AFRO-ASIANS COMING UNDER RECESSIONARY PRESSURE

Rich may force poor to sign FTAs for gaining greater leverage

Martin Khor

A meeting of Ministers of Trade of Africa was held in mid-March at the African Union headquarters in Addis Ababa, Ethiopia.
   Political leaders and government officials of that continent were very worried about the effects of the global recession on their countries. This anxiety was best captured in a report of another meeting in London, in the same week, between some African leaders and the British Prime Minister Gordon Brown, in preparation for the G20 Summit to be held in early April.
   At that meeting, the Ethiopian Prime Minister Meles Zenawi warned that African countries would face political chaos as the economic recession hits the region.
   In developed countries such as Britain, the worst problem was unemployment. But in Africa, the recession means that "people who were getting some food would cease to get it and instead of being unemployed they would die", Zenawi told the Financial Times.
   He called for between US$30bil and $50bil aid increase for Africa to offset the decline in exports and investments, which he described as a much smaller stimulus package than is being spent bailing out small and medium-sized banks in the West.
   At the Addis Ababa meeting, there was concern about how a recession is being induced by the fall in demand and falling prices of export commodities. In recent years, high commodity prices had spurred a higher rate of economic growth at 6 to 7 percent in the region. These gains are now vanishing. Balance of payments in African countries is coming under stress due to a fall in exports and in foreign aid, investment and migrants' remittances.
   The African ministers and officials were especially concerned that they were asked by the European Commission to finalise Economic Partnership Agreements (or EPAs, the term used for free trade agreements) with the European Union by the middle of this year.
   The African countries face a dilemma. If they don't sign the EPA, some of them could lose existing trade preferences for their exports to Europe. But if they sign, the African countries have to themselves reduce their tariffs to zero (over a period being negotiated) for up to 70 to 80 percent of their imports. This may overwhelm the local industries and farms, many of which are too weak to compete with cheap imports.
   Another problem is that the EPA also contains chapters on investment, competition policy and government procurement, issues that had previously been negotiated at the World Trade Organisation and then thrown out because they were found to be unsuitable by the developing countries.
   These chapters would further weaken the African countries as they would have to give up or reduce public assistance and preferences to local firms, and treat foreign firms equally when, for example, the government purchases goods and services.
   
   Five points and EPA
   As explained at the meeting, the current economic crisis should cause at least five areas to be reviewed in the EPA talks.
   Firstly, due to the crisis, African countries need to boost their trade balance, especially since exports are falling. But the EPA would instead reduce most of their tariffs to zero, thus causing a rise in imports and a deterioration of the trade balance.
   Secondly, African countries need to protect themselves from financial vulnerability. However, the EPAs will instead make the countries more vulnerable financially because the EPA increases the pressure to liberalise financial services, which opens the African countries to the entry and operation of new financial instruments, including the type that caused the US-European financial crisis.
   For example, under the recently signed EC-Caribbean EPA, if a Caribbean country introduces a new financial instrument, it must also allow EU financial institutions to provide these new instruments in the country. If a developing country allows a local hedge fund with a few million dollars in capital, it would have to allow the entry of European hedge funds with billions of dollars in equity, with the potential to magnify the risks of financial instability and effects.
   The EPA also has a clause that makes it compulsory to allow the free transfer into and out of the countries, making it difficult or impossible to regulate the flows of foreign capital. Yet, it was the deregulation of capital flows that transferred financial instability to developing countries as they were subjected to wild fluctuations, with huge capital inflows reversing into large outflows, causing havoc in their trail.
   The European leaders are themselves considering how to re-regulate their financial institutions now when the EPA would make it difficult for the developing countries to regulate.
   Thirdly, the EPA would reduce African governments' capacity to fight the recession, as the cut in tariffs will cause a significant fall in government revenue. Also, governments may wish to increase their spending to boost the local economy, but there will be a "leakage" if the government procurement business is opened up to foreign goods and services.
   Fourthly, as exports collapse, many governments will be thinking of shifting their development policies towards boosting the domestic sector, with local firms producing for the domestic and regional market. However, the zero-tariff or low-tariff regime of the EPA would make it difficult for domestic industries and farms to survive or to develop.
   Fifthly, the global crisis should lead African countries towards greater regional integration and intra-Africa trade. But the EPAs will seriously hinder this process, since the African countries will have to open up to competition from European products and companies before they have sufficient time to open up to their own neighbours in the region first.
   These problems are similar to those that Asian and South American countries will have to grapple with in their negotiations for a free trade agreement with the European Union. It is vital that they be looked at more deeply as the developing countries come under more pressure from the global recession.
   - Third World Network Features

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Bangladesh to face serious economic situation

Holiday Report

The Asian Development Bank (ADB) has portrayed a dimmed picture ofeconomy for the Asian nation under the impact of global recession.
   The Asian Development Outlook, 2009, a flagship publication of ADB feared that Bangladesh may face more serious situation in the second round effect leading to 5.6 growth per cent in the current financial year, the lowest in five years.
   The ADB projected that deteriorating economic prospects will hinder the efforts to reduce poverty in Asian countries. With the slow growth, more than 60 million people in 2009, and 100 million in 2010, will remain tapped in poverty- living on less than US dollar 1.25 a day.
   "The concern for the region, and especially for the region's poor, is that it is not yet clear that the US, European Union and Japan will recover as soon as next year, said ADB's Acting Chief Economist John-Wha Lee.
   The Manila-based ADB is dedicated to reducing poverty in the Asia and Pacific region through inclusive economic growth, environmentally sustainable growth and regional integration. Established in 1966, it is owned by 67 members- 48 from the region. In 2008, it approved $ 10.5 billion loans, $811.4 million worth of grant and technical assistance amounting to $274.5 million.
   In its new report, ADB has forecast that developing Asia's economic growth will slow in 2009 to its most sluggish pace since 1997/98 financial crisis. The economic growth will slide to just 3.4 percent this year, down from 6.3 percent last year and 9.5 percent in 2007.
   
   Bangladesh scenario
   In Bangladesh, the adverse impacts are evident with the decline in export, remittance and revenue collection, closure of factories and slow domestic demand with anxious consumers trimming their spending in the backdrop of a global recession, the duration of which is still unknown.
   While releasing ADB's Outlook report Tuesday in Dhaka, Country Director Paul J Heytens said that Bangladesh government needs to streamline its expenditure to create more jobs to help poor get out of poverty.
   "One of the development challenges of the government is to raise investment to enhance growth and job creation and thereby reduce poverty," he said.
   The key priorities of the government should be to increase investment in the public sector through annual development programme (ADP) and channel more funds to the market, Heytens said.
   The ADB country director said social safety net programme could be linked to rural infrastructure and job creating activities for long-term growth and poverty reduction. The government should also provide more support to small and medium enterprises (SMEs) for rapid growth and job creation, he added.
   M Zahid Hossain, head of Bangladesh country programming, said it is difficult to predict when the second round shock would come and what would be its magnitude, but the country should prepare itself for any adverse situation.
   Agriculture sector is expected to grow 4.0 per cent if normal weather prevails and farmers get credit and farm inputs. Farm productivity needs to be increased to maintain affordable price and to face food security threat in the future, Mr Zahid said.
   About the shortage of power and gas, the ADB official said if the crisis is not addressed immediately it would hamper domestic production and hold back medium term growth prospects.
   "The government needs to invest in the power sector as foreign direct investment in the sector is less likely in the recession period," he said.
   Inflation is expected to fall at 6.5 per cent in the next fiscal as fuel and food prices have eased in the international market, but revenue collection will fall due to slower private sector activity and import.
   Opening of letters of credit (L/Cs) declined by 2.3 percent in the first seven months of the current fiscal and import payments are expected to grow by 18 per cent in the current fiscal as against 26 percent in the last fiscal. The Outlook projected growth of export at 14 per cent and remittance at 20 per cent in FY'09.
   It, however, warned that return of confrontational politics, natural disasters and reversal of economic and other reforms could disrupt economic activities.
   "The new government needs to undertake further reforms in local governance and build local government capacity," it said.
   The government should also incorporate climate change issue into its development planning to reduce poverty in a sustainable manner, ADB's development outlook report suggested.

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Holiday Report

IDLC Finance Limited, a joint venture financial institution and a leading merchant bank, and it fully owne d brokerage subsidy, IDLC Securities Limited have jointly organised a investors' awareness programme in Sylhet.
   The ceremony of this continuing series of programme was held at a local hotel on March 24.
   Mansur Alam, Chairman Securities and Exchange Commission (SEC) addressing as the chief guest at the programme urged the investors to learn about the investment planning and make appropriate decision for investment.
   Anis Khan, CEO and managing Director of IDLC unveiled the plan of holding a series of awareness programme in the forthcoming months. Arif Khan, Deputy Managing Director of IDLC acted as the moderator of the discussion session.
   Others present on the occasion included Khandaker Asadul Islam, CEO, IDLC Securities Limited, Mahmudul Bari, Head of Merchant Banking, IDLC and Bidyut Kanti Das, AGM and head of IDLC Sylhet branch.

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