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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.

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

January 14, 2020

By Dan Gay

  • Following rapid progress, up to 12 LDCs may leave the category in coming years.
  • The countries involved include up to a quarter of the total LDC population. Progress has been underpinned in some areas by international support measures for LDCs.
  • Yet lingering – and in some cases worsening – inequalities mean that many people are being left behind.

 

On the journey south from Chittagong to Cox’s Bazar in southern Bangladesh the dynamism is palpable. A plush new road disrupts the ruts south of the city, funnelling travellers through green rice fields. The traffic is less apocalyptic than in the capital Dhaka but the shiny symbols of a youthful middle class still file past. The battlements of new concrete kingdoms flank the roadside.

The voyage reflects Bangladesh’s own. Civil war and famine in the early 1970s gave way to a green revolution. Ingenious industrial policies helped build employment in a booming garment industry, and the services sector is now expanding fast. Extreme poverty fell from four-fifths to less than a tenth. The economy will be one of the world’s three fastest-growing in 2019.

Health and education flourished. At independence in 1971 the average Bangladeshi lived to the age of 47. Now, she or he can expect to reach 72, higher than the South Asian average. Infant mortality plunged from 149 to 28 over the same period, also outperforming the region. Nearly three-quarters of children go to secondary school, up from only a fifth in 1973.

These feats of social headway are partly testament to Bangladesh’s legendary civil society. Over decades, non-government organisation workers honed their skills in rural areas. Alongside the UN and government in 2015 this enabled them to house, immunise and feed nearly three-quarters of a million Rohingya refugees at short notice after they walked across the border toward Cox’s Bazar from neighbouring Rakhine state in Myanmar.

A wave of graduation

It is this kind of economic and human advancement that places Bangladesh, by far the most populous LDC, near the vanguard of 12 countries scheduled to graduate from the UN least developed country (LDC) category in coming years.

Bangladesh and Myanmar were the only two to meet all three of the criteria for graduation out of LDC status for the first time at the most recent review of the UN Committee for Development Policy (CDP) in 2018. If these countries continue to hit the targets in 2021 they may graduate in 2024. Five countries are already scheduled to leave the category between now and 2024. Seven more are likely to follow soon after.

If so, after a transition period these countries – and their 270 million people, a quarter of the LDC total – will lose the benefits associated with LDC membership, including preferential trading arrangements; a commitment by rich countries to prioritise LDCs in aid allocations; concessional climate financing; assistance with attendance at international meetings; and UN budget concessions.

The growth of the garment industry in the likes of Bangladesh and Myanmar has been underpinned by duty-free, quota-free market access under the European Union’s Everything But Arms (EBA) scheme since its launch in 2001. Freed from paying tariffs on anything it sends to the EU, Bangladesh has become the world’s second-largest exporter of clothing. Myanmar’s industry has grown tenfold since the country was granted access to EBA in 2013. Over half a million workers send three-quarters of their pay to relatives in the countryside. For Cambodia, too, which is likely to graduate at a later date, EBA has been a boon to garment manufacturers.

Some other LDC exporters also make use of trade preferences. And for those countries that do not, governments are often reluctant to signal complacency by giving up the remaining small symbolic concessions.

Whilst some might say it is time for graduating LDCs to surrender these privileges, the real picture is more nuanced. The playing field is not level. Some former LDCs will still face massive disadvantages of geography, history, size, economic structure and position. A nation may graduate but many of its people will not.

The tyranny of averages

Gross national income per capita in Bangladesh hit US$1,274 on a purchasing-power basis in 2018, just above the threshold for graduation.[1] But dividing total income by the country’s 163 million population does not say anything about distribution.

While poverty has ebbed over the long term, and most Bangladeshis live vastly more educated, healthy lives than after independence, progress is stalling.

The incomes of the bottom tenth of Bangladeshi households fell between 2010 and 2016. The lowest five percent found their incomes falling by more than half over the same period, according to government figures. About 40 million people still live below the national poverty line – enough to make up the third-largest least developed country in their own right. Meanwhile the income of the top five percent of urban households rocketed 88%, in 2016 taking home over 100 times more than the poorest.

“The unambiguous conclusion that can be inferred is that the rich are getting richer while the poor are getting poorer,” says a report by the Dhaka-based Centre for Policy Dialogue. As in so many countries, increasing numbers of people are being left behind.

The explosion in the incomes of Bangladesh’s rich allows them to accumulate ever more. The distribution of wealth is stark. A paper by the Centre for Policy Dialogue calculated that by 2010 the top five percent of households owned over half of all the country’s wealth and the top one percent nearly a third. The bottom one percent, in contrast, did not have any wealth and the bottom five percent only 0.04%. The same paper found the wealth Gini coefficient was 0.74, representing severe wealth inequality.

A least-developed state

Across the world the share of wages in economic output is declining, while the returns to capital rise. Globalisation is narrowing differences between countries but opening up chasms within them. The same picture plays out across several graduating LDCs, where an affluent, educated urban class take advantage of the opportunities of industrialisation and international openness, leaving others behind.

Bangladesh is hardly unique. In Vientiane, the capital of Lao PDR, you can order a fine duck breast with foie gras followed by crème brûlée or while away lunchtime over a flat white. Meanwhile in a village of Lantan people in the northern province of Luang Namtha, pot-bellied trouserless children sell wrist-bands to tourists for 80 US cents. Coughing can be heard from inside thatched huts.

Here and in other rural areas, access to the modern economy and social services is worse than in the capital. Indigenous people are often among the most vulnerable. Faced with fewer job opportunities and no other source of income, many more people will in effect continue to live in a least-developed state for many years to come. How should the international community respond?

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First published on Trade for Development News.

This column is the first of a two-part series. Part two considers some possible new ways to support graduating LDCs.

[1] The per capita income threshold at the last triennial review was US$1,230 using the World Bank Atlas method on a purchasing power basis. The other two criteria are a human assets index and an economic vulnerability index. A country must exceed more than two of the three criteria at two consecutive reviews of the CDP to be considered for graduation.

Digits won’t replace states

September 20, 2019

I’m all for new technologies that subvert convention — but i’m cautiously sceptical about this piece on new multilateralism from Anne-Marie Slaughter in the Financial Times.

I love the sentence “while antediluvian men strut back and forth on the world stage beating their chests, a different kind of multilateralism may be on the horizon.”

Slaughter argues that the Internet makes new forms of digital cooperation both imperative and inevitable. A new UN “Declaration of Digital Inter-dependence” signed by business people and philanthropists like Melinda Gates and Jack Ma asks politicians to try to solve specific problems alongside leaders from business, civil society, labour, academia, faith groups, women and other marginalised communities.

It’s a good idea. Digital tools — like, presumably, social media and other forms of instantaneous mass communication — make global new forms of cooperation among these people possible. We should probably also get wise to their potential, because they also raise risks and challenges. “Isis can recruit a global army online, before and after its physical ‘caliphate’ has been destroyed. Companies can create currencies without a national mint or central bank.”

The digital Declaration proposes “new governance structures for the digital world of the future, which will supplement and could ultimately swallow the UN, at least as we have known it.”

Slaughter is quite right that politicians should listen to a range of different groups, and that in the future they’ll probably have no choice but to do so. Conventional democracy confined to nation states is woefully inadequate. We should be voting across international boundaries on issues of collective importance — especially climate change — using supra-national and local structures. Marginalised peoples for the first time have a voice. Technologies exist to allow us to make our voices heard on issues that concern us, from the local to the global. Those issues should be dealt with at the appropriate level rather than abandoned to stale, compromised representatives in a distant legislature which nobody really trusts any more.

We should probably be voting with our smartphones, often, on specific issues that concern us: refuse collection, schools, health, energy, equality. Part of the reason for Brexit and Trump is a power deficit: the old governance institutions of the twentieth century don’t reflect our demands (if they ever truly did). People want a bigger say in how their lives are run, and they’re finding new ways to connect, beyond old physical communities. There’s little doubt that digital space should play a bigger role in multilateralism.

But it’s the forces of power that make me sceptical. As Slaughter implicitly acknowledges, it’s all very well asking politicians to work with other ‘stakeholders’, but politicians do what serves their and their paymasters’ interests. Most probably aren’t going to surrender power voluntarily to other leaders. Social progress is taken, not given.

It’s noteworthy that the Declaration was launched by billionaire business leaders, not ordinary people or grassroots non-governmental organisations. The global 1% spent the last few decades building the plutocracy. Why would they hand over control? In fact, this sort of initiative is probably the billionaires’ way of maintaining it; hegemony in practice.

Despite the potential for liberation in digital technologies, they are controlled and controllable — and the potential source of mass unfreedom. Edward Snowden’s new book speaks with terror about China’s “utterly mind boggling” surveillance capabilities being replicated on the global stage. Closed-circuit television cameras on every street corner feed back to a central, government-run observation centre which also tracks and watches you through your smartphone.

Facebook shelved Libra because of the widespread outcry over its potential harm, and because US Congressmen for once did their job, subjecting it to scrutiny. Because of obvious vested interests and power, the US dollar will continue to hold sway, not Bitcoin.

A more serious problem with the FT piece is that it’s a bit blind to the full meaning of multilateralism — that it’s about several sides sitting down and physically negotiating rules, often about boring, bricks-and-mortar things. Rules, thrashed out between states, often protect the very marginalised stakeholders that Slaughter lists. Here, we argue that multilateralism is a matter of survival for the least developed countries, and that it must cater to their national interests in somewhat technical areas like rules of origin in international trade and intellectual property. The harmful impact of rich countries’ behaviour in macroeconomic management, tax havens, subsidies, climate and immigration must be addressed in global interactions between rich and poor nations: states, not only communities or digits.

The excellent A New Multilateralism for Shared Prosperity published by UNCTAD and Boston University’s Global Development Policy Centre argues that a global green new deal should feature the rather offline tasks of securing full and decent employment at a livable wage; a just society and caring communities; and a sustainable future. None of this implies swallowing the UN, more revitalising it.

That’s not to say that digital space won’t play a role in new forms of multilateralism, or that new communities shouldn’t be brought into discussions. But multilateralism will for some time probably continue to involve real people sitting down in physical rooms discussing often rather mundane, analogue technicalities. I hope that a new form of multilateralism is on the horizon, but in the meantime, unfortunately, the antediluvian white men will continue to strut.

For the least developed countries, revitalising multilateralism is life or death

August 30, 2019

New op-ed on the UN Sustainable Development Goals site.

Angola

By Daniel Gay and Kevin Gallagher

The international system governing the environment and economy is under pressure. Globalisation itself is wobbling, to the chagrin of governments in rich and emerging economies. What’s less talked about is the effect on the world’s 47 least developed countries (LDCs), home to a billion people, a quarter of whom live in extreme poverty.

The financial system has long been rusty. Criticism was again this year leveled at the selection process for the heads of the World Bank and International Monetary Fund. Developing-country voices called for an open and transparent process based on a pool of candidates drawn from all countries, rather than only from the United States and Europe. Leadership by the world’s marginalised nations would give them voice, reorientating the Bank and Fund toward their own needs.

Donors aren’t as generous as they used to be  — with worse to come after it recently emerged the United States might chop $4 billion from its aid budget. Development aid to LDCs has stagnated in recent years as some rich countries reallocate or cut aid. The latest figures show that support from official donors to all countries fell to US$146.6 billion in 2017 as donors spent less on in-country refugee costs. Only five out of 30 countries from the Organisation for Economic Cooperation and Development (OECD) Development Assistance Committee currently meet their pledges on aid, down from a peak of six.

Recent moves to redefine and repackage development assistance as a joint public-private endeavour have been criticized in some quarters as attempts by official government donors to escape their obligations. The private money mobilised in LDCs is only a third of the global average. Only eight per cent of blended finance goes to LDCs, with most going to middle-income countries. Of the $52 billion directly mobilized by multilateral development banks in long-term private co-financing during 2017, only $2 billion went to LDCs and other low-income countries.

Rich countries aren’t doing as much about environmental breakdown as they should. Support for the Paris Climate Change Agreement has been thrown into doubt despite progress on the work programme over the last couple of years. Any failure to meet targets will have the biggest impact on developing countries and LDCs. Promised adaptation and mitigation funding have often not materialised. LDCs at risk of extreme weather or with a large number of people living in low-lying islands or coastal zones  — like Bangladesh and the Pacific islands  — are under particular threat. Those countries can’t afford to protect their people from climate breakdown like the rich world can.

LDCs are increasingly unequal, as the urban nouveau riche leave their rural and factory-working compatriots behind. Gender, social and income inequalities remain stubbornly entrenched. Without global coordination, countries have been forced into a race to the bottom on wages, with the poorest countries obliged to slash pay to subsistence levels — or below. Cuts to multilateral agencies such as the UN Population Fund (UNFPA) affected women disproportionately, particularly in developing countries.

But it is in trade where the LDCs may lose most from the new cracks in the international order. The US-China trade war compounds stress on the multilateral trading system, which was already struggling because of a lack of progress on talks at the World Trade Organisation. Bilateral trade and investment agreements have multiplied in recent years, particularly those involving developing countries. Without multilateralism, flawed as it is, LDCs are compelled to accept terms offered by their developed and more powerful developing-country counterparts rather than strike deals collectively as part of a bloc using accepted rules.

Rich countries are negotiating mega-regionals like the Transatlantic Trade and Investment Partnership or the Trans-Pacific Partnership, eroding the value of existing schemes for LDCs and forcing on to the agenda ‘WTO Plus’ issues like strong intellectual property protection, which is contrary to the interests of LDCs.

Some LDCs are doing well. Up to 12 may officially ‘graduate‘ from the category in the next decade, including Bangladesh, Angola and Myanmar, which together account for half of all LDC exports. But many are being left behind. In a decade it is possible that on current trends, the LDC group will consist of about 30 countries in sub-Saharan Africa, plus Haiti, Yemen and Afghanistan.

This ‘Africanisation’ of the LDC group will mean that existing multilateral concessions such as the duty-free, quota-free access provided to LDCs by the European Union under its Everything But Arms (EBA) initiative will soon fade in importance, given that it is largely Asian countries that use the scheme. The EBA initiative, launched in 2001, was a major breakthrough in the relationship between the LDCs and the world’s biggest trading bloc. The abolition of import taxes and quantitative restrictions was worth billions to the exporting LDCs, particularly Bangladesh (the scheme clearly benefited European clothing importers too).

In a decade’s time, unless trade patterns change, the remaining LDC group will export far less to Europe under EBA — and even to developed countries in general under other trade preference schemes. Only a third of LDC exports come from Africa, mostly unprocessed commodities like oil, gas and minerals, some of which are duty-free for all countries. Trade preferences are already hugely under-used, especially by African agricultural exporters. Nearly half of fruit, vegetables and plants could be exported from developing countries under preference schemes but aren’t. Around $4 billion of clothing and mineral trade preferences go unutilised.

LDCs are  trading more with each other and with neighbouring countries. The African Continental Free Trade Area signed last year will boost intra-African trade. The rise of south-south commerce is already heralding the end of the era in which trade preferences were dispensed by the developed world to passive recipients. The multilateral regime will have to rebalance even further so that the global South plays a more active role. It’s worth remembering, though, that South-South trade is no panacea. Sub-Saharan Africa’s economy is about the same size as that of France.

If those at the head of the multilateral order want to avoid a damaging schism in which the rich world leaves the have-nots further behind, they’ll have to get inventive. New schemes should be tailored to the needs of individual countries or regions — particularly including measures which make it easier for LDCs to meet the rules of origin required to qualify for preferences. Existing trade agreements need to be made more inclusive, and more sensitive to the needs of LDCs. Trade is about more than market access. Developed nations could best help the world’s periphery by reforming their own practices on climate, tax havens, immigration, subsidies and economic management.

The shift in trade preferences amounts to yet another wrinkle in the multilateral order, one which stems from current trends rather than active challenges to the international system. It comes at a difficult time for the least developed, whose fragile economies are teetering amid global uncertainty. A small downturn in an LDC can be devastating, whereas the worst-off in richer countries have savings and social safety nets  — increasingly leaky though they are. Because people in the poorest countries have less room to cushion the impact, they have the most to lose. For people in LDCs, revitalising multilateralism is a matter of survival.


Dr Daniel Gay is an adviser working with the UN Committee for Development Policy on the least developed countries. Twitter: @DanGay

Dr Kevin P. Gallagher, a member of the UN Committee for Development Policy, is director of Boston University’s Global Development Policy Center. Twitter: @KevinPGallagher

March 15, 2019

Video on UN least developed country category:

August 14, 2018

Interview about leaving the least developed country category: The long and winding road to LDC graduation.

June 9, 2018

Short article for the OECD Development Matters website on Lessons learned from structural transformation in least developed countries.