The Hindu Business Line : Developing productive capacities, key to upgrading LDCs

Higher rates of economic growth and exports notched up by many least developed countries have not led to poverty reduction. According to a Unctad report of LDCs, this can be achieved by these nations developing domestic productive capacities to create wealth. To put productive capacities at the heart of development policies means bringing about structural change in the LDCs.

Amid the ritualistic reference to the worsening plight of the least developed countries (LDCs) in the gathering of the rich and the emerging economies in St. Petersburg, under the G-8 umbrella, the attitude of the global community to LDCs has been mixed. The rest of the world is not miffed at the deteriorating development saga of the 50 nations now designated by the United Nations as "least developed countries."

The Economic and Social Council (ECOSOC) reviews the list of LDCs every three years in the light of the recommendations by the Committee for Development Policy (CDP) on the basis of low-income, human assets and economic vulnerability criteria.

Be that as it may, the UN Conference on Trade and Development (UNCTAD), known for espousing the cause of the developing countries and the LDCs, released, on Thursday, its LDC Report 2006 with the theme "developing productive capacities."

Designed as a resource for policymakers in the LDCs and their development partners, the Unctad report contends, at the outset, that despite higher rates of economic growth and exports notched up by many LDCs than in the past, the fact remains that they do not translate effectively into poverty reduction and improved well-being.

Worse, even the sustainability of the accelerated growth is doubtful as it is highly dependent on commodity prices, including crude oil prices, trends in external finance, preferences for export of manufactured goods, and climatic and weather conditions.

Reversing this trend to benefit the LDCs so that they can join the development mainstream is not difficult to attempt, Unctad says, adding that developing productive capacities is the key to achieving sustained economic growth in the LDCs.

The report rightly states that though aid transfers to the LDCs are increasingly being used to alleviate human suffering, substantial and sustained poverty reduction cannot be achieved with such expressions of international solidarity alone.

It requires wealth creation in the LDCs and the development of domestic productive capacities in a way in which productive employment opportunities expand.

Challenges before LDCs

Stating that the development of productive capacities would be particularly crucial in the next 15 years because the LDCs are at a critical moment of transition, the report cites two challenges confronting the LDCs.

First, more and more people are seeking work outside agriculture leading to rapid urbanisation. Second, managing the transition in an open-economy context. But the production and trade structures of the LDCs offer limited opportunities in a rapidly globalising world driven by knowledge-intensive products with demanding conditions of market entry. Benefiting from recent technological advances requires advancing towards and crossing various thresholds in human capital, R&D and management practice which most LDC economies lack the wherewithal to do. The report says that to put productive capacities at the heart of development and poverty reduction policies means focussing on promoting capital accumulation, technological progress and structural change in the LDCs.

Here Unctad plumps for "a better balance between domestic and international sources of growth". It aptly notes that increased exports and export diversification are absolutely essential to the strategy. But an exclusive emphasis on exports rather than domestic demand or vice-versa, or on developing productive capacities in tradable rather than non-tradable or vice-versa, is likely to be counterproductive.

Both matter for growth and poverty reduction. Domestic demand improves from increasing incomes and poverty reduction and this builds a further feedback mechanism supporting the momentum of growth as productive employment opportunities expand.

Demand-supply constraints

The report contends that the development of productive capacities cannot happen without addressing demand- and supply-side constraints. Yet, demand as a source of growth has been generally ignored. The Unctad report criticises donor countries that seek to engineer a supply-side fix for the weak productive capacities of the LDCs, without due attention to the dynamics of demand. It says that inclusive development and poverty reduction require "a development strategy which pays attention to the dynamics of domestic demand as well as external markets".

The Unctad report cites the evidence of a small but varied sample of LDCs to show that expansion of domestic demand has contributed largely to their economic growth. Because domestic demand is such a large demand-side source of economic development, its weak growth is a major constraint on the development of productive capacities in most LDCs. Sluggish domestic demand, which is associated with persistent poverty, is a key deficiency of the investment climate in the LDCs.

Other constraints on the development of productive capacities include physical infrastructure and institutional weaknesses — firms, financial systems and knowledge systems. Most LDCs have the lowest and poorest-quality stock of transport, telecommunications and energy infrastructure. Pointing out that the infrastructure divide is particularly important with respect to energy, the report says that the "electricity divide" has not received as much attention as the digital divide.

Technology acqusition

Most modern technologies require electricity, and the current low levels of access to electricity increase costs for firms, reducing their available funds for investment. This is a basic reason for the technological incongruence between the LDCs and the rest of world, which hampers the former in the acquisition of technologies.

Unctad notes that the goods and services that the LDCs can supply competitively to world markets are ultimately limited by what they can produce, and how efficiently. This is the basic source of marginalisation of the LDCs in world trade. Even if the LDCs exported all their output, their share of world exports of goods and services would be only 2.4 per cent, though their share of world population is over 10 per cent.

Pitching for priority of upgrading the export structure of the LDCs, Unctad states that there is a place for new forms of industrial policy, based on a mixed market-based model, with private entrepreneurship and government working closely to create strategic complementarities, and the state not picking winners but helping the private sector discover and exploit economic potential.

This year's Unctad report for LDCs, thus, highlights policy issues and also the state of play towards attaining some of the objectives set out and adopted by the international community at the Third United Nations Conference on Least Developed Countries held in Brussels in May 2001. They will undoubtedly form the basis of discussions to be held in New York in September 2006 as part of the mid-term review of the Programme of Action adopted at the Brussels Conference.