unctad.org | Istanbul Trade and Development Symposium on LDCs - Panel 4: Tackling structural vulnerabilities and enhancing the resilience of LDCs to crisis
Statement by Mr. Supachai Panitchpakdi, Secretary-General of UNCTAD
Istanbul Trade and Development Symposium on LDCs - Panel 4: Tackling structural vulnerabilities and enhancing the resilience of LDCs to crisis
Istanbul, Turkey

[SPEAKING POINTS - AS PREPARED FOR DELIVERY]

Impact of financial and economic crisis

In 2009, LDCs experienced a sharp growth slowdown and GDP per capita declined in 19 of them. Relative to other developing countries and the developed countries, the overall macroeconomic performance of the LDCs was fairly resilient. But this was in fact more a reflection of the continuing marginalization of LDCs in the global financial system and their relative insulation from the direct effects of the financial meltdown. They were also helped by the strong recovery of commodity prices in 2009 and major inflows of official finance from international financial institutions.

The slowdown in LDCs was the most severe in oil- and mineral-exporting LDCs. Available forecasts suggest that the recovery will bring slower growth to LDCs than to other developing countries. The value of merchandise exports of the LDCs contracted by 26 per cent in 2009, far above the world average (-14 per cent). Conversely, FDI inflows to LDCs, fell by only 13 per cent (on average, 26 per cent in other developing countries). This is explained by the fact that most FDI is found in the extractive industries whose investment cycle is less linked to business cycle fluctuations. Remittances continued to grow by 8%, but relative to previous years this represents a slowdown.

The food and fuel price hikes of 2008, and which have recurred this year, reveal the extreme vulnerability of the LDCs to external shocks which are not of their making. Moreover, they have had major adverse social consequences, setting back progress towards MDG achievement. With the exception of primary education enrolment rates, very few LDCs are on-track to meet the MDGs. This scenario has deteriorated further with the global crisis. The number of people in the LDCs living in extreme poverty is estimated to be 7.3 million more than it would have been without the crisis in 2009.

Weak economic resilience pre-crisis

For the last 30 years, LDCs have laboured under an externally-driven model of development that has failed to meet their basic needs. In most LDCs, liberalisation and financialisation have created incentives for labour to move in the wrong direction, from more to less productive activities, especially to the informal sector and petty trading. This model of growth has not dramatically changed the share of population living below US$1.25 a day, which has remained around 50% since the 1990s. Looking at the further impacts of growth on poverty, 75% of LDC populations still live below US$2 a day.

Whilst developing countries have increased their participation in world output from 21% in 1996 to 28% in 2009, the LDC share of global output remains below one per cent - roughly unchanged since the 1970s. The share of the LDCs in the world population, nonetheless, has gone from 8% in 1970 to 12% in 2008. Thus, we now have a situation where 1/8 of the world population produces less than 1/100 of the world output.

The export concentration index of the LDCs more than doubled in 13 years, increasing from 0.23 in 1995 to 0.33 in 2000 and 0.54 in 2008. On average, three main export products of LDCs account for three quarters of their total exports, while in eight countries this proportion is higher than 95 per cent. In addition, most of the exports are commodities and as such subject to strong volatility in international prices. From the aforementioned figures, one can safely conclude that LDC economies are now even more vulnerable to external shocks, more dependent on commodities, and less diversified than before.

One of the fundamental challenges the LDCs face is that of creating sufficient and decent employment opportunities for all. With the process of demographic transition in full swing, the LDCs have young and growing populations that need productive and decent employment (on average, about 70% of the population is below 30 years of age). For example, the number of new entrants to the labour force in Mali is estimated to have been over 170,000 in 2005; this will increase annually until reaching nearly 450,000 per annum in 2045. [The same figures for Madagascar are over 285,000 in 2005 and over 470,000 in 2035]. Addressing this employment time bomb is critical both for economic growth and poverty reduction in the LDCs, if not social and political stability as well. Without the development of productive capacities there can be no success and the demographic dividend will be turned into complex humanitarian emergencies and a source of new economic and social problems.

The competitiveness of the LDCs in most goods and services is low. Most commodities exports and other LDC exports are characterized by very low value-added and by a labour-intensive production process. Thus LDCs competitive advantage tends to be very cheap labour. The productivity gap between workers in OECD countries and the LDCs is on average 22 to 1 in favour of the former. Without a much greater use of technology and higher levels of investment the LDCs will be unable to bridge that gap and to compete successfully on the world market with countries that possess much higher productivity.

Physical and environmental weaknesses

Most LDCs are located in tropical and sub-tropical geographic areas that are subject to more severe and more frequent natural disasters than is the case elsewhere. However, many LDCs also suffer from problems of remoteness and hence poor connectivity, in terms of trade and communications. This increases economic costs, and also has an impact on other factors, such as economic opportunities and regional integration.

Economic and social vulnerabilities (previous section) are compounded by frequent natural disasters and, at the same time, magnify the effect of these disasters. This is perhaps best illustrated by the recent example of two developing countries that were both hit by an earthquake. In the first, Haiti, the magnitude was 7.3 on the Richter scale: around 1.5 million people were affected, including over 230 000 dead. The second, in Chile, was hit by an earthquake of 8.8 magnitude on the Richter scale: 2 million people were affected, but only around 500 died. The difference between the impact of a natural disaster on an LDC and on a middle income country like Chile could not be greater.

Increasing LDC resilience to shocks

To address these persistent vulnerabilities which stem from structural weaknesses and the LDC´s exposure to external shocks, UNCTAD´s Least Developed Countries Report (LDCR) has, for over a decade, highlighted the importance of productive upgrading, and the limitations of focusing primarily on production for export. In the LDCR 2010, UNCTAD proposed a new international development architecture (NIDA) to provide a supportive environment for LDC growth, and drastically improve their chances for graduation.

NIDA focuses on the pillars of international support that are the most pressing for LDCs: trade, commodities, finance, transfer of technology, and climate change, which, for some LDCs, poses an existential threat. NIDA would be constituted through substantive reforms of the global economic regimes which directly affect development and poverty reduction in LDCs, and the design of a new generation of international support mechanisms to address the specific structural constraints and vulnerabilities of the LDCs.

To take one example, trade, the experience of LDCs shows that the effect of trade on most of these countries has locked them into an unfavourable pattern of specialization. The type of their integration with the world economy has actually increased some of their weaknesses, even while GDP was increasing. More generally, the economic growth and growth of trade during the last decade have not led to a sufficient development of productive capacities or improvements to the well-being of the majority of the population in LDCs.

From UNCTAD´s perspective, rapid and comprehensive trade liberalization in the LDCs has not had the desired effect, given their very low level of development and their large productivity gap with other countries. LDCs need to develop what could be called a "strategic trade policy" that would be compatible with the new post-crisis global macroeconomic environment and would take advantage of the new opportunities associated with South-South trade.

This new global environment is characterized by persistent difficulties in advanced economies, resulting in their underperformance in the medium term. If they want their economies to grow, the LDCs will have to rely more on demand from other emerging economies and on domestic or regional demand. The other characteristic of this new global environment is the acceptance of a more prominent role for state intervention than existed before. As the advanced economies intervene to help specific industries and sectors like banking and the auto industry, and as many developing economies intervene to avoid exchange-rate appreciation, the LDCs should not hesitate to use all the policies, instruments and mechanisms at the government´s disposal to foster their economic and social development.

Increasing South-South flows of trade, as well as FDI, official finance and knowledge suggest that South-South cooperation, both within regions and between LDCs and larger fast-growing developing countries, could play an important role in a NIDA for LDCs. Such forms of cooperation can release new sources of technology and finance, and also create new market opportunities for LDC exports.

However, there is nothing automatic about the translation of these ties into widely shared developmental gains in the LDCs. In looking to diversify their export markets, LDCs must ensure that they also address their productive capacities and diversification away from commodities. Otherwise there is a risk that they will only replace one set of asymmetric terms of trade to Northern markets, with a new set of asymmetric trade terms with large markets in the South. Policy matters, especially policies to help manage a cumulative transformation in the structure of economic activity towards higher productivity sectors and sufficient well-paid employment opportunities.

The conventional model of finance-led globalisation has failed to deliver these employment opportunities to LDCs and in many countries - not just LDCs - has at best created jobless growth. Moreover, such a model of globalisation was inherently unstable and unsustainable, putting at risk what progress the LDCs have made in the past decade, and increasing their vulnerability to crises. A new international development architecture which addresses some of these vulnerabilities, in the fields of trade, finance, technology, commodities and climate change could go some way towards enhancing LDC resilience to external shocks and crisis.



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