LDCs need new development path in wake of crisis

In its "Least Developed Countries Report 2009" released Thursday, UNCTAD said that the crisis has laid bare the structural deficiencies of the world's 49 poorest countries and has demonstrated their inability to achieve long-term growth and poverty reduction. To enable the LDCs to overcome their structural constraints and reduce dependence on external support, there is a need for a re-consideration of the role of the State, UNCTAD said.

For the LDCs, the market has not been able to generate sustained and inclusive growth, in part, because the market only works through incremental changes and small steps. These countries therefore need to "build developmental States" -- "a state whose ideological underpinnings are developmental and that seriously attempts to deploy its administrative and political resources to the task of economic development," UNCTAD added. According to the report, the current economic crisis is the result of weaknesses in the neo-liberal thinking that has shaped global economic policies over the last three decades; weaknesses that have been magnified by policy failures and lax regulation in the advanced countries. Most advanced economies are in recession and emerging markets have slowed.

The report points to the fact that reliance on commodities as the main source of export and fiscal revenues, along with the strong pro-cyclicality of commodity prices, contributes to the considerable volatility of output growth in many developing countries, but especially in the LDCs. Another factor is the high levels of indebtedness which represent a chronic structural weakness in LDCs. Despite an overall improvement during the recent boom, the debt burden remains unsustainably high in most LDCs, much higher than in other developing countries - an average of 42% of gross national income (GNI), compared to 26% in other developing countries. The current economic crisis creates both the necessity and the opportunity for a change of direction by LDCs and their development partners. The LDCs, although in a vulnerable position, must start to address their chronic structural weaknesses, says the report, recommending in this context: refocusing attention on developing productive capacities; building a new developmental State based on a better balance between States and markets; and ensuring effective multilateral support.

Neither the good governance institutional reforms which many LDCs are currently implementing, nor the old developmental State, including successful East Asian cases, are entirely appropriate models now for the LDCs. What is required now is a developmental State that is adapted to the challenges facing an interdependent world in the twenty-first century. The report argues that the developed market economies, which are most responsible for the global financial collapse, not only have a moral obligation to help the poorest countries through the present crisis, but also share a mutual interest in setting the LDC economies on a sustainable growth path. Failure to do so will risk increasing the number of unstable States and thus wider threats to peace and security.

It will be very difficult to realize a domestically-owned developmental vision and programme without the support of donors, says the report, noting that half the LDCs had less than 18.4 cents a day (compared to $3.20 per capita per day in lower-middle income countries in 2006, and $38.40 per capita per day in high-income countries) available per capita to spend on private capital formation, public investment in infrastructure, the running of vital public services such as health, education and public administration, as well as the provision of law and order. The report also discusses how macroeconomic policies of the LDCs can be modified in light of the global deterioration in real and financial conditions.

It will be important for LDC Governments to continue to devote a significant share of their budgets to public investment, which will enable them to maintain some degree of momentum in their previously achieved growth trajectories, which were brought about by the global boom in the export of primary commodities. It is imperative that donor countries stick to their previous commitments to ODA (official development assistance) and also increase donor financing to offset the negative impact of the global recession on LDCs.

The report lays out some general outlines for the kinds of tax policies that LDCs both in sub-Saharan Africa and elsewhere could usefully adopt. Countries should refrain from further reducing tariffs until domestic indirect and direct taxes are able to substantially boost revenue. Noting that tariffs can be expected to fall further in the coming years as countries join free trade areas and customs unions, the report says that since trade taxes still account for a significant share of tax revenue, the revenue losses from further liberalization, especially under conditions of declining trade, could be significant.

The report also highlights the importance of trying to direct ODA more towards building the domestic capacities of LDCs to mobilize domestic sources of development finance, saying that this implies much greater emphasis on mobilizing domestic savings.

On agricultural policies in the LDCs, the report underlines the need for these countries to raise their investments in agriculture to reduce hunger and prevent future food crises. Noting that 21 of the 31 countries worldwide currently facing food crises are LDCs, the report says that breaking the cycle of deficient food production, subsistence agriculture, low productivity, declining investment and increasing scarcity of land and water amongst others will require a more active government role than has been the case over the past 30 years. The report recommends increasing investment in agriculture, promoting technological change to boost farm productivity, enhancing local agricultural capacities and institutions and supporting regional integration of the LDCs. "Long-standing agricultural export subsidies and domestic support policies in the developed countries remain a critical obstacle to agricultural development in LDCs," says the report, noting that these subsidies are associated with rapidly increasing food imports in LDCs, alongside declines in agricultural production.

Pointing out that the tariff regime is an important tool for raising government revenue and fostering agricultural development and industrialization, the report finds that tariffs in LDCs however have been declining as a result of multilateral, regional and bilateral agreements, structural adjustment programmes and through autonomous reform efforts.

"In view of the negative effects of the food and financial crises, trade policies and associated export taxes could be rationalized and reviewed to ensure availability of imported food staples at affordable prices and to promote agricultural production."

Another key message is that the LDCs must take effective steps to expand domestic industry to weather the current global recession and to grow over the long term. A more diversified economy remains the best insurance policy for LDCs to reduce their vulnerability to future shocks.

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, the LDCs need sufficient "policy space" to make decisions that fit their domestic situations and can best lead to economic growth.

Download the full report: www.unctad.org