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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.

 

——-

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 fifth-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?

_____

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.

 

Pharmaceutical Dreams

May 17, 2018

New working paper: ‘Pharmaceutical Dreams: TRIPS and Drugs Policy in Bangladesh

If Bangladesh leaves the UN least developed country (LDC) category in coming years as expected, the country may among other things lose access to the World Trade Organisation (WTO) waiver which exempts LDCs from obligations related to pharmaceutical patents. If so, this could affect the industrial policy which has driven pharmaceuticals growth until now. This paper outlines the implications of the waiver and its relationship to industrial policy, showing that the waiver has helped support Bangladesh’s rapid pharmaceuticals export growth of recent years. Using an analysis of official documentation, existing studies and UN Comtrade export data from official government sources, cross-referenced with mirror data, the paper shows that Bangladesh’s drugs industry is important not only for domestic health and economic reasons, but as a source of essential medicines for 135 countries, including 27 other LDCs. As well as shedding light on the successful pursuit of sectoral industrial policy in LDCs, the paper finds that the loss of the waiver would indeed jeopardise the pharmaceuticals industry and national health outcomes, as well as drugs importation in other LDCs. Strong intellectual property protection does not promote technological development in developing countries. The main policy implications are that Bangladesh should seek an extension to the WTO waiver; that the government should continue with its somewhat unconventional, homegrown approach to industrial policy in the sector; and that the international community should support the government’s efforts to do so.

Download the paper here.

 

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

March 1, 2018
tags:

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