Amid slow recovery in the North, the South could become a game-changer for the LDCs, says UNCTAD

Geneva, 17 November 2011 - The Least Developed Countries Report 2011: The Potential Role of South-South Cooperation for Inclusive and Sustainable Development (LDC 2011)(1), produced by UNCTAD, argues that dynamic Southern economies could provide LDCs with development opportunities, but an adequate policy framework is needed to harness the potential of these emerging partnerships.

The medium-term prospects for least developed countries (LDCs) are likely to be less favourable than in the previous decade, cautions the Report. This is due to the downside risks surrounding the outlook for developed economies and also the uncertain dynamics underlying the rebalancing of the world economy. The forecasts for the medium-term point to average growth rates of around 5.8%, almost one and a half percentage points lower than during the boom period from 2002 to 2008.

The current unfavourable external conditions will not only affect the growth prospects of LDCs but also their export dynamism, putting into question their current development strategy, which is based on export-led growth. Indeed, recovery in terms of export performance has been slow. For example, exports of goods from LDCs in 2010 were still below the 2008 level. In fact, the balance in merchandise trade turned negative during and after the crisis, contributing to a substantial deterioration of the current account of the balance of payments. There is also more volatility, especially in commodity prices and - most worryingly for many LDCs - fuel and food prices are high. The trends also portend somewhat weaker private external capital inflows and possibly less aid.

With a more subdued demand for their products in developed economies, LDCs would have to search for opportunities elsewhere. Large and dynamic developing countries, as well as regional partners, both within formal integration groupings and outside, could prove to be additional outlets for LDC exports.

As the LDCs have become more open and more dependent on primary commodity exports, they have also become more vulnerable to sudden swings in external conditions. The recovery from the "triple crisis" -food, fuel and financial - is partial at best in the LDCs, and the current world situation and the outlook in the mid-term are not promising either. Moreover, if current trends in poverty reduction and population dynamics continue, LDCs are likely to become over time the major locus of extreme poverty in the world.

The Report also points out that despite the resurgence of growth during the early and mid-2000s and their apparent resilience to the global recession, LDCs continue to play only a marginal role in the global economy. This is underscored by the fact that they represented one eighth of the world total population, but accounted for less than one hundredth of total world output in 2009 (see chart).

Growth rates of 7.2 % recorded by LDCs during the boom period were not enough to reverse the long-standing trend of income divergence from other developing countries. Gross domestic product per capita of the LDCs fell, compared with that of other developing countries, from almost 40% in 1970 to less than 20% in the mid-1990 - and has stayed there ever since. Other indicators point in the same direction. The economies of LDCs today represent barely 1% of the world´s total merchandise exports. Likewise, their share of total foreign direct investment (FDI) is around 2.5%.

Expanding LDC-South Economic Relationships

The Report also illustrates how, in the span of a decade, economic ties with Southern partners have intensified remarkably and have become a crucial dimension of the LDCs´ integration into the world economy.

More specifically, the study indicates that developing countries contributed to nearly half of the expansion in LDCs´ total merchandise exports over the past decade, and that the importance of Southern markets has been steadily on the rise across the whole spectrum of LDCs.

In 2009, developing countries accounted for over half of LDC exports and approximately 60% of their imports. The composition of these trade flows, however, is radically different in the two directions. LDC exports to the South are dominated by primary commodities, which together account for over 90% of the total, whereas manufactured goods represent approximately two thirds of LDC imports from Southern markets.

Southern economies have also provided the LDCs with greater access to capital, particularly in the form of FDI. Between 2003 and 2010, when FDI inflows to the LDCs were growing at nearly 20% per year, the share of investment projects from Southern investors climbed from 25% to upwards of 40%.

The multifaceted economic relations of LDCs with other developing countries encompass not only trade and investment flows, but also migration, knowledge and technology transfers, as well as development cooperation, the UNCTAD report stresses. Notably, two thirds of the nearly $26 billion of remittances inflows to the LDCs in 2010 originated in Southern countries. In spite of being small compared to the traditional North-South aid, Southern official flows play a significant role in development of LDCs, given that they are overwhelmingly directed to productive sectors and used for financing much-needed infrastructure.

Development implications for LDCs

The Report points out that the weight of these emerging partnerships is likely to become even more significant in the near future, given the dismal outlook for economic recovery in developed countries. None of this, however, is to say that the South has become a panacea for the LDCs.

The UNCTAD study argues that the key for the LDCs is the extent to which the dynamism of South-South economic relations can serve as a springboard for developing their productive capacities. In that respect, the so-called "rise of the South" is creating a broader set of opportunities for the LDCs, but also poses challenges. However, South-South cooperation should be a complement not a substitute for North-South cooperation.

While the LDCs clearly benefit from the boost in exports, FDI and development finance, there is also a risk that their economies will be locked in by the emerging international division of labour into mostly commodity production and will encounter fierce competition in labour-intensive manufacturing. It is sobering to note that fuels accounted on average for roughly 60% of the LDCs´ exports to developing countries during the 2000s.

Nevertheless, the prominence of primary commodities in LDCs´ export structure should not obscure the fact that their manufacturing exports to Southern markets have grown at about 18% per year over the last decade.

Would it be easier for the LDCs to catch up with the rest of the world if they develop even closer ties with the South? Ultimately, the UNCTAD report contends, the structural conditions of each LDC and the specific terms of engagement with Southern partners will determine the developmental outcome of the ongoing integration and cooperation within the South. The net result of this multifaceted process, however, will be contingent on the implementation of appropriate policies to maximize the benefits and minimize the associated risks.

For this reason, the Report calls for the establishment of an enabling policy framework to harness the growing economic ties within the South with the goal of fostering structural transformation and economic diversification. To this end, the UNCTAD study also urges the LDCs to forge a proactive and strategic approach to their integration with developing country partners, leveraging synergies and complementarities across them.

ANNEX

Tables and figures

Chart: LDCs in the world economy, 1970-2009


Source: UNCTAD, Least Developed Countries Report 2011