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International support for the least developed countries: moving out of the mainstream

November 15, 2021

New short article on the Developing Economics site.

Next January In 2023, after being deferred due to Covid, the next United Nations Programme of Action for least developed countries (LDCs) will launch in Doha. It will set the framework for the next 10 years of international support for the world’s 46 officially poorest and most structurally disadvantaged countries, home to around a billion people.  

LDCs are low-income countries confronting severe structural impediments to sustainable development. Membership of the category is based on three criteria: income per capita, human assets and economic and environmental vulnerability.  

Assistance for LDCs currently falls under three categories: trade, aid and a range of ad hoc measures broadly aimed at help with taking part in the international system, such as lower contributions to the UN budget and support for travel to international meetings like the annual UN General Assembly.  

Support is largely based on the premise that LDCs are artificially or temporarily excluded from global commerce. Preferential market access, temporary development assistance and help with participating in multilateral processes are intended to tackle this defect, in turn helping the LDCs ‘catch up’.  

Dating to 1971, the category is the only one recognised in UN and multilateral legal texts. There is no official ‘developing country’ or ‘middle income’ category with associated support measures. Low income countries are not specifically targeted, and the small and vulnerable states are only recognised as a working group at the World Trade Organisation. They are not acknowledged in the legal texts. 

Although donors don’t meet aid pledges and support doesn’t go far enough, official targets are possible because the LDC group is officially recognised in the UN system and has legal bearing. An example of such a target is the commitment by developed countries to deliver 0.15-0.20% of gross national income (GNI) in development assistance to LDCs. The European Union offers duty-free, quota-free market access to LDC exports under its Everything But Arms (EBA) trade scheme for LDCs. 

The theory behind support for LDCs is implicitly based on the mainstream economics view that LDCs lag behind because they aren’t exposed enough to correct market prices and conditions. The removal of so-called distortions like overseas tariff and non-tariff barriers, alongside temporary development assistance and help taking part in the global system, is supposed to free up these economies to play a fuller role in the international economy. Economic growth will drive development and reduce poverty. 

The evidence shows that for most LDCs this theory never worked. Until the pandemic the economies of some LDCs were performing well. Up to 12 could leave the category in coming years. A few, like Bangladesh, Cambodia and Myanmar, were able to take advantage of lower tariffs for their garment exports. These three countries account for 87% of imports to the EU under EBA.  

But half were supposed to meet the criteria by 2020, according to international targets. 12 graduations falls well short. The six that have left since the formation of the category in 1971 have not all done so because of better international market access or special support measures. Commodity exports, tourism or improved health and education are mostly responsible.  

The remaining LDCs aren’t catching up. The gap is widening. The pandemic devastated the group. Gross domestic product (GDP) shrank 1.3% on average in 2020, with the economies of 37 contracting during the year and extreme poverty in the group rising by a staggering 84 million. But even before Covid, average real GDP per capita for the group had long diverged from other developing countries and the rest of the world.  

Source: UNCTAD Stat: 

Pushed behind 

In over a third of LDCs real gross national income per capita has fallen since 2015, according to UN estimates. The vulnerability scores of 19 LDCs (over two-fifths of the total) deteriorated over the same period.  

Trade performance has also missed targets, a telling failure given that most international support is for trade. For the majority of LDCs, better market access hasn’t spurred integration. Not many countries fully use the trade preferences available to them. African countries account for less than 5% of total Generalised System of Preference imports to the EU.  

LDC imports have grown considerably faster than exports in the last decade, and LDCs’ collective share of global merchandise exports – a key international metric – is no higher than a decade earlier, at less than one percent. Trade per capita remains very low – under a tenth of the world average. According to the UN conference on Trade and Development (UNCTAD) 85% of LDCs remain dependent on commodity exports. 

However well-designed trade preference schemes are, they will fail to address the fundamental economic problems facing most LDCs – particularly in Africa. These challenges include deindustrialisation, stagnation and reverse transformation characterised by a premature shift of the labour force into services, often informal. For many of the region’s LDCs, commodity dependence and a lack of value-addition mostly remain just as bad as they were decades ago.  

Conventional structural transformation into higher value-adding activities, driven by a move from agriculture into manufacturing, isn’t occurring, with a corresponding drag on productivity. Unemployment and semi- or informal employment remain extremely high and are even worsening. The creation of decent jobs for burgeoning young populations via revamped production is the pressing task facing the majority of LDCs that are being left behind.  

Even under conditions of full inward and outward openness to international investment and trade – ie. the conditions which the implicit theory underlying the current composition of international support posits as optimal – sustainable economic development may not take place. With current international support, countries on the global periphery will always struggle to develop in a way that meets human and ecological needs, unless active measures are taken to overcome these problems. 

These shortcomings raise questions about the existing approach to international support. Before Doha they imply the need to re-examine the underlying assumptions and theory behind existing support – and to propose a new framework. 

Barking up the wrong baobab: some alternative proposals for support 

International trade preference schemes are important for some countries – and the idea is not to criticise market access. But as a broad solution to the deep-seated problems of the LDCs that are being left behind, they amount to barking up the wrong baobab. Most LDCs just don’t produce enough goods or services and aren’t ‘flexible’ enough to respond to what are imagined to be ‘correct’ international prices. Whatever we’ve been doing so far, it isn’t good enough. 

This requires a long, hard, stare at the existing theory. Given the shortcomings of this mainstream approach, it’s time to revisit alternatives, particularly the developmentalist and structuralist traditions aimed exactly at the challenges now faced by the marginalised LDCs.1 These perspectives need to be revived and revitalised to acknowledge ecological imperatives, and reflected in international support for LDCs. 

Broadly, these schools of thought emphasise not market access but active global regulation of commodity flows; government intervention to build productive capacity (for the domestic market as well as foreign); and the direct promotion of structural transformation using a range of support options tailored to individual country circumstance.  

‘Flexibility’ isn’t necessarily either desirable or possible. If it means lower worker protections, weaker environmental standards or anti-union laws, it is by definition contrary to the goal of societal and ecological resilience. It also risks worsening already worrying trends in inequality. Flexibility can also lower economic growth by weakening aggregate demand as job insecurity, unemployment or semi-employment and downward wage pressures reduce consumer spending. Rather, we should be aiming to build demand and resilience. 

One of the most crucial tasks is to raise the rate of sustainable investment, via public revenues and investment in the capital stock. In LDCs the absolute and per capita rates of domestic savings and investment are consistently lower than other developing countries, a shortfall which acts as a particular drag on the development of productive capacities.  

As Kaldor said: “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.”2  

There is a need for systemic improvement to the multilateral architecture relating to LDCs – driven by LDC governments themselves and differentiated according to context. Acknowledging these ideas, in a recent paper I propose six areas of support, relating to the UN system, finance, trade, commodities, technology, and the environment and climate change.  

Productive capacity should be the main overarching theme, with concrete, actionable and time-bound activities. A new sustainable productive capacity fund, for example, could act as the lynchpin of the new architecture, with financing for sub-components of productive capacity including technology transfer, entrepreneurship, linkages development and human and physical capital accumulation. Industrial policy is essential – and in this regard trade and donor countries should allow policy space. 

In the paper each of six themes is accompanied by specific, practical proposals – 30 in total – which might be considered in the next programme of action. For instance the IMF and World Bank don’t use the LDC category, which means that their lending and other interventions aren’t coordinated with those of the UN. Even bilaterals and parts of the UN system often only pay lip-service. They should be encouraged to recognise the category fully. 

Given that capital accumulation is so central to productive capacity, a big push on financing is needed. Official donors need to fulfil their aid commitments to LDCs, devoting more of it to transforming production. As highlighted by Kaldor, more emphasis needs to be placed on helping governments build domestic revenues. The Debt Service Suspension Initiative (DSSI) is welcome but should be made permanent and should consider write-offs, not only suspension of payments. It should also monitor international lending and warn of potential excesses, with a focus not only on recipients but on lenders. 

That commodity dependence remains the bane of many African LDCs is not for want of ideas. Innovative proposals exist for price stabilisation schemes; counter-cyclical loan and financing facilities; taxing commodity derivatives markets; and making companies pay for the damage caused by resource extraction. The time has come to put these ideas into practice. 

Technology and intellectual property are critical. World Trade Organisation members should be held to account in their unfulfilled obligations to conduct technology transfer to LDCs. The US-backed TRIPS vaccine waiver needs to be operationalised as soon as possible so as to allow the several LDC pharmaceutical manufacturers that exist (and other developing countries) to produce the Covid vaccine. The Technology Bank for LDCs founded in Turkey three years ago must be funded properly.   

Climate financing needs to increase and be made more accessible – many capacity-constrained LDCs report finding it difficult to jump the administrative hurdles of the Green Climate Fund or the LDC Fund. Donors also need to be held to account in their aid promises, particularly after the LDC Fund ran out. Financing should also be linked to trade and orientated toward sustainable infrastructure built to resist climate breakdown. LDCs didn’t cause the climate catastrophe. They can ill-afford its consequences. 

I can’t count the number of LDC government officials or ministers who’ve told me they spent years following international advice, only for it to fail. First, under the Washington Consensus and its variants they opened up domestic markets, privatised state companies and cut fiscal spending – often with disastrous results. Then they were told that their newly supple economies would spring into action as liberal international market access opened up new opportunities. This too, mostly didn’t happen.  

In order to avoid yet more disappointment – not to mention the unthinkable immiseration manifested in the grinding poverty and exclusion experienced by the global periphery – it’s imperative that the underpinnings of international support are rethought and updated. Because of its multilateral recognition, the LDC category is a ready tool which can rapidly be deployed to practical effect. 

This isn’t to say that some trade support hasn’t been helpful, or to cast a slur on the good intentions of some international actors; it’s to recognise that much more needs to be done in order to avoid a decade of inactionIt would be a travesty to dither while a billion people languish. The best practical ideas often spring from quality theory. The mainstream failed. It’s time to move forward. 

Working paper: Daniel Gay (2021) A critical reflection on international support for least developed countries 

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