After several years of stagnation and decline, the economies of the least developed countries(1) (LDCs) displayed modest progress in 1994 and 1995, with estimated real GDP growth averaging over 3 per cent, according to an annual report issued today by UNCTAD. The Least Developed Countries 1996 Report(2) (113 pages and a Statistical Annex of 90 pages) shows that there has been a marked improvement in the growth rates of African LDCs which are estimated to have attained average growth of 2.2 percent in 1995, while Asian LDCs recorded estimated growth of 4.6 per cent.
The acceleration of growth in African LDCs is largely attributable to improved commodity prices. In some countries it is also the result of progress made in enhancing political and social stability and in domestic economic policy reforms. Despite the expected weakening of commodity prices, UNCTAD foresees that output growth in the LDCs as a whole should be sustained in 1996 at last year´s level, barring adverse weather conditions.
Risk of further marginalization
The main theme of the Report is the impact of globalization and liberalization on the LDCs. Globalization and liberalization of the world economy offer LDCs important long-term opportunities for growth. In the short term, however, these processes threaten to accentuate the marginalization of these weak economies. Both opportunities and risks will be analysed at the ninth ministerial session of UNCTAD to be held in Midrand, South Africa, from 27 April to 11 May (UNCTAD IX). The LDCs will figure high in the discussions there: 33 out of the 48 LDCs are situated on the African continent.
Unlike many other developing countries, especially those in East Asia, LDCs have not benefited so far from the process of globalization in the world economy. On the contrary, most of them have become increasingly marginalized, as is manifested in a range of development indicators.
LDC growth rates have lagged well behind those in other developing countries since the early 1970s. The LDCs´ share of world trade has fallen sharply - from 1.7 per cent of both world exports and imports in 1970 to 0.4 per cent and 0.7 per cent of exports and imports respectively in 1994. The LDCs have attracted a negligible share of foreign direct investment (FDI) flows to developing countries. They have achieved very little structural change and remain heavily dependent upon primary commodities for export earnings and on official development assistance (ODA) to finance a large share of their investment and government budgets.
Globalization and liberalization: opportunities for LDCs
Growth in world trade is expected to be robust over the next decade and significant growth in non traditional export markets may provide LDCs with opportunities to diversify export earnings away from their traditional primary products.
The Report stresses the advantages for LDCs that would result from effective liberalization of intraregional trade through the expansion of regional trading arrangements (RTAs), in which most LDCs are themselves members, together with other developing countries. Larger regional markets would allow domestic firms to exploit economies of scale and improve efficiency through increased competition. They may thus provide a useful training ground for LDCs´ domestic firms seeking to raise productivity to international standards before entering global export markets. Moreover, regional markets might also prove more attractive to investors.
Constraints to exploiting opportunities in the global economy
The major constraint on the ability of LDCs to exploit the opportunities arising from globalization and liberalization are their very weak supply capacities. The Report warns that faced with intensified competition LDCs may suffer a further erosion of their share of world export markets and a possible loss of domestic market share.
The Report sees little benefit in the Uruguay Round Agreements for the LDCs in the short run, since they have few internationally competitive industries. The Agreements may impose transitional costs on LDCs´ economies through a number of channels, such as erosion of tariff preferences in their export markets, higher food import prices, and compliance with the Round´s notification requirements.
Fall in external finance
LDCs also seem to be at risk of marginalization with regard to ODA. The share of aid to LDCs in the total ODA programmes of the major group of donor countries (the members of the Development Assistance Committee (DAC) of the OECD), has fallen from 27 per cent a decade ago to 23 per cent in 1994. ODA to LDCs as share of DAC countries´ GNP has declined from 0.09 per cent in 1990 to 0.07 per cent in 1994 - a set-back in the aid targets set for these countries when the Paris Programme of Action was adopted in 1990.
Current fiscal constraints in donor countries need not necessarily lead to a reduction of ODA flows to the neediest countries, such as the LDCs, says the Report, if aid programmes are refocused and prioritized. It argues that with even modest increases in the funding of multilateral aid programmes and priority allocations to LDCs within bilateral aid, it should be possible to meet the aid targets and commitments set out in the Programme of Action. In this respect, the outcome of ongoing negotiations on the replenishment of the concessional windows of the international institutions, which are key sources of financing for the LDCs, will be crucial.
The Report also calls for bolder action on LDCs´ external debt, which amounted to 73 per cent of their combined GDP in 1994. It sees the need for a substantial reduction in their outstanding debt stock. A comprehensive and concerted approach is required: a sufficiently endowed facility to deal with multilateral debt, together with extended implementation of existing schemes, could play a key role in achieving overall debt sustainability for the LDCs.
Need for market-oriented economic policies
Responding to the challenges posed by the processes of globalization and liberalization will require major adjustments in economic policies, resource allocation and production structures in the LDCs. The Report notes that as a result of these processes, the scope for autonomous national economic policies has been narrowed, leaving governments with few options other than to pursue market-oriented economic policies. Direct controls by governments over economic activities within their own national boundaries have become less effective and often counter-productive.
Globalization has significantly enhanced the premium on good macroeconomic policies and exacerbated the adverse repercussions of bad policies. Maintaining macroeconomic stability, adopting outward-oriented trade policies and avoiding excessive distortions in markets will be crucial policy requirements for all LDCs. Public policy must also address the critical supply-side constraints that impede the ability of their economies to compete effectively on global markets: strengthening the export sectors, rehabilitating and expanding the physical infrastructure, enhancing human-resource development, and improving agricultural technology.
The adjustment efforts of LDCs require more support from the international community, the Report stresses. Such support should take the form of adequate levels of concessional assistance to finance the infrastructural and social development programmes of LDC governments, and to provide balance of payments and budgetary support for facilitating economic reform programmes. Technical assistance to enhance capacities for policy formulation and implementation in these countries is also required. The international community must help to ensure that the market access of LDC exports is not undermined by protectionism, and that the growth of RTAs covering the major export markets for LDCs in the industrial countries does not damage the trading interests of LDCs.
Progress in Financial Sector Reforms
The Report indicates, in a special chapter on this topic, that many LDCs have made some progress in reforming their financial sectors. Banking laws have been revised to strengthen prudential regulations. Administrative controls which distorted resource allocation have been removed. There is greater competition in some countries and many banks are adopting a more explicitly commercial orientation and improving their services. However, restructuring large state-owned banks has proved to be very difficult and expensive, and substantial gaps in the range of services available in financial markets remain in many LDCs.
