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Domestic productive capacities could make international trade work for poverty reduction

26 May 2004

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Achieving poverty reduction goals in the least developed countries (LDCs) depends on the development of domestic productive capacities in a manner in which the working-age population becomes more and more fully and productively employed, says UNCTAD´s Least Developed Countries Report 2004 , released today. But doing this will require an end to development pessimism.

Development pessimism is founded on one of the following views: that past development policies and international development assistance have failed; that if national development strategies did work they cannot work once a country has undertaken trade liberalization; that the globalization of production systems renders national development strategy impossible; or that WTO rules leave no room for promoting development. Within the context of the LDCs, weak state capabilities are added as a further ingredient, reinforcing the view that development promotion simply cannot be done.

Development pessimism has led to the view that the best way to reduce poverty is through ever-closer integration with the world via trade liberalization. International development assistance to the LDCs has also increasingly shifted away from production sectors and economic infrastructure to supporting basic human needs. In the early 1980s, 45% of total bilateral aid commitments by developed countries to LDCs went to the development of productive sectors and economic infrastructure. But by 2000-2002, this had fallen to 23%. In real terms, external assistance to agriculture in the LDCs in the 1990s was half the level it was in the 1980s. Moreover, aid commitments for trade-related infrastructure (defined as transport, storage and communications) declined by 43% in real per capita terms between 1990 and 2001.

The Report argues that it is an illusion to think that mass poverty found in most of the LDCs can be reduced through global integration and trade expansion alone. Trade already constitutes a larger share of the GDP in the LDCs than it does in high-income OECD countries, and many LDCs have undertaken extensive trade liberalization in the 1990s that has left them with open trade regimes (see UNCTAD/PRESS/PR/2004/010). Investment and technological progress are the engines of sustained economic growth through which substantial poverty reduction can be achieved in the LDCs. International trade is the fuel for the engine. If the fuel dries up, the engine will stop. But if the engine has missing parts, it will not run, no matter how much fuel it gets.

The policy challenge facing most LDCs and their development partners now is how to promote sustained development and poverty reduction in a newly liberalized, small, open, subsistence-level national economy situated in a very asymmetrically liberalized international economy. Although post-liberal development promotion presents daunting challenges for most of the LDCs, there should be no grounds for development pessimism. One of the most important achievements of the second half of the twentieth century was the lifting of millions of people out of poverty through the promotion of development. Moreover, these achievements are now being continued in China and India. The question is how to make this happen in other developing countries as well, particularly the LDCs.

The need for policy coherence

The Report advocates a development approach to make international trade work for poverty reduction with three pillars:

  • The formulation and implementation of post-liberal development strategies within the LDCs which include trade as a central component;
  • Improvements in the international trade regime, including issues which go beyond the scope of the WTO, to reduce international constraints on development in the LDCs; and
  • Increased international financial and technical assistance for developing production and trade capacities of the LDCs.

Policy coherence, in which these three pillars mutually support each other, is a sine qua non for success. As well as ways to make trade a more effective mechanism of poverty reduction, coherence between national development strategies and international processes will be the core focus of the eleventh session of the United Nations Conference on Trade and Development (UNCTAD XI), to be held in São Paulo from 13 to 18 June.

The Report argues that if the three-pillar approach is adequately resourced and wholeheartedly implemented at both national and international levels, it is possible to envisage a process of sustained economic growth and expansion of productive employment opportunities in the LDCs. As was advocated in the "Spirit of Monterrey" discussion at the Heads of State retreat during the 2002 International Conference on Financing for Development, the aim should be to double the size of the economies of the poorest countries. The alternative, the Report warns, is a world in which: millions of people will continue to live below the international $1-a-day poverty line and below internationally-agreed minimum standards of human development; civil conflict, which is prevalent in low-income countries with economic regress or stagnation, will continue to disrupt lives and livelihoods, threatening international as well as national security; and international assistance will increasingly be absorbed in repeated rounds of debt relief, recurrent humanitarian emergencies and global welfare transfers to help achieve minimum social standards of human dignity.

Pillar 1: Post-liberal development strategies

The Report´s three-pillar proposal is not based on turning the clock back. It takes as its starting point the fact that many LDCs have open trade regimes. The first important policy issue that requires innovative thinking is the choice of post-liberal development strategy.

The choice of development strategy is a crucial determinant of poverty reduction because it influences such factors as the absorption of labour in the modern sector, the extent of the rural-urban income gap and the degree of income inequality within sectors. At the present moment, Poverty Reduction Strategy Papers (PRSPs) - which cover priority policy actions over a three-year period - are not well embedded within long-term development strategies. In such cases the problem is not simply to mainstream trade into a poverty reduction strategy, but to mainstream both trade and development within the poverty reduction strategy.

The implicit strategy of the PRSPs prepared by many LDCs seems to be "export-led growth with a human face". This hybrid strategy combines export-led growth, based on trade liberalization and "behind-the-border" measures to reduce internal constraints to exports (such as high transaction costs associated with weak trade facilitation and port infrastructure), with the provision of social safety nets and investment in basic education and health, mainly funded by donors. But in an LDC context, export-led growth tends to be associated with an exclusionary growth trajectory with benefits concentrated in an enclave (see UNCTAD/PRESS/PR/010). These exclusionary tendencies are always running against the grain of the "human face" part of the strategy, and if international development assistance ignores the need both to develop productive capacities and to meet basic human needs, the great danger of this strategy is that countries will end with a deepening debt problem.

The UNCTAD report identifies various alternative post-liberal development strategies, notably:

  • A balanced growth strategy based on agricultural productivity growth and export-accelerated industrialization;
  • An agricultural-development-led industrialization (ADLI) strategy - which includes infrastructure investment and technological progress in agriculture, together with forward linkages into processing activities - with an export component;
  • Development/diversification through management of mineral revenues;
  • Development of natural resource-based production clusters; and
  • An employment-led development strategy that includes the promotion of competitive tradeables, employment-intensive non-tradeables, and labour-saving technological change in subsistence-oriented activities.

Export growth is an important component of all these strategies. But they seek to achieve export growth that is adequate for national development objectives rather than expecting exports to be the major source of growth. They are thus based on greater balance between domestic demand and export expansion as components of economic growth than export-led growth strategies.

The existence of an open trade regime does not imply that there should be laissez-faire within the domestic economy as well. On the contrary, addressing underdevelopment requires domestic policies which correct the domestic distortions, market failures and coordination failures that are manifold in very poor countries. Public policies should use market-supporting mechanisms aimed at market creation, market development and market acceleration. The provision of public goods that address the current gaps and shortages in the productive sectors of LDCs is vital. New investment should also be directed towards increasing the absorption capacity of imported technologies and new techniques of production throughout the LDC economies. A major effort must be made to develop a domestic enterprise sector that is oriented to production rather than simply to exchange. Particular emphasis must be placed on small and medium-sized enterprises, and new market-oriented approaches to agricultural development need to be devised to fill the vacuum left by the dismantling of the old commodity marketing boards.

Pillar 2: An international trade regime that supports development

Without improvements in the international trade regime to reduce international constraints on development in the LDCs, the positive effects of better national development strategies will not be realized. This requires that attention be paid not simply to WTO rules but also to multilateral norms, rules and practices that go beyond WTO issues. Improvements to the international trade regime should encompass (i) measures at the global level that are generally applicable to all developing countries, (ii) special international support measures targeted at the LDCs and (iii) enhanced South-South cooperation.

Generally applicable measures: The close link between commodity dependence and the incidence of extreme poverty, which was identified in The Least Developed Countries Report 2002, remains the major sin of omission in the current international approach to poverty reduction. Renewed attention needs to be given to this issue, with three main priorities:

  • Rapid phasing-out of agricultural support measures in OECD countries that adversely affect LDCs. The Report identifies beans, beef, cotton, maize, potatoes, rice, sorghum, sugar, veal and wheat as some of the key products which receive support in the developed countries but which are important to the least developed countries.
  • Implementation of initiatives to ensure greater international transparency in the revenues derived from oil, gas and mineral exploitation. The need for this reflects the fact that in 1999-2001, extractive industries constituted 38% of LDC exports, and during the last two decades the incidence of poverty has increased most in mineral-exporting LDCs.
  • Initiatives to reduce vulnerability to commodity price shocks, including making aid more countercyclical and linking debt service payments to world commodity prices. These shocks are important not just because of their direct poverty impact but also because they lower economic growth and investment and have contributed to external indebtedness in the LDCs.

Special international support measures for LDCs: Special and differential treatment that is provided in the multilateral trading system should be better targeted and upgraded from best-endeavour provisions to binding regulations. Renewed efforts also need to be made to simplify the WTO accession procedures for LDCs and ensure that acceding LDCs do not have to forgo rights enjoyed by current LDC members of the WTO. The Report also argues that market access preferences can still be an important instrument to help the least developed countries overcome their marginalization in world trade. However, this requires further improvements to existing initiatives, particularly by extending their product coverage, simplifying rules of origin and making them more stable and predictable.

As multilateral trade liberalization deepens, market access preferences will gradually erode and the major market-based approach to supporting the LDCs will be undermined. As this happens it is important to consider complementary international support measures for LDCs. One possible course of action is to introduce what UNCTAD calls "supply-side preferences", which use fiscal and financial incentives, including risk mitigation, to promote foreign direct investment in, and technology transfer to, the LDCs, and which use official development assistance to reduce private investment costs and risks in LDCs.

Enhanced South-South cooperation in the field of trade and investment: Between 1989 and 2002, the share of total LDC imports coming from other developing countries rose from 32% to 56%. But over the same period, the share of total LDC exports going to other developing countries increased less - from 15% to 34%. The development of South-South trade has been impressive, the Report says. However, the LDCs´ emerging trade deficit with other developing countries has almost tripled, from $5.5 billion in 1990 to $15.6 billion in 2002. This needs to be addressed.

Pillar 3: More and better international financial and technical assistance for developing production and trade capacities

There is a need for massive investment in enhancing production and trade capacities in the LDCs and improving their competitiveness. But these countries have few domestic surplus financial resources to achieve this. Increased and better financial and technical assistance for these purposes is thus vital. The recently established WTO/OECD database on aid for trade-related technical assistance and capacity-building indicates that in 2002, aid commitments to support trade policy formulation and trade development in the LDCs were only 0.5% and 1.5%, respectively, of total aid commitments to these countries. This is much too low, the Report says.

The upturn in international assistance to LDCs following the Monterrey meeting needs to be reinforced, and as international assistance increases there should also be a shift in the composition of aid back towards building production and trade capabilities. There is also a strong case for facilitating the wider use of Highly Indebted Poor Country (HIPC) assistance for the development of productive sectors and trade and for ensuring that further debt relief, which is certainly needed, is provided in a way that is consistent with the development of productive and trade capacities.

There are three particular problems for the development partners of the LDCs that need to be addressed to improve the effectiveness of international assistance to develop production and trade capacities. Firstly, the commercial interests of developed countries as trading powers may be in conflict with their development objectives as donors. It is important that this does not bias assistance for trade development. The untying of aid to LDCs, on which important progress is being made, provides a major opportunity for a sea change in this regard. Secondly, there is an urgent need to strengthen donors´ own capacities for trade-related assistance. Mainstreaming trade in aid programmes is as important and urgent as mainstreaming trade in national poverty reduction strategies. Thirdly, the LDCs´ development partners need to elaborate innovative approaches to private-sector development in the LDCs as part of a broad-based approach to trade capacity-building. Post-liberal aid policies need to complement post-liberal development strategies.

For more information, please contact:
Press Office
T: +41 22 917 5828
E: press@unctad.org
Web: www.unctad.org/press
Charles Gore
T: +41 22 917 5944
E: charles.gore@unctad.org


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