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Economic Diplomacy in times of Pandemic

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The coronavirus presents Germany’s most significant challenge in its postwar history; Chancellor Angela Merkel told viewers across the German nation. COVID triggered the most profound economic recession in nearly a century, threatening almost every fundamental aspect of our societies. The IMF estimates our global economy went down by 4.4% in 2020, the worst decline since the Great Depression. The only major economy to grow in 2020 was China of 2.3%.

The immediate outlook on the pandemic’s impact has made us think on how governments have dealt with prospects for economic growth. Most forecasts envision a 5 per cent contraction in global GDP, despite the outstanding efforts of governments to counter the economic spiral with fiscal and monetary policy support and even austerity. During the COVID-19 crisis peak, EU leaders regularly met via e-conferences to discuss and assess the situation and coordinate action COVID economic reactions. The same happened in other states internally, namely Canada, who spearheaded federal strategic communication and policy building under the Trudeau government to reboot the economy. Something that will cost Canadians considerably down the line. Yet most if not all world leaders know that this situation is expected to leave lasting scars through lower investment, an erosion of human capital through lost work and schooling, and fragmentation of global trade and supply linkages. We are just about to enter a new world era. It is instructive for us international relation practitioners to review and refine our diplomatic, economic strategies to guide us through these hardships. What diplomatic tools can we use to help our communities get through, and how to go about it?

A little refresher for those interested in economic diplomacy and its study has rapidly developed over the past decade that is very relevant today, especially. Yet, there is still no strict consensus among academics about its definition. Despite this lack of agreement, in this short article, I will try to outline the basics of economic diplomacy theory and some examples of its practice.

We could see economic diplomacy as a policy practice, institutional structure, behavioural aspects, and policy aims and results in dealing with the state and businesses’ financial and commercial interests. Indeed, different thinkers have given a variety of angles of practice and theories on economic diplomacy yet they all agree that: economic diplomacy can be defined as a set of methods and processes related to cross border economic activities such as exports, imports, investment, lending, aid and migration, all of which are pursued by state and non-state actors. It is divided into three main elements; economic diplomacy encompasses the use of political influence and relationships to promote trade and investment, monetary assets and relationships to increase economic security including multilateral negotiations to consolidate the right political climate and political-economic environment to facilitate the institution’s objectives.

To distinguish it from diplomacy in general, we would have to highlight the private sector’s involvement in decision-making processes precisely because market developments are closely monitored by private sector actors and not government agencies to stay informed about where and how to invest in their country of interest. Economic diplomacy became particularly important within our globalized economic interdependence context to set the tone of foreign policy. It is also essential for domestic markets while managing regional trade and competitive international investment agreements. To get the desired financial results, states would have to use their available resources agencies, networks, and yes – diplomatic tools, while practising economic diplomacy.

The subject touches many levels, and governments practice informal dealing on various issues such as trade agreements and investment agreements. Multilateral approaches are assisted with pre-established guidelines within a set framework of international organizations in different levels such as the World Trade Organization, the Organization of Economic Co-operation and Development, etc. Strategic communication is imperative between the private and government sectors to agree on set positions, hardliners, in other words, taken between government actors and their stakeholders before negotiating with other countries or organizations in this framework.

Moreover, we must not forget the plurilateral or more commonly known as the regional approach. It offers a streamlined, expressway for exploring the market opportunity, The EU being the best example of this approach. From the plurilateral perspective, we can observe how economic diplomacy has many tools to remove trade barriers while its users aspire to liberalize economies. Liberalizing markets, of course, has proven itself easier done in the regional context.

Contemporary practices see economic diplomacy as mainly concerned with formal government activities to promote their economic interest. However, our readers are invited to see the idea in the broader sense, which goes much further than foreign ministers’ mandated responsibilities. Engagement in economic diplomacy concerns all government agencies that have economic responsibilities, it is not exclusive to the foreign ministries, although they might not acknowledge it themselves. That is, in other words, all ministers, and independent public agencies and institutions that are involved with economic issues are engaged in economic diplomacy.

Analyzing the current global cooperation structures shifts economic diplomacy to be deployed by states seeking to achieve the newly flexible international environment’s financial goals. These flexible approaches and the weakening adherence to strict multilateral rules have made bilateral policies more attractive to economic diplomacy. The same could also be said about plurilateral methods; geo-economic power shifts encourage governments to reassess their national and foreign policies to be compatible with regional power shifts. Modifications and changes spark new thinking, such as on commercial diplomats’ mandate working on trade and investment promotion. In emerging economies and small states, a larger role for the ministry in international economics becomes necessary for success because emerging forms are seen to have a much stronger influence on the domestic private sector. Therefore public institutions have a larger stake in economic diplomacy than the private sector alone.

Nonetheless, economic and cultural and historic reasons explain why trade partners in emerging economies expect state involvement from their foreign partners in investment and trade. This contrasts the separation of public and private sectors as seen in larger capitalist economies. Economic diplomatic practices reflect the larger private sector and allow these to have an essential role in diplomatic practices. In the same way, states must be flexible; they have to change how they go about diplomacy depending on the economy they are dealing with.

As mentioned above, due to its main concerns with governments’ actions and what they do to promote their economic interests, economic diplomacy involves government agencies as primary actors. It recognizes the involvement of non-governmental entities in shaping economic diplomacy strategies. The case study of Latvia’s economic interests regarding economic diplomacy manifests in facilitating exports and promoting foreign investment, a good form of flexible economic diplomacy. Of course, most of the work concerning economic diplomacy is done through the Latvian Ministry of Foreign Affairs and its diplomatic representation network across many countries, each with commercial representatives that would deal with economic diplomacy. However, other ministries such as the Ministry of Economics, the Ministry of Transportation, the Ministry of Justice, the Ministry of Agriculture and the State Chancellery are also in touch with, say the embassies to define commercial targets.

Meanwhile, other government agencies such as the Investment and Development Agency of Latvia are involved, indirectly, in dealing with various issues more or less related to the realm of economic diplomacy. Relations between government agencies and non-governmental actors have been coordinated through several forms of cooperation, both formal and informal. Diplomacy, commerce, trade and international investment concepts are therefore hard to separate in cases of practical implications for Latvia, which leads to an assumption that businesses may have an easier way to access decision-making. Indeed, economic diplomacy favours the discussions as direct as a business owner and an ambassador. Internationally, Latvia’s economic diplomacy policy is highly influenced by its business sector and its membership in the EU. Since the EU has an exclusive role for trade policy and significant part of the investment policy, the EU monopolizes much of the economic diplomacy arena; the EU institutions are also negotiating EU-level treaties and agreements on behalf of Latvia. However, Latvia is still free to negotiate bilateral agreements with third-party countries, although only in cases where the EU has not already started negotiations and with the formal approval of other member states, and engage in external economic activities to promote trade and investment. Over the last 25 years, the Latvian government established a fully functioning set of state organizations from the ground up, responsible for formulating and executing an economic policy which includes economic diplomacy.

These frameworks imply action on both domestic and external levels for Latvia to be competitive enough in the international environment. Main policy initiatives suggest that the government is pursuing an active partnership with non-government actors to facilitate a better environment for business. Other state institutions, indirectly would do their part by informing and supporting Latvian companies that wish to enter foreign markets and provide useful services to foreign investors and enterprises looking to invest in Latvia. That said, it is evident that the Ministry of Foreign Affairs is not only the only coordinator since other agencies’ activities help towards this end as well. Yet the foreign affairs organizations have become the spearhead of foreign economic management since they are best positioned to represent and promote Latvian businesses abroad and access foreign markets. While there is no universally useful institutional framework of economic diplomacy applicable for every country, the coordination of economic diplomacy in Latvia has adapted to the changing environment and issues that are most pressing in a particular time frame, and that is so considering the current changes and tensions coming from contemporary EU challenges. This and other institutional frameworks’ success or failure can be observed only by an in-depth look at specific issues of economic diplomacy, not a general overview. To conclude, for those who are embarking in studying the challenges of a state’s economic diplomacy, they must dissect and uncover its layers due to its broad umbrella covering a series of stakeholders interconnected through formal and informal activities.

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Economy

Covid-19 and food crisis

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COVID-19 has hit at a time when food crisis and malnutrition are on the rise. According to the most recent UN projections, the pandemic-induced economic slump would cause as many as 132 million people to be hungry. This would be in addition to the 690 million people going hungry now. At the same time, 135 million people suffer from acute food insecurity and in need of urgent humanitarian assistance. Although the pandemic’s transmission has slowed in certain countries and cases have decreased, COVID-19 has resurfaced or is spreading rapidly in others. This is still a global issue that needs a worldwide solution.

This epidemic threatens both lives and livelihoods. COVID-19 has had a wide-ranging and disruptive influence on the agriculture system. We fear a worldwide food crisis unless we act quickly, which may have long-term consequences for hundreds of millions of children and adults. This is mostly due to a lack of food availability — as wages decline, remittances decline, and in certain cases, food prices rise. Food insecurity is increasingly becoming a food production concern in nations that already have high levels of acute food insecurity.

Agriculture continues to serve a reliable and major part in world economy and stability, and it remains the primary source of food, income, and work for rural communities, even in the face of a pandemic. The impact of the COVID-19 pandemic on the agricultural system and sector has been wide-ranging, causing unprecedented uncertainty in global food supply chains, including potential bottlenecks in labor markets, input industries, agriculture production, food processing, transportation and logistics, as well as shifts in demand for food and food services.

The COVID-19 epidemic not only created a new sort of agricultural catastrophe, but it also occurred at a difficult moment for farmers. In most years during the last few years, global commodity output has exceeded demand, resulting in lower prices. In 2013, the Food and Agricultural Organization (FAO) predicted decreased global agricultural output growth due to limited agricultural land development, rising production costs, expanding resource restrictions, and increasing environmental concerns.

An expanding global population remains the main driver of demand growth, although the consumption patterns and projected trends vary across countries in line with their level of income and development. Average per capita food availability is projected to reach about 3,000 kcal and 85 g of protein per day by 2029. Due to the ongoing transition in global diets towards higher consumption of animal products, fats and other foods, the share of staples in the food basket is projected to decline by 2029 for all income groups. In particular, consumers in middle-income countries are expected to use their additional income to shift their diets away from staples towards higher value products. Meanwhile, environmental and health concerns in high-income countries are expected to support a transition from animal-based protein towards alternative sources of protein.

When people suffer from hunger or chronic undernourishment, it means that they are unable to meet their food requirements – consume enough calories to lead a normal, active life – over a prolonged period. This has long-term implications for their future, and continues to present a setback to global efforts to reach Zero Hunger. When people experience crisis-level, acute food insecurity, it means they have limited access to food in the short-term due to sporadic, sudden crises that may put their lives and livelihoods at risk.

However, if people facing crisis-level acute food insecurity get the assistance they need, they will not join the ranks of the hungry, and their situation will not become chronic

It is clear: although globally there is enough food for everyone, too many people are still suffering from hunger. Our food systems are failing, and the pandemic is making things worse.

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How Bangladesh became Standout Star in South Asia Amidst Covid-19

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Bangladesh, the shining model of development in South Asia, becomes everyone’s economic darling amidst Covid-19. The per capita income of Bangladesh in the fiscal year 2020-21 is higher than that of many neighbouring countries including India and Pakistan. Recently, Bangladesh has agreed to lend $200 million to debt-ridden Sri Lanka to bail out through currency swap. Bangladesh, once one of the most vulnerable economies, has now substantiated itself as the most successful economy of South Asia. How Bangladesh successfully managed Covid-19 and became top performing economy of South Asia?

In March 1971, Sheikh Mujibur Rahman declared their independence from richer and more powerful Pakistan. The country was born through war and famine. Shortly after the independence of Bangladesh, Henry Kissinger, then the U.S. national security advisor, derisively referred to the country as a “Basket Case of Misery.” But after fifty years, recently, Bangladesh’s Cabinet Secretary reported that per capita income has risen to $2,227. Pakistan’s per capita income, meanwhile, is $1,543. In 1971, Pakistan was 70% richer than Bangladesh; today, Bangladesh is 45% richer than Pakistan. Pakistani economist Abid Hasan, former World Bank Adviser, stated that “If Pakistan continues its dismal performance, it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030,”. On the other hand, India, the economic superpower of South Asia, is also lagging behind Bangladesh in terms of per capita income worth of $1,947. This also elucidates that the economic decisions of Bangladesh are better than that of any other South Asian countries.

Bangladesh’s economic growth leans-on three pillars: exports competitiveness, social progress and fiscal prudence. Between 2011 and 2019, Bangladesh’s exports grew at 8.6% every year, compared to the world average of 0.4%. This godsend is substantially due to the country’s hard-hearted focus on products, such as apparel, in which it possesses a comparative advantage.

The variegated investment plans pursued by the Bangladesh government contributes to the escalation of the country’s per capita income. The government has attracted investments in education, health, connectivity and infrastructure both from home and abroad. As a long-term implication, investing in these sectors helped Bangladesh to facilitate space for businesses and created skilled manpower to run them swiftly. Meanwhile, the share of Bangladeshi women in the labor force has consistently grown, unlike in India and Pakistan, where it has decreased. And Bangladesh has maintained a public debt-to-GDP ratio between 30% and 40%. India and Pakistan will both emerge from the pandemic with public debt close to 90% of GDP.

Bangladesh’s economy and industry management strategy during Covid-19 is also worth mentioning here since the country till now has successfully protected its economy from impact of pandemic. At the outset of pandemic, lockdowns and restrictions hampered the country’s overall productivity for a while. To tackle the pandemic effect, Bangladesh introduced improvised monetary policy and fiscal stimuli to bring them under the safety net which lifted the situation from worsening. Government introduced stimulus package which is equivalent to 4.3 percent of total GDP and covers all necessary sectors such as industry, SMEs and agriculture. These packages are not only a one-time deal, new packages are also being announced in course of time. For instance, in January 2021, government announced two new packages for small and medium entrepreneurs and grass roots populations. Apart from economic interventions, the government also chose the path of targeted interventions. The government, after first wave, abandoned widespread lockdown and adopted the policy of targeted intervention which is found to be effective as it allows socio-economic activities to carry on under certain protocols and helps the industries to fight back against the pandemic effect.

Another pivotal key to success was the management of migrant labor force and keeping the domestic production active amidst the pandemic. According to KNOMAD report, amidst the Covid-19, Bangladesh’s remittance grew by 18.4 percent crossing 21 billion per annum inflow where many remittance dependent countries experienced negative growth rate. Because of the massive inflow of remittance, the Forex reserve of Bangladesh reached at 45.1 billion US dollar.

Bangladesh’s success in managing COVID19 and its economy has been reflected in a recent report “Bangladesh Development Update- Moving Forward: Connectivity and Logistics to strengthen Competitiveness,” published by World Bank. Bangladesh’s economy is showing nascent signs of recovery backed by a rebound in exports, strong remittance inflows, and the ongoing vaccination program. Through financial assistance to Sri Lanka and Covid relief aid to India, Bangladesh is showcasing its rise as an emerging superpower in South Asia. That is why Mihir Sharma, Director of Centre for Economy and Growth Programme at the Observer Research Foundation, wrote in an article at Bloomberg that, “Today, the country’s 160 million-plus people, packed into a fertile delta that’s more densely populated than the Vatican City, seem destined to be South Asia’s standout success”. Back in 2017, PwC (PricewaterhouseCoopers) report also predicted the same that Bangladesh will become the largest economy by 2030 and an economic powerhouse in South Asia. And this is how Bangladesh, a development paragon, offers lessons for the other struggling countries of world after 50 years of its independence.

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Build Back Better World: An Alternative to the Belt and Road Initiative?

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The G7 Summit is all the hype on the global diplomatic canvas. While the Biden-Putin talk is another awaited juncture of the Summit, the announcement of an initiative has wowed just as many whilst irked a few. The Group of Seven (G7) partners: the US, France, the UK, Canada, Italy, Japan, and Germany, launched a global infrastructure initiative to meet the colossal infrastructural needs of the low and middle-income countries. The Project – Build Back Better World (B3W) – is aimed to be a partnership between the most developed economies, namely the G7 members, to help narrow the estimated $40 trillion worth of infrastructure needed in the developing world. However, the project seems to be directed as a rival to China’s Belt and Road Initiative (BRI). Amidst sharp criticism posed against the People’s Republic during the Summit, the B3W initiative appears to be an alternative multi-lateral funding program to the BRI. Yet, the developing world is the least of the concerns for the optimistic model challenging the Asian giant.

While the B3W claims to be a highly cohesive initiative, the BRI has expanded beyond comprehension and would be extremely difficult to dethrone, even when some of the most lucrative economies of the world are joining heads to compete over the largely untapped potential of the region. Now let’s be fair and contest that neither the G7 nor China intends the welfare of the region over profiteering. However, China enjoys a headstart. The BRI was unveiled back in 2013 by president Xi Jinping. The initiative was projected as a transcontinental long-term policy and investment program aimed to consolidate infrastructural development and gear economic integration of the developing countries falling along the route of the historic Silk Road. 

The highly sophisticated project is a long-envisioned dream of China’s Communist Party; operating on the premise of dominating the networks between the continents to establish unarguable sovereignty over the regional economic and policy decision-making. Referring to the official outline of the BRI issued by China’s National Development and Reform Commission (NDRC), the BRI drives to: “Promote the connectivity of Asian, European, and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road [Silk Road], set up all-dimensional, multi-tiered and composite connectivity networks and realize diversified, independent, balanced, and sustainable development in these countries”. The excerpt clearly amplifies the thought process and the main agenda of the BRI. On the other hand, the B3W simply stands as a superfluous rival to an already outgrowing program.

Initially known as One Belt One Road (OBOR), the BRI has since expanded in the infrastructural niche of the region, primarily including emerging markets like Pakistan, Bangladesh, and Sri Lanka. The standout feature of the BRI has been the mutually inclusive nature of the projects, that is, the BRI has been commandeering projects in many of the rival countries in the region yet the initiative manages to keep the projects running in parallel without any interference or impediment. With a loose hold on the governance whilst giving a free hand to the political and social realities of each specific country, the BRI program presents a perfect opportunity to jump the bandwagon and obtain funding for development projects without undergoing scrutiny and complications. With such attractive nature of the BRI, the program has significantly grown over the past decade, now hosting 71 countries as partners in the initiative. The BRI currently represents a third of the world’s GDP and approximately two-thirds of the world’s entire population.

Similar to BRI, the B3W aims to congregate cross-national and regional cooperation between the countries involved whilst facilitating the implementation of large-scale projects in the developing world. However, unlike China, the G7 has an array of problems that seem to override the overly optimistic assumption of B3W being the alternate stream to the BRI. 

One major contention in the B3W model is the facile assumption that all 7 democracies have an identical policy with respect to China and would therefore react similarly to China’s policies and actions. While the perspective matches the objective of BRI to promote intergovernmental cooperation, the G7 economies are much more polar than the democracies partnered with China. It is rather simplistic to assume that the US and Japan would have a similar stance towards China’s policies, especially when the US has been in a tense trade war with China recently while Japan enjoyed a healthy economic relation with Xi’s regime. It would be a bold statement to conclude that the US and the UK would be more cohesively adjoined towards the B3W relative to the China-Pakistan cooperation towards the BRI. Even when we disregard the years-long partnership between the Asian duo, the newfound initiative would demand more out of the US than the rest of the countries since each country is aware of the tense relations and the underlying desperation that resulted in the B3W program to shape its way in the Summit.

Moreover, the B3W is timed in an era when Europe has seen its history being botched over the past year. Post-Brexit, Europe is exactly the polar opposite of the unified policy-making glorified in the B3W initiate. The European Union (EU), despite US reservations, recently signed an investment deal with China. A symbolic gesture against the role played by former US President Donald J. Trump to bolster the UK’s exit from the Union. As London tumbles into peril, it would rather join hands with China as opposed to the democrat-regime of the US to prevent isolation in the region. Despite US opposition, Germany – Europe’s largest economy – continues to place China as a key market for its Automobile industry. Such a divided partnership holds no threat to the BRI, especially when the partners are highly dependent on China’s market and couldn’t afford an affront to China’s long envisaged initiative.

Even if we assume a unified plan of action shared between the G7 countries, the B3W would fall short in attracting the key developing countries of the region. The main targets of the initiative would naturally be the most promising economies of Asia, namely India, Pakistan, or Bangladesh. However, the BRI has already encapsulated these countries: China-Pakistan Economic Corridor (CPEC) and Bangladesh-China-India-Myanmar Economic Corridor (BCIMEC) being two of the core 6 developmental corridors of BRI. 

While both the participatory as well as the targeted democracies would be highly cautious in supporting the B3W over BRI, the newfound initiate lacks the basic tenets of a lasting project let alone standing rival to the likes of BRI. The B3W is aimed to be domestically funded through USAID, EXIM, and other similar programs. However, a project of such complex nature involves investments from diverse funding channels. The BRI, for example, tallies a total volume of roughly USD 4 to 8 trillion. However, the BRI is state-funded and therefore enjoys a variety of funding routes including BRI bond flotation. The B3W, however, simply falls short as up until recently, the large domestic firms and banks in the US have been pushed against by the Biden regime. An accurate example is the recent adjustment of the global corporate tax rate to a minimum of 15% to undercut the power of giants like Google and Amazon. Such strategies would make it impossible for the United States and its G7 counterparts to gain multiple channels of funding compared to the highly leveraged state-backed companies in China.

Furthermore, the B3W’s competitiveness dampens when conditionalities are brought into the picture. On paper, the B3W presents humane conditions including Human Rights preservation, Climate Change, Rule of Law, and Corruption prevention. In reality, however, the targeted countries are riddled with problems in all 4 categories. A straightforward question would be that why would the developing countries, already hard-pressed on funds, invest to improve on the 4 conditions posed by the B3W when they could easily continue to seek benefits from a no-strings-attached funding through BRI?

The B3W, despite being a highly lucrative and prosperous model, is idealistic if presented as a competition to the BRI. Simply because the G7, majorly the United States, elides the ground realities and averts its gaze from the labyrinth of complex relations shared with China. The only good that could be achieved is if the B3W manages to find its own unique identity in the region, separate from BRI in nature and not rivaling the scale of operation. While Biden has remained vocal to assuage the concerns regarding the B3W’s aim to target the trajectory of the BRI, the leaders have remained silent over the detailed operations of the model in the near future. For now, the B3W would await bipartisan approval in the United States as the remaining partners would develop their plan of action. Safe to say, for now, that the B3W won’t hold a candle to the BRI in the long-run but could create problems for the G7 members if it manages to irk China in the Short-run.

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