What Does China’s Currency Devaluation Mean for Developing Economies?

By Amy Chang

The Central Bank of China cut the daily reference rate of the yuan by 1.9 percent on August 11, and then twice more in the following two days, resulting in the largest currency devaluation in 20 years. The People’s Bank of China (PBoC) claims that the adjustment was a means of introducing market forces into the yuan, and President Xi has vowed to pursue no further devaluation.  The currency reforms will likely aid China in its bid to have the yuan included in the IMF’s Special Drawing Rights basket, but also comes as Chinese exports and growth stall.

China currency

What are the implications for China’s development projects?

China has laid out a series of ambitious development projects that will require large scale investment, and could be impacted by falling foreign currency reserves.  Foreign reserves plunged by $93.9 billion in August, and a further $43.3 billion in September as exports declined and Beijing took action to stabilize its stock markets and currency. Despite these decreases, China’s foreign currency reserves are still the world’s largest at approximately $3.3 trillion.

The IMF has indicated that $2.6 trillion would be an adequate total foreign currency reserve for China, and the recent outflows should not impede financing for China’s recent spate of outward investment. The New Silk Road is expected to require an investment of  $40 billion, China will provide roughly $30 billion of the $100 billion capital base for the Asian Infrastructure Investment Bank, and the China Development Bank and Export-Import Bank each received an injection of $30 billion this spring. These projects represent significant investment, but should not pose a problem for the world’s second largest economy.

Will this adjustment hurt China’s trading partners?

The devaluation of the yuan will make Chinese exports cheaper internationally. Importers of heavy machinery, bulldozers, and electrical lines such as Ethiopia, Kenya, and Mozambique – all previously experiencing trade deficits due to the high costs of Chinese capital goods – will enjoy lower import costs. Indian firms specializing in the production of electronic goods import components from China, and can also expect a cheaper bill.

China is currently the number one trading partner for most African countries, and the devaluation makes it more expensive for China to import goods.  Many African countries export raw materials and commodities to China, and prices for these goods were already falling amidst slowing global demand.   Copper and crude oil prices both fell four percent to six-year lows, and Zambia’s copper mines have already started laying off workers. A devalued yuan will only contribute to falling Chinese demand for raw material imports.

How will the policy change affect global trade and investment patterns?

The yuan devaluation also means that Chinese exports will threaten to displace goods from emerging market competitors – particularly within the textiles, chemical products, and metals industry. India, already experiencing dwindling exports this year with the rising rupee, has seen export orders being shifted to its neighbor.  Cheaper Chinese goods will likely impact other exporters, in Southeast Asia in particular.

With slowing global demand leading to iron ore and oil prices hitting record-lows before August, commodities exporters to China have seen their currencies weaken in the foreign exchange.  Kazakhstan has seen its exports suffer a decrease of more than 40 percent since January, and the Kazakh tenge saw an accompanying fall in value. Capital outflows from emerging markets are expected to exceed inflows this year for the first time since 1988 due to such exchange rate volatility, pulling $540 billion from developing countries, according to the Institute of International Finance.

This economic slowdown is likely to worsen in upcoming months; this 3 percent devaluation in the yuan will lead to further market turmoil, as capital flows out of Chinese companies when investors start selling their short-US dollar/long-renminbi carry trades.

Amy Chang is a research intern with the Project on Prosperity and Development at CSIS.

Reorienting the War on Drugs in Colombia and Afghanistan

By Ariel Gandolfo & Miguel Eusse

The United States’ multi-billion dollar War on Drugs in Afghanistan and Colombia has failed. Afghanistan supplies 80 percent of the world’s opium, which is derived from poppies and used to make heroin, while Colombia is home to around 43 percent of the global coca supply. Despite continued efforts to crack down on the production of heroin and cocaine in these countries, poppy cultivation in Afghanistan rose 36 percent between 2012 and 2013, to record levels. In Colombia, approximately 2.6 million acres of coca were sprayed with toxins between 2000 and 2007, yet cocaine production rose during the same period, and more recently increased by 44 percent between 2013 and 2014.

Coca field fumigation. Source: Policía Nacional Colombiana

Coca field fumigation. Source: Policía Nacional Colombiana

In Colombia and Afghanistan, farmers grow coca and poppies because they are profitable, but also because there are no viable alternatives to earn a living. Governments are now realizing that criminalization and eradication programs are not enough, and they are changing strategies to foster alternative opportunities to drug cultivation. These new approaches are supported by multilateral and bilateral organizations such as the UN Office on Drugs and Crime and USAID. Continue reading

Can Morocco Continue to Attract Foreign Investment?

By Motoki Aoki

In the past five years, the Kingdom of Morocco has been the most rapidly transforming economy in the unstable North African region—and arguably even in the world. Morocco has made an incredible leap in the World Bank’s 2015 Doing Business index, ranking 71 out of 189 economies compared to 130 in 2009. This dramatic improvement attracted the attention of the private sector, drawing even more foreign cash into the kingdom. In 2014, Morocco became the second-largest destination for FDI in North Africa and the third-largest recipient of FDI on the African continent. This year, Morocco continues to win foreign investors’ attention.

Last month, French aircraft company Figeac Aéro announced plans to invest $29 million to open a production plant in Morocco, generating 500 direct jobs. The French automaker PSA Peugeot Citroen will invest $632 million in a low-cost vehicle assembly factory, with production scheduled to start in 2019. This is estimated to create 4,500 direct jobs and 20,000 indirect jobs by the time the factory is operational. Additionally, Japanese company Furukawa Electric, the world’s third-largest fiber-optics manufacturer, is poised to invest $8 million to build a Moroccan plant and tap into the growing demand for communications infrastructure in Africa. Not only do these private investments create jobs, they also boost exports of vehicular, aeronautic, and electronic equipment.

Port_of_Casablanca

Casablanca is an important trade and financial hub for both Morocco and the African continent.

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Landlocked Developing Countries Face Unique Challenges on Trade and Economic Progress

By Milos Purkovic

On November 5, the United Nations concluded its second conference on landlocked developing countries (LLDCs) and produced a 10-year action plan designed to address their bottlenecks related to transit, trade, and infrastructure. According to the 2014 Human Development Report, nine of the poorest performing 15 countries are landlocked and face additional burdens in these areas critical for economic growth. Further, the UN conference highlights growing international recognition of “landlockedness” as a development issue and an opportunity for broad based economic growth. Below are key takeaways from the conference, and implications for development in LLDCs.

1.     Trade processes in LLDCs are more expensive, take more time, and have more steps than in average transit countries

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In 2013, the cost for LLDCs to export and import a standard 20 foot container was over twice the average cost of shipping in transit countries. Additionally, export costs from 2006-2013 grew at a faster rate in LLDCs than in transit developing countries — roughly 38 percent compared to 26 percent. Import costs over the same period increased about 35 percent in LLDCs versus 22 percent in transit countries.

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A Quick Breakdown of the U.S.-Africa Business Summit

By Julia Marvin

The first ever U.S.-Africa Leaders’ Summit took place in Washington earlier this week bringing more than 40 African Heads of State and representatives from the U.S. public and private sector. The Summit sought to strengthen trade and investment ties with Africa while highlighting U.S. commitments to security, democratic development, and the people of Africa. Despite concerns regarding the extent to which the Summit can bolster trade relations with one of the world’s fastest growing regions, the administration announced several deliverables. However, specifics for the realization of these goals remains unclear amidst questions regarding the Export-Import Bank’s reauthorization and fiscal uncertainty in Washington.

Here are some takeaways:

Africa Summit

Photos courtesy of USAID and the State Department’s Flickr photostream used under a creative commons license.

Julia Marvin is a researcher with the Project on Prosperity and Development at CSIS.