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International support for the least developed countries: A different way?

March 1, 2018
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Bhutan Community e-Center

A community e-Centre in Bhutan. Source: ADB

Part I questioned the theoretical background behind the existing international support measures for least developed countries (LDCs) and highlighted some shortcomings in the record of achievement so far. This section looks at how the international support measures might be reconceptualized for the modern era.

This emerging evidence has increasingly brought the conventional neoclassical view of trade and development into question, implying that international support for LDCs may need to be reconsidered. As argued in part I, no amount of liberalization or exposure to ‘correct’ prices may induce economic progress. The challenges facing LDCs go beyond mere incentives, and include often intractable problems such as smallness, distance from major markets, fragmentation or being landlocked.

An alternative to the neoclassical perspective has long existed, although it has fallen out of fashion and has not yet been used to inform the design of international support measures for LDCs. This perspective, based on the developmentalist and structuralist traditions, tends to emphasise the importance of measures aimed at building productive capacity and directly promoting structural transformation.

Some critics of neoclassical trade models have been particularly harsh. According to Erik Reinert: “International trade theory’s prediction of equalization of wages across countries is, in my view, the key terrible simplification that causes world hunger. Not only are all qualitative differences assumed away, the production process itself is also abstracted away. Assuming away unemployment, as the World Bank traditionally does in its models, only adds another dimension to the terrible simplification on which our world economic order is based. In many countries, 80 per cent of the potentially active population are unemployed or underemployed. Assuming that fact away is a terrible simplification” (Reinert 2009: 3).

Maybe the time has come to look again at the implications of the structuralist perspective for international support, adapted for the contemporary era and taking into account the 2030 Agenda for Sustainable Development? Recent attempts at synthesising the insights of the neoclassical approach, with its emphasis on trade, with the older structuralist and developmentalist perspectives, can be seen in the contrasting work of Ocampo (2005), Lin (2012) Spence (2011) and others.

Until now, international support for LDCs has focused too much on international demand for these countries’ existing or potential products. In essence, LDCs face almost unlimited demand for their exports. What has been relatively neglected has been domestic production, sustainable or otherwise — and whether or not orientated toward export or domestic consumption. In very blunt and simplistic terms, many LDCs simply do not make enough to meet the significant demand that would potentially exist for their products, and however good the incentives, their economies will not adapt to take advantage of that demand.

Both Michal Kalecki and Albert Hirschman, the latter of whom was the leading light of the structuralist school, understood the essentially Keynesian insight that developing economies operate permanently below conditions of full employment and demand. Kalecki and Hirschman recognized that no single set of policy recommendations was appropriate to all circumstances, and that support and policy advice should vary according to country context. Broadly, however, development policy should focus on the active promotion of investment in the capital stock, which was more likely to be fully utilized in developing than in developed economies because it was smaller and less advanced. Kalecki said that the main problem in developing countries was the deficiency of productive capacity rather than its under-utilisation. In contemporary language, simply ‘getting the prices right’ via global economic integration would not necessarily lead to the development of productive capacities; active government policies and measures to stimulate the accumulation of capital are also necessary.

These insights map directly on to the experience of LDCs, many of which feature extremely undeveloped capital stocks, low rates of investment and permanent shortfalls of demand. Gross fixed capital formation is 23% on average in LDCs, well below the level of 25-30% believed to be necessary for structural transformation. In a classic 1963 paper Nicholas Kaldor extended this point when he said that: “It is shortage of resources, and not inadequate incentives, which limits the pace of economic development. Indeed the importance of public revenue from the point of view of accelerated economic development could hardly be exaggerated.” Ha-Joon Chang follows Kaldor in stating that the investment rate is the most important indicator of structural transformation (Chang 2014).

Using the broad insights of these thinkers and others, it can be seen that it is not the lack of exposure to global demand because tariffs are too high that is the key problem facing LDCs, it is the shortage of sustainable investment, the deficiency of the capital stock and particularly the shortage of public revenues. Even under conditions of full inward and outward openness to international investment and trade – ie. the conditions which neoclassical theory posits as optimal – sustainable economic development may not take place. No matter how much trade facilitation and tariff-reduction occurs, countries on the global periphery will always struggle to develop in a way that meets both human and ecological needs without active measures aimed at stimulating investment, boosting demand and accumulating capital sustainably.

The structuralists and developmentalists were writing largely before the challenges of climate change and questions of sustainability were widely understood. Intra-country inequality has also since worsened. In the age of the sustainable development goals, it is worth reconsidering their output within the broader framework of sustainability, and even reconsidering the ends of development in LDCs. Several recent works, such as Raworth (2017) have underlined the importance of integrating human wellbeing and ecological sustainability in order to remain both inside ecological boundaries and above the social minimum necessary for people to live fair, fulfilling and healthy lives. The challenge of the 21st century is to: “meet the needs of all within the means of the planet. In other words, to ensure that no one falls short on life’s essentials (from food and housing to healthcare and political voice), while ensuring that collectively we do not overshoot our pressure on Earth’s life-supporting systems, on which we fundamentally depend – such as a stable climate, fertile soils, and a protective ozone layer.”

Sustainable development goal 3, on health and wellbeing, implies that at times, economic expansion should be subordinated to human fulfillment. Bhutan’s Gross National Happiness approach is a good example. Sustainable development goals 11-15 concern sustainability, responsible consumption, climate action and life above and below water. Growth, while important for poverty reduction, should not come at all costs.

What might be done differently

It is important to recognize that the support measures provided the international community are not a recipe for development, nor do they hold all the answers for LDCs. They should be seen not as low-hanging fruit which alone can stimulate or support sustainable  development, but as part of the overall development process to be complemented by active government policies. The sustainable development goals, however, and the earlier work of the structuralists and developmentalists may imply the need for a redesign of international support measures for existing LDCs and for those leaving the category.

Given a blank canvas, what sort of measures might be designed to address the real constraints, needs and opportunities facing LDCs? Is the conventional support for trade in LDCs – duty-free, quota-free market access – enough to ensure that those countries benefit from trade? Will integration into the world economy alone address the concerns of LDCs, or will other steps be necessary? Are the goals of sustainability and poverty-reduction in LDCs sufficiently well defined?

Without creating undue complexity, it may even be necessary to design different international support mechanisms for different country groups. Cornia and Sognamillo(2016), for instance, suggest dividing LDCs into six clusters, each of which should pursue different policy measures. These groups are countries at war, small and remote countries, mining, agriculture, manufacturing and services LDCs. Prospective and new graduates may even merit dedicated support measures aimed at propelling them through and beyond graduation.

Ecological sustainability must take a more prominent role in support measures for LDCs, alongside inequality. Until now international support for LDCs has focused almost exclusively on economic growth. Even climate financing has often been couched in terms of mitigating the impact of environmental changes on economic output. Yet the LDCs are often the countries facing the worst impact of climate change. Plenty of emerging theory and evidence suggests that multiple goals in addition to aggregate economic welfare are desirable, compatible and feasible.

This said, any framework which questions the limits of economic growth is particularly controversial in LDCs. For countries at the very lowest levels of aggregate income, economic growth is absolutely essential to reduce poverty. Most LDCs do not contribute substantially to carbon emissions and should not be prohibited from adopting productivity-boosting technologies.

Yet the national goals of many LDCs often do not centre around the purely economic. Vanuatu and Bhutan are examples of two countries which have adopted the goal of life satisfaction and environmental sustainability rather than simple economic growth. There can thus be an acceptable compromise between growth, life satisfaction and ecological sustainability. The location and size of many LDCs makes the traditional development path extremely difficult in any case, and, whether we like it or not, many LDCs probably won’t reach developed-country income levels in coming decades.

If any new international support measures were adopted, LDC policymakers, civil society and businesspeople also need to be consulted closely in their design. In the past, support measures have tended to be conceived at the inter-governmental level or by developed countries in collaboration with international agencies; yet ownership is critical. A detailed and careful process of consultation needs to be undertaken, with types of support measure tailored to specific situations. Whilst the eventual outcome of any such consultation process is uncertain, it seems appropriate that any support measures should place greater emphasis on building domestic savings and investment and on stimulating domestic demand with a view to the development of environmentally-sustainable productive capacities which have a direct bearing on poverty reduction, in addition to global economic integration.

New types of support measures applicable to one or more country clusters may include some of the following options:

  • International support via global governance mechanisms aimed at addressing the problem of tax havens or secrecy jurisdictions, which are the main source of capital outflows from LDCs and which facilitate a race to the bottom on taxation.
  • Dedicated assistance for LDCs seeking to benefit from international tax cooperation, with the aim of closing loopholes and limiting the ability of multi-national enterprises to avoid paying taxes, as laid out in the Addis Ababa Action Agenda.
  • Measures to coordinate wages globally, similarly aimed at avoiding a race to the bottom under which LDCs try to attract the cheapest labour-intensive production.
  • Dedicated capacity-development assistance for domestic tax revenue mobilization in LDCs
  • Global tax incentives aimed at promoting domestic processing in LDCs
  • A programme of untied cash transfers targeted at LDC populations.
  • An LDC sustainable infrastructure fund, with associated maintenance funding
  • Additional resources aimed at technology transfer, such as via the new technology bank for LDCs. This may include the promotion of new, sustainable ‘fourth industrial revolution’ technologies such as 3D printing, complementary currencies and artificial intelligence.
  • Capacity assistance with applications for donor support, something with which the smaller, more capacity-constrained LDCs struggle.
  • Dedicated policymaking support specific to LDC clusters as identified by Cornia and Scognamillo (2016).
  • Increased support for institutions such as thinktanks for south-south and triangular cooperation.
  • Post-graduation capacity development support measures from UN entities, specifically aimed at mitigating the impact of the middle-income trap

Perhaps more importantly, in addition to international support, developed countries may need to consider the impact of rules, practices or mechanisms in the international system which prevent LDCs from following their chosen sustainable development path. The economic volatility that originates in the developed world, such as that experience during the 2008 crisis, can have severe repercussions on LDCs. Measures to ensure economic stability, which is in the best interests of almost everyone, would be one of the best ways of supporting LDCs. The impacts of tax havens, carbon emissions, farm subsidies and immigration restrictions vastly outweigh any existing international support.

Whilst this is only a preliminary analysis listing a few possible areas, and much more needs to be done, it is important to recognize the need for a new approach and to think of new ways of supporting least developed countries as well as limiting the negative impact of policies and actions in the developed world. Whatever has happened until now, it hasn’t worked well enough. Ten LDC graduations in half a century is too few. Hopefully the emerging literature on sustainable development, as well as the direct experiences of prospering LDCs, will provide lessons for other countries which want to leave the category, and for the international community in general.

 

References:

Chang, J. (2014) Economics: A User’s Guide, London: Penguin

Cornia, G. and A. Scognamillo (2016) Clusters of Least Developed Countries, their evolution between 1993 and 2013, and policies to expand their productive capacity, Committee for Development Policy Background Paper no. 33, July 2016

Kaldor, N. (1963) Capital Accumulation and Economic Growth, London: MacMillan

Lin, J. (2012) The Quest for Prosperity: How Developing Economies Can Take Off, Princeton, Princeton University Press

Ocampo J. A. (ed.) (2005) Beyond Reforms: Structural Dynamics and Macroeconomic Vulnerability, Stanford, Stanford University Press

Raworth (2017) Doughnut EconomicsSeven Ways to Think Like a 21st-Century Economist, Vermont, Chelsea Green

Reinert (2009) ‘The Terrible Simplifers: Common Origins of Financial Crises and Persistent Poverty in Economic Theory and the new ‘1848 Moment’’, DESA Working Paper No. 88, December 2009

Spence (2011) The Next Convergence: the Future of Economic Growth in a Multispeed World, New York, Picador

 

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