While the pandemic continues to rage worldwide, some of the countries at the leading edge of the global vaccine programme, including Israel, Bahrain and the United Kingdom, are beginning to see enough light at the end of the tunnel to be able to consider life after Covid-19.
It is not, at first glance, a happy picture. Even before the pandemic struck, the global economy was slowing as a result of cyclical trends and increasing trade tensions. A decade of increasing protectionism and the rise of non-tariff barriers was taking its toll. Now much of the globe faces a recession, with some of the Emerging Markets and Developing Economies (EMDEs) hardest hit.
When the figures are finally calculated it is expected that global output will have fallen by around 5.3% in 2020. Some countries such as Angola, Congo and Egypt are forecast to take a big hit due to a combination of reduced foreign investment, a fall in both tourism and overseas remittances and lower global commodity prices.
With dampened fiscal revenues, an ongoing health crisis and a global recession, the high levels of sovereign debt owed by many EMDEs places them at risk of being unable to service their debts. During the pandemic, Ecuador and Argentina have already defaulted on their sovereign debt obligations, restructured their debts with counterparties, and received aid from the IMF.
Yet, as in all difficulties, there may lie opportunity. As the UK nominee for the post of Director-General at the World Trade Organisation, I had numerous and detailed conversations about the concept investment facilitation with many of these countries. It became very clear that the whole concept meant different things to different people. Many of the smaller developing countries saw it as a threat of having further G7 rules applied inappropriately to them, while many others, including myself, saw it as a means of sharing best practice with, and improving the investment potential for, those who would most benefit.
The UK has maintained its position as the world’s third top destination for investment for a number of clear reasons. The legal system is well understood and widely respected, the regulatory system is generally very stable and the taxation system extremely competitive.
The combination of a skilled labour force and permissive labour law makes the UK more attractive than many of its European neighbours. Add to this the natural advantage of English language skills, access to collaboration with some of the world’s top universities and world leading tech and IP protection, and it becomes clearer why the UK retains its global FDI position. Yet there is no reason why many of these advantages could not be shared more widely if the appropriate domestic reform programmes were put into place. The countries of the Commonwealth, for example, who account for a third of the world’s total population (with many of them under 30 years of age), tend to share a common legal system.
Dynamic gateway countries such as Morocco have set about reforms to improve the teaching of English, the international business language, while others such as the UAE have altered ownership rules to facilitate business investment.
Foreign Direct Investment flows have no sentiment. They will go to where money can be made, where money can be moved and where money can be removed if necessary. This requires clear and consistent legal, financial and regulatory positions. For developing economies, there is an urgent need to build economic capacity and capability in order to be able to take advantage of any opening up that might occur in the global economy especially in services, where liberalisation has fallen well behind what we’ve seen with goods.
This difficult time may present a real opportunity for many governments to introduce domestic reforms to make their countries more attractive to the inward investment they will need to compete in the post-Covid global economy.
If such changes are made and the investment community is properly informed about the pace and scope of reforms, it could create the conditions for sustainable prosperity. As sovereign nations they will have to determine which elements of reform are most appropriate to them, but there are many in the developed world who would be more than ready to lend a hand.
This may not be exactly a silver lining in the Covid cloud but, at the moment, every chink of light needs to be investigated.
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