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Productive capacity as resilience

May 22, 2021

Published on the UN least developed countries Portal.

Least developed countries (LDCs) were hit harder than most by a succession of crises in recent years – from the Asian crisis to the dotcom collapse, SARS and bird ‘flu, then the global economic crisis, several climate-related disasters and finally Covid-19. For the nearly 400 million extremely poor people in LDCs, the health, financial and social impact of these shocks were catastrophic. On the breadline, any loss of income is disastrous. LDC governments have fewer resources to cushion the impact. Policymakers are increasingly asking how to deal with this seemingly endless catalogue of calamities. Resilience is the new watchword.

Resilience is sometimes defined as the opposite of vulnerability, or the ability of an economy to withstand or recover from shocks.[1] Economies are supposed to be resilient if they can overcome a crisis and recover, perhaps supported by aid, low debt and fiscal tightening in order to satisfy international lenders, together with labour-market flexibility. Policies should help economies quickly recover their original shape, minimising time in the downturn and resuming their equilibrium path.

But maybe this is the wrong way to think about robustness? After all, most economies are vulnerable. During the past two decades 103 countries—over half the world’s total—at one point had a vulnerability rating too high to pass the LDC graduation threshold. Developing countries on average now have a vulnerability score of 33.6, which would mean they would be too vulnerable to qualify for LDC graduation based on the threshold of 32 or below.[2]

If developing countries in general–never mind LDCs—don’t meet the vulnerability criteria, it implies that the most sensible policy might not be to try to avoid vulnerability using standard tools. Vulnerability seems an inevitable feature of today’s world economy. Considerable time and resources, for example, may be wasted on trying to meet the expectations of international creditors, with little benefit for resilience. The optimal route to robustness may be to form the ability to recover from shocks and re-emerge in a different form.

Resilience is not linear, or only about the ability of an economy to regain its old shape.[3] If this were the case it would be difficult to reconcile the notion with the idea of economic evolution. The more resilient an economy was, the less it would change over time, even in the face of shocks. An economy whose structure doesn’t change can’t be considered resilient on any reasonable understanding.

A more helpful definition may be one in which an economy can adapt to the increasing likelihood of crises and recover – but crucially to a more dynamic, advanced state than before – and without any specific predictions about the future production landscape. This definition fits with the broad notion of building back better, although it can also be thought of as ‘bouncing forward’.[4]

Resilience should be an ongoing process rather than a recovery to a pre-existing or new stable equilibrium. This shifts the debate away from how an economy resists change to how it adapts through time to various kinds of stress. Resilient economies and supply chains emerge from shocks as different entities rather than snapping back like a piece of elastic to some pre-crisis state. This approach is about frequent change rather than hoping for stability and having to try and compensate for unpredictable downturns.

Resilience as transformation

The countries that rebounded fastest from the pandemic—including several in East Asia—were mostly those with the strongest productive capacity, adaptability and technological sophistication. These countries were able to produce and export the goods that were in high demand during the crisis, like electronics and pharmaceuticals, to attract foreign direct investment (FDI) and move into new, high-technology areas. Their resilience lies in their ability to transform the economic structure.

Chinese FDI inflows actually increased in 2020, by 4%, compared with a slump of 69% to developed economies.[5] As a result China overtook the United States as the world’s largest recipient of FDI. Asia accounted for more than half of global cross-border investment in the same year. 

Of course, these are big economies that locked down early, rolled out the vaccine quickly and put in place strong health and fiscal responses. Lessons for LDCs are limited. But the East Asian states that rebounded so quickly are at the forefront of technological advance and have long been the exemplars of structural transformation—often reshaping the domestic economy with unconventional policies.

Development took place during times of frequent crisis. Powerful industrial structures emerged which could respond to, and generate, new demand. At times government expenditure and debt were high as the country invested in structural transformation and pursued expansionary fiscal policy. Job creation was rapid, which supported demand and brought large numbers of people out of poverty.

It is sometimes forgotten just how far-reaching was the transformation and how rocky the journey. In 1964 the Republic of Korea was poorer per head than the Congo. In effect it was an LDC, although the category did not yet exist. Hundreds of millions of Chinese people moved out of extreme rural poverty in the last few decades. Viet Nam’s rise was later but no less remarkable. Resilience, for the most dynamic East Asian countries, had little to do with rebuilding back to a pre-crisis state. Development meant a societal and economic overhaul, often as a process of adaptation in response to shocks.

The implications for LDCs are clear. Recovery from the pandemic is of course the immediate priority, and this should mean equal access to vaccines, international support and a strong economic stimulus where possible—together with a resumption of demand in the developed world. Better international support is critical.

But aid can only play a partial role in rescuing LDCs from the pandemic and protecting them from future instability. Often, governments may need to deviate from the standard prescriptions—perhaps allowing the temporary build-up of debt during crises, spending more and limiting lay-offs. This can allow them to build climate-resilient infrastructure, maintain demand and help workers keep their jobs in a downturn – the ultimate form of resilience.

In the longer term, the most anti-fragile response would be to try to ‘bounce forward,’ changing the economic structure for the better. This will involve policy space to redouble the long-term effort to build productive capacity, defined by the UN Conference on Trade and Development (UNCTAD) and the UN Committee for Development Policy (CDP) as the sustainable development of human and physical resources, entrepreneurship and linkages.

Productive capacity-building needs to take into account the likelihood of crises and expanding the economy so that it can withstand disruptions. Capital accumulation and technological progress are central to this process, alongside sustainable trade and investment.

Governments should try to diagnose the major obstacles to transformation, be it insufficient resources or investment, skills shortages, get-up-and-go among businesspeople, or connections up and down the supply chain. Everything should be done to tackle the binding constraints head-on.

Covid-19 won’t be the last major shock. The best way for LDCs to prepare for the next crisis is to keep building the economic engine and to bounce forward, not back.


[1] Eg. Briguglio, L. G. Cordina, N. Farrugia and S. Vella (2008) ‘Economic Vulnerability and Resilience,’ UNU-WIDER research paper no. 2008/55, May 2008

[2] Data source: https://www.un.org/development/desa/dpad/least-developed-country-category/ldc-data-retrieval.html

[3] Eg. Nelson, R. and S. Winter (1982) An Evolutionary Theory of Economic Change, Cambridge (MA), The Belknap Press of Harvard University Press, 1982; Simmie, J. and R. Martin (2010) ‘The economic resilience of regions: towards an evolutionary approach,’ Cambridge Journal of Regions, Economy and Society, Volume 3, Issue 1, March 2010, Pages 27–43, https://doi.org/10.1093/cjres/rsp029

[4] ‘Bouncing forward: a resilience approach to dealing with COVID-19 and future systemic shocks,’ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7247742/

[5] Source: UNCTAD: ‘Global foreign direct investment fell by 42% in 2020, outlook remains weak,’ https://unctad.org/fr/node/31924

LDCs and the EU Carbon Border Adjustment Mechanism

May 4, 2021

As part of the European Green Deal the European Union (EU) is establishing a carbon border adjustment mechanism (CBAM), which will put a carbon price on imports of certain goods from outside the EU. The mechanism is designed to disincentivise European companies from producing their products elsewhere – known as carbon ‘leakage’ – and to prevent European producers from being undercut by cheaper, high-carbon imports.  Least developed countries (LDCs) should be exempt from the CBAM and benefit from revenues generated by the mechanism. This article, for the United Nations LDC Portal on International Support Measures for LDCs, explains more.

Click here to read the piece.

Shaky progress: structural transformation in graduating Pacific least developed countries

March 24, 2021
The island of Pele, Vanuatu

I’ve just published a new UN working paper on the Pacific’s least developed countries (LDCs). The paper finds that whilst these economies have been growing reasonably quickly, bringing them to the point where they’re eligible to leave the LDC category, their structures aren’t changing fast enough or in the right ways to spark widespread transformation.

The countries in question — Kiribati, Solomon Islands, Tuvalu and Vanuatu* — aren’t industrialising. This might not sound surprising, but the paper shows so clearly, with international data stretching back two decades. The finding has far-reaching implications for the region and similar countries.

In theory, developing economies are supposed to move from low-productivity activities like agriculture to high productivity pursuits such as manufacturing. Factories are important because they build mass employment for subsistence or agricultural workers and increase value-addition. In turn this raises living standards and creates the wealth needed for investment in health and education.

This hasn’t been happening in the Pacific (or in many other LDCs, for that matter). Economic output has shifted away from agriculture over the past 20 years, but mostly toward services. Almost all new jobs created have been in retail and tourism — progress, but shaky.

As we’ve seen in the Covid-19 crisis, tourism is vulnerable to global instability. The industry almost completely screeched to a halt in 2020. Last year’s 74% collapse in global visitor numbers was the biggest ever, according to the World Tourism Organisation. For a country like Vanuatu, the LDC most dependent on tourism, this was devastating, removing the main source of foreign exchange, investment and secondary economic activity.

Most simple services like tourism and shopping are inherently less productive. A tour group, for example, can only reach a certain size – maybe 20-30 people per guide – before it becomes unviable. A shop can only employ so many assistants, and pay is limited. The gains from mechanisation can, in contrast, be extremely high as marginal costs fall.

Not only are the Pacific LDCs failing to industrialise or to raise productivity, but trade liberalization hasn’t produced the desired results either. This runs counter to the mainstream theory, which says that exposing the economy to international competition should encourage entrepreneurs or existing companies to move into areas in which the country has a comparative advantage, in turn improving productivity.

In the Pacific, trade hasn’t grown much relative to the size of the economy. Exports in three of the four regional LDCs have become less diversified since 1995.

It shouldn’t be too much of a shock that the traditional idea of structural transformation doesn’t apply in the Pacific LDCs. These countries are tiny, all falling within the world’s 15-smallest by population. Tuvalu has the smallest economy of any independent territory in the world. GDP is about the same size as the US city of Albequerque, or Edinburgh, Scotland’s capital city. If you added up the GDP of all four Pacific LDCs it’d still be smaller than that of the Central African Republic.

They’re enormous by sea area. Kiribati covers the 12th-largest sea area of any country, 3.4 million square kilometres — bigger than India’s total land and water area, and much bigger than the Caribbean Sea. Because the islands’ small populations are spread across such a wide area the workforce is mostly very fragmented, raising the cost of domestic transport and limiting economies of scale.

These countries are so spread out that their producer and consumer bases are miniscule. Isolation means that trade costs are extremely high, making import and export costly. No Pacific island capital is within 2,000 km of Sydney or Auckland.

Whilst it isn’t a big surprise that the standard theory proves inappropriate, it does raise the question as to why so much international advice and thinking runs along conventional lines. It doesn’t make sense to recommend normal routes to industrialisation, or to continue to spend so much of the region’s extremely scarce human resources on yet more trade negotiations.

Most of the economy in these countries isn’t market-based or commercial. Subsistence still plays a big role in Melanesia and beyond. Domestic economies will never be very flexible because of their peculiar characteristics, so policies that aim to alter incentives or free up markets will only have limited impact.

Dependence on government spending across the four countries is so high that on average it forms 80% of GDP . By comparison the LDC average is 11%. Transfers from abroad, donor aid and remittances are also historically huge. None of these things are affected by national policies aimed at stimulating markets or cutting the role of government.

There’s a need to think creatively about analysis and policies. New, context-sensitive ways of thinking about economic transformation must be conceptualized and enacted to promote the next phase of economic development.

The paper tries to start thinking a bit deeper about what this might mean in the very special circumstances of the Pacific. Part of the challenge lies in escaping the old ways, and not continuing to adopt models drawn from other contexts.

Firstly, governments and donors will remain a large part of the economy for many years to come — in many cases not just as a complement to the private sector or as a source of incentives, but as a source of service provision, resilience and ultimately a component of aggregate demand. Trying to shrink fiscal expenditure in the name of efficiency will often only weaken economic growth.

Secondly, linkages should form a much higher priority than they have done until now. The region could capitalise much more on what is termed the ‘blue economy‘ — leveraging the region’s huge ocean resources sustainably for tourism, fisheries and niche, high-value agriculture. Government and donors can play a role in stimulating production up and down individual value chains so that more money stays inside the country and local producers benefit from tourism.

Thirdly, institutional management should be rethought. Instead of spreading skilled officials across 10 conventional Westminster-style ministries, valued staff should be brought together in a single economic management unit. Some countries, like Singapore and Rwanda, have based their entire development strategy on economic development boards. Consolidation would lead to better coordination in areas like linkages policy.

Fourthly, the so-called fourth industrial revolution isn’t too advanced for the Pacific, and any hope for structural transformation should take into account modern technologies and the increased merging of manufacturing and services. Whilst many developing countries fear the loss of jobs to robots, this isn’t a concern for a region that never industrialised. At a stretch it’s possible to imagine the region leapfrogging some previous technologies.

Major opportunities exist in services with low start-up costs where physical location is less important and which serve the international market. Business process outsourcing and microwork may have potential. Tourism is now even possible online. In September 2020 Amazon launched a new service called Explore that allows customers to book live, virtual experiences led by local experts who conduct virtual tours.

New processes like additive manufacturing are almost made for the region. In principle 3D printers could make products using recyled raw materials, reducing the need to import things thousands of miles on expensive shipping routes.

Drone and surveillance technologies could benefit fisheries and the environment. For instance a New Zealand company is currently trialling an autonomous sea craft to police Pacific waters. The sea-based drone can detect illegal fishing, help with search and rescue by deploying life rafts; assess cyclone damage to remote islands by launching aerial drones; and collect scientific data, particularly on climate change.

Its energy comes from solar panels and a horizontal wind turbine, which power batteries that enable the craft to operate autonomously for long periods. Such technologies can address many of the challenges faced by island countries simultaneously, including illegal fishing, safety at sea, and climate change.

Technology is no panacea, and the fourth industrial revolution will not provide all the answers for structural transformation. Policies will remain critical. Governments will among other things need to keep tackling the uphill tasks of education and training; rules and regulations; lowering the cost of internet access and speeding it up; and making the living environment attractive enough to retain skilled workers and attract new investors.

Donor partners will need to keep investing in the region, and taking enough of a hands-off approach to allow policymakers to make mistakes and learn from them.

The paper is by no means exhaustive, and plenty more ideas along these lines are needed. Neither does it deny the progress that the likes of Vanuatu has made in tourism. But hopefully it shows that thinking a bit differently and seizing on new trends may yield dividends for the region — as well as small, marginalised countries elsewhere.


Download the paper here (pdf), from the UN Economic and Social Commission for Asia and the Pacific (UNESCAP) Macroeconomic Policy and Financing for Development (MPFD) Working Paper Series.

*Vanuatu graduated from the LDC category in December 2020.

The need to extend the WTO TRIPS pharmaceuticals transition period for least developed countries in the Covid-19 era: Evidence from Bangladesh

August 28, 2020

New UN policy brief (pdf) with Prof. Kevin Gallagher of Boston University.

Abstract

Bangladesh is one of the most successful least developed countries (LDCs). The country has made such strides that in 2021 the United Nations Committee for Development Policy will consider whether it should graduate out of the LDC category altogether. Like few others, Bangladesh took advantage of WTO flexibilities to build a vibrant pharmaceuticals industry that provides needed industrialization and employment. The pharmaceuticals industry also gives access to essential medicines to millions of Bangladeshis as well as people in other developing countries and LDCs. LDC graduation would bring a loss of WTO exceptions, particularly in intellectual property. This policy brief synthesizes recent research, showing that Bangladesh’s vital pharmaceutical industry would be threatened if the country had to adhere fully to WTO rules upon LDC graduation. Given that COVID-19 has dealt such a severe blow to Bangladesh’s development and health prospects, these papers point to the need for Bangladesh to be able to maintain its WTO flexibilities in order for the sector to remain a source of economic growth and health provision in the years to come.

Full paper here (pdf).

Building the world back realistically

June 10, 2020

World

My last post on the need to build the world back better said that most discussion of the post-covid recovery is mistakenly confined to national borders and should have a global dimension.

It’s a view that could be read as idealistic and naive. The world is retreating from physical globalisation. Building the world back better is probably far from most people’s minds.

The G20 can’t even coordinate itself as it did during the last crisis. The world’s multilateral institutions are under attack: the World Trade Organisation and the World Health Organisation, and more broadly the United Nations. Europeans squabble. The United States and China are Punch and Judy.

But even if world leaders look like they’re intent on turning back the clock rather than building back better, it’s at least worth saying something. As I said in the conclusion to my post, sometimes things change quickly.

For progressives or internationalists it’s also important to think about how and why change happens. The cynic who imagines everything always gets worse is just as inaccurate as the relentless optimist. We’re not heading for an entirely splintered, uncoordinated world where all countries shut in on themselves.

Progress occurs, but it has to be fought for. Who’d have thought a couple of months ago that US protests against police discrimination and violence could have shut down a police department and spread worldwide? Certainly not me.

The end of segregation and votes for black people and women – as ordinary as these outcomes can now sound – were hard-fought struggles against entrenched reaction and commercial interest which echoed around the world. The anti-apartheid movement wasn’t assured of success.

At one time the idea of most countries signing a charter urging world peace and harmony would have sounded silly – yet that is what the United Nations is (with all its shortcomings): a popular attempt at a punctuation mark on mass, mechanised death – supported, of course, by powerful lobbies and nations whose interests it served.

The Treaty of Rome in 1957 had democratic and elite support. It led to the longest period of peace in modern European history.

So positive international change happens and it can be grand in scale, even if progress is far from guaranteed and has to be fought for in order for it to benefit ordinary people rather than only the powerful. The interests of the 1% can at times be made to coalesce with those of the rest of us.

It’d be wrong to imagine that recent trends toward nationalism or insularity can only lead one way, even if further fragmentation looks likely and things can deteriorate across time or place.

At times of stress things can pivot one way or another, making it more important than ever to put ambitious ideas on to the agenda and for good people who’d otherwise do nothing to get off their backsides.

Useful change is usually the result of thoughtful people engaging in protest and democracy, with coherent political objectives: pressure from below, with an eye beyond national borders.

Back on the idealistic subject of the need to build the world back better, it’s important not to see things in binary. Globalisation will moderate and perhaps retreat, but it won’t end. It benefits large, rising powers like China, which needs the high-spending United States to buy its exports. Americans need somewhere to make their stuff, cheaply. And integration was obviously to the advantage of the United States and European corporations in recent decades.

Goods trade will probably continue to stagnate or wobble. Supply chains are shortening after Covid-19. Environmental concerns are prompting some to ask why goods need to be shipped so far.

Robots will take over some jobs from workers, so there’s less need to make products on the other side of the world. America and Europe won’t need to make so many goods in China (even if they still make a lot of things there).

But multinational companies need lower barriers to trade and investment. States usually adapt to the demands of capital.

The institutions that facilitated and accompanied the last phase of globalisation won’t just crumble. They’re needed to smooth the flow of capital and trade with rules and norms for commerce.

A small but significant chance exists that new global institutions emerge to service the changed environment, just as during previous crises. New types of global governance might centre around the digital economy where so much trade now takes place.

Screenshot from 2020-06-10 11-35-59

International digital trade is largely unregulated but some argue we’re at the start of a new era — like the age of steam, container ship or airline.

Companies (mostly big ones in the US, Europe and increasingly China) will demand protection of their intellectual property. They’ll need rules for selling their stuff to other countries, which needs legislation and common formats. The current talks on digital trade at the World Trade Organisation are among the most interesting and important.

A shift to a new, online, less labour-intensive type of globalisation might already be happening – although any shift won’t be absolute, and shoppers in the rich world will for a long time still want to take advantage of cheap labour in poor countries.

Unfortunately financial globalisation is rushing ahead. That sort of integration has boomed in recent years and doesn’t necessarily look like slowing down nor being regulated better. The world economy will remain a casino for financial market speculators.

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Source: Financial Times, H/T @DanielaGabor

What’s likely is that we’re seeing the ending of one phase of international consolidation and the dawn of another. It needs to be bent toward the needs of the majority.

Build the world back better

June 4, 2020

Bike lanes are all very well, but it’s global change that really counts.

At a time when politicians and commentators are talking about the need to rebuild more sensibly after Covid-19, it’s more important than ever to think globally. Most recent health, economic and environmental crises were international, and so must be the remedies. This view isn’t misty-eyed one-worldism; it’s self-preservation.

Pandemics like Covid-19 are inherently global. The first death was reported on January 11. Ten days later the virus was being treated in half a dozen countries. The pathogen’s spread has now made it more lethal than any other in nearly a century.

The only way to tackle it successfully is to coordinate the international response, sharing information on its causes and proliferation, and collaborating on containment and vaccines.

Heading off any future potential viral outbreaks at source would be the best way of preventing more crises. The next Covid will probably come from the developing world. This means large-scale coordinated international humanitarian and development assistance in zones of potential concern — before the fact, not after.

Ebola, for instance, was a story of poverty and over-stretched West African health systems as much as it was a terrible new illness. Communities and hospitals simply couldn’t cope. The prospect of such a disease reaching the scale of Covid is even more horrifying than the original catastrophe.

Investment in vulnerable countries’ economies, national revenue collection and health systems needs to be scaled up — not only an act of caring, but a form of insurance against future disasters.

A further reason to think and act globally is that health and environmental shocks are connected. Ebola and Covid can be traced to the invasion of isolated ecosystems and to over-intensive farming techniques.

Humans are exploiting animals to unprecedented levels and intruding more and more on the habitats of previously less-contacted species. Without joined-up thinking, separate health and environmental initiatives will simply fall short of objectives.

Three out of four new infectious diseases come from animals. Covid has been linked to bats and Pangolins in East Asian meat markets.

According to the UN Environment Programme: “[The] Ebola outbreak in West Africa was the result of forest losses leading to closer contacts between wildlife and human settlements; the emergence of avian influenza was linked to intensive poultry farming; and the Nipah virus was linked to the intensification of pig farming and fruit production in Malaysia”.

It’s long been clear that global and local pressures on the environment must be addressed internationally. Just as burning and logging the Brazilian rainforest amounts to destruction of the world’s biggest carbon sink, so too, Chinese, European and US emissions in effect cause coastlines on the other side of the world to be swamped.

The largest carbon emitters can each make a difference on their own, but no single country will do so without another first committing, which is why a commonly-negotiated binding agreement is so essential.

And it’s no good folk in the rich world thinking they’ll stop domestic flooding only by recycling more or installing bike lanes. Enlightened though such moves are, global carbon cuts will have an incalculably larger benefit.

In the same way that climate breakdown blows back on the rich in the form of health and national environmental emergencies, so does global poverty itself. The main reason Europe has recently faced such large refugee inflows is that some people from poor or unstable countries understandably want to leave.

Immigrants are in reality good for the countries they arrive in, working hard in the jobs locals don’t want to do and forming a valuable source of dynamism and entrepreneurship.

But no-one wants to fester in a refugee camp. And anti-immigration sentiment is easily manipulated by short-sighted populists; arguably the biggest current scourge of the rich world.

As mercenary as it sounds, reducing poverty at source and reducing overseas conflict would make it safer and more attractive for poor people to stay at home and help them live more sustainably.

Poor communities are often the guardians of the natural environment on which the rich countries depend. The Kayapo and other Brazilian tribespeople defending their areas of the rainforest from logging and mining are in effect acting on behalf of the world. Pacific islanders who protect their seas from illegal fishing safeguard two-thirds of the earth’s surface.

Conversely poverty can lead to unsustainable exploitation of the natural environment. Deforestation and illegal mining, for example, are partly economic in origin, as people search for fuel and income. Drought and flooding also contribute to emigration.

Economic instability makes for an increasingly global undertow to health and environmental stress. Economic crises have been deepening and becoming more regular, and globalisation has synchronised the cycles of several markets, regions and countries which used to be relatively independent.

A currency wobble soon becomes a financial meltdown, and before long a worldwide economic downturn. As we’re now finding out, environmental, refugee and health problems become more acute amid growing poverty and insecurity.

Depending on how you define the term, a crisis has struck about once a year since 1990, beginning with widespread recession among developed countries, a series of national calamities, then the Asian collapse and the Russian devaluation and default toward the end of the decade.

The 2000s kicked off with the recession brought on by the bursting of the dotcom bubble – then turmoil really got going with the 2007-2009 global economic crisis and the fallout across Europe. This rocky road ended in 2020 with the worst economic crash in centuries, the impact of which will play out for many years.

New foundations

These health, environmental and economic convulsions are inherently linked. They can’t be addressed by one nation alone behind closed borders. As unlikely as it currently sounds in a fragmenting world, the only answer is common action using fit-for-purpose global rules and institutions.

A global green new deal is critical, reflating the world economy with sustainable infrastructure ready to serve people and the planet. Not only must the Paris climate targets be met, but policies put in place to reduce carbon dependency, protect ecosystems and water resources, and alleviate poverty.

UN reform is a prerequisite for such an ambitious programme, starting with full representation of all of the world’s regions on the Security Council rather than only the five powerful nations that won the second world war.

Other than China, no Asian country is a permanent member — nor any African or Latin American nation. Concerted and unified pressure from these rising regions can lead to real change.

The UN Sustainable Development Goals, worthy though they are, are now beginning to look over-ambitious, with not enough done to ensure compliance. The machinery for implementation needs to be put in place before it’s too late.

One of the most sensible ways in which the rich world could build back better would be to get its own economic house in order, ending the financial lawlessness that leads to worsening crises. This means resetting the monetary system, with coordination of global macroeconomic policy, exchange rate management and capital flows.

As part of this reset, leadership of the World Bank and International Monetary Fund – at the helm of the global economy – needs to change so that all countries are properly represented in leadership, ending the anachronism whereby Europe and the US split leadership between them.

Radical options to be re-explored include an international clearing union, world currency and global minimum wage.

Further taxing international financial transactions would throw sand in the wheels of international flows and deter speculators. This is particularly needed in the case for commodity derivatives speculation, which directly causes poverty and hardship.

Instead of the world having to bail poorer governments out so often and write off loans, it would be better to avoid the conditions that created the debt in the first place, which include forcing austerity policies on to poor or emerging countries, making them reliant on international capital markets and making it difficult for them to earn foreign exchange. The UN has even proposed a sovereign debt forum and an international mechanism for restructuring sovereign debt.

Broad-based support for the least developed countries would help head off future health and environmental ructions at source and cushion the impact on the worst off. This support needs to encompass trade, investment, commodities, technology and climate breakdown.

Some have even proposed a Marshall Plan for health, with wealthy countries clubbing together to kickstart mass investment in health infrastructure among poorer nations.

If all of this sounds ambitious, that’s because it is. The very foundations of the world are creaking, and this parlous state demands unified health, environmental and economic action. Weakness and indecision will only lead to further division, heralding yet worse calamity.

Crisis need not feed on itself. Enlightenment can spring from the darkest places. Just as the old international system emerged from the second world war, extreme stress can, against the odds, bring new beginnings.

As Lenin said, there are decades where nothing happens and weeks where decades happen. Instead of waiting for the weeks when a crumbling house turns to dust, it would be better to start rebuilding now.

 

Six suggestions for improving support to least developed countries

May 19, 2020

To get LDC graduation back on track, and to help other LDCs, reform of the international system of support must be fundamental and far-reaching.

At the start of 2020, a dozen least developed countries (LDCs) were on schedule to leave the category by the middle of the decade. That timetable now looks uncertain.

COVID-19 has exacted an unprecedented human toll as underprepared health systems struggle to cope and workers in lockdown lose their livelihoods. Many economies are collapsing as demand for exports falls, tourism tumbles and remittances slump with the repatriation of foreign workers. As LDCs and others struggle to balance their books, global financial turbulence looms.

The UN Committee for Development Policy (CDP), the body responsible for monitoring the category and recommending countries for graduation, is consulting governments about what action to take. No decision has yet been made to delay any country’s graduation or to put in place longer transition periods. But a range of outcomes are possible.

Source: Committee for Development Policy Secretariat

*ECOSOC: UN Economic and Social Council

Six countries were close to meeting the UN criteria for graduation for the first time: Cambodia, Djibouti, Lesotho, Senegal, Togo and Zambia. Coronavirus will slow their progress.

The current downturn shouldn’t be seen as a one-off, with LDCs bouncing back quickly. The 2007-08 global economic crisis suggests that LDCs will take years to recover.

Global health, economic and environmental crises are becoming more frequent, and the fallout for LDCs regular and calamitous. Even before the current shock, LDCs suffered worse than most from trade, financial and commodity price volatility, cyclones, droughts and other disasters.

Not enough has been done to make LDCs more resilient or to boost incomes. In a paper published by the Commonwealth Secretariat last month, I argue that the support measures for LDCs could be much more ambitious.

A comprehensive overhaul of the system of international support needs to aim not only at the 18 countries at or near the graduation threshold, but the other 29, many of which in recent years have become more vulnerable and moved even further from graduation.

The recovery from COVID-19 represents a chance to put in place deep-rooted, systemic improvements to the multilateral architecture relating to LDCs – driven by LDC governments themselves and differentiated according to context.

While existing support for LDCs is welcome, any new support architecture should be much more extensive, running across six areas:

1. The international system
UN entities and institutions such as the World Bank and International Monetary Fund should coordinate LDC-related activities better and use the category more in aid, lending and other decisions. A facility to support graduates, as considered by the CDP earlier this year, would help accommodate differences within the category. Direct assistance should be provided for less-advanced members of the group.

2. Finance and investment
Donors should meet official targets and allocate a higher proportion of aid to graduating countries toward building productive capacities. For all LDCs, new forms of financing need to be approached carefully and strategically. Help with growing public revenues is a bigger priority. Debts should be cancelled during crises as big as the current one; not just interest payments suspended.

3. Trade
World Trade Organisation special and differential treatment (SDT) for LDCs, while useful, could be strengthened. Some types of SDT have already run out or will soon do so, and could be extended. Several countries do not provide full duty-free coverage for LDC exports, while relaxed rules of origin have been shown to benefit LDC exporters. Ecommerce is playing a bigger role in LDC trade – and here the interests of LDCs must remain paramount in bilaterals and multilaterals.

4. Commodities and resources
Commodity price volatility has been one of the worst sources of instability for LDCs, and a series of innovative proposals has been made to smooth prices, including a counter-cyclical financing facility; transactions taxes; and revitalised ‘smart’ commodity agreements.

5. Technology
The new technology bank for LDCs was launched on a small budget and should be funded better. Knowledge and dissemination of technology in LDCs needs to be encouraged through the transfer of corporate personnel.

6. Climate breakdown and environment
LDCs are affected more than most. South-South collaboration could be encouraged more; the LDC climate fund replenished; and financing made more accessible. The administrative requirements for funding are often too great for small, capacity-constrained countries. Disaster resilience could be made more pre-emptive and built into infrastructure in advance, rather than addressed only via insurance.

Without far-reaching reform to international support, any hope of meeting graduation targets will be in vain. The COVID-19 downturn will take many years to play out. To get things back on track, the world needs to help cushion the impact of this crisis and shield LDCs from future ones.

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Download the paper here.

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webinar on 28 May 2020 will be covering LDC graduation and COVID-19’s impacts, hosted by EIF and the Commonwealth Secretariat. Register here.

First published on EIF Trade for Development News.

Time to get serious about support for the Pacific’s least developed countries

May 11, 2020

Until early this year the Pacific islands were a rare ray of sunshine for the international development system. The region’s four least developed countries (LDCs) were among the first of a dozen nations newly scheduled to leave the UN category for the most vulnerable low income states.

Led by Vanuatu, which is scheduled to graduate in December 2020, these countries benefited from years of relative regime stability, tourism growth and solid health and education policies. Solomon Islands is scheduled to graduate in 2024. Kiribati and Tuvalu also meet the criteria.

Covid-19 has thrown a shadow across the region, cutting off the tourism on which most rely. Restrictions on movement have disrupted domestic activity. The collapse in the world economy has slashed demand for exports and forced foreign workers to go home. Global financial calamity threatens, as countries in and outside the region struggle to pay their debts.

In early April yet another tropical cyclone hit agriculture and rural communities in Solomon Islands and Vanuatu.

A poor run of luck? A ‘black swan’ – the term coined by the philosopher Nassim Nicholas Taleb for unknowable high-impact events – compounded by unlucky weather?

In a paper published last month by the Commonwealth Secretariat in London, I argue that vulnerability is an inherent and functional feature of the existing global order. The international community could do much more to support LDCs.

Vulnerability is the norm for these countries. The way the global economy and climate are currently (dis)organised, peripheral countries will always be exposed to shocks.

The Pacific island countries, like others on the global margins, have in the past couple of decades fallen foul of a series of crises that began in the rich world. They included the dotcom crash, an eight year commodity boom that led to huge price increases for imported items such as gasoline and food, a subsequent collapse, resurgence and then even deeper trough in 2016. The global financial crisis in 2008 hit LDCs more than most and small island developing states worst of all, as export demand and tourism slowed.

The rich world’s carbon addiction has played out particularly badly for the Pacific as, on top of sea level rise and the periodic plunder of their natural assets by multinationals, a series of climate cataclysms culminated in cyclone Pam in 2015.

According to the official UN measure of vulnerability, 20 of the 47 LDCs worldwide became more vulnerable between 2015 and 2018.

Covid is only the latest in this nightmarish helter-skelter. The pandemic was no black swan. It was entirely knowable and could have been prepared for: health experts warned for years that health scares were worsening in the wake of bird ‘flu, SARS and MERS.

But global leadership is lacking and the system isn’t set up to prevent crises. One of the best things that the rich world could do for LDCs is get its own house in order, clamping down on the behaviour that leads to worsening global health and economic crises.

But wealthy countries could do much more directly for the least developed. There are three types of help for LDCs: market access, aid, and assistance with taking part in the international system.

The main benefit for LDCs is that in most markets they pay no taxes on exports or restrictions on how much can be sent abroad.

But Pacific island LDCs don’t export many goods. And exports don’t respond magically to falling trade barriers anyway – they depend on domestic productive capacity.

Another support for LDCs is that official donors commit to send them certain amounts of development assistance. While aid per head to Pacific LDCs is among the highest in the world, most donor states fail to meet their pledges.

LDC governments also benefit from a series of other small advantages like free travel to some international meetings and lower payments to the UN budget. All good stuff, but small beer alongside the regular and worsening catastrophes raining down on the region.

In my paper I argue that while this support is welcome, it’s time to think bigger – particularly about economic instability and its impact on the most vulnerable. Systemic change is needed at the multilateral level, with measures to coordinate global markets and better coordination at the UN.

The paper argues for a series of around 30 support mechanisms, covering finance and investment, trade, commodities and resource extraction, technology, climate breakdown and the environment. These measures need to be part of an ecosystem led by LDCs, not offered willy-nilly at the whim of the powerful.

  • A measure long argued for, is a tax on international financial transactions to slow the flow of hot money and stabilise the world economy.
  • An international financing facility to boost demand in LDCs during crises.
  • The evidence shows that direct cash payments to the poor work well, and can provide a buffer for the most vulnerable in society.
  • Donors could finance geological information in LDCs so as to avoid multinationals manipulating knowledge about mineral reserves to their own advantage.
  • Companies should be made liable for environmental damage incurred in resource extraction, including on the seabed. Such a rule should be enshrined in international law, with independent adjudication determining damages.
  • It is imperative to meet climate targets. The climate fund for LDCs is depleted and should be replenished, made less bureaucratic and more accessible.
  • Infrastructure should be made disaster-resilient during construction using innovative financing and made part of building productive capacity.

These are just a few of the suggestions in the paper. Business-as-usual just isn’t good enough. Unless the global system of economic governance changes radically and the architecture for LDCs drastically improves, things will continue to get more precarious. The next economic crisis or pandemic could be even worse. And, after a couple of decades of experimentation with globalisation and the market economy, the tried and tested traditional resilience measures of Pacific islanders’ subsistence ancestors will start to look more and more attractive. Pacific leaders might just start questioning their engagement with the wider world.

Originally published in Griffith University’s Pacific Outlook.

A Critical Reflection on International Support for Least Developed Countries

April 23, 2020

New Commonwealth Secretariat International Trade Working Paper:

International support to least developed countries (LDCs) falls in the areas of trade, development cooperation and assistance with participation in the inter-governmental process. With 10 years of the 2030 Agenda to go, and before the fifth 10-year Programme of Action for LDCs starts in 2021, there is a need to re-evaluate the system of international support. Some LDCs are performing well, but key international targets have been missed. On average the contributions of trade and investment remain too low. Several LDC economies are contracting and becoming more vulnerable.

Taking a critical look at the theory and assumptions underlying international support makes it possible to propose new assistance mechanisms, as opposed to falling back on the mainstream position, which is implicitly based on the misleading premises that better international market access, aid and participation in existing multilateral processes will prompt spontaneous economic catch-up and sustainable development. Exposure to undistorted international prices will not alone drive the reorganisation of production or a move towards greater domestic efficiency. Duty-free, quota-free market access has benefited a select few countries. Official development assistance to LDCs is declining and may fall short of objectives.

As structuralists, developmentalists and others have long emphasised, governments and the international community need to promote active measures aimed at building productive capacity. In a power-based global system, developed countries and regions often shape the system of support for LDCs in their own interests – a recognition that is all the more important when commitment to multilateralism is faltering. Dependency theorists stress the importance of power relations and the interdependent nature of the global economic core and periphery. Rather than individual ad hoc assistance or promises of more aid, there is a need for deep-rooted, systemic improvement to the multilateral architecture relating to LDCs – driven by LDC governments themselves and differentiated according to context.

Acknowledging these ideas, this Working Paper proposes six areas of support, relating to the UN system, finance, trade, commodities, technology, and the environment and climate change. Each is accompanied by specific proposals that could be considered in the run-up to UNLDC-V and beyond.

Download (pdf).

Leaving no-one behind: New help for graduating least developed countries (part II)

January 28, 2020

By Dan Gay

  • The first part of this series showed how rising inequalities in many least developed countries means that for many people graduation is not the end of the story.
  • International donors and trading partners could help by further extending international support beyond graduation. 
  • New post-graduation support measures are also necessary. These measures should prioritise the development of productive capacity; building public finances; tackling environmental vulnerability; south-south technical assistance; and direct cash transfers for marginalised people.

Despite the large number of least developed country (LDC) graduations and the impressive social and economic feats of several graduating countries, inequality is rising. Governments and the international community can still play a part in easing the transition.

This implies stretching international support measures beyond the graduation date. It also means designing new mechanisms for graduating and graduated LDCs.

More of the same

Official donors should be urged to meet their aid targets for LDCs beyond the date of graduation (although paradoxically they already give more development assistance to graduating LDCs than to others, perhaps because they want to invest in faster growing countries where projects earn better returns).

Trade helps ease poverty, and its benefits should not be cut off too quickly, something which is recognised by the Enhanced Integrated Framework, which offers support to LDCs for five years following graduation.

The European Union already extends Everything But Arms (EBA) for a standard three years after a country leaves LDC status – why not longer? European clothing importers order a growing majority of their clothing from the graduating east Asian LDCs, so this should not be too hard a sell. Help could be offered with other preference schemes, such as with putting in place the international conventions necessary to qualify for the Generalised System of Preferences Plus scheme. The United States, too, could expand product coverage of its own preference scheme.

Rules of origin that qualify goods as coming from LDCs are often too stringent, and developed countries might consider extending the simplified terms for LDCs after graduation.

Prolonging flexibilities at the World Trade Organisation (WTO) would also help, such as the exception to the Trade-Related Aspects of Intellectual Property Rights agreement which allows Bangladeshi pharmaceutical manufacturers to copy patented drugs and to issue compulsory licences, exporting cheaply to other LDCs.

The international community could assist former LDCs in joining forces in negotiations. Membership of the LDC group at the UN and WTO, and in climate talks, carries considerable collective bargaining power. The provision of resources contingent on cross-collaboration among trade and climate negotiators would help break down the barriers that often exist between the two groups.

Time for something different

As well as continuing existing support for LDCs after graduation, new, targeted mechanisms for graduating and graduated LDCs should be considered.

Productive capacity remains the main challenge. However much market access they enjoy, most LDCs will always struggle to produce enough – which is why so many run trade deficits.

The international community needs to continue supporting LDCs in accumulating capital, building the technology and enhancing the domestic linkages and entrepreneurship necessary to raise production. Graduating countries can afford to invest more of their total income in building production than many LDCs below the threshold, which must prioritise consumption. Graduating nations also offer particularly receptive territory for technical assistance. Why not a dedicated production transformation fund for all LDCs, with targeted assistance for graduating countries, learning from middle-income success stories?

Public spending remains the best way of tackling inequality, and LDCs often struggle to collect enough tax. In Bangladesh, tax revenues are only 8.8% of gross domestic product, lower than the LDC average. The shortage of state funding for infrastructure is partly why the country’s roads and ports slow development. Public finance management is already a key part of international development assistance. Broadening the tax base helps countries self-finance development and reduces reliance on aid.

Might a dedicated facility for graduating LDCs make sense, particularly at a time when these countries face the prospect of lower aid flows over the longer term? Multilateral efforts to stem tax revenue leakages, to ensure banking transparency and to reform tax havens are at least as important.

In public finance management and other areas graduating countries need good, appropriate guidance from similar contexts. Technical capacity has evolved enough in most graduating countries that policymakers can put nuanced advice into practice. The challenges facing countries on the brink of leaving the LDC category are growing in technicality and specificity. A sufficient critical mass of countries now exists for mutual help on analysis and policy.

Funding for south-south and current and former LDC think tanks should be bumped up in order to build ownership over policy proposals and to tailor any recommendations to the national context.

Prominent institutions in graduating LDCs include Bangladesh’s Centre for Policy Dialogue, the Myanmar Development Institute, Lao PDR’s National Institute of Economic Research and South Asia Watch on Trade, Economics and the Environment in Nepal. Advice should be targeted at different clusters, such as the Asian, island or landlocked nations.

Many of the smaller graduating and former LDCs (like others) struggle to deal with the red tape required for environmental financing. According to the 2016 UNCTAD LDC Report: “While numerous funds have been established for adaptation, this has given rise to a complex architecture of multiple bilateral and multilateral agencies; some of the funds which exist remain seriously underfunded, and accessing funds is complex and time-consuming, particularly for countries such as LDCs with limited institutional capacity.”

While it is important to make sure that money is well spent, institutions like the Global Environment Facility should be urged to simplify their procedures or help recipients with applications. Most graduating LDCs fail to meet the economic vulnerability criterion. Better access to disaster risk insurance, too, would help ameliorate some of the impact on the worst-off.

Reaching the have-nots

Whilst technical assistance is part of the equation, aggregate economic progress does not always reach every section of society. The widening of inequality in so many countries worldwide has prompted many to rethink social inclusion. Handing cash straight to marginalised people may be one answer. A dedicated cash transfer mechanism for graduating and graduated countries could be a critical part of helping ensure that all parts of society are included in economic advancement.

In the larger graduating countries that appear likely to receive less support in the long run, economic growth can exist alongside deepening inequity. In others, like Kiribati, São Tomé and Príncipe, Solomon Islands, Tuvalu and Vanuatu, absorptive capacity for aid is already reaching its limits. These smaller nations, which are often very unequal, have high levels of official development assistance per capita but their governments are often overwhelmed by conventional development funding.

Unconditional direct transfers are a proven solution. Around 130 low- and middle-income countries implement at least one non-contributory unconditional cash transfer programme, either government or donor funded, or both.

Research on cash transfer schemes by donors like the United Kingdom shows that existing cash transfer schemes cut monetary poverty, raise school attendance, stimulate health service use and improve dietary diversity, reducing child labour and increasing women’s decision-making power. Transfers also target the marginalised and lead to more equitable and just outcomes, forming a valuable social safety net for the vulnerable.

Creativity and ambition

Doubtless there are many other ways in which donors and multilaterals could improve help for graduating LDCs, particularly measures that address inequality.

One of the obvious objections is: why not the other LDCs too? And why not middle-income countries facing similar challenges? But official development assistance is already being re-designed anyway under the Financing for Development agenda. OECD DAC donors are seeking to redefine aid to include private flows and blended finance. Now is a prime opportunity to aim new forms of assistance better at the exact demands of graduating LDCs, allowing the needs of other recipients to be addressed more precisely. The stubbornness of lingering inequality in otherwise dynamic nations calls for a more nuanced, targeted approach.

The 2030 Sustainable Development Agenda is clear that new forms of development assistance need to be tailored to the needs of the least advantaged. The private sector, donors and recipients all have an interest in leaving no-one behind.

A touch of ambition, invention and creativity would go a long way. Every person in those dozen graduating countries deserves to share in success.

 

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This article is the second of a two-part series. Part one looks at rising inequalities in Bangladesh and other least developed countries.