Impact of Brexit on International Development and Developing Countries

Abstract

Before the people of Britain voted to leave the EU, UK and other members of the EU collaborate through common policies in dealing with international issues or in forming relationship with the rest of the world. By leaving the EU after 43 years of involvement, there is likely to be an economic consequence for Britain and international development. This essay links the possible changes that may occur in Britain affairs post-Brexit linked with the possible impact on developing countries and international development in terms of trade, Oversea Development Assistance, remittance and migration.

INTRODUCTION

Brexit is an issue of great concern for developing countries and international development. It will have major implication for developing countries (Mendez-Parra, Papadavid and Willem Te Velde, 2016). The impact could come through different pathways such as international trade, Overseas Development Assistance (ODA), migration and remittances. Yet Brexit may offer a “silver lining” precisely because new trade agreement will need to be negotiated, which provides developing countries with an opportunity to restructure and improve their trade relations with UK (Jones, 2016). International development experts worries that Britain’s exit from European Union (EU) may result in a lower UK aid in sterling and dollars, because a lower Gross National Income (GNI) will result in a lower budget deficit (Gavas, 2016). Despite reports that the UK government has drawn up plans aimed at restricting immigration, Mendez-Parra et al., suggest that migration might actually increase on the basis that lower migration into the UK will mean less UK growth which will affect development negatively. While there are many articles presenting that Brexit will reduce the value of remittance that migrant send home due to a fall in the value of pound, there are evidence (Yang, 2006) that suggest migrants sending money back to their household in developing countries may work extra hours to counter the exchange rate shocks.

Brexit may create opportunities and challenges for developing countries, but It is uncertain the kind of economic or international arrangement that Britain may have with developing countries after leaving the EU. Such relationship may depend on how international policies are conducted and the growth of Britain economy post-Brexit

CONCEPT OF TRADE WITH DEVELOPING STATES

Granting of trade preference by industrialised countries to developing countries has been a common practice since the early 1970s. The trade preferences involve the removal or reduction of trade regulations such as tariff and quotas and is enshrined in the international trade law of World Trade Organisation (WTO). For example, the EU offers Everything but Arms (EBA) initiative with ‘Zero’ tariff for Least Developed Countries and also the Generalised System of Preferences (GSPs) plus tariffs for developing countries that respect human right and other international conventions.  (Klasen et al., 2016). Dirk Willem te Velde analyses the scenario of UK not forming part of a custom union with the EU. He gave an instance whereby UK reduces the margin of preference for developing countries which may increase the amount of duties paid by countries dependent on such preferences. L. Alan Winters, calls for a simple rational approach with forgiving rules of origin when UK makes policies towards developing countries (Mendez-parra, Willem and Winters, 2016)

Brexit may also have significant impact on the terms of trade of developing countries.  A country’s terms of trade measures a country’s export price in relation to its imports price. The terms of trade are favourable when every units of exports sold can yield more units of imports. It is a key determinant for developing countries’ macroeconomic performance (Al-abri and Gani, 2016). According to Prebisch-singer hypothesis, terms of trade does not favour developing countries producing and exporting primary products and for them to maintain the gap with developed economies they must continually increase output. In the short term the threat of Brexit led to currency and stock market fluctuation which have not spared Emerging Markets (EMs) and poorer countries (Mendez-Parra, Papadavid and Willem Te Velde, 2016). Britain’s decision to leave the EU may cause the UK economy to slow down for some period of time due to uncertainties in its economy, and it could lead to a decline in UK’s demand for foreign goods, directly affecting those EMs that have high exposure to the UK in terms of exports. (Jan Willem Velthuijsen, Halûk Yalçın, 2016).

IMPLICATIONS OF BREXIT IN TERMS OF TRADE

The EU and developing countries have existing trade arrangement that may be affected by Brexit due to the large involvement of UK in the arrangement. This arrangement includes free trade agreement, EU General System of Preferences, Economic Partnership Agreements (EPAs) and  African Caribbean and Pacific Preferences (ACP preferences) (Panagariya, 2002)

The UK Department for International Development (DFID) published its post Brexit trade approach towards developing countries in 2017. According to the DFID the UK government pledges to secure the existing duty-free access to UK market of which 48 countries across the globe from Bangladesh, to Sierra Leone, Ethiopia and Haiti exports all their goods except arms and ammunitions also known as Everything but Arms (EBAs) duty-free. Most of These countries already benefit from the EU’s EBAs deal, hence UK’S pledge here simply amounts to maintaining the status quo for this group and is not actually an improvement (Dr Peter Holmes, 2017). Although this access is important for developing countries terms of trade as it reduces the cost of their product in EU market making them more competitive and creating demand for them.

The EU existing duty- and quota-free access is part of its GSPs programme which grant full removal of tariffs of over 66 percent on items listed in its tariff schedule for developing countries. It is designed to help developing countries comply with a number of key international conventions on human and labour rights, environmental protection and good governance. Beneficiaries include Armenia, Bolivia, Cape Verde, Mongolia, Kyrgyzstan, Pakistan, Paraguay and the Philippines (Commission, 2017). The preference of the beneficiaries of this package are likely to be affected if Britain does not keep the EU GSPs. For example, Pakistan which is UK’s largest trading partner within the EU, accounting for 20% of its trade within the bloc is likely to lose preferential access to the UK market (Council, 2017) if Britain does not keep the EU GSPs. It would make more sense for Pakistan if UK keeps the existing EU GSP’s. Another issue with the GSPs is that the rules of origin are very complicated. Rules of origin is defined by the World Trade Organisation, as the criteria needed to determine the national source of a product. To take advantage of the tariff preference, exporting countries must meet certain rules of origin to substantiate the claim that it indeed produced the export product rather than import it from another country excluded from the GSP privileges. Hence, if UK decides to implement its own GSP’s for Pakistan and other developing countries this would create double standard requirement for Pakistan’s goods coming into the EU market and UK market. It would make more sense for Pakistan if UK keep the EU GSPs.

In the case of UK forming a Post-Brexit trade policy, there could be a major implication for the existing EPAs between the EU and ACP countries. The EPAs are also tariff negotiations between the EU and its former colonies in the group of the ACPs. The rules of origin are more generous in this agreement as it allows developing countries to source for input from other countries that are excluded from the GSP privileges. The impact of Brexit on EPAs could come in two ways. Firstly, certain product could face higher most favoured nation tariffs and secondly export from ACP developing countries could be exposed to competition from non-APC developing countries (Vickers, 2004). Developing countries would have to pay double tariffs to access the EU market and UK market, although UK might endeavour to make its trading terms to be almost as favourable like that of the EU EPAs. Take for instance the Dominican Republic (DR) export of banana into the EU market.  DR is a major beneficiary of the EU EPAs with 75 percent of its trade with EU exported to UK. lack of equivalent EPAs to UK market could lead to higher tariffs for DR. On the other hand, it is likely that UK grant free trade access to non-ACP developing countries that produce banana (such as Latin America) at a lower cost than the DR making them lose competition in the UK market. In order words large developing countries are likely to benefit more than less economical developing countries post-Brexit.

 IMPLICATIONS FOR DEVELOPING COUNTRIES TERMS OF TRADE

As earlier discussed the terms of trade for most developing countries is not always favourable because they export mainly primary product (raw materials) which is cheaper than secondary product (manufactured product) in the international market and for them to benefit from free trade access they would have to increase their exports in international trade.

The impact of Brexit on developing countries terms of trade could come through two different pathways. Firstly, the value of developing countries exports to UK might increase due to a fall in the value of pounds. Conversely this may be countered by an increased interest rate set by Bank of England (BOE) in order to curb inflation. After Brexit referendum the British pounds fell to values not seen since 1985, (BBC, 2016). This implies that the value of export coming into UK would increase relative to British pounds which may be favourable for developing countries balance of trade. On the other hand, high price of developing countries export could be upset by lower demand from UK due to inflation. The rise in inflation could raise the chances of the BOE to increase interest rate. In other words, developing countries terms of trade could improve in the short run, but this may be manoeuvred by UK’s economic policies that involves raising interest rate in order to normalise inflation. 

Secondly increased competition for UK market through negotiations of more trade deals could reduce the terms of trade for developing countries trading with UK in the EU. According to the DFID published, the UK government aims to provide new opportunities to poorer countries by increasing trade links. If the trade links covers other developing countries that do not trade with UK before Brexit, then there will be higher competition for UK market. Based on the assumption of Bertrand Competition in a competitive market, firms always have incentives to cut prices, which actually leads to a race to the bottom (a situation in which companies compete against each other by paying lower wages to workers or making work condition worst). Another case under the assumption is where there is free entry that drives profit to Zero (Helpman & Krugman, 1985). Here Brexit may create more trading opportunities for developing countries, but at the benefit of UK economy (getting the cheapest commodities) and at the cost of developing countries terms of trade (competitive price for their product) which is likely to get worse after Brexit.  Another issue is that developing countries, particularly least developed countries may struggle to compete with other efficient producers from large developing countries.

POSSIBLE IMPACT OF BREXIT IN TERMS OF OVERSEAS DEVELOPMENT ASSISTANCE

CONCEPT OF OVERSEA DEVELOPMENT ASSISTANCE  

War against poverty and underdevelopment is a major issue in the contemporary world. ODA is the means by which developed countries and international donors assist countries that are less developed. It is defined as resource flows to developing countries and multilateral organisations, which are provided by official agencies or their executive agencies and each transaction is aimed at promoting economic development and welfare of developing countries (DFID, 2016). Traditional development economics view foreign aid as a tool for overcoming the saving gaps in developing countries based on the view that developing countries are poor because they lack capital to make income-generating investment while mainstream economic literature suggest that aid can help developing countries by closing their financial gap that otherwise leave them stuck in poverty trap (Abuzeid, 2009). Aid can also be given in form of trade. This is known as aid for trade.  The World Trade Organisation (WTO) describes aid for trade as the means of helping developing countries to build the trade capacity and infrastructure they need to benefit from trade opening. It is part of the overall official development assistance that includes grant and concessional loans targeted at trade related programmes and projects. Mendez et al., analysed how aid for trade can be used to reduce trade cost for developing countries in the case where UK adopts independent trade policies after leaving the EU. They proposed that it can be used to complement trade and investment agreement and compensate vulnerable countries whose preference margins are eroded. According to the UK Department for International Development the ODA provided by UK government has increased over the past years by 10 per cent to £13,348 million in 2016. In 2015 it was £12,138.  It comes in form of financial assistance or aid, military assistance in term of the fight against terrorism and humanitarian assistance. Sachs and Stiglitz believe that levels of aid has historically been too low and that large increase in foreign assistance could be greatly effective in helping reducing poverty (Edwards, 2015).  The European Union (EU) is recognised as the largest aid donor in the world, with UK among the largest three contributors to EU aid budget. Britain’s decision to leave EU would reduce the impact of EU’s aid that helps in reducing poverty in developing countries. (Actionaid, 2016).

Implications for Overseas Development Assistance

The UK government meets the United Nation calls for countries to spend 0.7 per cent of their Gross National Income (GNI) on overseas development aid. The GNI is the value of goods and services produced by all the citizens of a country during a certain period of one year. Even after the referendum the DFID published that UK met it ODA in 2016. The possible impact of Brexit on developing countries in terms of ODA going forward can be viewed through the changes in the value of UK’S GNI, changes in the way UK decides to spend its aid and UK economic outlook.

GNI can be derived by the summation of all the expenditures made in a country within a year. It includes government expenditure, private individual expenditure and household expenditure. This implies that GNI depends on a prosperous economy. If Britain economy continues to prosper after Brexit then there could be no significant change in Britain 0.7 percent aid but if Britain economy growth declines then it is likely for the value of UK ODA to decline. Maurice Obstfeld, International Monetary Fund (IMF) chief economist said the IMF had long predicted that Brexit would have negative long-term effect on Britain and things could get worse depending on the outcome of EU-UK negotiations (CONNOR MURPHY, 2017). The effect of EU-UK negotiation on UK’s economy would merit study in the future as nothing is really certain for now. In contrast to what IMF believes a group called “A think thank” has held steady on its prediction for continued economic growth in the UK with the cheaper pounds increasing prospect for exports (Isaac, 2017). Also, the Organisation for Economic Co-operation and Development (OECD) maintains the same view.

Although the value of the aid is likely to reduce in pound. Assuming that UK 0.7 percent aid was reckoned at £13,348 million pounds and given as cash to developing countries in 2016 as discussed earlier. If the same amount is paid to developing countries in 2017 and the value of the pounds declines by say 10 per cent. This means that £13,348 million has reduced in size by £1,334.8 and cannot be as effective as in 2016. In this sense aid has declined in value.

There is the possibility that ODA would be used as a bargaining tool to encourage developing countries to open up their markets for the UK (HARRIS, 2016). After Brexit, UK may seek to change from the traditional approach of giving aid to securing trade deals, an approach referred to as Aid for Trade (AfT). The traditional form of aids come in form of grants and it is likely that ODA post-Brexit could come mainly in form of concessional loans. These are loans extended on terms substantially more generous than market loans. The terms could be in form of lower interest rate than market rates and longer grace periods to pay back. Britain may give this type of loans to developing countries in order to boost their production capacity, by investing in industries and sectors so they can diversify exports and build on comparative advantages. The loans can be used to build infrastructures such as roads, ports and telecommunications that links domestic and global markets. Aid for trade include technical assistance that help developing countries to develop trades strategies that could result in positive outcomes. And it delivers adjustment assistance that helps reduce cost associated with tariff or declining terms of trade.

There are some concerns about AfT that is worth inspecting. Firstly, we could inspect if AfT is given at the interest of Britain’s economy whereby developing countries sell their product in the UK market at a cheap price or where developing countries open up their economy for Britain investment to flourish. Another issue is whether it increases the indebtedness of developing countries to developed countries.  The effectiveness of aid itself on developing countries growth is a remarkable debate among scholars but AfT could be given a chance. Over time Africa has received a substantial amount of foreign aid but statistics shows an inverse relationship between aid and growth in Africa.

Britain decision to leave the EU will lead to a decrease in the impact of the EU aid budget for developing countries. The UK channels funds for development co-operation and humanitarian aid to two budget lines, which are both managed by the European commission. The first line is the development part of the EU Budget which target Asia, Latin America, Middle East and North Africa. while the second line is channelled to the European development fund for the most vulnerable ACP countries. If the UK was to maintain its level of aid, this would mean either that money will be spent through less effective multilateral organisation, or would be spent bilaterally reducing its efficiency (Actionaid, 2016). According to the OECD record, the EU is the largest donor in the world accounting for about half percent of the world’s ODA. The UK is recognised as one of the three largest contributors to the EU aid budget with $13,670 million of its aid disbursed through the EU in 2016. Hence, developing countries that benefit from EU aid may be negatively affected especially if UK decides to channel its aids towards specific states not benefiting or receiving only little from the EU aid such as the commonwealth states. Barder, et al., 2016 assumed that UK’s relationship with partner countries might be reshaped with an increase in aid to commonwealth states among British aid recipients or alternatively by deepening ties with least developed countries (EUROPEAN PARLIAMENT, 2017).

POSSIBLE IMPACT OF BREXIT IN TERMS OF MIGRATION

Concept of Migration

In the contemporary world migration is recognised as an important factor of international development, based on the assumption that migrant do not cut ties with their country of origin, their households communities back home and in the process important exchange take place in the form of money, knowledge and ideas between the host and home countries through migrants (Vargas-Silva, 2012). Many scholars believe that “international migration and remittance play an important role in economic and social development of the developing countries as it helps in achieving the gains of globalization”(Siddique et al., 2016). In contrast, some authors views of migration are that it leads to ‘brain drain’. Brain drain is the emigration of highly trained or qualified citizens from their country to another. In the 21^st century migration is regarded as an era of fluidity and openness in which changes in transportation, technology and culture are making it normal for people to think beyond boarders and to cross them frequently (Urry 2007). People move for the purpose of studying, professional advancement, marriage, retirement or lifestyle (Castles, 2010). People from developing countries also migrate to UK because of high economic benefits.

Implications for Migration

According to a senior government in London, the British government, in planning its industrial strategy for UK will consider a new EU visa scheme that will aim at reducing the number of workers entering Britain (POLITICO, 2017). British Election Study suggests that the reasons people voted to leave EU in 2016 were relatively split between sovereignty and immigration control. (YouGov UK, 2016). If Britain would restrict immigration for its neighbouring countries then its immigration policy could be stricter for people in other developing countries hoping to come and work in the UK.

Alternatively, Brexit could offer developing countries a break in brain drain. According to the UK Home Office immigration statistics for granted settlement to non-European migrants, people settling for employment reasons represent 40 per cent of the total category of settlement in 2016. Indian and Pakistan nationals and young people receive the most grant of settlement (Blinder, 2017).  According to a global survey of more than 42,000 employers titled Talent Shortage Survey, 40 percent bosses were experiencing difficulties filling roles. In India for example, 48 percent of the employers reported that they had difficulties filling job vacancies dues to talent shortages (TIMES, 2016). The expected income gap between UK and India could be the reason why many Indian nationals migrate to UK for work. Another example is the case Poland Prime minister made when addressing the press in 2017. He expressed that he would like have one million Polish citizens in Britain return to Poland and occupy the job vacancies. According to him the wages in Britain is high but the cost of living in Poland is lower. In the context of Brexit, there is the likelihood that workers in developing countries  looking to come and work in UK because of the income gap could be restricted, making them to remain in their countries and fill the fill the labor deficit.

Notwithstanding, it is also possible that the UK adopt a relatively liberal system of migration whereby it accepts an increase in skilled migrants from outside the European Economic Area and at the same time reducing EU migration (Portes & Forte, 2017). This approach to migration could give people from developing countries more hopes of coming to UK to work enhancing the contribution of remittance in globalisation.

Brexit could have less impact on international student coming to study in the UK except maybe EU nationals that benefit from student finance in the UK. In a public poll conducted by Universities UK on more than 2000 adults, 75 percent expressed the view that they would like to see the same number or more of international students coming to study in UK, while 25 percent expressed the view that international students are immigrants (UK, 2016), signifying that reducing foreign student migration might not be on top of the British government agenda when making immigration policy.  

Over the past several years, the number of Indian students coming to study in UK has decreased. There are conceivable different reasons for the decline including a drop in the value of the rupee relative to the pound (Hajela & Sumption, 2017). A drop in the value of the sterling post Brexit may have a positive impact on students of developing countries (example; India) that would want to study in the UK. In contrast student fees may be revised upwards by UK universities in order to compensate for the loss in the value of pounds. Inflation in UK may make living in the UK costly for international students from developing countries.

POSSIBLE IMPACT OF BREXIT IN TERMS OF REMITTANCES

Concept of Remittance

Remittances is a source of development financing that is three times the size of all ODA, while the UK is estimated to be the world’s fourth largest sender of remittances and well within the top 10 senders to developing countries. Hence the implication of Brexit on remittance is an issue of significant concern (Juden, 2016). De Hass and Ruttan, observed that migrants from developing world bring labour, skills and Know-how to the countries where they settle, while continuing to contribute to development in their countries of origin by sending by remittances, investing in business, introducing knowledge and skills and contributing to charity (Levitt and Lamba-nieves, 2011). Key factors that may affect remittances after Brexit are “migrants income level, economic conditions in host country, inflation rate, exchange rate, real interest rate, government migration policy and political stability in host country” (Abbas, Masood and Sakhawat, 2017).

Implication for Remittance

Amazingly, despite the economic downturn in UK (2015/2016) the UK recorded a median household disposable income of £26,300 in the financial year ending (2016) which was £600 higher than the previous year (Wells and Thomas, 2017). Assuming households where migrants live in UK are among the estimated disposable income calculated, then the amount of remittance they send is not likely to be affected. This is based mainly on the fact that the Brexit referendum had just taken place. It is uncertain what the household disposable income will be after Britain really exit the EU, but if it decreases significantly then the amount of remittance that migrant send to developing countries might reduce significantly.

In august 2017, the UK’s inflation rate climbed to its joints highest in more than five years (BBC, 2017). One of the factors responsible could be the falling value of the pound since Brexit vote occurred. This shock may reduce the amount of money that migrants send to developing countries, as they have to adjust their expenditure pattern to suit the economic circumstances. Also, if the pounds continue to fall, then the value of remittance that developing countries receive will decline when they convert it to their local currencies. On the other hand, it is also possible that migrant increase their working hours in response to the exchange rate shocks.

CONCLUSION

Britain’s approach to international trade with developing countries is likely to have the most significant impact on international development post-Brexit. In the modern world trade is the most important factor for growth in either a least developed or a developed country. It provides jobs, it provides revenue and it affects the welfare of everyone living in the society. It is difficult to evaluate how Brexit will affect international trade, but it is easy to mention that it may lead to losers and winners if UK expands trade links to countries not on the EU preferential system. For clarity purpose, large economical developing countries are likely to benefit while least developed countries are likely to be on the losing side in terms of competing for UK market.

The impact of Brexit in terms of remittance, foreign aid, and migration may not have a serious impact on the growth of developing countries. In view of foreign aid, the impact depends on Britain’s economic performance and commitment to International development goals. Britain is one of the most generous country in the world and it has stated her commitment to continue the contribution of 0.7 percent of its GNP post-Brexit. The level of remittance also depends the growth of Britain economy post-Brexit. Nonetheless, migrants sending money back home are unlikely to tarry with the amount they send to their loved ones in their home of origin, some may even work extra hours make up for any impact that Brexit may have on the value of their remittances. Migration has remained strict for non-EU nationals before Brexit and it is likely to be the same post-Brexit. The main people that may be affected in terms of migration are the nationals of the other EU and they are likely to migrate to other regions in the EU where there is economic benefit.

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