LDCs Need New Approach to Development Policy, Say Experts

22 December 2010

The world's poorest countries and the international community urgently need to revise their approach to development policy. Or so believe many economic, trade, and development experts looking ahead to a high-profile United Nations summit on least-developed countries (UNLDC IV) in Istanbul next May.

Since 1971, the United Nations has identified LDCs as a category of states which, for reasons of  very low income, poor human development, and high economic vulnerability to natural, trade, and economic shocks, face more structural handicaps than other countries in rising out of poverty.

However, over the past 40 years, despite the increased spotlight on their problems, and considerable economic aid, the number of LDCs has doubled, to 49. Only two have graduated to non-LDC developing country status: Botswana, in 1994, and Cape Verde, in 2007. Most remain exporters of primary In meetings aimed at preparing for the Istanbul summit - one in Dhaka, Bangladesh, organised by the Centre for Policy Dialogue, and another in Geneva, organised by the World Bank -  participants expressed frustration at this lack of progress. Many LDCs remain exporters of raw materials, with little value addition taking place, a diagnosis that has remained largely unchanged over the past thirty years. Even the LDCs  that have expanded trade and attracted foreign investment have struggled to diversify beyond a handful of products. Despite high commodity prices over the past decade,  LDCs are still failing to converge with developing countries, with income gaps widening instead of narrowing. Reversing this trend will require new policies, the experts said.

At the meeting in Geneva, which took place on 13 December, Paul Collier, an Oxford economics professor and author of ‘The Bottom Billion', called for this new development focus to be put on manufacturing, since it has high growth potential and can create jobs. He pointed to Bangladesh as a positive example of this approach. Mustafizur Rahman, executive director of the Dhaka-based Centre for Policy Dialogue, explained how Bangladesh had gained from targeting aid to exporting industries, particularly in the garment sector.

Also in Geneva, it was suggested that  better management of natural resources could support development - in many poor countries, the presence of natural resources is often negatively correlated with development, as the so-called ‘resource curse' leads to conflict, corruption, and bad governance. Participants suggested that databases such as the natural resource charter (www.naturalresourcecharter.org), which provide information on how to best manage the opportunities created by finding of natural resources for development, could potentially help LDCs make long term, durable development gains from reinvestment of resource profits into their economies.

A theme echoed at both meetings was the opportunity presented by the changing dynamics of the global economy and of LDC trade patterns. While LDCs traditionally focused on Northern markets, relying on trade preferences linked to colonial-era ties, developing countries - above all, China - were becoming a more and more important source of capital and destination for exports. Furthermore, since emerging economies will be the fastest growing economies in the near future, LDCs should try to get access into these markets.

Value addition central to structural transformation

But accessing new markets is not the only challenge, as Rehman Sobhan, a prominent Bangladeshi economist and founder of the Centre for Policy Dialogue, said in Dhaka at the late-November meeting. Increasing value addition, and expanding the participation of poor people in structural economic transformation, remain the  ultimate objectives. China, India, and Brazil had been transformed by massive investments in value addition, he said. Competing solely on the basis of cheap labour, Sobhan argued, was "politically and socially unsustainable, and morally questionable."

He suggested that one way to do this would be to give workers ownership rights in processing enterprises; another would be to require foreign resource investors to provide domestic entities with an equity share in their projects. Small rice farmers could get together and cooperatively set up a mill; cacao farmers could receive equity shares in cocoa processing industries, some of which are now relocating from the North to the poor countries where the cocoa is produced.

Asked whether WTO rules, which restrain governments from using a variety of subsidies and performance requirements that countries traditionally used to stimulate domestic industrial activity, affected attempts to stimulate value addition, Sobhan said "they're not helpful."

"The problem with the WTO strictures," he told Bridges, "is that they have frustrated the design of a purposeful industrial policy, which was the way in which the East Asian countries, including India and China really transformed themselves." In particular, they limited "the extent to which the state can intervene and really sort of support, and guide the market in a particular direction."

Sobhan suggested that waivers permitting LDC governments to provide new industries with temporary tariff protection, capital subsidies, and intermediate input subsidies could enable the development of value-added industries.

He noted that tariff regimes remained an obstacle to value-addition in LDCs - garments face much higher tariffs in the US market than does raw cotton.

In Geneva, a representative from the Coca Cola Company told the World Bank meeting that LDCs should open their markets gradually, at a pace appropriate for the country in question, even if protectionism is not the best solution for development.  Since market opening entails many difficulties, the representative said, what is really needed is a joint discussion between the private and the public sector on how to lower tariffs - supplemented by action by international institutions to identify priorities for LDCs.

Promoting coordination between governments and the private sector was also pointed to byWTO Director-General Pascal Lamy, who suggested that such partnerships could be one potential focus for the Istanbul summit on LDCs. Other issues he raised were youth employment and the simplification of rules of origin, which often act as a barrier to LDC exports.

Aid, not just trade, is also likely to feature prominently in Istanbul. At the last UN LDC summit, in Brussels in 2001, government pledged to provide  0.15-0.2 percent of national income in aid to LDCs. Despite significant increases, however, development aid flows to LDCs remain at 0.09 percent of total donor country income, well below the target.

ICTSD reporting.

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