Comprehensive Midterm Review of the Implementation of the Istanbul Programme of Action (IPOA)

Good morning,

Thank you for the invitation to join you today.

The IPoA, just as Agenda 2030, recognizes the centrality of trade to sustainable growth and development in the LDCs. But it also recognizes that not all trade is equal.

What you trade matters. And it probably matters more than how much you trade.

Today, more than four fifth of all LDCs are commodity dependent. That is to say, commodities represent at least 60 percent of their total merchandise exports. And for more than half of LDCs, commodity exports account for at least 10% of total GDP.

LDCs were able to double their share of global exports, albeit from miniscule levels, during the commodities boom between 2000 and 2007. Many saw record export earnings. But poverty levels did, for the most part, not fall due to missed opportunities of diversification. And fortunes quickly reversed when the crisis hit. LDCs now face a protracted period of the commodities slump.

In this context, we must learn from past mistakes: Only genuine and comprehensive structural economic transformation will enable LDCs to meet the goals of the IPoA.

With this in mind, there are three messages that I'd like to leave you with today.

First, structural transformation - even if there has been too little of it to date - is possible in LDCs.

Second, LDC graduation is a means and not an end.

Third, the international community needs to provide better support to LDCs not only before and during graduation, but also after they cross the finish line.

Let me elaborate.

First, despite slow progress, structural transformation is possible in LDCs, and there are signs of it.

LDCs are of course still heavily dependent on agriculture and traditional sectors, not least extractives.

But there are signs of change.

There are embryos of structural transformation towards industrialization and modernization that could serve as models for other parts of the economy to emulate.

To give just two examples: In Ethiopia, the industrial sector has experienced significant growth despite its low overall contribution to output. In the period between 2012 and 2013, the industrial sector grew by 18.5 percent and the agricultural sector grew by 7.1 percent.

And In Bangladesh, the share of manufacturing in total output increased from 14 percent in 2000 to 17 percent in 2013 and the successful exploitation of market access, especially to EU market, has created significant job opportunities, not least for women.

Add to that growth in many countries' services sectors. In fact, much of the hype around "Africa rising" is actually referring to a services phenomenon. This should be good news. Improved infrastructural services are indispensable for achieving the sustainable development goals. Improved services can also promote better backward and forward linkages in the extractive sector. And improved services, not least when embedded in other sectors of the economy, can serve as a lubricant for both enhancing productivity and export competitiveness.

My second message is this: LDC graduation is a means and not an end. The focus has to be on building productive capacities.

The experience of the four countries that have already graduated suggests that graduation per se is not a guarantee of sustained development.

Take Botswana. It benefited from rapid growth over the past decade that translated into an almost tenfold increase in per capita incomes between 1980 and 2014 (from $855 in 1980 to $7,703 in 2014). But despite its graduation into the ranks of middle-income countries, it is still heavily dependent on diamonds. This makes the country vulnerable to economic shocks.

We saw this during the 2008 crash, when Botswana had difficulties finding buyers for its diamonds. This led to a contraction of real output by 6 percent and a double-digit budget deficit (of 13.5 percent) of GDP in 2009/2010.

Importantly, Botswana learned from this experience. It has since strengthened efforts to foster diversification and domestic value-addition, for example, by encouraging diamonds cutting and polishing to take place in Botswana.

Other LDCs need to take note, and diversify and industrialize their economies to build resilience to similar shocks. Like we see in Cape Verde, where UNCTAD is helping the country to promote tourism and diversify into higher value services sectors for West African market (ECOWAS).

My third message is that the international community needs to provide better support to LDCs not only before and during graduation, but also after they cross the finish line. In short, we need a more supportive framework for LDCs. And we need to ensure that LDCs are not penalized for making success on graduation.

Let me explain what this would look like in the areas of trade, aid, and FDI. And allow me here to also refer to the piece that I published jointly with EIF Executive Director on World Economic Forum yesterday. Constraints to trade arise locally, nationally, regionally and internationally and must be tackled in concerted fashion.

In the area of global trade, graduating LDCs should retain preferential access to developed country markets as long as they have high scores on the Economic Vulnerability Index. Otherwise, they may struggle with the loss of benefits that come with LDC status. And LDCs should be given preferential access for their services, just as they currently are for goods.

We must also address globally the policies that continue to reduce, indeed nullify, the benefits of trade preferences for LDCs. This includes tariff escalation, trade-distortive agricultural subsidies, non-tariff measures and rules of origin.

But what is harming LDCs in global trade is also often harming them in regional trade. Much more needs to be done to unlock the untapped potential of regional integration to spur trade growth, diversification and economies of scale, especially in Africa. To just give one example in the case of regional rules of origin: in the Southern African Development Community (SADC), clothes are required to be both manufactured and sourced in SADC to qualify for preferential market access. But since few of the textile inputs are produced in southern Africa, the rules have stifled regional trade in garments.

At regional, national and local levels, development partners and developed countries can do much more to slash trade cost by supporting trade facilitation reforms, tackling regulatory divergences at and behind borders, promoting e-commerce as well as investing in infrastructure, transport and ICT links. We cannot afford to continue to have a situation where it is cheaper to transport a good from one West African country to another via the Netherlands, than to do it directly.

In the area of aid, the international community needs to revise the allocation criteria for ODA. Increasing aid is important, but not enough - it needs to be aligned with national development priorities. And beyond that, it needs to also go to productive sectors. In fact, between 2000 and 2011, the percentage of ODA going to productive sectors almost halved (it dropped from 50 percent to 27 percent). This trend needs to be reversed.

Finally, investment can be key to build productive capacity. A priority must be to enhance linkages between FDI and domestic private sector development, to maximise the absorption of foreign technology and knowhow and to use FDI to diversify output and exports The international community needs to act to ensure that FDI goes to sectors that are essential to structural transformation: such as agriculture, manufacturing, and infrastructure. Unfortunately, in 2013, as much as 70 percent of total FDI flows to LDCs still went to countries specialized in extractive industries.

A big part of the reason why FDI gravitates to extractive industries stems from lack of local infrastructure. In many LDCs, foreign firms are often reluctant to invest in sectors other than extractive industries because there is no reliable power supply. Increased public investment in these SDG-sectors is essential. When this is not feasible or not enough, the international community can promote South-South and triangular cooperation, public-private partnerships, or other innovative financing mechanism for infrastructure improvements to create the conditions for more productive investment.

Ladies and Gentlemen,

Graduating half of all LDCs by 2020 is a worthy objective. But victory will not last if graduation is not sustainable. Ultimately, LDC graduation is not about ticking boxes. It's about a quest for sustainable development rooted in structural economic transformation.

LDCs themselves have much work to do in the area of resilience-building and diversification. But the international community has an important role to play in terms of smoothing the transitions of LDCs into the ranks of middle-income countries.

Thank you for your attention.