TWN Info Service on WTO and Trade Issues  (Nov10/01)
09 November 2010
Third World Network

How to develop LDCs' productive capacities
Published in SUNS #7028 dated  28 October 2010

Geneva, 27 Oct (Kanaga Raja) -- What can be done to help the 49 Least Developed Countries (LDCs) improve their productive capacities to enable them to produce a broader array of goods and services, and thus creating better-paying jobs and improving living standards, is the subject of a three-day meeting being hosted by the UN Conference on Trade and Development (UNCTAD).

The UNCTAD-sponsored meeting from 27-29 October is one in a series of "pre-events" being held by various United Nations agencies in the run-up to the Fourth United Nations Conference on Least Developed Countries (LDC IV) to be held in Istanbul, Turkey from 30 May to 3 June 2011.

The purpose of LDC IV is to assess the results of the 10-year action plan for the LDCs that was adopted at the Third Conference on LDCs in Brussels in 2001, and to adopt new measures and strategies for the sustainable development of the LDCs into the next decade.

According to an UNCTAD document prepared for the LDC IV pre-conference event titled "Developing Productive Capacities in Least Developed Countries: Issues for Discussion", the three-day meeting here will examine what the focus on developing productive capacities means for the design of national policies to promote development and poverty reduction in LDCs, and international support measures for LDCs by their development partners.

Two types of output are envisaged to emerge from the discussions, namely, recommendations on the type of language that might go into a New Programme of Action for LDCs, and, perhaps most importantly, a set of proposals for deliverables (concrete actionable initiatives) which would support the development of productive capacities in the LDCs and could constitute part of a new set of LDC-specific international support mechanisms.

At a media briefing on Wednesday, Dr Supachai Panitchpakdi, Secretary-General of UNCTAD, said that LDC IV will not be a "business-as-usual" conference. Although much has been gained by the LDCs in the past decade, particularly, before the global crisis - i. e. between 2003 and 2008 - the crisis has glaringly exposed the structural deficiencies of the LDCs, he added.

He stressed two major areas, namely, how to integrate the LDCs into the global economic system in an effective and beneficial way, and how to strengthen the structural deficiencies in the LDCs over the past decade.

According to the UNCTAD document for the LDC IV pre-conference event, during the period 2002-2007, LDCs as a group experienced high gross domestic product (GDP) growth rates, which surpassed the 7% target of the Brussels Programme of Action (of 2001).

However, about a quarter of the LDCs continued to experience very sluggish growth or economic regression. Moreover, even in the more successful countries, growth was associated with a pattern of insertion into the global economy based on commodity exports, low-skill manufactures and tourism, which meant that they were highly vulnerable to external shocks.

Omitting oil-exporting countries, the UNCTAD paper says, there was little improvement in domestic investment and savings, and very slow technological progress in the LDCs. Agricultural productivity growth lagged and there was widespread de-industrialization rather than a progressive structural transformation. Most significantly, the form of economic growth was not associated with broad-based improvements in human well-being, but rather very slow poverty reduction.

In 2008 and 2009, there was a sharp though very heterogeneous slowdown in growth in the LDCs. The LDCs did not fare as badly as other developing countries, partly because commodity prices recovered in 2009 and partly because multilateral institutions provided increasing official flows.

But it has been estimated that the number of people living in extreme poverty was 7.3 million more than it would have been without the crisis in 2009. More significantly, about half the population of the LDCs still lives in extreme poverty and the long-standing structural weaknesses and vulnerabilities which contribute to the LDCs' continued marginalisation in the global economy remain.

The UNCTAD document draws attention to the double challenge being faced by many LDCs. Firstly, they must find productive jobs and livelihoods for the millions of young people who are entering the labour force each year.

The scale of this employment challenge is formidable, it says. In Mali, for example, it has been estimated that the number of new entrants to the labour force was 171,800 in 2005 and this will increase to a peak of 447,800 per annum in 2045, when the annual additional labour force will start to decline. In Madagascar, the new entrants to the labour force in 2005 are estimated as 286,200 and their number will increase to 473,400 per annum by 2035, when the additional labour force will begin to decline.

Moreover, the nature of the employment challenge is changing. In the past, most of the new labour force was absorbed in low-productivity livelihoods in agriculture. But farm sizes are diminishing and farmers are being forced to cultivate more ecologically fragile land.

"The failure to improve agricultural productivity means that agricultural livelihoods are pitifully poor as well as physically onerous and full of drudgery," said UNCTAD, adding that more and more people are seeking work outside agriculture and urbanization is accelerating.

Secondly, says the paper, the LDCs must deal with the employment challenge in an open-economy context. Very few LDCs have restrictive trade regimes at present, and most have undertaken rapid and extensive trade liberalization.

But their existing production and trade structures offer very limited opportunities in a rapidly globalizing world driven by new knowledge-intensive products and services with demanding conditions of market entry. "At the same time, rapid opening up in more traditional sectors is exposing existing producers to an unprecedented degree of global competition."

Citing the widespread search for pragmatic and constructive policies that can foster new, more inclusive development paths in LDCs, UNCTAD said that it has argued in its successive reports on the LDCs that "the key to achieving sustained development and poverty reduction in the LDCs is to put the development of productive capacities - and the related expansion of productive employment - at the heart of national and international policies."

Noting that the term "development of productive capacities" is understood by different people in different ways, UNCTAD said that from its perspective, the development of productive capacities refers to the expansion of productive resources, acquisition of technological capabilities and creation of production linkages which permit a country to produce an expanding array of goods and services and enable a beneficial integration into the global economy on the basis of an internal momentum of growth development.

From the UNCTAD perspective, the development of productive capacities occurs through three inter-related processes - capital accumulation, technological progress and structural change.

Capital accumulation and technological progress not only lead to the expansion of existing productive potential. They facilitate a process of diversification away from sectors characterized by diminishing returns towards sectors characterized by increasing returns, as well as a shift in the form of integration of LDCs with the global economy. Substantial poverty reduction occurs as employment opportunities increase along with the transformation of the productive base of the economy.

UNCTAD said that focusing on building productive capacities in the LDCs will require a paradigm shift with respect to current national and international policies - a different approach to poverty reduction, to the role of the state, and to international trade, finance and technology. The paradigm shift advocated here places production and employment at the heart of efforts to reduce poverty.

At present, according to the UNCTAD document, emphasis is being placed on improving the overall investment climate, in particular through the reduction of bureaucratic red-tape and governance-related costs of doing business. "But whilst this is important, it is insufficient in an LDC context characterized by extensive structural weaknesses."

The paradigm shift advocated here involves a different approach to the development of productive capacities.

"There is a need for a more pro-active approach to developing productive capacities which will require the state playing a more developmental role and a better balance between markets and the state. Empowering national leadership in the design and implementation of national development strategies, and policy space for pragmatic experimentation are vital issues."

The paradigm shift advocated here also involves a different approach to international trade, finance and technology, said UNCTAD.

Since the early 1980s, it noted, there has been a strong tendency for ideas from international trade theory to dominate understanding of development processes. This was reinforced during the 1990s through arguments that fast and full integration with the world economy was the key to seizing the opportunities of globalization and minimizing the chance of being left behind.

However, recent experience shows that this is much too simplistic and indeed the most successful developing countries have not followed the orthodox policy prescription, stressed UNCTAD.

In the approach advocated here, international trade is seen as essential for the development of productive capacities, and the development of productive capacities is seen as essential for international trade. "But the paradigm shift entails starting at the development end, rather than the trade end, of the relationship between trade and development. National and international policies which can facilitate this must be rooted in a development-driven approach to trade rather than a trade-driven approach to development."

With regard to finance, aid inflows to LDCs increased significantly in the 2000s, but the long-term shift in the composition of aid away from production sectors and towards social sectors has been reinforced in recent years.

The UNCTAD paper finds that due to low levels of domestic resource mobilization, LDCs also remain in conditions of unhealthy aid dependency, which is undermining the possibility of genuine ownership of national development strategies.

Changes in the aid architecture are thus important as well as a broader approach to development finance in which aid works to leverage other forms of development finance. "More fundamentally, the productive capacities approach gives greater emphasis to domestic resource mobilization and the promotion of investment, both domestic and foreign. Using aid to end, rather than reinforce, aid dependence is an important objective."

The paper adds that technology has become the dividing line between development and under-development, and LDCs lag far behind in their technological capacities. "Changes in the international knowledge architecture are necessary to foster technology transfer, and national policies must also be adjusted to promote effective absorption and diffusion of technologies in LDCs."

On the question of the role of the State in the development of productive capacities, and how to build capable developmental States in the LDCs, UNCTAD has argued that developing productive capacities necessarily entails a more developmental role for the State.

It has advocated a mixed economy model in which the government harnesses the profit motive of the private sector towards the achievement of national development objectives. This requires: Macroeconomic policies oriented to promote growth, investment and employment; a developmental agricultural policy and a developmental industrial policy to promote productive development in sectors; a strategic trade policy which uses available flexibilities to promote diversification and value-addition; an active approach to promoting firm-level entrepreneurial capabilities and innovation to create new activities.

On the issue of what international support measures can effectively promote the development of productive capacities, the UNCTAD paper says that at the Third UN Conference on the LDCs in Brussels (in 2001), the major innovative idea was the Everything But Arms Initiative of the European Union.

UNCTAD said that a basic aim of the pre-event will be to contribute to building political consensus and analytical basis for thinking about a new generation of international support measures for LDCs. Such measures should dovetail with national policies and work more effectively to achieve sustained growth, productive employment generation and poverty reduction.

According to the UNCTAD paper, one important obstacle to a more development-oriented economic model in LDCs is a low national ownership of development strategy. In general, the latter has been a product of policy advices of international financial institutions through Poverty Reduction Strategy Papers (PRSPs) and official development assistance (ODA) donors' conditionalities.

"There is thus a constant tension between the promotion of country ownership and the desire of the international financial institutions (IFIs) and the bilateral donors to ensure that their assistance is being used to support what they regard as credible development strategy."

Country ownership of national development strategies is the cornerstone of development effectiveness and also aid effectiveness, stressed UNCTAD, suggesting that one step that can be taken to increase country ownership is the adoption of an aid management policy in LDCs. This can play an important role in reducing the multiple ways in which aid delivery is undermining ownership by being unaccounted, off-budget, off-plan and misaligned.

The UNCTAD paper also highlights product coverage and Rules of Origin as two major issues regarding preferential market access of LDCs. Rules of origin, for their part, have been identified as one of the main obstacles for full utilization of the preferential market access.

"Therefore, rules of origin for LDCs' exports should be liberalized, simplified and made more transparent in accordance with the Hong Kong (China) Declaration."

In addition, new, innovative ways to make preferential market access for the exports from LDCs commercially meaningful should be explored, said UNCTAD. "For example, developed countries could encourage their domestic firms through the provision of favourable tax treatment or grant support for partial cost-coverage to develop supply sources in the LDCs. This would enable the LDCs to take advantage of the preferential market access they have been offered but are at present unable to exploit due to their insufficient supply-side capacity."

Duty-free quota-free initiatives could also be linked with support measures aimed at building productive capacities, facilitating integration into supply chains, promoting trade and competitiveness in beneficiary LDCs such as Aid for Trade, UNCTAD concluded. +