Escaping commodity trap critical for landlocked developing countries

29 November 2019

Promoting structural transformation and productive capacities, including economic diversification, can help countries overcome disadvantages.

Landlocked Bolivia has made impressive economic gains in recent years.

Its gross domestic product (GDP) grew at an average annual rate of 4.9% from 2004 to 2014, one of the best economic performances in South America.

Bolivia also cut extreme poverty from 35% to just 18% between 2006 and 2015. Boasting a positive external balance, reduced public debt and efficient taxation, it has achieved significant progress in human and social development.

However, the Bolivian economy remains highly commodity dependent. Commodities accounted for 95% of its merchandise exports in 2017, with natural gas accounting for 33% of the exports.

As a result, the recent fall in commodity prices has slowed the country’s economic growth from a peak of 6.8% in 2013 to about 4.0% in 2019. 

This vulnerability to fluctuations in commodity prices is replicated in another landlocked country, Botswana, which is heavily dependent on the mineral sector.

On average, the sector has contributed to more than 22% of Botswana’s total GDP in recent decades, diamonds being the leading mineral.

In recent years, Botswana produced 28% of global diamonds in value terms and sales amounted to US$3.9 billion, according to the latest data.

Although it has used diamond earnings to improve the welfare of its citizens, Botswana’s heavy dependence on the mineral sector has left it highly vulnerable to price shocks.

Bolivia and Botswana exemplify one of the perils facing many landlocked developing countries (LLDCs) – dependence on commodities, said Mussie Delelegn, chief of UNCTAD’s landlocked developing countries' section.

Special challenges

Across the world, 32 countries are landlocked, with a population of about 440 million.

“These countries face special trade and development challenges, arising from their lack of territorial access to the sea and geographical remoteness from international markets,” Mr. Delelegn said.

Exports and imports of LLDCs are required to transit through at least one neighbouring state and often have to change the mode of transport frequently.

This substantially increases the cost of trade for LLDCs and is a key factor in preventing their effective integration into the global trading system.

The geographical challenges of LLDCs are often compounded by weak transit-transport infrastructure, inefficient customs operations, and over-dependence on exports of primary commodities.

Programme of action

In recognition of the complex challenges facing LLDCs and their special development needs, the international community adopted the Vienna Programme of Action (VPoA) for these countries for the decade 2014-2024.

The programme seeks to help the LLDCs achieve sustainable and inclusive growth and eradicate poverty.

A comprehensive high-level midterm review on the implementation of the programme is scheduled for 5 and 6 December in New York. It will analyse the status of implementation of the programme.

The review meeting will be a forum to share best practices and lessons learned. It will also identify remaining obstacles and actions needed to accelerate the implementation of the programme.

UNCTAD will organize an event on impact investing and innovative resource mobilization to foster productive capacities and structural economic transformation in LLDCs on 5 December.

It will co-organize another event on how trade facilitation and transit systems can assist LLDCs reduce trade costs by more than 15% and create win-win opportunities with their transit partner countries on 6 December.

Progress falls short

Five years into the VPoA’s implementation, UNCTAD’s assessments show that progress has fallen far short of what is needed to meet the programme’s goals.

In some areas, LLDCs have regressed. Average GDP growth fell sharply from 5.2% in 2014 to 3.1% in 2016. While growth recovered to 4.4% in 2018, it remains below the average of 6% achieved in the decade prior to the VPoA.

LLDCs continue to be heavily commodity-dependent, and their average share of manufacturing in total value added has decreased.

“The commodity-driven path to inclusive and sustainable economic growth is not helping LLDCs make progress towards achieving the VPoA and the Sustainable Development Goals,” Mr. Delelegn said.

According to UNCTAD, with the current pace of progress in implementing the VPoA, LLDCs are neither likely to achieve the targets of the VPoA by its 2024 deadline nor the global goals by 2030.

“A new generation of development policies and strategies are urgently needed,” Mr. Delelegn said. “LLDCs should focus on fostering productive capacities and structural economic transformation.”

Bolivia: Need to build productive capacities

Besides commodity dependence, Bolivia is also experiencing premature deindustrialization and limited structural transformation.

Its competitiveness is constrained by high trade costs that limit the country’s capacity to attract foreign direct investment, especially for trade-oriented firms.

To overcome these challenges, Bolivia needs to formulate policies and strategies that are anchored in fostering productive capacities and structural economic transformation, according to UNCTAD’s analysis.

Such efforts could include targeted policies and programmes to build public sector capabilities in policy formulation and implementation, improve trade and transport facilitation and increase private investment.

The country also needs to develop a modern and dynamic manufacturing sector (with higher value-added goods) and harness its rich biodiversity to produce niche products such as nutraceuticals (nutritional and healthy foodstuffs).

Botswana: Time to diversify into non-extractive sectors

The government in Botswana has pursued the beneficiation of diamonds as part of its economic diversification strategy and charted a development path with reduced diamond resource income.

The strategy seeks to create downstream competencies in the areas of cutting and polishing, the manufacture of jewellery, diamond trading and ancillary businesses.

Although Botswana’s economic diversification policies have been relatively successful, the country still doesn’t have a fully diversified economy.  

UNCTAD’s analysis shows that Botswana needs to ramp up efforts to diversify into non-extractive sectors. This would involve bolstering small and medium-sized enterprises to enable the country to compete in the global economy.

E-commerce strategies required

During the review meeting, UNCTAD will also co-organize an event on e-commerce on 5 December.

UNCTAD’s e-trade readiness assessments conducted in LLDCs in the past two years have shown non-existent or weak legal frameworks for the regulation of online transactions.

Of the 10 assessed LLDCs, only Nepal has adopted a dedicated e-commerce strategy.

The lack of up-to-date legal frameworks for e-commerce affects the ability of LLDCs to engage with global business partners, attract investors, increase the domestic uptake of e-commerce.

The level of LLDC legislative adoption is close to the world average, except for the protection of consumers online. Only 25% of LLDCs have such legislation, which is key to ensuring consumers’ trust.

Regulations and enforcements are lagging behind across a majority of the LLDCs assessed and capacity-building is needed to make implementation effective.