TWN Info Service on Finance and Development (Dec10/01)
1 December 2010
Third World Network  

LDCs need a new international development architecture
Published in SUNS #7048 dated 26 November 2010

Geneva, 25 Nov (Kanaga Raja) -- In order to achieve accelerated development and poverty reduction in the Least Developed Countries (LDCs), there is need not only for better LDC-specific international support mechanisms (ISMs), but rather a new international development architecture (NIDA) for the world's poorest countries.

This is the main message of the Least Developed Countries Report 2010 released Thursday by the United Nations Conference on Trade and Development (UNCTAD).

According to UNCTAD, existing LDC-specific support measures work within a more general framework of rules, norms, understandings and practices which guides the international economic relations of all developing countries, including LDCs and sub-categories of countries that largely overlap with the LDCs, such as low-income countries.

Given the weaknesses in the design and implementation of current LDC-specific international support measures, these general regimes actually have a greater impact on development and poverty reduction in the LDCs than the special measures.

The report argues that a NIDA for the LDCs should be constituted through reforms of those aspects of the global economic regimes that are directly relevant for the LDCs, as well as through the design of a new generation of special ISMs for the LDCs that would aim at developing their productive capacities.

Most fundamentally, says the report, the content of the NIDA should enable a shift to new, more inclusive development paths in LDCs, based on the development of their productive capacities, an associated expansion of productive employment and an improvement in the well-being of all their people.

"This will be best achieved by giving the State a stronger developmental role, which entails a re-balancing of the respective roles of the State and markets in national policy frameworks for economic development. The NIDA should facilitate this paradigm shift."

UNCTAD adds: "Finally, the NIDA for LDCs should be part of a broader set of systemic reforms, away from business as usual, which need to be taken in response to the financial crisis and global recession, and which would be beneficial for all countries, both developed and developing."

UNCTAD also notes that while the LDCs have weathered the global downturn better than was generally anticipated, they are all still trapped in the boom-bust cycles which have long plagued their economies. The LDCs must develop their productive capacities - their abilities to efficiently and competitively produce an increasing range of higher value-added goods and services through expanding investment and innovation - in order to escape poverty and end their chronic vulnerabilities.

Under current patterns of heavy dependence on exports of primary commodities and low-value-added manufactures, even boom periods have done little to improve living standards, says UNCTAD.

During the 2002-2007 boom, rapid economic growth translated only weakly into poverty reduction, notes the report, estimating that 53% of the total population of LDCs was living in extreme poverty in 2007.  The economic expansion also appears to have had little positive impact in closing the LDCs' productivity gap in agriculture.

And given that domestic supply responses have been rather weak, the expansion of LDC economies has been accompanied by a simultaneous increase in the food import bill, which went up from over $9 billion in 2002 to $24 billion in 2008.

According to the report, the NIDA is defined as a new architecture of formal and informal institutions, rules and norms, including incentives, standards and processes, which would shape international economic relations in a way that is conducive to sustained and inclusive development in the LDCs. Its objectives are: (a) to reverse the marginalisation of LDCs in the global economy and to help them catch up; (b) to support a pattern of accelerated and sustained economic growth which would improve the general welfare and well-being of all people in the LDCs; and ( c) to help LDCs graduate from LDC status.

These objectives could be achieved through a greater emphasis on the development of productive capacities of LDCs and through a renewed role of the State in promoting development.

The NIDA for LDCs should be part of a broader set of systemic reforms which need to be taken in the wake of the financial crisis and global recession, and which would be beneficial for all countries, both developed and developing. Part of this new international development architecture must involve the design of a new generation of ISMs for the LDCs. It is necessary to strengthen these measures by introducing institutional mechanisms for their implementation and by ensuring adequate financing. It is also important to move beyond a focus on trade, and in particular market access, to special measures which help build up the productive base of LDC economies.

The report contends that the rationale for a new international development architecture for the LDCs stems from the weaknesses of the current international economic architecture.

It highlights four major weaknesses in the existing global economic regimes that cause them to constrain rather than enable development and poverty reduction in the LDCs: First, there are certain policy issues that are missing from the international economic architecture even though they are very important to LDCs because of their stage of development and their form of integration into the global economy. Second, the global economic regimes are founded on models of trade, finance and technology that are inappropriate for the LDCs, given their initial conditions, structural weaknesses and vulnerabilities. Third, these models have been propagated through conditionalities and micro-incentives for encouraging compliance which have undermined country ownership of national development strategies and limited policy space. Rather than encouraging policy diversity and learning tailored to local conditions, a one-size-fits-all policy approach has been applied. Fourth, there is a lack of policy coherence between different components of the global regimes and between the global regimes and special international support measures for the LDCs.

The report highlights some of the failures that have arisen from the application of models for finance, trade and technology that are not appropriate to address the structural weaknesses and vulnerabilities of the LDCs.

On the issue of finance, the report says that at the heart of the development problem in LDCs are the low investment levels that prevent these countries from achieving sustained growth, structural transformation and poverty reduction. The thrust of economic reforms which LDCs have been implementing has not been domestic resource mobilization but rather the attraction of foreign direct investment (FDI) and integration into global private capital markets.

"These reforms have actually curtailed the efforts of development banks, often parastatal, to promote domestic resource mobilization, and have thus perpetuated LDCs' heavy dependence on external finance."

The thrust of the continuing reforms in LDCs has been to diminish the role of the State in promoting development while encouraging a greater reliance on the creative power of market forces. However, in spite of financial liberalization, financial systems have not been able to mobilize and efficiently channel savings into investment and technical change.

On the key issue of the composition of aid, the report finds that an increasing proportion of aid to LDCs has been allocated to social infrastructure and services, and there is a concomitant decline in aid to production sectors and economic infrastructure. In 2006-2008, social infrastructure and services absorbed approximately 45% of total aid commitments to LDCs, up from the 30% of the mid-1990s. In real terms, they accounted for more than half of the scaling up of aid flows to LDCs between 2002 and 2008.

On the issue of trade, the report says that most LDCs have undertaken rapid and comprehensive trade liberalization to the extent that they now have open economies. Most undertook sweeping trade liberalization in the late 1980s and the 1990s, through a rapid succession of measures taken unilaterally, especially in the context of structural adjustment programmes. The share of total exports and imports in gross domestic product (GDP) for LDCs increased, on average, from 36% in 1985 to 62% in 2008. Exports have also boomed following trade liberalization. But the share of LDCs in world trade has been a constant at close to 0.33% during the last 10 years if oil is excluded.

For LDCs, their comparative advantages have meant a concentration on commodities and labour-intensive, low-skill and low-value-added manufactures in their exports. As a result, there has been a "lock-in effect", whereby LDCs (as a group) have become more commodity-dependent or have focussed on low-skill manufactures. Moreover, trade liberalization has adversely affected LDC's fiscal revenue earnings. Although their imports as a share of GDP have increased significantly, trade taxes have declined, from 39% of all tax revenue in the early 1990s to 31% during the 2000-2006 period.

"On balance, the score card of the positive and negative effects of trade liberalization is very mixed. Instead of economic diversification, LDCs today have, on average, a less diversified economy and more concentrated exports. Instead of reducing their structural vulnerabilities, trade liberalization has accentuated them. In short, trade liberalization in LDCs was premature, given their level of development," the report stresses.

On the issue of technology, the report finds that a very important impact of the greater proliferation of IPRs (intellectual property rights) worldwide has been the shrinking policy space available to LDCs to develop their own catch-up policies. Innovation is continuously encouraged by the wide accessibility of society to already produced knowledge at low costs, but IPRs limit the ways and means by which countries and firms can access knowledge locally to generate newer knowledge. While the TRIPS Agreement contains flexibilities for the LDCs, most LDCs have, to varying degrees, forgone these flexibilities through "TRIPS-plus" regimes negotiated with major technology exporters or included in bilateral trade and investment treaties.

According to UNCTAD, the overall design of the NIDA for LDCs should: Enable new, more inclusive development paths in LDCs based on the development of productive capacities, the associated expansion of productive employment and improvement in the well-being of all their people; foster and support country ownership of national development strategies and enhance policy space for development policies; and facilitate strategic integration into the global economy in line with the development needs and capacities of the LDCs, including through a better balance between external and domestic sources of demand.

It should also redress the balance between markets and the State so that the State plays a more significant role in guiding, coordinating and stimulating the private sector towards the achievement of national development objectives; promote greater domestic resource mobilization in LDCs with a view to reducing their dependence on aid; promote greater policy coherence between the different domains of trade, finance, technology, commodities, and climate change mitigation and adaptation, and also between the global economic regimes and the ISMs;  support South-South development cooperation as a strong complement to North-South development cooperation; and foster more democratic and universal participation in the global system of governance with a view to giving LDCs a greater voice and representation.

The core of the design of a NIDA is that it should enable a shift to new, more inclusive development paths in LDCs, based on the development of productive capacities, the associated expansion of productive employment and an improvement in the well-being of all their people.

According to UNCTAD, this will be best achieved by giving the State a stronger developmental role, which entails a re-balancing of the respective roles of the State and markets in national policy frameworks for economic development.

UNCTAD points out that the development of productive capacities refers to the expansion of the productive resources, acquisition of technological capabilities and creation of production linkages which permit a country to produce a growing array of goods and services and enable the country's beneficial integration into the global economy on the basis of an internal momentum of development. It occurs through three inter-related processes: capital accumulation, technological progress and structural change.

But the development of productive capacities, with the associated expansion of productive employment opportunities and reduction in poverty, is not automatic. There is a need for a strengthened role for the State, involving a re-balancing of the respective roles of the market and the State in the process of economic development.

National governments, with the full involvement of civil society organizations, and supported by the international community, need to take urgent measures to implement national development strategies that enable accelerated reduction of poverty, inequality and marginalisation. This means promoting the fiscal space for delivery of key public services and long-term public investments in infrastructure, agriculture and human skills.

It also means re-examining existing macroeconomic frameworks, says UNCTAD, pointing out that there is need for a relaxation of unnecessarily stringent fiscal and monetary restrictions, and use of counter-cyclical fiscal and monetary policies to boost employment and incomes in order to reduce poverty and minimizing the impact of external and other shocks.

Successful developmental States have also pursued policies of strategic integration with the global economy. That is to say, the timing, speed and sequencing of opening up to the rest of the world have been decided on the basis of how they support national interests in terms of promoting development and poverty reduction. "This implies a development-led approach to trade rather than a trade-led approach to development, as well as a gradual approach to trade liberalization and capital-account liberalization."

The report proposes an agenda for action to create a NIDA for the LDCs. It says that the creation of a new international development architecture for the LDCs requires comprehensive reforms in the areas of finance, trade, commodities, technology and climate change. These should include: (i) systemic reforms of the global regimes governing these areas; (ii) the design of a new generation of ISMs for the LDCs, building on the lessons of the past; and (iii) enhanced South-South development cooperation in favour of LDCs.

In the area of finance, UNCTAD suggests that priorities for systemic reforms in the global economic regime should include: (i) promoting domestic resource mobilization through increased aid for developing tax administration capability and financial deepening and with global financial and tax cooperation to reduce illicit capital flight and transfer pricing; (ii) promoting country ownership of national development strategies through reform and reduction of conditionalities and helping to rebuild developmental State capacities; and (iii) the enhancement of current debt relief initiatives show that the debt overhang in 20 LDCs which are currently in debt distress, or at risk of debt distress is addressed.

The report also calls for increased official development aid inflows in line with the Organization for Economic Cooperation and Development's Development Assistance Committee aid commitment of 0.15-0.20% of gross national income.

In the area of trade, the report stresses that it is clear that the successful conclusion of a Doha Round of multilateral trade negotiations in a way which gives central importance to development outcomes for all developing countries would also benefit LDCs.

In this context, the report makes three major proposals: First, it supports the "early harvest" notion for LDCs. This includes, in particular, full implementation of duty-free and quota-free (DFQF) market access for all products originating from all LDCs, and a waiver decision on preferential and more favourable treatment for services and service suppliers in LDCs. Secondly, LDCs should be empowered to use all the flexibilities already available under WTO rules to foster the development of their productive capacities and pursue their own form of strategic integration into the global economy. This will allow them to develop a new strategic trade policy to support their development and poverty reduction efforts in a manner compatible with the new post-crisis global macroeconomic environment. Thirdly, the Enhanced Integrated Framework for Trade-Related Technical Assistance (EIF) offers an important operational mechanism for ensuring that aid for trade development in the LDCs is focussed on priority activities, and is integrated within national development and poverty reduction strategies.

In the area of commodities, the report underscores that the long-term goal should be structural transformation leading to more diversified economies. However, in the short and medium term, some new forms of international commodity policy are required.

From an LDC perspective, the report notes, the major element missing from the global economic regimes is the lack of an international commodity policy of any kind. This is important because many LDC economies are still commodity-dependent, and the way in which commodity markets behave and the increasing interdependence between these markets and financial markets, is integrally associated with the boom-bust nature of the growth experience of the LDCs and their structural constraints.

Priority actions in the global economic regime could include the introduction of new measures for reducing the volatility of commodity markets and the adverse impacts of that volatility, such as: (i) The establishment of a global counter-cyclical facility that ensures fast disbursement of aid at times of commodity price shocks, with low policy conditionality and high concessionary elements; (ii) Setting up of innovative commodity price stabilization schemes, consisting of both physical and virtual reserve facilities; (iii) Introduction of taxation measures to reduce speculation in global commodity markets; and (iv) A counter-cyclical loan facilities indexed to debtors' capacity to pay.

In the area of technology, UNCTAD says that the NIDA should focus on achieving a new balance between the private and public dimensions of knowledge. Knowledge is both a public good and a proprietary good (or quasi-private good), and includes features of both appropriability and exclusivity.

The new knowledge architecture should focus on enabling a more development-friendly technology and IPR regime. It can do this by creating a balance between the public and private dimensions of knowledge and supporting the emergence of a new, coherent system of technology transfer that facilitates LDCs' domestic efforts to build innovative capacity.

It should also strengthen LDCs' efforts to mobilize domestic resources to promote knowledge-intensive activities and the emergence of a learning-oriented developmental State.

The report proposes a series of international support mechanisms in the area of technology, including the development of a technology license bank, regional technology sharing consortia and a multi-donor trust fund for financing enterprise innovation in LDCs.

UNCTAD said that the forward-looking agenda that it proposes would create a much more supportive international environment for LDCs. Linking international support mechanisms for LDCs with a new international policy and cooperation framework that can deliver a more stable, equitable and inclusive global governance regime for all countries is one of the most urgent challenges facing the international community.

One billion people will be living in the LDCs by 2017 and they need to find new development paths which will reduce their marginalisation in the global economy and will substantially reduce their poverty, contends UNCTAD.