As a group, the 48 countries designated as least developed by the United Nations recorded another solid performance in 1997. On preliminary estimates released today by UNCTAD in its Least Developed Countries 1998 Report, gross domestic product (GDP) averaged 4.8 per cent last year, compared with 3.2 per cent for the world economy as a whole. This headline figure followed GDP increases of 5.5 per cent and 4.5 per cent in 1996 and 1995, respectively.
Underlying the aggregate figure, there were, as usual, considerable regional variations. Asian and African least developed countries (LDCs), in particular, suffered declines in their growth rates attributable to poor weather conditions and the effects of the financial crisis in many of the fastest-growing Asian economies. Declining commodity prices also undermined African growth.
However, a number of LDCs continued to experience a relatively high level of growth. Among them were Bangladesh, Ethiopia, Lesotho, Mozambique and Uganda. Apart from Bangladesh, in each of them growth depended less on agricultural expansion than on output in the industrial sector (in Lesotho and Uganda) or in services (in Ethiopia and Mozambique).
Despite the modest decline in the aggregate growth figure compared with 1996, UNCTAD takes heart from the fact that per capita increases last year benefited two-thirds of these poorest countries in the world community. Over half of the group (25 countries) have now recorded real increases in growth for three or more consecutive years.
Bad Weather Casts a Pall over Future Prospect
The key question facing LDCs today is whether their overall improved economic performance of recent years can be sustained, given their continued vulnerability to external shocks, notably adverse weather conditions and sharp fluctuations in the prices of their exports.
In 1997, the effects of the El Niño weather system resulted in widespread crop failures and consequent food shortages. The output of essential cash crops was also reduced. Governments were thus obliged to divert expenditure from investment in infrastructure and manufacturing to the more immediately pressing needs of disaster relief and food procurement.
The outlook is even more foreboding. Devastating floods in Bangladesh and above-average rainfall in Bhutan and Nepal this year, as well as hurricane damage in Haiti, foreshadow further difficulties in 1999. The floods that currently cover as much as two-thirds of Bangladesh are expected to restrict growth severely at least for the foreseeable future.
What makes the LDCs especially vulnerable to the vagaries of the weather and world commodity prices is their lack of export diversification. Over the past decade, most LDCs’ exports have been limited to two or three products, almost all of which are sold in raw or semi-processed form. Of the 28 LDCs for which there are comparable export data, only five reduced their commodity dependence during the decade. Twenty-six of the 28 countries continue to depend on commodities for over 70 per cent of their export revenues.
Their continuing overall good economic performance notwithstanding, the LDCs’ relative share in world production and trade has remained minuscule. Moreover, their integration into world trade has declined over the past decade compared with that of other developing countries. Output in 1996 represented less than one per cent of world GDP; while their export share (in 1995, the latest available figure) was only 0.4 per cent, down from 0.5 percent in the period 1985-1990.
Unlike many of their trading partners, most LDCs have little chance of achieving significant productivity gains, at least in the short to medium term, owing to shortages of most of the key ingredients for productivity gains -- skilled labour, technology, etc.
LDC’s growth prospectives are thus dependent on the success of wide-ranging macroeconomic reforms aimed at attacking the structural factors that continue to shackle these economies. The risk of policy reversals and the continuing threat of armed conflict in some countries also pose severe threats to the sustainability of their recent economic performance.
Asian Financial Crisis Has Mixed Effect
In Africa, a particularly unfavourable mix of depressed agricultural commodity prices (except for the prices of some tropical beverages, which showed substantial increases), the worst weather conditions this century, and continuing armed conflicts were responsible for the slowdown that affected many of the 33 LDCs on the continent.
Thus, while most parts of the world economy enjoyed greater price stability during 1997, significant declines in the export prices of agricultural raw materials -- resulting largely from the Asian crisis -- hit African LDCs disproportionately hard.
The sharp declines in oil prices, which saw a near 40 per cent slump during 1997, severely affected two oil-exporting LDCs, Angola and Yemen. In consequence, these could expect GDP declines of up to 20 per cent in 1998. On the other hand, for the majority of LDCs, heavily dependent for energy supplies on imported oil, the net effect on balance of payments accounts of the oil price drop was positive.
In its Least Developed Countries 1997 Report, UNCTAD reported that Asian LDCs had benefited particularly from their proximity to the boom countries of South-East and East Asia. Their average growth reached 5.5 percent in 1996. The severe financial crisis that began in Thailand in mid-1997 and spread rapidly to other Asian developing countries, sharply reducing both their outward foreign direct investment (FDI) and import demand, was thus a matter for concern for their LDC neighbours.
UNCTAD points out in its 1998 Report that, as it transpired, the crisis barely dented last year’s performance by the Asian LDCs, but this can be partly attributed to the dominance of subsistence agriculture and a correspondingly low level of monetization. Nevertheless, their GDP growth reached an average of 5.4 per cent, hardly changed from the previous year.
FDI Increase Masks Underlying Shortage of Private Capital
The latest figures for FDI inflows to the LDCs have been encouraging. In 1996, FDI reached US$ 2 billion, almost double the US$ 1.1 billion recorded the previous year. It should be noted, though, that a disproportionately large share went into capital-intensive oil and mining-related activities in a few countries.
As a group, however, LDCs last year received only 1.5 per cent of FDI flows to developing countries. And, as a percentage of total inflows worldwide, their share was a minute 0.5 per cent, illustrating the scale of the task ahead in mobilizing capital, at a time of continuing declines in grant aid and -- for some -- a heavy foreign debt overhang.
Unlike some other developing countries, LDCs have also experienced severe difficulty in attracting equity investments in local enterprises. From an investor’s perspective, negative factors include the relatively small size of many LDCs’ domestic markets and the fact that large currency devaluations, a periodic problem, have tended to undermine otherwise attractive rates of return on investment.
Despite the current efforts of UNCTAD and other international bodies to promote FDI and other capital flows to LDCs, investment capital in almost all of these countries, from both domestic and foreign sources, thus remains in short supply. "FDI and domestic savings rates in LDCs are generally too low to sustain rates of growth that would have a significant, economy-wide impact," says the Least Developed Countries 1998 Report.
Official development assistance (ODA) flows to LDCs have not compensated for the negligible private capital flows, despite the efforts of some donor countries to focus particular attention on the poorest countries in their aid programmes. Measured as a percentage of the total gross national product (GNP) of the OECD Development Assistance Committee (DAC) donor countries, in 1996, aid to the LDCs as a group declined to 0.05 per cent, down from 0.06 the previous year. The decline mirrored the continuing fall in total ODA to developing countries.
This severe shortage of external finance in the LDCs must be seen against the background of a debt picture that remains very grim, despite a slight fall in the total outstanding external debt. In 1996, the combined external debt of the 48 countries concerned stood at US$ 134 billion -- a full 90 per cent of their combined GDP -- down from US$ 136 billion in 1995.
Many LDCs have been unable to meet their debt-servicing obligations and have had to request rescheduling of official debt. Among the 41 countries included in the World Bank/IMF Heavily Indebted Poor Countries (HIPC) initiative are 29 LDCs. The LDCs had a relatively low debt service ratio of 15 per cent of exports in 1996; but this figure can be misleading -- reflecting payments made rather than payments due.
