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The CGD Podcast
Brexit Breakdown: What Now for Global Development? Podcast with Owen Barder
00:23:34
It’s been three weeks since the UK voted to leave the European Union in the move popularly known as Brexit, and the consequences are still becoming apparent. Senior fellow and director of CGD Europe Owen Barder joins the podcast from London this...
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- [00:00]
A
Foreignani and thanks for joining me for this edition of the CGD podcast. So there I was on June 23rd in the UK visiting my mother, enjoying some home cooking and preparing slightly nervously for the results of the Brexit vote. That night I sat with my family members discussing how the final polls looked close, but it seemed the UK would choose to remain. How wrong we were. The days since have been somewhat surreal in British politics, not to mention an economics roller coaster ride. One forecast estimates a contraction in the UK economy of 4 and a half percent by 2019. The pound has already, well, taken a pounding and by the end of my trip, in fact, I was paying for everything with my US credit card to try and save money. Things are so uncertain that it's hard to make any predictions, so we won't. Instead, let's try and take a considered view of what Brexit might mean for global development. My CGD colleague Owen Barda wrote a thoughtful, balanced blog called Threats and Opportunities for Global Development and you can find it on our website. And Owen joins me today on the podcast. Welcome, Owen.
- [01:16]
B
Thanks very much, Roger.
- [01:17]
A
Now, there are three things to consider here, I suppose. There are the direct effects on UK politics and economics, Brexit, there's the effect on developing countries, and there's the impacts of Brexit on development cooperation. So let's start off by thinking about that expected shrinking of the UK economy. What do you think that could mean for global development?
- [01:37]
B
I think that as the UK economy is smaller than it would otherwise be, just to be clear, that doesn't necessarily mean that it will shrink from one year to the next. It might just mean that we grow more slowly than we would have expected. Expected. That's bad news for obviously for British citizens, but it could also be bad news for our trading partners in the developing world. Some of the particularly Commonwealth countries that send a lot of their exports to us will find reduced demand in the British economy for their exports. It could be bad for Britain's aid program, our willingness to send money abroad. And it could be bad if for a given size of our aid program, the change in the value of sterling that you were talking about means that the same amount of sterling aid goes less far in terms of dollars spent across the developing world.
- [02:33]
A
I mean, I guess we're already seeing that with the way that the pound has plunged. That has a direct effect already on.
- [02:39]
B
Remittances, doesn't has an effect both on the aid program and on the remittances that overseas workers working in Britain will be sending the value of that money that they're sending home to their families abroad. So that's a double hit for people who are depending on money coming from the UK to a developing country.
- [03:01]
A
Let's talk about Britain's aid programme. The UK is the only G7 country to meet its commitment of spending 0.7% of GNI on aid, a target that has been enshrined in UK law. What do you think might happen to the UK aid budget, to that legal commitment, and what are the implications?
- [03:21]
B
So I'd very much like to see the UK continue to meet that commitment. And I think paradoxically, as we leave the European Union, we might choose to use continuing with that commitment as a way of signaling that we're not retreating from the whole world. So it's possible that a new Prime Minister in the United Kingdom will maintain that commitment to signal continuity, really in our global engagement. And I hope that that will happen. That 0.7% will be 0.7% of a smaller economy. So it will. The aid budget will either shrink or grow less fast than it would have done if we'd kept that commitment with a faster growing economy. And of course, as we've just talked about, the value of it will go down because of the depreciation of sterling if sterling continues to remain low. But nonetheless, I think there's a good chance that we will continue with it, and I hope so. But there is a small chance that part of what this reflects is an intention by the British public to disengage with some of our global engagement. Many people see our aid program as a. A somewhat elitist, unaffordable expense. Working people, seeing income stagnate across the industrial heartlands of Britain, think that our foreign aid program is something that we should not be using taxpayers money for. And if that point of view. I hope it doesn't. But if that point of view is regarded as very powerful, then you could see a British government concluding that the Brexit vote is telling us not only that people want to leave the European Union, but they actually want Britain to play a less outward looking role in the world. In which case that aid budget could be under threat. Let's hope not.
- [05:13]
A
One of the things that became apparent in the Brexit result is a kind of swing against immigration. And that pulling out of the EU will mean could mean fewer migrants from EU countries coming to the uk. What about migrants that are not from EU countries that might not necessarily be controlled by a Brexit vote as easily? What are the kind of implications for those people, could there even be more of those coming in as British employers seek to fill gaps?
- [05:45]
B
That's an extremely good question. And you're right, there was a proportion of the people who voted for Britain to leave the EU were doing so because they wanted to see tighter control of immigration. But some of those who were campaigning for Britain to exit were saying that we should limit the number of migrants, but that we should particularly limit European migrants so that we could create more space in our society for migration to come from Commonwealth countries, places like India and Nigeria. And it's possible that we'll see a reduction overall in the number of migration migrants coming to the uk, but some rebalancing with many fewer European migrants and somewhat more people coming from the rest of the world. So it really depends on how big the reduction in the overall numbers is and how that's achieved, whether this does actually create some more opportunities for migration from the rest of the world. I would like to see the British Government implementation an idea that Michael Clemens, one of our colleagues at cgd, has had called the Global Skills Partnership, where we could invest in training people in developing countries, perhaps in sub Saharan Africa. We could fund, for example, health workers or agricultural worker training for people to come to the UK and fill those much needed jobs here, stay here for a few years. They could be sending money home and saving up, and return home not only much wealthier but also much wiser, having benefited from the experience of being here and contribute back to their economy at home. So the Global Skills Partnership is a really interesting idea for enabling developing countries without them paying, to train our workers, because we would bear the cost. It's much cheaper to train workers across the developing world than it is to train them here. We could actually see a benefit for developing countries that would also be a benefit for us here, within whatever level of migration the government decides to cap.
- [07:50]
A
It at the Global Skills Partnership. If you'd like to read about that, you can find it on our website, cgdev.org, just search global Skills Partnership or Michael Clements, the expert who came up and worked on that idea. Whatever the opinion, Owen, of those who voted to leave the EU and the UK on immigration and the UK aid budget, it's a pretty fair bet that most people do want the UK to be able to trade with more and more countries and to do more trade with countries, including developing countries. So I'm wondering what you think will be the impact on developing countries that want to trade with Britain, a Britain that's outside of the eu.
- [08:31]
B
So there's an immediate threat to that trade, but then there are also some long term opportunities. The immediate threat is that if Britain leaves the single market, as seems likely, although it's not inevitable, but it seems difficult for us to put limits on migration without leaving the single market. So if we do at that point we lose the trading system at the moment that enables least developed countries, the very poorest countries in the world, to send their goods to Britain duty free, quota free, which they're able to do because we're part of a European Union agreement called Everything But Arms. So they would automatically lose that. But as well as the very poorest countries, the next tier up, the lower middle income countries, countries like Kenya and Ghana that are not least developed but are still poor, are able to trade with the European Union through a series of new trade agreements called the EPAs, the European Partnership agreements, which are either in place or about to be in place, and there are temporary arrangements in the meantime. And those countries would also lose their access to Britain's market. So if we just left the single market, the immediate effect of that is that we would be imposing tariffs or quotas on a whole series of traditional British trading partners that are very poor countries that rely on us to be buying their exports, beans from Kenya, for example. Now we're not going to want that to happen. So it's really important that the government introduces very quickly some kind of replacement to these trade preference schemes that we will lose when we, when we leave the European Union and everything but arms we can just unilaterally do. We can just say that least developed countries will be able to access Britain in the same way as they access European markets. At the moment it's a bit more tricky to replace the EPAs for the slightly richer countries because those have to be negotiated trade agreements. But we could make it clear now that we will reproduce something like that so that those countries will continue to have access to our markets on the same favorable terms that they have it now. If we don't make that clear soon, then there's a danger that investment in companies in those countries will fall off, that people won't want to invest in countries where it's not clear whether they'll have access to our market to the fifth largest economy in the world.
- [10:59]
A
And UK consumers will also see prices rise of things they want to buy.
- [11:03]
B
Well, they'll be seeing that anyway because of the depreciation of sterling. I mean the 11% depreciation of sterling means that prices for all our imported goods are going to Go up. The price of a foreign holiday for the average family has already gone up. So we're going to see rising prices in the UK if sterling remains at its current level. But this would add to that if we start to put tariffs and quotas on imports into the uk, which by default is what we will do if we don't replace our existing trading arrangements with something new.
- [11:34]
A
Talking about tariffs and quotas, there are some that will no longer apply to the UK agreements, say on fishing quotas or agricultural subsidies that the UK was part of because it's part of the eu. What's going to happen in those areas, then?
- [11:50]
B
That's exactly right. And this is a big area of uncertainty. So many people know that the European Union has something called the Common Agricultural Policy that supports farmers. We have something called the Common Fisheries Policy that supports our fishing folk. And it's now going to be a decision outside the European Union for UK politicians to decide whether we want to support British farmers and if so, how. And of course, that will be keenly contested. And one of the interesting things about the Brexit voters, the people who voted to leave the eu, is that there was a bit of a coalition of people from very different ends of that spectrum. There are some free traders in there who think this is the perfect opportunity to get rid of all those subsidies. And there are also people in there who think that this is the time to put Britain first, to support our farmers, to support our factories, to support our workers, and that we'll be able to do that more outside the European Union than we were within the more tightly regulated environment inside it. So we don't know whether we will end up paying these agricultural subsidies if we do, if we continue them, or if we increase them. That's bad for developing countries because many developing countries export agricultural products both into Europe and into countries like, say, Saudi Arabia, which has a big and growing appetite for meat imports. Developing countries are competing with European farmers for access to those big and growing markets. China, India. And if we're subsidizing our farmers, then it's very hard for developing countries to compete with that. So they would like to see us reducing our subsidies, especially on things where we're competing with them either in our own country or in third country markets. Whether we do that or not, that's up to us. And it really is. It depends on who wins out on this battle of what kind of nation we want to be after Brexit. Do we want to be a kind of New Zealand, open, free trading, competitive, global economy? Player? Or do we want to be more like France, using our resources to protect a certain way of life in our country, protect a standard of living for a particular community? Perfectly legitimate policy objectives, but bad for developing countries.
- [14:10]
A
In fact, I think New Zealand has made an offer to the UK to loan it some trade negotiators because the UK didn't have enough for all these trade agreements. It was going to have to renegotiate. But I want to move on slightly and talk about another example of development cooperation, one that sort of looms large, and that's the Paris Climate Agreement. As part of that, the UK pooled its target emissions reductions, the intended nationally determined contributions, or indc, with the eu. So how do we go about unpicking those?
- [14:44]
B
So it's, I think, a testament to the UK's diplomacy within the European Union in recent years that the European Union came forward to the Paris discussions with such a forward promise on cutting carbon emissions. This is one of the cases where the UK has been one of the good guys. And in a way, we're lucky that Brexit happened after Paris rather than before, because it's likely that Europe would have offered a much less planetarily sustainable offer, a much less ambitious offer, if Britain hadn't been part of that. So what's important now is that Britain continues to meet our share of those commitments. We have to figure out what part of the European offer we are going to deliver. Having pushed Europe into having an ambitious agenda, we have to make sure that we continue to keep it. And we have domestic legislation which does require reductions in carbon emissions. And the important thing now is to make sure that we embed within that the same level ambition as is embedded in our collective European commitment that we made in Paris to reduce carbon emissions. We can do that, but that doesn't happen automatically. And that, again, is a political battle that needs to be won within the UK to show that we're continuing to engage in these global problems and to play our part in solving them.
- [16:14]
A
You talked about the UK being one of the good guys in this area, and that kind of brings me to the kind of final area that I wanted to talk about.
- [16:20]
B
I should say all things are relative, by the way. We are rather the good guys relative to some other countries.
- [16:26]
A
Okay, let's add that caveat there. The reasonably good guys, relatively good guys. But it does bring us to this area of the issue, the broader issue of the UK's standing in the world and its ability to punch above its weight in diplomacy and in development. So, you know, for example, the UK's leadership on issues around international tax avoidance and transparency, which it championed only last month a at a conference in London. Is England going to be sort of cast out? Is it going to have to take a step down? Or as the Brexiteers would have it, a truly sovereign nation standing up proud on the world stage on its own, Is it going to have a louder voice?
- [17:06]
B
So I think your listeners will probably have as good an idea about this as you and I do. It seems to me inevitable that leaving the European Union will cause people to question Britain's commitment to working in partnership with other countries. Whether as a nation we're willing and able to cooperate. And so the initial impact must be some kind of reduction in our standing and influence. And the question now, I think the long term depends on how we handle this, how we react to this and what we do next. And we could turn inwards. We could get rid of our aid budget and walk away from our climate change obligations and put up trade barriers and protect our industries. Or we could redouble our efforts to be global citizens and to engage effectively and cooperate with the broader multilateral system to contribute our part of making the world a more prosperous and peaceful place. And I think there will be some incentive on the British government to do the second of those, that this may cause us to bend over backwards to show what good global players we are, having made the decision to leave the European Union.
- [18:37]
A
So as we move to a close now, just one final thought. Our colleague Vijaya Ramachandran also also wrote about Brexit. She wrote that it was a wake up call for development economists who often talk about the net benefits to a country's economy of increased globalization. But without taking into account the difficult politics that come from the negative impacts on many people in those countries who do actually lose out. And I'm wondering if those are the voices we've heard in the Brexit results. But what do you think then is the single biggest lesson of Brexit for other countries who are wondering about the benefits of globalization and of greater cooperation?
- [19:13]
B
I think VIJ has this exactly right. Economists like me have made a fundamental mistake in recent decades. We have said correctly, in my view, that globalization and the adoption of new technologies leads to improvements overall in economic well being for countries, and that if those improvements are managed properly, we can use the fact that we're better off to compensate those among us who lose out from those changes. So free trade makes us all richer, but somebody somewhere in our society has lost their job making Something that's now being done more cheaply by a Chinese import. And what we need to do is that the benefits to our whole nation of that free trade goes in part to help that person retrain, reskill, find a new job, maintain their standard of living while they're going through that transition. And what we've been quite good at is making the case for the globalization, the technical change, making the cake bigger. But many economists have not pushed as hard as we need to, and many politicians have not delivered the redistribution of those benefits from the global benefit to compensate the individual losers. And what you've seen in the US Particularly, and to a lesser extent in the UK, is a stagnation of many people's incomes and indeed, in many cases, a reduction in incomes where people have lost out. And we haven't found a way to use the benefits, for example, of migration. We have migrants coming to the uk and that makes the British economy richer, more successful. They pay more taxes, they contribute more to our society than they take out. They also use our public services. They go to schools and hospitals and live in houses, as they should as a member of our society. But if we're not using the extra taxes that those migrants pay to pay for extra public services, then people experience that as more pressure on public services, longer queues at their doctor's waiting room, a longer wait for housing or a higher cost of housing. So if you don't use the additional economic benefit you're getting from this globalization to invest in public services, to invest in communities, to invest in the people who are losing out from it, then they will eventually tell you that they don't want any more of it, that they can see how it's making somebody richer, but it isn't them. And that's sort of what's happened within Britain that led to, I think, the votes in the referendum. But I also think that can happen globally. And I think that's something that as development economists, we should be conscious of, that we can talk about the benefits to the world of globalization. But it may be that there are many countries that are analogous to the people in the industrial heartlands of Britain who are losing their jobs. There are many people across the world who don't feel that they're benefiting from globalization. And if we don't give them some share of the benefits of it, they will eventually say that it has to stop. So there is a strong analogy between what's happened within the UK and what's happened internationally, which is that we have to do a better job of sharing the proceeds of both globalization and technological change. Otherwise, the people affected by it will bring it to a halt.
- [22:43]
A
Owen Barda, always fascinating to talk with you. Thanks very much.
- [22:47]
B
Thanks, Rajesh.
- [22:48]
A
So Owen's blog, Threats and Opportunities for Global Development is available on our website. You might also want to check out that blog by Vijaya Ramachandran. Brexit is a wake up call for development economists. And then we also have a third blog on Brexit called Bad News for Remittances by our colleagues Matt Collin and Matt Juden. All of them can be found@cgdev.org along with information on everything that we're working on. And you can also subscribe to the podcast and and for our weekly newsletter that way too. I'm Rajesh Merchandani. Thanks for joining me for this edition of the CGD podcast. And please do join me again for the next one.