Strengthening South-South cooperation to combat COVID-19

Strengthening South-South cooperation and solidarity can offer a positive route forward for developing countries in combating COVID-19 and addressing existing and new challenges, the UN Conference on Trade and Development (UNCTAD) has said.

Kanaga Raja

IN a May update to its Trade and Development Report, UNCTAD said that given the high vulnerability of the South to the ongoing COVID-19 pandemic and low capacity and preparedness of developing countries at national level, there is an urgent need to strengthen South-South solidarity, involving new financial relations, rebuilding trade competitiveness by reviving industrial growth and strengthening South-South cooperation for taking bold initiatives in health and health-related areas.

It further said that South-South solidarity is needed for carving out policy space in multilateral trade agreements for sustainable recovery of the South.

‘Based on results-oriented actions, the countries of the South can cultivate the ambition among themselves to build a strategic partnership, not only to promote cooperation and peer learning, but to translate their commitment to solidarity into common positions in international affairs aiming for a more inclusive global governance,’ UNCTAD emphasised.

Global recession

According to the UNCTAD report, the world economy is reeling from the COVID-19 pandemic and most governments have no choice but to lock down social and economic activity – a decision that comes at the cost of a global recession. Global output is estimated to contract by at least 3%, with up to half the global workforce at risk of losing their jobs and billions of people, especially in the South, pushed back into poverty and hunger.

While developed countries are providing trillions of dollars in relief, support and bailouts (to their enterprises and unemployed), developing countries are more constrained on the fiscal, monetary and external payments fronts, making it difficult for many of them to respond to the multiple shocks triggered by the crisis.

Nevertheless, some larger developing countries have provided immediate relief through financial bailouts and income support. In China, the first country affected by the outbreak, an estimated RMB 13 trillion (over 10% of the GDP) of fiscal measures and financing plans have been announced. Right after the outbreak, Brazil’s government announced emergency measures to inject nearly 575 billion reals ($106 billion) into the economy to soften the blow from the coronavirus pandemic. India’s overall disbursement to date amounts to around 9% of its GDP.

In most other developing economies, however, the allocated funds are minimal. Developed economies have so far committed on average almost 30% of their GDP to fighting the pandemic, while the average size of relief packages in developing countries does not even reach 5% (as of 25 May).

UNCTAD also highlighted significant differences in the composition of these packages – while in advanced economies, over 40% of the total resources are employed to facilitate access to credit for firms operating in the non-financial sector, this component is much lower in the developing economies. This can put at risk many small and medium-sized enterprises which operate in the non-financial sectors in these countries, it said.

South more vulnerable

Overall, this crisis is serving as an important reminder of the significant differences in the underlying economic conditions of developed and developing countries which determine their respective vulnerabilities to external shocks and capacity to respond, said UNCTAD.

In particular, the much higher levels of informality in the economy, the lack of diversity in the formal economy and the heavy reliance on external markets and sources of finance, all of which are closely interlinked, not only make developing countries much more exposed to the adverse economic impacts of the pandemic but also put them in a weaker position to respond with active policy measures.

According to UNCTAD, administrative capacity has over decades been hollowed out in many developing countries by repeated adjustment programmes designed to downsize the public sector, erode the regulatory capacities of the state and generally extend the reach of markets and private firms into the public realm.

At the same time, a weakened fiscal base in most developing countries has not only acted as a direct constraint on government spending but also restricted the room for a more active monetary response, given that the effectiveness and legitimacy of the central bank to manage credit expansion also depend on reliable fiscal revenues.

As a result, developing countries have in recent years become more and more dependent on external private finance as a source of resource mobilisation.

Least developed countries (LDCs) are the most exposed to COVID-19 because of their higher capacity constraints in providing even the basic health facilities, due in part to the large percentage of government revenues absorbed by debt servicing.

General government health expenditure in low- and middle-income countries amounts to only 3% of GDP and in the group of LDCs just 1%, against 10% in high-income countries.

While the European Union has four physicians per 1,000 people, low- and middle-income countries have one physician per 1,000 people and low-income countries have one physician per 2,000 people, UNCTAD noted. It said developing countries are especially exposed to the COVID-19 outbreak given their limited ICU (intensive care unit) capacity. In China and India, for example, the number of critical care beds per 100,000 people stands at just 3.6 and 2.3 respectively, compared with 29.2 registered in Germany.

‘Beyond the threat to health services, in the absence of effective international support, developing countries will inevitably suffer lasting economic damage from the pandemic, including lower rates of capital formation, persistent debt stress, trade disruption, etc., all of which will severely constrain their recovery as well as halting progress towards meeting the 2030 Agenda [for Sustainable Development].’

If the downside risks identified in the International Monetary Fund (IMF)’s forecasts push global growth below 3% this year and the anticipated rebound in 2021 fails to materialise – both plausible outcomes – the recession that will ripple across the South could turn into a more prolonged depression and, in some regions, another lost decade, said UNCTAD.

Given their limited room to respond to a major shock, developing countries, at all levels, will need massive international support to avoid the worst-case economic and health scenarios. However, the response to date has been wholly inadequate, UNCTAD added.

There is undoubtedly much greater room for bolder and more comprehensive action. First and foremost, due to the tightening finance constraint caused by the current shock, the Southern countries particularly need external financial support to help mitigate the economic and social damage they are enduring.

UNCTAD said that it has laid out a menu of possible options for the international financial system involving the scaling up of liquidity provision (through a massive injection of Special Drawing Rights by the IMF) and long-term financing (through grants and concessional lending by the World Bank and increased flows of official development assistance) as well as substantial debt relief.

Second, while the packages announced so far have rightly focused on strengthening national health systems, and to a lesser extent helping smaller businesses, much more needs to be done to effectively protect countries’ productive capacities, employment, and inter-sectoral linkages within and across borders and enhance social protection systems.

‘At the national level, effectively using fiscal tools (including subsidies) and strengthening public institutions to help guide recovery and expand fiscal space would be important but needs to be accompanied by strategic trade and industrial policy measures where South-South cooperation has a crucial role to play through sharing lessons and expertise.’

And at the regional and international levels, South-South cooperation could facilitate the scaling up of available finance, for the better integration of developing countries into the existing trading system, as well as supporting new regional/global value chains and forging more coordinated positions in trade negotiations for preserving adequate policy space, said UNCTAD.

South-South solidarity essential to recovery

UNCTAD said the COVID-19 shock has not only exposed the fragile health systems and economic vulnerabilities of the South but also revealed the lack of a strong vision that unites developing countries, at all levels, around a shared international agenda.

Since the outbreak of the pandemic, although cooperation and coordination among the advanced economies themselves has been disappointing, the leading members of the G20 major economies grouping have organised a series of meetings and dialogues to discuss their actions. However, among developing countries, only some general statements (from the G77 and the BRICS countries) have emerged affirming the fight against COVID-19, without any systematic and concrete action plans.

‘Given the urgency of multiple challenges, it is essential that the South countries build a strategic partnership and take coordinated actions without further delay. Going beyond the immediate relief packages, there is a need to have in place a plan for recovery and resilience in the South.’

Any such initiative cannot substitute for effective multilateral action to ease the pressure on developing countries and drive a resilient recovery for all countries. But the multilateral system is currently weak and rudderless and cooperation measures within the South should not only be reactive and palliative in nature but designed to promote reform of the wider multilateral system, UNCTAD emphasised.

With this in mind, cooperation should be designed around three basic principles: scaling up resources; enhancing policy space; and building resilience. Accordingly, said UNCTAD, a solidarity plan could come in the form of enhanced South-South financial cooperation encompassing initiatives covering mechanisms for both short- and long-term finance; joint action by developing countries for reviving trade and industry; and strengthened South-South cooperation for mitigating the health and food crises.

Scaling up finance

According to UNCTAD, most developing countries do not have large national development banks with access to significant funding at short notice (be it from markets or in the form of treasury transfers) to support emergency programmes on a scale required to protect a country’s productive capacity, jobs and the most vulnerable. Given that the multinational and regional development banks thus far have launched narrowly focused financing packages, the two newly created Southern banks (the Asian Infrastructure Investment Bank and the BRICS New Development Bank), plus the Islamic Development Bank (IsDB), could have a significant role to play, it said.

Another area for urgent South-South cooperation is on the liquidity front. Despite promising $1 trillion for crisis countries, the IMF has still to spell out how it will proceed and under what conditions countries may have access to it. It recently created a short-term liquidity line to help countries address emergency balance-of-payments needs but has yet to roll it out. Meanwhile the US Federal Reserve dollar liquidity swap lines have been restricted to advanced economies and very few large emerging economies.

Therefore, South countries should act together to use existing Southern-based liquidity funds to assign much-needed liquidity at this critical juncture. Doing so may, in addition, strengthen the hand of Southern countries in future discussions on reforming the global financial architecture and rule-making, said UNCTAD.

Long-established regional liquidity funds could be another important source of scaled-up liquidity, especially for smaller countries with few or no liquidity source alternatives. These funds include the Arab Monetary Fund, the Latin American Reserve Fund (FLAR), the Eurasian Fund for Stabilization and Development (EFSD) and the Chiang-Mai Initiative Multilateralization (CMIM), the latter with a pool of $240 billion serving the ASEAN+3 countries. The value of these four funds reaches a total of $254.2 billion.

According to UNCTAD, these funds can be significant for small and poorer countries for which access to other official liquidity sources is rather limited, slow and burdened with taxing negotiations.

In addition to Southern liquidity funds, regional payments systems could bring further relief to countries facing severe balance-of-payments restrictions.

Finally, said UNCTAD, other regional financial institutions for critical deployment in this crisis are export-import (EXIM) banks, to provide much-needed trade finance for scaling up imports of medical products and other essential needs.

Trade and industrial recovery

The UNCTAD report said that by applying sudden brakes to international trade, COVID-19 has challenged the simple connection between openness (to both trade and capital flows) and development.

Even before the crisis, developing countries had differed significantly in their ability to manage integration into a hyper-globalised international division of labour in ways that could enhance their mobilisation of domestic resources in support of sustained and inclusive growth. The picture was one of uneven interdependence; diversification in some countries co-existed with de-industrialisation in many, trade surpluses in some with persistent trade deficits in others, and sustained growth with fitful episodes of boom and bust.

While (and contrary to their four-decade-long ideological drive) massive financial subsidies are being rolled out in the North to sustain its businesses during the pandemic, developing countries, which cannot afford comparable bailouts, will, at all levels, need to revive the use of strategic trade and industrial policies.

Learning how to successfully implement these policies can begin through closer South-South arrangements, said UNCTAD.

The importance of providing subsidies as an additional support for industrial recovery during a crisis has been widely recognised, it said. Industrial subsidies including financial support to specific industries, tax credits, rent rebates to small and medium enterprises, export subsidies, debt forgiveness etc. are important policy instruments which will be needed by developing countries to provide additional support to their domestic producers during and post pandemic. These subsidies can enable the rebuilding of labour-intensive and export-oriented industries like textiles and clothing, footwear etc., which are expected to take the hardest hit and lead to massive unemployment in the South.

However, developing countries do not have enough policy space to support their economic recovery given the existing multilateral trade agreements, especially with respect to industrial subsidies, said UNCTAD.

‘A sensible place to explore the judicious mix of liberalising and subsidising measures in support of economic diversification would be through South-South agreements which could be subsequently used as a model for reform of multilateral rules in this area.’

Meanwhile, a temporary WTO peace clause to use industrial subsidies for reviving their industrial growth and subsequently their exports is desirable to ensure enough policy space during and after the crisis to developing countries.

Apart from industrial subsidies, industrial tariffs are one of the most effective tools in the hands of governments in the South for protecting their infant industries, regulating imports of luxury items and providing a level playing field to their domestic producers. They are also an important source of revenue for many governments, especially small developing countries.

There is a need for developing countries to reassess and judiciously use their existing agricultural and industrial tariffs to help mitigate the damage from the crisis and build future resilience, said UNCTAD.

‘Across all these challenges, simplistic pronouncements on free trade (which fail to recognise the dominant role of very large, and often oligopolistic, firms in shaping trade outcomes) should be avoided in favour of selective trade integration for which special and differential treatment to developing countries was enshrined into the Doha Development Agenda.’

This pandemic has exposed the lack of capacity of all developing countries to recover on their own and the need for the South to show solidarity in preserving the special and differential status for all developing countries in the WTO as a means to ‘harnessing the developmental benefit of international trade’, in line with G77 principles on South-South cooperation.

Further, strategic and selective trade integration in the digital era will depend to a large extent on the digital capabilities of developing countries. Given the growing digital divide, there is an urgent need for developing countries to pool human and financial resources at the regional level to build their digital infrastructure and skills, said UNCTAD.

Building resilience

There are ways to integrate into the global economy without necessarily sacrificing the policy autonomy of the states which enable them to respond to the developmental and social needs of their citizens by putting people before profits, it added.

While the European Union is in the process of putting in place a new industrial strategy that would increase state powers to scrutinise and potentially block takeover bids in strategic sectors of the economy, the South also needs to protect its vulnerable industries and firms from unfair foreign competition in order to speed its industrial recovery and build a more diversified economy which is a prerequisite for resilience to future shocks.

To recover quickly from the pandemic, developed countries are bound to readjust their supply chains, bringing some links closer to home for shorter delivery time as well as to lower further risk of disruption due to the threat of a prolonged pandemic in the South. Furthermore, automation and digitalisation will in all likelihood assist the developed countries in this regard and will further reduce the (labour) cost advantage still enjoyed by countries of the South.

In this changing landscape, said UNCTAD, developing countries will need to re-engineer their existing production and distribution systems, which will be more challenging if the ongoing economic slump persists for some time.

‘In the face of falling exports, increasing domestic consumption using expansionary policies to boost domestic demand will be urgently required by the developing countries.’

However, given the constraints that many, particularly smaller economies in the South face, regional integration, and more generally South-South trade, can be an important complement to domestic-demand-led growth strategies providing new markets, encouraging complementary investment flows and technological upgrading, and, with appropriate financial arrangements, reducing balance-of-payments constraints.

As such, strengthening intra-regional trade and regional value chains for diversifying export markets needs to be prioritised in the South, said UNCTAD.

Pandemics like COVID-19 have also revealed to the world the importance of scientific discoveries and medical research for human welfare, it noted. Any medicines or medical discoveries which are important for the survival of people need to be shared widely and access made available to all, especially to the most vulnerable countries and communities. This highlights the importance of making the TRIPS moratorium permanent, prohibiting non-violation complaints in the WTO on intellectual property rights (Article 64.2 of the WTO’s TRIPS Agreement).

UNCTAD also said that regional trade pacts for emergencies should be forged. Regional trade pacts can be used to avoid trade bans on certain key product categories in times of global and regional shortages, as is the case in the ongoing health emergency.

‘As in all dramatic moments in history, despite its enormous cost in terms of human lives and the inevitable economic and social damage generated, the COVID-19 crisis can also present a unique opportunity for change. This is especially true for developing economies and their mutual relationships.’

Despite the urgency and sudden nature of the shock, the COVID-19 crisis will inevitably leave a deep and lasting scar on the global economy and its governance, said UNCTAD. Due to the inadequate international response, chaotic preparedness, disruption of travel and trade flows, capital flight and rising geopolitical tension, hyper-globalisation, with its hallmarks of financial insecurity, economic polarisation and environmental degradation, is not the basis for recovery and resilience in the post-pandemic period.

In combating COVID-19 and addressing both existing and new challenges, strengthening South-South cooperation and solidarity can offer a positive route forward for the developing countries, the UNCTAD report concluded.                 

*Third World Resurgence No. 343/344, 2020, pp 21-24