Brexit: Threats and Opportunities for Global Development

There is much uncertainty now about how the UK will respond to Thursday’s referendum result calling for Britain to leave the European Union. The effects on developing countries—and development cooperation—will depend in part on what is agreed in the coming months and years. But here is some speculation about the possible threats that Brexit implies, and a (rather shorter) list of the possible opportunities.

Threats

Brexit will lead to direct effects on economic growth, trade, remittances, and aid which could have negative implications for developing countries:

• A slowdown in the British economy will have negative implications for developing countries with close economic links to Britain, such as South Africa and Nigeria (and other, mainly Commonwealth countries), perhaps leading to slower growth of exports, inward investment, and remittances. If there is a broader negative impact on the global economy, for example because of a loss of economic confidence in the European Union, this would have commensurately bigger negative effects on a wider range of developing countries, potentially reducing exports, growth, investment, jobs and remittances, especially among commodity producers.
   
• The UK’s commitment to spending 0.7 percent on aid may be abandoned if the fiscal position deteriorates and the government has to find further spending reductions, or wishes to switch public spending to programmes with a greater domestic multiplier to stimulate the economy. Depending on the political complexion of the next government, this could result in substantial contraction of aid spending, perhaps even down to a small humanitarian programme, and perhaps the closure of DFID. Even if the 0.7 percent commitment is maintained, lower GDP will reduce the aid budget compared to where it would have been.  The immediate effect of the depreciation of sterling (6% against the dollar at the time of writing) will be that the value of the UK aid programme abroad has declined. This may create short-term problems for organisations with local currency or dollar liabilities but sterling-denominated grants.
   
• The poorest developing countries will automatically lose their duty-free, quota-free access to UK consumers and the liberalised rules of origin, which they currently get under the Everything But Arms (EBA) agreement and the European Partnership Agreements (EPAs), assuming that the UK leaves the European trading bloc. Market access to the UK won't automatically be transferred if the UK leaves the Single Market, but the UK could make similar arrangements itself for some or all developing countries (though not, under WTO rules, for a hand-picked group of them). Uncertainty about future access to the UK market may immediately reduce investment, growth and jobs in developing countries with close economic ties to the UK.
   
• The UK will be able to abandon fishing quotas, and will come under pressure from domestic fishing communities (especially in Scotland) to do so, which would contribute to the depletion of global fish stocks.
   
• The UK will lose the legal basis for nearly all of its economic and financial sanctions—meaning it will either need to pass new UK sanctions legislation or those sanctions will disappear with the repeal of the European Communities Act.

As well as these direct effects on development, the UK after Brexit seems likely to have diminished global “soft power” which it has used in recent years to promote progressive international change—tackling issues like climate change, humanitarian aid reform, and corruption. There may be some people who think that an independent Britain will have more, rather than less, influence on the world stage because it will look less towards Europe and more towards the rest of the world. But in general, the UK has a progressive, liberal impact on European policies—promoting a more open, liberalised trading system; opposing agricultural subsidies; and pushing for generous, effective, poverty-focused foreign aid. There may be others who have a less rosy view than me about the UK’s positive influence on European development-related policies, or who think that the EU’s approach to development is largely irrelevant anyway. But overall, the risk is that Brexit will lead to a diminution in a progressive, pro-development global voice, in at least the following ways:

• For the next few years, the UK will have very little bandwidth or negotiating capital for any international initiatives or global leadership (e.g., hosting big events on family planning, nutrition, vaccination etc): not least because much of the civil service will be devoted to negotiating the post-EU settlement, especially a raft of new trade deals; and no Minister will want to use up their scarce international political capital securing agreement to such initiatives.
   
• The UK will no longer be within the EU arguing against agricultural production and export subsidies, and in favour of liberalisation of trade with developing countries, which may tip EU trade policy more towards protectionism and away from development-friendly trade policies. Nor will the UK be able to continue to push the EU into more ambitious targets for low-carbon growth in the future, on which it has a record of which to be proud.
   
• The UK will no longer provide a strong voice within the EU pushing for measures to 1) increase transparency (e.g., country-by-country reporting, public registers of beneficial ownership), 2) reduce international tax avoidance (e.g., automatic exchange of information), and 3) reduce corruption. To the extent that the EU position on these issues matter, that may slow progress across the world.
   
• The UK will lose its influence over the world’s largest multilateral aid agency (EuropeAid spends considerably more each year than World Bank), thereby reducing a mainly progressive voice on how and where this aid is spent. As a result, it is likely that more European aid will be spent in the European neighbourhood and less on the poorest countries in the world.
   
• The UK risks losing influence and leverage over key partners, notably Turkey, with which it maintains its relationships in part through the EU. It may try to compensate for this by reallocating aid spending away from poor countries to these strategically important countries with whom it would otherwise gradually lose its ties.
   
• The UK will no longer be part of European coordination meetings which agree a common position for key global forums such as the World Bank, World Health Organisation, etc., despite being by far the world’s largest funder of the multilateral development system. Both UK and European voices are likely to be weaker as a result.

Opportunities

Set alongside these threats, Brexit does offer some possible opportunities for more development-friendly policies, which we should identify and seize. For example:

• If the UK sticks to the 0.7 percent commitment but does not spend it through the European Commission, there is an opportunity to target UK aid more sharply on the poorest countries and communities, or to shift this aid to more effective multilateral institutions than the European Commission (notably the World Bank).
   
• The UK could offer preferential market access to developing countries, including duty-free, quota-free access and simplified rules of origin, if it leaves the European Singe Market. This won't happen automatically, and the UK would need to be careful to comply with WTO rules; but it could at least duplicate the market access currently available the Everything But Arms and European Partnership Agreements, and perhaps more (either to a broader range of countries or more open market access).
   
• Though immigration to the UK may be lower overall, there may be increased opportunities for migrants to come to the UK from non-EU countries, especially Commonwealth countries such as Nigeria and India. That may increase the share of immigrants to the UK from developing countries, which is good both for the migrants themselves, and through increased remittances for their families at home.
   
• The UK could unilaterally reduce or abandon agricultural and fishing subsidies, improving prospects for agricultural producers and fishing industries in developing countries. EU farm subsidies will be reduced if the UK’s net contribution to the EU is not replaced from elsewhere, which is also good for developing countries; though it is more likely that in the absence of Britain’s voice in Europe, agricultural support will increase.
   
• The UK could adopt more scientifically-justified restrictions on GMOs—which may help increase the global food supply—and perhaps other phytosanitary standards which unnecessarily restrict developing country agricultural exports.
   
• If Scotland votes to become independent, the Scottish government may pursue a set of development policies which look more like those of progressive Scandinavian countries than the existing UK position, promoting not only generous and effective aid but also a much greater commitment to policy coherence.

Overall, the list of threats seems greater than the opportunities. I didn’t vote for Brexit, but the British government is now faced with implementing the voters’ decision as effectively as possible. CGD will work with the British government as it navigates a future outside the EU to do what we can to limit the potential harmful effects on development, and to take advantage of as many of these opportunities as possible. We would welcome ideas and collaboration to do increase the chance of this happening in the coming months.

And finally: the Brexit referendum should be a stark warning to those who have benefited over the last two decades from globalisation and technological change. Unless the benefits of these profound economic shifts are shared with all citizens, in rich countries and in poor countries, those citizens will eventually overthrow the apple cart.