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Expanding productive capacity: lessons learned from graduating least developed countries

December 11, 2017

The limited progress of least developed countries (LDCs) in developing their productive capacities remains one of the main obstacles to move towards graduation from the LDC category and to achieve the sustainable development goals. While there is international agreement on the importance of building productive capacity, the question of what policy interventions are successful usually remains unanswered.

This Policy Note provides some answers by analyzing the strategies and policy choices of 14 countries that have successfully graduated from the LDC category, or have made noteworthy progress towards graduation. It contains a wide range of lessons not only relevant to all LDCs but the international community at large.

The note develops an analytical framework for expanding productive capacities for sustainable development that highlights the need for integrated policies across five broad policy areas: (I) development governance; (II) social policy; (III) macroeconomic and financial policies; (IV) industrial and sectoral policies; and (V) international support. It also emphasizes the need for different national strategies and tailored international support due to the diversity of LDCs. In this regard, the note identifies three different pathways towards graduation and highlights for each pathway key policy lessons for effectively expanding productive capacity. The first pathway is characterized by rapid economic growth based on natural resource exploitation, but also by insufficient building of human assets and high vulnerabilities to external economic shocks. On the second pathway, economic specialization is coupled with investments in social sectors. The third pathway open to more larger economies is characterized by structural transformation leading to more diversified economies.

Download here (pdf)

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From Planning to Policy: 50 years of the CDP

May 10, 2017

A UN background paper I recently published.

The United Nations Committee for Development Policy (CDP) comprises 24 independent specialists from a variety of disciplines. It advises the UN Economic and Social Council on emerging economic, social and environmental issues relevant to sustainable development and international co-operation. The paper argues that since its launch in 1965 the CDP has at times struggled to make an impact, but that it has been most effective when it has been at its most creative and when it has broken with convention. It helped put into practice the target that developed countries should devote 0.7% of their gross national income to official development assistance. The Committee created the least developed countries category and continues to monitor and update membership of the group. Its members were prominent in the genesis of the human development approach and continue to conduct new work in the areas of governance, productive capacity and sustainable development.

Download the paper here (pdf)

The taxman cometh: Are Vanuatu’s days as a tax haven numbered? 

August 30, 2016

“Before sunset we sat in a circle to drink kava. My friend Tim passed around some smol kaekae (food) to wash away the taste. Gathered for a fundraiser to help a friend pay her daughter’s school fees, we chatted as group of about eight kids played nearby. Who belonged to which parent? Later, a plate of chicken legs and island cabbage followed – for everyone….”

Continues in Vanuatu Business Review, August 2016

 

 

What will Brexit mean for the least developed countries?

July 15, 2016

The United Kingdom vote in June 2016 to leave the European Union will have major implications for developing economies, according to a report from the Overseas Development Institute (ODI). Least developed countries (LDCs) will be particularly affected, mostly via reduced exports and lower aid values. Aid and trade preferences are two of the main international support measures (ISMs) available to LDCs.

Although LDCs will be impacted differently depending on how (and if) the UK leaves the EU, the effect will mostly be negative, via trade, financial markets and investment, aid, migration and remittances, and global collaboration. The ODI conservatively estimates that the 10% devaluation of the pound in the first week after Brexit, together with a downturn in the British economy, could cost LDCs $500 million in lost exports. In addition the devaluation will in effect reduce total British aid to all developing countries by $1.9 billion, with LDCs probably among the worst affected. “If the pound continues to fall, the effects could increase,” says the report. Around half of Britain’s £12.2 billion aid budget is allocable to LDCs. By mid-July the sterling/dollar exchange rate had fallen by 12%.

The UK accounts for around 5% of LDC exports, although export dependency varies significantly by country. LDCs that export a lot to the UK will be most affected, including Bangladesh, which sends 10% of exports to the UK, and Cambodia, which sends around 7% of its exports to the UK. The devaluation effect could even be compounded by increased protectionism or a deterioration in Europe and Britain’s trade relations with the rest of the world.

LDCs also rely heavily on the larger EU market, the single biggest in the world. If the EU is negatively impacted by Brexit, these countries will suffer and import less from the rest of the World. Bangladesh sends half of its exports – mostly garments – to Europe including the UK. Ethiopia, Malawi and Uganda send nearly a third of their exports to Europe. Tanzania, Sierra Leone and Rwanda export less to the EU but will still be affected.

Exports of selected LDCs to the UK, 2014

Country Exports to UK
(million US$)
Total exports
(million US$)
Exports to the UK
as % of total
Tanzania 46.6 5,704.6 0.8%
Rwanda 5.5 653.3 0.9%
Zambia 97.7 9,687.9 1.0%
Sierra Leone 3.1 279.2 1.1%
Ethiopia 62.3 5,666.8 1.1%
Uganda 33.2 2,261.9 1.5%
Nepal 20.5 900.8 2.3%
Malawi 64.4 1,341.8 4.8%
Cambodia 751.6 10,681.3 7.0%
Bangladesh 2,306.4 23,313.7 9.9%

Data source: UN Comtrade; NB. excludes re-exports. Data on Bangladesh is from ODI.

An additional channel for the Brexit effect is via investment – both portfolio and direct. Whilst the impact of a downturn in financial markets immediately after the vote appeared negative for developing countries and LDCs, the subsequent stock-market rebound suggests that the near-term fallout could be limited. Estimating the impact of further financial volatility is extremely difficult, and in any case LDCs tend not to be major recipients of portfolio flows. A greater long-term impact may be felt in the form of lower foreign direct investment (FDI). Zambia, according to the ODI report, is a particularly large LDC recipient of British FDI.

Another of the outcomes of the Brexit vote may be lower remittances, which will affect the countries most dependent on the UK such as Afghanistan, Angola, Cambodia, Haiti, Mali, Uganda and Somalia. Not only may Brexit lead to restrictions on immigration, but sterling remittances will be worth less following devaluation.

A final area of uncertainty for LDCs surrounds UK trade policy following the vote to leave Europe. The ODI, like a number of other commentators, envisages two main scenarios: either that Britain pursues a UK-EU customs union, or that the UK pursues an autonomous trade policy. The first scenario would be less disruptive, and in principle there need be no impact on trade preferences. The UK could continue to offer duty free access along the lines of Everything But Arms (EBA) initiative and under the same conditions as under current Economic Partnership Agreements (EPAs) between the EU and African, Caribbean and Pacific (ACP) countries.

An autonomous UK trade policy might present further problems. Some proponents of leaving the EU have suggested that Britain would reduce tariffs to either very low levels or to zero as part of a series of new trade deals with other countries. In this case the LDCs benefiting from the EBA initiative and the ACP-EPAs would lose their preferential margins. Preference-dependent LDCs may struggle to compete with more efficient or cheaper middle-income countries. This further underlines the need for LDCs to focus on building productive capacity and on generating greater efficiencies among exporters. LDCs also need to diversify and engage in economic transformation that makes them less dependent on European and UK aid, trade, remittances and investment.

Overall, the case of Brexit may only be the latest in a number of international economic shocks that LDCs are forced to confront as large economies experience slow growth and voters begin to question the benefits of economic internationalisation. Whilst ISMs are an important source of help for the LDCs, they depend on continued stability and prosperity in the biggest economies. Global political and economic events often have a much greater impact than aid and trade concessions granted by the international community.

Trade and productive capacity in Solomon Islands

June 30, 2016

Here’s the abstract for a working paper I just published on the Solomon Islands:

Economic growth, environmental sustainability and human development in the Solomon Islands have lagged much of the Pacific region since independence in 1978. Trade contributes insufficiently to development, partly because of the dominance of the logging industry but also due to the lack of emphasis on building productive capacities with a view to economic transformation toward higher productivity activities. Targeted soft industrial policies may help address these shortcomings, in the form of sectoral prioritisation; linkages policies; joint government-donor support to build appropriate infrastructure; and the development of human resources in specific areas. Government institutional capacity will only improve if policymakers are permitted true ownership over policies and if they are allowed to make mistakes.

Applying the Growth Identification and Facilitation Framework to Uganda

December 16, 2015

Here’s a blog I just wrote about work we commissioned with Justin Lin and Jiajun Xu of the Peking Center for New Structural Economics on the application of the Growth Identification and Facilitation Approach to Uganda, the first time it’s been done in a least developed country.

Hiatus

May 27, 2015

Please note i’ve stopped updating this site, hopefully temporarily, as i’ve started a new job. More soon — with luck (or not, depending on how you see these things).