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Dependence on commodities has grown, Least Developed Countries Report 2008 warns; shift is needed towards broader range of more sophisticated products
Geneva, 17 July 2008 - The world´s 50 poorest nations saw the values of their exports climb by a collective 80% between 2004-2006 and recorded their highest rates of economic growth in 30 years, even surpassing the 7% target set by their governments and their development partners. But their increased dependence on selling a few unsophisticated products -- primarily petroleum, low-technology manufactures , minerals, ores, metals, and farm goods -- leaves them vulnerable to a reversal, a new UNCTAD report warns.
The Least Developed Countries Report 2008(1) cautions that a global economic slowdown, if it continues, may lessen demand for the primary commodities the so-called LDCs have to offer and lead to a repeat of the boom-and-bust cycles that have long tormented LDC economies.
These countries have a strong need to diversify what they produce and sell on world markets, the report urges. They must increase manufacturing, improve their use of science and technology, find greater sources of domestic investment (rather than depending heavily on official foreign aid), and create jobs for increasingly urbanized populations who can´t depend for survival on farming.
The vulnerability of the world´s poorest countries is apparent in social unrest related to the food crisis that has already occurred in eight LDCs, the report warns. It notes that a number of LDCs are dependent on imported food.
Strong growth during the worldwide export boom beginning shortly after the turn of the Millennium did not lead to a diversification or structural changes in LDC economies, the study says. In fact, from 2004-2006, the portion of primary commodities in LDC exports rose from 59% to 77%. LDCs´ share of world manufacturing exports stagnated at a meagre 0.2% of the global total. Current patterns of export specialization may increase LDCs´ economic vulnerability and diminish their resilience to external shocks.
How LDCs integrate into the global economy matters, the report argues.
Aggregate LDC performance also masks major differences among countries, along with several significant trends:
- During 2005-2006, the real gross domestic product (GDP) growth rate of 11 LDCs was below 3% ; 20 LDCs grew at a rate between 3-6% annually; and 19 LDCs exceeded 6%;
- Export growth has been particularly strong in oil and mineral exporting LDCs; they account for 75% of LDC exports overall;
- Regional differences in exports have widened between African, Asian and island LDCs; there are now strikingly different patterns of exports and growth;
- LDCS show increasing dependence on external sources of finance, especially official development assistance (ODA), rather than domestic resources (see press release UNCTAD/PRESS/PR/2008/014);
- Increased foreign direct investment (FDI) inflows are now associated with rapidly increasing profit remittances; expectations that private capital inflows and FDI will replace public sources of finance remain largely unfulfilled; and
- High growth is not occurring though a process of diversification and structural change in most LDCs; the result is that they are increasingly vulnerable to future trade shocks.
Without the development of productive capacities and associated employment, climbing LDC exports and increased foreign investment do not lead to inclusive development no do they provide the basis for economic transformation, the report says. Unless LDCs and their development partners renew efforts to broaden the domestic productive bases of LDCs and address their poverty-related structural weaknesses, their marginalization is likely to deepen. LDCs can export their way out of poverty only if they export the right kinds of products, the report argues. Despite their recent record export performance, LDCs remain marginalized in the global economy -- in 2006, the overall value of their output and export share remained below 1% of the global value of output (0. 5%) and as a share of world merchandise exports (0.8%).
Persistent trade deficits and unrelenting balance-of-payments difficulties remain the norm. The merchandise trade deficit of oil-importing LDCs increased from US$25 billion in 2005 to $31 billion in 2006. The majority of LDCs (42 out of 50) experienced trade deficits in 2005-2006, up from 37 of 50 for the period 2003-2004.
The enhanced export performance of oil-exporting LDCs (Angola, Equatorial Guinea, Chad, Sudan, Timor-Leste, and Yemen) and mineral exporters (Zambia, the Democratic Republic of the Congo, Mozambique, Guinea, Mali, and Mauritania) accounted for 76% of the total increase in LDCs´ merchandise exports for 2004-2006.
Most LDCs remain agricultural economies with limited capacity to mobilize domestic resources or provide people with adequate means for survival; more and more people are seeking work outside of agriculture, but employment opportunities are not being generated fast enough to meet the growing demand, the report notes. The food crisis in many LDCs is in part a result of this lopsided development pattern.
The report points out that the LDCs have not reduced their heavy dependence on external sources of finance, particularly official development assistance. And they continue to have insufficient domestically generated resources. Reliance on external finance has declined for a number of LDCs (from 11% to 8% as measured by the ratio of aggregate net flows to GDP), but still remains much higher than in other developing countries (3% in 2006), especially in the case of African and island LDCs (11%).
The report shows that the aid inflows which provide LDCs´ major source of external finance are mainly directed towards improving social services and social infrastructure, including governance mechanisms, rather towards increasing productive capacities and promoting structural change and economic diversification.
Workers´ remittances are also growing and - while they play a role in directly alleviating poverty for those who receive them - their contribution to development by financing investment remains to be proven. They should not be seen as a substitute for long-term capital inflows, the report warns.
Overall investment patterns in LDCs remain inadequate to meet either the targets set at the Third United Nations Conference on the Least Developed Countries held in Brussels in 2001 or the United Nations Millennium Development Goals, the report says, although some improvement in investment levels has been registered, especially in oil-exporting LDCs.
The big policy illusion of the past decades was that investment in productive sectors would be taken care of by the international private sector through increased access to international capital markets or FDI inflows. But these inflows have concentrated on a few LDCs and have been weakly linked with the rest of their economies, the report says. Most FDI remains concentrated on natural resource extraction, particularly of oil and minerals.
To build economic resilience, the LDC economies need to improve agricultural productivity and diversify their economies to create non-agricultural employment opportunities. As argued in earlier Least Developed Countries Reports, this requires a new development model focused on building productive capacities and on shifting from commodity-price-led growth to "catch-up" growth.
LDC debt problems also continue, the report notes, especially for the 34 LDCs that have not been granted debt relief under the Enhanced Highly Indebted Poor Countries Initiative or the Multilateral Debt Relief Initiative of 2006. The 16 LDCs that received irrevocable debt relief under these initiatives, by contrast, performed well. Eight out of the 16 LDCs granted debt relief attained growth levels of over 6 % for 2005-2006 (Ethiopia, Malawi, Mauritania, Mozambique, Niger, Sierra Leone, Uganda, and Zambia), and the other eight achieved growth rates of 3-6 %.
The global economic slowdown implies a further decline in demand that is likely to exert adverse impact on growth prospects in LDCs, largely underpinned by increasing prices for oil, minerals, and primary commodities in Africa and increased demand for low-skilled, labour-intensive manufactures in Asian LDCs, the report says. In the face of this global slowdown, most LDCs will confront major challenges in the period ahead. Meeting these challenges will require renewed efforts by the LDCs and their development partners to improve the productive bases of LDC economies and address their structural weaknesses.
Recent poverty trends and progress towards meeting the Millennium Development Goals in LDCs are examined in press release UNCTAD/PRESS/PR/2008/013.