Manufacturing poverty reduction

New UNCTAD report recommends "developmental" industrial policy for world´s poorest countries; says current economic crisis creates necessity and the opportunity for a big policy rethink in least developed countries

Geneva, 16 July 2009 --To weather the current worldwide recession and grow over the long term, the world´s 49 poorest countries must take effective steps to expand domestic industry, a new UNCTAD report says.

Least developed countries (LDCs) are currently looking for a combination of macroeconomic measures and international financial support to limit damage from the global economic crisis. However, they also must look for ways to reduce their vulnerability to future shocks. A more diversified economy remains the best insurance policy, the Least Developed Countries Report 2009 (1) contends.

This year´s report is subtitled "The State and Development Governance".

The study says industrial policy will have to play a critical role. Simultaneous efforts in the LDCs to raise investment levels, build new economic links, and upgrade technological capacity - which is at the heart of industrial growth - are the surest way of promoting a more effective involvement in the world economy and the best way to avoid the economic dangers of the lopsided reliance on commodities exports and private capital flows that have been exposed by the current crisis. However, to carry out such economic transformations, LDCs need sufficient "policy space" to make decisions that fit their domestic situations and can best lead to economic growth.

By and large, LDCs have benefited little from the global economy, and the progress they made during the boom years at the start of the new Millennium has proved mostly ephemeral. That is because LDCs exported mostly basic farm goods and raw materials and increased their reliance on them during the boom. When prices for these commodities fell, the world´s poorest nations found that this dependence actually had increased their vulnerability to external shocks.

The report argues that the market alone will not ensure the formation of productive capabilities -- that is, the ability of LDC economies to manufacture a broader variety of products, and more sophisticated products. Nor will the market provide the resources and capabilities needed to revive LDC economies during the crisis. In most cases, the study says, governments will have to take a clear leading role in laying the foundations for sustainable growth and structural transformation. To accomplish this, they will in many cases have to change their development strategies. The current economic crisis creates both the necessity and the opportunity for a change of direction, the LDC Report notes.

While state intervention per se is no guarantee of success, improvements in LDCs´ economic performance are unlikely to occur without higher levels of government-directed investment. Putting that investment to work will require an integrated policy response. The report also recommends that sectoral policies be supported by more growth-oriented macroeconomic policies. It notes that historically, no late-developing economy has succeeded in greatly expanding industry by relying on the market alone.

There is no single pattern of resource allocation that generates sustained growth and lifts countries out of poverty. However, declining manufacturing activity -- a feature of LDCs for most of the past three decades -- particularly in Africa, coincides with weak investment, employment and productivity linkages. Between 1980 and 2000, the manufacturing value added (MVA) in sub-Saharan Africa grew by 1.7% per year, while in East Asia, it grew by 9.1%. And even while some Asian LDCs have been able to achieve a more "virtuous circle" of industrial progress, it has been a weak one (table 17). Particular attention is given in the report to the promotion of technological learning and the adoption of new technologies through targeted policies. The report notes that LDCs lag behind in this area.

The commodities boom that ran from 2002-2007 perpetuated LDCs´ excessive reliance on commodities exports, the report says. As the study shows, this has resulted in a highly lop-sided integration of LDCs into the global economy and has left them vulnerable to external shocks (see fig 1).

UNCTAD believes "one-size fits all" is no more appropriate for industrial policy than were the economic liberalization measures enacted in the 1980s and 1990s. It argues instead for a tailored and targeted approach: "The crucial point is that industrial policy cannot be equated with a particular set of policy instruments, but may evolve over time. Governments should seek to promote structural change towards more dynamic and diversified activities and should have sufficient policy space to intervene in any way necessary with a view to achieving that goal."

The report acknowledges major constraints imposed on the LDCs´ policy space at the international level, particularly in bilateral and regional trade agreements, and calls for a rethinking of these arrangements (table 18). But it also argues against development pessimism, suggesting that developmental industrial policy is a search process which involves "calling forth and enlisting for development purposes, resources and abilities that are hidden, scattered or badly utilized". UNCTAD argues that a more developmental and active state is required if this search is to be successful.

Besides East Asia, the LDC Report 2009 looks at past success stories and recent experiences in industrial policy in Ireland and in some Nordic countries, for lessons for LDCs. It concludes "it is strongly argued that LDCs require greater policy space than is currently the case, in order to increase the range of their policy options, to provide time and space for policy experimentation, and to adapt various development ´models´ to suit their own needs. Without such freedom to choose, alternative ´models´ of trade or industrial policies are no more likely to succeed than their predecessors".

ANNEX

Tables and figures

Figure 1 - Imports and exports concentration indices


Source: UNCTAD secretariat calculations, based on data from the GlobStat database.

Note: Herfindahl-Hirshmann index: averages 2000-2006