By Ratnakar Adhikari, Executive Director, Enhanced Integrated Framework
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide. This blog is also a part of a thread looking more specifically at the impacts and responses to the COVID-19 crisis in Least Developed Countries (LDCs).
Many least developed countries (LDCs) have not yet seen large numbers of COVID-19 cases – though there are notable exceptions such as Afghanistan, Bangladesh, Nepal and Sudan.
Yet, all LDCs are confronting severe economic disruptions – and a major fiscal squeeze – from the global demand shock, supply chain disruptions and, significantly reduced income from tourism and remittances. Domestic lockdowns to prevent the spread of the virus present unique challenges in countries with high poverty rates in which large sections of the workforce are informally employed.
At the same time, crises can come with opportunities for positive change, and the present crisis might offer this for LDCs, to undertake much-needed reforms that would place them on firmer footing as economic recovery takes hold. A few LDCs have done just that, examples of which are below.
E-commerce has posted rapid growth during the pandemic due to touchless/contactless modes of transaction, while sectors reliant on physical presence continue to struggle. Even prior to COVID-19, many LDCs had prioritised e-commerce as a means of directly connecting their firms to global and regional markets and thus making them competitive. For countries to quickly identify barriers to further e-commerce development, LDCs undertook rapid e-trade readiness assessments, with the help of EIF and UNCTAD.
After the assessment, Senegal developed “ecommerce-covid.sn”, an e-commerce platform that provides easy access to websites of small- and medium-sized enterprises (SMEs) that sell essential goods such as medical and agricultural products. The platform not only facilitates the distribution of essential products, but also brings SMEs together and encourages more traditional businesses to participate. In Cambodia, UNDP, with the support of Australia and in collaboration with the Ministry of Commerce, is implementing a project to accelerate the deployment of e-commerce solutions to help contain the economic impact of COVID-19.
These efforts seek to diversify the services provided by existing online marketplaces to facilitate business continuity for essential sectors by shifting traditional business transactions online and enabling effective local retailer/consumer logistics. Two aspects of the work are particularly noteworthy; first, partnering with existing marketplaces that have proven experience in aggregating sellers and buyers; and, second, leveraging idle capacity in service sectors such as the hospitality industry to service merchants/consumers through e-commerce platforms.
Foreign Direct Investment (FDI)
According to UNCTAD, FDI is slated to dip by 40% in 2020-2021, and LDCs, which receive only 1.4% of global FDI inflows in 2019, are bound to be affected. Given the supply chain disruptions caused by COVID‑19, along with pre-pandemic trends such as rising labour costs in China and growing uncertainty about market access due to trade tensions, business enterprises globally are looking for opportunities to diversify their component production and assembly. Countries like India and Vietnam seem to have already benefited from such a shift.
The LDCs that are able to plug into the global value chain are not only likely to quickly recover lost trade, but also to attract FDI. These countries in particular offer two advantages: first, they have an abundance of low-wage labour, and, second, they benefit from duty-free and quota-free market access in the major developed countries. However, the LDCs face several constraints that raise cost projections for prospective international investors, including a lack of skilled human resources, dilapidated and deficient infrastructure and limited logistics services.
Skills gaps in some LDCs may be alleviated to some extent by the return of skilled or semi-skilled workers from developed and emerging economies. However, collaboration with the private sector would be paramount in this case.
Although infrastructure and logistics services cannot be improved overnight, those LDCs that have special economic zones (SEZs)/industrial parks, where these issues are taken care of to a large extent, can attract FDI in building up their capacity to serve the global production network. Examples include Bangladesh, Cambodia, Ethiopia, Myanmar, Nepal and Senegal.
Therefore, the LDCs putting in place active policies to attract and retain investment during the COVID‑19 crisis are likely to benefit in the long run. For example, Myanmar, one of the first LDCs to adopt a COVID‑19 Economic Recovery Plan, which, among others, includes an active investment promotion and facilitation policy, is likely to have a head start in this regard.
Limited trade facilitation measures, including burdensome customs formalities, have been a major constraint. If we consider the ratification of the WTO’s Trade Facilitation Agreement as a proxy for the willingness and capacity of a WTO Member to undertake trade facilitation reforms, the LDCs lag far behind their counterparts.
However, COVID-19 seems to have provided them incentives to introduce some quick win measures to facilitate trade as well as taking steps towards paperless trade. For example, Nepal has put in place a system for the release of customs consignment for essential goods within two hours of submission of documents at the customs point, besides exempting duties on 17 categories of medical goods, health materials and equipment. Moreover, the Government of Nepal decided to accept copies of required documents and to provide for the possibility of attaching documents online, thus removing the requirement to present original documents during the lockdown period. The OECD Trade Facilitation Indicators can help LDCs benchmark with other countries and simulate the impact of different actions.
Several regional bodies have launched regional or cross-regional initiatives in response to the COVID-19 pandemic predominantly to mitigate the public health impact, although some have gone beyond to strengthen collaboration on the economic sphere. Two examples are worth highlighting.
ASEAN Economic Ministers, for example, have reaffirmed their commitment to maintain ASEAN’s open economic and integration policies and their resolution to take collective action to mitigate the impact of the COVID-19 outbreak on other areas as well. These include strengthening information sharing, coordination and working closely with industry stakeholders.
Similarly, the Consultative Meeting of the Heads of the States of East African Community, held on 12 May, directed partner states to encourage regional value/supply chains to support production of essential medical products and supplies as part of regional efforts to combat COVID-19.
In conclusion, the ability of LDCs to convert such reforms into lasting benefits is predicated on the continuation of a broadly open and supportive global economy. This is because when trade and investment as well as technologies and ideas can freely move across borders, they can contribute to a quick recovery. The opposite, however, is equally true.
[The author wishes to acknowledge the information provided by Sven Callebaut on Cambodia and Myanmar and Shyam Dahal on Nepal as well as for helpful discussions].