PwC Africa: Africa’s Finance Leaders Take Steps to Ensure the Safety of Workers

As lockdown regulations are eased all over the world, business leaders are recognising that they have a critical role to play in the safety, health and stability of their employees and customers.

While business leaders implement new policies and processes to bring employees back into the workplace and engage with their customers, they are realising the physical workplace and customer experience will no longer be the same as it was prior to the global COVID-19 pandemic. Many companies have weathered the immediate crisis by implementing safety measures, transitioning to remote work and other new ways of working, and considering what they need to survive and thrive moving forward.

Since March 2020, PwC has been tracking sentiment and priorities among finance leaders about the COVID-19 pandemic. We surveyed 989 CFOs from 23 countries during June 2020, including 41 CFOs from nine countries in sub-Saharan Africa (SSA). This survey is the fifth in a rolling series. We continue to add territories and companies to offer a robust view of how the crisis is affecting people and businesses worldwide.

When we initially commenced with our survey, almost half of CFOs were concerned about the impact of the COVID-19 pandemic on their business. At that time, many companies were in the early stages of crisis response, not yet thinking about strategies and plans for recovery. Currently, most lockdowns have been lifted around the world as leaders of nations and companies accept that economies will reopen and ultimately operate alongside a virus that remains a constant threat.

The pandemic took hold in some African countries as late as May, while others were already in lockdown by late March. Whichever phase they find themselves in, the economic fallout of the pandemic is still widespread, and the stabilisation waves of countries’ responses is likely to be long. The World Bank projects that economic growth in SSA will contract to between -2.1 percent and -5.1 percent, which will result in the region’s first recession in the last 25 years.

[caption id="attachment_16767" align="aligncenter" width="800"] Question: What impact do you expect on your company's revenue and/or profits this year as a result of COVID-19? Africa vs All Territories.
Source: PwC, COVID-19 CFO Pulse, June 2020. Base: Global - 989. Africa - 41.[/caption]

Decline in revenue is the reality for most businesses. CFOs’ expectations of a decrease align with their concerns about the global economic downturn and financial impact, and with key economic indicators. Against this backdrop, 34 percent percent of African CFOs (compared to 20 percent globally) expect a reduction in revenue this year of 25 percent or more.

Many African countries implemented containment measures to flatten the infection curve due to capacity concerns of their healthcare systems. These containment measures, however, have tended to deepen the economic recession curve at the same time, putting pressure on businesses to generate revenue and/or profits in the immediate future.

Cost Containment a High Priority

As companies settle into stabilisation, cost containment is a favoured strategy among CFOs, with 90 percent of African CFOs (compared to 81 percent globally) implementing cost containment measures and 66 percent (compared to 56 percent globally) either deferring or cancelling planned investments. Other cost alleviation actions, such as changing financing plans, adjusting guidance and changing M&A strategy, remain on the table for a minority of respondents.

"Companies are being judged on the character they’re demonstrating right now, and their actions or inaction today are sure to count for or against them in the future."

It is notable that fewer CFOs today than in past CFO Pulse Surveys said they would consider cancelling or deferring investments in R&D. This is positive, given survey respondents’ belief in the importance of developing new products and services. Similarly, with an eye towards what measures will be needed to succeed in the post-crisis world, only seven percent of African CFOs are considering deferring or cancelling investments in digital transformation. Only 11 percent of African business leaders say they are likely to cut investments in customer experience and notably none are targeting cybersecurity or privacy.

Community Focus and Social Engagement

Many companies have already responded to the needs of local communities affected by the pandemic, and the measures taken to manage it. It is positive to note that more than half of African respondents (56 percent) say their companies have increased community and societal efforts with financial or other contributions to non-profits, or pro bono goods and services.

It is increasingly clear that corporate responsibility programmes are being recognised as fundamental. In these difficult times, it is important for companies to engage their people in determining consequential community impacts and being part of the solution, such as retraining the unemployed or creating new job opportunities.

Business leaders will also want to think about how to share their story around these efforts, including how their companies invested in employees and communities and innovated during the crisis. Companies are being judged on the character they’re demonstrating right now, and their actions or inaction today are sure to count for or against them in the future.

[caption id="attachment_16768" align="aligncenter" width="800"] Question: Changes in which of the following will be most important to rebuilding or enhancing your revenue streams?
Source: PwC, COVID-19 CFO Pulse, June 2020. Base: Global - 989. Africa - 41.[/caption]

COVID-19 and New Ways of Working

Most CFOs (Africa 76 percent; global 75 percent) are making plans to change workplace safety measures and requirements. Not all staff, however, will be returning to physical work sites. More than half of CFOs (Africa 68 percent; global 50 percent) indicated that they will take steps to accelerate automation and new ways of working. In Africa, 63 percent (compared to 52 percent globally) of CFOs stated they would consider making remote working a permanent feature for roles that allow it.

In addition, 83 percent of African finance leaders (compared to 74 percent globally) said they were “very confident” in their companies’ ability to provide a safe working environment, and 78 percent (Global 79 percent) were also “very confident” of meeting customers’ safety expectations.

To sustain these gains, businesses will also need to consider the tools, behaviours and incentives that will enable employees to be productive, collaborative and creative — and invest in areas that have the most impact.

A Renewed Focus on Innovation

Along with decisions about cutting investments, African CFOs are evaluating the other changes they’ve made to help manage the crisis. Many cite work flexibility (Africa: 78 percent; global: 75 percent), technology investment (Africa: 71 percent; global 58 percent) and better resiliency and agility (Africa: 80 percent; global: 65 percent) as crisis-driven developments that will improve their companies in the long run.

Around the world the pandemic has underscored the need for new skills, including empathetic leadership, resilience and agility, collaboration and digital skills, and technical and trade skills such as design, manufacturing, and cyber and supply chain management.

Many companies will find there is much work still to be done. According to our 23rd Annual Global CEO Survey, 2020 (conducted prior to the coronavirus crisis in September and October 2019), only 20 percent of global CEOs felt their programmes were very effective at reducing skills gaps and mismatches. Among African CEOs, that figure was 15 percent. Many leaders will clearly need to step up efforts and initiatives in this area to ensure that their technology investments continue to benefit the company and that the resilience they created is built to last.

Africa’s finance leaders are shifting their focus to a more prolonged recovery period. Ensuring a safe workplace is a priority as economies all over the world reopen. Stabilising supply chains also remains critical to ongoing business continuity.

As new recovery milestones are reached, we will continue to monitor how business leaders react and respond.

About the Author

[caption id="attachment_16769" align="aligncenter" width="300"] Author: Dion Chango[/caption]

PwC’s Africa region extends across three market areas: Southern Africa, East Africa and West Africa. Dion Shango was appointed as PwC’s new Africa CEO in 2019, following an election process in which some 400 PwC Africa partners across the continent participated.

Since being admitted to the partnership in 2008, Shango has led engagements on complex and multinational businesses and has serviced a number of large listed clients, mostly within the mining industry. He has extensive experience reporting under IFRS and of financial reporting in the mining industry.

He has also enjoyed exposure to other sectors and industries throughout his career, by virtue of being involved in the audits of companies and organisations such as the South African Reserve Bank, Vodacom, and Montecasino.

In recent years, Dion Shango’s client base has included Exxaro Resources Limited, Harmony Gold Mining Company Limited and Sasol Oil.


Kristalina Georgieva, Managing Director of the IMF: Europe and the Global Recovery in 2021

[caption id="attachment_16823" align="alignright" width="300"] IMF Managing Director: Kristalina Georgieva[/caption]

We are at a point in our history where it is paramount to concentrate on what this crisis entails, what are the risks and opportunities a recovery will present to us, and how to bring the world together. These will be the three points on which I will concentrate.

Let me start with the crisis. We labelled it a crisis like no other, for multiple reasons. First, because it is truly global, and we have not had a global crisis like this before. By the end of 2020, 170 countries will have lower per capita incomes than at the beginning of the year—when as recently as January we projected positive growth for 160 countries. This a stunning reversal of fortunes.

Second, the nature of the crisis means it is hitting the service sector especially hard, rather than a larger hit to manufacturing as often experienced. This time, what we see is a dramatic blow to tourism, hospitality, and travel. What it means is that we have had unemployment at the somewhat lower-skilled end of the spectrum, with the likelihood for elevated joblessness for these workers for quite some time.

Third, it is unique also in terms of the enormity of the response. And I want to praise you for that—praise Italy and all the countries that in a short time vastly increased fiscal measures: 10 trillion dollars up to now, with one third of this coming from the European Union. And there has been a massive injection of liquidity and easing of conditions by major central banks, again, with the European Central Bank forcefully doing its job.

Why is this important? Because, as the economists among us remember, the definition of depression is a significant reduction in output, lasting several years. Now, with these exceptional measures, we have put a floor under the world economy, and therefore, we are reducing dramatically the risks of scarring and the longevity of this crisis.

"Together, the whole world—including the EU and the IMF—faces a clear question. How will history judge our response to this crisis?"

Policy actions have also had some positive spill over effects for emerging markets. In March, emerging markets were basically shut out of access to bond issuance, creating tremendous concern about a potentially severe impact. In April and May, however, because of the scale of measures taken, primarily by advanced economies, but also by many emerging markets economies, the enormous injection of liquidity meant that emerging markets with good fundamentals could return and issue bonds. These critical financial lifelines can help countries stabilize at a time when economies are at a standstill.

It is especially important to recognize that there are categories of countries that are in a very dire place. These are emerging markets with weak fundamentals and high debt levels, and low-income and fragile countries. And this is where the attention of the IMF is now concentrated.

In a short time, in six weeks, we have provided financial support to 68 countries that are desperately in need of buffers against the crisis. Never in the history of the IMF have we done so much in such a short period of time. And as you mentioned, we have also taken action to provide debt relief to our poorest members, as well as the so-called G20 debt service suspension initiative, which is intended to help provide space to respond to the crisis for 73 vulnerable countries.
How should we think about the recovery?

We know that we ought to pay attention to how we use the enormous injection of stimulus so that we give the economy a chance to recover and grow.

And here is an unusual message to the membership from the IMF Managing Director: please spend as much as you need. But spend carefully and keep your receipts: we do not want accountability to be lost.

And we must be careful not to withdraw the stimulus too fast if we want to ensure the recovery maintains momentum.

We know that digital is a big winner in this crisis—and some experts say the pandemic has accelerated the digital transformation by two or three years. This gives us a chance to build on this transformation for the future.

We know we are in a more risk-prone environment. As one critical example, climate change is real. We may have put it on the back burner during this crisis, but it is still with us. I tell everyone—if you do not like the pandemic, you are not going to like the climate crisis when it comes. So, there is action to take towards a greener economy.

"Europe must take this chance and help European businesses to stay alongside their peers in the digital space—because if this moment is missed, Europe will miss out on future growth opportunities."

And we know there are ways in which we must address inequality. This was done well after the Second World War, and after this current crisis we must renew our commitment in a similar way.

Together, the whole world—including the EU and the IMF—faces a clear question. How will history judge our response to this crisis?

Will history say we presided over the great reversal that brought more poverty, more fragmentation, and less trade?
Or will history say we marshalled a great reset, and a great renewal on a massive scale?

Here, the European Union has championed a strong sense of solidarity and a strong sense that the recovery is coming.

As a former budget commissioner, I believe this is a key moment when the European dream is becoming reality because Europe is standing together to put forward a fiscal support package of the magnitude required to help countries cope with the pandemic and its economic fallout.

This is money that Europe will get from markets based on its strength, and that it will distribute to member states on the basis of their needs.

And I want to say clearly – it is not just about the money. It is a chance for Europe to restart its convergence engine, which has been stalling since the global financial crisis.

It is a chance for Europe to exercise leadership. And it is a chance not to be missed.

So how do I envisage the recovery for Europe?

First, I see that Europe must take a very bold step to overcome the gap that has grown in digital. European citizens and businesses have been falling behind and this cannot continue.

We know what Europe needs to do—it needs to invest in digital skills and infrastructure, to adopt a ‘digital first’ attitude in everything, including digital government as has been done in Estonia.

Europe must take this chance and help European businesses to stay alongside their peers in the digital space—because if this moment is missed, Europe will miss out on future growth opportunities.

Secondly, it is a unique chance for Europe to continue its pre-pandemic path towards low-carbon, climate-resilient growth. This can foster job rich growth.

We will have lots of low-skilled workers in need of jobs, so we must invest in labour-intensive programs that are also green—such as reforestation, insulating buildings, and urban renewal. These can help absorb part of the labour surplus. These investments would also help us build the businesses of tomorrow.

I have been asked—why shouldn’t countries go back to the dirty industries of the pre-pandemic era? My answer is that we should not rebuild the economy of yesterday when we can build the economy of tomorrow.

Third, Europe has been backpedalling in terms of inequality and poverty eradication

After the Global Financial Crisis, the world strengthened the resilience of the banking system in such a way that it is much better positioned to withstand the current crisis. Today, we must strengthen the resilience of the people by investing in human capital or Europe will miss a great opportunity.

One of the most dramatic reversals in European history has been how Europe started slipping back in education.

Investing in education does not bring immediate benefits. But without radical reform and investment in education systems, no country can hope to compete effectively in the economy of tomorrow.

Source: Excerpts of remarks by IMF Managing Director Kristalina Georgieva to Italy’s National Consultation on June 13, 2020: “Italy, Europe and the Global Recovery in 2021”.


Women's Brain Project on COVID-19: Sex and Gender Differences Paving the Way for Precision Medicine

[caption id="attachment_16826" align="alignright" width="300"] Antonella Chadha at the World Health Summit in Berlin[/caption]

On February 10, an executive committee member of the Women’s Brain Project (WBP) travelled to China, taking medical aid and scientific knowledge to help in the first COVID-19 outbreak.

While she was not able to reach Wuhan, during her time in China she acted as a source of scientific information for the team of scientists working mostly pro bono at WBP.

When the first data became available from the affected Chinese populations, it appeared that more men than women were affected and dying from COVID-19.

This observation was of particular importance, because WBP studies the impact of sex (DNA-based) and gender (culture-based) factors on diseases, with a special focus on brain and mental health.

When infection spread to the home country of two WBP co-founders, Italy, data began to show that the sex and gender differences observed in the Chinese population also applied to Italy. By mid-May 2020, it was confirmed worldwide that women face the COVID19 infection with fewer complications and mortalities, despite comprising the majority of the front line healthcare workforce.

A similar situation occurred in the SARS and MERS epidemics, but the reason why fewer women are dying due to this type of viral infection is unknown. It is hypothesised that the main reason might be that the “abnormal” immune response which is stronger in men and leads to a pro-inflammatory cascade which attacks the body of the affected patient. Other speculation includes smoking habit (more frequent in men) and men’s reported tendency to poorer hygiene measures.

"When the first data became available from the affected Chinese populations, it appeared that more men than women were affected and dying from COVID-19."

But the real truth is that we do not know yet. We have not learned from previous epidemics. Is this perhaps because in medicine such differences are not important?

Quite the opposite. Our work at the Women’s Brain Project shows that these differences play a major and crucial role.

First, sex and gender differences play a role in the trajectory and management of disease.

Second, myriad diseases differ between men and women in terms of prevalence and incidence, symptoms, the way the disease is diagnosed, the way it progresses over time, and the way it responds to treatment.

Although it is not always discussed, nearly every aspect of modern medicine confronts such differences. The good news is that although sex and gender differences are not yet part of the public discourse across the board, more scientific evidence has been gained that such differences have major implications in the way we understand and study diseases, develop medical treatments, and design technology for medical applications.

These differences also matter in terms of care for patients. This particularly true for brain and mental disease.

For Alzheimer’s Disease, migraine, depression, multiple sclerosis and certain brain tumours, the majority of patients are women. Parkinson’s, Amyotrophic lateral sclerosis (ALS), and midlife stroke are more predominant in men.

To analyse and characterise sex- and gender-based differences in such conditions is of extreme importance for the assessment of benefit and risk in treatment and intervention. This is particularly true for neurology and psychiatry, where one of the greatest unmet medical needs persists.

Coming back to Alzheimer's Disease, we see that women are not only experiencing the disease more frequently, but they display a faster cognitive decline than men, with more brain atrophy. To bring successful drugs to the market, these aspects must be reflected in the study of drugs and the design of clinical trials.

If we wish to advance drug development in the field of brain and mental health, we must embrace approaches based on precision medicine — as we are doing for the drugs under development for Alzheimer’s. This means relying on pre-selected patients, based on testing positive to specific biomarkers of the disease, such as amyloid or tau. In this regard, some of the latest scientific evidence shows that women might have more tau protein deposits per same level of tau in certain brain regions.

The most important take-away of all this is that we have to move from the concept of one-size-fits-all in medicine to precision medicine.

Out of the COVID-19 tragedy, we have an opportunity to transform the healthcare system. By including factors such as sex and gender, genomic and proteomics, the microbiome, ethnicity, and the socio-economic status of patients in our analyses, we will be able to achieve precision medicine.

This will pave the way to embrace medicine that doesn’t treat a non-existent average persona, but according to their specific characteristics.

The result will be a more sustainable healthcare system, reduced costs, less waste, making drugs act better with fewer side effects, and achieving a better adherence to the treatment, because the drugs will work better.

The WBP mission is to carry out research and advocate for sex and gender differences as a key factor to achieving precision medicine.

This requires a systematic and meaningful analysis of sex differences in baseline patient’s characteristic, progression of the disease, and clinical outcomes — even when using digital of fluid biomarkers. We need to increase awareness of such differences and characteristics in the scientific community, the technology industry, among policymakers, and in the general public. We need to implement solutions such as explainable algorithms in data analysis (sometimes also referred to as explainable AI) and drug development to detect biases in systems and consequently implement mitigation strategies.

The strength of WBP lies also in taking precision medicine beyond the scientific community and healthcare specialists; in fact, we recently had the privilege to introduce Julius Baer managers and select clients to our work with few dedicated webinars.

Finally, we need to incorporate key ethical considerations during every stage of technological development, ensuring that the systems maximise the wellbeing and the health of the population. Only then, to quote Eric Topol, can we move from shallow medicine to precision medicine.

The good news is that World Economic Forum has an initiative on precision medicine that identifies key challenges, along with recommendations for its broad adoption. Certain specialties, such as oncology, are more advanced than neuroscience in implementing this approach, so we can learn from them. What this means is that there are pioneers within the healthcare system, and a shift is happening.

At WBP, we continue to catalyse multi-stakeholder dialogue and collaborations towards the goal of replacing shallow medicine with precision medicine for brain and mental health and are thrilled to have a growing group of supporters such as Biogen, Eli Lilly, Roche, and MCM. Precision medicine will be at the core of our International Women’s Brain and Mental Health Forum taking place virtually on 19-20 September this year, and an integral part of the Sex & Gender Precision Medicine Institute we are in the process of establishing. The Institute will work with corporates, academic institutions, policymakers, healthcare professionals, regulators, patients, and caregivers to proactively contribute to the evidence-base, novel technologies, and advocacy around precision medicine for brain and mental health. Anyone interested in improving health and care is welcome to be a part of it.

With brain and mental health at the forefront of many people’s minds after the COVID-19 lockdowns and the realisation that physical health is not the only key aspect of wellbeing to invest in, we believe that the time for this transformation is now. Our latest webinars about COVID-19, mothers and families, and children show that there is a thirst for shared knowledge and a collaborative design of the “new normal”.

That is why we invite people to join not only our project or initiative, but the WBP movement that is building like an inevitable wave of change. Don’t hesitate to get in touch.

Change is never easy, but it is often worthwhile.

About the Author

Dr Antonella Santuccione Chadha is the co-founder and CEO of the Women’s Brain Project. She was elected Top Woman in Business Switzerland in 2019, and will give the keynote at the World Sustainability Forum in September 2020 as one of the shortlisted candidates for their Sustainability Awards.

To find out more:

follow @womensbrainpro on Twitter

or visit www.womensbrainproject.com


Sweden - A Controversial Approach Belatedly Vindicated

[caption id="attachment_16834" align="alignright" width="300"] Stockholm[/caption]

The Swedes are a trusting lot. Asked if they usually confide in ‘other people’, almost two-thirds of Swedes answered ‘yes’. In the US and the UK, the comparable numbers hover around the 30 percent mark. According to data tabulated by the World Value Survey, just about 4 percent of Colombians trust others whilst, on the other end of the scale, 73 out of 100 Norwegians expressed no fear of relating to their fellow men or women – and trusting them.

The exceptionally elevated level of trust displayed in Sweden reflects on the government as well. Although the share of people with a ‘very large’ confidence in the national government has retreated slightly from its 2010 high of 52 percent, most Swedes are reluctant to think ill of their elected officials and bureaucrats.

As a result, Swedish society is rather compliant and placid, if not serene. The concept of civil disobedience is alien to the nation. Whomever dares break away, rebel, or otherwise act up and shred the social covenant is cast to the fringes of civil society where the maladjusted and troubled dwell in relative comfort but largely without voice or face.

As a swift and radical deviation from the highly prized and peaceful normal – the country hasn’t suffered a war in over two centuries – the Corona Pandemic profoundly upset and confused Swedish society. Moreover, its government lacked the legal instruments – readily available to its counterparts elsewhere – to tackle the novel emergency. The constitution, comprised of four (uncodified) basic laws of which the oldest was drawn up in 1634, has no provision for declaring of state of emergency outside war. As a result, the government did not possess the authority to restrict freedom of movement.

Dualism

An additional limitation was found in the administrative dualism the characterises the Swedish attitude to government. A large number of state institutions are fully autonomous and, as such, beyond the reach of ministers. They operate and act regardless the government’s wishes. Thus, the Public Health Agency (Folkhälsomyndigheten) ruled supreme during the pandemic. Its edicts, pronounced with gravitas by state epidemiologist Anders Tegnell, carried significantly more weight and meaning than the interventions of Prime Minister Stefan Löfven and even the televised appearance of King Carl XVI Gustaf.

Finally, the national government’s powers are also limited by municipalities and lands that set their own policy and manage public healthcare, social welfare, and a host of other services – and do not take kindly to interference from Stockholm. About the only option open to the national government was to restrict public gatherings to a maximum of 500 at the onset of the pandemic, a number later reduced to 50. Even so, the decision needed the approval of both the national parliament (Riskdag) and every regional chamber (Landsting).

The choice, made in early March, to pursue herd immunity was founded as much on constitutional necessity as it was on public healthcare considerations. The government has now admitted that it made a mistake. At the beginning of May, just about a quarter of the 2.4 million people living in the Greater Stockholm area had obtained some degree of immunity by exposure to covid-19. The 50 percent expected by mid-June was never attained.

Whilst the viral outbreak reached its first high in early May, and fatalities were mounting at an alarming rate, most Swedes remained steadfast in their trust of official policy even though their country came in for strong criticism internationally. The absence of a lockdown caused almost universal consternation as people confined to their homes elsewhere in Europe and the world watched in astonishment as ‘irresponsible and frivolous’ Swedes enjoyed the springtime in the great outdoors, albeit keeping their distance and avoiding crowds as per medical recommendation.

In soon transpired that in a high-trust society a hint or recommendation suffices to get the message across. Remarkably, the government took a backseat and let public health authorities set policy. Even as the death toll mounted, and the herd immunity idea was rather hastily ditched, political fallout remained close to nil. Support for Prime Minister Löfven’s Social Democratic Party actually increased noticeably.

Home Alone

At Malmö University, Senior Lecturer Astrid Hedin explained that Sweden is sparsely populated with just 25 inhabitants per square kilometre and people are used to keeping their distance from each other. Besides, she added, Swedes are not known for their touchy-feely disposition. Ms Hedin also noted that single-person households make up 57 percent of the total, the highest share in Europe.

However, communication was key to preserving the Swedes’ institutional trust: “The Public Health Agency has not presented itself as infallible. Instead, they emphasised time and again their willingness to change policy should another country find a better way of addressing the pandemic.”

Although happy with both their government and public health officials, Swedes were visibly hurt by, and disappointed in, the neighbours. Denmark, Finland, and Norway closed their borders to travellers from Sweden which pointedly did not follow suit. The avalanche of international criticism proved a painful novelty for a people more accustomed to being celebrated for their model behaviour – and neatly organised country.

However, of late the tide has been turning in Sweden’s favour as other countries realise that strict lockdowns represent but a blunt policy instrument that can only be used once before fatigue sets in. As the pandemic continues, weariness is on the rise with increasing numbers of people in the United States, the United Kingdom, Germany, and elsewhere giving voice to their discontent with restrictions on civil liberties – real or imagined.

In fact, other countries have been opening up whilst the virus was still present, emulating, in a sense, the Swedish approach which excluded stay-in-place orders from the get-go. Mr Tegnell still argues that the effectiveness of lockdowns in containing the spread of the virus is yet unclear and far from a scientific given.

Dr David Nabarro, one of six World health Organization special envoys on covid-19, heaped praise on Sweden’s light-touch approach and said that, in the long run, universal behavioural change is probably the only way to limit outbreaks. At 57.16 per 100,000, Sweden’s covid-19 death rate ranks almost at par with the US (55.95) and just below that of Brazil (57.68) and Italy (58.71). It is also not that far removed from Spain’s (62.09) and the UK’s (62.55). However, Belgium – which imposed strict lockdowns and reduced ‘social bubbles’ to a minimum – recorded a much higher mortality rate (86.62) and a case-fatality incidence almost four times as high as the one recorded in Sweden.

Sore Thumb No More

In Northern Europe, Sweden did stand out as Denmark (10.76), Finland (6.07), and Norway (4.97) all managed to contain the spread of the disease and keep fatalities in check by leveraging public trust and strictly observed lockdowns. For Johan Carlson, director-general of the Public Health Agency, the comparison fails to take into account that the infection rate keeps heading down in Sweden whilst it is creeping up elsewhere: “I call that the champagne cork effect.”

There is an economic angle to the light-touch approach as well. Dr Carlson warned that an economic malaise with a sharp rise in joblessness can also deteriorate public health and prove deadly as social services need to be curtailed and people cut back on the quality of their food whilst dealing with high levels of stress.

According to Statistics Sweden, the country’s GDP retreated by 8.6 percent during Q2 2020 which compares favourably to the rest of the European Union which saw its overall GDP shrink by 11.9% over the same period. The Swedish unemployment rate, traditionally the highest in the Nordics, rose to 9 percent, up 1.9 percentage points since March. For the entire year, GDP is forecast to drop with 5 percent – a decline similar to those expected throughout the Nordics.

What makes Sweden’s approach to covid-19 unique is that the nation recognised early on that the novel corona virus, absent a vaccine, cannot be completely eliminated and will likely become a contemporary health fixture not dissimilar – in that aspect – from the seasonal flu. The nation also agreed to put the pandemic in perspective. The Swedish Statistics Office was quick to remind people that in both 1993 and 2000, excess mortality was significantly higher than it is now due to particularly virulent flu strains.

Sweden, then, is keeping calm and carrying on. With a stiff upper lip that would probably cause even the most stoic of Brits to award the nation an approving nod.


Otaviano Canuto: Brazil, South Korea - Two Tales of Climbing an Income Ladder

The “middle-income trap” has captured many developing countries: they succeeded in evolving from low per capita income levels, but then appeared to stall, losing momentum along the route toward the higher income levels of advanced economies (Gill & Kharas, 2007, 2015) (Canuto, 2019). Such a trap may well characterize the experience of Brazil and most of Latin America since the 1980s. Conversely, South Korea maintained its pace of evolution, reaching a high-income status (Figure 1).

Such divergence of economic growth can be related to their distinctive performances of domestic accumulation of technological and organizational capabilities. Their different approaches to global value chains and trade globalization reinforced such discrepancy in domestic accumulation processes.

The first item of this note reviews middle-income as a stage of development, while item 2 recalls how the rise of global value chains opened opportunities for countries to move up the income ladder. Item 3 matches the results of their domestic accumulation of technological capabilities, whereas sections 4 and 5 compare the different ways the countries related to global value chains.

[caption id="attachment_16887" align="aligncenter" width="900"] Figure 1: GDP per capita (US$): Brazil versus South Korea. Source: data from World Bank[/caption]

Middle income as a stage of growth and development

In most cases of successful evolution from low- to middle-income per capita in recent history, the underlying development process has been broadly similar. Typically, there is a large pool of unskilled labor that is transferred from subsistence-level occupations to more modern manufacturing or service activities that do not require much skill upgrade from those workers, but nonetheless employ higher levels of capital and embedded technology. The associated technology is available from richer countries and easy to adapt to local circumstances. The gross effect of such a transfer – usually happening in tandem with urbanization – is a substantial increase in “total factor productivity”, i.e. an expansion of the value of GDP that goes beyond what can be explained by the expansion of labor, capital and other physical factors of production to the economy.

Reaping the gains from such “low-hanging fruits” in terms of growth opportunities sooner or later faces limits, after which growth may slow down, and the economy may get trapped in middle-income levels. The turning point in this transition occurs either when the pool of transferrable unskilled labor is exhausted, or in some cases, when the expansion of labor-absorbing modern activities peaks before that exhaustion happens.

Beyond this point, raising total factor productivity and maintaining a fast growth pace becomes dependent on the economy’s domestic ability to move upward in manufacturing, service or agriculture value chains, toward activities characterized by technological sophistication, as well as high requirements in terms of human capital and intangible assets such as design and organizational capabilities. The path from low- to middle- and then to high-income per capita corresponds to increasing the shares of population moved from subsistence activities to simple modern tasks and then to sophisticated ones. Within-sector productivity gains and “moving up value chains” rise in weight relative to productivity-lifting cross-sector structural change (Gill & Kharas, 2015).

An institutional setting supportive of innovations and complex chains of market transactions is of the essence. Instead of mastering existing standardized technologies, the challenge becomes the local creation of domestic capabilities and institutions, which cannot be simply brought or copied from abroad. Provision of education to labor and of appropriate infrastructure becomes a minimum condition.

Brazil saw the transfer of labor from subsistence-level employment slow well before they had exhausted their labor surpluses, as macroeconomic mismanagement and an inward-looking orientation established early limits to that labor-transfer process. Nevertheless, some enclaves have been established in high positions on global value chains (for example, Brazil’s technology-intensive agriculture, sophisticated deep-sea oil-drilling capabilities, and aircraft industry).

By contrast, South Korea relied extensively on international trade to accelerate their labor transfer by inserting themselves into the labor-intensive segments of global value chains, before climbing the ladder of value and technology intensity within value chains. This was facilitated by those advances in information and communication technologies, and by decreasing transport costs and lower international trade barriers that allowed the full-fledged development of “global value chains” (Canuto, 2017).

The path from low to middle income per capita, and then to high-income status, corresponds to the increase in the share of the population that has moved from subsistence activities to simple modern tasks, and then to sophisticated ones. International trade has opened that path, but institutional change, high-quality education, and local creation of intangible assets are also essential for sustaining progress over the long run. South Korea is a prime example of a country that exploited these opportunities to move all the way up the income ladder. Countries trapped at middle-income levels have typically failed in undergoing appropriate changes in institutions, education, and local accumulation of intangible assets

Figure 2 shows the structure of wealth for economies by income group and they illustrate the path of evolution that a country is expected to cross on the way up the ladder. It displays averages and individual countries will differ, e.g., because of different levels of natural wealth (Canuto & Cavallari, 2012). However, three broad features may be highlighted: the high and increasing weight of human capital (World Bank, 2018a); the weight of produced capital – physical capital – stabilizes in relative terms after the ascent from low-income levels; and, regardless of country-specific natural resource richness, its weight decreases relatively along the ascent.

Natural resource-rich middle-income countries face a road of their own. Unlike manufacturing, natural resource use is to a large extent idiosyncratic, in the sense that each concrete experience is unique. That creates a privileged scope for local creation of capabilities in sophisticated upstream and downstream activities, with the corresponding challenge to do so in a sustainable fashion (Vostroknutova, E., Brahmbhatt, M., and Canuto, O., 2010). Nevertheless, an institutional setting supportive of innovations and complex chains of market transactions, high-level education and local building of intangible assets are also preconditions.

Although not included in the data displayed in Figure 2, one may expect a strong correlation between the human capital accumulation and local development of intangible assets (capabilities to adapt technologies and innovate; managerial and organizational capabilities; rules and institutions that do not impose costs and waste on chains of transactions which tend to become dense and complex as the economy climbs the ladder). One may expect the return from these assets to underlie what Moses Abramovitz called our “measured ignorance” – namely, total factor productivity increases not explained by the accumulation of production factors in exercises of production function-based GDP and productivity decomposition.

[caption id="attachment_16888" align="aligncenter" width="1025"] Figure 2: Composition of wealth by country income levels. Source: data from Lange et al (2018).[/caption]

Local development of capabilities of imitation and creative adaptation of existing technologies, followed by or in tandem with capabilities to innovate, is a requisite to raise productivity, upgrade occupation and move up the income ladder. Any application of technology needs locally specific content that cannot be acquired or transferred by means of textbooks or other codifiable forms of knowledge transmission. This knowledge cannot be made explicit, simply transmissible in blueprints, and thus cannot be perfectly diffused as either public information or private property. It must be developed locally. Production, technology adoption, and invention requires a relatively high level of such idiosyncratic knowledge and local capabilities (Canuto, 1995).

Solutions must be found to market failures that generate disincentives to the accumulation of knowledge, but the private and public sector interaction cannot be unfriendly to the rising density and complexity of chains of transactions accompanying progression. Transaction costs associated with “doing business” - such as trading across borders, hiring and enforcing contracts - cannot be too high, whereas other dimensions of the “investment climate” – like policy uncertainty, macroeconomic instability, corruption, losses due to crime, infrastructure and others (Canuto, 2007) – must be favorable so as to not disincentivize investment in the acquisition of capabilities. In a broad sense, the structure of incentives for economic agents must be such as to favor the search for efficiency rather than seeking “rents” (Canuto & Ribeiro dos Santos, 2018).

International trade and technology transfer have proven to be important boosters to such a journey, but institutional change, high-level education and local building of intangible assets are also essential for sustaining this over the long run. South Korea is a prime example of a country that exploited these opportunities to move all the way up the ladder.

It is worth remarking that, particularly in the case of large economies, heterogeneity and diversity of states is to be expected. Brazil’s per-capita income, classified as upper-middle by the World Bank, is associated with an economic structure where one locates both high- and low-income types of activities and jobs. Overcoming middle-income traps in such a case means upgrading a substantial share of overall employment, including by rescuing low-income agents left behind as such by the previous transition (Canuto, 2011).

Traps may take place in situations when upgrading faces high obstacles to gain competitiveness because of incumbents in global markets. Gill & Kharas (2007) used “middle income trap” to designate economies that were being “squeezed between the low-wage poor country competitors that dominate in mature industries and the rich-country innovators that dominate in industries undergoing rapid technological change”. To a large extent, manufacturing in Latin America was relatively squeezed by the large addition of cheaper labor to the global economy resulting from the downfall of the Soviet Union and China’s economic integration.

Ultimately, however, one may point to local insufficiency or appropriateness of some of the policies and institutions necessary to underpin the transition upward as potential causes of middle-income traps. Agenor & Canuto (2015; 2017) developed analytical models of multiple equilibria in which distorted incentives and misallocation of talent, weak contract enforcement and protection of intellectual property rights, lack of access to advanced infrastructure, and lack of access to finance create the possibility of a middle-income economy to settle on a “bad” low-growth path. In turn, Aiyar et al. (2013) and Han & Wei (2017) approach the negative implications for growth of a high frequency of macroeconomic booms-and-busts.

ADB (2017) offers a summary of the morphing set of policy priorities if an economy is to move beyond the track from low- to middle-income stages:

(i) As economies evolve from low- to middle-income, so do their growth drivers. While accumulating physical (produced) capital remains important for growth in middle-income economies, human capital accumulation and total factor productivity improvement - or growth in production not derived from higher use of inputs – acquire larger weight in growth determination. Productivity-centered growth is needed to reach high income;

(ii) Innovation matters more as economies approach the technological frontier and entrepreneurship turns new ideas or technology into innovation-based growth. Opportunity-driven entrepreneurship, which is often built on new ideas or technology, increasingly outweighs necessity-driven entrepreneurship, which responds to existing market needs;

(iii) Risk-taking entrepreneurs take the lead in fostering innovation, and these individuals respond to incentives that are either strengthened or weakened by economic policies and institutions. Governments can promote innovative entrepreneurship through stronger intellectual property protection and rule of law, better access to finance, and allowing private-sector competition to prevail;

(iv) Graduation to high income requires a diverse and sophisticated product mix. In addition to producing a wider range of goods, middle-income economies must aim to produce more complex goods and services, which support higher productivity and better wages;

(v) Human capital accumulation rises in relevance and the emphasis must be on ramping up the quality of education. Economies with relatively high cognitive skills benefit from having a critical mass of students likely to become innovators. As economies move closer to the technological frontier, the returns on research-oriented innovation increases;

(vi) Infrastructure needs shift as an economy becomes more complex and sophisticated. There is a nexus between advanced infrastructure, highly developed skills, and innovation;

(vii) The role of the government necessarily evolves as an economy progresses, becoming more of a supportive type as the private sector is fully fledged. The government must shape an environment conducive to innovative entrepreneurship by promoting investment in education and infrastructure; and,

(viii) An environment conducive to growth needs macroeconomic stability. When a country reaches middle income, its growth rate tends to become more vulnerable to indicators affecting macroeconomic stability—given hysteresis effects of banking and currency crises, the exposure to capital inflow fluctuations, and the legacy of macroeconomic instability.

The qualitatively distinctive nature of the middle-income stage of development differentiates it from both high- and low-income phases, demanding an effort to go beyond generalizations about growth and productivity. In our view, the relevance of the concept of middle-income traps stems not from being a hypothesis about deterministic trends in growth, but rather as a warning shot about “complacency” risks of casting forward past transition successes instead of updating policies and institutions to new requirements. Individual middle-income country experiences of falling into a “trap” may be approached as cases of lack of or failing performance in footing the bill in terms of appropriate policies and institutions (Canuto, 2020c).

Global Value Chains as part of a revolution in global trade

In recent decades, international trade went through a revolution, with the wide extension of the organization of production in the form of cross-border value chains. This extension was a result of the reduction of tariff and non-tariff barriers, the incorporation of large swaths of workers in the global market economy in Asia and Central Europe, and technological innovations that allowed modularization and geographic distribution of production stages in a growing universe of activities. International trade grew faster than world GDP and, within the former, the sales of intermediate products rose faster than the sale of final goods.

The geography of industrial production changed dramatically, with unskilled labor-intensive sectors moving out of advanced economies rapidly. Although the “hollowing out” of such jobs in advanced economies may have been, to a greater or lesser extent, determined by biases in trends of technological progress, the transfer of unskilled labor-intensive segments of supply chains has been part of the explanation. On the other side of such transfers, low-income countries have experienced rapid economic growth processes stemming from the structural transformation that resulted from the large-scale migration of workers from subsistence to modern tradable activities.

Sharp changes in relative prices in the global economy accompanied this process. While labor prices fell – as well as prices of manufactured products, according to their labor intensiveness – prices rose for natural resource-intensive goods, following an increase in demand coming from economically-growing low-income areas. Even though the super-cycle of commodity prices has ended, in real terms they have remained higher than in the 1980-90s.

The logic of value chains was also extended to other sectors beyond manufacturing. Producers opted for less self-sufficient, in-house capacities, choosing to sub-contract activities that are not essential to their business. This is also one reason for the expansion of services in GDP accounting in recent decades. Commodity chains have increasingly relied on sophisticated services both upstream and downstream. The content of services embedded in industrial products has also increased. Additionally, technological innovations have increased the marketability of various services, as expressed in the growth of international trade in services.

The opportunities and challenges of the international industrial division of labor were reconfigured in this new world of cross-border value chains. For low-income economies, one can say that it has become relatively easier – especially for small countries – to increase their local industrial production, since joining the market through labor-intensive segments of existing chains allows them to circumvent the limits of (a lack of) scale and sophistication in local markets. Nevertheless, such entry is volatile and can easily be undone and relocated soon after any adverse signal comes out. This process of entry – with easy exit – corresponds to a window of opportunity for local accumulation of skills and a leap forward.

For high- and middle-income economies, in turn, it has become increasingly difficult to maintain competitiveness in those segments. It should also be noted though that some technological trajectories currently in early stage – such as 3D printing – may require the substitution of qualified for unqualified labor in a wide range of segments of existing chains, partly reversing the spatial dynamics described above (Canuto, 2017).

Middle-income economies are also facing a new landscape in other aspects. On the one hand, technological spillovers, productivity increases, and wider market access are now facilitated via entry at points that require intermediate sophistication levels within existing value chains. On the other, the consolidation of existing value chains raises the stakes in terms of the competition for core positions. For consolidated and mature branches, creating new chains and challenging established ones is the only alternative.

 Brazil and South Korea: human capital and intangible assets make the difference

Table 1 contains the results of the latest wealth measurement effort made by the World Bank for Brazil and South Korea. It depicts what lies behind the contrasting evolution of GDP per capita of the two countries exhibited in Figure 1 above. As expected, the relative natural-resource richness of Brazil appears in the value of natural capital. Produced capital (physical capital, i.e. machines and equipment, infrastructure etc.) reflects the differences in investment ratios of GDP between the countries over the years. The differential is glaring in the case of human capital, reflecting South Korea’s investments in comprehensive education of its population and success in the local development and accumulation of intangible assets (technological and organizational capabilities).

Table 1 - Brazil, South Korea - Per Capita Wealth for 2014

Brazil
South Korea

Total wealth
188,883
424,052

Produced capital
32,067
126,650

Human capital (reflecting education and intangible assets)
123,696
291,748

Natural capital
36,978
4,013

Net foreign assets
−3,859
1,641

Population
206,077,898
50,423,955

Note: Estimates are in 2014 U.S. dollars per capita at market exchange rates.

Source: Lange et al (2018).

It is worth highlighting four aspects of the comparative evolution of Brazil and South Korea toward what Table 1 exhibits. First, manufacturing structures in both countries evolved in tandem with the extent of local accumulation of intangible assets, with productivity and levels of upgrade in value chains reflecting such accumulation. While both countries went through similar trajectories of heavy industrialization up to the 1980s, South Korea’s successful entry into higher-tech mechanical-electronic areas afterwards reflected a local intangible asset accumulation, as part of a co-evolutionary process, rather than being the consequence of any “forced”, protected installation of activities. Capabilities explain sectors, not contrariwise.

Second, the structure of incentives – rewards for success, punishment for failure – matters for local investment in intangible assets, as they shape the risk-weighted benefit-cost calculus made by economic agents. In this regard, an important distinction between public policies in South Korea and Brazil could already be pointed out before the 1980s. Chaebols were the outcome of an evolutionary (“Schumpeterian”) process during which success in mastering technology and productivity – including contractual targets of world market share occupancy - was rewarded with additional permits and subsidized finance, whereas losers were left behind (Amsden, 1989) (Canuto, 1993). Under such market-emulating rules of “helping winners and punishing losers”, industrial policy beneficiaries did not think twice before using surpluses to invest in technological capability construction.

Now compare that with the “helping winners and saving losers” of Brazil’s industrial policies and finance. Under such circumstances, the temptation to use surpluses to accumulate wealth in ways to maximize frontiers of interaction with the public sector prevails against spending them with technology and productivity mastering. Brazil’s long-standing high levels of trade protection and closure also favored such an option (Canuto, Fleischhaker, and Schellekens, 2015a).

Third, Brazil has remained an upper-middle income country for long because of the co-existence of islands of high-income activities and a remaining large pool of low-productivity, low-education occupancy of the population. That constitutes a still-untapped source for increases in total factor productivity via occupational change.

Fourth, as we approach in the following item, South Korea’s local accumulation of intangible assets benefited from technology spillovers of globalization through trade, whereas the global fragmentation of production processes along cross-border value chains has largely bypassed Brazil (Canuto, Fleischhaker, and Schellekens, 2015b). Nevertheless, South Korea’s local attributes to escalate the ladder of innovation capabilities were highly relevant to explain its appropriation of globalization’s technological spillovers. Different business environments have also made a difference between Brazil and South Korea.

South Korea used globalization and global value chains to accumulate technological capabilities

South Korea’s drive into mechanics-electronics manufacturing in the 1980s already benefited from what at the time was called “regional networks of production”, engaging with Japanese and U.S. firms (Canuto, 1994). Climbing up the income per capita ladder happened as the availability of educated labor, infrastructure, and a friendly business environment allowed country’s firms to climb up the value ladder within global value chains.

Globalization helped knowledge from technology leaders spread faster than before. Cross-border technological diffusion not only contributed to rising domestic productivity levels in advanced and emerging economies, but also facilitated a partial reshaping of the technological innovation landscape, with some recipients – like South Korea - becoming new significant sources of research and development (R&D) and patents (Canuto, 2018a).

Higher trade, foreign direct investment and international use of patents more intensively disseminated knowledge and technology across borders. A double dividend could potentially be derived from such a feature: as technology is typically “non-rival” in its use, its diffusion may lead to increases of average outputs at relatively low costs; furthermore, its multiple use may generate positive network effects through cross-pollination. Knowledge flows from abroad can have impact both on productivity, through the adoption of foreign technologies in the production process, and – combined with domestic R&D – on local innovation.

Chapter 4 of the IMF’s “World Economic Outlook (2018)” presented estimates that in emerging market economies, “from 2004 to 2014, foreign knowledge accounted for about 0.7 percentage point of labor productivity growth a year, or 40 percent of observed sectoral productivity growth, compared with 0.4 percentage point annual growth during 1995–2003”. According to the report, these results remain robust even when China is excluded, which indicates that productivity effects were broad among emerging market economies.

Furthermore, the IMF report depicted a picture of a changing international constellation of sources of technological innovation, as R&D expenditures skyrocketed in China and stocks of international patents piled up in South Korea. These countries have joined traditional leaders in sectors like electrical and optical equipment and, especially Korea, in machinery equipment.

This has happened even as, since the early 2000s, traditional frontier economies have gone through a slowdown in the increase of labor and total factor productivities, together with slower growth in patenting and, to some extent, lower R&D investment. Competing explanations have been offered for the foregoing, either as a time gap in the transition between the third and fourth industrial revolutions or as a secular decline in opportunities to push productivity forward. In any case, as I pointed out back in 2010, prevailing technological convergence gaps and the non-rivalry in the use of existing technologies have offered emerging market economies the opportunity to keep advancing even if the rhythm decelerated at the frontier (Canuto, 2010).

There are, however, local requisites to escalate the ladder of innovation capabilities. Notwithstanding the enhancement of cross-border knowledge flows by globalization, simple interconnectedness does not automatically spark productivity increases and local innovation. As we remarked before, any application of technology embodies a “tacit” and locally specific – idiosyncratic – content that cannot be acquired or transferred by means of handbooks or any other codifiable forms of knowledge transmission (Canuto, 1995).

One may expect rising requirements in terms of tacit-and-idiosyncratic knowledge and development of local capabilities as one thinks of production, technology adoption and invention. One may also find as typical for latecomers an evolution often starting from production and technology adoption before invention. That has exactly been the case of Korea and China, which have strived to develop innovation capabilities after intense learning by using and adapting existing technologies.

Success in stepping on and ascending the capabilities escalator – Figure 2 - depends on the presence of a broad set of complementarities, in the absence of which, returns from investing in the development of capabilities are hardly accruable. Access to finance, infrastructure, skilled labor, and managerial and organizational practices matters. Solutions to market failures that generate disincentives to the accumulation of knowledge must also be present. Furthermore, transaction costs associated with the business environment – trading across borders, hiring, enforcing contracts etc. – cannot be too high (Canuto, Dutz & Reis, 2010).

[caption id="attachment_16889" align="aligncenter" width="940"] Figure 3: The Capabilities Escalator. Source: Cirera & Maloney (2017)[/caption]

As the presence of such complementarities is not widespread, one may understand why the international innovation landscape change has been limited. It also explains what Cirera & Maloney (2017) have called an “innovation paradox”: levels of innovation-related investment in developing economies not commensurate with high returns thought to accompany technological adoption and catch-up. Globalization may spread knowledge, but it does not necessarily come with what it takes to fully profit from it.

Brazil remained delinked from new global value chains

While international trade underwent the radical transformation in the past decades as production processes fragmented along cross-border value chains, the Brazilian economy remained on the fringes of this production revolution, maintaining an extremely high density of local supply chains. Opportunity costs incurred by such option taken by the country were accordingly high.

The factors behind Brazil’s bypassing are multiple. They include precarious logistics and high transaction costs related to international trade, as well as deliberate policy decisions to favor local content over international integration. Brazil’s trade figures contrast with those of its peers and reflect the fact that the country’s economy remained relatively segmented from the deep transformation that took place in the global economic geography in the last decades.

The Brazilian economy pays a price in terms of productivity foregone because of its lack of trade openness. A trade opening process would bring an adjustment impact that could nonetheless be mitigated with public policies that facilitate labor mobility and job migration. Benefits from trade opening would also hinge on policy improvements in complementary areas, such as infrastructure investments, business environment and others.

The Brazilian economy is commercially closed, even when taking into account its size and location (Canuto, Fleischhaker and Schellekens, 2015a). Consider, for example, tariffs on imports. Weighted by import shares, the average was 8.3% in 2015, the highest among comparable emerging and advanced economies. Such tariff protection in Brazil is accompanied by the use of non-tariff barriers and local content rules that are also even more intense than in those comparable countries (Canuto, 2018c). The number and depth of free trade agreements to which Brazil is a signatory are also limited.

Not surprisingly, Brazil maintains a degree of density in its domestic industrial production chains above what one should expect from its level of income and development. By abdicating more advanced and externally available inputs, equipment and technologies, such integrated chains operate at lower levels of productivity and quality than would have been the case if they had access to said inputs. Leaner and outward integrated producer chains would have greater capacity to export and to provide domestically better and cheaper products, while at the same time, their expansion could outweigh the lower domestic density.

It is also not by chance that, in 2015, while in Norway there was one exporting company for every 250 Norwegians, in Brazil the proportion was one for every 10,000 Brazilians (Canuto, Fleischhaker and Schellekens, 2015b). Restrictions on imports function as export taxes, preventing the accrual of economies of scale in the foreign market.

Embraer, Petrobras (before being subjected to heavy commitments of local content after the discovery of pre-salt layers of deep-sea oil) and agriculture are examples of Brazilian successes that constitute exceptions confirming the rule above. The fear of loss of local production segments with high technological content must be countered by the fact that their domestic survival due to protection steroids does not necessarily mean local technological dominance, and tends to be done while imposing a burden on others (Canuto, Cavallari and Reis, 2013). A cheapening of the basket of goods may well mean lower wages and intermediary costs for those areas where the country can develop local capacity for value added generation.

Therefore, the Brazilian economy suffers from high costs because of its trade closure. What the country produces could be done with greater productivity and competitiveness, even if it abdicated to do internally what it would import if it could have access to the best and most advanced equipment and technology. Incidentally, recent historical experience shows that countries that are not at the technological frontier and those that are both have better results in terms of local technological innovation when they can benefit from access to external sources of knowledge, including via imports of goods and services, as we approached before.

Challenges ahead

Current technological developments in manufacturing are likely to lead to a partial reversal of the wave of fragmentation and global value chains that was at the core of the rise of North-South trade from 1990 onwards (Canuto, 2017, 2018c). Such a trend, together with protectionism, tends to be exacerbated by the coronavirus crisis (Canuto, 2020a). At the same time, China – the main hub of the global-growth-cum-structural-change of that period - may attempt to extend the previous wave through its “One Belt, One Road” initiative. The major challenge faced by South Korea will be to overcome what Lee et al (2019) have called a “middle innovation trap”, while navigating in a global environment of trade and technology wars.

Challenges to achieve simultaneously employment of unskilled workers and substantial increases of productivity are becoming taller. Furthermore, those horizontal productivity and competitiveness factors - including local accumulation of capabilities, low transaction costs, infrastructure improvement, etc. - that were crucial for a broad and deep manufacturing-led development are now extended to services. There is more complementarity than substitutability between productivity and competitiveness factors supporting manufacturing and services. There is no alternative but to raise the bar domestically if a developing country wants to enjoy any of these as engines of growth.

As for Brazil, following the protectionist mood triggered by recent trade wars and the coronavirus crisis - Canuto (2020a) - wouldn’t it be more convenient to have a closed economy in the current global context of trade wars? It should be emphasized that the burden of lost productivity and quality falls on the Brazilian economy itself. In addition to direct import and export channels, trade closure contributes to the low intensity of competition in many domestic markets, which in turn helps to explain why the survival of less efficient firms is proportionally larger in Brazil than again in comparable economies.

In most sectors, Brazil presents high degrees of heterogeneity in the productivity of companies, with the survival of less efficient companies higher than in many other countries. Goods and services available in the country are more expensive and of lower quality than they could be, as avenues for innovation and productivity increases remain narrow. The average productivity is lower than what would prevail if market slices and resources could be absorbed by the most efficient companies. Brazilian commercial closure thus has a deleterious effect by reducing the strength of competition between firms and hence allowing capital and human resources to remain in inefficient firms. Average productivity would be greater if they were reallocated to better companies.

It is worth emphasizing the key role of Brazilian domestic reforms in order to improve the broad set of complementarities to knowledge and technology from abroad, as it happened in South Korea. Brazil’s lack of competition and poor productivity performance have domestic reasons that go beyond external trade closure: low investment in infrastructure; unfriendly business environment; distortions in long-term financing; quality of public spending on education; etc. Changes in these areas would be a precondition for benefits of greater trade integration to be fully realized - but these improvements are already necessary by themselves (Canuto, 2020b). Instead of corporate supportive policies to compensate for competitive disadvantages resulting from the burden of those aspects and other goals, it would be necessary to adopt policies aimed at raising productivity and smoothing worker relocation processes.

First appeared as Policy Brief PB-20/70, Policy Center for the New South

References

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About the Author

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.


Vietnam - No Stopping Country on the Ascendancy

After two decades of recording full employment and boisterous growth rates, Vietnam has taken a significant, though far from fatal, economic hit even as the country received near-universal praise for its deft handling of the Corona Pandemic. Though most of the nearly one million workers laid off during the first scare in March have since been rehired, average take home pay dipped by 5 percent according to the latest World Bank numbers.

The Ministry of Labour in Hanoi estimates that around 30 million workers – roughly half of the country’s workforce – were affected by the pandemic in some way. Used to watch its economy barrel ahead by 7 percent or more annually, the latest GDP data (Q2 2020) showed a measly 0.36 percent growth rate.

However, as GDPs plunge around the world, Vietnam’s continued economic expansion, albeit at a rather anaemic pace, is both remarkable and exceptional. Also noteworthy is the (corona-adjusted) International Monetary Funds’ forecast for growth over the full year to come in at 2.7 percent. The Asian Development Bank is more optimistic still and expects Vietnam’s GDP to regain most of its momentum and end the year on a high note with a 4.9 percent advance over 2019.

By contrast, the view from Hanoi is slightly less sanguine. The national economy put in its worst performance in 35 years whilst the global pandemic continues more or less unabated. The country now faces a ‘covid-19 trap’: Domestic demand has stalled as risk-averse households postpone or cancel consumption and investment plans and export-oriented industries – a major source of jobs and forex earnings – face a gradual slimming of order books.

All manufacturing sectors, with the sole exception of computer components, report a sharp decrease in the volume of overseas orders. Moreover, the collapse in demand has worsened significantly over the past weeks. Due to restrictions on cross border mobility, the tourism sector fears that just a fraction of the 20 million foreign visitors expected this year will turn up.

Good News

The good news is that Vietnam is relatively well equipped to take a hit. With a (public) debt-to-GDP ratio of barely 7 percent and a stable rating outlook, the government should have little trouble raising cash via bonds. Though the major agencies still rate the country at just below investment grade, Fitch has indicated that an upward adjustment is imminent.

Though its income may take a $6.2 billion hit, the government still enjoys enough fiscal wiggle room to deploy an ambitious stimulus programme. The country maintained its national accounts reasonably balanced for a nation undergoing accelerated development. So far, the Corona Pandemic has widened the expected fiscal deficit for this year by just 1.2 percentage points to -5 percent of GDP.

The government unveiled a $12.9 billion package to help businesses and households survive the pandemic. Most support is being offered as tax deferrals and rebates, and discounts on utility bills. An additional $2.7 billion has been freed to support unemployed workers. However, its disbursement suffered delays over bureaucratic hurdles. Many owners of small businesses have been unable to access emergency credit lines due to excessive demands for paperwork. Out of an estimated 350,000 eligible businesses, only about 70,000 managed to secure loans.

In its recent economic update on Vietnam, the World Bank suggests the country increase its economic footprint by tapping into the trend towards supply chain diversification. The way Vietnam tackled the Corona Pandemic – early and decisive – has not only created a lot of goodwill but also showed a mature and responsible society ready to meet the challenge without turning to excessive authoritarianism or clamping down on dissent.

World Bank (acting) country director Stefanie Stallmeister thinks that Vietnam may yet turn the table on covid-19 by rapidly exploring new drivers of growth such as the digitisation of the economy or the speeding up of a public investment programme to ready the country’s infrastructure for a return to high growth. Ms Stallmeister also sees opportunities in the ‘contact-free’ economy by promoting e-learning, digital payments, and data-sharing between societal actors, including government departments, to improve decision-making processes and the efficient implementation of their outcomes.

As part of its covid-19 response the government in Hanoi has fast-tracked a number of major public works projects such as the new north-south highway, two metro lines, and a new airport for Ho Chi Minh City – formerly Saigon.

Prime Minister Nguyen Xuan Phuc also gave the green light for a $9.3 billion resort to be constructed in the Can Gio district by Vingroup, the country’s largest privately-owned conglomerate. Slated for completion in 2031, the future megaresort represents the largest single investment in the country since the 1970s. Approval had been held up over environmental concerns but was granted after the politburo intervened and ordered the project to go ahead.

Better News

Perhaps the best news to emerge concerned the fast-track and unanimous approval by the National Assembly in June of the EU-Vietnam Free Trade Agreement (EVFTA) which took effect in August. The trade deal eliminates duties on 71 percent of Vietnamese shipments to the EU. In the other direction, 65 percent of exports will arrive duty-free at their destination. Vietnam has agreed to phase out all remaining duties over the next ten years. The EU promises to do likewise in seven years. After Singapore, Vietnam became only the second Southeast Asian country to sign a free trade deal with the European Union.

The EVFTA is seen as an important steppingstone towards Vietnam’s unstated goal of replacing the People’s Republic of China (PRC) as a hub of global manufacturing. The country is already home to the world’s third-largest apparel sector after Bangladesh and the PRC. Last year, garments and footwear counted for about $39 billion in forex earnings, about 20 percent of the total value of exports.

Electronics contract manufacturer Foxconn (of iPhone fame) heard the call and has already begun shifting part of its production to Vietnam. Nintendo and Google have followed suit.

With close to 100 million inhabitants, Vietnam represents the potentially third-largest market of the Association of Southeast Asian Nations (ASEAN). European exporters are particularly excited by the fast-growing spending power of the Vietnamese. Per capita GDP approaches the $3.500 per year mark usually considered a tipping point beyond which the sales volume of durables such as cars and domestic appliances takes off.

The country seems determined to expand its global reach via trade deals and is pushing the ASEAN to speed up the creation of the Regional Comprehensive Economic Partnership which seeks to add South Korea, Japan, and the PRC to the free trade area plus Australia and New Zealand. Late last year, India opted out of the talks over concerns that unrestricted trade may ‘adversely impact’ its people. Japan and the PRC have since asked India to reconsider. Meanwhile, Vietnamese entrepreneurs are urging the government to pursue a free trade deal with the United States as well.

Though the corona infection rate crept up in August, the Vietnamese government again reacted swiftly and decisively to contain the outbreak, closing beachside resorts, ordering local lockdowns, and introducing more stringent checks on people, livestock, and goods crossing the border with the PRC. It is suspected that the virus may have been reintroduced by travellers returning from up north.

Holding a steady course that keeps its society united, the government of Vietnam is not just weathering the storm but, whilst doing so, keeping a keen eye out for opportunities that may come knocking in the wake of the pandemic. With maturity and a clear sense of purpose, Vietnam is one of the few countries that may expect to do alright whatever shape the new normal takes.


World Bank on COVID-19 in Africa: Can Safety Nets Ease Social and Economic Impacts?

Across the world, governments have geared up to respond to the socio-economic shock of the coronavirus pandemic.

Early action in countries hard-hit by the crisis range from economic stimulus packages and the lowering of interest rates to social safety nets for millions of people. From China to the UK, Morocco to South Africa, more than 190 countries have introduced various forms of social protection. The aim is to compensate workers for lost income from lockdown and the broader economic downturn, and mitigate adverse impacts on the poor and vulnerable sectors of society.

COVID-19 is expected to trigger the first recession in Sub-Saharan Africa in 25 years. In a region where roughly eight in 10 people are engaged in low-wage informal employment, many households are at risk.

Sickness will deprive individuals of earnings and can lead to impoverishing payments for medical treatment, but the effect is felt more widely across the general population. Social distancing measures curtail economic activity and disrupt supply chains; remittances from abroad dry up.

"The COVID-19 crisis is driving innovation in service delivery by promoting electronic rather than in-person payments."

Informal sector workers and self-employed people in cities, such as market vendors, are initially the worst affected. There is discontent at the hardships already being faced by the urban poor from the government-imposed lockdown in some of Africa’s megacities.

Policymakers, too, can leverage social protection programmes in response to the shock. They can help households to avoid hunger and protect them while respecting stay-at-home orders to prevent the spread of the virus. By putting cash into poor people’s pockets, social protection can help sustain local economic activities especially in essential sectors such as nutrition.

A mix of cash and services such as financial literacy, microbusiness development, life skills training and coaching can support households and help with the return to work, accelerating a wider economic recovery.

Many countries in Africa can build on solid foundations. Sub-Saharan Africa has seen a significant expansion of social protection over the past two decades. More than 45 countries now have safety net programmes to address chronic poverty and help households to diversify their livelihoods and invest in children’s health and education. Owing to fiscal and capacity constraints, social safety net programmes often cover only a small proportion of the poor, and are concentrated in rural areas where chronic poverty is worst.

And yet, social safety nets are a critical tool for governments across Africa to mitigate the social impact of the pandemic. Social safety nets can flex in response to a shock – horizontally, by reaching more households, and vertically, by increasing cash transfer amounts. Mauritania, Kenya and Ethiopia have shock response programmes that can expand when triggered by droughts. And where food markets stop functioning, governments can consider direct food support instead of cash transfers.

But with its impact on urban areas, its social distancing imperative and its scale and rapid onset, the COVID-19 shock is unlike any other African countries have seen in recent years. It necessitates rapid innovation in the design and delivery of social safety nets.

Governments need to expand coverage to population groups who do not typically qualify for cash transfers but are now pushed into poverty. COVID-19 shock response cash transfers can “piggy-back” on existing beneficiary registries and payment systems, but should be designed and communicated as separate from regular safety nets, time-bound with a clear exit strategy.

The Togolese government has introduced for a limited duration Novissi, a coronavirus cash transfer programme for those worst affected, with a larger benefit for women. Reaching informal workers will often require extending beneficiary registries by enrolling households in novel ways: drawing on registries of mobile phone providers, trader associations, and other reliable databases. While the urgency of the response puts a premium on speed and coverage over accuracy, emergency registries can later be reassessed as countries enhance their social protection systems post-crisis to make them more responsive for future shocks.

Digital technologies can help expand coverage of social safety nets and safeguard beneficiaries in line with social distancing requirements. The COVID-19 crisis is driving innovation in service delivery by promoting electronic rather than in-person payments, and leveraging big data for targeting and expanding communications through radio and short-message services. Africa has around 400 million registered mobile accounts, the highest number of in the world, and about 160 million unbanked adults who own mobile phones. In many countries, governments can transfer cash to mobile accounts quickly and effectively. Where digital payments are not possible in the short term, administrators of cash transfer programmes can stagger physical payments and adjust frequencies to reduce crowds and provide handwashing facilities where payments take place.

Realising the potential of social safety nets to cushion the pandemic’s economic and social impacts will require reprioritising public expenditure towards social protection. This has often been under-funded, relative to other activities across the continent. Development financing can also help, including efforts underway for debt relief for the poorest countries to create fiscal space for increased public spending. Social safety nets to save lives and protect livelihoods from the COVID-19 shock, and are a good investment.

About the Authors

Christian Bodewig
Lead Economist, Social Protection and Jobs, Africa
Christian Bodewig is a Lead Economist and Program Manager of the Sahel Adaptive Social Protection Program at the World Bank which supports programs to help protect poor and vulnerable households from the impact of climate change. He has worked on social protection, education and health issues in the West Africa, the European Union, Vietnam and the Western Balkans. Christian is the co-author of the 2018 World Bank study "Growing United: Upgrading Europe's Convergence Machine" as well as the 2014 Vietnam Development Report and has published on education, skills, social protection and labor market issues in Europe and Asia. He holds degrees in economics and political economy from University College London and the London School of Economics. He is fluent in English, German, and French.

Ugo Gentilini
Senior Economist, Social Protection and Jobs Global Practice, World Bank
Ugo Gentilini is the global lead for social assistance at the World Bank. His work encompasses the analytics and practice of social protection systems across regions and country income groups. Over the past 20 years, he has authored dozens of publications on empirical and operational matters related to safety nets. He holds a PhD in Economics and produces a weekly social protection newsletter reaching thousands on practitioners.

Zainab Usman
Public Sector Specialist
Zainab Usman is currently at the Office of the Chief Economist, Africa Region, as a Public Sector Specialist. She joined the World Bank in 2016 as a Young Professional in the Social, Urban, Rural and Resilience (SURR) and later the Energy and Extractives (EEX) Global Practices.

Her interests are in the governance and institutions around natural resources management, energy sector reforms and economic policy in Africa as well as south-south economic relations. She holds a PhD in International Development from the University of Oxford.

Penny Williams
Senior Social Protection Specialist
Penny is a Senior Social Protection Specialist with the World Bank. She has been at the World Bank for fifteen years in a variety of roles, including as adviser at the Executive Board, Senior Country Officer and Senior Social Protection Specialist in the Social Protection global practice. She has led or been a key member of social protection operations, as well as provided operational advice across the Europe and Central Asia and Africa regions.

Prior to joining the World Bank, Penny worked at the Department for International Development, the United Kingdom’s aid agency, and also with NGOs, including in Southern Africa.