Although poorest countries coped with recession, they remain stuck in boom-and-bust cycle, report says

Study stresses that least developed countries must diversify and modernize economies to achieve substantial and lasting poverty reduction

Geneva, 25 November 2010 -- While least developed countries(1) (LDCs) have weathered the global downturn better than was generally anticipated, they are still trapped in the boom-bust cycles which have long plagued their economies… and their medium-term prospects are a cause for concern, UNCTAD´s Least Developed Countries Report 2010(2) cautions.

The world´s 49 poorest countries must develop their productive capacities -- that is, their abilities to efficiently and competitively produce an increasing range of higher value-added goods and services through expanding investment and innovation, the report counsels. Otherwise, they will have difficulty escaping poverty and ending the chronic vulnerabilities. Under current patterns of heavy dependence on exports of primary commodities and low-value-added manufactures, the study contends, even boom periods have done little to improve living standards. Using new poverty figures, the report estimates that the number of people in extreme poverty increased by 3 million per year during the boom years of 2002-2007, reaching an estimated 421 million in 2007 -- twice as many as in 1980.

The report, released today, is subtitled, "Towards a new international development architecture for LDCs". It argues that LDCs need a new approach and a new international development architecture is required to support this (see UNCTAD/PRESS/PR/2010/047).

During the boom years, the LDC group as a whole averaged growth rates of 7 per cent per year. But LDC dependence on commodities increased overall. And in over half of the 49 LDCs, the manufacturing share of the countries´ total value added actually declined. Dependency on primary commodities exports actually rose; exports became more concentrated rather than more diversified (see chart); there was very weak improvement in domestic savings (with the exception of oil exporters), greater economic reliance on foreign savings, and a faster depletion of natural resources. The study says all these shortcomings are now hindering the nations´ post-recession development prospects.

Across-the-board liberalization of trade and capital flows does not automatically result in greater economic diversification, the study notes. A stronger focus on domestic productive capacities is crucial for generating higher-paying employment. Since LDC populations are expanding, many more people each year need jobs and more and more people are seeking work outside agriculture. The report says "investment-led growth policies" are needed.

During the 2002-2007 boom, rapid economic growth "translated only weakly into poverty reduction". The report estimates that 53 per cent of the total population of LDCs was living in extreme poverty in 2007. While strong progress has been made to achieve the United Nations Millennium Development Goal (MDG) of universal primary education, only a handful of countries are on track to achieve the MDGs on a broad front and very few are on track to reach the target of halving extreme poverty by 2015. The report characterizes the pattern of LDC growth during this period as "non-sustainable" and "non-inclusive".

The economic expansion also appears to have had little positive impact in closing the LDCs´ productivity gap in agriculture. And "given that domestic supply responses have been rather weak, the expansion of LDC economies has been accompanied by a simultaneous increase in the food import bill, which went up from over US $9 billion in 2002 to $24 billion in 2008".

Export concentration

The 2008-2009 financial crisis and recession led to a significant growth slowdown in the large majority of LDCs. There were particularly adverse outcomes for oil and mineral exporters such as Angola, Chad, Equatorial Guinea, and Sierra Leone, and for some island LDCs such as the Maldives, Samoa, and the Solomon Islands.

Direct financial contagion has been acute in some cases, but generally has had rather circumscribed effects, the report says, owing to LDCs´ anemic financial development and shallow integration into international capital markets. But the adverse effects of the global recession through international trade were significant. The contraction of LDCs´ export revenues (down 26 per cent in 2009) has been the main channel of transmission of the crisis, resulting from both the slump in world demand and the sharp decline in commodity prices between the last quarter of 2008 and the first quarter of 2009. Moreover, in 2009, foreign direct investment (FDI) inflows to LDCs contracted by 13 per cent compared to the previous year, while remittances proved somewhat more resilient. Many LDCs have also been adversely affected by declining public revenues at a time when government stimulus measures were all the more needed. In African LDCs, for example, "government revenues as a share of GDP fell in about half of the 29 countries for which data were available", the report says, with oil and mineral exporters suffering the largest shortfalls.

Aggregate growth indicators show that average GDP growth in LDCs was 4.3 per cent in 2009, higher than in other developing countries and developed countries. Their apparent resilience reflects the fact that the crisis was not rooted in LDC economic fundamentals and it partially reversed the previous exceptional boom conditions. The deterioration in the external economic environment of LDCs in 2009 was also reversed by the recovery of commodity prices during the year and the increase in official financial flows from the World Bank, International Monetary Fund (IMF) and regional development banks to address the crisis. Most LDCs have avoided strong reductions in imports and only some have witnessed major fiscal contractions.

Given that GDP per capita declined in 19 LDCs in 2009, the social costs of the crisis are expected to be significant, particularly as they follow the food and fuel price hikes of 2008. Moreover, UNCTAD argues, these effects are likely to be long-lasting, even if there is a rebound in macroeconomic variables, since many of the coping strategies of poor households (such as selling assets or taking children out of school) tend to affect long-term well-being. Evidence suggests that the global recession has resulted in significant setbacks in the employment levels. "In Cambodia, for instance, the slowdown in the garment sector resulted in the loss of 63,000 jobs between the last quarter of 2008 and the first quarter of 2009, and it is estimated that 30 per cent of construction jobs disappeared in the first three quarters of 2009." Similarly, in the Democratic Republic of the Congo, declining activity in the mining sector caused over 100,000 job losses.

LDCs face a difficult medium-term outlook, the report says. As low investment levels and weak financial development continue to pose serious concerns, LDCs will depend largely on the speed of economic recovery in the rest of the world and on increased support from international donors. However, donors appear reluctant to scale up their external assistance. Meanwhile, "new multilateral lending may have partly cushioned the downturn, but it certainly contributed to the build-up of external debt. While debt owed to official creditors remains far below its level of the early 2000s, in the median African LDCs it increased by 1.5 per cent of GDP between 2008 and 2009, to reach 25 per cent of GDP. By April 2010, a total of 10 LDCs were in a situation of debt distress, and another 10 were at high risk of debt distress."

ANNEX

Tables and figures

Concentration indices of exports of country groups


Source: UNCTAD secretariat calculations, based on UNCTAD´s GlobStat database.