WORLD´S POOREST ECONOMIES ARE PERFORMING BETTER, SAYS UNCTAD, BUT STRUCTURAL WEAKNESSES MUST BE ADDRESSED

The world´s poorest countries entered the third millennium with encouraging GDP growth and export performance, but their social well-being lags far behind, says UNCTAD in its Least Developed Countries Report 2004, released today . A rising debt burden, declining and unstable commodity prices, the erosion of trade preferences, civil conflict and HIV/AIDS have all taken their toll, and the economic good news may not last if these countries´ structural weaknesses are not addressed soon.
During the period 2000-2002, the latest for which data are available, the real average annual GDP growth rate of the least developed countries (LDCs) as a group was 4.9%. Real GDP per capita grew by 2.6% per annum, in contrast with the 1.8% reported for other developing countries.
Countries are designated as "least developed" by the United Nations on the basis of their very low per capita incomes, weak human resources and high economic vulnerability to shocks. The latest country to have joined the group is East Timor, raising the total number of LDCs to 50. UNCTAD´s research on economic and social aspects related to the development of the LDCs is presented biannually in the Report.
The improved economic performance was underpinned by significant increases in capital inflows in the form of official development assistance (ODA) and foreign direct investment (FDI). According to World Bank data on 46 LDCs, aggregate net resource flows to the LDCs jumped from $12.4 billion in 2000 to almost $17 billion in 2002. Aggregate net transfers to these same 46 countries were up by over 43% between 2000 and 2002.

In 2001, the driving force (63%) of this upsurge in long-term capital inflows to LDCs was FDI. FDI inflows declined by 7% in 2002. But there was a particularly large increase in ODA inflows that year.

Net ODA inflows to the LDCs fell considerably in the 1990s, particularly after 1994. But a turning point was reached in 2000, and the trend has been on the upswing ever since. In real terms, net aid inflows to the LDCs as a group expanded by 36% between 2000 and 2002, and in the latter year were comparable to the 1990 level.

This upward trend is associated with a recent tendency of the donor community to concentrate international assistance on the poorest countries. The share of total ODA disbursements going to LDCs rose to 28% in 2002. But only six member countries of the OECD´s Development Assistance Committee -- Denmark, Ireland, Luxembourg, Netherlands, Norway and Sweden -- exceeded the target of making net ODA disbursements to the LDCs of over 0.20% of their gross national income in 2002. Net aid inflows in 2002 were still 17% lower in real per capita terms than they had been in 1990-1994.

LDC merchandise exports reached a new high of $37.8 billion in 2002, up from $26.1 billion four years earlier. In nominal terms this represented a 45% increase, compared with a 15% increase in other developing countries (not including China) over the same period. But most of the increase occurred in 1998-2000. In that period, merchandise exports, driven in particular by increased oil exports, climbed by 36.7%. But between 2000 and 2002 alone, they gained 5.7%.

Divergent economic performance

There was marked divergence in the economic performance of the LDCs in the 1990s - a trend that was not reversed during the period 2000-2002.

While the real annual GDP per capita growth rate exceeded 3% in 14 least developed countries, it stagnated or declined in 24, more than half of the countries for which data are available. Only seven LDCs -- Angola, Bhutan, Chad, Eritrea, Mozambique, Rwanda and Sudan -- achieved the 7% growth target set under the Programme of Action for the Least Developed Countries for the Decade 2001-2010. That programme was adopted by the Third UN Conference on the LDCs (Brussels, 2001).

According to UNCTAD statistics, net FDI inflows to the LDCs reached $5.2 billion in 2002. But 87% of those flows went to the top 10 FDI recipients, which were (in descending order) Angola, Chad, Sudan, Mozambique, Equatorial Guinea, Uganda, United Republic of Tanzania, Zambia, Myanmar and Mali. The four LDC oil exporters -- Angola, Equatorial Guinea, Sudan and Yemen -- plus Chad, which is developing its infrastructure for oil exporting, garnered 63% of all FDI inflows to the LDCs.

Although less concentrated geographically than FDI, trends in aid inflows to the LDCs were also highly uneven. In real terms aid inflows declined over 1999-2002 in 13 LDCs but climbed by over 20% a year in 16 other countries.

Export earnings are also markedly uneven among the LDCs. During 2000-2002, 56% of total LDC merchandise exports originated in only five LDCs: the four oil exporters plus Bangladesh. For the period 1998-2002, while exports for the LDCs as a group mounted spectacularly, merchandise exports decreased by 6% in nominal terms in those LDCs exporting agricultural products and by 16.6% in LDCs exporting minerals. In contrast, the merchandise exports of LDCs exporting manufactures and/or services rose by 43% and those of oil exporters by 134.4%. The nominal value of merchandise exports declined in 23 LDCs between 2000 and 2002.

Sustainability at risk

While the improved economic performance is most welcome, sustainability is at risk due to various internal and external factors. Those LDCs with the best economic performance in the period 2000-2002 also experienced the greatest growth instability in the 1990s. The Report finds that risk factors for the LDCs include:

• Very high levels of dependence on external finance. Between 2000 and 2002, the ratio of gross capital formation to GDP increased in three quarters of the 28 LDCs for which data are available, from an average 20.2% in 2000 to 23% in 2002. But the average domestic saving rate grew only slightly over the same period, from 4.4% to 4.8%. Domestic resource mobilization is difficult in these countries, given very low incomes and mass poverty.
• Increasing levels of external indebtedness. Although grants represent the majority (82% in 1999-2002) of aid disbursements to LDCs, official loans have been increasing, at the rate of 27% a year. External debt stock decreased significantly in the group of LDCs from $154.4 billion to $137.3 billion between late 1998 and late 2001. In 2002, however, despite large amounts of debt forgiveness, the total debt stock rose to $145 billion. The increase in debt stock occurred in 43 out of the 46 LDCs for which data are available. This was driven by multilateral concessional lending in particular. In 2002, total debt service payments reached a record level of $5.1 billion.
• Declining and unstable commodity prices. Primary commodities constitute 67% of total LDC merchandise exports and are the major source of export earnings in 31 of these countries. UNCTAD data on world primary commodity prices of importance to the LDCs show prices rising for cocoa and fish meal between 2000 and 2002. But world prices dropped over the same period for aluminium, coffee, copper, cotton, sugar and tea and, to a lesser extent, tobacco. World oil prices continued to be relatively high and volatile.
• Erosion of trade preferences. The strong export performance of those LDCs exporting manufactures has been aided by quantitative restrictions and preferences within the Multifibre Arrangement (from 1974 to 1995) and then the Agreement on Textiles and Clothing. The phasing-out of the latter could adversely affect Asian LDCs in particular.
• Limited public resources. The provision of modern public services, law and order, contract enforcement and good administration and governance are all constrained by the lack of financial resources. For example, African and Asian LDCs spent an average $4.60 per capita per annum on public health during the 1990s, compared with $73 per capita per annum in other low- and middle-income developing countries and $1,456 in high-income OECD countries.
• The HIV/AIDS epidemic. The LDCs are the primary locus of the HIV/AIDS epidemic in the world. According to UNAIDS data, in 2001, when the LDCs comprised 11% of the global population, 37% of all HIV/AIDS deaths worldwide occurred in the LDCs, and 46% of all children with HIV lived in LDCs. For the least developed countries as a whole, life expectancy at birth in 2010-2015 is expected to be 46.1 years, as against 58.7 years had the epidemic not occurred. For some LDCs, particularly in Africa, the epidemic is turning into a development crisis.
• Civil conflict. The LDCs became the world´s primary locus of civil conflict in the late 1990s. Between 1990 and 2001, 60% of them experienced civil conflicts of varying intensity and duration, and in most cases these conflicts erupted after a period of economic stagnation and regress.

The challenge of inclusive development

The sustainability of economic growth ultimately requires that improved economic performance is translated into a broad-based improvement in the daily lives of people. The scale of the challenge is immense. According to both UNCTAD and World Bank data, about 50% of the population in the LDCs live on less than $1 a day - a rate that has remained the same since the early 1990s. If this trend continues, there will be no chance of reducing the proportion of the LDC population living on less than $1 a day by half by 2015, as pledged in the Millennium Declaration adopted by the UN General Assembly in 2000. Rather, the Report estimates that the number will increase from 334 million people in 2000 to 471 million in 2015. By that time, and assuming too that current progress in China and India continues, the LDCs will be the major locus for global poverty.

The LDCs lag behind other developing countries on a range of other social indicators. For example:

• 16 of every 100 children born alive in the LDCs in 2001 may be expected to die before their fifth birthday, as against nine of every 100 in developing countries as a whole and less than one of every 100 in the high-income OECD countries. Only 11 of the 48 LDCs for which data are available are on course to achieve the Millennium Development Goal of reducing the under-5 mortality rate by two thirds between 1990 and 2015. As of the year 2000, none of them had achieved it.
• The maternal mortality rate was 1000 per 100,000 live births in the LDCs in 1995, as compared to 463 per 100,000 in developing countries as a whole and 12 per 100,000 in high-income OECD countries.
• 38% of the population was undernourished during 1998-2000, as against 18% in developing countries as a whole. Only 11 of the 34 LDCs for which data are available are on course to achieve another Millennium Development Goal - that of halving the proportion of the population who suffer from hunger between 1990 and 2015.
• 34% of the 15-to-24-year-old population was illiterate in 2001, vs. 15% in developing countries as a whole.
• Only 55% of the LDCs´ rural population had sustainable access to an improved water source in 2000, in contrast to 69% in developing countries as a whole. Only seven of the 22 LDCs for which data are available are on course to achieve yet another Millennium Development Goal - that of halving the proportion of the population without sustainable access to safe drinking water between 1990 and 2015.

Sustained economic growth will be essential to address these challenges. This will require new policy initiatives at both the national and international levels (see UNCTAD/PRESS/PR/2004/011). Such initiatives - which should be addressed by the LDCs themselves, with the support of their development partners - need to tackle the structural weaknesses that contribute to the risk factors listed above. Otherwise, the economic recovery process that is currently enjoyed by the LDC group will be seriously undermined.