A slumping British economy and devalued currency are bad news for Brits after voting to leave the European Union. For developing countries, the short-term losses add up to about $3.8 billion, according to the U.K.-based think tank the Overseas Development Institute. There are some potential benefits in the long term as the U.K. will hopefully stabilize its economy and work out new trade deals, but a lot of uncertainty remains.
The authors of the report estimate that export goods from least-developed countries to the U.K. will decline by about $500 million. Bangladesh, Fiji, Kenya and Mauritius are the four countries expected to be affected. The second hit comes from the value of foreign aid dropping by $18.7 billion (based on a 10 percent devaluation of the currency). It similarly causes the value of money sent home from migrants living in the U.K. to drop by $1.4 billion, with Nigeria and India taking $370 million in losses alone. Declining investments and the poor performance of the financial markets complete the bleak picture for developing countries.
“The U.K.’s decision to leave the EU could have far-reaching macroeconomic consequences harming the growth prospects for emerging and developing countries,” according to the report. “The U.K. and other developed countries can do more to reduce the impact of the shock. The U.K. can engage in further monetary easing, while the G20 can reassure financial markets and engage in necessary action. ”
For many countries, the timing of the Brexit could not have been worse. Emerging markets rallied a few years ago thanks, in large part, to the roaring Chinese economy, despite of the global economic downturn. But as China’s economic growth has declined, so have the fortunes of those countries. Other countries that built wealth on oil made big bets that did not pan out after oil prices fell. With former colonies around the world, economic ties between the U.K. and developing countries are strong. That means this decision could be even more harmful than other negative global events.
Credit: ODI
Fortunately, it is not all doom and gloom. Where the British economy will go in the next year or two is unknown. Some warn of a coming recession because of the Brexit, while others predict that the immediate downturn will be corrected soon. If that correction happens, a lot of the $3.8 billion loss will be wiped away. If it does not, then countries with close ties to the U.K. could experience significant harm.
The potential place for opportunity is through trade deals. The U.K. will be on its own once it leaves the European Union, forcing it to renegotiate more than 100 trade deals in the African continent alone. New deals could benefit developing countries more than the current European Union deals. That is why the report shows some optimism about the long-term prospects of the Brexit. It is possible that the U.K. could increase trade by removing some of the barriers established by the European Union.
Such gains are predicated on many unknowns. The U.K. could negotiate a deal with the European Union to still participate in their trade deals and maintain the status quo. The report authors also suggest that the Brexit could lead the U.K. to work more closely with other international organizations, like the United Nations and the G20, which could help uphold broader issues like human rights and development support for poor countries.
For their part, developing countries could help themselves by diversifying their income sources and trade partners. An over-reliance on the U.K. for aid and trade leaves countries like Kenya particularly vulnerable to decisions like the Brexit. The vote has the potential for force such changes that may open new opportunities and provide a more stable foundation for developing countries.
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