In recent years, many least developed countries (LDCs) have achieved higher rates of economic growth than in the past and even higher growth of exports and of FDI inflows. But this is not translating effectively into poverty reduction and improved human well-being. Moreover, the sustainability of growth is fragile as it is highly dependent on trends in commodity prices, aid inflows, trade preferences and weather conditions.
UNCTAD´s Least Developed Countries Report 2006 argues that the development of domestic productive capacities and concomitant expansion of productive employment opportunities is the key to sustained economic growth and poverty reduction in the least developed countries (LDCs).
Defining productive capacities as "the productive resources, entrepreneurial capabilities and production linkages which together determine the capacity of a country to produce goods and services and enable it to grow and develop", the Report shows that the core processes through which productive capacities develop - capital accumulation, technological progress and structural change - have been very weak in most LDCs. As a result, labour productivity is low and there is widespread underemployment. This is the basic cause of persistent mass poverty in the LDCs.
For the LDCs as a group, the decade 2000-2010 is going to be the first decade in which the growth of the economically active population outside agriculture is predicted to be greater than the growth of the economically active population within agriculture. This transition will affect more than half the LDCs during the decade and most of the others in the decade 2010-2020. Substantial poverty reduction in the LDCs will thus require not simply increased agricultural productivity, but also the development of competitive businesses in manufacturing and services, as well as increased dynamic inter-sectoral linkages.
The Report calls for a paradigm shift from a consumption- and exchange-oriented approach to poverty reduction towards a production- and employment-oriented approach. It analyzes three basic constraints on the development of productive capacities in the LDCs -- poor physical infrastructure; weaknesses of the domestic private sector and supporting financial systems and knowledge systems; and insufficient demand and thus underutilization of domestic resources and capabilities as well as weak incentives to invest and innovate -- and it identifies some key policy priorities to overcome these constraints, including the mobilization of underutilized domestic potentials and a re-balancing of the sectoral allocation of aid.