Building productive capacities can avert a lost decade in the poorest countries

25 February 2021

© World Bank

By Perks Master Ligoya, Ambassador of Malawi, and Paul Akiwumi, Director for Africa and Least Developed Countries, UNCTAD

The COVID-19 crisis shook the very foundations of the international system, triggering an abrupt and severe global recession, which threatens to heighten economic contagion. While no country is spared, the coronavirus has hit the world’s poorest nations disproportionately.

The 46 least developed countries (LDCs) were already  highly exposed due to weak healthcare services and their lower levels of socio-economic resilience. Despite relatively strong growth in LDCs prior to the outbreak, the effects of the crisis will reverse years of painstaking economic and social progress. The potential long-term impacts, including secondary and tertiary shocks, and spillover effects on production, job creation, household income, domestic finances and investment mean that LDCs will continue to rely on external financing to sustain their much-needed development.

However, the outlook for official development assistance (ODA) is bleak as donor countries focus on domestic economic stresses. High levels of informality, limited IT access and skills shortages, and fragile industrial sectors coupled with weak integration into global value chains also hamper the uptake of new technologies in LDCs.

Swift policy action a must

LDCs face multiple risks, especially mounting debt. Recently, Zambia became the first African country in the wake of COVID-19 to default on its external obligations. Without swift action, fiscal discipline and international support, several other LDCs and developing countries may fall victim to a wave of COVID-induced financial challenges. Already, 14 LDCs are at high risk of debt distress and five more are in that critical situation, according to the International Monetary Fund and the World Bank.

Over the next decade, the LDCs need to take comprehensive measures, with the support of development partners, to build back better and become resilient against future shocks. Strong productive capacities, including those related to the development of science and technology, are at the heart of what is needed for long-run macroeconomic stability, debt management and systemic resilience.

Rethinking the development framework, embracing technology

Converting flaws into drivers of economic transformation will require a deep revamp of the development process. LDCs will need an overhaul of both domestic policy approaches and comprehensive international support.  A sound mix of partnership, policy and productive capacities could be powerful fuel for harnessing digital technologies for inclusive growth and development.

An example of where this is working comes from the EU-Africa e-Infrastructure initiative, UBORA, which exploits open source knowledge networks and data, paired with expert partnerships and mentoring. It brings together European and African universities, research labs, business incubators and government policymakers. This could serve as a model for the co-design of healthcare solutions as a starting point for LDCs.

UNCTAD research shows these kinds of innovative approaches are only possible through the expansion, development, and full utilization of productive capacities – the engine of real economic development.

But how do we do this?

Utilizing tools to assess productive capacities

Measurement, as a start, can help understand the scale of a challenge. Enter UNCTAD’s 2020 Least Developed Countries Report which uses its new Productive Capacities Index (PCI) to measure and diagnose productive capacity performance. Analysis finds that LDCs have 40% less productive capacities than the group of other developing countries, and 60% less than those of developed countries.

As a group, LDCs portrayed major deficiencies in utilizing the productive resources for which they have comparative advantages, for example, natural resources and population. The LDCs scored an average of only 17 on the 0–100 PCI scale from 2011-2018, against 28 for other developing countries and 40 for developed countries.

UNCTAD’s assessment confirms that countries that have developed a denser, more diversified fabric of productive capacities have shown greater resilience to different shocks. For example, Bangladesh, one of the largest LDCs, has displayed a steady improvement. It has systematically outperformed the median score for all LDCs, driven by faster improvements in energy, human capital and structural change.

The index also highlights important supply side bottlenecks, and infrastructure and ICT gaps that affect the economy’s competitiveness, raising its vulnerability to natural disasters. These insights show where Bangladesh needs to focus policy attention. And other countries can do the same with the tool.

Using the PCI should help LDCs embrace a knowledge-based, productive capacities-centred development outlook, adopting the technologies and skills needed to deepen participation in global production systems. This includes strengthening value chain linkages and producing higher value-added goods and services.

Towards a new decade of action for LDCs

Achieving the UN’s Sustainable Development Goals (SDGs) and structural transformation in the world’s poorest economies requires multilateralism that is fit for purpose. As the world embraces the hope of a vaccine-induced return to a new normal, leaders in LDCs and the international community must take a hard look at where the most vulnerable countries fit into this scenario.

The Fifth UN Conference on the Least Developed Countries scheduled for January 2022, is a critical chance to get things right for LDCs. It should not be missed. The international community should use the runway to develop a comprehensive and ambitious programme of action for LDCs, comprising vigorous policy options to tackle vulnerabilities, enhance their abilities to achieve the SDGs and build resilience against future crises.

This entails revamping support, addressing long-standing flaws in the prevailing trade and financial architecture and putting in place forward-looking science technology and innovation frameworks to upgrade skills in line with market needs.  An urgent U-turn in the trend of decreasing ODA to LDCs and a concomitant increase in the share of grants and concessionary lending should accompany preparations.

Indeed, a global partnership for LDCs goes beyond “leaving no one behind”. It is an investment in systemic resilience. For LDCs to truly advance towards their development goals and recover sustainably, their economic engines need to be kickstarted by concerted internal efforts and international programmes aimed squarely at nurturing productive capacities.

The article was originally published on OECD Development Matters.