36 Gordon Square
London WC1H 0PD

T +44 (0) 20 7958 8251
admin@lidc.bloomsbury.ac.uk

Brexit: Threats or opportunities for developing countries?

If Britain’s departure from the EU goes ahead – and Theresa May has pledged that “Brexit means Brexit” – there could be far reaching consequences for many of the world’s poorest and most vulnerable countries.  But are those consequences all about threats, or could ‘Brexit’ usher in new opportunities for developing nations?

As the crisis that has engulfed the British government since the outcome of the EU referendum begins to subside with the appointment of a new prime minister, the shockwaves triggered by the result may continue to reverberate around the world for some time.  The immediate aftermath of the vote was greeted by volatility in the markets and economy. Sterling plummeted, traders and investors got very nervous, and fears of an economic downturn seemed more real.  If Britain’s departure from the EU goes ahead – and Theresa May has pledged that “Brexit means Brexit” – there could be far reaching consequences for many of the world’s poorest and most vulnerable countries.  But are those consequences all about threats, or could ‘Brexit’ usher in new opportunities for developing nations?

Economist Homi Kharas believes that with the falling value of the pound, the immediate impact has been on the value of development assistance.  Speaking at a post-referendum event hosted by the Brookings Institution, Kharas says “right of the bat we’ve lost $2bn of aid”.   He is pessimistic about the short, medium and long term consequences for developing countries that are already at the periphery of the global economy.  They will not only lose out on aid money, but will see low commodity prices and face higher borrowing costs.  He says when the global economy becomes shaky, the economies of developing countries become shaky – the tragedy is that “they have fewer instruments at their disposal to cushion some of these shocks”.

Other commentators share the view that ‘Brexit’ and the lead up to it, will be destabilising for the least developed countries.  The scenario of a slowing British economy and a weak pound will have a negative impact on aid, trade and global collaboration. 

At another event discussing the ‘Brexit’ fallout, this time organised by the Overseas Development Institute (ODI), economist Vicky Pryce suggests that Britain’s ring-fenced foreign aid budget will inevitably come under pressure.  The UK reached the UN target of committing 0.7% of the national income to overseas aid in 2013.  (It was a milestone that the now former prime minister, David Cameron, said was one of his proudest achievements).  The budget is currently just over £12bn ($16bn) but Pryce warns it could be significantly cut if a post ‘Brexit’ Britain slides towards recession and funds need to be diverted elsewhere.  Even if the 0.7% level is protected, in a situation where Britain is experiencing slow or stagnant economic growth, the amount of foreign aid, in absolute terms, will be much lower.  The knock-on effect is that projects or programmes in the pipeline would be at risk.

Another source of income for LDCs that would be badly affected is remittances from the diaspora.  In 2015, remittance flows from the UK to developing countries were expected to be around $440bn, according to World Bank figures.  Bangladesh, Somalia and Uganda are among the top recipient countries for ‘money being sent back home’ and these funds are important for individual households and contribute towards reducing poverty.  But the value of remittances will be considerably less because of the weakened pound.  The ODI has calculated that already, the equivalent of $1.4bn has been lost in remittances after the pound fell to its lowest level in more the 30 years following the referendum result.  In a tighter UK economy, it will also be harder for individuals to find the cash to send overseas.

ODI figures also reveal that LDCs as a group could see exports to the UK decline by 0.6% and $500m lost, as imports become more expensive and a slowing UK economy depresses consumer demand.  The impact would different in different countries, but would be the most severe in countries that heavily rely on the UK market for their goods, such as Kenya with cut flowers, India and Bangladesh with textiles and clothing.  New trade deals would have to be negotiated but as the WTO experiences have shown, ‘talks’ can be long, drawn out affairs, and that would also be detrimental.

Despite the promises of the Leave campaigners before the vote of a more globally focused UK, the worry now is that the opposite might happen and Britain becomes more inward-looking as it tries to reconcile a divided nation.  In this scenario, developing countries could lose an influential and supportive voice in the global community.  In Europe, the UK’s exit from the EU will also mean its withdrawal from the European Development Fund (EDF), which is the EU’s main mechanism for assistance to developing nations, and without a UK presence, priorities that may have favoured LDCs might be rearranged. There is another factor to consider too, alluded to in the Brookings discussion, and that is the worry of a ‘Brexit contagion’. If other EU members follow suit, development collaboration in Europe could become completely fragmented.

But pessimism does not have to be the prevailing sentiment.  In an interview to French radio before the vote, the UK Minister for Africa James Duddridge, a Leave supporter, argues that Britain would be better able to engage with the continent if it is not hampered by having to view Africa through the “prism” of the EU.  He believes that the UK’s share of funds that are channelled through the EDF could more efficiently targeted. He also sees greater opportunities for stronger bilateral relationships with Commonwealth countries. 

In the ODI event, the Commonwealth Secretariat’s Mohammad Razzaque echoes the view that there could be opportunities for the UK to not only build on existing ties with developing nations within the Commonwealth, but to forge new ones too. 

Although recognising there would be challenges, Razzaque feels ‘Brexit’ would offer opportunities for the UK to negotiate development-friendly policies, particularly eliminating issues in agricultural trade and on rules of origin.  Greater diversification of exports to the UK could also be encouraged.

David Luke, co-ordinator of the African Trade Policy Center at the UN Economic Commission for Africa, argues that now is the time for developing countries to take positive action to mitigate the impact of the impending ‘Brexit’.  The UK’s referendum outcome provides an opportunity for African states to diversify their economic partnerships, engage in more South-South co-operation and step up efforts to boost intra-Africa trade.

How the future unfolds with regard to ‘Brexit’ and the development agenda will depend a lot on the management of the exit, the nature of the continued relationship with the EU and the terms that are agreed. What is certain is that there are many uncertainties.  The optimistic view is that uncertainties now may evolve into long term benefits for those countries on the periphery of the global economy.

Experts give their views on what Brexit will mean for international development

Patricia Whitehorne works at London International Development Centre

 

Add new comment