential. High-level representatives from Eurasia and OECD countries will meet at OECD Headquarters in Paris from 24-27 November 2014 for the first Eurasia Week, to exchange perspectives on “Enhancing Competitiveness in Eurasia”, assess progress made, and agree on a roadmap for the region’s future reforms.

References

[1] OECD calculations based on World Bank data, 2014

[2] OECD calculations based on World Bank data, 2014

[3] OECD calculations based on World Bank data, 2014

[4] For the current 2015 fiscal year, middle-income economies are those with a GNI per capita of more than $1,045 but less than $12,746 (World Bank).

[5] OECD Calculations based on World Bank (2014) “Diversified Development: Making the most of natural resources in Eurasia”, Washington D.C. and World Bank World Development database.

[6] BP Statistical Review of World Energy 2014

[7] BP Statistical Review of World Energy 2014

[8] OECD calculations based on World Bank data, 2014

Paris police capture Eiffel Tower

Some of this is copyright
Some of this is copyright

We’ve just learned that a special police unit has busted an Eiffel Tower smuggling ring. Well, more of key ring really, since the raid netted 60 tonnes of souvenirs with a street value of, er, 5 for a euro. I’ve no idea how many you need to make up 60 tonnes, but sources say it’s a lot. (If you read this article to the end, I’ll tell you how much the original weighs). A police inspector told Le Figaro that they’re not after the hundreds of sellers you may have seen around various touristy areas of Paris. They’re after the ringleaders who control what is in fact an international business, or a global value chain (GVC) as we would say, importing the merchandise from China into France for sale by mainly African sellers to tourists from the world over.

The OECD is usually all in favour of GVCs and often asks governments to do more to open up international trade. The OECD Trade Facilitation Indicators for example estimate that comprehensive implementation of all measures currently being negotiated in the World Trade Organization’s Doha Development Round would reduce total trade costs by 10% in advanced economies and by 13-15.5% in developing countries.  Reducing global trade costs by 1% would increase worldwide income by more than $40 billion according to the OECD, and most of this would go to developing countries, where the people selling Eiffel Towers come from.

Those gains from the Doha Round may or may not be realised. Progress in the negotiations is slow to non-existent, and in the meantime, selling key rings and other cheap souvenirs allows those who do it to make a living and to help their families. It’s a very precarious living and they can’t send much money home, but at least whatever they send goes directly to those who need it, and those little sums soon add up. According to the 2013 African Economic Outlook, remittances from workers abroad overtook foreign direct investment and aid as the main financial flow into Africa in 2010 (and that’s only for remittances that are recorded).

But the situation of the workers sending the remittances can be terrible. According to a Malian I spoke to, many of the young men selling souvenirs and employed in other dead-end jobs are trapped in France. They expected to do great things here, based on the stories they’d heard and the fact that usually they’re the brightest, most dynamic members of their community.  They don’t dare tell their families what it’s really like, and that the money they spent to help them emigrate could have been put to a better use. So they perpetuate the myth with stories of the good life, and live in utter poverty to be able to keep up appearances and send money back. That encourages their younger siblings and friends to try their luck too, and although satellite TV and the amount of information available on Internet are changing perceptions, many still think that the grass is greener on this side.

It’s not just in France that immigrants have a harder time than the others. The 2013 edition of the International Migration Outlook says that “on average in OECD countries, immigrants’ labour market outcomes are below those of the native-born of similar age and education levels. Immigrants also find themselves more often living in sub-standard housing conditions.” You could argue that language difficulties and different work experiences or types of qualification explain the fact that immigrants have a harder time finding a job and keeping it. But that wouldn’t explain why their children face the same problems.

For the Outlook, “Discrimination is a key obstacle to the full integration of immigrants and their offspring into the labour market and the society as a whole” adding that “it is not uncommon for immigrants and their offspring to have to send more than twice as many applications to get invited to a job interview than persons without a migration background who have an otherwise equivalent CV.”

That discrimination is often fuelled by stories of immigrants abusing the welfare system or health services. According to the OECD’s figures however, the effect on public finances “is around zero on average across the OECD countries considered […] It is highest in Switzerland and Luxembourg, where immigrants provide an estimated benefit of about 2% of GDP to the public purse.”

I wonder if the Swiss and Luxembourg papers are full of stories about immigrants coming over here, boosting our economy, reducing our borrowing requirements and helping keep taxes down. Probably not.

And since you’ve read, or skipped, to the end, the Eiffel Tower weighs 10,100 tonnes, 7300 tonnes of which is the metal structure. And it’s not illegal to make souvenirs featuring it since it’s in the public domain. The lighting however isn’t, so you should pay to film or photograph it at night. But we’ll talk about knowledge-based capital another time.

Useful links

International Migration: The Human Face of Globalisation an OECD Insights book by Brian Keeley