How can the US support democracy and development in Latin America?
From widespread protests in Cuba to the assassination of Haitian President Jovenel Moïse, recent unrest across Latin America has brought new attention to political and economic issues in the region and created diplomatic challenges for the Biden administration. To discuss how the United States should engage with Latin America, David Dollar is joined by Santiago Levy, a nonresident senior fellow in the Global Economy and Development program at Brookings and senior advisor to the United Nations Development Program.
Levy describes the negative effects of U.S. policy toward Cuba, his concerns about sovereign debt in the region, and how the U.S. could work with Latin American governments to rethink development strategies in order to achieve socially inclusive growth. Then, the conversation turns to Progresa-Oportunidades, a conditional cash transfer program Levy helped design during his career in public service in Mexico, and what lessons it could provide for similar economic programs proposed by the Biden administration.
Read more:
Poverty in Latin America: Where do we come from, where are we going?
Is social policy in Latin America heading in the right direction? Beyond conditional cash transfer programs
How should the G-7 respond to China’s BRI?
Santiago Levy
Nonresident Senior Fellow – Global Economy and Development, Brookings Economic and Social Policy in Latin America Initiative
David Dollar
Senior Fellow – Foreign Policy, Global Economy and Development, John L. Thornton China Center
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davidrdollar
Africa in the news: Natural resource update, security updates, and COVID-19’s third wave in Africa
OPEC forecasts 2022 return to pre-pandemic oil demand and DRC introduces cobalt price floor
On Thursday, the Organization of the Petroleum Exporting Countries (OPEC) announced it anticipates that global oil demand will return to pre-pandemic levels in 2022, a move that will affect oil-rich African OPEC members Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, and the Republic of the Congo. Hinging on expectations of COVID-19 containment and ensuing global economic growth, OPEC forecasts daily demand for oil will exceed 100 million barrels per day (mbpd) next year. This rising demand reflects a sharp reversal from pandemic levels of global oil demand, which sank to approximately 91 mbpd in 2020 from the 2019 peak of nearly 100 mbpd. Facing low global gas prices, OPEC and its allies, known as OPEC+, instituted coordinated supply cuts that have raised the price of oil more than 40 percent this year. Yet, with optimistic forecasts of rising demand on the horizon, OPEC+ agreed to gradually ease their output cuts.
In other news, this week the Democratic Republic of Congo (DRC) announced that the state-run Entreprise Generale du Cobalt, which buys and resells cobalt from artisanal miners, will place a price floor on the commodity of $30,000 per ton. Undercutting the market price, which is currently set at approximately $50,000 per ton, the DRC is expecting to augment government revenue by tapping into the mostly informal sector and cutting out its unregulated middlemen. The DRC currently produces more than 70 percent of the world’s cobalt, an important metal whose demand is set to double by 2030 due to its use in batteries for electric cars.
Rwanda deploys troops to Mozambique, conflict continues in Tigray, and South Africa sends troops to contain riots and protests
On July 9, Rwanda’s defense ministry announced in a statement that it has begun to deploy 1,000 soldiers to Mozambique in order to “restore Mozambican state authority by conducting combat and security operations, as well as stabilisation and security-sector reform.” The deployment is meant to deal with an insurgency in Cabo Delgado that began in 2017 and has since led to more than 2,500 deaths and 800,000 displaced civilians. However, the operation has drawn concern from the Southern Africa Development Community (SADC) over the deployment of troops without the organization’s approval – particularly since SADC had also sent troops to the region as of July 15. Rwanda is not an SADC member but has agreed to aid Mozambique’s government in part due to a memorandum the two countries signed in 2018. The European Union has also agreed to set up a two-year mission in Mozambique to train and support Mozambican armed forces in Cabo Delgado.
Meanwhile, conflict in Ethiopia’s Tigray region continue as the government accuses humanitarian aid groups of arming the Tigray fighters. Ethiopia’s government has also denied restricting aid to Tigray, which remains inaccessible to most aid groups that supply much-needed food and water to the embattled region. The worsening humanitarian situation has put over 400,000 people in famine conditions, mostly women and children. Earlier this week, Tigray leaders rejected a cease-fire announced by Ethiopia’s government, renewing fighting in the south and west regions of Tigray. The U.N. Human Rights Council announced a resolution on Tuesday calling for an immediate halt to all human rights violations and the withdrawal of Eritrean troops from the region.
Turning elsewhere on the continent, on Thursday, the South African government deployed 25,000 soldiers to deal with violence and riots that followed the imprisonment of former President Jacob Zuma. The riots, mainly carried out in major South African cities like Johannesburg and Pretoria, have led to more than 117 deaths and 2,000 arrests. Meanwhile, in Nigeria, 140 students were kidnapped from a boarding school in the northwestern state of Kaduna on Monday, bringing the total number of students that have been kidnapped since last December to nearly 1,000. The recent mass kidnappings have led to the closure of 13 schools that the Kaduna State Schools Quality Assurance Authority determined to be most vulnerable to future attack.
Agencies sign tech-transfer deal for antigen rapid test as COVID-19’s third wave hits Africa
On July 15, FIND, the global alliance for diagnostics, and Unitaid announced two new deals that have the potential to expand Africa’s capacity to manufacture diagnostic tests, including those used to detect COVID-19. Beginning in early 2022, Senegal will produce antigen rapid tests for diagnosing COVID-19 following a new tech-transfer agreement. According to the agreement, South Korea’s Bionate and the United Kingdom’s Mologic will share production know-how with Senegal’s DIATROPIX. Housed at the Institute Pasteur de Dakar, DIATROPIX will aim to produce 2.5 million tests per month next year, assuming it can receive regulatory approval from the Senegalese government. In addition, South Africa’s Xixia Phramaceuticals (a subsidiary of drugmaker Viatris) has partnered with Chinese medical diagnostic company Guangzhou Wondfo Biotech to enable commercialization and distribution of rapid tests to low- and middle-income countries.
This announcement comes at a time when COVID-19 deaths in Africa have risen by 43 percent over the last week as the continent deals with its third wave of the virus. According to the World Health Organization (WHO), COVID-19 cases have risen for eight straight weeks in Africa. WHO attributes the recent rise in cases to inadequate vaccine supplies. Africa has vaccinated about 52 million people this year, with only 18 million of those people fully vaccinated, equating to just 1.5 percent of the continent’s population.
Of the continent’s 6 million confirmed cases, 1 million have been recorded over the past month, making this the fastest COVID-19 surge the continent has seen. Recently, Rwanda has put Kigali under total lockdown for 10 days effective July 17 to suppress a rapid rise in cases. The country has also banned nonessential movement in the districts of Gicumbi, Burera, Musanze, Kamonyi, Nyagatare, Rwamagana, Rubavu, and Rutsiro. Moreover, Tunisia is also struggling to cope with a recent jump in COVID-19 cases, recording its highest single-day coronavirus death toll at 157 on Tuesday.
Crony globalization: How political cronies captured trade liberalization in Morocco
Developing countries have been liberalizing their trade since the late 1980s. The establishment of World Trade Organization (WTO) in 1995 and the subsequent proliferation of free trade agreements (FTAs) furthered this trend. As a result, applied tariff rates have fallen by 66 percent since 1996. However, such tariff liberalization has not always translated into lower trade protection in developing countries. A key reason for this is that the fall in tariffs has been typically accompanied by an increase in nontariff measures (NTMs), such as policies and regulations that constrain imports.
Such trade policy substitution can be relatively innocuous because, unlike tariffs, NTMs do not generally have a discriminatory or protectionist intent. They are usually imposed to promote non-trade objectives, such as ensuring environmental, health, and safety standards. However, in practice, NTMs can shape both trade costs and market access. The implementation of NTMs can be complex and burdensome. The cost of following these regulations is typically higher for some products, sectors, and firms. Many firms in developing countries lack the capacity and resources to comply with required technical specifications and standards. Research shows that NTMs contribute to overall trade restrictiveness. In fact, their restrictive impact on trade is higher than that of tariffs.
Are technical considerations or larger political-economy factors at work?
While there is substantive work on the role of politically influential business groups in shaping tariff policies, we have limited knowledge of the institutional and political determinants of NTMs. Recent evidence shows how exceptional non-tariff measures, such as anti-dumping and safeguarding measures, were used in the wake of India’s IMF Agreement in 1991 to substitute for the fall in tariffs in politically organized sectors. Does this logic apply even to non-exceptional NTMs, such as technical barriers to trade?
In recent work, we examine the political economy of an important trade episode in Morocco. In 1996, Morocco signed an association agreement with the European Union (EU), which led to a dramatic reduction in tariff barriers. Driven largely by geopolitical objectives, the agreement was part of the EU’s Barcelona process that attempted to link “security and stability in the Mediterranean” with trade cooperation. Singularly focused on tariff reduction, the agreement triggered an across-the-board tariff cut that was followed by a substantial increase in NTMs. Given that the EU is Morocco’s largest trading partner, the EU-mandated tariff reduction represented a major trade policy shock.
Were sectors with prior exposure to politically connected firms more likely to receive compensatory protection in the form of NTMs? Our paper examines over 1,500 manufacturing firms and finds that previously politically connected firms received substantially higher nontariff protection after the agreement (see Figure 1). On average, the NTM coverage ratio was 9 to 11 percentage points higher in politically connected sectors relative to unconnected sectors where this ratio was 24 percent. Disaggregating the analysis by type of NTMs, we find that our results are principally driven by technical barriers to trade (TBTs) whose enforcement requires greater administrative oversight and is susceptible to political abuse. We also examined whether the compensatory trade protection in the guise of NTMs especially favored sectors with royally owned firms. Differentiating between different types of political connections, we show that the effect of cronyism on trade policy substitution is primarily driven by firms owned by politicians, royal advisers, and confidants rather than royal firms.
This is explained by two factors. First, the monarchy has a comparatively stronger presence in the services sector (e.g., real estate, banking, and finance) whereas nonroyal firms are mainly active in manufacturing. Second, even if sectors with royal firms witnessed a comparatively smaller increase in NTMs after the EU agreement, its protectionist impact was substantial. To establish this, we analyze the ad valorem equivalents (AVEs) of NTMs that measure the “additional costs” that NTM presence imposes on imports. AVEs are typically used to express the trade impact that an NTM would have that is akin to a uniform tariff. Our analysis suggests that median AVEs in 2009 were 65 percent in royal sectors compared to 49 percent in nonroyal sectors.
Furthermore, while the AVEs registered a general increase during the period 1997-2009, the increase was substantially higher in politically connected sectors. The percentage increase in median AVEs in crony sectors was close to 300 percent compared with only 100 percent in unconnected sectors. Overall, the wave of NTMs that accompanied the EU-mandated tariff reductions not only compensated for the fall in tariffs but actually led to an increase in overall trade protection in connected sectors. The connected sectors’ total trade restrictiveness, defined as the sum of tariffs and AVEs, increased from 54 percent in 1997 to 58 percent in 2008. Had the AVEs of NTMs in connected sectors increased at the same rate as those in unconnected sectors, median trade restrictiveness would have actually fallen to 33 percent instead.
Our work also sheds light on the political economy of trade policy in autocratic states. Prior research has mainly focused on democratic contexts where trade protection is typically exchanged for lobbying contributions by special interest groups. Political scientists emphasize that authoritarian rulers face a perennial challenge of survival in the face of threats, including those arising from within the ruling elite coalition. In the face of such threats, rulers frequently need to buy elite support by granting privileges and sharing rents. In this milieu, trade policy can be used to generate rents that can be selectively and strategically passed on to political powerful groups in exchange for their support.
Will another taper tantrum hit emerging markets?
In early July, the yield on U.S. 10-year Treasury bonds fell to its lowest level in four months, and stock markets dipped on fears that this year’s rosy projections for economic growth will not be borne out. Still, the prevailing view is that the recent spike in inflation will be transitory, allowing the U.S. Federal Reserve to pursue a smooth unwinding of its balance sheet at some point in the future.
This month’s market episode can be partly traced back to February and March of this year, when U.S. long-term rates rose in anticipation that the Fed might soon start tightening its monetary policy. With U.S. President Joe Biden’s large fiscal packages came new fears about inflation and economic overheating. Ten-year Treasury yields duly rose from below 1.2 percent to close to 1.8 percent before stabilizing and falling back to previous levels this month.
Though there were some jitters following the June meeting of the policy-setting Federal Open Market Committee, when some FOMC members assumed a more hawkish attitude, the Fed nonetheless managed to keep markets cool by promising to give plenty of advance notice before beginning to taper its monthly bond purchases. Since then, interest rates have declined at a notable pace.
Rather than worrying about another taper tantrum, we should be more concerned with the slow pace of immunizations leading to an anemic post-pandemic recovery; commodity price hikes generating inflation; and economic strategies that merely restore the low growth rates of the pre-pandemic era.
But uncertainties remain for emerging markets, most of which suffered capital flight as a result of the February-March tantrum and the attendant hike in U.S. market interest rates. Although these outflows have since reversed, there is always a possibility that the Fed will feel obliged to change tack, leaving open the question of whether we are heading for another “taper tantrum” of the kind that shook global markets in 2013.
Recall that in June of that year, then-Fed Chair Ben Bernanke suggested that the FOMC might soon start to slow down its bond purchases. With that one passing statement, Bernanke unwittingly triggered a wave of interest-rate hikes and capital flight from emerging markets.
At the time, the “fragile five”—South Africa, Brazil, India, Indonesia, and Turkey—had high current-account deficits and a strong dependence on inflows of foreign capital. For years, they had experienced the spillover effects of ultra-loose U.S. monetary policies, which sent investors seeking higher yields in emerging markets. When Bernanke raised the possibility of gradual monetary-policy tightening, investors briefly panicked.
Another bout of capital outflows from emerging markets occurred in May 2018, when the Fed really did start to reduce its asset holdings; but this tapering—followed by a sell-off in U.S. bond markets and dollar appreciation—was halted in 2019. This time, the “fragile five” had been reduced to the fragile two of Turkey and Argentina, which both had high current-account deficits and an acute vulnerability to exchange-rate fluctuations, owing to their large volumes of foreign-currency debt.
That brings us back to this year. According to the Institute of International Finance, the February-March market tantrum was enough to generate a significant reduction in non-resident portfolio flows to emerging markets. Although these losses were partly recovered over the following three months, worries of a “taper tantrum 2.0” will remain salient over the next two years, especially if it starts to look like the Fed will tighten faster than it is currently projecting.
But it is important to remember that we are no longer in 2013. Back then, the fragile five’s current-account deficits averaged around 4.4 percent of GDP, compared to just 0.4 percent today. Moreover, the flow of external resources into emerging markets in recent years has been nowhere close to as large as in the years before the 2013 tantrum. Nor are real exchange rates as overvalued as they were then. With the exception of Turkey, the fragile five’s gross external financing needs as a proportion of foreign reserves have fallen substantially.
Two additional mitigating factors are also worth considering. First, if stronger economic growth drives up U.S. interest rates, positive trade linkages for some emerging markets might help to offset any negative financial spillover. Second, it is reasonable to assume that the Fed will offer more appropriate “signaling” this time around, thereby minimizing the risk of another panic episode.
What about the problem of “twin deficits” in many emerging economies? One cannot dismiss the fact that emerging markets suffered large capital outflows last year just as their fiscal deficits were rising in response to the pandemic. But despite the COVID-19 crisis, emerging markets generally have been able to finance their larger fiscal deficits by relying on domestic investors and, in some cases, their central banks. And starting in the second half of 2020, purchases of government securities by non-residents in some emerging markets started to pick up again.
True, because some issuance of foreign-currency-denominated securities may still be necessary, the risks associated with changing foreign-exchange flows have not been eliminated entirely. Countries like Colombia and Chile still have relatively high levels of dollar-denominated debt, and in some emerging markets, portfolio inflows will remain crucial to financing fiscal deficits.
But, ultimately, the bigger risks facing emerging markets lie elsewhere. Rather than worrying about another taper tantrum, we should be more concerned with the slow pace of immunizations leading to an anemic post-pandemic recovery; commodity price hikes generating inflation; and economic strategies that merely restore the low growth rates of the pre-pandemic era.
A golden opportunity to end destructive fishing subsidies
It is not often that trade negotiators get a chance simultaneously to protect vulnerable people and their livelihoods, promote healthier oceans, and fulfill one of the United Nations Sustainable Development Goals. But that is exactly the opportunity awaiting trade ministers as they gather at the World Trade Organization this week to discuss new global rules limiting government support for the fishing industry.
These public subsidies incentivize overfishing, and WTO members have been debating how to limit them for 20 years now. During those long two decades, global fish stocks have decreased sharply, and poor and vulnerable artisanal fishers have suffered along with ocean ecosystems.
In 2017, the U.N. Food and Agriculture Organization (FAO) warned that an estimated one-third of global fish stocks were overfished, an increase from 10 percent in 1970 and 27 percent in 2000. The depletion of fish stocks threatens the food security of low-income coastal communities and the livelihoods of poor and vulnerable fishers, who must travel farther and farther from shore only to bring back smaller and smaller hauls.
In 2017, the U.N. Food and Agriculture Organization (FAO) warned that an estimated one-third of global fish stocks were overfished, an increase from 10 percent in 1970 and 27 percent in 2000.
Despite these disturbing findings, governments continue to disburse around $35 billion in annual fisheries subsidies, two-thirds of which go to commercial fishers. In doing so, they are keeping at sea many commercial vessels that would otherwise be economically unviable.
World leaders recognized the seriousness of the problem back in 2015 when they agreed to forge an agreement on fisheries subsidies by 2020 as part of the Sustainable Development Agenda. But while trade ministers reaffirmed this pledge in 2017, talks at the WTO have repeatedly stalled.
Over the past year, however, things have begun to turn around. Political leaders and trade ministers from around the world tell me they want to get an agreement done this year. In Geneva, the chair of these negotiations, Ambassador Santiago Wills of Colombia, has worked with WTO members to draft a negotiating text that I believe can provide the foundation for final-stage talks. But despite the political support voiced by government leaders, important divisions persist. Indeed, as matters stand, we are in danger of failing to conclude a deal before the WTO’s year-end Ministerial Conference.
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This tight timetable is the reason for convening trade ministers this month. While no one expects a miracle, the meeting represents a golden opportunity to bring the negotiations within striking distance of a deal. WTO members need to conclude an agreement in time for the U.N. Biodiversity Conference in October, and no later than the end of November, when the WTO’s own ministerial begins. A failure to do so would jeopardize the ocean’s biodiversity and the sustainability of the fish stocks on which so many depend for food and income.
Yes, the talks are complex, because fish do not inhabit a single national territory or observe maritime boundaries. WTO negotiators must account for both the existing framework of international fisheries rules and the role of the regulatory bodies that govern many aspects of fishing around the world. They also must define how new subsidy rules would apply to far-flung fishing vessels.
By negotiating away harmful fisheries subsidies, WTO members will not just be honoring past commitments. They will also be lending momentum to other international efforts to address problems in the global commons—from climate change to the COVID-19 pandemic.
Compounding the challenge is the fact that the WTO is not a fisheries management organization. Still, the WTO has a longstanding framework of rules that curb trade-distorting subsidies for industrial and agricultural goods. That is why trade ministers agreed back in 2001 to come up with similar measures to protect marine fisheries.
Although there is still work to do, the current draft negotiating text would make an important contribution to the sustainability of our oceans. For starters, it would completely ban government funding for vessels that engage in illegal fishing. According to the FAO, these activities account for 11 million to 26 million tons of fish per year, or roughly 20 percent of the total global catch. The agreement would also rein in other types of subsidies that support increased fishing activity, by requiring that governments prove they have taken steps to ensure such support does not harm fish stocks.
One of the toughest issues in the negotiations is how to define and honor the original negotiating mandate guaranteeing special and differential treatment for developing countries—and especially for least-developed countries. Many of these countries rely on small-scale artisanal fishing, and they are seeking more policy space to develop their industrial fishing capabilities. But, because their fisheries management capacity is weak, they may struggle to implement new subsidy regimes as quickly and effectively as better-off members can.
Another tough issue is to ensure transparency, with requirements that a member offer notification when deploying non-harmful and non-distortionary subsidies to encourage its fishing industry. Tackling these issues will not be easy, but tackle them we must, because WTO members have pledged to protect the fisheries and ocean we all share.
By negotiating away harmful fisheries subsidies, WTO members will not just be honoring past commitments. They will also be lending momentum to other international efforts to address problems in the global commons—from climate change to the COVID-19 pandemic.
Let’s hope that the world’s trade ministers rise to the challenge.
Social and development impact bonds by the numbers
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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Tracking an education initiative’s integration into government: An institutionalization tool for scaling
While there are many different pathways to scaling and sustaining the impact of a development initiative, the reality is that in the education sector, delivering at scale over the long term is very often not possible without government in the lead. When an NGO, social enterprise, or donor develops and implements the initiative first, the scaling strategy must center around the gradual transition to government ownership, delivery, and financing—assuring quality and impact are maintained.
This type of scaling—called institutionalization, vertical scaling, or mainstreaming—is the process by which an initiative becomes embedded within the formal education system and is led and sustained by the government. The ultimate goal is that the initiative becomes part of the government’s policies, plans, procedures, budgets, and daily activities—effectively “disappearing” into the broader system.
Tracking institutionalization in Real-time Scaling Labs
One example of this type of scaling pathway can be seen in the Real-time Scaling Lab in Côte d’Ivoire, where the scaling goal is not only to reach 100 percent of students in grades 3-6 with the Teaching at the Right Level or “PEC” targeted literacy and numeracy approach, but also to institutionalize and sustain PEC delivery fully within the education system, such that it is wholly integrated into the Ministry of National Education’s own processes and plans. The Ministry currently implements PEC directly in 1,000 public schools and is in the process of infusing all aspects of delivery throughout the education system, including incorporating data collection and mentoring activities into existing processes and planning to incorporate PEC training into teacher training colleges’ curricula.
Another example can be seen in the Real-time Scaling Lab in Jordan, where the Ministry of Education, in collaboration with the Central Bank of Jordan, has been gradually mainstreaming a financial education course developed by the social enterprise INJAZ in all public, private, and refugee secondary schools over a seven-year period. The end goal is for all program elements to be transferred fully to the government by 2023. Throughout the process of institutionalization, INJAZ has been playing a key role supporting the Ministry in areas such as curriculum revision, teacher training, and monitoring and evaluation of program outcomes.
Through the Real-time Scaling Labs, CUE has witnessed the need for more practical, education-specific guidance on how to track the progress of vertical scaling and prioritize next steps.
Using the tracker
While the end goal for institutionalization may be clear, assessing progress toward achieving it can be less straightforward. Identifying the various elements of the education system to track headway and roadblocks faced in each of these areas can be challenging. Further, it is not always evident what concrete actions need to be taken to advance the institutionalization process and how to prioritize among them. Through the Real-time Scaling Labs, the Center for Universal Education (CUE) has witnessed the need for more practical, education-specific guidance on how to track the progress of vertical scaling and prioritize next steps.
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To support policymakers, practitioners, and funders engaged in this process, CUE has developed the “Institutionalization Tracker,” a tool to measure the progress of efforts to integrate an initiative into the education system and identify areas that require additional attention to strengthen institutionalization. As noted in the tool directions and demonstrated by the graph below (Figure 1), the tool is organized by education system building blocks, each of which is broken down into specific elements. For each element, there is a set of criteria to consider when assigning a score, and a column for providing an explanation for the score selected. The score is based on a scale of 1–4, with 1 meaning “low institutionalization,” and 4 meaning “full institutionalization.” This tool measures the progress of institutionalization efforts related to one government agency or ministry, specifically the ministry of education. The tool is designed to track progress toward national-level institutionalization, but in a decentralized system it can instead track institutionalization for the appropriate subnational education authorities. Notably, the tool is not meant to determine if an initiative should scale, or to assess the strength of an education system, and it does not track other important aspects of scaling such as impact and quality, and so ideally it should be complemented with other scaling metrics. It is important that stakeholders use the tool as part of a collaborative effort not only once, but as a dynamic planning tool—repeated at intervals to assess progress and determine next steps.
Figure 1. Sample radar graph
Source: CUE “Institutionalization Tracker,” 2021.Note: This radar graph visually depicts a sample of two rounds of results from the tracker and can help determine priority actions.
The Institutionalization Tracker can be adapted to the specific needs of the intervention and context where it is used and can be extended to include further dimensions not currently explicitly identified, such as the structure and dynamics of costs that need to be covered by the public budget. This tracker is one in a suite of tools developed and tested by CUE, each of which supports different aspects of the scaling process and works in synergy. While the tracker can certainly be used on its own, we recommend that this tool inform the refinement of a broader scaling strategy and be used in conjunction with a resource such as CUE’s “Scaling Strategy Worksheet.”
The Institutionalization Tracker has been piloted in several of the Real-time Scaling Labs to date and has been directly informed by the work and input of our partners. We welcome readers’ questions, feedback, and reflections to inform future editions.
Leveraging digital technology during the pandemic
During COVID-19, firms experienced unprecedented shocks. Their supply chains were disrupted as were their relationships with customers and workers; demand plummeted, as no one knew what would happen next. The dual shocks pushed firms to look for new ways to stay afloat and navigate their businesses. But in some cases, the crisis became an opportunity for innovative businesses, especially those that increased the adoption of digital technologies. How widespread was the innovation? Will it be enough to foster a productivity-driven recovery?
An initial analysis of novel data collected between April 2020 and January 2021 from Bulgaria, Poland, and Romania, suggests that the pandemic triggered some innovation. Still, it was limited to low-hanging fruits and varied depending on firm size and previous technology investments. A mix of financial constraints and managerial capacities likely limited deeper and more widespread innovation in firms.
COVID-19 lockdowns, workforce restrictions, and limited access to inputs (60 percent of firms reported problems obtaining inputs) reduced firm productivity and supply capacity. At the same time, demand slumped or shifted toward new products and services. These shocks were compounded by unprecedented uncertainty about the virus, the extent and duration of public policy responses, and future outlooks. These channels affected firms and sectors differently and in a manner that required businesses to adopt novel solutions or risk going out of business.
Firms needed a moment, but they did react. Initially (April-August 2020), most firms (more than 60 percent on average) did not implement any adjustments to the way they carried out their business. However, the share of firms that adopted some innovation steadily increased over time. By the end of January 2021, close to 60 percent of firms had either expanded the use of or invested in new digital technology, or introduced product innovation (Figure 1).
The challenges from the pandemic were multifaceted—from the disruption in the availability of inputs to the need to guarantee safe working conditions for workers or recreate broken relationships with customers—and so were the firms’ adjustments. Some firms reorganized production and distribution processes (process innovation, like takeaway and delivery in the hospitality industry). Others revamped their products to meet the customers’ needs (product innovation). We find that while both types of innovation were common to all three countries, on average, process innovation occurred more frequently than product innovation.
Firms’ responses were much more nuanced and complex than what the aggregate numbers suggest. Among the firms that did not increase their digital technologies usage, a minority (9 percent) did not use ICT (information and communication technologies) before COVID-19 and did not start using them during the crisis. Similarly, there were businesses that were already using ICT and did not increase usage during the crisis (55 percent). By the end of the second wave, about 90 percent of firms were using digital technologies for their business and almost one-third of firms had either started using or increased their use during the pandemic (Figure 2).
A higher intensity in the use of digital technologies could already contribute to a faster recovery. It could induce productivity gains and reduce the persistent productivity gap previously found between European and U.S. firms. However, digital technologies are complex and heterogeneous and can affect the opportunities of growth and convergence across different firms and local economic contexts unevenly.
For digitization to spur a productivity-driven recovery, it must concentrate on business functions with the highest potential to spur upgrade and firm growth (according to recent World Bank research). In these three countries, we find that digitization has concentrated in business functions such as marketing, sales, and business administration (Figure 3), which can be considered low-hanging fruits with less potential for spurring productivity at the firm level. So far, digitization is making very limited inroads in areas such as production and supply chain management, which require complex organizational changes.
More opportunities await firms with the possibility of expanding and incorporating digital technologies toward optimizing production capacity and more efficient supplier management. Given these findings, in our next blog, we will address the question of what could be preventing firms from expanding the use of digital technologies.
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South Africa after COVID-19—light at the end of a very long tunnel
In this time of crisis, we are often reminded of a famous quote attributed to Winston Churchill during World War II: “If you’re going through hell, keep going.” While South Africa is not in the middle of a physical war, it is battling the COVID-19 crisis in full force. Like most other countries, South Africa could not escape the pandemic. It suffered the loss of lives and livelihoods. At the time of writing, in early July 2021, more than 64,000 South Africans have lost their lives. The third wave is hitting the country very hard and infections keep rising every day. But there is also light at the end of a very long tunnel.
The government responded swiftly and strongly to the crisis while also spearheading an international alliance for the distribution of vaccines in Africa. If the South African government would carry out with the same determination long-standing economic reform as it was fighting the pandemic, COVID-19 could serve as a turning point in reenergizing South Africa’s economy and labor market. While South Africa is set to emerge from the crisis weaker than it was going into it, the World Bank’s South Africa Economic Update argues that the reasons for low growth and high unemployment do not lie in the government’s crisis response. Instead, the pandemic has exposed long-standing structural weaknesses that have progressively worsened since the global financial crisis of 2008–09.
For 2021, the World Bank projects a gross domestic product (GDP) growth of 4 percent, followed by 2.1 percent in 2022 and 1.5 percent in 2023. South Africa’s weak recovery is putting pressure on public finance. For the first time ever, public debt is now at almost 80 percent of GDP and under the current trajectory debt levels will not stabilize before 2026. However, the current global recovery is helping South Africa, especially the strong rebound in China and the United States—two of its key trading partners. As other emerging markets are recovering faster, South Africa’s economy could have benefited more in 2021 if integration with the rest of the world was stronger (Figure 1).
Figure 1. South Africa’s contraction in 2020 was deep, and recovery in 2021 will be moderate
The crisis has exposed South Africa’s biggest challenge: its job market. Even in the best of times, the labor market has been marked by high levels of unemployment and inactivity. Out of a working-age population of almost 40 million people, only 15 million South Africans are employed, which includes 3 million jobs in the public sector. The COVID-19 crisis has made a difficult situation worse because low-wage workers suffered almost four times more job losses than high-wage workers. In 2021, we saw a modest job recovery, but it is at risk due to the third wave.
Against the odds, there are also positive developments in the labor market, and young entrepreneurs are one of South Africa’s best hopes to solve the jobs crisis. There are an increasing number of startups, especially in the digital sector, which are growing fast and could in the future become an engine of jobs growth. Cape Town alone, the “tech capital of Africa”, has over 450 tech firms and employs more than 40,000 people. In 2020, a total of $88 million (1.2 billion rand) disclosed investments went into its tech startups.
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A focus on young entrepreneurs would also help South Africa to close its large gap in self-employment (own-account workers with own businesses, freelancers), which represents only 10 percent of all jobs—compared to around 30 percent in most upper-middle-income economies such as Turkey, Mexico, or Brazil (Figure 2). If South Africa were to match the self-employment rate of its peers, it could potentially halve its unemployment rates.
Figure 2. Self-employment—South Africa’s biggest opportunity to create jobs
South Africa’s economy would benefit from measures to preserve macroeconomic stability, to revitalize the jobs market by improving the investment climate to build a better and more inclusive economy after the pandemic. There is a risk that the recovery leaves behind most of the potential economically active population, particularly young job seekers, which would mean that the pandemic permanently impaired the country’s long-term development prospects. Conversely, if South Africa were to engineer a broad-based recovery, this decade could bring new prosperity.
Addressing structural constraints to growth behind and at the border could support exports and higher growth, and so preserve the sustainability of public finances. The experience of major emerging economies shows that the two most potent factors for reducing public debt-to-GDP ratios are economic growth and primary surpluses. The implied priorities are self-evident: a better climate for investment and trade, and prudent fiscal policy.
To generate employment, South Africa would have to address three chronic problems in its labor market: extremely high rates of inactivity, high rates of unemployment, and low levels of self-employment. Along with enacting carefully chosen regulations to improve the business climate and investing in the workforce through better education, the government can implement reforms to encourage self-employment and support the growth of micro- and small enterprises.