A partnership with academia

Building knowledge for trade and development

Vi Digital Library - Text Preview

The Least Developed Countries Report 2016 - the Path to Graduation and Beyond: Making the Most of the Process

Report by UNCTAD, 2016

Download original document (English)

The 2016 Least Developed Countries (LDC) Report, subtitled 'The path to graduation and beyond: Making the most of the process' calls for more action to be taken by the international community on behalf of developing countries. The report argues the proportion of the global poor in the 48 LDCs has more than doubled since 1990, to well over 40 per cent, and the breaks down key priorities for graduation out of LDC status.

U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


The path to graduation and beyond: Making the most of the process


THE LEAST DEVELOPED COUNTRIES
REPORT 2016


EMBARGO
The contents of this Report must not
be quoted or summarized in the print,
broadcast or electronic media before
13 December 2016, 17:00 hours GMT






U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


The path to graduation and beyond: Making the most of the process


THE LEAST DEVELOPED COUNTRIES
REPORT 2016


New York and Geneva, 2016




Note


Symbols of United Nations documents are composed of capital letters with figures.
Mention of such a symbol indicates a reference to a United Nations document.


The designations employed and the presentation of the material in this publication
do not imply the expression of any opinion whatsoever on the part of the Secretariat
of the United Nations concerning the legal status of any country, territory, city or
area, or of its authorities, or concerning the delimitation of its frontiers or boundaries.


Material in this publication may be freely quoted or reprinted, but full acknowledgement
is requested. A copy of the publication containing the quotation or reprint should be sent
to the UNCTAD secretariat at: Palais des Nations, CH-1211 Geneva 10, Switzerland.


The overview of this report can also be found on the Internet, in all six official languages of
the United Nations, at www.unctad.org/ldcr


This publication has been edited externally.


UNITED NATIONS PUBLICATION


Sales No. E.16.II.D.9


ISBN 978-92-1-112905-2


eISBN 978-92-1-059723-4


ISSN 0257-7550


UNCTAD/LDC/2016


Copyright © United Nations, 2016
All rights reserved




What are the least developed countries?


Forty-eight countries are currently designated by the United Nations as “least developed countries” (LDCs).
These are: Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, the Central
African Republic, Chad, the Comoros, the Democratic Republic of the Congo, Djibouti, Equatorial Guinea, Eritrea,
Ethiopia, the Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, the Lao People’s Democratic Republic, Lesotho,
Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nepal, the Niger, Rwanda, Sao Tome and
Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, South Sudan, the Sudan, Timor-Leste, Togo, Tuvalu,
Uganda, the United Republic of Tanzania, Vanuatu, Yemen and Zambia.


The list of LDCs is reviewed every three years by the Committee for Development Policy (CDP), a group of
independent experts reporting to the United Nations Economic and Social Council (ECOSOC). The CDP, in its
report to ECOSOC, may recommend countries for addition to, or graduation from, the list of LDCs. The following
three criteria were used by the CDP in the latest review of the list, in March 2015:


(a) Per-capita income, based on a three-year average estimate of the gross national income (GNI) per capita,
with a threshold of $1,035 for possible cases of addition to the list, and a threshold of $1,242 for cases of
graduation from LDC status;


(b) Human assets, involving a composite index (the Human Assets Index) based on indicators of (i) nutrition
(percentage of undernourished population); (ii) health (child mortality ratio); (iii) school enrolment (gross
secondary school enrolment ratio); and (iv) literacy (adult literacy ratio);


(c) Economic vulnerability, involving a composite index (the Economic Vulnerability Index) based on indicators of
(i) natural shocks (index of instability of agricultural production; share of victims of natural disasters); (ii) trade-
related shocks (index of instability of exports of goods and services); (iii) physical exposure to shocks (share
of population living in low-lying areas); (iv) economic exposure to shocks (share of agriculture, forestry and
fisheries in GDP; index of merchandise export concentration); (v) smallness (population in logarithm); and (vi)
remoteness (index of remoteness).


For all three criteria, different thresholds are used for identifying cases of addition to the list of LDCs, and cases
of graduation from LDC status. A country will qualify to be added to the list if it meets the admission thresholds
on all three criteria and does not have a population greater than 75 million. Qualification for addition to the list will
effectively lead to LDC status only if the government of the relevant country accepts this status. A country will
normally qualify for graduation from LDC status if it has met graduation thresholds under at least two of the three
criteria in at least two consecutive triennial reviews of the list. However, if the three-year average per-capita GNI of
an LDC has risen to a level at least double the graduation threshold, and if this performance is considered durable,
the country will be deemed eligible for graduation regardless of its score under the other two criteria. This rule is
commonly referred to as the “income-only” graduation rule.


Four countries have so far graduated from LDC status: Botswana in December 1994, Cabo Verde in December
2007, Maldives in January 2011 and Samoa in January 2014.


In March 2009, the CDP recommended the graduation of Equatorial Guinea. This recommendation was
endorsed by ECOSOC in July 2009, then by the General Assembly in December 2013. The General Assembly
established as June 2017 the date of Equatorial Guinea’s graduation from LDC status.


In December 2015, the General Assembly endorsed the CDP’s 2012 recommendation to graduate Vanuatu.
The Assembly took into consideration the serious disruption that was caused to Vanuatu by Cyclone Pam in
March 2015, and decided, on an exceptional basis, to delay to December 2020 the country’s graduation from
LDC status.


The CDP’s 2015 recommendation to graduate Angola was endorsed by the General Assembly through a
resolution, in February 2016, that set February 2021 as the date of Angola’s graduation from LDC status. This
decision was an exceptional measure to take into account the high vulnerability of the Angolan economy to
commodity prices fluctuations.


In a June 2015 resolution, ECOSOC recalled the CDP’s 2012 recommendation to graduate Tuvalu from LDC
status, and deferred to 2018 the Council’s consideration of this potential graduation case.


After a recommendation to graduate a country has been endorsed by ECOSOC and the General Assembly,
the graduating country benefits from a grace period (normally three years) before graduation effectively takes
place. This period, during which the country remains an LDC, is designed to enable the graduating State and its
development and trading partners to agree on a “smooth-transition” strategy, so that the planned loss of LDC
status does not disrupt the socioeconomic progress of the country. A smooth-transition measure generally implies
extending to the graduated country, for a number of years after graduation, a concession the country had been
entitled to by virtue of LDC status.




Acknowledgements


The Least Developed Countries Report 2016 was prepared by UNCTAD. Contributors to this Report are: Rolf
Traeger (team leader), Mehmet Arda, Bineswaree Bolaky, Lisa Borgatti, Agnès Collardeau-Angleys, Pierre Encontre,
Christian Kingombe, Ralph-Christian Maloumby-Baka, Pauline Mauclet, Madasamyraja Rajalingam, Matfobhi Riba,
Giovanni Valensisi, Stefanie West and David Woodward (the LDC Report team). The work was carried out under the
overall guidance and supervision of Taffere Tesfachew, Director, Division for Africa, Least Developed Countries and
Special Programmes until April 2016; and thereafter of Guillermo Valles, Director and Officer-in-Charge, Division for
Africa, Least Developed Countries and Special Programmes.


UNCTAD colleagues Alessandro Nicita and Julia Seiermann contributed to preparations for the estimation and
analysis of the trade effects of graduation. Pamela Eser (United Nations Capital Development Fund) provided specific
inputs to the Report.


An ad hoc expert group meeting on “The Path to Graduation and beyond: Making the most of the process”
was held in Geneva on 28–29 June 2016 to peer-review the Report and its specific inputs. It brought together
specialists in the fields of international trade, trade law, finance, the least developed countries and graduation-
related issues, employment and productivity, industrial development and capacity building. The participants were:
Debapriya Bhattacharya (Centre for Policy Dialogue), Christophe Bellmann (International Centre for Trade and
Sustainable Development), Samuel Choritz (United Nations Capital Development Fund), Mario de Gortari (World Trade
Organization), Sema Kinn Gnangnon (World Trade Organization), Simon Hess (Enhanced Integrated Framework),
Jodie Keane (Commonwealth Secretariat), Christiane Kraus (Enhanced Integrated Framework), Massimiliano La
Marca (International Labour Organization), Richard Mukunji (Africa21), Raymond Saner (Centre for Socio-Eco-Nomic
Development), Frank Van Rompaey (United Nations Industrial Development Organization) and Jonathan Werner
(Enhanced Integrated Framework), as well as the members of the LDC Report team and the following UNCTAD
colleagues: Ermias Biadleng, Mussie Delelegn, Michael Lim, Benjamin McCarthy, Tansung Ok, Patrick Nwokedi
Osakwe, Claudia Roethlisberger, Julia Seiermann and Anida Yupari.


The following persons provided comments on drafts of the Report: Stefano Inama, Günther Fischer and Jörg
Mayer (UNCTAD), and Simona Santoro (United Nations Capital Development Fund).


Auelua Taito Samuelu Enari (Samoa), Danny Lui (Maldives), Chedza Mogae (Botswana) and João Resende dos
Santos (Cabo Verde) prepared background papers for the Report.


William John Rogers edited the text. Sophie Combette designed the cover.


Madasamyraja Rajalingam did the overall layout, graphics and desktop publishing.




Contents


What are the least developed countries ............................................................................................................... iii


Explanatory notes ................................................................................................................................................ x


Abbreviations ......................................................................................................................................................xi


Classifications used in this Report...................................................................................................................... xiii


Overview ........................................................................................................................................................ I-XIV


INTRODUCTION: Recent Economic Trends and Outlook for LDCs............................................................................... 1


A. Introduction ...................................................................................................................................................2


B. The real sector ...............................................................................................................................................2


C. Current account and international trade........................................................................................................4


1. Current account balance ............................................................................................................................4


2. Trade in goods and services .......................................................................................................................5


D. Resource mobilization ...................................................................................................................................9


1. Domestic resource mobilization ..................................................................................................................9


2. Official capital flows ..................................................................................................................................10


3. Foreign direct investment..........................................................................................................................10


4. Personal remittances ................................................................................................................................12


E. The economic outlook for least developed countries..................................................................................12


Notes ................................................................................................................................................................14


References .......................................................................................................................................................14


CHAPTER 1: Graduation: A Milestone, Not the Winning Post ................................................................................... 15


A. Introduction ..................................................................................................................................................16


B. The least developed country predicament, the rationale of the category and the significance of
graduation ...................................................................................................................................................17


1. The rationale of the least developed country category ..............................................................................17


2. The poverty trap .......................................................................................................................................18


3. The commodity-dependence trap ............................................................................................................19


4. Balance-of-payments constraints to growth .............................................................................................25


5. The significance of graduation ..................................................................................................................27


C. The graduation process and criteria ............................................................................................................27


D. The evolution of the least developed country list ........................................................................................30


E. The least developed country category: More relevant than ever .................................................................31


1. Economic divergence and the growing concentration of social deprivation ...............................................31


2. Divergence in productive capacities ..........................................................................................................33


3. The changing global economic environment for development ...................................................................37


F. Graduating to what? ....................................................................................................................................39


1. A milestone, not the winning-post ...........................................................................................................39


2. Graduation with momentum: The key role of productive capacities ...........................................................41


3. The key role of inclusivity and gender .......................................................................................................42




The Least Developed Countries Report 2016vi


G. The economic and political calculus of graduation .....................................................................................44


1. The economic calculus .............................................................................................................................44


2. The political calculus.................................................................................................................................45


H. Summary .....................................................................................................................................................46


Notes ................................................................................................................................................................47


References .......................................................................................................................................................48


CHAPTER 2: The National Dynamics of Graduation ....................................................................................................... 51


A. Introduction ..................................................................................................................................................52


B. Historical, current and future cases of graduation.......................................................................................52


C. The role of geographical factors in graduation performance ......................................................................56


1. The landlocked developing country factor.................................................................................................56


2. The small island developing State factor ...................................................................................................58


D. National processes leading to graduation ...................................................................................................63


1. Strategies of the graduates to date ...........................................................................................................63


2. Strategies, plans and policies of current least developed countries ...........................................................67


E. The least developed countries group in 2025: Implications of the UNCTAD projections ............................72


1. Geographical features ..............................................................................................................................72


2. Output structure and income ....................................................................................................................72


3. Urbanization and the rural economy .........................................................................................................74


4. Productivity and poverty ...........................................................................................................................74


5. Financing for development .......................................................................................................................75


6. Major exports ..........................................................................................................................................75


7. Export concentration ................................................................................................................................76


8. Conclusions .............................................................................................................................................77


F. Summary .......................................................................................................................................................77


Notes ................................................................................................................................................................79


References .......................................................................................................................................................80


CHAPTER 3: The Contribution of International Support Measures to Graduation ............................................ 83


A. Introduction ..................................................................................................................................................84


B. International support measures - An overview ...........................................................................................85


C. Finance-related international support measures .........................................................................................85


1. Volume of official development assistance ................................................................................................88


2. Official development assistance modalities ...............................................................................................93


3. Climate finance .........................................................................................................................................94


D. Trade-related international support measures.............................................................................................98


1. Accession to the World Trade Organization ..............................................................................................99


2. Preferential market access ........................................................................................................................99


3. Other special and differential treatment ..................................................................................................104


4. Trade-related technical assistance ..........................................................................................................106




viiCONTENTS


E. Technology-related international support measures..................................................................................109


1. Aid for science, technology and innovation .............................................................................................109


2. The Agreement on Trade-related Aspects of Intellectual Property Rights .................................................110


3. Climate change-related technology transfer ............................................................................................112


4. The Technology Bank .............................................................................................................................113


F. The role of international support measures in past graduation cases ........................................................114


G. The utilization of international support measures by present least developed countries and
their perceived usefulness ........................................................................................................................116


H. Conclusion .................................................................................................................................................117


I. Summary .....................................................................................................................................................119


Notes ..............................................................................................................................................................120


References .....................................................................................................................................................121


CHAPTER 4: Post-Graduation Processes and Challenges ........................................................................................ 125


A. Introduction ................................................................................................................................................126


B. Smooth transition ......................................................................................................................................126


C. Economic implications of graduation .......................................................................................................129


1. External financing ...................................................................................................................................129


2. Trade preferences ...................................................................................................................................133


3. Special and differential treatment ............................................................................................................140


4. Conclusion .............................................................................................................................................140


D. Post-graduation challenges .......................................................................................................................141


1. Persistent commodity dependence ........................................................................................................141


2. The risk of reversion ..............................................................................................................................143


3. The middle-income trap .........................................................................................................................145


E. The post-graduation development paths of the past graduates ...............................................................149


1. External debt .........................................................................................................................................149


2. Official development assistance and foreign direct investment ................................................................150


3. Economic diversification policies .............................................................................................................151


4. Poverty and inequality ............................................................................................................................152


F. Summary .....................................................................................................................................................153


Notes ..............................................................................................................................................................154


References .....................................................................................................................................................156


Annex 1. Simulation of the effects of loss of trade preferences due to graduation: Methodology ................159


CHAPTER 5: The Path to Graduation and Beyond ........................................................................................................ 161


A. Introduction ................................................................................................................................................162


B. Graduation with momentum ......................................................................................................................162


C. “Graduation-plus” strategies for graduation with momentum ..................................................................164


1. Rural transformation ..............................................................................................................................165


2. Industrial policy ......................................................................................................................................166




The Least Developed Countries Report 2016viii


3. Science, technology and innovation policy..............................................................................................167


4. Development finance ..............................................................................................................................169


5. Macroeconomic policies .........................................................................................................................170


6. Employment generation ..........................................................................................................................171


7. Gender ...................................................................................................................................................172


D. The international environment ...................................................................................................................173


E. International support measures .................................................................................................................174


1. Development finance ..............................................................................................................................174


2. Proposal: An LDC finance facilitation mechanism ...................................................................................177


3. Trade ........................................................................................................................................................................................................................ 178


4. Technology .............................................................................................................................................180


F. Least developed country criteria ...............................................................................................................182


G. Summary ...................................................................................................................................................183


Notes ..............................................................................................................................................................185


References .....................................................................................................................................................186


Boxes


1.1. A brief history of the LDC category .........................................................................................................17


1.2. Evolution of the criteria for inclusion in, and graduation from, the LDC category ..................................28


2.1. Methodology for the projection of LDC graduation until 2024 ...............................................................56


2.2. The MIRAB, PROFIT and SITE models for small island economies .......................................................61


3.1. Sectoral aid allocation in LDC graduates................................................................................................92


3.2. An early assessment of the services waiver .........................................................................................104


4.1. The smooth transition experience of recent LDC graduates ................................................................128


4.2. The middle-income trap and LDCs’ growth performance ....................................................................146


5.1. UNCDF’s MicroLead and MicroLead Expansion programmes .............................................................170


Figures


Intro.1. Evolution of commodity prices by type, 2000–2016 ..............................................................................3


Intro.2. Current account balance of LDCs, 2000–2021 ......................................................................................5


Intro.3. Current account balance as a percentage of GDP, 2015.......................................................................6


Intro.4. Composition of LDCs’ merchandise exports and imports, 2015...........................................................8


Intro.5. Net ODA disbursed for LDCs, 2006–2014 ...........................................................................................11


1.1. Primary commodities as share of merchandise exports, by commodity group, 2013–2015 .................21


1.2. Primary commodities as share of merchandise exports in LDCs ...........................................................22


1.3. Primary commodity dependence and export concentration, 2012–2014 ..............................................23


1.4. Current account balance of LDCs, by export category, 2000–2014 .......................................................26


1.5. Number of LDCs by geographical group, 1971–2016 ............................................................................31


1.6. LDC and ODC GDP per capita as percentage of world average, 1981–2014 ........................................32


1.7. LDCs’ share in world population, poverty and infrastructure shortfalls, 1980–2014..............................33


1.8. Tertiary education enrolment ratio, LDCs and ODCs, 1970–2013 ..........................................................34


1.9. Selected indicators of technological capabilities in LDCs and ODCs ....................................................35




ixCONTENTS


1.10. Per capita energy use, LDCs and ODCs, 1971–2013 .............................................................................35


1.11. Access to financial services, LDCs and ODCs, 2011–2014 (latest) ........................................................36


1.12. ICT access, LDCs, ODCs and graduating countries, 2014 .....................................................................37


1.13. ODA, trade, FDI and remittances as percentage of world GDP, 1960–2015 ..........................................38


1.14. Real ODA receipts per capita, LDCs and ODCs, 1960–2014 .................................................................39


1.15. LDC graduation and sustainable development .......................................................................................43


2.1. Country groups: LDCs, LLDCs, SIDS and sub-Saharan African countries ............................................57


2.2. Gross national income per capita of LDCs and subgroups, 2013–2015 ................................................59


2.3. Selected structural indicators of landlocked LDCs .................................................................................59


2.4. Selected structural indicators of SIDS LDCs ..........................................................................................62


2.5. Geographical features of the present and projected group of LDCs......................................................73


2.6. Export specialization of the present and projected group of LDCs........................................................75


3.1. ODA commitments and net disbursements to LDCs ..............................................................................89


3.2. Net ODA received as share of recipient country’s GNI ...........................................................................90


3.3. Net ODA to LDCs from individual DAC member countries, 1992–2014 (selected years).......................91


3.4. Net ODA to LDCs: Annual delivery gap vis-à-vis United Nations targets for DAC donors .....................93


3.5. ODA commitments to LDCs by DAC donors, by aid type ......................................................................94


3.6. Global climate finance architecture diagram ..........................................................................................96


3.7. Quad imports originating from LDCs by tariff treatment, 2013 .............................................................102


3.8. Quad preference coverage and utilization rate, 2013 ...........................................................................103


3.9. Aid for Trade disbursements to LDCs by broad sector (all donors)......................................................107


3.10. ODA gross disbursement for STI in LDCs and ODCs, 2002–2014 .......................................................110


4.1. Smooth transition procedures reporting by graduating and graduated countries and the CDP ..........127


4.2. Composition of total official flows before and after LDC graduation....................................................132


4.3. Effects of preference losses related to LDC graduation vis-à-vis G20 countries .................................135


4.4. Effects of preference losses related to LDC graduation by sector .......................................................138


4.5. Commodity dependence and current account balance, 2012–2014 ....................................................142


4.6. Climate-related risks and potential for risk reduction ...........................................................................144


4.7. External debt level of the graduated countries, index, graduation year = 100 .....................................149


Box figures


1.1. Changes in LDC criteria over time ..........................................................................................................29


3.1. Sectoral composition of aid disbursements, present LDC total and LDC graduates
before graduation ....................................................................................................................................92


4.1. Distribution of current LDCs in terms of GDP per capita relative to the United States ........................148


4.2. Real GDP per-capita growth, 1950–2010 .............................................................................................148


Tables


Intro.1. Real GDP growth rates in LDCs, other developing countries and developed countries, 2002–2017 ...3


Intro.2. LDC exports and imports of goods and services, 2005–2015, selected years .....................................7


Intro.3. Gross fixed capital formation, gross domestic savings and external resource gap in LDCs ................9


Intro.4. FDI inflows into LDCs, 2002–2015 .......................................................................................................11


Intro.5. Remittances inflows to LDCs, 2002–2015, selected years ..................................................................12




The Least Developed Countries Report 2016x


1.1. Median access to ICTs by country group, 2014 ....................................................................................37


2.1. The history of graduation to date ...........................................................................................................53


2.2. Projected graduation cases, 2017–2024 ...............................................................................................54


2.3. Structural indicators of LDCs and ODCs, 2010–2015 ...........................................................................73


2.4. Export concentration index of LDCs and ODCs, 1995–2015, selected years .......................................76


3.1. Main international support measures in favour of LDCs........................................................................86


3.2. ODA from OECD DAC member countries to LDCs reported as untied .................................................95


3.3. Aid for Trade to LDCs and other developing countries ........................................................................108


4.1. LDCs’ and LDC graduates’ access to concessional windows, selected multilateral
development banks, 2016 ...................................................................................................................131


4.2. Overview of selected preferential market access schemes in favour of LDCs....................................134


4.3. Annual effects of preference losses extrapolated to all LDCs, by region ............................................136


4.4. Performance of graduated countries, 2015 indicators ........................................................................149


4.5. Net ODA receipts .................................................................................................................................150


4.6. Sectoral composition of gross value added, averages before and after graduation,
selected countries ................................................................................................................................151


4.7. Export concentration index, ten years pre- and post-graduation........................................................151


4.8. Poverty rates, Gini index and unemployment rate for the graduated countries, various years ...........152


Annex table


A.1. Counterfactuals used in the analysis ....................................................................................................160


Box tables


2.1. Classification of island economies according to the MIRAB and PROFIT-SITE models .........................61


4.1. Transition matrix across World Bank income categories, for LDC and LDC graduates ........................147


EXPLANATORY NOTES


The term “dollars” ($) refers to United States dollars unless otherwise stated. The term “billion” signifies 1,000
million.


Annual rates of growth and changes refer to compound rates. Exports are valued f.o.b. (free on board) and
imports c.i.f. (cost, insurance, freight) unless otherwise specified.


Use of a dash (–) between dates representing years, e.g. 1981–1990, signifies the full period involved, including
the initial and final years. An oblique stroke (/) between two years, e.g. 1991/92, signifies a fiscal or crop year.


The term “least developed country” (LDC) refers, throughout this report, to a country included in the United Nations
list of least developed countries.


In the tables:


Two dots (..) indicate that the data are not available, or are not separately reported.


One dot (.) indicates that the data are not applicable.


A hyphen (-) indicates that the amount is nil or negligible.


Details and percentages do not necessarily add up to totals, because of rounding.




xiCONTENTS


Abbreviations


AFD Agence Française de Développement


AfDF African Development Fund


AGOA African Growth and Opportunity Act


APQL augmented physical quality of life


AsDF Asian Development Fund


ASEAN Association of Southeast Asian Nations


AUC African Union Commission


CDM Clean Development Mechanism


CDP Committee for Development Policy


COP Conference of the Parties to UNFCCC


COP21 twenty-first session of the Conference of the Parties to UNFCCC


CTCN Climate Technology Centre and Network


DAC OECD Development Assistance Committee


DFQF duty-free quota-free


ECOSOC United Nations Economic and Social Council


EDI economic diversification index


EIF Enhanced Integrated Framework


EITI Extractive Industries Transparency Initiative


EPA Economic Partnership Agreement


EVI economic vulnerability index


FDI foreign direct investment


FERDI Fondation pour les Etudes et Recherches sur le Développement International


FFM finance facilitation mechanism


G20 Group of Twenty


GATS General Agreement on Trade in Services


GATT General Agreement on Tariffs and Trade


GCF Green Climate Fund


GDP gross domestic product


GEF Global Environmental Facility


GNI gross national income


GNP gross national product


GSP Generalized System of Preferences


GSTP Global System of Trade Preferences


GVC global value chain


HAI human assets index


HS Harmonized System


ICT information and communications technology


IDA International Development Association


IMF International Monetary Fund


IPoA Programme of Action for the Least Developed Countries for the Decade 2011–2020 (Istanbul
Programme of Action)


ISM international support measure




The Least Developed Countries Report 2016xii


ITC International Trade Centre


LDC least developed country


LDCF Least Developed Country Fund


LLDC landlocked developing country


MIRAB migration, remittances, foreign aid and public bureaucracy


MFN most favoured nation


NAPA national adaptation programme of action


NDE national designated entity


NDP national development plan


NTB non-tariff barrier


NTM non-tariff measure


ODA official development assistance


ODC other developing country


ODI Overseas Development Institute


OECD Organisation for Economic Co-operation and Development


PPP purchasing power parity


PROFIT people, resources, overseas management, finance and transport


PTA preferential trade agreement


Quad Canada, European Union, Japan, United States of America


SAMOA SIDS Accelerated Modalities of Action


SDG Sustainable Development Goal


SDT special and differential treatment


SIDS small island developing State(s)


SITE small island tourist economy


SME small and medium-sized enterprise


SPARTECA South Pacific Regional Trade and Economic Cooperation Agreement


STI science, technology and innovation


TNA technology needs assessment


TRIMs Agreement Agreement on Trade-related Investment Measures


TRIPS Agreement Agreement on Trade-related Aspects of Intellectual Property Rights


UNCDF United Nations Capital Development Fund


UNDESA United Nations Department of Economic and Social Affairs


UNDP United Nations Development Programme


UNECA United Nations Economic Commission for Africa


UNFCCC United Nations Framework Convention on Climate Change


UNIDO United Nations Industrial Development Organization


UNSGHLP United Nations Secretary-General’s High-Level Panel on the Technology Bank for the Least
Developed Countries


UN-OHRLLS United Nations Office of the High Representative for the Least Developed Countries, Landlocked
Developing Countries and Small Island Developing States


WIPO World Intellectual Property Organization


WTO World Trade Organization




xiiiCONTENTS


Classifications used in this Report


Least developed countries


Geographical/structural classification


Unless otherwise specified, in this Report the least developed countries (LDCs) are classified according to a
combination of geographical and structural criteria. The small island LDCs that are geographically in Africa or Asia are
thus grouped with the Pacific islands, due to their structural similarities. Haiti and Madagascar, which are regarded
as large island States, are grouped with the African LDCs. South Sudan declared its independence on 9 July 2011,
and became both an independent State and a United Nations Member State on 14 July 2011. Accordingly, starting
with 2011, data for South Sudan and the Sudan, where available, are shown under the respective country name. For
periods prior to the independence of South Sudan, data for the Sudan (former) include those for South Sudan unless
otherwise indicated. The resulting groups are as follows:


African LDCs and Haiti: Angola, Benin, Burkina Faso, Burundi, the Central African Republic, Chad, the Democratic
Republic of the Congo, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, the Gambia, Guinea, Guinea-Bissau, Haiti,
Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, the Niger, Rwanda, Senegal, Sierra Leone,
Somalia, the Sudan (former) or South Sudan and the Sudan, Togo, Uganda, the United Republic of Tanzania, Zambia.


Asian LDCs: Afghanistan, Bangladesh, Bhutan, Cambodia, the Lao People’s Democratic Republic, Myanmar, Nepal,
Yemen.


Island LDCs: The Comoros, Kiribati, Sao Tome and Principe, Solomon Islands, Timor-Leste, Tuvalu, Vanuatu.


Graduation projection


This year’s Report also classifies LDCs into two groups according to their graduation prospects, as follows. The
methodology for reaching this group composition is explained in box 2.1 of chapter 2.


LDCs projected to graduate in the period 2017–2024: Afghanistan, Angola, Bangladesh, Bhutan, Djibouti, Equatorial
Guinea, Kiribati, the Lao People’s Democratic Republic, Myanmar, Nepal, Sao Tome and Principe, Solomon Islands,
Timor-Leste, Tuvalu, Vanuatu, Yemen.


Projected group of LDC by 2025: Benin, Burkina Faso, Burundi, Cambodia, the Central African Republic, Chad, the
Comoros, the Democratic Republic of the Congo, Eritrea, Ethiopia, the Gambia, Guinea, Guinea-Bissau, Haiti, Leso-
tho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, the Niger, Rwanda, Senegal, Sierra Leone, Somalia,
South Sudan, the Sudan, Togo, Uganda, the United Republic of Tanzania, Zambia.


Export specialization


UNCTAD has classified the LDCs under six export specialization categories, according to which type of exports ac-
counted for at least 45 per cent of total exports of goods and services in 2013–2015. The group composition is as
follows:


Agricultural and food exporters: Guinea-Bissau, Malawi, Solomon Islands, Somalia*.


Fuel exporters: Angola, Chad, Equatorial Guinea, Yemen.


Manufactures exporters: Bangladesh, Bhutan, Cambodia, Haiti, Lesotho.


Mineral exporters: The Democratic Republic of the Congo, Guinea, Mali, Mauritania, Sierra Leone, Zambia.


Mixed exporters: Benin, Burkina Faso, Ethiopia, the Lao People’s Democratic Republic, Liberia, Madagascar,
Mozambique, Myanmar, the Niger, Senegal, the Sudan, Togo, the United Republic of Tanzania.


Services exporters: Afghanistan, Burundi, the Central African Republic, the Comoros, Djibouti, Eritrea, the Gambia,
Kiribati, Nepal, Rwanda, Sao Tome and Principe, Timor-Leste, Tuvalu, Uganda, Vanuatu.


* No data for Somalia services exports are available.
No export data for South Sudan exports are available.




The Least Developed Countries Report 2016xiv


Other groups of countries and territories


Developed countries: Andorra, Australia, Austria, Belgium, Bermuda, Bulgaria, Canada, Croatia, Cyprus, Czechia,
Denmark, Estonia, Finland, France, Germany, Greece, Greenland, Hungary, Iceland, Ireland, Italy, Israel, Japan,
Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, San Marino,
Slovakia, Slovenia, Spain, Sweden, Switzerland, United Kingdom of Great Britain and Northern Ireland, United States
of America, Holy See, Faeroe Islands, Gibraltar, Saint Pierre and Miquelon.


Other developing countries (ODCs): All developing countries (as classified by the United Nations) that are not LDCs.


Product classification


Goods: The figures provided below are the codes of the Standard International Trade Classification (SITC), revision 3.


Primary commodities: Sections 0, 1, 2, 3, 4, division 68 and groups 667 and 971.


Agriculture and food: Sections 0, 1, 2, and 4, excluding divisions 27 and 28.


Minerals: Divisions 27, 28, 68, and groups 667 and 971.


Fuels: Section 3.


Manufactures: Sections 5, 6 (excluding division 68 and group 667), 7 and 8.


Labour-intensive and resource-intensive manufactures: Divisions 61, 63, 64, 65, 82, 83, 84, 85, 66 (excluding
group 667).


Low-skill- and technology-intensive manufactures: Divisions 67, 69 and groups 785, 786, 791, 793, 895, 899.


Medium-skill- and technology-intensive manufactures: Divisions 62, 71, 72, 73, 74, 77 (excluding group 776),
81, and groups 781 to 784, 893, 894.


High-skill- and technology-intensive manufactures: Section 5, divisions 75, 76, 87, 88 and groups 776, 792,
891, 892, 896, 897.


Section 9 (Commodities and transactions not classified elsewhere in the SITC) has been included only in the total
of exports of goods and services, but not in the goods classification above, except for group 971 (Gold, non-
monetary (excluding gold ores and concentrates)), which has been included in Minerals.


Services: Total services cover the following main categories: transport, travel, communications, construction,
insurance, financial services, computer and information services, royalties and licence fees, other business services,
personal, cultural, recreational and government services.




OVERVIEW




The Least Developed Countries Report 2016II


Deteriorating economic performance


Following several years of apparent resilience to the international economic and financial crisis, economic growth
in the least developed countries (LDCs) has declined steeply since 2012, reaching a low of 3.6 per cent in 2015.
This is the slowest pace of expansion this century, and far below the target rate of at least 7 per cent per annum
recommended by the 2011 Programme of Action for the Least Developed Countries for the Decade 2011–2020
(the so-called Istanbul Programme of Action (IPoA)). Thirteen LDCs experienced a decline in gross domestic product
(GDP) per capita in 2015. This performance has been strongly influenced by the sharp decline in commodity prices,
which has particularly affected African LDCs. Such weak economic growth is a serious obstacle to generating
and mobilizing domestic resources for structural transformation and investment in the development of productive
capacities. It also hampers progress towards the United Nations Sustainable Development Goals. This economic
slowdown is likely to be reinforced by the current world economic climate, which remains lacklustre in its recovery.


Depressed exports as a result of falling commodity prices, with a smaller decline in imports, have also led to a
doubling of the merchandise trade deficit of LDCs as a group from $36 billion in 2014 to $65 billion in 2015. The
largest increase in the merchandise trade deficit took place in the subgroup of African LDCs and Haiti. The services
trade deficit fell somewhat for the LDCs as a group, from $46 billion in 2014 to $39 billion in 2015, as a shrinking
deficit across African LDCs and Haiti more than offset an increasing deficit across Asian and island LDCs. These
developments largely account for an increase of almost one third in the LDC current account deficit to a record $68.6
billion in 2015, a trend that is expected to continue over the medium term.


Domestic resource mobilization has been recognized by the Addis Ababa Action Agenda of the Third International
Conference on Financing for Development and the 2030 Agenda for Sustainable Development (2030 Agenda) (both
adopted in 2015) as an important process for LDCs to finance their development. However, this objective remains
elusive for most LDCs due to their external resource gaps, the complexity of their development challenges, their
narrow tax bases, deficiencies in tax collection and administration, resources forgone due to illicit financial flows, and
the underdevelopment of their domestic financial sectors. The external resource gap of LDCs as a whole increased to
3.2 per cent of GDP in 2014, due mainly to an increase in fixed investment in Asian LDCs that was not accompanied
by a corresponding rise in their domestic savings. If LDCs are to raise their fixed investment, as is essential for
structural transformation, the deficit will inevitably widen in the coming years, particularly in view of the enormous
financing needs associated with the Sustainable Development Goals.


The resources gap is financed by a mixture of official and private financial flows. Official development assistance
(ODA) to LDCs declined by 12.2 per cent in 2014 to $26 billion — some 27 per cent of total aid to developing
countries as a whole. Foreign direct investment (FDI), by contrast, rose by one third to $35 billion (9.5 per cent of the
developing-country total), most being directed to African LDCs. Contrary to worldwide trends, workers’ remittances
to LDCs also rose in 2015, reaching $41.3 billion. They exceeded 20 per cent of GDP in the Comoros, Haiti, Liberia
and Nepal.


The economic outlook for LDCs as a group for the next two years remains uncertain in the face of a lacklustre
global economic environment that is depressed by weak demand in developed countries, a continuing slowdown of
international trade, a sharp decline in growth or even recession in many developing countries, and high or rising debt
in both developed and developing countries. In some LDCs, the prospects are aggravated by risks in the domestic
political environment. Nevertheless, the real GDP growth of LDCs as a whole is forecast to recover somewhat to 4.5
per cent in 2016 and 5.7 per cent in 2017, though remaining below the IPoA target.


Graduation: A milestone, not the winning post


The IPoA includes a target that at least half of the LDCs should satisfy the criteria for graduation from LDC status
by 2020. This was a bold step by the international community, putting LDC graduation firmly on the global agenda.
The midpoint between the adoption of this target and the target date is an opportune time to evaluate the prospects
for its fulfilment and to review the significance, nature and process of graduation.


Graduation is the process through which a country ceases to be an LDC and becomes one of what this Report
terms “other developing countries” (ODCs). The significance of this step emerges from the rationale behind the
LDC category itself. Its establishment in 1971 reflected a recognition that certain countries faced particularly serious




IIIOVERVIEW


obstacles to achieving the structural transformation needed to advance economically and socially. The international
community adopted special international support measures (ISMs) for LDCs to enable them to escape from the
intersecting vicious circles that prevented their economic progress, and to derive developmental benefits from the
global economy. This required the development of clear criteria to define which countries should be eligible for such
measures.


There are three major vicious circles affecting LDCs. First, many LDCs suffer from a poverty trap, with low income
and limited economic growth giving rise to high levels of poverty, which in turn act as a brake on economic growth.
In spite of the progress achieved in the era of the Millennium Development Goals (2000–2015), it is in LDCs that
poverty has been and remains most pervasive, with almost half of their total population still living in extreme poverty.
Two thirds of the labour force of LDCs work in mostly smallholder agriculture, a sector suffering from chronically low
labour productivity. Productivity growth has been constrained by the adverse impact of risk aversion on investment,
and often by limits to access to and adoption of new technology.


Second, many LDCs suffer from a commodity trap, as they depend heavily on commodity production and trade
for employment, income, savings and foreign exchange. In the overwhelming majority of LDCs (38 of the 47 for
which data are available), commodities accounted for more than two thirds of merchandise exports in 2013–2015.
Commodity dependence increases vulnerability to exogenous shocks (such as adverse terms of trade movements,
extreme meteorological events and climate change impacts). It also often gives rise to a “natural resource curse”,
when exchange rate appreciation undermines the competitiveness of the manufacturing sector or when rent-seeking
behaviour prevails, and there are limited incentives for public and private incentives to invest, even in human capital.
Like poverty traps, commodity dependence tends to be persistent. LDCs face difficulties in upgrading within global
value chains and are often kept locked into specialization in primary commodities and low-value-added products.
With a few notable exceptions (Afghanistan, Burundi, the Comoros, Solomon Islands and Uganda), there is little
evidence of a significant reduction in primary commodity dependence since the beginning of the century.


Third, weak productive bases and limited export diversification in LDCs give rise to a very high import content in
production and consumption, and chronic current account deficits. These factors in turn result in aid dependence
and the accumulation of foreign debt. These factors can also weigh heavily on the growth rate, as imports of capital
goods and intermediate goods for investment projects may be reduced while essential imports such as food and
fuels absorb the available foreign exchange.


Thus graduation, in principle, should mark the point at which an LDC has risen sufficiently from these vicious
circles to rely primarily on its own strengths and on international markets for its subsequent development, without
requiring the maximum concessionary treatment from development partners. In brief, graduation is normally expected
to mark a move from economic dependence to a state of greater self-reliance.


Graduation from LDC status needs to be viewed as part of a longer and broader development process, in which
economic growth should both result from and contribute to the development of productive capacities and a process
of structural transformation. The latter entails an upgrade in the country’s economic activities and helps to increase
resilience to exogenous shocks.


Graduation is thus not the winning post of a race to cease being an LDC, but rather the first milestone in the
marathon of development. It represents the end of a political and administrative process, in which the institutions
responsible for inclusion in and exclusion from the group of LDCs take decisions based on statistical and other
criteria. However, it does not mark the completion of an economic and developmental process.


Formally, an LDC is eligible to graduate if, in at least two consecutive triennial reviews of the list of LDCs by the
Committee for Development Policy (CDP), it complies with one of two conditions: either it meets the graduation
threshold of at least two of the three LDC criteria (gross national income (GNI) per capita, the human assets index (HAI)
and the economic vulnerability index (EVI)); or it reaches a level of income per capita of at least double the graduation
threshold for that criterion (the “income-only” graduation rule). The actual decision on graduation, however, does not
follow mechanically from the satisfaction of these conditions: the specific circumstances of each country, especially
its vulnerability, and the likely impact of graduation and the ensuing loss of LDC treatment are also taken into account.


In contrast to the ambition of the graduation target set by the IPoA, and contrary to expectations when the LDC
category was established, the number of LDCs doubled from the original list of 25 in 1971 to a peak of 50 between
2003 and 2007, before decreasing to 48 in 2014. This partly reflects the fact that only four LDCs have graduated
in the 45 years since the establishment of the category: Botswana (1994), Cabo Verde (2007), Maldives (2011) and
Samoa (2014).




The Least Developed Countries Report 2016IV


The limited number of graduations to date reflects a marked divergence of development paths among developing
countries, with dynamic “emerging market economies” leaving the LDCs well behind in many respects. The per-
capita income gap between LDCs on the one hand and ODCs and countries with economies in transition on the
other has consistently widened since 1981. This divergence largely reflects the increasing gap in the productive
capacities of the two groups, a gap mirrored by large differences in the social indicators.


The gap in social indicators is of particular importance in the context of the 2030 Agenda: as noted in previous
Least Developed Countries Reports, LDCs will be the battleground on which the 2030 Agenda will be won or lost.
Achieving the Sustainable Development Goals in LDCs will require major breakthroughs in the development of
productive capacities, structural transformation, technological upgrading, economic diversification, productivity and
job creation, some of which lie beyond the explicit targets of the Goals themselves. Thus, for LDCs to meet the
Sustainable Development Goal targets in full would entail not only graduation in a formal sense, but graduation as
part of a broader and longer-term process of economic transformation — what this Report terms “graduation with
momentum”.


The very limited number of LDC graduation cases to date is also in part indicative of major shifts in the international
economic environment in recent decades, as market-based flows, especially of international trade and international
investment, have increased in importance in the global economy. As a result, the success of developing countries has
become increasingly dependent on fruitful engagement with export markets, particularly in higher-value segments
of global value chains, including by means of appropriate strategic FDI policies. This gives rise to a growing need
to compete, which intensifies the challenge posed by the widening gap in productive capacities between ODCs
and LDCs. LDCs have been further disadvantaged by the relative decline in ODA, on which they are much more
reliant than ODCs. The impact of the decreasing importance of ODA in international flows is compounded when the
geographical allocation of aid does not benefit the neediest countries, and when its sectoral allocation is only weakly
focused on the building of productive capacities.


The conceptualization of graduation as a milestone rather than a winning post has important implications for
LDCs’ approaches to development and to graduation. Just as it is inadvisable to sprint for the first kilometre of a
marathon, it is not enough simply to target achievement of the criteria needed for graduation. It is also of paramount
importance to establish the foundations needed to maintain development progress beyond graduation. This means
approaching the graduation process with a view to longer-term development needs, rather than focusing only on
the graduation criteria themselves. The latter approach risks diverting attention and resources from other aspects of
development which, though not fully reflected in the criteria, will be critical long after graduation has been achieved.


Thus, the goal is not graduation per se, but graduation with momentum, which will allow the development trajectory
to be maintained and pitfalls to be avoided far beyond graduation: in the long term, how a country graduates is at
least as important as when it graduates. This indicates a need to move beyond graduation strategies oriented to the
achievement of the graduation criteria, towards “graduation-plus” strategies directed to graduation with momentum
and establishment of the conditions for a viable long-term development process.


While the development that leads a country to graduation is clearly beneficial, the loss of LDC status at graduation
may give rise to potentially important economic costs as a result of the loss of access to the ISMs associated with
LDC status. The magnitude of such costs depends on the extent to which the country concerned benefited from
such measures before graduation. The need for ISMs is likely to be greatest at early stages of development, when
the ability to compete in international markets is most limited. However, the potential to exploit and benefit from some
ISMs, particularly preferential market access, largely depends on the level of productive capacities, which becomes
higher as a country moves towards graduation. In a country where productive capacities expand in export sectors
that are largely covered by trade preferences, and these preferences have been utilized, their loss may be a major
cost. This highlights the importance of a smooth transition process in such cases, and of early preparation for the
consequences of graduation as part of “graduation-plus” strategies.


National policy approaches to graduation depend not only on economic considerations but also on a political
calculus of which the economic calculus forms a part. This includes the potential for a “kudos effect” domestically —
the opportunity for a government to gain political advantage by claiming responsibility for having brought a country
from LDC status to parity with other developing countries. Such considerations may have encouraged some LDC
governments to develop strategies specifically oriented towards graduation by a specified date.


While some LDC governments resisted the idea of graduation during the 1990s and early 2000s, many now
seem to take a much more positive view, interpreting reclassification as synonymous with irreversible progress and a




VOVERVIEW


reflection of their proactive efforts to achieve such progress. This apparent change of attitude could in part reflect the
political dividends offered by graduation, combined with the declining economic effectiveness of some of the ISMs.


The national dynamics of graduation


During the 45 years since the establishment of the LDC category, despite the domestic efforts of LDCs themselves
and the impact of ISMs with the stated objective of strengthening their development processes, only four countries
have succeeded in graduating from LDC status. This raises the question of why the development performance of
LDCs has been so disappointing in both its domestic and international dimensions. Answering this question requires
an understanding of the processes through which LDCs can exit from underdevelopment and achieve graduation.


To date, the countries which have achieved graduation comprise one landlocked mineral exporter in Africa
(Botswana) and three small island economies that predominantly export services (Cabo Verde, Maldives and Samoa).
For the purposes of this Report, a simulation was conducted to assess which LDCs were likely to graduate in the
2017–2024 period (without prejudging decisions by the CDP, the Economic and Social Council (ECOSOC) the United
Nations General Assembly or LDCs themselves).


This exercise indicates that the number of graduations in the coming years is likely to fall well short of the IPoA
target, showing only 10 countries as meeting the graduation criteria by 2020, against a target of 24. By 2025, only
16 countries are projected to have graduated. These 16 countries include all but one (the Comoros) of the seven
small island LDCs and all but one (Cambodia) of the eight Asian LDCs, but only three (Angola, Equatorial Guinea and
Djibouti) of the 33 LDCs in the Africa and Haiti group.


Despite their major structural handicaps (high environmental vulnerability due to high exposure to natural
disasters, economic remoteness, smallness of domestic markets and a high dependence on ODA and remittances),
small island developing States (SIDS) tend to perform relatively well in terms of graduation. This partly reflects their
relatively large human asset endowments (reflecting their achievements in education and health) and high per-capita
incomes (relative to other LDCs), although these positive features are counterbalanced by their high economic and
environmental vulnerability.


Conversely, being landlocked presents many LDCs with additional challenges that are a greater obstacle to
graduation. The landlocked developing countries (LLDCs) among the LDCs generally perform considerably less
well than other LDCs, reflecting their more limited export diversification and productive capacities, lack of export
competitiveness, economic remoteness and dependence on the economic and political situations of neighbouring
(transit) countries. However, these challenges do not prevent some landlocked LDCs from achieving positive
development outcomes or graduation, as attested by the first graduation case (Botswana) and the presence of four
LLDCs among the LDCs projected to graduate before 2025.


While the structural handicaps outlined above may jeopardize structural transformation and development, the
historical success of four LDCs in graduating and the projected future graduation cases demonstrate that neither
underdevelopment traps nor disadvantageous geographical features are insurmountable obstacles to graduation.
Successful development depends upon national and international policies and strategies that address the root
causes of these underdevelopment traps, and kick-start the process of sustainable development.


None of the four ex-LDCs carried out policies with the explicit goal of graduation. Botswana’s development
policies were based on the efficient capture and use of mineral rents, and effective investment in education and
physical infrastructure. The other three graduates (Cabo Verde, Maldives and Samoa) owe their graduation to sound
policies to develop a competitive tourism sector and other services sectors (for example, offshore financial and legal
services in Samoa), together with investment in the fisheries industry and in human capital. A strong influx of ODA
and remittances was instrumental in supporting various forms of structural economic progress in Cabo Verde and
Samoa.


The current LDCs, by contrast, tend to direct their strategies more explicitly towards graduation. Those countries
that are close to graduation thresholds tend to adopt graduation as a major national goal and typically develop
programmes targeting specific components of the graduation criteria. Often, the goal of graduation is set in the
context of long-term development plans that aim at attaining the status of a middle-income country or even an
“emerging market” economy.




The Least Developed Countries Report 2016VI


Those LDCs that are further below graduation thresholds, by contrast, tend to aim at increasing per-capita income,
and often implement strategies and programmes aimed at broad-based sustainable development. To that end, they
typically focus on issues such as domestic resource mobilization, rural development, diversification of production and
exports, raising productivity and increasing disaster preparedness.


UNCTAD’s graduation projection exercise highlights the different growth and development paths that can lead to
graduation. Some, but not all, of the 16 countries that are projected to have graduated by 2025 are likely to achieve
graduation with momentum through broad-based development of productive capacities, diversification and structural
economic transformation. This is the case for some manufactures exporters (Bangladesh and Bhutan) and mixed
exporters (the Lao People’s Democratic Republic and Myanmar). When graduation is achieved through a broader
process of economic and social development, including progress towards structural transformation and economic
diversification, it is likely to be more inclusive and to provide more solid foundations for continued development in the
post-graduation phase.


However, by no means all graduates will achieve graduation with momentum: some LDCs are projected to reach
graduation without having undergone meaningful structural economic transformation. This may be the case, in
particular, for economies based on fuel extraction and, to some extent, SIDS. While fuel extraction boosts income,
in most cases it does not lead to diversification or to commensurate social and economic inclusion, and does
not necessarily provide a basis for sustainable development progress. Achieving these last goals requires policies
and strategies to reinvest resource rents in productive-capacity development in other sectors beyond the extractive
industries.


The past and projected graduation cases indicate that SIDS typically graduate through a combination of limited
diversification towards services and investment in human capital. However, this is not enough for strong structural
economic transformation, which requires a greater degree of diversification and advances towards higher-value-
added sectors and activities.


The projections conducted for this Report have important implications for the composition of the LDC group over
the next decade. In 2025, if the projections prove broadly correct:


• The LDC group would be composed of 32 countries, all but two (Cambodia and Haiti) in Africa;


• There would be only one SIDS (the Comoros), while coastal countries would represent a small majority of the
total (17 of 32), only slightly outnumbering LLDCs (14);


• Commodities would continue to play a major role in the economy of the group as a whole; and


• The development challenges facing the group as a whole would be intensified, with greater reliance on agriculture
for output and employment, higher poverty rates, low average labour productivity, and a higher degree of aid
dependence. In the absence of more decisive and efficient development policies, the development gap between
the remaining LDCs and ODCs would thus be even wider than at present, requiring heightened attention from
both national authorities and the international community.


Differences in graduation performance highlight an increasing differentiation within the LDC group. While some
LDCs are achieving visible progress in terms of building productive capacities, diversifying their economies and
moving resources to higher-value-added sectors and products, others remain at the initial stage of these processes.


It is of utmost importance that the States and organs influencing or deciding the cases of graduation (LDCs
themselves, the CDP, ECOSOC and the General Assembly) continue to take due account of factors other than
statistical eligibility for graduation. Moreover, the possibility of graduation without structural transformation points to
the need to reconsider the graduation criteria, and to reflect more fully the long-term development processes that
these countries are undergoing.


The contribution of international support measures to graduation


The effectiveness of ISMs for LDCs is coming under greater scrutiny as growing emphasis is placed on the
monitoring and evaluation of international support. This issue should be addressed in terms of the contribution of
ISMs to enabling LDCs to overcome the structural handicaps and exit from the “traps” that limit their development
of productive capacities and progress towards structural transformation — that is, in terms of their contribution to
graduation with momentum.




VIIOVERVIEW


ISMs for LDCs encompass a range of measures, commitments and provisions across the fields of development
finance, trade, technology and technical assistance. The widening divergence between LDCs and ODCs in terms of
income and productive capacities is indicative of shortcomings in their development models, strategies and policies,
and/or of the ISMs that have been put in place in their favour. By making a greater contribution to the development
of productive capacities in LDCs, more effective ISMs would have helped to limit the divergence between LDCs and
ODCs. The failings of LDC-specific ISMs, in turn, reflect a combination of inappropriateness, diminishing effectiveness,
insufficient funding, inadequate institutional settings and insufficient uptake.


There are 139 special and differential treatment (SDT) provisions benefiting developing countries (including LDCs)
in the agreements of the World Trade Organization (WTO), of which 14 are specific to LDCs. Several decisions
concerning LDCs have also been adopted since the inception of WTO. These provisions vary greatly in breadth,
relevance and effectiveness. They have various objectives, notably to facilitate compliance with WTO rules, for
example, through extended implementation periods. Some call on WTO members to provide assistance in various
forms to LDCs; but these are generally limited to “best endeavour” language rather than being enforceable obligations.
LDCs are also accorded some special rights with respect to protection and promotion of economic activities,
allowing them somewhat greater policy space. However, the benefits of SDT provisions depend on awareness of
their existence and terms, which varies widely among LDCs. Often LDC governments and firms do not make use
of existing preferential measures (for example, flexibilities under the WTO Agreement on Trade-related Investment
Measures (TRIMs Agreement) or under the WTO Agreement on Subsidies and Countervailing Measures) because
they are not aware of them. Effective use of such preferential measures also depends on institutional capacities,
financial resources and productive capacities.


Preferential market access is a major ISM available to LDCs, helping to offset the higher production and trade
costs associated with their structural and geographical handicaps. While the majority of LDCs consider their major
exports to be covered by duty-free quota-free (DFQF) schemes in developed countries, these often exclude some
sensitive products in which LDCs have export capacity, such as clothing, textiles and some agricultural products.
Although most existing preferential schemes cover the overwhelming majority of products, the exclusion of even a
few tariff lines may entail huge losses, given the high concentration of LDC exports. Moreover, the benefits of duty-
free market access have been progressively eroded as tariff levels more generally have declined, eroding preference
margins.


Utilization of the preferences available is often limited by supply-side constraints, trade-policy-related obstacles
(stringent rules of origin, low preference margins, product coverage and non-tariff barriers), lack of awareness, and
the unpredictability of preferences due to their discretionary nature. However, the guidelines for preferential rules
of origin for LDCs adopted at the Tenth WTO Ministerial Conference in December 2015, if implemented, could
contribute substantially to easing this particular constraint on preference utilization. Preferences for LDCs in trade in
services have also been permitted since December 2011, although the effective implementation and the expected
commercial and developmental benefits of the so-called services waiver remain to be seen.


In the 2001 Doha Ministerial Declaration, WTO members agreed “to work to facilitate and accelerate negotiations
with acceding least developed countries”, and guidelines to this effect were operationalized in 2012. However, all the
LDCs that have sought to join WTO since its creation have faced some degree of difficulty in the accession process,
and there have been complaints from LDCs, individually and collectively, about the nature of the procedures and the
demands that have been made on them in the course of negotiations.


Institutional constraints and limitations within LDCs are a key obstacle to their ability to use ISMs effectively,
particularly in the trade arena. This makes trade-related technical assistance, notably through the Enhanced
Integrated Framework (EIF), a particularly important ISM. Despite increasing support from the EIF, however, the IPoA
target of increasing the share of LDCs in trade-related technical assistance has not been fulfilled: their share was no
higher in 2014 than in 2011, when the IPoA was agreed.


The IPoA also repeated the targets of the Programme of Action for the Least Developed Countries for the Decade
2001–2010, adopted at the Third United Nations Conference of the Least Developed Countries in 2001, that donors
should provide ODA to LDCs equivalent to 0.15–0.20 per cent of their GNI. The ratio for major donors as a whole
more than doubled between 2001 and 2011. However, even at its peak the ratio was less than half the lower
threshold, and it has since fallen back further. The gap between actual disbursements and the lower bound of
the 0.15–0.20 per cent target has increased from $25 billion at the time of the IPoA (2011) to $30 billion in 2014.
Available data also suggest limited progress on the 2001 commitment to increase the proportion of ODA to LDCs
that is not tied to purchases from the donor country.




The Least Developed Countries Report 2016VIII


Climate change adaptation and mitigation need to play a central role in LDCs’ development and graduation
strategies. The United Nations Framework Convention on Climate Change (UNFCCC) recognizes the necessity
of financial and technical support for their adaptation. However, while numerous funds have been established for
adaptation, this has given rise to a complex architecture of multiple bilateral and multilateral agencies; some of the
funds which exist remain seriously underfunded, and accessing funds is complex and time-consuming, particularly
for countries such as LDCs with limited institutional capacity. The LDC Fund (LDCF), established in 2001, has
financed the development of national adaptation programmes of action (NAPAs) in all but one (South Sudan) of the
LDCs. However, total contributions to the LDCF remain below $1 billion, while the cost of implementing the NAPAs
is estimated at $5 billion and expected to increase further over time. In October 2014, the LDCF was declared
empty; and it remains to be seen how much of the pledges to climate funds made at the twenty-first session of the
Conference of the Parties to the UNFCCC (COP21, held in 2015) will be forthcoming, and how much of this will be
devoted to the LDCF.


Building technological capabilities is an essential component of sustainable development and of graduation with
momentum. Nevertheless, existing ISMs make little contribution to technological upgrading in LDCs. These countries
benefit from a waiver of most obligations under the WTO Agreement on Trade-related Aspects of Intellectual
Property Rights (TRIPS Agreement) until 2021 (and 2033 for pharmaceuticals). However, the use of this waiver is
restricted by TRIPS-plus obligations included in bilateral and regional trade and investment agreements, and by the
low technological capabilities of LDCs. Under article 66.2 of TRIPS, developed countries are required to provide
incentives for enterprises and institutions to promote technology transfer to LDCs; but in practice there have been
very few effective measures taken in respect of this obligation. This ISM has therefore failed to provide a meaningful
contribution to graduation with momentum.


Technology transfer also has a critical role in climate change adaptation and mitigation. During COP7 (held in
Marrakesh in 2001), as part of the Marrakesh Accords, Parties to the UNFCCC established the Marrakesh Technology
Framework, under which each LDC is expected to submit a technology needs assessment (TNA) to identify its
mitigation and adaptation technology needs; and the COP has pledged to fund the production of such TNAs in full.
As of 2015, however, only half of LDCs had submitted a TNA, and only nine had developed technology action plans
as part of this process.


The major mechanism for climate-related technology transfer is the Clean Development Mechanism (CDM), which
allows developed countries to meet their emissions-reduction obligations in part by financing emissions-reducing
projects in developing countries using technologies unavailable in the host country. To date, however, such projects
have been overwhelmingly located in more advanced developing countries (70 per cent in Brazil, China and India
alone in 2010); and only 30 per cent of projects claim to offer technology transfer. By the end of 2012, there had been
only 12 CDM projects in 7 LDCs.


To strengthen the technology component of the international support architecture to LDCs, the international
community has decided to establish the United Nations Technology Bank for the Least Developed Countries.
However, its effectiveness and contribution to graduation with momentum will only become apparent after the
beginning of its operations, scheduled for 2017.


In the field of financing for development, ODA played an important role in the graduation of the four countries that
have graduated to date. This partly reflects the small size of these countries (with populations of between 0.2 million
and 1.5 million at the time of graduation) and the strong tendency for such small countries to receive much more
ODA, both in per-capita terms and relative to GNI, than larger countries. Equally important for most of them, however,
was the proactive approach their governments took to managing ODA receipts and orienting them towards their
respective development plans. Trade-related ISMs played a much smaller role in these graduation cases, reflecting
these countries’ position as exporters mainly of primary commodities (Botswana) or services (Cabo Verde, Maldives
and Samoa). However, Maldives benefited from preferential access to the European Union market for its fish exports.


To deepen the understanding of the perceived effectiveness of ISMs by present LDCs, UNCTAD has carried out
a survey of LDC officials. The results suggest that they consider ISMs insufficient to support development challenges
in LDCs, while also confirming that institutional capacity is an important constraint to LDCs’ ability to make effective
use of ISMs. Most respondents reported the use of one or more SDT provisions, although this varied widely across
provisions. Preferential market access, flexibilities in commitments and the EIF are widely used, while little utilization
was reported of SDT provisions relating to agreements on TRIMs, sanitary and phytosanitary measures, and technical
barriers to trade. The survey also indicated that LDCs face difficulties in the WTO accession process, in making use
of existing flexibilities, and in participating in negotiations.




IXOVERVIEW


Respondents generally considered access to development finance insufficient to achieve the IPoA targets,
but most saw aid management policies as having improved. However, particular concern was raised about the
effectiveness of technology-related ISMs, respondents citing limited technology transfer and difficulties in tracing it to
ISMs. While growing international recognition of LDCs’ needs in the context of climate change was acknowledged,
concerns were expressed about the wide disparity between funding pledges and actual contributions, additionality to
ODA, lack of technical capacity in LDCs and lack of systematic information about the funds.


Overall, existing ISMs remain largely inadequate to the developmental needs of the LDCs, making a limited
contribution to the development of LDC productive capacities or to the acceleration of their progress towards
graduation. The shortcomings of ISMs have become more critical in light of the ambitious targets of the 2030 Agenda
and the IPoA. The effectiveness of the existing ISMs is undermined, to varying degrees, by vague formulation,
non-enforceability of commitments, insufficient funding, slow operationalization and exogenous developments in
international trade and finance. A viable institutional framework and a concrete operational mandate closely aligned
with LDCs’ needs and developmental interests are essential to effectiveness. Nonetheless, the experiences of past
LDC graduates and the views of some current LDCs suggest that some of the existing ISMs can play an important
role in supporting graduation. This applies particularly to preferential market access for those LDCs that can make
most use of it, and to ODA to small economies.


However, the contribution of ISMs to LDC graduation and development depends critically on the institutional
capacities of each individual LDC and its ability to leverage the available mechanisms strategically in pursuit of its own
development and graduation agenda. It is thus critical that institutional capacity constraints are taken into account
in the design of ISMs, including by combining the establishment of these measures with the provision of related
technical assistance.


Post-graduation processes and challenges


An LDC’s prospects for sustainable development after it has graduated are strongly influenced by the processes
that lead it to graduation, including its economic specialization or diversification, the type of structural transformation
it undergoes, and the policies it puts in place. While graduation from the LDC category in principle indicates greater
resilience and/or reduced exposure to structural vulnerabilities, graduates can be expected to remain more vulnerable
than other developing countries, not least as a result of geographical challenges such as landlocked position, small
size and remoteness. It is thus imperative that such long-term challenges should be taken into account in the design
and implementation of national graduation strategies, to avoid the risk of recurrent shocks when the country no
longer has access to LDC-specific support measures.


Following graduation, there is a “smooth transition” period of up to nine years from the effective date of
graduation, during which LDC-specific support is phased out gradually and predictably so as to avoid disrupting
the country’s development progress. While many trading partners (for example, the European Union) have adopted
a policy of extending their LDC-specific trade preferences for a transition period, this is not the case for all LDCs’
development partners. Moreover, there is little clarity regarding smooth transition procedures for other ISMs, such
as ODA allocations, aid modalities and technical assistance. The absence of a systematic approach to smooth
transition means that the ability of a graduating country to make use of SDT provisions following graduation is heavily
dependent on its ability and efforts to mobilize technical, financial and political support from its trading partners, and
from bilateral and multilateral development partners.


The full costs of graduation are felt only once the smooth transition period has elapsed. A broad assessment
of the economic implications of LDC graduation suggests that the phasing out of LDC-specific support ultimately
entails some adverse effects and additional costs, but that the related losses are in most cases relatively limited and
should not be exaggerated. Moreover, graduates can typically benefit from other support measures (such as different
financing windows and SDT provisions for ODCs) that provide a certain degree of continued support, though less
generous than those accorded to them before graduation.


In relation to development financing, there is in principle little reason why LDC graduation should, in itself, have any
effect on private capital flows such as remittances and portfolio investment. Graduation (or the prospect of graduation)
may discourage FDI inflows motivated by preferential market access that may be lost as a result. However, most
FDI flows are shaped primarily by long-term trends in macroeconomic fundamentals and institutional development
(notably economic growth, domestic market, labour force qualification, technological capabilities), which ultimately
underpin the process of graduation itself.




The Least Developed Countries Report 2016X


Concerning ODA, there is little evidence of a positive “LDC effect” on aid allocations, notwithstanding the LDC-
specific ODA target. Aid allocations are dictated not only by the needs of recipient countries, but also — especially
in the case of bilateral donors — by donors’ strategic and political considerations. A different issue arises in the case
of multilateral donors, many of which have formal eligibility criteria for their concessional windows. The International
Development Association (IDA) of the World Bank — the largest multilateral funder of LDCs — defines eligibility
essentially on the basis of a threshold level of GNI per capita, which is close to the LDC graduation threshold. The
IDA eligibility criteria are also largely applied by the regional development banks for Africa, Asia and the Americas.


Graduation of an LDC is unlikely to trigger sharp changes in its access to development finance, although it may
entail some increase in its cost by reducing its concessionality. Similarly, there is little reason to expect graduation
to trigger a sudden decline in Aid-for-Trade financing, especially since the main LDC-specific programme, the EIF,
already has well-established procedures for smooth transition. Overall, concerns over the costs of graduation in
terms of reduced access to concessional financing upon graduation seem to be exaggerated.


In the international trade arena, the main implication of LDC graduation is the phasing out of SDT provisions
favouring LDCs, leading (according to the particular agreement or arrangement) either to less favourable SDT
provisions available to ODCs, or in some instances standard provisions for all non-LDC economies. Of particular
importance in this respect is the loss of preferential market access under LDC-specific schemes (such as the
European Union’s Everything But Arms Initiative and the concessions granted to the LDCs under the Global System
of Trade Preferences among Developing Countries).


For the purposes of this Report, a simulation was conducted of the potential consequences for LDCs of losing their
trade-preference margins in the main G20 (Group 20) markets. This found that the loss of LDC-specific preferential
treatment in the G20 countries is on average equivalent to a 3–4 per cent reduction in merchandise export revenues,
depending how the preference margin is computed. Extrapolating this result to all 48 LDCs suggests that the loss
of preferential market access to the G20 countries might reduce total LDC merchandise exports by more than $4.2
billion per year. The greatest effect would be on those exports for which tariffs are generally highest for non-LDCs,
namely agricultural commodities, apparel and textiles, while effects on exports of energy products, mining and ores,
and wood products would be limited, as these products face relatively low tariffs regardless of LDC status.


In the context of WTO, graduation could entail some erosion of policy space, for example, in relation to intellectual
property rights, industrial policy (TRIMs) and agricultural subsidies, as well as requiring some adjustments to the
country’s legal framework to comply with the newly applicable WTO discipline (for example, putting in place full
TRIPS compliance). Early efforts to map and address such adjustments are advisable. In this context, it is important,
ahead of graduation, to anticipate post-graduation challenges and devise appropriate coping strategies to limit their
adverse impacts.


Beyond the immediate adjustment to the loss of access to ISMs, LDCs also need to be forward-looking, in order
to plan for the broader development challenges typical of the post-graduation phase. Such challenges include, in
particular, commodity dependence, the risk of reversion to LDC status, and the “middle-income trap”.


Commodity dependence is expected to remain a major feature of many LDC graduates, as it is for many lower-
middle income ODCs. Commodities make a major contribution to the exports of the graduates of 2017–2024, except
for the manufactures exporters (Bangladesh and Bhutan) and the service exporters (Nepal, Sao Tome and Principe,
and Vanuatu); and there is no assurance that they will escape commodity dependence or the associated challenges.


Reversion to LDC status is at least a theoretical possibility, despite the existing precautions (such as different
thresholds for inclusion in and exclusion from the category, grace period, smooth transition and consideration of
country circumstances). Some countries may graduate by narrowly meeting the graduation thresholds without having
acquired sufficient resilience or built a sufficiently solid and diversified productive base to ensure the sustainability
of their development progress. While no graduating country has ever reverted to LDC status, the risk of such an
outcome is increased by the likelihood of a difficult global economic environment in the coming years and by the
prospect of intensifying impacts of climate change, to which some LDCs are particularly vulnerable.


While the likelihood of reversion to LDC status is at present limited, the risk of graduates of falling into a middle-
income trap at some point after graduation is much greater. The various characterizations of the middle-income
trap — limited likelihood of transition to a higher income group, lack of income convergence towards a benchmark
advanced country, and frequency of growth slowdowns — closely mirror phenomena typically experienced by LDCs.
Avoiding the middle-income trap after graduation requires anticipation of its underlying causes in the pre-graduation
period and achieving the structural transformation that characterizes graduation with momentum.




XIOVERVIEW


The path to graduation and beyond


This Report advocates that LDCs should approach the quest for graduation from the perspective of the
development of productive capacities in order to achieve graduation with momentum. This means giving the highest
priority to structural transformation of the economy and development of productive capacities, including shifting
production and exports to higher-value-added products and sectors, upgrading technology, diversifying the economy
and raising productivity. This view mirrors the Sustainable Development Goals, not only in explicitly addressing
structural transformation and industrialization, but also in emphasizing the need for an integrated approach in which
the social pillar of sustainable development is complemented by strong economic and environmental pillars.


The graduation-with-momentum perspective entails targeting longer-term development and the processes
that underlie it, rather than focusing narrowly on the graduation criteria and adopting measures aimed at achieving
statistical eligibility for graduation. If development strategies are underpinned by such a broader and longer-term
sustainable development perspective, this will allow the graduation criteria to be met, as well as achieving the
structural transformation central to graduation with momentum.


Graduation is a milestone in a long-term socioeconomic development process, not the winning post in a race
to leave the LDC group. It marks only the end of an initial stage of development, at which point LDC-specific ISMs
are phased out. The development process, essentially rooted in a sustainable expansion of productive capacities
and increased sophistication of the productive base, continues indefinitely beyond this point, and development
challenges do not cease to exist at a particular level of income. The importance of such a perspective is highlighted
by the challenges faced by countries at more advanced stages of the development process as a result of constraints
on the development of productive capacities or failures of structural transformation, notably the middle-income trap.


The key importance of attaining graduation with momentum, rather than simply graduating, indicates a need to
move from graduation strategies focused on satisfying the statistical graduation criteria to what this Report calls
“graduation-plus” strategies, aimed also at establishing the foundations for a continuing development process
beyond the graduation milestone. This implies mobilizing different instruments and planning techniques for addressing
macroeconomic and sectoral development challenges. While these instruments must clearly reflect national
specificities and priorities, certain types of policies are likely to feature in any effective graduation-plus strategy. This
Report groups such policies into six areas for action, while highlighting gender as a cross-cutting issue.


Rural transformation: As highlighted in The Least Developed Countries Report 2015, structural transformation in
LDCs cannot overlook the key role of rural development. Redressing chronic underinvestment in agriculture remains
a key priority for most, if not all, LDCs, and requires building essential infrastructure, upgrading farming technologies
and practices, and developing agricultural research and development and effective extension services. Rural
economic diversification, through the development of non-farm activities, has an important complementary role.


Industrial policy: The main objective of industrial policy is to “nudge” economic agents to bring about a shift
from lower- to higher-productivity sectors and activities, exploiting more intensively those sectors that are consistent
with current comparative advantage, while also encouraging the expansion of sectors of a somewhat higher level
of sophistication. It is therefore essential that industrial policy is coordinated and creates synergies with policies for
science, technology and innovation (STI).


STI policy: To support and advance the process of structural transformation, LDCs’ technological capabilities
need to be strengthened by reinforcing the absorptive capacity of their firms and farms. This includes strengthening
their capacity to absorb and master superior technologies from more advanced countries (whether developed
or developing). This, in turn, requires improvement in the international system for technology transfer to LDCs.
Domestically, STI policies need to reinforce local and regional research and development, especially in agriculture, as
well as to be coherent with education policy.


Finance: Transformative productive investment and technological upgrading are crucial to increase labour
productivity within sectors and to promote productivity-enhancing structural change; and finance plays a key role
in mobilizing resources, both domestic and foreign, and intermediating them effectively to these ends. Beyond the
traditional banking sector, considerable opportunities for domestic resource mobilization are opening up for LDCs
through innovative financial instruments relying on the increasing penetration of information and communications
technologies (ICTs), notably mobile banking and money transfer services.




The Least Developed Countries Report 2016XII


Macroeconomic policies: Sound macroeconomic fundamentals are a necessary condition for the smooth working
of the economy, but are not by themselves sufficient to spur structural transformation. Graduation with momentum
requires considerable scaling up of capital accumulation; and fiscal policy has a key role to play in this context,
notably through public investment that can crowd in additional private investment. Large-scale infrastructural projects
addressing bottlenecks in productive sectors can achieve this, by relaxing supply-side constraints which hamper the
private sector. Increasing the available fiscal space requires both improving taxation and revenue collection systems
and diversifying public revenue sources. It also requires addressing the challenge of illicit financial flows, which besets
fuel- and mineral-exporting countries in particular.


Employment generation: Graduation with momentum requires LDC economies to generate jobs on a substantially
larger scale than in the recent past, to allow productive employment of the growing cohorts of new entrants to
the labour market and thereby reap the demographic dividend. To reach these goals, the process of structural
transformation should be steered so as to include the adoption of labour-intensive technologies, especially in sectors
such as agriculture, manufacturing and infrastructure.


Gender: Structural transformation and development of productive capacities cannot be fully effective unless they
empower women to develop their potential economic contribution to a much greater extent than at present. This
requires gender considerations to be taken fully into account in all areas of policy. Such an approach could also be
adopted in the formulation of the LDC criteria, where gender balance could become an additional component of the
human assets index.


The international environment and international support measures


The international community has a central role to play in facilitating the path of LDCs to graduation with momentum.
This means, first, ensuring a stable and conducive international economic environment; and second, designing and
implementing ISMs that contribute effectively to strengthening the process of graduation with momentum.


With respect to the first aspect, a major priority, the urgency of which UNCTAD has repeatedly emphasized, is to
ensure a more conducive international financial system, to reduce the frequency of crises and ensure the financing of
productive investment in both developed and developing countries, as well as to cater for the particular vulnerabilities
and concerns of LDCs. A more supportive international environment, in the run-up to graduation and beyond, would
also include strengthening regional integration and forging stronger trade and financial partnerships within the global
South.


Similarly, UNCTAD has long stressed the importance of adopting measures to stabilize international commodity
markets, for example through improvements in commodity market regulation. More predictable and less volatile
commodity markets would facilitate the mobilization of resource rents for the development of productive capacities
by reducing the uncertainty of LDC export revenues and the negative impact on current account balances of sharp
fluctuations in terms of trade.


The current architecture of ISMs is not conducive to the achievement of the Sustainable Development Goals,
especially in the LDCs. While the effectiveness of ISMs such as ODA and preferential market access has been eroded
in recent years, the need for effective ISMs remains, particularly in view of the widening gap between LDCs and
ODCs — a gap which is likely to widen further in the light of current trends. ISMs need to be designed to take into
account both changing international conditions and the changing features and conditions of the LDC group.


In particular, development-financing practices need to be better suited to supporting structural transformation
and resilience-building activities in both LDCs and recently graduated countries. ODA is the main source of external
financing to LDCs, amounting to $47 per person and some 5 per cent of GNI on average in 2014. The Sustainable
Development Goals and the IPoA objectives will thus not be fully achieved unless: (a) ODA to LDCs is increased
at least sufficiently to meet the international target of 0.15–0.2 per cent of donor countries GNI; and (b) all donors
allocate at least 50 per cent of net ODA to LDCs (as foreseen in paragraph 52 of the Addis Ababa Action Agenda).
This is particularly important to those countries expected to make up the LDC group in 2025, which will need
to benefit disproportionately from such increases in light of their underdevelopment and poverty. Therefore, the
quantitative targets for ODA to LDCs should be kept intact even as the group shrinks, in view of the greater needs
of the remaining LDCs. Moreover, in line with the strategy of graduation with momentum and with the approach of
the 2030 Agenda, donors would raise aid effectiveness by rebalancing their aid allocation towards supporting the
development of productive capacities.




XIIIOVERVIEW


Blended finance, combining ODA, philanthropic funds and other public or private development finance flows, may
offer a versatile means of mobilizing and leveraging private resources. Other financial instruments, such as GDP-
indexed bonds, countercyclical loans and weather insurance, may also have a role to play in helping LDCs to manage
risk and vulnerability to shocks more effectively.


An LDC finance facilitation mechanism: The proliferation of separate institutions and financing windows, together
with limited progress towards donor coordination and harmonization, has given rise to an increasingly complex
development finance architecture for LDCs. To improve their access to development (and, for example, climate)
finance, this Report proposes the establishment of an LDC finance facilitation mechanism (FFM). The FFM could
serve as a “one-stop shop”, identifying appropriate funding agencies for the investments identified as priorities in
LDCs’ national development strategies by matching them with the particular criteria, priorities and preferences of
potential funding sources. This could considerably reduce the administrative burden of seeking development finance,
while accelerating access to finance and reducing funding uncertainty. Such benefits could be further enhanced
by providing support to the preparation of funding applications and fulfilment of reporting requirements; and an
appropriately designed FFM could also contribute substantially to capacity-building in LDCs. An appropriate structure
and adequate funding and staffing would be essential to the effectiveness of such a mechanism. In view of its long-
standing work on financing for development and on LDCs, UNCTAD could play a useful role as a member of the
board of the FFM, which would decide its priorities, policies and practices.


Trade: In the area of trade, preferential market access is one of the most effective ISMs in favour of LDCs, even
though not all countries have adopted DFQF schemes for LDCs, and the coverage of existing DFQF arrangements is
incomplete. Achieving 100 per cent DFQF coverage would certainly represent an important step towards the IPoA/
Sustainable Development Goal target of doubling LDCs’ share in global exports. Equally, one of the priorities of a
successful smooth transition strategy should be to ensure that graduating countries retain some degree of preferential
access in key export markets through other unilateral preference schemes or bilateral or regional agreements. From
a longer-term perspective, however, the strategic value of preferential market access should not be overemphasized.


It is important that preference-granting partners review their rules of origin in accordance with the WTO Ministerial
Decision on Preferential Rules of Origin for Least Developed Countries, originally adopted at the Bali Ministerial
Conference in 2013 in the form of a “best endeavour” clause. It is also important to capitalize on the ongoing efforts
to streamline non-tariff measures — especially in the field of agricultural goods — and to converge, to the extent
possible, towards commonly accepted international standards, to reduce compliance costs.


Greater progress is needed towards operationalizing the LDC services waiver, to enable LDCs to take greater
advantage of the expansion of international trade in services. Enhancing the commercial value of the preferences
under the waiver and increasing the number of preference-granting countries could represent significant steps in
favour of a number of LDCs, particularly island LDCs.


Technology: LDCs could harness more fully such policy space as is available to them through bolder and more
strategic industrial policy frameworks including in the field of technology. Appropriate STI policy frameworks, for
example, could help LDCs to reap some of the strategic opportunities offered by the extension of the transition
period for their implementation of the TRIPS Agreement, particularly if combined with more effective support for
technology transfer under its article 66.2.


The international framework will start to work for technology transfer, rather than focusing mainly on the protection
of intellectual property, if developed countries comply with their obligation under article 66.2 of the TRIPS Agreement
to foster technology transfer to LDCs. In order to reach this goal, the following measures could be considered.


• The WTO TRIPS Council could implement its 2003 decision to review the monitoring system for developed
countries’ compliance with their obligations under article 66.2. It could require developed countries to report, in
a standard format, comparable information on programmes and policies relating to activities corresponding to
a previously agreed definition of technology transfer. LDCs could play an active role by reporting on the extent
to which technology transfer is contributing to their building a sound and viable technological base.


• Developed countries are advised to focus on sectors and activities where technology transfer is not profitable for
technology owners due to low absorptive capacity in the receiving country, and where technologies correspond
to local entrepreneurial demands in LDCs, where they have a high social return.


• Institutionally, developed countries could consider funding specialized agents that link developed country donors,
private firms holding a given technology and entrepreneurs in LDCs to ensure the effectiveness of technology
transfer operations.




The Least Developed Countries Report 2016XIV


The United Nations Technology Bank can become an instrument to foster the development of technological
capabilities of LDCs if:


• It has a monitoring mechanism that ensures that the ultimate objective of helping LDCs to build a solid and
viable technological base is being achieved;


• It is adequately funded, especially as it expands its activities;


• It gives priority to the transfer of technology (including intellectual-property-free technologies); and


• It adjusts technical assistance to LDCs in the management of their intellectual property systems according to
the type of system most appropriate to their level of economic and institutional development.


Inputs for reconsidering LDC criteria: The effectiveness of the current graduation criteria in capturing the extent
to which LDCs have overcome the structural impediments to development is open to debate. Particular issues are
raised by the potential for LDCs to graduate without having advanced in structural transformation and the failure of
any LDC graduate to date to achieve the graduation threshold for the EVI — arguably the most suitable of the three
criteria to capture structural vulnerabilities.


Such issues have given rise to calls for revisions of the criteria and graduation thresholds used to define the LDC
category. Issues which the CDP might consider in this context include:


• Incorporation, to the extent possible, of the Sustainable Development Goals and the 2030 Agenda;


• Incorporation of the perspective of graduation with momentum, so as to embed graduation in a long-term
process of sustainable development;


• Enhanced measurement of structural transformation;


• Enhanced environmental criteria, including consideration of climate change and related vulnerabilities.


More specific approaches which the CDP might consider include the following:


• A “vulnerability ceiling”: In addition to satisfying the existing criteria, a graduating country could be required to
have an EVI of no more than half of the graduation threshold level;


• Adjustment of the composition and computation of the EVI: The exposure index could be improved by giving
less weight to geographical challenges, such as size and remoteness, and more to those reflecting structural
transformation and environmental considerations; replacing the share of agriculture, fisheries and forestry in
production with a composite index of structural transformation; and replacing the environmental subindex with
one or more indices better reflecting LDCs’ particular environmental concerns and vulnerabilities, particularly
those related to climate change; and


• Separate indices: A more far-reaching proposal, in line with the concept of graduation with momentum, would
be to separate the structural transformation and environmental dimensions and build separate indices. The
structural transformation index could also be made a mandatory condition for graduation.


Dr. Mukhisa Kituyi


Secretary-General of UNCTAD




RECENT ECONOMIC TRENDS
AND OUTLOOK FOR LDCS


INTRODUCTION




The Least Developed Countries Report 20162


A. Introduction


After having apparently shown resilience for some years to the international
economic and financial crisis, economic growth in the least developed countries
(LDCs) has declined steeply since 2012, reaching a low of 3.6 per cent in 2015.
This is by far the slowest pace of expansion this century and it is far below
the targeted rate of at least 7 per cent per annum recommended in the 2011
Programme of Action for the Least Developed Countries for the Decade 2011–
2020 (the Istanbul Programme of Action (IPoA)). Such a low economic growth
rate renders it difficult to generate and mobilize domestic resources to sustain
efforts at structural transformation and the building of productive capacities
through investment. By the same token, it also slows down the progression
of countries towards graduation out of the LDC category, which is analysed
in detail in this Report. The growth slowdown is likely to be reinforced by the
current world economic climate, which continues to be characterized by a
sluggish recovery.


The merchandise trade deficit among LDCs as a group almost doubled from
$36 billion in 2014 to $65 billion in 2015. The negative trade balance increased
among all LDC subgroups except for island LDCs. The services trade deficit fell
somewhat for the LDCs as a whole, from $46 billion in 2014 to $39 billion in
2015. This is the result of the shrinking deficit of African LDCs, which more than
compensated the widening experienced by Asian and island LDCs.


This chapter provides an overview of LDCs’ recent performance in terms of
economic growth (section B), foreign trade and current account balance (section
C), and domestic and external financing (section D). Section E concludes with a
brief review of the outlook for LDCs, especially for 2016 and 2017.


B. The real sector


Economic growth (measured as growth in real gross domestic product
(GDP) at constant 2005 prices) slowed down to 3.6 per cent in 2015 in LDCs as
a group, which is a sharp drop from the growth performances recorded in the
years before the 2009 crisis and the lowest growth rate since 1994.1 Between
2008 and 2015 the economic growth rate of the group surpassed the 7 per
cent per annum benchmark, as recommended in the IPoA, only once, in 2012.2


Much of this weak performance can be attributed to the preponderance in the
group of African LDCs, which are primarily commodity dependent, and thus
vulnerable to falling commodity prices. Figure Intro.1 depicts the evolution of
commodity prices by type of commodity for the period 2000–2016.


Crude oil prices plunged by 47.2 per cent in 2015, having previously fallen
by 7.5 per cent in 2014. This was accompanied across the board by significant
drops in prices of other commodities such as minerals, ores and metals, and
agricultural raw materials and food, confirming a downward trend in prices that
started in 2012. The fall in demand for primary commodities is partly explained
by China’s strategic reorientation towards consumption-led growth, while the
general economic slowdown worldwide further compounded the downward
trend in primary commodity prices. Global growth continues to be stifled by
weak demand in developed economies, reflecting a falling wage share and
insufficient household demand, which have not been offset by higher investment
spending (UNCTAD, 2016b).


Table Intro.1 also shows the economic growth rate of LDCs based on their
export specialization. Fuel exporters were the only group to have contracted


Since 2012, LDCs’ growth has
slowed dramatically to the
lowest rate this century.


Commodity prices fell significantly
in 2015, oil plunged 47.2 per cent.




3Introduction: Recent Economic Trends and Outlook for LDCs


in 2015, by a hefty 4.5 per cent, reflecting the strong exposure of primary-
commodity-dependent economies to the boom–bust price cycles that afflict
primary commodity markets (which is discussed in chapter 2 of this Report). In
fact, the other main commodity-specialized LDC groups (food and agricultural
exporters and mineral exporters) also experienced a sharp decline in their
growth rates, expanding by less than 4 per cent in 2015. By contrast, LDCs that
are mainly exporters of manufactures achieved the highest economic growth
rate in 2015 at 6.2 per cent, higher than the rates recorded by other developing
countries (ODCs; that is, non-LDC developing countries) and by developing
countries as a whole.


Figure Intro.1. Evolution of commodity prices by type, 2000–2016
(Indices, 2000 = 100)


0


50


100


150


200


250


300


350


400


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jan-July
2016


All food Agricultural raw materials Minerals, ores and metals Crude petroleum


Source: UNCTADstat database (accessed July 2016).


Table Intro.1. Real GDP growth rates in LDCs, other developing countries and developed countries, 2002–2017
(Per cent)


2002–2008 2012 2013 2014 2015 2016 2017


Total LDCs 7.4 7.1 6.1 5.6 3.6 4.5 5.7


African LDCs and Haiti 7.9 7.4 6.1 5.6 4.1 3.7 4.8


Asian LDCs 6.7 6.5 6.1 5.7 2.9 5.9 7.0


Island LDCs 3.9 5.2 2.9 4.3 3.3 4.4 4.8


LDCs by export specialization:


Agricultural and food exporters 5.6 1.7 4.5 5.1 3.2 3.2 4.0


Fuel exporters 11.6 5.0 4.9 3.5 -4.5 1.1 3.6


Mineral exporters 6.0 5.9 6.6 6.7 3.8 4.4 4.7


Manufactures exporters 6.3 6.2 6.0 6.2 6.2 6.4 6.8


Services exporters 5.8 6.4 2.8 4.2 3.9 3.6 4.9


Mixed exporters 7.1 4.5 6.6 6.5 6.2 5.7 6.2


Other developing countries 6.9 4.9 4.8 4.4 3.9 3.8 4.3


All developing countries 6.9 5.0 4.8 4.5 3.9 3.8 4.4


Developed countries 2.4 1.1 1.0 1.7 1.9 1.8 1.9


Source: UNCTAD secretariat calculations, based on data from IMF, World Economic Outlook database (accessed May 2016).
Notes: Data for 2015 are preliminary; those for 2016 and 2017 are forecasts.


For the classificaiton of LDCs according to their export specialization, see p.xiii.
“All developing countries” consists of LDCs and other developing countries.


Growth performance in 2015 varied
widely among export groups.




The Least Developed Countries Report 20164


African LDCs suffered more from the shock in primary commodity prices
than Asian LDCs due to their greater dependence on primary commodity
exports. Their economic performance was also influenced by other exogenous
shocks, such as exposure to disease outbreaks, which aggravated the situation
for some African LDCs. Four of them (Burundi, Equatorial Guinea, Sierra Leone
and South Sudan) experienced a contraction in their real GDP, while it stagnated
in two others (Guinea and Liberia). In Asia, Yemen experienced a deep slump
in GDP (-28.1 per cent), due to the situation of armed conflict, while among
islands Vanuatu experienced a fall in GDP of 0.8 per cent, having been adversely
impacted by a series of natural disasters since 2014. By contrast, the highest
economic growth rate among all LDCs in 2015 was in Ethiopia (10.2 per cent),
followed by the Democratic Republic of the Congo, Bhutan, Myanmar, the Lao
People’s Democratic Republic and the United Republic of Tanzania, all of which
grew by at least 7 per cent in 2015.


The weak economic performance of many LDCs means that their average
per-capita GDP growth tumbled to 1.5 per cent in 2015, from 3.3 per cent in the
previous year. Thirteen of the 47 LDCs for which data are available experienced
a contraction in per-capita income, which exceeded 10 per cent in three cases
(Equatorial Guinea, Sierra Leone and Yemen).


Given this weak economic performance, it is likely that progress towards
poverty reduction and other Sustainable Development Goals has slowed down in
many LDCs. In 2015 nominal GDP per capita ranged from $221 in South Sudan
to $11,768 in Equatorial Guinea. Seventeen LDCs out of 47 for which data were
available had a GDP per capita above $1,200 in 2015. Nine LDCs, all African,
had a GDP per capita below $500 (Burundi, the Central African Republic, the
Democratic Republic of the Congo, the Gambia, Liberia, Madagascar, Malawi,
the Niger and South Sudan); 19 LDCs had a GDP per capita in the range of
$500 to $1,000; 16 LDCs in the range of $1,000 to $2,900 and three LDCs
stood above $2,900 (Angola, Equatorial Guinea and Vanuatu). Unsurprisingly,
all of the countries in the last group, but none of the lowest-income group, are
expected to graduate out of the LDC category before 2025 (as discussed in
chapter 2 of this Report).


C. Current account and international trade


1. CURRENT ACCOUNT BALANCE3


In 2015 the LDCs as a group registered a record current account deficit of
$68.6 billion, a strong increase of one third over 2014 (figure Intro.2). This stands
in contrast with ODCs, all developing countries and developed countries, which
as groups registered current account surpluses.


Island LDCs were the only LDC subgroup that experienced a current account
surplus in 2015, albeit representing a decrease of 68 per cent compared to
their 2014 surplus. The current account deficit of the African LDCs and Haiti
amounted to $55.3 billion, an increase of 22.1 per cent compared with 2014.
The Asian LDCs registered a current account deficit of $13.8 billion, representing
a near doubling vis-à-vis the deficit of 2014.


These aggregate figures must be interpreted with caution, however. All
African LDCs recorded current account deficits in 2015, but among island LDCs
Kiribati and Timor-Leste alone accounted for the current account surplus of the
island LDC grouping. In Kiribati, there was an increase in revenues from fishing
licences on the services export side,4 which also contributed to economic growth


The fall in primary commodity prices
particularly affected African LDCs.


LDCs' per capita growth slowed
to 1.5 per cent in 2015.


GDP per capita was below $500
in nine LDCs in 2015, and above


$2,900 in three.


LDCs' total current account deficit
rose by one third in 2015, to a
record level of $68.6 billion ...




5Introduction: Recent Economic Trends and Outlook for LDCs


and rising public revenues, while in Timor-Leste a modest growth in exports of
oil and gas was accompanied by a slight fall in services exports. Among Asian
LDCs, Afghanistan and Nepal had current account surpluses in 2015, partly as
a result of a weakening of import demand in both countries.


Falling commodity prices adversely affected the export earnings mainly of
primary-commodity-dependent African LDCs. Mozambique had the highest
current account deficit as a share of GDP in 2015 at 41.3 per cent (figure Intro.3),
while Kiribati at the other end of the scale had the largest current account
surplus as a share of GDP at 45.7 per cent. Depressed external demand in
2015, reflecting weak economic growth among both developed and developing
economies, contributed to the persistent current account deficits of many
LDCs, as export demand in LDCs was stymied by worldwide conditions, while
imports remained buoyant in the face of persistent production constraints and
narrow trade bases. The current account deficits of LDCs were also fuelled by
the appreciation of the dollar on world markets.


2. TRADE IN GOODS AND SERVICES5


Global trade growth slowed down to a five-year low in 2015 according to
estimates by UNCTAD and the World Trade Organization (UNCTAD and WTO,
2016). They show that, measured in current dollars, global merchandise exports
plummeted by 13 per cent in 2015. Services exports declined by 6 per cent.
Developed and developing economies appeared similarly affected by the
decline of merchandise exports in 2015, with falls of 12 per cent and 13 per
cent, respectively. The sharpest reductions were experienced by the principal
petroleum exporters (-37 per cent), while major exporters of manufactured
goods and of non-fuel commodities were less affected (-5 per cent).


The estimated fall in exports for the LDC group during 2015 was quite severe
and not at all compensated by the developments in their imports. Total exports


Figure Intro.2. Current account balance of LDCs, 2000–2021
(Billions of current dollars)


-120


-100


-80


-60


-40


-20


0


20


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016p 2017p 2018p 2019p 2020p 2021p


African LDCs and Haiti Asian LDCs Island LDCs LDCs total


Source: UNCTAD secretariat calculations, based on data from IMF, World Economic Outlook database (accessed July 2016).
Note: p=projected.


…and all African LDCs had
current account deficits...


…reflecting depressed external
demand, weak commodity prices,


dollar appreciation and
production constraints.




The Least Developed Countries Report 20166


Figure Intro.3. Current account balance as a percentage of GDP, 2015


-40 -30 -20 -10 0 10 20 30 40 50-50


Mozambique


Liberia


Djibouti


Tuvalu


Bhutan


Lao People’s Dem. Rep.


Guinea


Mauritania


Niger


Burundi


Gambia


Sierra Leone


Rwanda


Ethiopia


Chad


Central African Republic


South Sudan


Togo


Dem. Rep. of the Congo


Sao Tome and Príncipe


Cambodia


Benin


Comoros


Vanuatu


Myanmar


Uganda


Malawi


United Rep. of Tanzania


Angola


Senegal


Equatorial Guinea


Burkina Faso


Yemen


Zambia


Mali


Lesotho


Solomon Islands


Haiti


Eritrea


Madagascar


Bangladesh


Guinea-Bissau


Afghanistan


Nepal


Timor-Leste


Kiribati


Source: UNCTAD secretariat calculations, based on data from IMF, World Economic Outlook database (accessed July 2016).


of goods and services of this group of countries amounted to $201 billion in
2015 at current prices, a decrease of 20.2 per cent from $252 billion in 2014,
itself a small decline from the post-2000 peak of $256 billion, achieved in 2013.
All LDC groupings experienced a fall in total exports of goods and services.
The decline was most pronounced among the primarily commodity-export-
dependent group of African LDCs and Haiti and least pronounced among the
services-export-oriented group of island LDCs (table Intro.2).


LDC exports of goods and
services fell by 20.2 per cent


to $201 billion in 2015.




7Introduction: Recent Economic Trends and Outlook for LDCs


Table Intro.2. LDC exports and imports of goods and services, 2005–2015, selected years
(Millions of current dollars )


2005 2006 2010 2013 2014 2015
% change


(2014–2015)


Total trade in goods and services


Exports


LDCs 95 892 117 795 190 934 255 864 251 842 200 905 -20.2


African LDCs and Haiti 66 919 83 769 138 522 183 813 175 296 131 951 -24.7


Asian LDCs 28 549 33 545 51 530 70 806 75 254 67 755 -10.0


Island LDCs 424 481 882 1 244 1 292 1 199 -7.2


Imports


LDCs 108 319 125 101 220 519 312 908 333 518 305 083 -8.5


African LDCs and Haiti 73 094 83 765 151 278 210 631 221 764 190 199 -14.2


Asian LDCs 34 334 40 168 66 416 99 218 108 666 111 888 3.0


Island LDCs 892 1 168 2 826 3 058 3 087 2 996 -3.0


Trade
balance


LDCs -12 427 -7 306 -29 585 -57 044 -81 675 -104 178 27.6


African LDCs and Haiti -6 175 4 -12 755 -26 818 -46 468 -58 249 25.4


Asian LDCs -5 784 -6 623 -14 886 -28 411 -33 412 -44 133 32.1


Island LDCs -468 -687 -1 944 -1 814 -1 795 -1 796 0.1


Total trade in services


Exports


LDCs 12 030 14 070 24 390 36 880 39 820 40 330 1.3


African LDCs and Haiti 7 840 9 150 14 020 22 140 22 730 22 740 0.0


Asian LDCs 3 940 4 620 9 840 14 060 16 390 16 940 3.4


Island LDCs 250 300 530 680 690 640 -7.2


Imports


LDCs 28 330 33 160 61 450 81 020 85 900 79 550 -7.4


African LDCs and Haiti 22 720 26 200 48 940 63 330 66 540 58 460 -12.1


Asian LDCs 5 370 6 470 10 960 16 540 18 270 19 940 9.1


Island LDCs 240 490 1 550 1 150 1 090 1 140 4.6


Trade
balance


LDCs -16 300 -19 090 -37 060 -44 140 -46 080 -39 220 -14.9


African LDCs and Haiti -14 880 -17 050 -34 920 -41 190 -43 810 -35 720 -18.5


Asian LDCs -1 430 -1 850 -1 120 -2 480 -1 880 -3 000 59.6


Island LDCs 10 -190 -1 020 -470 -400 -500 25.0


Total trade in goods


Exports


LDCs 83 862 103 725 166 544 218 984 212 022 160 575 -24.3


African LDCs and Haiti 59 079 74 619 124 502 161 673 152 566 109 211 -28.4


Asian LDCs 24 609 28 925 41 690 56 746 58 864 50 815 -13.7


Island LDCs 174 181 352 564 602 559 -7.1


Imports


LDCs 79 989 91 941 159 069 231 888 247 618 225 533 -8.9


African LDCs and Haiti 50 374 57 565 102 338 147 301 155 224 131 739 -15.1


Asian LDCs 28 964 33 698 55 456 82 678 90 396 91 948 1.7


Island LDCs 652 678 1 276 1 908 1 997 1 856 -7.1


Trade
balance


LDCs 3 873 11 784 7 475 -12 904 -35 595 -64 958 82.5


African LDCs and Haiti 8 705 17 054 22 165 14 372 -2 658 -22 529 747.6


Asian LDCs -4 354 -4 773 -13 766 -25 931 -31 532 -41 133 30.4


Island LDCs -478 -497 -924 -1 344 -1 395 -1 296 -7.1


Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed July 2016).


Imports of goods and services also contracted for the LDC group, falling
from $334 billion in 2014 to $305 billion in 2015. However, the decline in imports
was not enough to outweigh the decrease in export earnings, so that the trade
balance deficit in goods and services rose in nominal terms from $82 billion in
2014 to $104 billion in 2015. The trade balance deficit in goods and services
rose fastest among Asian LDCs from 2014 to 2015 (32.1 per cent), while it was
virtually stagnant in island LDCs.




The Least Developed Countries Report 20168


Differences in trade structures and composition matter. Countries that are
primarily commodity export dependent, mostly in the African LDCs and Haiti
group, experienced a severe deterioration in their merchandise trade deficit in
2015, which grew by a factor of more than eight in nominal terms. In this group
of countries, fuels, ores, metals, precious stones and gold accounted in 2015
for 77.7 per cent of merchandise exports, whereas they accounted for 59.5
per cent among LDCs as a group, only 20.5 per cent among Asian LDCs and
only 7.9 per cent among island LDCs (figure Intro.4). By contrast, the primarily
services-export-oriented island LDCs group experienced a slight improvement
in its merchandise trade deficit (a nominal decrease of 7.1 per cent), matched
by a manageable increase in its services trade deficit (a nominal increase of 25
per cent).


Figure Intro.4. Composition of LDCs’ merchandise exports and imports, 2015
(Per cent)


13.9


43.3


16.2


26.3


14.2


56.4


21.3


7.7


12.7


15.3


5.2


66.3


75.7


2.7


5.2


4.9


0 20 40 60 80


Agriculture and food


Fuels


Ores, metals and
precious stones


Manufactured goods


Agriculture and food


Fuels


Ores, metals and
precious stones


Manufactured goods


Exports


18.6


13.4


2.5


63.3


16.9


13.3


2.5


65.3


21.0


13.6


2.4


60.6


26.9


15.1


0.8


50.2


0 20 40 60 80


Imports


LDCs African LDCs and Haiti Asian LDCs Island LDCs


Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed July 2016).




9Introduction: Recent Economic Trends and Outlook for LDCs


The merchandise trade deficit among LDCs as a group almost doubled from
$36 billion in 2014 to $65 billion in 2015. It widened among all LDC subgroups
except for island LDCs. The services trade deficit fell among LDCs as a group
from $46 billion in 2014 to $39 billion in 2015. It narrowed among African LDCs
but widened in Asian and island LDCs from 2014 to 2015 (table Intro.2).


In relation to trade, the IPoA sets a major target for LDCs of doubling the
share of LDCs in global exports by 2020. Data from the UNCTADstat database
reveal that the LDC share of global exports of goods and services rose from
0.75 per cent in 2005 to 0.96 per cent in 2015. These low figures highlight
the serious challenges to competitiveness faced by LDCs, and their important
deficits in productive and institutional capacities, as discussed in the remainder
of this Report. Between 2011 and 2015, LDCs’ share in global exports of goods
and services actually fell from 1.05 per cent to 0.96 per cent, which implies that,
since the adoption of the IPoA, LDCs have been unable even to prevent their
share of global exports from declining.


D. Resource mobilization


1. DOMESTIC RESOURCE MOBILIZATION


Domestic resource mobilization was also identified as a priority area for
action in the IPoA, and has since been recognized by the Addis Ababa Action
Agenda of the Third International Conference on Financing for Development and
the 2030 Agenda for Sustainable Development (2030 Agenda) (both adopted in
2015) as an important process for LDCs to finance their development.


However, this objective remains elusive for most LDCs due to their external
resource gaps, the complexity of their development challenges, their narrow tax
bases, deficiencies in tax collection and administration, resources forgone due
to illicit financial flows, and the underdevelopment of their domestic financial
sectors.


The external resource gap of LDCs as a group (that is, the difference between
the gross fixed capital formation rate and the gross domestic savings rate)
averaged 3.2 per cent of GDP in 2014.6 There are, however, variations among
LDC subgroups (table Intro.3). From 2013 to 2014, gross fixed capital formation
rate fell slightly in African LDCs and Haiti from 25.7 per cent to 25.5 per cent of
GDP, while their gross domestic savings rate rose marginally from 24.0 per cent
to 24.2 per cent of GDP, thereby narrowing the external resource gap for this
group slightly to 1.3 per cent of GDP. Among Asian LDCs, on the other hand,
the external resource gap rose to 7.2 per cent of GDP. This was mainly the result
of the increase in their gross fixed capital formation rate (from 26.5 per cent to
27.8 per cent of GDP) outweighing the rise in their gross domestic savings rate
from 20.3 per cent to 20.6 per cent of GDP.


Table Intro.3. Gross fixed capital formation, gross domestic savings and external resource gap in LDCs
(Per cent of GDP)


Gross fixed capital formation Gross domestic savings External resource gap


2002–
2008


2012 2013 2014
2002–
2008


2012 2013 2014
2002–
2008


2012 2013 2014


LDCs (total) 22.2 26.6 25.9 26.2 20.0 23.3 22.9 23.0 -2.2 -3.3 -3.0 -3.2


African LDCs and Haiti 22.5 27.2 25.7 25.5 21.7 24.2 24.0 24.2 -0.8 -3.0 -1.7 -1.3


Asian LDCs 22.0 26.1 26.5 27.8 16.4 20.9 20.3 20.6 -5.6 -5.2 -6.2 -7.2


Islands LDCs 12.1 13.7 13.1 14.1 33.7 50.5 41.8 40.9 21.5 36.8 28.7 26.8


Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed July 2016).


LDC merchandise trade deficit
almost doubled from $36 billion


to $65 billion.


LDCs' share in global exports
fell from 1.05 per cent in 2011


to 0.96 per cent in 2015.


LDCs' external resource gap
averaged 3.2 per cent of GDP


in 2014, narrowing in Asian LDCs
but widening in the Africa and


Haiti group.




The Least Developed Countries Report 201610


As a group, island LDCs face an external resource surplus (rather than a gap)
of 26.8 per cent of GDP. However, this aggregate number can be misleading
as it reflects exclusively the savings–investment surplus of Timor-Leste. The
other six island LDCs (the Comoros, Kiribati, Sao Tome and Principe, Solomon
Islands, Tuvalu and Vanuatu) all have gross fixed capital formation rates that
exceed their gross domestic savings rates by margins ranging from 2.6 per cent
of GDP in Vanuatu to 82.9 per cent in Kiribati.


If LDCs maintain their efforts to boost domestic investment rates, in order
to accelerate structural transformation and the achievement of the Sustainable
Development Goals, their investment–savings gaps are likely to grow further.
How investment–savings gaps are financed will have important implications for
the indebtedness of LDCs, especially in Africa (UNCTAD, 2016a). LDCs will need
to diversify the sources of their development finance away from debt and official
development assistance (ODA) towards alternative and innovative sources of
finance, potentially including the mobilization of diaspora savings (UNCTAD,
2011) and the tackling of illicit financial flows. For instance, according to the
United Nations High-level Panel on Illicit Financial Flows, illicit financial flows out
of Africa could potentially amount to $50 billion a year, approximately double
the continent’s ODA receipts (UNECA, 2015). Another study indicates that illicit
financial flows from LDCs accounted for around 4.8 per cent of GDP in 2008
(Kar, 2011). Policies to mobilize domestic resources in LDCs need to integrate
concrete measures to tackle illicit financial flows, which is the other side of the
coin of mobilizing development finance in LDCs.


2. OFFICIAL CAPITAL FLOWS


LDCs continue to finance their external resource gap through a mixture of
official development financing7 — including ODA — and private resource flows
such as foreign direct investment (FDI) and remittances.


Total net ODA disbursed to developing countries amounted to $95 billion in
2014. Total net ODA to LDCs in 2014 amounted to $26 billion,8 representing
an estimated 27.1 per cent of total ODA to developing countries, down from
31.2 per cent in 2013 (figure Intro.5). Despite the commitments made by the
Development Assistance Committee of the Organisation for Economic Co-
operation and Development (OECD DAC) donors that they would not reduce
ODA to LDCs and that they would allocate 0.15–0.20 per cent of their gross
national income to these countries, it is to be noted that net ODA to LDCs fell in
real terms by 12.2 per cent from 2013 to 2014. Preliminary estimates indicate
that bilateral aid to LDCs was $25 billion in 2015 (OECD, 2016).


The eight largest recipients of ODA in 2014 were Afghanistan ($3.9 billion),
Ethiopia ($1.9 billion), South Sudan ($1.6 billion), the United Republic of
Tanzania ($1.5 billion), Mozambique ($1.4 billion), Bangladesh ($1.4 million), the
Democratic Republic of the Congo ($1.2 billion) and Myanmar ($1.2 billion).


The four largest increases in ODA disbursed (in real terms) from 2013 to 2014
occurred in the Central African Republic (+151.5 per cent), followed by Sierra
Leone (+146.7 per cent), Liberia (+132.9 per cent) and South Sudan (+42.7 per
cent), representing for the most part emergency and humanitarian aid in the face
of a crisis. The four largest declines in ODA disbursed in real terms from 2013
to 2014 took place in Lesotho (-74.0 per cent), Myanmar (-66.4 per cent), the
Sudan (-50.8 per cent) and Angola (-35.8 per cent).


3. FOREIGN DIRECT INVESTMENT


Inflows of FDI to LDCs as a group amounted to $35 billion in 2015, a one-
third increase over the previous year (table Intro.4). The growth of FDI inflows


Reducing illicit financial flows and
mobilizing diaspora savings can
generate additional resources


for development.


Net ODA fell by 12.2 per cent
in real terms in 2014.


Inflows of FDI increased by
one third in 2015, to $35 billion…




11Introduction: Recent Economic Trends and Outlook for LDCs


Figure Intro.5. Net ODA disbursed for LDCs, 2006–2014
(Billions of constant 2014 dollars)


0


5


10


15


20


25


30


35


2006 2007 2008 2009 2010 2011 2012 2013 2014


Source: OECD International Development Statistics (IDS) database (accessed July 2016).
Note: The latest year for which data are available is 2014. Excludes amounts allocated to unspecified developing countries.


Table Intro.4. FDI inflows into LDCs, 2002–2015
(Millions of dollars)


Category
2002–2008


(annual average)
2010 2013 2014 2015


LDCs (total) 10 939.3 23 762.9 21 366.4 26 311.2 35 107.1


African LDCs and Haiti 8 402.2 13 690.0 16 767.7 22 952.7 28 067.3


Asian LDCs 2 430.3 9 765.7 4 503.2 3 266.2 6 910.7


Islands LDCs 106.9 307.1 95.4 92.3 129.1


Source: UNCTAD secretariat calculations, based on data from the UNCTAD FDI/MNE database (www.unctad.org/fdistatistics) (accessed
July 2016).


to LDCs far outpaced that of inflows to all developing countries (+9.5 per cent),
where they increased from $698 billion in 2014 to $765 billion in 2015. The
share of LDCs in FDI flows to developing economies as a whole has been
relatively stable since 2010, and reached 4.6 per cent in 2015. It is imperative
for LDCs to pursue strategic policies to tap into the development potential of
global FDI as a complementary source of development finance as part of their
national development strategies, for the implementation both of the IPoA and of
the Sustainable Development Goals.


The Africa and Haiti group received the lion’s share of FDI flows to LDCs
(79.9 per cent of the total). Asian LDCs received 19.7 per cent of the total and
the remaining 0.4 per cent went to the island LDCs.


At a country level, there was a remarkable growth in FDI inflows between
2014 and 2015 in Angola (+351.7 per cent), Myanmar (+198.4 per cent), Liberia
(+85.1 per cent), Nepal (+73.8 per cent) and the Lao People’s Democratic
Republic (+69.2 per cent). This is in marked contrast to the situation between
2013 and 2014 when Angola, Liberia and Nepal experienced a contraction in
FDI inflows. Other countries that experienced positive growth of FDI inflows
between 2014 and 2015 after a significant contraction in the preceding year


…80 per cent of which went to the
Africa and Haiti group.




The Least Developed Countries Report 201612


include Bangladesh, Guinea, Guinea Bissau, Madagascar, Solomon Islands,
Somalia and the Sudan. FDI inflows switched from being negative to positive
in Chad and Vanuatu, and fell considerably in Burundi (-84.4 per cent), Kiribati
(-78.9 per cent), the Gambia (-62.7 per cent), Bhutan (-61.8 per cent) and
Burkina Faso (-53.1 per cent).


4. PERSONAL REMITTANCES


Personal remittances9 worldwide fell to $582 billion in 2015 from a historic
high of $592 billion in 2014. Remittances to LDCs as a group moved in the
opposite direction, rising from $38.5 billion in 2014 to $41.3 billion in 2015 (table
Intro.5). While this amounts to just 7.1 per cent of the world total, remittances
are a significant contributor of external finance in a number of LDCs (UNCTAD,
2012). In 2014, the share of remittances in GDP was 29.2 per cent in Nepal,
24.6 per cent in Liberia, 22.7 per cent in Haiti, 21.2 per cent in the Gambia and
20.2 per cent in the Comoros, and it exceeded 10 per cent in Lesotho, Senegal
and Tuvalu. In 2015, the largest recipients of remittances as a share of GDP
(among countries for which data were available) were Liberia (33.8 per cent),
Nepal (33.4 per cent), Haiti (24.7 per cent), Senegal (11.7 per cent) and Kiribati
(11.0 per cent). Of the 23 largest recipients of remittances as a share of GDP in
the world (more than 10 per cent of GDP), five were LDCs. In terms of volume,
the largest recipients of remittances among LDCs are Bangladesh ($15.4 billion
in 2015), Nepal ($7 billion), Myanmar ($3.5 billion), Yemen ($3.5 billion), Haiti ($2.2
billion), Senegal ($1.6 billion) and Uganda ($1.1 billion). These seven countries
accounted for 82.5 per cent of remittances flowing to LDCs in 2015, confirming
the historical pattern of concentration of remittance inflows in a few LDCs. The
ability of LDCs to muster increasing flows of remittances from their diasporas is
likely to depend on a range of factors that include migration possibilities for their
citizens abroad, maintenance of close affective ties between diasporas and their
countries of origin, costs and facilities to transfer funds from host countries to
countries of origin, and domestic conditions in countries of origin.


E. The economic outlook
for least developed countries


The economic outlook for LDCs as a group for the next two years remains
uncertain and will be driven by unfolding conditions at the global level. The
current international economic scenario remains lacklustre due to a combination
of weak demand in developed countries as a result of stagnant real wages, the
continuing slowdown of international trade, a sharp decline in growth or even
recession in many developing countries, high or rising debt in both developed
and developing countries, and depressed commodity prices (UNCTAD, 2016b).
This international environment will continue to weigh down on the outlook for
economic growth in LDCs and, hence, on their prospects for graduation and
sustainable development. Nevertheless, the collective GDP growth of the LDCs


Table Intro.5. Remittances inflows to LDCs, 2002–2015, selected years
(Millions of current dollars)


Category 2002–2008 2010 2013 2014 2015


LDCs (total) 13 446.6 25 330.8 35 374.4 38 523.0 41 323.8


African LDCs and Haiti 5 412.5 8 555.5 10 129.3 10 337.5 11 004.5


Asian LDCs 7 964.4 16 499.8 25 003.4 27 924.5 30 036.2


Islands LDCs 69.7 275.6 241.8 261.0 283.1


Source: UNCTAD secretariat calculations, based on data from the World Bank Migration and Remittances database (accessed July 2016).


Remittances to LDCs rose to $41.3
billion in 2015, 7.1 per cent of the


world total…


…and five of the 23 largest
recipients relative to GDP are LDCs.


The economic and social prospects
of LDCs remain fragile


and uncertain.




13Introduction: Recent Economic Trends and Outlook for LDCs


is forecast to strengthen somewhat to 4.5 per cent in 2016 and 5.7 per cent in
2017. However, even if this stronger growth materializes, it will be lower than the
IPoA target. African LDCs will be significantly more impacted, especially if the
downward trend in commodity prices and slump in demand for commodities
continue unabated, as developed and developing markets struggle to cope with
challenges of their own in revitalizing their economies.


A number of LDCs are likely to face increasing current account deficits as
a result of a general fall in export earnings, reflecting slower global demand
growth. This may be compounded by a further appreciation of the dollar or
depreciation of their local currencies, inflating their import expenditures. Such
increases in current account deficits will intensify pressure on the external
financing requirements of the countries concerned.


Combined with volatile and unpredictable aid flows, and lower remittances
due to deteriorating economic conditions in host countries, the depressed level
of export earnings may also trigger adverse fiscal shocks, particularly in those
LDCs dependent on aid and primary commodities. LDCs could be confronted
with a situation of “twin deficits” (that is, a combination of external and fiscal
deficits), which would require sound macroeconomic policy management.
Outbreaks of civil unrest in politically unstable LDCs and adverse environmental
shocks, especially in small island LDCs, will only increase their economic
vulnerabilities further. Such adverse external and internal shocks can be
expected to impede national development strategies and planned infrastructure
improvements in many LDCs.


Overall, the economic and social prospects of LDCs remain fragile. The
accelerated implementation of development-oriented policies — to reduce
economic vulnerabilities through the development of productive capacities, to
promote social inclusion and cohesion, and to mitigate disaster-related risks —
remains a paramount priority for all LDCs. This applies equally to those expected
to graduate before 2025, and those for which graduation remains more distant,
as analysed in the remainder of this Report.


While LDC growth may strengthen
in 2016-2017, this depends on
global economic conditions…


…and macroeconomic management
needs to address the risk of twin


(external and fiscal) deficits.




The Least Developed Countries Report 201614


Notes


1 A comprehensive set of statistics on the LDCs is available in Statistical Tables on the
Least Developed Countries – 2016 (available at unctad.org/LDCs/Statistics), a sister
publication to the present Report.


2 The real GDP growth rate (per cent) for the LDC group as a whole was 6.6 per cent in
2008, 4.6 per cent in 2009, 5.6 per cent in 2010, 4.4 per cent in 2011, 7.1 per cent
in 2012, 6.1 per cent in 2013, 5.6 per cent in 2014 and 3.6 per cent in 2015.


3 This analysis of the current account is based on data from the International Monetary
Fund’s (IMF) World Economic Outlook database of April 2016, which includes data
for 2015 and projections for subsequent years. These data may differ from data
contained in the UNCTADstat database. Data from UNCTADstat on 2015 current
account balances were not yet available at the time of writing.


4 Whereas export sales of fish are classified as merchandise exports, revenues from
royalties and licence fees for fishing by foreign fleets are recorded in the balance of
payments as a services receipt.


5 This discussion is based on data from UNCTADstat database (accessed July 2016).
Data for trade in services follow the methodology of the sixth edition of the IMF’s
balance of payments manual (IMF, 2009).


6 Data for 2015 were not available at the time of writing.
7 Official development financing consists of (a) bilateral ODA, (b) grants and concessional


and non-concessional development lending by multilateral financial institutions, and
(c) other official flows for development purposes (including refinancing loans) that
have too low a grant element to qualify as ODA (source: Organization for Economic
Cooperation and Development (OECD), OECD Statistics Database (http://stats.oecd.
org/) (accessed September 2016)).


8 Excluding allocations that are not attributed to a specified recipient country.
9 The World Bank data on remittances used here include balance of payments data


and estimates.


References


IMF (2009). Balance of Payments and International Investment Position Manual. 6th ed.
International Monetary Fund (IMF). Washington, D.C.


Kar D (2011). Illicit financial flows from the least developed countries: 1990–2008. Discussion
paper. United Nations Development Programme. New York. Available at http://www.
gfintegrity.org/wp-content/uploads/2014/05/IFFs_from_LDCs_web.pdf (accessed 9
October 2016).


OECD (2016). Development aid in 2015 continues to grow despite costs for in-donor
refugees. Press release. 13 April. Organisation for Economic Cooperation and
Development. Available at http://www.oecd.org/dac/stats/ODA-2015-detailed-
summary.pdf (accessed 9 October 2016).


UNCTAD (2011). The Least Developed Countries Report 2011: The Potential Role of
South–South Cooperation for Inclusive and Sustainable Development. United Nations
publication. Sales No. E.11.II.D.5. New York and Geneva.


UNCTAD (2012). The Least Developed Countries Report 2012: Harnessing Remittances
and Diaspora Knowledge to Build Productive Capacities. United Nations publication.
Sales No. E.12.II.D.18. New York and Geneva.


UNCTAD (2016a). Economic Development in Africa Report 2016: Debt Dynamics and
Development Finance in Africa. United Nations publication. Sales No. E.16.II.D.3.
New York and Geneva.


UNCTAD (2016b). Trade and Development Report 2016: Structural Transformation for
Inclusive and Sustained Growth. United Nations publication. Sales No. E.16.II.D.5.
New York and Geneva.


UNCTAD and WTO (2016). Global trade slows down to a five-year low in 2015. UNCTAD
communiqué. Geneva. UNCTAD and World Trade Organization (WTO). Available at
http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=1230 (accessed 9
October 2016).


UNECA (2015). Illicit financial flows. Report of the High-level Panel on Illicit Financial
Flows from Africa. United Nations Economic Commission for Africa (UNECA). Addis
Ababa. Available at http://www.uneca.org/sites/default/files/PublicationFiles/iff_main_
report_26feb_en.pdf (accessed 9 October 2016).




GRADUATION: A MILESTONE,
NOT THE WINNING POST


CHAPTER




The Least Developed Countries Report 201616


A. Introduction


While the 2030 Agenda for Sustainable Development (2030 Agenda) and
the Sustainable Development Goals imply a much stronger focus on the
least developed countries (LDCs) than did the Millennium Development Goals
(UNCTAD, 2015a), they do not include an explicit goal for graduation from LDC
status. However, such a goal was previously established by the Programme
of Action for the Least Developed Countries for the Decade 2011–2020 (the
Istanbul Programme of Action (IPoA)), adopted in 2011. This included for the
first time an explicit target for graduation — that at least half of the 49 countries
classified as least developed at the time should satisfy the criteria for graduation
from LDC status by 2020. Though not embodied in the 2030 Agenda, this
represents a bold step by the international community to move LDC graduation
towards the centre of international attention.


At the halfway point between the adoption of the IPoA target and the target
date of 2020, it is timely to review the nature and historical experiences of
graduation, and the outlook for graduation to 2020 and beyond.1 This is the
focus of The Least Developed Countries Report 2016. It analyses the experience
of LDC graduation since the establishment of the category in 1971, against the
background of the major changes that have occurred in the global economic
environment in this period; examines the outlook for graduation until 2024; and
draws conclusions for national policies and international support measures
(ISMs) for LDCs and the graduation process. The objective is to assist countries
graduating in the future to achieve what this Report terms “graduation with
momentum” — a development path leading to graduation that also establishes
the basis needed for continued and solid sustainable development in the post-
graduation phase.


The present chapter provides the historical context and conceptual framework
for the remainder of the Report. Section B places graduation in the context of
the origins and rationale of the LDC category and the underdevelopment “traps”
that underlie it. This is followed by a presentation of the graduation process
and criteria (section C), and the historical evolution of the LDC list as a result
of new inclusions in, and graduations from, the category (section D). Section E
highlights the greater-than-ever relevance of the LDC category, as a result of the
economic and social divergence between LDCs and other developing countries
(ODCs), reflecting the interaction between divergences in their productive
capacities and long-term changes in the global economic environment. Section
F presents graduation in the context of the longer-term process of development,
emphasizing the importance of graduation with momentum. Finally, the economic
and political calculus of graduation, from the perspective of LDC governments,
is discussed in section G.


Following this chapter, the Report is structured around four further chapters.
Chapter 2 presents projections for graduation cases in the 2017–2024 period
and describes the national dynamics of graduation, including the role of
geographical constraints, and the processes, strategies and policies leading to
graduation. Chapter 3 examines the role and limitations of ISMs in bringing LDCs
to graduation, including an assessment of their role in past graduation cases.
Chapter 4 analyses the post-graduation phase of the development process,
examining smooth transition, the costs and benefits of graduation, and the
experience of those countries that have graduated to date. Chapter 5 discusses
how graduation can be steered to achieve graduation with momentum, to avoid
major post-graduation pitfalls and traps. It discusses policy alternatives for
consideration by LDCs and by the international community to strengthen the
development processes of LDCs and establish “graduation-plus” strategies for
graduation with momentum.


The IPoA set a target that half of all
LDCs should satisfy the criteria for


graduation by 2020.


This Report aims to help future
graduates achieve “graduation


with momentum”.




17CHAPTER 1. Graduation: A Milestone, Not the Winning Post


B. The least developed country predicament,
the rationale of the category and


the significance of graduation


1. THE RATIONALE OF THE LEAST DEVELOPED COUNTRY CATEGORY


The nature and significance of the graduation process emerge from the
rationale of the LDC category. From its inception, the rationale of a distinct
category of LDCs was that certain developing countries had particularly low
levels of economic and human development and limited economic and export
diversification, in most cases associated with these countries’ relatively recent
emergence from colonial rule and/or geographical factors; and that this
underdevelopment gave rise to insurmountable obstacles to their ability to
engage with global markets or to derive developmental benefits from doing so.
A brief history of the LDC category is presented in box 1.1.


Box 1.1. A brief history of the LDC category


The concept of the least developed countries has its origins in the first session of the United Nations Conference on Trade
and Development (UNCTAD I), which adopted without dissent a recommendation that (United Nations, 1964, annex A.IV.1,
paragraph 4, emphasis added)):


Industrialized countries and regional and international organizations should endeavour to increase the flow of the
technical assistance needed to accelerate the growth of developing countries, and particularly of the least developed,
to achieve the maximum efficiency in the use of external resources.


It also adopted a general principle that (United Nations, 1964, general principle fifteen:11, emphasis added):


The adoption of international policies and measures for the economic development of the developing countries shall
take into account the individual characteristics and different stages of development of the developing countries, special
attention being paid to the less developed among them, as an effective means of ensuring sustained growth with
equitable opportunity for each developing country.


Both the concept of LDCs and the linkage with ISMs was reinforced by UNCTAD II in 1968, which adopted a resolution
on “Special measures to be taken in favour of the least developed among the developing countries aimed at expanding their
trade and improving their economic and social development”. This called on the Secretary-General of UNCTAD to (United
Nations, 1968, resolution 24 (II)):


undertake studies of different aspects of the special problems of the least developed countries with a view to devising
effective measures that would enable these countries to benefit fully from measures undertaken within the UNCTAD
programme and framework.


While inviting other agencies “to identify such countries in the context of each measure concerned, taking fully into
account the identifying criteria relevant to the policy measure in question” (resolution 24 (II), paragraph 2), it also requested
the Secretary-General of UNCTAD “to continue studies relative to the identification of least developed countries” (paragraph
3(c)). This resolution thus provided the foundation both for the LDC category and later for The Least Developed Countries
Report series, which UNCTAD started publishing in 1984.


On 13 December 1969, the United Nations General Assembly adopted the International Development Strategy for the
Second United Nations Development Decade, including a section on the adoption of measures to support LDCs (resolution
2626(XXV):C.5). In early 1970, a working group of the United Nations Committee for Development Planning (later renamed
the Committee for Development Policy (CDP)) was formed to identify the LDCs (box 1.2).


Further resolutions were passed on special measures in support of LDCs at UNCTAD III in 1972 and UNCTAD IV in
1976. However, a heightened sense of urgency was apparent at UNCTAD V in 1979, reflecting the adverse global economic
environment for development at the time. In a resolution adopted without dissent, the Conference expressed concern that the
UNCTAD III and IV resolutions had not been fully implemented, and also “deep concern at the gravity of the economic and
social situation of the least developed countries”. It therefore launched “as one of its major priorities” a Comprehensive New
Programme of Action for the Least Developed Countries, encompassing an Immediate Action Programme for 1979–1981
and a Substantial New Programme of Action for the 1980s. This programme was finalized and adopted unanimously by
the international community in 1981 at the First United Nations Conference on the Least Developed Countries, which was
convened in Paris by the General Assembly to establish such a programme. This was followed by further such conferences in
1990 (also in Paris), 2001 (in Brussels) and 2011 (in Istanbul), each of which adopted a programme of action for the following
decade. The most recent of these is the IPoA.
Sources: UNCTAD secretariat; CDP (2015); Guillaumont (2009).


The nature and significance of the
graduation process emerge from


the rationale of the LDC category…




The Least Developed Countries Report 201618


Then as now, these obstacles were linked with the idea that LDCs are caught
in an “underdevelopment trap” arising from a number of intersecting vicious
circles, most notably the poverty trap and the commodity dependence (see,
for example, Guillaumont, 2009; UNCTAD, 2002). The consequence is that the
vulnerabilities associated with low levels of economic and human development
and limited diversification of production and exports in LDCs hamper their ability
to derive developmental benefits from engagement in international markets.
This view, the conceptual roots of which can be traced to the seminal work of
development economists such as Rosenstein-Rodan, Nurkse and Hirschmann,
was and remains a key part of the rationale for the LDC category.


It should be emphasized that the terminology of “traps” does not mean
that these problems are insurmountable or deterministic, although they may
be exacerbated by geographical challenges (for example, landlocked position,
extremely small size or remoteness). Rather, “traps” are vicious circles that need
to be overcome if a country is to establish a sustainable development path
(Sindzingre, 2012). Nonetheless, escaping from such traps requires specific and
concrete actions.


The international community therefore decided to establish ISMs, especially
in the fields of finance, trade, technology and technical assistance, to assist
“low-income countries which faced severe structural handicaps to economic
growth and development and needed access to support beyond what was
commonly available for all developing countries” (CDP, 2015). By providing more
favourable treatment for LDCs than for ODCs, such measures were intended
to help them to break out of the trap of underdevelopment, to overcome their
major development challenges, and thus to embark on a path of sustainable
growth and development.


Establishing ISMs specific to LDCs required the establishment of a clearly
defined category of LDCs, and thus a set of criteria as a basis for such a
definition. A corollary of this, though not operationalized until two decades
after the establishment of the LDC category in 1971, is the definition of a point
at which a country has attained a sufficient level of development that it has
escaped the traps associated with underdevelopment, and therefore no longer
requires the special treatment associated with LDC status – that is, a point at
which it should be considered to have graduated from LDC status.


Hence, it is in the context of these traps and vicious circles, the most
important of which are outlined in the following subsections, that the significance
and nature of graduation can best be understood.


2. THE POVERTY TRAP


A poverty trap can be defined as “a circular constellation of forces tending
to act and react upon one another in such a way as to keep a poor country in
a state of poverty” (Nurkse, 1953:4). On the one hand, low incomes and slow
economic growth are reflected in a persistently high incidence of poverty; on
the other, pervasive poverty acts as a brake on investment, limiting economic
growth (Azariadis and Stachurski, 2005). Where the majority of the population
lives at income levels at or below those necessary to meet their basic needs, this
all-pervasive poverty acts as a major constraint on economic growth (UNCTAD,
2002).


Collectively, LDCs are the group of countries where poverty is most pervasive.
In 2011, all but seven LDCs had a poverty headcount ratio above 30 per cent,
whereas in only five ODCs was it even above 25 per cent (UNCTAD, 2015a).
Poverty reduction has also been much slower in LDCs than in ODCs, and fell


…particularly the idea that LDCs
are caught in an underdevelopment


“trap”.


LDC-specific ISMs are intended to
enable LDCs to break out of this


trap…


…requiring clear criteria to define
which countries are LDCs.


The poverty trap arises because low
incomes and slow growth increase
poverty, while poverty slows growth


by limiting investment.




19CHAPTER 1. Graduation: A Milestone, Not the Winning Post


far short of the Millennium Development Goals target: in LDCs, the poverty
headcount ratio fell by less than one third, from 65.7 per cent in 1990 to 44.8
per cent in 2011, compared with a fall from 47.7 per cent to 18.1 per cent in
ODCs (United Nations, 2015). Thus almost half of the overall population of LDCs
lives in poverty, with much higher rates in some individual LDCs – in excess of
70 per cent in 2011 in Burundi, the Democratic Republic of the Congo, Liberia,
Madagascar, Malawi and Zambia.2


A major mechanism through which poverty hampers growth and development
is its negative effects on the domestic resources available to finance investment
and the provision of public goods. Where the majority of the population lives
in absolute poverty, a major part of the gross domestic product (GDP) must
be devoted to the necessities of life, giving rise to low savings and very limited
capital accumulation. This in turn leads to low fixed investment, and thus to low
productivity and low incomes.


Similarly, State capacities tend to be weaker where extreme poverty is
pervasive. This situation gives rise to a very narrow fiscal base, which limits the
provision of public services such as education, health, administration, and law
and order. While government revenues, public investment and government final
consumption expenditure in LDCs may appear little lower than in ODCs in terms
of GDP share, this translates into extremely limited resources in absolute per-
capita terms (UNCTAD, 2002).


An important aspect of poverty traps in LDCs is the fact that a large majority
(two thirds) of the LDC labour force works in agriculture, especially smallholder
agriculture, which suffers from chronically low and slow-growing labour
productivity. This is, in itself, a major cause of poverty, and thus tends to be self-
perpetuating: the high levels of risk aversion inherent in extreme poverty interact
with the extreme uncertainties of agricultural yields, output and income that are
characteristic of traditional smallholder agriculture; and this limits the adoption
of new technologies and techniques that could raise labour productivity and
household incomes (UNCTAD, 2015a).3


There are thus various vicious circles — processes of circular and
cumulative causation — in which the high incidence and severity of poverty
act as constraints on economic growth, which in turn perpetuates all-pervasive
poverty.4 A similar phenomenon arises from the detrimental effect of poverty on
the environment: widespread and serious poverty may lead to environmental
degradation, undermining sustainability, as people have to overexploit natural
capital to make an adequate living, even if this ultimately reduces the productivity
of key assets on which their livelihoods depend (Barrett et al., 2011). Over time,
such environmental degradation also increases the uncertainty of agricultural
production, further impeding technological upgrading.


3. THE COMMODITY-DEPENDENCE TRAP


The international aspect of the poverty trap is particularly apparent in those
countries that are heavily dependent on primary commodities. A complex
set of interrelated trade and financial relationships may lock a country in to a
disadvantageous pattern of market integration, exposing it to boom-and-bust
cycles that ultimately compound its structural vulnerabilities and exacerbate
poverty. While the coexistence of globalization with chronic poverty clearly does
not indicate a causal relationship, it does mean that economic outcomes are
increasingly determined by global economic forces, and not solely related to
household, local and national factors (UNCTAD, 2002).


Since the majority of LDCs, notably in the African region, depend heavily
on primary commodities for the generation of employment, income, and


Poverty is systematically higher, and
falling more slowly, in LDCs than in


other developing countries...


…undermining domestic resource
mobilization and State capacities.


Poverty traps are particularly
pervasive in agriculture, which


employs two thirds of the workforce
in LDCs.


Poverty tends to lead to
unsustainable exploitation of


natural capital.


Trade and financial relationships
may lock a country into commodity


dependence.




The Least Developed Countries Report 201620


foreign exchange, a natural starting point for successful graduation strategies
is the upgrading of the commodity sector. Key objectives in this respect are
to improve productivity and to increase domestic value addition by fostering
backward and forward linkages in key segments of the value chain, as a means
of promoting commodity-based industrialization (UNECA and AUC, 2013;
Morris and Fessehaie, 2014). This requires countries to overcome an array
of challenges related to insertion into commodity value chains and upgrading
within them. These include volatile and unstable international prices, intense
competition among suppliers of raw materials, and barriers to skill development
and adoption of more sophisticated technologies. Other challenges, particularly
those related to resource management and utilization, are commodity specific,
including, for example, the adoption of sustainable production practices and
reduction of post-crop losses in agriculture.


Most LDCs are characterized by a high level of reliance on primary
commodities, particularly for export revenues, but also as essential sources of
employment (in the case of agricultural commodities), income and government
revenues. Abundant natural endowments of mineral and fuel stocks or
agricultural land (compounded in many cases by legacies from the colonial
era) have shaped LDCs’ comparative advantages and specialization strongly
towards primary commodity sectors. In the overwhelming majority of LDCs (38
of the 47 for which data are available), commodities accounted for more than
two thirds of merchandise exports in 2013–2015.


In nearly half of the LDCs, the disproportionate weight of primary commodities
in the export basket is mainly driven by food items, particularly tropical beverages
and fish, and agricultural raw materials such as cotton. Exports of minerals, and
particularly metals, play a key role for the African LDCs that make up the mineral
exporters group in the classification used in this Report (the Democratic Republic
of the Congo, Guinea, Mali, Mauritania, Rwanda, Sierra Leone and Zambia),
while fuels account for the great majority of merchandise export revenues for the
fuel exporters group (Angola, Chad, Equatorial Guinea and Yemen)5 (figure 1.1).


Commodity dependence inhibits the emergence and development of
activities in other sectors, thus restricting economic and export diversification.
It can thus lock countries into a development path based on static comparative
advantage rather than the dynamic evolution of comparative advantage in
progressively more sophisticated and development-oriented activities.


The changes in the commodity shares in LDC exports clearly demonstrate
the persistence of commodity export dependence (figure 1.2). As the figure
shows, only a handful of LDCs (Afghanistan, Burundi, the Comoros, Solomon
Islands and Uganda) have experienced any significant reduction in their
dependence on primary commodities since the beginning of the century, while
around a quarter have seen increases of a similar magnitude. More generally,
despite many instances of growth accelerations partly or wholly underpinned by
commodity sectors, relatively few commodity-dependent developing countries
have managed to achieve sustainable development gains through successful
economic diversification.


Concerns about the persistence of commodity dependence have often been
linked with other factors such as a supposed secular decline of commodity prices
(generally referred to as the Prebisch-Singer hypothesis), exposure to commodity
price volatility and the absence in the commodity sectors of the opportunities
for increasing returns and learning-by-doing characteristic of the manufacturing
sector. Previous UNCTAD publications have argued that the current international
trade and financial architecture reinforces commodity-related boom-and-bust
cycles, by limiting the policy space available to commodity-dependent countries
to take measures to increase the sophistication of their economies by increasing
value addition to locally sourced commodities (UNCTAD, 2013a, 2014a).


In 38 LDCs commodities accounted
for more than two thirds of


merchandise exports in 2013–2015.


Commodity dependence is driven
mainly by agricultural produce in


nearly half of LDCs, and by minerals
and fuels in many African LDCs.


Commodity dependence can
lock countries into a development
path based on static comparative


advantage.


Only a handful of LDCs have
reduced their commodity


dependence significantly since
2000, while it has increased


in around a quarter.




21CHAPTER 1. Graduation: A Milestone, Not the Winning Post


Figure 1.1. Primary commodities as share of merchandise exports, by commodity group, 2013–2015


0 20 40 60 80 100


Zambia


Yemen


Vanuatu


United Rep. of Tanzania


Uganda


Tuvalu


Togo


Timor-Leste


Sudan


Somalia


Solomon Islands


Sierra Leone


Senegal


Sao Tome and Principe


Rwanda


Niger


Nepal


Myanmar


Mozambique


Mauritania


Mali


Malawi


Madagascar


Liberia


Lesotho


Lao People's Dem. Rep.


Kiribati


Haiti


Guinea-Bissau


Guinea


Gambia


Ethiopia


Eritrea


Equatorial Guinea


Djibouti


Dem. Rep. of the Congo


Comoros


Chad


Central African Rep.


Cambodia


Burundi


Burkina Faso


Bhutan


Benin


Bangladesh


Angola


Afghanistan


Food items Agricultural raw materials Fuels Ores and metals


Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed July 2016).


As discussed below, the economic challenges arising from commodity
dependence can hamper development and thus cast a shadow on LDCs’
graduation prospects.


(a) External vulnerability


Commodity dependence worsens developing countries’ vulnerability to
exogenous shocks (for example, extreme meteorological events, negative
effects of climate change and adverse terms-of-trade movements), which can


Commodity dependence worsens
LDCs’ vulnerability to exogenous


shocks…




The Least Developed Countries Report 201622


Figure 1.2. Primary commodities as share of merchandise exports in LDCs


0 20 40 60 80 100


Zambia


Yemen


Vanuatu


United Rep. of Tanzania


Uganda


Tuvalu


Togo


Timor-Leste


Sudan*


Somalia


Solomon Islands


Sierra Leone


Senegal


Sao Tome and Principe


Rwanda


Niger


Nepal


Myanmar


Mozambique


Mauritania


Mali


Malawi


Madagascar


Liberia


Lesotho


Lao People's Dem. Rep.


Kiribati


Haiti


Guinea-Bissau


Guinea


Gambia


Ethiopia


Eritrea


Equatorial Guinea


Djibouti


Dem. Rep. of the Congo


Comoros


Chad


Central African Rep.


Cambodia


Burundi


Burkina Faso


Bhutan


Benin


Bangladesh


Angola


Afghanistan


2013–20152000–2002


Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed July 2016).


have serious and wide-ranging macroeconomic impacts. Terms-of-trade shocks
are of particular relevance, as dependence on primary commodity exports tends
to be associated with a high level of export concentration, particularly among
LDCs (figure 1.3). Since commodity price changes are essentially exogenous
to most LDCs, whose capacity to withstand large commodity shocks is very
limited, these countries bear a disproportionate share of the adjustment costs of
commodity market volatility.


…as shown by the 2008-2009
financial crisis and the subsequent


slump in commodity prices.




23CHAPTER 1. Graduation: A Milestone, Not the Winning Post


The risks associated with commodity market volatility have been highlighted
both by the 2008–2009 crisis and by the more recent (and ongoing) slump
in commodity prices. Contrary to the implication of the “efficient market
hypothesis”, there is little evidence that commodity financialization has reduced
price volatility. Rather, it has introduced spurious price signals, reflecting
trading decisions based largely on financial market movements rather than on
market fundamentals for each commodity (UNCTAD, 2015b; UNCTAD and
Arbeiterkammer Wien, 2011). The greater correlation between commodity and
other financial markets increases the difficulty of coping with often procyclical
price movements, whose macroeconomic effects can be substantial (UNCTAD,
2013a).


While rising commodity prices undoubtedly underpinned growth in LDC
export revenues for most of the 2000s, especially among African LDCs, much of
this expansion stemmed from an increase in prices rather than in export volumes.
Export volume growth has been increasingly outpaced by that of imports, further
increasing exposure to adverse terms-of-trade shocks. In a context of chronic
current account deficits in the majority of LDCs (with the notable exception
of fuel exporters in some years), adverse price movements even in a few key
commodity markets have the potential to trigger significant terms-of-trade
shocks, putting pressure on the balance of payments (subsection 4).


It should also be noted that LDCs’ dependence on imports of food and
fuel exposes them to price volatility in commodity markets for these goods as
importers, in addition to their exposure to the markets for their major products
as exporters. Since imports of food and fuel are both difficult to compress in the
short term, and highly vulnerable to sharp fluctuations in international prices, this
high level of import dependence reinforces the external vulnerability arising from


Figure 1.3. Primary commodity dependence and export concentration, 2012–2014


0


10


20


30


40


50


60


70


80


90


100


Ex
po


rts
c


on
ce


nt
ra


tio
n


in
de


x


0 10 20 30 40 50 60 70 80 90 100


Share of primary commodities in merchandise exports


Non-LDCsLDCs


Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed July 2016).


Adverse price movements even
in a few key commodity markets


can put pressure on the balance of
payments.


LDCs are also exposed as importers
to price volatility in commodity


markets for food and fuel.




The Least Developed Countries Report 201624


commodity dependence. This tendency has recently been demonstrated by the
experiences of net fuel importing LDCs in the 2003–2011 period and of net food
importers in 2008–2011.


(b) Global value chains


The emergence of global value chains (GVCs) has the potential to create
a more efficient international division of labour and open new opportunities of
economic diversification. However, it also raises the risk of locking in LDCs’
commodity dependence through specialization in primary commodities and
low-value-added products, thereby hampering the gradual upgrading of the
sophistication of production and exports that lies at the core of successful
development trajectories (Hausmann et al., 2007).


In principle, connecting to GVCs, even though the production of raw material
or of simple apparel (as in the case of Lesotho, Haiti and various Asian LDCs)
can provide firms with opportunities to accumulate technological capabilities,
acquire tacit knowledge and establish business relationships, thus paving
the way for subsequent upgrading (UNCTAD, 2013c). However, the process
of upgrading along a GVC is far from automatic, and depends on a number
of factors, including the input-output structure, geographic features and
governance of the supply chain, and the interaction of these factors with the
socioeconomic and institutional context of the host country (Gereffi et al, 2005;
UNCTAD, 2013a; UNECA, 2015a). In the case of the apparel sector in Lesotho
and Madagascar, for example, more locally-embedded regional or diaspora-
owned firms tend to provide greater upgrading prospects than other lead firms,
whose primary interest is in exploiting preferential access to the United States
market under the Africa Growth and Opportunity Act (Staritz and Morris, 2013).


While captive value chains (those characterized by asymmetric bargaining
power between the lead firm and its suppliers) typically offer less potential for
upgrading, the scope for sophistication may be enhanced by the presence
of a supportive institutional framework and innovation system (Pietrobelli and
Rabellotti, 2011). Examples include Botswana’s diamond industry, where the
Government has played a significant role in fostering linkages to downstream
activities, through the establishment of the international branch of the Diamond
Trading Company and the promotion of training programmes on gem-cutting
and polishing (UNECA, 2015a).


Fuel and mineral commodity value chains tend to be capital-intensive,
and moving beyond basic transformation requires specific engineering and/or
chemical skills and reliable energy supply, factors which are typically lacking
in LDCs. Even in sectors where they display revealed comparative advantage,
LDCs are thus mostly confined to low-end activities and to the role of exporters
of raw materials (UNCTAD, 2007: chap.1). This suggests that the emergence of
GVCs and the associated reorganization of the production process have in most
cases left LDCs’ commodity dependence virtually unchanged. While both trade
in intermediate goods and trade in value-added terms suggest that the majority
of LDCs have established small but rapidly expanding forward linkages within
global supply chains (UNECA, 2015a), these relationships are often restricted to
the supply of products embodying limited domestic value addition.


Similar problems arise in LDC agricultural sectors, which are typically
dominated by smallholder farmers, as the benefits to small producers of
connecting to agricultural GVCs are likely to be limited by the concentration
of market power that characterizes them. For example, four transnational
corporations control more than 60 per cent of the global coffee market, while
three control 85 per cent of the world’s tea market. This poses significant
challenges to small producers at the early stages of buyer-driven value chains
controlled by global retailers and category buyers (UNCTAD, 2013a).


The emergence of global value
chains raises the risk of locking in
LDCs’ commodity dependence…


...as upgrading along GVCs depends
on a number of country-specific


factors.


The scope for upgrading within
a GVC can be enhanced through


supportive institutions.


Fuel and mineral commodity value
chains tend to be capital-intensive,
and LDCs are mostly confined to


low-end activities.




25CHAPTER 1. Graduation: A Milestone, Not the Winning Post


(c) The natural resource curse


Commodity dependence, and dependence on mineral and fuel exports more
particularly, has often been associated with sluggish growth and poor economic
and social performance, a phenomenon often referred to as the “natural resource
curse” (Frankel, 2010; Gylfason, 2001; Sachs and Warner, 1995). In addition
to “Dutch disease” (associated with exchange rate appreciation triggered
by surging commodity export revenues undermining the competitiveness
of manufacturing), concerns revolve primarily around the limited use of the
resources generated by extractive industries due to weak incentives for savings
and investment (including in human capital) and obstacles to harnessing resource
rents for development. Resource rents originating in extractive industries are
unequally distributed, partly reflecting a “race to the bottom” to attract resource-
seeking foreign direct investment (FDI) through lower taxation and royalties and
weaker regulation. Combined with the limited reinvestment in the local economy
of profits from extractive industries, which have in practice mostly been remitted,
this has constrained LDCs’ ability to leverage primary commodities for structural
transformation (UNCTAD, 2010, 2013a).


Illicit financial flows through trade mis-invoicing are a particularly important
dimension of the resource mobilization issue, in light of their documented
magnitude, making this a high policy priority for commodity-dependent LDCs,
most notably in the fuel, mining and timber sectors (Mevel et al., 2013; UNCTAD,
2016a; UNDP, 2011; UNECA, 2015b). A recent study by UNCTAD, for example,
documents significant under-invoicing of Zambian copper exports to most
trading partners (UNCTAD 2016b).


Limited resources and weak incentives for investment represent a particular
obstacle to reducing commodity dependence, because investment and human
capital are essential to the development of new sectors and activities, and
particularly to increasing the sophistication of production. This is compounded
by the Dutch-disease effect, which reduces the incentives for investment in
tradeable sectors in particular. Economic diversification is further inhibited by the
inability of commodity-dependent LDCs to move beyond low-end activities or
to foster the establishment of backward and forward linkages with the domestic
economy. This reinforces the enclave nature of extractive industries in many
LDCs, limiting opportunities for value addition and job creation.


Thus, while extractive industries have undoubtedly contributed to improving
the macroeconomic fundamentals of many LDCs, their long-term developmental
benefits depend crucially on the economic and institutional framework. Although
mineral and fuel exports contribute substantially to generating government
revenues and foreign-exchange earnings, their expansion has made little
contribution to poverty reduction, even during boom phases (UNCTAD, 2013a).


4. BALANCE-OF-PAYMENTS CONSTRAINTS TO GROWTH


LDCs’ generally very narrow export bases, exposure to variations in
international commodity prices and heavy dependence on imports of essential
goods results in a strong tendency towards chronic current accounts deficits.
This has been compounded by a strong tendency for their trade opening to be
accompanied by a trend towards stronger growth of imports than of exports,
except for commodity exporters in periods of booming prices. When non-debt-
creating financial flows such as official development assistance (ODA) and FDI
are limited, this gives rise to accumulation of foreign debt; and overindebtedness
limits access to countercyclical financing to offset external shocks, as well as
potentially triggering highly damaging debt crises, such as those experienced
by many African LDCs in particular throughout the 1980s and 1990s (UNCTAD,
2016a).


The benefits to small producers of
connecting to agricultural GVCs are
limited by concentration of market


power.


Commodity dependence is also
associated with the “natural


resource curse”.


Illicit financial flows through trade
mis-invoicing are a key deterrent


to resource mobilization.


The Dutch-disease effect weakens
incentives for investment


in tradable sectors.


Despite macroeconomic benefits,
extractive industries have


contributed little to
poverty reduction.




The Least Developed Countries Report 201626


The current account balances of LDCs since 2000 are shown in figure 1.4,
by export categories. This highlights particularly the very wide swings in the
current account balances of fuel exporting countries. Mineral and agricultural
exporters also show wide variations, with persistent and often large deficits; and
mixed exporters also show consistently large deficits. While the current account
of manufactures exporters is broadly in balance over time, with much more
limited variations, services exporters moved from significant surpluses before
the financial crisis to substantial deficits in the post-crisis period.


Large current account deficits arise in part from the heavy dependence
of most LDCs on imports of food, fuels and capital goods. Imports of capital
goods (as well as intermediate goods and specialist services) are essential to
the investment needed for the development or productive capacities, not least
as a means of accessing new technologies needed to upgrade production
and increase productivity. Equally, however, food and fuel imports are difficult
to reduce at times of external shocks. This can give rise to a tension between
the two: either food and fuel imports are maintained at the expense of capital
goods, limiting investment and slowing growth and the development of
productive capacities; or imports of capital goods are maintained (for example,
due to binding commitments to investors), intensifying pressure on imports of
food and fuels, with potential impacts on the well-being of the population. More
generally, foreign-exchange shortage or exchange rate depreciation as a result
of external shocks reduces the attractiveness of investments that use imported
items, which are more likely to embody productivity-enhancing technologies.


The balance of payments is thus typically a constraint to LDCs’ long-term
economic growth and development (Thirlwall, 1979) and, hence, to graduation.
Chronic current account deficits typically dampen investment and growth
prospects, as they often end with a sharp balance of payments adjustment
occasioned by tightening external financing constraints (Cavallo et al., 2016).


Figure 1.4. Current account balance of LDCs, by export category, 2000–2014


0


5


-15


-10


-5


10


15


20


20
00


2 20
01


20
02


20
03


20
04


20
04


20
05


20
0606


20
07


2 20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14P


er
c


en
t o


f G
DP


A. Most commodity-dependent groups B. Less commodity-dependent groups


Agricultural and food exporters Fuel exporters


Minerals exporters


Manufactures exporters Services exporters


Mixed exporters


Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed July 2016).
Note: For the composition of the groups, see p.xiii.


Large current account deficits result
partly from heavy dependence on
imports of food, fuels and capital


goods…




27CHAPTER 1. Graduation: A Milestone, Not the Winning Post


Since the severity of these constraints depends on the composition of imports
(in the short term) and of production and exports (in the longer term), economic
diversification is a key element in overcoming them.


The period since the global financial and economic crisis has seen renewed
recourse by LDCs to balance-of-payments support from the International
Monetary Fund (IMF). Since 2010, IMF facilities have been used by 29 LDCs, of
which 14 were using the Extended Credit Facility and two the Standby Credit
Facility in September 2016.6 While increases in foreign-exchange reserves in
most LDCs over the last decade may contribute to easing their foreign-exchange
constraints, reserve accumulation entails a considerable opportunity cost in
terms of forgone mobilization of finance for developmental purposes.


5. THE SIGNIFICANCE OF GRADUATION


The above discussion provides a basis for an interpretation of the significance
of graduation in the context of the LDC predicament and the rationale for the LDC
category. In principle, graduation marks the point at which an LDC has escaped
sufficiently from the vicious circles described above to enable it to operate in,
and benefit from, international markets on an equal footing with ODCs — that is,
to make a transition from reliance primarily on exceptional international support
to a greater degree of reliance on international markets.


As discussed in section F, however, policy approaches to graduation also
need to go beyond the need to escape from the traps particular to the earliest
stages of development, and take fully into account the need to prepare for the
challenges of development beyond graduation. In other words, it is not sufficient
merely to fulfil the criteria and complete the processes of graduation itself. The
aim should rather be to achieve graduation with the momentum required to
maintain development progress in the post-graduation period.


C. The graduation process and criteria


The concept of graduation was established only in 1991. Until that point, the
criteria for LDC status had only been considered in relation to the addition of
new countries to the list. Since then, the CDP has conducted triennial reviews,
as part of which it analyses each LDC’s performance against the graduation
criteria and decides whether it is statistically eligible for graduation.


While the criteria for addition to, and graduation from, the LDC category have
changed significantly over time (box 1.2), they are now based on three elements:


• The income criterion — gross national income (GNI) per capita;


• A human assets index (HAI);


• An economic vulnerability index (EVI).


The components of the HAI and EVI are shown in box figure 1.1.


An LDC may be considered to be statistically qualified for graduation if it
achieves the threshold levels of two of these three indicators, or (since 2006) if
its GNI per capita is at least double the threshold level. The latter is referred to
as income-only graduation, and was introduced in response to rapid growth in
certain LDCs — notably some oil-producing countries — which continued to
perform poorly on the other graduation criteria.


…and give rise to balance-of-
payments constraints to long-term


development and graduation.


In principle, graduation marks
the point at which an LDC has


escaped from the vicious circles of
underdevelopment.


Graduation is based on three
criteria: GNI per capita, a human
assets index and an economic


vulnerability index.




The Least Developed Countries Report 201628


Box 1.2. Evolution of the criteria for inclusion in, and graduation from, the LDC category


In 1971, in the interests of simplicity and clarity, the CDP established three criteria for a country’s classification as an LDC:


• GDP per capita of $100 or less;


• An adult literacy rate (among those above 15 years of age) of 20 per cent or less;


• A share of manufacturing value added in GDP of 10 per cent or less.


Eligibility was based on countries meeting these three criteria. However, recognizing the need for flexibility in applying
these criteria, the CDP allowed a slightly higher GDP per capita threshold (of $120) for countries that met the literacy and
manufacturing criteria. In borderline cases, it also took account of recent growth rates and particular factors likely to affect the
relevant indicators. In 1971, the CDP identified 25 countries as LDCs on this basis. The criteria were adopted by the United
Nations General Assembly following reviews by the Economic and Social Council and an UNCTAD committee established for
the purpose. The CDP was accorded the role of recommending revisions both to the criteria and the list of LDCs.


These criteria have been modified repeatedly over time (box figure 1.1). From 1975, the CDP decided that the threshold
for GDP per capita should be adjusted, not only for global inflation (which was particularly high at the time), but also for
global growth. The threshold was adjusted in this way in 1975, 1985 and 1990. In 1980, observing that adult literacy rates
in several LDCs had increased above the threshold level while their economies remained undiversified and poverty remained
acute, the CDP adopted a hierarchy of criteria, with GDP per capita at the top and literacy rates at the bottom. They thus
allowed a country to be classified as an LDC if it met the GDP per capita and manufacturing-value-added criteria even if its
literacy rate was above the threshold level.


The first substantial revision of the criteria came in 1991, when the adult literacy rate was replaced by the augmented
physical quality of life (APQL), a broader composite indicator of human development; and the share of manufacturing in
GDP was similarly replaced by a broader economic diversification index (EDI). The APQL retained the adult literacy rate,
but combined this with indicators of health (life expectancy at birth), nutrition (per-capita calorie supply) and education (the
combined primary and secondary school enrolment ratio). The EDI, likewise, included the share of manufacturing in GDP, but
combined this with the export concentration ratio, the share of employment in industry and per-capita electricity consumption.


An additional criterion for inclusion was also added in 1991, although this was not considered in the context of graduation –
that the population should be less than 75 million. This allowed Bangladesh to retain its LDC status, but would have prevented
countries such as Nigeria or Pakistan from joining the list.


In 1991, the gap between the inclusion and graduation thresholds was fixed in absolute terms for each criterion ($100
in the case of GDP per capita). In its 1991 review, the CDP also emphasized the importance of flexibility in application of the
graduation criteria, and the need to take account of other considerations such as natural resources, natural disaster risks and
dependency on ODA in borderline cases. This was taken a step further in 1999, when the CDP decided that consideration
of the inclusion and graduation criteria should be supplemented by a qualitative assessment of vulnerability. In the three
years following the review in which the criteria were met, in the case of potential inclusion cases, UN/DESA was to prepare
an assessment note on eligibility; and, in the case of potential graduation cases, UNCTAD was to produce a vulnerability
profile, to be supplemented by ex-ante assessments of the likely consequences of graduation and potential gains and risks
following graduation.


In 1999, the EDI was replaced with the EVI. While retaining export concentration, this changed the manufacturing value-
added indicator to the share of manufacturing and modern services in GDP. Reflecting the shift of emphasis from diversification
to vulnerability, the share of employment in industry and per-capita electricity consumption were dropped; and the logarithm
of population (reflecting the greater vulnerability of very small economies) was added, together with indicators of the instability
of agricultural production and of exports of goods and services (as indicators of vulnerability to climatic shocks and external
economic shocks, respectively). More minor changes were also made to the health and nutrition components of the AQPL:
life expectancy at birth was replaced by the under-5 mortality rate; and per-capita calorie supply was replaced with average
calorie intake as a percentage of calorie requirements.


Two further minor changes occurred in 2002, when GDP per capita – unchanged as a criterion since 1971 – was replaced
with GNI per capita, and the AQPL was further modified (replacing the combined primary and secondary enrolment ratio with
the gross secondary school enrolment ratio) and renamed the human assets index (HAI).


In 1999, the gap between the inclusion and graduation criteria was changed to a fixed percentage (15 per cent, compared
with 11–17 per cent for the previous absolute differences). In 2002, the margin between inclusion and graduation thresholds
for GNI per capita was increased from 15 per cent to 20 per cent, while those for the HAI and EVI were reduced from 15 per
cent to 10 per cent.


In 2005, average calorie intake per capita as a percentage of calorie requirements was replaced as a component of the
HAI by the percentage of the population who are undernourished.


The EVI has also been further modified twice, in 2005 and 2011. In 2005, two further indicators were added – remoteness
and homelessness due to natural disasters — and the share of manufacturing and modern services in GDP as a positive
indicator was replaced with the share of agriculture, forestry and fisheries in GDP as a negative indicator. In 2011, homelessness
due to natural disasters was replaced by a wider measure of victims of natural disasters; and the share of population in low-
lying coastal areas was added, to reflect the potential risk of rising sea levels and storm surges as a result of climate change.


Sources: CDP (2015); Guillaumont (2009).




29CHAPTER 1. Graduation: A Milestone, Not the Winning Post


2011 LDCs are low-income countries suffering from the most severe structural impediments to sustainable development


GNI per capita Human Assets Index (HAI) Economic Vulnerability Index (EVI)


t1FrDFOUBHFPGQPQVMBUJPOVOEFrOPVSJTIFE t1PQVMBUJPOTJ[F
t3FNPUFOFTT
t.FrDIBOEJTFFYQPSUDPODFOUSBUJPO


tShare of population in low-lying coastal zones


t(rPTTTFDPOEBSZTDIPPMFOrPMNFOUSBUJP
t"EVMUMJUFSBDZSBUF


tVictims of natural disasters
t*OTUBCJMJUZPGBHSJDVMUVSBMQrPEVDUJPO
t*OTUBCJMJUZPGFYQPSUTPGHPPETBOETFSWJDFT


2005 LDCs are low-income countries suffering from low levels of human resources and a high degree of economic vulnerability


GNI per capita Human Assets Index (HAI) Economic Vulnerability Index (EVI)


tPercentage of population undernourished t1PQVMBUJPOTJ[F
tRemoteness
t.FrDIBOEJTFFYQPSUDPODFOUSBUJPO
t


t(rPTTTFDPOEBSZTDIPPMFOrPMNFOUSBUJP
t"EVMUMJUFSBDZSBUF


tHomelessness due to natural disasters
t*OTUBCJMJUZPGBHSJDVMUVSBMQrPEVDUJPO
t*OTUBCJMJUZPGFYQPSUTPGHPPETBOETFSWJDFT


2002 LDCs are low-income countries suffering from low levels of human resources and a high degree of economic vulnerability


GNI per capita Human Assets Index (HAI) Economic Vulnerability Index (EVI)


t"WFSBHFDBMPSJFJOUBLFQFSDBQJUBBTBQFrDFOUBHF
PGUIFDBMPSJFrFRVJrFNFOU


t1PQVMBUJPOTJ[F
t&YQPSUDPODFOUSBUJPO
t4IBrFPGNBOVGBDUVSJOHBOENPEFrOTFSWJDFT
JO(%1


tGross secondary school enrolment ratio
t"EVMUMJUFSBDZSBUF


t*OTUBCJMJUZPGBHSJDVMUVSBMQrPEVDUJPO
t*OTUBCJMJUZPGFYQPSUTPGHPPETBOETFSWJDFT


1999 LDCs are low-income countries suffering from low levels of human resources and a high degree of economic vulnerability


GDP per capita Augmented Physical Quality of Life Index (APQLI) Economic Vulnerability Index (EVI)


tAverage calorie intake per capita as a
percentage of the calorie requirement
t


tPopulation size
t&YQPSUDPODFOUSBUJPO
tShare of manufacturing and modern
services in GDP


t$PNCJOFEQSJNBSZBOETFDPOEBSZTDIPPMFOrPMNFOUSBUJP
t"EVMUMJUFSBDZSBUF


tInstability of agricultural production
tInstability of exports of goods and services


1991 LDCs are low-income countries suffering from long-term handicaps to growth, in particular, low levels of human resource development and/or severe structural weaknesses


GDP per capita Augmented Physical Quality of Life Index (APQLI)


tPer capita calorie supply
tLife expectancy at birth tExport concentration ratiot4IBrFPGNBOVGBDUVSJOHJO(%1


tShare of employment in industry
tPer capita electricity consumption


tCombined primary and secondary school
enrolment ratio
t"EVMUMJUFSBDZSBUF


1971 LDCs are countries with very low levels of per capita gross domestic product facing the most severe obstacles to development


GDP per capita tAdult literacy rate tShare of manufacturing in GDP


Source: UNCTAD secretariat, based on CDP and UNDESA (2015).
Notes: Bold type indicates new components or new names.


For the 2011 criteria, numbers in parenthesis indicate the weighting in the index composition.


Box 1.2 (contd.)




The Least Developed Countries Report 201630


To qualify for graduation, a country must meet these conditions in at least
two consecutive triennial reviews. As a further measure to limit the risk of
premature graduation, resulting in a graduating country subsequently reverting
to LDC status, the threshold levels of the indicators for graduation are set above
those for inclusion in the category.


Where a country meets these conditions for graduation, the CDP can make
a recommendation for graduation for consideration by the Economic and Social
Council. However, such a recommendation does not follow automatically
from fulfilling the statistical graduation criteria — the specific circumstances of
each country, particularly its vulnerability, are also taken into account, as is the
anticipated impact of graduation and the loss of LDC treatment.


If the Economic and Social Council endorses the recommendation — again
taking account of country circumstances and the likely impact of graduation
— it sends the case to the United Nations General Assembly to take the final
decision on the country’s graduation, including its timing. While graduation
should in principle take place three years after the decision to graduate the
country is taken, a different grace period may be agreed. Longer periods have
been agreed in nearly all graduation cases, but not as yet a shorter one.


Given the potential adverse effects of loss of access to LDC-specific ISMs,
a three-year period following graduation is granted to enable the country to
negotiate a “smooth transition” process with its development partners, so as
to avoid disruption to development plans and programmes. The CDP continues
to monitor the progress of graduating countries following their graduation and
UNCTAD provides technical assistance to accompany the country during this
phase.


D. The evolution of
the least developed country list


In principle, it might seem reasonable to expect that the list of LDCs would
become shorter over time, as countries escape from the vicious circles outlined
above – particularly as the primary objective of establishing the LDC category
was to allow countries to develop sufficiently, through ISMs and national
development strategies, to be able to engage more successfully in global
markets.


In practice, however, this has not been the case. On the contrary, the number
of LDCs doubled from the original list of 25 in 1971 to a peak of 50 between
2003 and 2007, declining only to 48 since 2014 (figure 1.5). However, while this
has been partly a result of changes in country circumstances, two other factors
have been largely responsible: countries gaining independence (including
by secession from existing States); and changes in the LDC criteria and the
graduation thresholds (box 1.2).


The geographical composition of the group has varied relatively little since
1971 (figure 1.5). The main change has been the increase in the proportion of
island economies, from 8 per cent (2 of 25) when the category was established in
1971, to 20 per cent (8 of 39) 15 years later, largely reflecting the late attainment
of independence by many countries in this group.


As well as the number of new countries becoming LDCs, the near doubling
of the size of the group in the last 45 years in part reflects the small number
of countries graduating out of the category — just four in the 25 years since


LDCs can graduate either by
meeting two of the three criteria, or
by reaching double the graduation


threshold for GNI per capita.


Country-specific circumstances are
also taken into account in graduation


decisions.


After a transition period of at least
three years, graduating countries


lose access to LDC-specific ISMs.


The number of LDCs doubled from
25 LDCs in 1971 to 50 in 2003–


2007, and has since fallen only to 48.




31CHAPTER 1. Graduation: A Milestone, Not the Winning Post


the principle of graduation was established (Botswana in 1994, Cabo Verde in
2007, Maldives in 2011 and Samoa in 2014). While these limited numbers in
part reflect relatively slow progress towards the graduation thresholds, they may
also reflect changes in the economic and political calculus of graduation, as
discussed in section F below.


After 45 years of relative stability, however, the expected increase in the
number of countries expected to graduate in the coming years, if realized, is
likely to give rise to much more significant changes in the composition of the
group. This is discussed in chapter 2.


E. The least developed country category:
More relevant than ever


1. ECONOMIC DIVERGENCE AND THE GROWING
CONCENTRATION OF SOCIAL DEPRIVATION


The global economy and the landscape for development have changed
dramatically since the LDC category was introduced. Nonetheless, it
unquestionably remains valid. Indeed, it is of greater relevance than ever. Some
ODCs, particularly emerging economies, have grown strongly, and their per-
capita incomes have converged rapidly towards the global average. Despite
some improvement in their growth performance in the early part of the twenty-
first century, the LDCs have been left ever further behind.


Thus, the average GDP per capita of ODCs and countries with economies in
transition (as a single group) has increased by nearly half relative to that of the
world as a whole in just 16 years, from 28.4 per cent in 1998 to 42.8 per cent in
2015. By contrast, the figure for (current) LDCs rose by barely a quarter over the
same period, from 5.8 per cent to 7.3 per cent; and even this increase did little


Figure 1.5. Number of LDCs by geographical group, 1971–2016


0


10


20


30


40


50


60


1971 1975 1980 1985 1990 1995 2000 2005 2010 2015


African LDCs and Haiti Asian LDCs Island LDCs


Source: UNCTAD secretariat elaboration, based on CDP and UNDESA (2015).


To date, only four countries
have graduated from LDC status:
Botswana, Cabo Verde, Maldives


and Samoa.


Widening economic and social gaps
between LDCs and ODCs make


the LDC category more
relevant than ever.




The Least Developed Countries Report 201632


more than reverse the reduction experienced since the early 1980s (figure 1.6).
The GDP per capita of LDCs as a whole has fallen almost continuously relative
to that of ODCs and countries with economies in transition since 1981, from
more than a quarter to barely one sixth. This ratio fell in all but 5 of the 33 years
from 1981 to 2014.


LDCs have also fallen ever further behind in terms of social indicators in recent
decades (figure 1.7). While their share in the world population has increased only
from 9.7 per cent to 12.8 per cent since 1990, the proportion of extreme poverty
accounted for by LDCs has doubled from less than 20 per cent to nearly 40
per cent, accelerating markedly since the beginning of the current economic
and financial crisis which broke out in 2008. Over the same period, the share of
people in LDCs without access to electricity has increased by two thirds, from
31.8 per cent to 53.4 per cent; and the share of people without access to water
has more than doubled, from 20.0 per cent to 43.5 per cent.


This further highlights the contemporary relevance of the LDC category,
particularly in light of the increased emphasis on social goals embodied in
the 2030 Agenda and the Sustainable Development Goals, which have the
avowed aim of “leaving no one behind”. The LDCs are the epitome of those left
behind in the global economy, both economically and in human development;
and, as observed in The Least Developed Countries Report 2015 (UNCTAD,
2015a), their increasing share of the social ills addressed by the Sustainable
Development Goals makes them the battleground on which the 2030 Agenda
will be won or lost. If extreme poverty is to be eradicated globally by 2030, in
line with the 2030 Agenda, it must be eradicated everywhere; and it is in the
LDCs that extreme poverty is systematically most generalized and most severe,
and where it is falling most slowly. A similar logic applies to other Sustainable


Figure 1.6. LDC and ODC GDP per capita as percentage of world average, 1981–2014


0


5


10


15


20


25


30


35


40


45


1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013


ODCs and transition economiesLDCs


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development
Indicators database (accessed May 2016).


LDCs' GDP per capita has fallen
almost continuously relative to


ODCs and transition economies
since 1981.


LDCs now account for twice as large
a proportion of global poverty and of
people without access to electricity


as in 1990.




33CHAPTER 1. Graduation: A Milestone, Not the Winning Post


Development Goal targets, such as access to water, sanitation and electricity,
preventable child deaths and children out of school. Achieving such outcomes
will require both very close attention to the LDCs and continued and enhanced
international support.


2. DIVERGENCE IN PRODUCTIVE CAPACITIES


The economic divergence between LDCs and ODCs has reflected, and is
reflected in, a widening gap in their productive capacities. Advanced education
is critical to the development of productive capacities, not only in the fields of
science and technology, but also in areas such as management, and business
and public administration. However, tertiary education enrolment ratios in
LDCs have fallen progressively further behind the overall figure for developing
countries. Even in relative terms, there was only a brief convergence, from 2004
until 2010, and the absolute gap has continued to widen (figure 1.8). In 1970,
the tertiary enrolment ratio in LDCs was 1.6 per cent, compared with 4.0 per
cent across developing countries as a whole; by 2013 the ratio had increased


Figure 1.7. LDCs’ share in world population, poverty and infrastructure shortfalls,
1980–2014


0


10


20


30


40


50


60


1990 1995 2000 2005 2010 2015


% of people in extreme poverty (estimated)


% of people without access to electricity


% of people without access to water


% of world population


Source: UNCTAD secretariat estimates, based on data from World Bank, World Development
Indicators database and World Bank, PovcalNet database (both accessed April 2016).


Notes: Figures for extreme poverty are approximate, and based on a poverty line of $1.25 per
day at 2005 purchasing power parity (PPP) (due to the unavailability of data for some
LDCs at 2011 PPP at the time of writing). The estimates provided are based on the
overall poverty headcount ratio for all LDCs for which data are available, multiplied by
the total population for all LDCs. Since no data are available for Afghanistan, Angola
(before 2002), Equatorial Guinea, Eritrea, Kiribati, Myanmar, the Solomon Islands, So-
malia, Tuvalu and Vanuatu, this effectively assumes that the average poverty headcount
ratio across these countries is equal to the average across the other LDCs.


The 2030 Agenda aims to "leave no
one behind" - and the LDCs are the
epitome of those left behind in the


global economy.


Economic divergence has reflected,
and is reflected in, a widening gap in


productive capacities.




The Least Developed Countries Report 201634


to 26.4 per cent for developing countries as a whole, but only to 9.0 per cent in
LDCs – a level attained by the developing world as a whole in 1996. Moreover,
retention of high-level human capital is as important, and can be as problematic,
as its production. Not only is the supply of graduates in LDCs barely one third of
that in ODCs, but the “brain drain” is substantially greater, further widening the
gap: the proportion of graduates from LDCs living abroad is more than half as
much again as in ODCs, at 12.4 per cent in 2000, compared with 7.9 per cent
for ODCs (UNCTAD, 2007).


There is also a widening technological gap between LDCs, on the one
hand, and ODCs and developed countries on the other, a trend documented
by previous UNCTAD research (UNCTAD, 2014b). A dramatic divergence has
occurred in their respective science and technology outputs. The ratio between
the number of patents filed per capita by ODC and LDC citizens soared from
35 in 1980 to 907 in 2014, reflecting a strong intensification of ODC efforts
in science and technology, and a virtual stagnation in LDCs (figure 1.9A). The
share of middle and high skills- and technology-intensive manufactures in total
merchandise exports (an indicator of export sophistication) has consistently
been around 10 times higher in ODCs than in LDCs, and the gap has widened
still further in recent years (figure 1.9B).


The divergence in energy use – another important measure of productive
capacities – has also been dramatic (figure 1.10). Between 1971 and 2013, per-
capita energy use in LDCs increased by only 12.5 per cent, compared with 169
per cent across ODCs.


Financial depth and inclusion is another important enabler of the development
of productive capacities, given its role in financing productive investment
(UNCTAD, 2006), as well as in channelling remittances to development in


Figure 1.8. Tertiary education enrolment ratio, LDCs and ODCs, 1970–2013


0


5


10


15


20


25


30


1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2012


LDCs ODCs


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development
Indicators database (accessed April 2016).


The widening LDC-ODC gap can
be seen in tertiary education and


graduate emigration…


…patent registration and skills-
and technology-intensive


manufactured exports.




35CHAPTER 1. Graduation: A Milestone, Not the Winning Post


Figure 1.9. Selected indicators of technological capabilities in LDCs and ODCs


0


10


20


30


40


50


60


1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
P


er
c


en
t


of
m


er
ch


ad
is


e
ex


po
rt


s


B. Exports of medium and high skill- and
technology-intensive manufactures, 1995–2015


0


50


100


150


200


250


1980 1985 1990 1995 2000 2005 2010 2014


N
um


be
r


of
p


at
en


ts
p


er
m


ill
io


n
in


ha
bi


ta
nt


s,
by


a
pp


lic
an


t'
s


or
ig


in


A. Patents per capita, 1980–2014


LDCs ODCs


Source: UNCTAD secretariat calculations, based on data from World Intellectual Property Organization, WIPO Statistics Database; and
UNCTADstat database (both accessed September 2016).


Figure 1.10. Per capita energy use, LDCs and ODCs, 1971–2013


LDCs ODCs


0


200


400


600


800


1 000


1 200


1 400


1 600


1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013


En
er


gy
u


se
(k


g
oi


l e
qu


iva
le


nt
p


er
c


ap
ita


)


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development
Indicators database (accessed April 2016).




The Least Developed Countries Report 201636


countries with large diasporas (UNCTAD, 2012). In most LDCs, less than 20 per
cent of the adult population have an account with a financial institution, while in
only four (Bhutan, Nepal, Rwanda and Zambia) is the rate above 30 per cent.
In the majority of ODCs, by contrast, the corresponding rate is higher than 40
per cent — a rate not achieved by any LDC. By the same token, only two LDCs
(Angola and Bhutan) have more than 10 commercial bank branches per million
inhabitants, while it is above this level in two thirds of ODCs (figure 1.11).


Despite remarkable progress in the adoption of new information and
communications technologies (ICTs) in some LDCs, here, too, they have lagged
well behind ODCs (figure 1.12 and table 1.1). The median level of Internet
access is less than one fifth of that in ODCs across LDCs as a whole, and one
ninth in African LDCs and Haiti (9.0 and 5.8 users per 100 people, respectively,
compared with 44.7). Even in Asian LDCs the figure is barely a quarter of that for
ODCs. Mobile telephone subscriptions are also much more limited in LDCs — a
median of 65 per 100 people compared with 110 in ODCs. Asian LDCs again
fare somewhat better, but are also far behind ODCs at 77.5, while island LDCs
have slightly fewer subscriptions than African LDCs and Haiti (62.7, as against
64.0).7 The gaps in physical ICT infrastructure are much greater: in 2014, ODCs
had an average of 34.3 secure Internet servers per million people, compared
with only 1.5 per million in LDCs.8


3. THE CHANGING GLOBAL ECONOMIC ENVIRONMENT FOR DEVELOPMENT


The divergence between LDCs and ODCs described above, in terms of
economic and social indicators and productive capacities, is closely linked
with fundamental shifts in the nature of the global economy in recent decades,


Figure 1.11. Access to financial services, LDCs and ODCs, 2011–2014 (latest)


0


20


40


60


80


100


0 5 10 15 20 25 30


Po
pu


la
tio


n
(a


ge
1


5+
) w


ith
a


cc
ou


nt
at


a
fi


na
nc


ia
l i


ns
tit


ut
io


n
(p


er
c


en
t)


Commercial bank branches per 1 million population


African LDCs and Haiti Asian LDCs Island LDCs ODCs


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development Indicators database (accessed May 2016).


The gap can also be observed in
per-capita energy use and financial


depth and inclusion.


Despite remarkable progress,
wide gaps also remain in ICT


infrastructure.




37CHAPTER 1. Graduation: A Milestone, Not the Winning Post


Figure 1.12. ICT access, LDCs, ODCs and graduating countries, 2014


0


10


20


30


40


50


60


70


80


90


100


50 100 150 200


In
te


rn
et


u
se


rs
p


er
1


00
p


op
ul


at
io


n


Mobile telephone subscriptions per 100 people


ODCsAfrican LDCs and Haiti Asian LDCs Island LDCs LDC graduates


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development Indicators database (accessed May 2016).


Table 1.1. Median access to ICTs by country group, 2014


Mobile telephone subscriptions Internet users Secure Internet servers


(Per 100 population) (Per 1 million population)


LDCs (total) 64.9 9.0 1.5


African LDCs and Haiti 64.0 5.8 1.4


Asian LDCs 77.5 11.9 1.6


Island LDCs 62.7 10.6 9.1


LDC graduates 144.5 30.7 40.9


Other developing countries 110.1 44.7 34.3


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development Indicators database (accessed May 2016).


particularly from a development perspective (UNCTAD, 2015b). In particular,
this divergence is related to the major increase in the role of commercial
transactions, and the corresponding reduction in the relative importance of non-
market mechanisms, since the inception of the LDC category. This is clearly
demonstrated in figure 1.12, above. Trade has increased from around 12 per
cent of global GDP in the 1960s to around 30 per cent since 2011. FDI has
risen from an average of 0.4 per cent of global GDP between 1970 and 1985 to
between 2 per cent and 5 per cent since 1998. ODA, by contrast, fell by nearly
half relative to global GDP, from 0.35 per cent in the early 1960s to an average
of less than 0.2 per cent since 1996. By contrast, migrants’ remittances, which
were less than half as much as ODA in the early 1970s, are now three times
as great as ODA. FDI flows, which were around 1.5 times greater than ODA in
the 1970s and early 1980s, have been between 10 and 20 times greater since
1997.


Divergence is also linked to the shift
in the global economy from ODA


to commercial transactions.




The Least Developed Countries Report 201638


In the context of LDCs and graduation, this has three critically important
implications. First, the major increase in the importance of trade and international
investment in the global economy has made success in development ever more
dependent on effective engagement with export markets and foreign investors,
and latterly on being able to secure a position in higher-value segments of GVCs.
This has dramatically highlighted the gap in productive capacities between LDCs
and ODCs, intensifying its effects on the LDCs’ prospects for success.


Second, the greatly increased flows of trade and international investment
have strengthened the rewards available to those countries that are most
successful in competing for them. Together, these two factors have made an
important contribution to the increasing divergence between LDCs and ODCs
in economic and human development highlighted above. At the same time, this
has increased the need for effective international support to the development of
productive capacities in LDCs, to enable them to compete more successfully in
a changing international landscape.


Third, the decline in ODA relative to private capital flows and trade has limited
its impact. Its effectiveness has also been impaired by extraneous influences
on its allocation, such as commercial, financial, geopolitical and domestic
political considerations rather than relative needs (Alesina and Dollar, 2000;
Dollar and Levin, 2006). In the 1960s, ODA per capita to the countries that are
now LDCs was approximately equal to that to ODCs, increasing only slowly
during the course of the decade. Following the official recognition of the LDC
category in 1971, however, ODA to LDCs increased dramatically, peaking at 3.5
times that for ODCs in per-capita terms in 1987. Thereafter, however, the trend
was reversed, the ratio having fallen to 2 by 1999. Despite the inclusion in the
Millennium Development Goals and the 2001 Programme of Action for the Least
Developed Countries for the Decade 2001–2010 (the Brussels Programme of
Action) of a target of 0.15–0.20 per cent of donor GNI for ODA to LDCs, the


Figure 1.13. ODA, trade, FDI and remittances as percentage of world GDP,
1960–2015


0


5


10


15


20


25


30


35


0


1


2


3


4


5


6


7


1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015


Remittances FDI ODA
Trade (right-hand scale)


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development
Indicators database (accessed April 2016).


The growing importance of
international markets intensifies


the effect of the divergence
in productive capacities
on LDCs' prospects…


…widening the economic gap with
ODCs and increasing the need for


more effective international support.




39CHAPTER 1. Graduation: A Milestone, Not the Winning Post


ratio has fluctuated widely in a range between 2 and 3 since 2000, but with no
clear trend (figure 1.14).


F. Graduating to what?


1. A MILESTONE, NOT THE WINNING-POST


The above discussion highlights the importance of considering graduation
from the LDC category in the context of a broader and longer development
process. While developing countries are often divided into broad categories, of
which the LDCs are one, these do not generally represent clearly demarcated
groups. Rather, developing countries are spread across a continuous spectrum,
whether in terms of income, commodity dependence, fragility or any other
criterion or set of criteria. The precise criteria for LDC status do not signify a
clearly defined boundary between fundamentally different economies, any more
than the threshold between the low- and middle-income, or between the lower-
and upper-middle-income categories. A degree of arbitrariness is inevitable in
any such classification.


This progressive nature of development means that graduation — and still
more the achievement of the statistical criteria for graduation — is not an end
in itself. It marks the end of a political and administrative process, but not the
completion of an economic or developmental process. Rather, it should indicate
that a certain minimal level of development has been achieved as the initial stage
of a single continuous process – that the threshold has been crossed from
dependency on ISMs to a capacity to rely primarily on markets.


Figure 1.14. Real ODA receipts per capita, LDCs and ODCs, 1960–2014


0


10


20


30


40


50


60


70


1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2014


$
pe


r c
ap


ita
, 2


01
3


pr
ic


es


LDCs ODCs


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development
Indicators database (accessed March 2016).


The criteria for LDC status do not
signify a clearly defined boundary
between fundamentally different


economies.


Graduation is not the winning post
of a race to leave the LDC category,


but the first milestone in the
marathon of development.




The Least Developed Countries Report 201640


Graduation is thus not the winning post of a race to cease being an LDC,
but rather the first milestone in the marathon of development. This has critically
important implications for LDCs’ approaches to development and to graduation.
Just as it is inadvisable to sprint for the first kilometre of a marathon, it is not
enough simply to target achievement of the criteria needed for graduation: it is
also necessary to establish the foundations needed to maintain development
progress beyond graduation. Focusing exclusively on the graduation indicators
risks diverting attention and resources from other aspects of development that
will be critical long after graduation has been achieved.


This is of particular importance because many of the prerequisites for
development are dependent on prior actions and/or subject to very long time
lags, and their effectiveness and sustainability can be seriously impaired by
attempting to compress such actions into an unrealistically short period.


This applies particularly — but by no means exclusively — to the income-
only route to graduation. As the experiences of Angola and Equatorial Guinea
demonstrate, it is possible for an LDC to reach the income level necessary
for graduation with limited progress either on human assets or on economic
vulnerability. Particularly where growth is based on an extractive sector that
operates essentially as an enclave, this may provide a very weak basis for post-
graduation development, unless resource rents are effectively used to support a
deeper and more broadly based development process.


Even where countries qualify for graduation on the basis of two criteria
(typically income per capita and the HAI), similar issues arise. Important as the
indicators underlying these criteria unquestionably are, there are many critical
aspects of development that they capture only indirectly or to a limited extent.
Graduation may thus be achieved with relatively limited progress in key areas
such as infrastructure, structural transformation, and effective institutions and
governance. However, if the necessary foundations are not laid in these areas,
they are likely to constrain post-graduation development.


This means that how the income criterion is met (that is, the nature of growth)
may be as important as when it is met (the rate of growth). Moderate but broadly
based growth, founded upon the development of productive capacities (which
entails increasing productivity, structural transformation and infrastructure
development), may well be more conducive to development success in the long
term than faster growth with weaker foundations, even if the latter leads to faster
graduation.


Equally, some caution is needed with respect to the components of the
human assets indicator. Focusing on improving under-5 mortality statistics, for
example through concentrating on vertical immunization programmes, may
well maximize the reduction of child mortality in the short term, and hence
progress towards meeting the human assets criterion for graduation. Important
as child immunization unquestionably is, however, a greater emphasis on the
development of effective health systems may provide a more solid foundation
for development beyond graduation, as well as broader and more sustainable
progress on child health.


Similarly, progress towards graduation can be maximized by focusing on
increasing the secondary school enrolment ratio — that is, providing more
classrooms and promoting school attendance. In developmental terms,
however, merely having children in classrooms is not enough: the nature and
quality of education, though less readily measurable, is also critical. Moreover,
given the time lags inherent in child education, long-term development requires
attention to prospective needs a decade or more in the future. Those children


Income-only graduation may provide
a weak basis for later development,
especially when based on extractive


sectors.


How the income criterion is met may
be as important as when it is met,


and the nature of growth as relevant
as the rate of growth.


Focusing only on the specific
indicators used in the graduation


criteria is not enough…




41CHAPTER 1. Graduation: A Milestone, Not the Winning Post


beginning education now will be the pool of adults from which the graduates
and post-graduates available in 15–20 years will be drawn.


Thus the nature of the graduation criteria, and of their individual components,
need to be borne in mind. Indicators are selected for this purpose primarily on the
basis, first, that they have a strong correlation with key aspects of development;
and, second, that they are readily and objectively measurable. The latter is of
particular importance in LDCs, where reliable data collection is limited by a
combination of financial and human resource constraints, institutional limitations,
and logistical factors such as low population densities and poor transport and
communications infrastructure.


While the indicators are readily measurable, the picture they provide of
the development process is inevitably imperfect and incomplete. To target
improvements in the specific indicators would be to place excessive emphasis
on certain objectives because they are readily measurable, rather than on the
basis of their importance — for example, on child mortality rather than other
aspects of child and adult health or the establishment of effective health systems.
This would be suboptimal from a longer-term development perspective.9


This suggests that a graduation strategy should focus primarily on the needs
of the long-term development process rather than on the particular criteria
used to assess graduation. This is referred to in this Report as “graduation with
momentum” — graduation from LDC status in such a way as to provide a solid
basis for sustained development progress subsequently, allowing the pitfalls of
the later stages of development to be avoided.


2. GRADUATION WITH MOMENTUM:
THE KEY ROLE OF PRODUCTIVE CAPACITIES


The key to such a process of graduation with momentum is the development
of productive capacities — an issue consistently highlighted in The Least
Developed Countries Report series (most notably UNCTAD, 2006). This
entails a shift of production towards more sophisticated goods and services,
through investment in technological upgrading of productive facilities and the
establishment of new sectors and activities; and diversification and upgrading of
the export structure towards a greater number of higher-value-added products.
A key aspect is the production, not only of new, but of “better” products – those
generating a greater proportion of value added in the country, with forward and
backward linkages and positive externalities. Further elements include improving
product quality, product differentiation to earn a market premium, and increasing
domestic supply of the services associated with production.


Such development of productive capacities leads to structural transformation
of the economy, shifting labour and capital from less productive to more
productive sectors and activities (UNCTAD, 2014c), and contributes to creating
the jobs needed for the growing LDC population with higher levels of labour
productivity and value addition, thus raising living standards (UNCTAD, 2013b).
This process of progressively increasing sophistication of production (and export)
structures lies at the core of successful development trajectories (Hausmann et
al., 2007).


Such a “virtuous” pattern of development, founded upon the development
of productive capacities and structural transformation, is also essential to
increasing LDCs’ ability to cope with their acute vulnerability to external risks
and shocks, particularly economic shocks (stemming from factors such as
commodity dependence, chronic current account deficits, dependence on
imports of essential inputs, the combination of small economies and openness,


…as the picture of development
they provide is inevitably imperfect


and incomplete.


Graduation strategies should focus
primarily on long-term development
needs, to achieve graduation with


momentum.


Graduation with momentum requires
the development of productive
capacities, leading to structural


transformation…


...to enable LDCs to cope with
their vulnerability to economic and


environmental shocks.




The Least Developed Countries Report 201642


and constraints to raising fiscal revenues) and environmental shocks (such as
natural disasters and climate change impacts, in some cases compounded
by geographical factors). Since such vulnerabilities tend to hamper investment
and thus jeopardize development, increasing resilience further contributes to
progress towards graduation and subsequent development.


At some point along this trajectory — in principle marked by graduation —
LDCs should cease to need LDC-specific ISMs and be able to face international
competition on the basis of the productive capacities they have developed.
However, this is but one step along the development continuum, and they often
continue to face challenges such as commodity dependence and vulnerability to
a greater or lesser extent. The need to continue developing productive capacities
and upgrading the productive base is thus a permanent one.


The concept of graduation with momentum also accords closely with the
2030 Agenda. In contrast with the previous Millennium Development Goals,
the Sustainable Development Goals incorporate a balanced treatment of the
economic, social and environmental dimensions of sustainable development,
fully recognizing the interdependence among them. Sustainable Development
Goals 1, 8–12 and 17, in particular, imply achieving sustainable development
through the development of productive capacities, structural transformation,
technological upgrading, diversification, rising productivity and the creation of
more and better jobs. Thus, to pursue the Sustainable Development Goals in
a similarly balanced manner implies a development strategy consonant with
that long advocated by The Least Developed Countries Report series and
summarized in figure 1.14. If LDCs were to achieve the Goals and their targets
fully, they would in doing so also achieve graduation with momentum.


In practice, of course, such an ideal graduation-with-momentum scenario
is by no means always achieved. While the graduation criteria are intended to
ensure that graduating countries are fully capable of pursuing their development
process in the post-graduation phase in the absence of ISMs, they are inevitably
imperfect, and can omit some important aspects of development. As discussed
in chapter 2, some countries may thus graduate without having achieved
significant structural transformation.


3. THE KEY ROLE OF INCLUSIVITY AND GENDER


The structural transformation and development of productive capacities
essential to graduation with momentum require making full use of productive
resources, not least human resources. This requires harnessing the productivity,
skills, talents, creativity and entrepreneurial vigour of the entire population
effectively for development. Given the potentially transformative role of women’s
empowerment, greater gender equality in access to education, employment
opportunities and factors of production is an important aspect of this.10


Graduation with momentum can best be achieved and sustained by ensuring
inclusiveness in access to and use of productive resources, including through
implementation of gender-specific measures where appropriate to overcome
the particular disadvantages faced by women.


Women in LDCs face particular constraints to their access to productive
resources and markets. Their disadvantages in reproductive health,
empowerment and the labour market are particularly striking: the United Nations
Development Programme (UNDP) gender inequality index for LDCs in 2015
amounted to 0.57, compared with 0.45 for developing countries as a whole.11


LDCs also perform significantly less well than ODCs on the UNDP’s gender
development index (based on the female-to-male ratios of indicators relating
to health, education and command over economic resources). In 2014, the


The concept of graduation with
momentum accords closely with the


2030 Agenda.


If LDCs meet the SDGs, they will in
doing so also achieve graduation


with momentum.


Some countries may graduate
without achieving significant


structural transformation.




43CHAPTER 1. Graduation: A Milestone, Not the Winning Post


Figure 1.15. LDC graduation and sustainable development


Drivers


Development


Vulnerability


Traps


LDCs ODCs


International
dimensions


Middle-income trap


International markets


ISMs/ODA


Poverty


Commodity dependence


Balance of payments


Landlocked countries
Small islandsGeographical


Economic


Natural/
environmental


Productivity, value addition,
income, innovation,


technology, sophistication


Productive
capacities Diversification


Structural transformation


Gr
ad


ua
tio


n


Source: UNCTAD secretariat.


overall gender development index of LDCs was 0.87, compared with 0.90 for
developing countries as a whole. Of the 36 LDCs for which data are available,
26 are in the lowest of five categories based on this index, and a further six
in the second lowest group. Only four LDCs, all in Africa, performed better:
Madagascar and the United Republic of Tanzania were classified in the middle
group, while Lesotho and Rwanda were in the second highest group (UNDP,
2015: table 4).




The Least Developed Countries Report 201644


The cost of failing to address gender parity effectively is considerable. The
Africa Human Development Report 2016 (UNDP, 2016) estimated the cost
of gender inequality in labour markets in sub-Saharan Africa in 2014 at $105
billion (6 per cent of GDP). Reducing such costs requires realizing the potential
contribution of women to development, by identifying and addressing the
particular constraints they face in accessing education and labour and other
markets. Women typically face time constraints arising from obligations to care
for other family members; discriminatory practices and cultural norms that limit
access to labour (and other) markets; gender assignment of roles and tasks
(notably in agriculture) and occupations; lack of control over the proceeds of crop
sales in agriculture; lack of financial inclusion and access to financial services;
limited access to education and training; and discriminatory practices, customs
and laws (for example, in relation to land ownership, titling and inheritance).


Though by no means exclusively a rural issue, gender inequality tends to be
particularly marked in rural areas, and is therefore of particular relevance to the
transformation of rural economies (UNCTAD, 2015a: chap. 4). Gender-based
obstacles, compounded by other market imperfections in rural areas, reduce
women’s productivity and inhibit their entrepreneurial potential, slowing the
transformation of rural economies. Unless such constraints are addressed, the
supply response to incentives aimed at increasing production will remain weak,
as half the population will be unable to respond effectively. Estimates made
by the Food and Agriculture Organization of the United Nations (FAO, 2011)
suggest that total agricultural output could be increased by between 2.5 per
cent and 4 per cent if women were provided with the same access to productive
resources as men.


G. The economic and political
calculus of graduation


1. THE ECONOMIC CALCULUS


Graduation should in principle be a reflection of development in terms
of income per capita, human assets and economic vulnerability; and this
development, in itself, has clear economic benefits. However, these benefits
may be increased or reduced by the economic effects of graduation (that is, of
the loss of LDC status itself); and these potential effects are a key element in
LDCs’ approaches to graduation.


A key result of graduation from LDC status is that the graduating country,
after the three-year transition period, loses access to LDC-specific ISMs. This is
a potentially significant economic cost, as further analysed in chapter 4 of this
Report. However, the importance of ISMs to a graduating country depends on
the benefits it derived from them while it was an LDC. As discussed in chapter 3,
such benefits are often subject to major constraints and limitations.


It is also possible that there may be indirect costs of graduation. The
increasing emphasis on LDCs within the development cooperation discourse, for
example, could contribute to a reduction in ODA receipts following graduation.
Once a country has graduated, the ODA it receives no longer contributes to the
donor country’s performance against the target of 0.15–0.20 per cent of GNI for
ODA to LDCs. To the extent that this target is regarded as a significant policy
objective in donor countries, this could contribute to a reallocation of ODA from
a graduating country towards the remaining LDCs.


Loss of access to LDC-specific ISMs
after graduation may give rise to


economic costs…


…but there could also be benefits
in terms of international market


perceptions.




45CHAPTER 1. Graduation: A Milestone, Not the Winning Post


Against this, however, graduation may have more positive effects. While
LDC status may confer benefits in terms of access to ISMs, graduation may
have (or be perceived by governments as having) potential benefits in terms of
commercial relations, particularly its attractiveness to foreign investors. Market
perceptions are important, most notably to FDI, credit ratings, and access to
and the cost of international lending. Such benefits could, in principle, outweigh
any losses associated with the loss of access to ISMs.


The economic calculus of graduation therefore rests on the balance between
these positive and negative aspects; and this balance is likely to evolve over
the course of development. At the earliest stages of development, a country’s
attractiveness to foreign investors (at least outside extractive industries) is limited
by low incomes, limited human capital, weak infrastructure, relatively poor
health and nutrition, and often economic, social and/or political instability. The
potential benefits of graduation in terms of FDI are therefore likely to become
progressively more important as development progresses, and the country
becomes potentially more attractive as a destination for FDI.


The evolution of the effects of ISMs over the course of development is less
clear-cut. While the need for ISMs is likely to be greatest at earlier stages of
development, when the ability to compete in international markets is most
limited, the potential to exploit and benefit from some ISMs – for example, market
access — is dependent on the level of development of productive capacities.
The benefits of such ISMs, and hence the potential impact of their loss through
graduation, may thus increase as development progresses.


The economic calculus of graduation may also be expected to change over
time, in line with changes in the global economy. As noted above, there has
been a major increase in the importance of market transactions over time, while
ODA to LDCs has failed even to regain its 1980s level in per-capita terms. At
the same time, as discussed in chapter 3, the potential benefits of preferential
market access have been reduced as the wider process of trade liberalization
globally over recent decades has resulted in preference erosion.


The above discussion suggests that the balance of the economic calculus
is likely to have shifted significantly towards graduation since its introduction in
the early 1990s, as the importance of commercial transactions such as trade
and FDI has increased relative to non-market transactions such as ODA. This
appears to be confirmed by the historical experience of graduation cases, as
discussed in chapter 2.


2. THE POLITICAL CALCULUS


In practice, national policy approaches to graduation (as to other aspects
of development) depend not only on economic considerations, but also on
a political calculus. While the economic calculus is an important part of this,
it is overlain by distinct political considerations, both domestically and at the
international level. Domestically, there is a potential kudos effect – the opportunity
for a government to enhance its reputation and gain future political advantage
by claiming responsibility for having brought a country from LDC status to parity
with ODCs. This may have encouraged some LDC governments to develop
strategies specifically oriented towards graduation by a specified date.


Internationally, there may also be a status effect, to the extent that graduation
is seen as enhancing the country’s image in the global community; and this
may be expected to have some positive effect on the country’s influence
in regional and international forums. Its bargaining power at the international
level may also be enhanced by reduced dependency on support from ISMs,


The graduation costs and benefits
evolve over the course


of development…


…and as a result of changes in the
global economy.


Economic considerations are only
part of the political calculus of


graduation…


…as graduation may enhance
the government's reputation


domestically and the country's
status internationally.




The Least Developed Countries Report 201646


which are essentially discretionary in nature. Such benefits, in turn, could further
reinforce the positive economic effects of graduation. Graduation typically
constitutes a culminating moment of national pride, which allows reaffirmation
and strengthening of the country’s long-term development vision, as was the
case, for instance, in Cabo Verde (Resende Dos Santos, 2016).


Either or both of these effects may tend to tip the balance of the political
calculus towards seeking to graduate sooner than would be indicated by
economic considerations alone. This tendency is likely to be strengthened by
political and electoral cycles, to the extent that governments seek to secure the
political benefits of graduation during their terms of office.


This gives rise to a potentially significant tension between the economics
and the politics of graduation. While the “how” of graduation is more important
than the “when” economically, as discussed above, the reverse may be the case
politically. While this might improve progress towards achieving the IPoA target
for graduation, it may increase the risk that some LDCs will graduate without the
momentum necessary for sustained development progress beyond graduation.


LDCs’ attitudes towards graduation are essentially a product of the
combination of political and economic reasoning mentioned above. The political
dividends derived from graduation and the declining economic effectiveness of
some of the LDC ISMs arguably explain the shift from an apparent reluctance to
graduate during the 1990s and early 2000s to the recent adoption of strategies
specifically aimed at rapid graduation.


H. Summary


• The 2011 IPoA for the first time adopted an explicit target on graduation —
that at least half of the 49 LDCs at that time should satisfy the graduation
criteria by 2020.


• Graduation in principle marks the point at which an LDC has escaped
sufficiently from the vicious circles which obstructs its development to
benefit from international markets on an equal basis with ODCs.


• Graduation thus marks a shift from dependence primarily on ISMs to
dependence on markets — that is, from dependency to a greater degree
of self-reliance.


• Graduation is the first milestone in a marathon of development, not the
winning post in a race to escape LDC status. It marks the end of a political
and administrative process, but not the completion of an economic or
developmental process.


• It is not enough for LDCs to graduate; they need to achieve graduation
with momentum, laying the foundations for their subsequent development,
to avoid the pitfalls of the post-graduation phase.


• Graduation with momentum requires the development of productive
capacities and structural transformation of the economy. This, not the
fulfilment of the statistical criteria for graduation, should be the primary
objective of graduation strategies.


• Economic and social divergence between LDCs and ODCs, including in
productive capacities, makes the LDC category more relevant than ever.
This is further reinforced by the 2030 Agenda.


• While the “how” of graduation is more important than the “when”
economically, the reverse may be the case politically, giving rise to a potential
tension between the two.


Tensions between the economic
and political calculus of graduation


may arise.




47CHAPTER 1. Graduation: A Milestone, Not the Winning Post


Notes


1 At the intergovernmental level, the Comprehensive High-Level Midterm Review of the
Implementation of the Istanbul Programme of Action for the Least Developed Countries
for the Decade 2011–2020 was held in Antalya, Turkey on 27–29 May 2016.


2 Based on a poverty line of $1.25 per person per day at 2005 purchasing power parity.
At the time of writing, data based on the World Bank’s revised poverty line of $1.90
per person per day at 2011 purchasing power parity were not available for all LDCs.


3 In the analysis of convergence and divergence in the global economy, economists
have spent considerable time and resources to understand why the very richest and
the very poorest countries do not converge in output per worker. (See, for example,
Ben-David, 1998; Mayer-Foulkes, 2010).


4 In the growth-related literature, a poverty trap is essentially characterized by the
presence of multiple equilibria with a locally stable low-level attractor, so that countries
spontaneously tend towards the high-level equilibrium only above a given threshold
(typically characterized in terms of income and/or investment). The main mechanisms
cited as potentially giving rise to poverty traps include: subsistence consumption
and demographic issues (which give rise to saving-based non-linearities); increasing
returns due to externalities and learning by doing (typically in the manufacturing sector);
complementarities across heterogeneous production factors; financial externalities
acting on demand; credit market imperfections; coordination failures; and institutional
traps (Azariadis, 1996; Azariadis and Stachurski, 2005; Acemoglu et al., 2005).


5 The Sudan and Timor-Leste are other important fuel exporters. The former, however,
is classified as a mixed exporter (reflecting the substantial shares in its exports of ores
and metals and of services). In the case of Timor-Leste, foreign exchange receipts
in the energy sector mostly take the form of royalty payments, which are therefore
classified as services exports. Consequently, the country is included in the service
exporters category.


6 As of 30 September 2016, the Extended Credit Facility was being used by Afghanistan,
Burkina Faso, the Central African Republic, Chad, Guinea, Guinea-Bissau, Haiti, Liberia,
Madagascar, Malawi, Mali, the Niger, Sao Tome and Principe, and Sierra Leone, and
the Stand-by Credit Facility by Mozambique and Rwanda.


7 It should be noted that these figures include individuals with more than one subscription,
a phenomenon which is particularly pronounced in countries where signal coverage
from individual providers is limited or unreliable.


8 In this case, island LDCs fare much better than the other LDC groups, with 9.1 secure
servers per million people (doubtless reflecting the very small population of most), six
times the figure for the other two groups, but still barely a quarter of the median for
ODCs.


9 Possible improvements to the LDC criteria are discussed in chapter 5 of this Report.
10 The considerations in this section also apply (in varying degrees in different countries) to


other systematically disadvantaged population groups, notably those living in poverty,
ethnic minorities, migrants, refugees and displaced people, indigenous peoples, people
with disabilities and chronic illnesses, and people living with HIV/AIDS. All of these
dimensions also intersect with gender, potentially leaving women in these groups
particularly disadvantaged.


11 The gender inequality index is equal to zero when women and men fare equally,
and it is equal to 1 when either gender fares as poorly as is possible in all measured
dimensions.




The Least Developed Countries Report 201648


References


Acemoglu D, Johnson S and Robinson JA (2005). Institutions as a fundamental cause of
long-run growth. In: Aghion P and Durlauf SN, eds. Handbook of Economic Growth
vol.1A. Handbooks in Economics. No.22. Elsevier. Amsterdam:385–472.


Alesina A and Dollar D (2000). Who gives foreign aid to whom and why? Journal of
Economic Growth. 5(1):33–63.


Azariadis C (1996). The economics of poverty traps part one: Complete markets. Journal
of Economic Growth. 1(4):449–486.


Azariadis C and Stachurski J (2005). Poverty traps. In: Aghion P and Durlauf S, eds. Handbook
of Economic Growth. Handbooks in Economics. Elsevier. Amsterdam:295–384.


Barrett CB, Travis AJ and Dasgupta P (2011). On biodiversity conservation and poverty
traps. Proceedings of the National Academy of Sciences. 108(34):13907–13912.


Ben-David D (1998). Convergence clubs and subsistence economies. Journal of
Development Economics. 55(1):155–171.


Cavallo E, Eichengreen B and Panizza U (2016). Can countries rely on foreign saving for
investment and economic development? Working paper No. 07-2016. Economics
Section, Graduate Institute of International and Development Studies. Geneva.


CDP and UNDESA (2015). Handbook on the Least Developed Country Category: Inclusion,
Graduation and Special Support Measures. United Nations publication. Sales No.
E.07.II.A.9. New York.


Dollar D and Levin V (2006). The increasing selectivity of foreign aid, 1984–2003. World
Development. 34(12):2034–2046.


FAO (2011). The State of Food and Agriculture 2010–11: Women in Agriculture: Closing
the Gender Gap for Development. Rome.


Frankel JA (2010). The natural resource curse: A survey. Working paper No.15836. National
Bureau of Economic Research. Cambridge (MA).


Gereffi G, Humphrey J and Sturgeon T (2005). The governance of global value chains.
Review of International Political Economy. 12(1):78–104.


Guillaumont P (2009). Caught in a Trap: Identifying the Least Developed Countries.
Economica. Paris.


Gylfason T (2001). Natural resources and economic growth: What is the connection?
CESifo Working Paper Series. No. 530. CESifo. Munich.


Hausmann R, Hwang J and Rodrik D (2007). What you export matters. Journal of Economic
Growth. 12(1):1–25.


Mayer-Foulkes D (2010). Divergences and convergences in human development. Human
Development Research Paper 2010/20. United Nations Development Programme.
New York.


Mevel S, Vakataki Ofa S and Karingi S (2013). Illicit Financial Flows from Africa through
Trade Mispricing and Assessing Their Incidence on African Economies. Presented
at the Sixteenth Annual Conference on Global Economic Analysis. Shanghai. 12–14
June. Available at https://www.gtap.agecon.purdue.edu/resources/res_display.
asp?RecordID=4192 (accessed 22 October 2016).


Morris M and Fessehaie J (2014). The industrialisation challenge for Africa: Towards a
commodities based industrialisation path. Journal of African Trade 1(1): 25–36.


Nissanke M and Mavrotas G, eds. (2010). Commodities, Governance and Economic
Development Under Globalization. Palgrave Macmillan. Basingstoke, Hampshire.


Nurkse R (1953). Problems of Capital Formation in Underdeveloped Countries. Oxford
University Press. New York.


Pietrobelli C and Rabellotti R (2011). Global value chains meet innovation systems: Are there
learning opportunities for developing countries? World Development. 39(7):1261–1269.


Resende Dos Santos J (2016). Cabo Verde: Impacts and lessons of graduation from the
LDC list. Background paper prepared for The Least Developed Countries Report
2016. UNCTAD. Geneva.


Sachs J and Warner AM (1995). Natural resource abundance and economic growth.
National Bureau of Economic Research Working paper No. 5398. Cambridge (MA).


Sindzingre A (2012). The impact of the 2008–2009 crisis on commodity-dependent low-
income African countries: Confirming the relevance of the concept of poverty trap?
Journal of International Development. 24(8):989–1007.


Staritz C and Morris M (2013). Local embeddedness, upgrading and skill development global
value chains and foreign direct investment in Lesotho’s apparel industry. Manchester:
Capturing the Gains working paper 2013/20. Capturing the Gains. University of




49CHAPTER 1. Graduation: A Milestone, Not the Winning Post


Manchester. Available at http://www.capturingthegains.org/pdf/ctg-wp-2013-20.pdf
(accessed 22 October 2016).


Thirlwall AP (1979). The balance of payments constraint as an explanation of international
growth rate differences. Banca Nazionale del Lavoro Quarterly Review. 32 (128):45–53.


UNCTAD (2002). The Least Developed Countries Report 2002: Escaping the Poverty Trap.
United Nations publication. Sales No. E.02.II.D.13. New York and Geneva.


UNCTAD (2006). The Least Developed Countries Report 2006: Developing Productive
Capacities. United Nations publication. Sales No. E.06.II.D.9. New York and Geneva.


UNCTAD (2007). The Least Developed Countries Report 2007: Knowledge, Technological
Learning and Innovation for Development. United Nations publication. Sales No. E.07.
II.D.8. New York and Geneva.


UNCTAD (2010). The Least Developed Countries Report 2010: Towards a New International
Development Architecture for LDCs. United Nations publication. Sales No. E.10.II.D.5.
New York and Geneva.


UNCTAD (2012). The Least Developed Countries Report 2012: Harnessing Remittances
and Diaspora Knowledge to Build Productive Capacities. United Nations publication.
Sales No. E.12.II.D.18. New York and Geneva.


UNCTAD (2013a). Commodities and Development Report: Perennial Problems, New
Challenges and Evolving Perspectives. United Nations publication. New York and
Geneva.


UNCTAD (2013b). The Least Developed Countries Report 2013: Growth with Employment
for Inclusive and Sustainable Development. United Nations publication. Sales No.
E.13.II.D.1. New York and Geneva.


UNCTAD (2013c). World Investment Report 2013: Global Value Chains: Investment and
Trade for Development. United Nations publication. Sales No. E.13.II.D.5. New York
and Geneva.


UNCTAD (2014a). Trade and Development Report, 2014: Global Governance and Policy
Space for Development. United Nations publication. Sales No. E.14.II.D.4. New York
and Geneva.


UNCTAD (2014b). Transfer of Technology and Knowledge Sharing for Development:
Science, Technology and Innovation Issues for Developing Countries. UNCTAD Current
Studies on Science, Technology and Innovation, No. 8. United Nations publication.
New York and Geneva.


UNCTAD (2014c). The Least Developed Countries Report 2014: Growth with Structural
Transformation – A Post-2015 Development Agenda. United Nations publication.
Sales No. E.14.II.D.7. New York and Geneva.


UNCTAD (2015a). The Least Developed Countries Report 2015: Transforming Rural
Economies. United Nations publication. Sales No. E.15.II.D.7. New York and Geneva.


UNCTAD (2015b). Trade and Development Report 2015: Making the International Financial
Architecture Work for Development. United Nations publication. Sales No: E .15.II.D.4.
New York and Geneva.


UNCTAD (2016a). Economic Development in Africa Report 2016: Debt Dynamics and
Development Finance in Africa. United Nations publication. Sales No. E.16.II.D.3.
New York and Geneva.


UNCTAD (2016b). Trade misinvoicing in primary commodities in developing countries:
The cases of Chile, Côte d’Ivoire, Nigeria, South Africa and Zambia. Special Unit on
Commodities. UNCTAD/SUC/2016/ 2. New York and Geneva. Available at http://
unctad.org/en/PublicationsLibrary/suc2016d2.pdf (accessed 22 October 2016).


UNCTAD and Arbeiterkammer Wien (2011). Price Formation in Financialized Markets:
The Role of Information. United Nations publication. UNCTAD/GDS/2011/1. New
York and Geneva.


UNDP (2011). Illicit financial flows from the least developed countries: 1990–2008. Discussion
paper. New York. Available at https://www.researchgate.net/publication/272534851_
Illicit_Financial_Flows_from_the_Least_Developed_Countries_1990-2008 (accessed
22 October 2016).


UNDP (2015). Human Development Report, 2015: Work for Human Development. United
Nations Development Programme (UNDP). Sales No. E.15.III.B.1. New York.


UNDP (2016). Africa Human Development Report 2016: Accelerating Gender Equality
and Women’s Empowerment in Africa. United Nations Development Programme
(UNDP). New York.


UNECA and AUC (2013). Economic Report on Africa 2013: Making the Most of Africa’s
Commodities: Industrializing for Growth, Jobs and Economic Transformation. United
Nations Economic Commission for Africa. Addis Ababa.




The Least Developed Countries Report 201650


UNECA (2015a). Economic Report on Africa 2015: Industrializing through Trade. United
Nations publication. Sales No. E.15.II.K.2. United Nations Economic Commission for
Africa. Addis Ababa.


UNECA (2015b). Illicit financial flows. Report of the High-level Panel on Illicit Financial Flows
from Africa. Addis Ababa: United Nations Economic Commission for Africa. Available at
http://www.uneca.org/sites/default/files/PublicationFiles/iff_main_report_26feb_en.pdf
(accessed 9 October 2016).


United Nations (1964). Proceedings of the United Nations Conference on Trade and
Development, Geneva, 23 March–16 June 1964. E/CONF.46/141. New York.


United Nations (1968). Proceedings of the United Nations Conference on Trade and
Development, second session, New Dehli, 1 February–29 March 1968. TD/97. New York.


United Nations (2015). The Millennium Development Goals Report 2015. United Nations
publication. New York.




CHAPTER


THE NATIONAL
DYNAMICS OF GRADUATION




The Least Developed Countries Report 201652


A. Introduction


In the 45 years since the establishment of the least developed country (LDC)
category, only four members of the group have succeeded in graduating out
of it (Botswana, Cabo Verde, Maldives and Samoa). Even taking account of
successive changes to the LDC criteria (as shown in box figure 1.1 of chapter
1), and the absence of provisions for graduation until 1991, this indicates very
limited progress towards graduation. It also suggests that neither the domestic
policy efforts of LDCs nor the international support measures (ISMs) established
to support them have had a decisive effect in improving their development
prospects. This chapter addresses the national dimension of this issue, focusing
on the processes by which LDCs can emerge from the underdevelopment
discussed in chapter 1 and progress towards graduation.


The present chapter begins, in section B, by examining the historical
and current cases of graduation and assessing the outlook for graduation of
the current LDCs in the period 2017–2024. Section C analyses the role of
geographical factors in influencing graduation performance. Section D discusses
the domestic processes that have allowed Botswana, Cabo Verde, Maldives and
Samoa to graduate, and the national strategies and priorities of the remaining
LDCs, from the perspective of the structural transformation required to achieve
“graduation with momentum”. Section E examines the likely features of the
group of LDCs once the next wave of expected graduations has taken place.


B. Historical, current and
future cases of graduation


The past and current cases of graduation to date are listed in table 2.1. While
Botswana graduated in 1994, three years after first meeting the criteria, others
took much longer, and several countries that have met the criteria at some point
have still not graduated. Samoa graduated 23 years after having met the criteria
for the first time, Maldives 14 years after, and Cabo Verde 13 years after. Among
these first four historical cases, one was a landlocked country in Africa exporting
primarily minerals (mainly diamonds), and three were small island developing
states (SIDS), with primarily services exports. All four qualified for graduation by
virtue of the income criterion and the human assets index (HAI) criterion (or its
forerunner, the augmented physical quality of life index), while none satisfied the
vulnerability criterion.


For the purposes of this Report, UNCTAD has also assessed the outlook for
graduation of the current LDCs in the period 2017–2024, based on the decisions
taken by the United Nations General Assembly up to mid-2016 (which take into
account the results of the last triennial review, held in 2015), and on projections
of the performance of each LDC against the graduation criteria at the time of the
triennial reviews of 2018 and 2021. The methodology used in these projections
is outlined in box 2.1, and the results are summarized in table 2.2.


The objectives of the exercise were:


(a) To assess the impact of domestic processes in fostering the development
of countries’ productive capacities and structural transformation and,
hence, improving the likelihood of graduation;


(b) To identify the expected cases of graduation from the LDC category
during the 2017–2024 period;


(c) To gauge the likelihood of the Programme of Action for the Least
Developed Countries for the Decade 2011–2020 (Istanbul Programme
of Action (IPoA)) target on graduation being met;


To date, only four countries have
graduated from the LDC category.


None of the four graduates has
satisfied the vulnerability criterion.


This Report presents indicative
projections for graduation


until 2024.




53CHAPTER 2. The National Dynamics of Graduation


Table 2.1. The history of graduation to date


Country
Year of statistical
pre-eligibility for


graduation


Year of full
statistical elibility


for graduation


Criteria
satisfied


Year of CDP
recommendation


for graduation


Year of ECOSOC
endorsement of the
recommendaiton for


graduation


General Assembly endosement of
the recommendaiton for graduation


[effective graduation date]


Botswana 1991 1994
Income,
APQLI


1994 1994
1994 (res. 49/133 of 19 Dec.)


[Dec. 1994]


Samoa


1991 1997
Income,
APQLI


Not retained due to
probable impact of


ODA reduction


2003 2006 Income, HAI 2006 2007


2007 (res. 62/97 of 17 Dec.)
2010 (res. 64/295 of 7 Sep. -


following 2009 tsunami)
[Jan. 2014]


Cabo Verde


1994
(pre-eligibility not


recognized)


Income,
APQLI


1997
(pre-eligibility
recognized)


1997
(full eligibility
recognized)


2003 2004
2004 (res. 59/210 of 20 Dec.)


[Dec. 2007]


Vanuatu


1994 1997
Income,
APQLI


1997 1997


1997 (res. 52/210 of 18 Dec.
postponed consideration of the


case to the 2000 review, pending
completion of vulnerability review)


2006 2009 Income, HAI 2012 2012


2013 (res. 68/18 of 4 Dec. decided on
graduation in Dec. 2017)


2015 (res. 70/78 of 9 Dec. deferred
graduation to Dec. 2020)


Maldives 1997 2000
Income (both),


EDI (1997),
APQLI (2000)


2000 2004


2004 (res. 59/210 of 20 Dec.)
2005 (res. 60/33 of 30 Nov. deferred


graduation to Jan. 2011)
[Jan. 2011]


Kiribati


2003
(pre-eligibility not


recognized)
2006 Income, HAI


2006, 2012
(pre-eligibility
recognized)


2015 Decision on graduation deferred by the CDP to the 2018 review


Tuvalu


2003 (pre-eligibility
not rcognized)


2006 (pre-eligibility
recognized)


2009
(CDP questioned
"the sustainability


of the present
level of income"


and did not
recommend
graduation)


Income, HAI 2012
ECOSOC did not take a decision on the case of Tuvalu unitl


July 2015, when it decided to defer to 2018 its consideration of
the recommendaoiton to graduate Tuvalu


Equatorial Guinea 2006 2009 Income only 2009 2009
2015 (res.68/18 of 4 Dec. determines


graduation in June 2017)


Angola 2012 2015 Income only 2015 2015
2016 (res.70/253 of 12 Feb.


determined graduation in Feb. 2021)


Bhutan 2015 Income, HAI


If these countries meet the criteria for graduation once again at the time of the 2018
triennial review, they may be recommended by the CDP for graduation


Nepal 2015 HAI, EVI


Sao Tome and
Principe


2015 Income, HAI


Solomon Islands 2015 Income, HAI


Timor-Leste 2015 Income only


Source: UNCTAD secretariat elaboration, based on own research and on information from the following websites: http://www.un.org/en/development/desa/
policy/cdp/ldc/ldc_data.shtml; http://unohrlls.org/about-ldcs/criteria-for-ldcs/ (accessed June 2016).


Note: APQLI: augmented physical quality of life index; ECOSOC: United Nations Economic and Social Council; EDI: economic development index; EVI:
economic vulnerability index; HAI: human assets index.


(d) To evaluate the trajectories followed by LDCs likely to graduate based
on two criteria vis-à-vis those graduating based on the income-only
criterion;


(e) To examine the likely major features of the LDC group once the countries
projected to graduate have left the category.


It should be emphasized that these projections are purely indicative and are
made for analytical purposes only. They are not meant to prejudge the decisions




The Least Developed Countries Report 201654


either of LDCs themselves, or of the Committee for Development Policy (CDP),
the United Nations Economic and Social Council (ECOSOC) or the United
Nations General Assembly. As noted in chapter 1, the decisions of these States
and organs concerning graduation do not follow mechanically from the statistical
criteria, but rely also on other considerations. Such considerations are not
taken into account in the projections used here, although some cases in which
they are likely to modify a decision based purely on the statistical criteria (and
hence the timing of graduation) are indicated in the notes to table 2.2. Cases
of prolonged military conflict, for example, are likely to modify the graduation
prospects of affected countries, but their potential impact has not been factored
into the projections due to inherent uncertainties generated by these processes.
Consequently, the actual graduation cases in the period analysed are likely to
differ somewhat from those indicated here.


The main results of this exercise are as follows.


• Sixteen LDCs are projected to graduate during the 2017–2024 period,
including most of the Asian and island LDCs, but only three LDCs in Africa.


• Graduation may result from a broad-based process of development of
productive capacities, structural transformation and diversification of the
economic structure, in line with what this Report calls “graduation with
momentum”, as in the case of two manufactures exporters (Bangladesh and
Bhutan) and two mixed exporters (the Lao People’s Democratic Republic
and Myanmar). However, this is by no means always the case.


Table 2.2. Projected graduation cases, 2017–2024


Country


Year of actual/
projected statistical


pre-eligibility
for graduation


Year of actual/projected
full statistical elibility


for graduation
Criteria satisfied


Year of already
decided/projected


graduation


Equatorial Guinea 2006 2009 Income only 2017


Vanuatu 2006 2009 Income, HAI 2020


Angola 2012 2015 Income only 2021


Bhutan 2015 2018 Income, HAI 2021


Kiribati1 2006, 2012 2015 Income, HAI 2021


Nepal 2015 2018 HAI, EVI 2021


Sao Tome and Principe 2015 2018 Income, HAI 2021


Solomon Islands 2015 2018 Income, HAI 2021


Timor-Leste 2015 2018 Income only 2021


Tuvalu1 2006 2009 Income, HAI 2021


Afghanistan2 2018 2021 HAI, EVI 2024


Bangladesh 2018 2021 Income, HAI, EVI 2024


Djibouti 2018 2021 Income, HAI, EVI 2024


Lao People’s Democratic Republic 2018 2021 Income, EVI 2024


Myanmar 2018 2021 HAI, EVI 2024


Yemen3 2018 2021
HAI, EVI (2018); Income,


HAI, EVI (2021)
2024


Source: UNCTAD secretariat elaboration. For the methodology and assumptions used for projections, see box 2.2.
Notes: For caveats regarding the interpretation of the results presented in this table, see the main text.


1 Although this country has already met the full statistical eligibility for graduation according to prevailing criteria, it is possible that
the decision on its actual graduation will eventually be delayed, in view of its lingering vulnerability.


2 UNCTAD projections indicate the full statistical eligibility of this country for graduation according to prevailing criteria. However, it
is possible that the decision on its actual graduation will eventually be delayed, in view of its lingering security concerns which can
potentially have adverse effects on the three graduation criteria.


3 While UNCTAD projections indicate the full statistical eligibility of this country for graduation according to prevailing criteria, it is pos-
sible that the decision on its actual graduation will eventually be delayed, in view of its lingering security concerns, and of the steep
(28 per cent) fall in GDP projected for 2015. This fall is fully taken into account in the Income forecasts, but not at all in the HAI and
EVI projections. A prolonged military conflict is likely to have adverrse effects on the three graduation criteria.


Sixteen LDCs are projected to
graduate during 2017–2024.




55CHAPTER 2. The National Dynamics of Graduation


• Almost half of the projected graduates are services exporters, indicating
the significant role of services exports in progress towards graduation.
These countries have diversified their exports into tourism (particularly the
island LDCs, but also Nepal) or government services (Afghanistan and
Djibouti). Diversification of exports towards services has an impact on the
economic vulnerability index (EVI), but does not necessarily mean structural
transformation of the economy.


• Fuel extraction is an important driver of graduation over the period. It
tends to boost income growth, but this is not necessarily associated with
commensurate human development or with economic diversification. Four
fuel-exporting LDCs are projected to graduate (Angola, Equatorial Guinea,
Timor-Leste1 and Yemen), all based on the income-only criterion except
for Yemen, which is projected to graduate based on two criteria.2


• Afghanistan, Myanmar and Nepal are projected to graduate on the basis
of the HAI and the EVI. If this is the case, this will be the first time that the
income criterion has not been met at the time of graduation.


• The IPoA target on graduation is interpreted here as meaning that half of
the LDCs should achieve full statistical eligibility for graduation by 2020 (as
explained in chapter 1). However, the UNCTAD projections indicate that
this target is unlikely to be met, as only 10 LDCs are projected to be fully
statistically eligible for graduation by that date, rather than the 24 targeted.
Even in 2021, only 16 countries are projected to have achieved full statistical
eligibility, still well below the IPoA target.


The different growth and development paths leading to graduation are of
particular significance in the present context. Some LDCs are on course for
a process of graduation with momentum, characterized by a broad-based
process of development of productive capacities and structural economic
transformation. However, other LDCs are projected to graduate without such
a process. In some cases this occurs through enclave-led growth (especially in
cases where growth is led by extractive industries). In others, particularly small
economies, it occurs through investment in human development combined
with a limited degree of export diversification, which push the HAI and EVI,
respectively, beyond graduation thresholds. In neither case does graduation
indicate that these countries have undergone structural transformation.


The possibility of countries graduating without being on the path to structural
transformation indicates a need to reconsider the graduation criteria, so that they
reflect more fully the long-term development processes that underpin graduation
with momentum. This issue is further discussed in chapter 5. Meanwhile, under
the current graduation criteria, it is of the utmost importance that the States
and organs influencing or deciding the cases of graduation (LDCs themselves,
the CDP, ECOSOC and the General Assembly) continue to take due account of
factors other than the statistical eligibility for graduation. As can be seen in table
2.1, this has been the practice in graduation cases to date.


It should be emphasized that the projections made here rely heavily on the
methodology used and the assumptions made (box 2.1). Other projections,
which apply different methodologies and assumptions, have obtained different
results. Drabo and Guillaumont (2016) project that between 8 and 13 LDCs will
meet the income-only graduation criterion in the 2021 review of the list of LDCs,
depending on assumptions for the gross national income (GNI)/gross domestic
product (GDP) growth rate. Kawamura (2014), in a paper published before the
2015 triennial review of the list of LDCs, projected that up to 11 countries would
achieve full statistical eligibility for graduation by the 2021 triennial review.3


Only three projected graduates
are in Africa, while almost half


are services exporters.


The projections suggest that
the IPoA target for graduation


will not be met.


The projection results suggest
a need to reconsider the graduation


criteria to reflect “graduation
with momentum”.




The Least Developed Countries Report 201656


C. The role of geographical factors
in graduation performance


1. THE LANDLOCKED DEVELOPING COUNTRY FACTOR


There is a significant relationship between LDC status and a landlocked
geographical location: more than 40 per cent of the LDCs are landlocked (20
of 48); and these 20 LDCs represent almost two thirds of the 32 landlocked
developing countries (LLDCs) (figure 2.1). There is also a relationship with
graduation: although the first LDC to graduate in 1994 was an LLDC (Botswana),
no LLDC has graduated since; and of the 16 countries projected to graduate
by 2025, only four — all in Asia — are landlocked (Afghanistan, Bhutan, the Lao
People’s Democratic Republic and Nepal) (table 2.2).


The Vienna Programme of Action for Landlocked Developing Countries for
the Decade 2014–2024 highlights the special challenges faced by LLDCs, which
(United Nations, 2014a, para. 1):


are associated with their lack of direct territorial access to the sea,
remoteness and isolation from world markets. Their international trade
depends on transit through other countries. Additional border crossings
and the long distance from major markets, coupled with cumbersome
transit procedures and inadequate infrastructure, substantially increase
the total expenses for transport and other transaction costs, which
erodes the competitive edge of landlocked developing countries, reduces
economic growth and subsequently negatively affects their capacity to
promote sustained economic development, human and social progress
and environmental sustainability.


Box 2.1. Methodology for the projection of LDC graduation until 2024


The projection of the progress of individual LDCs towards graduation prepared by UNCTAD for this Report is based on
the assumptions and methods detailed below. The first set of assumptions, related to the graduation process, was as follows.


• In cases where the United Nations General Assembly has endorsed the recommendation made by ECOSOC, graduation
will take place on the date that has already been decided.


• Once a country has achieved full statistical eligibility for graduation, the CDP will make a recommendation for graduation,
which will be endorsed by ECOSOC. The United Nations General Assembly will then endorse the recommendation and
set a uniform grace period of three years.


• There will be no cases of addition to the list of LDCs during the period, only of graduation out of the category.


The second set of assumptions refers to the projections of GNI per capita, the HAI and the EVI for each country.


The GNI per capita of each LDC at the triennial reviews of 2018 and 2021 was estimated by applying the forecast growth
of the GDP of the country concerned for the period between successive reviews to the level of the GNI per capita at the
2015 review. It is thus assumed that the GNI/GDP ratio of each LDC will remain the same throughout the forecast period. The
forecast GDP growth rates are taken from the International Monetary Fund’s World Economic Outlook database (April 2016
edition).4 It is also assumed that the CDP will follow the standard practice of using data with a two-year lag. Projections for
the 2018 review, for example, were based on GNI per capita for the 2014–2016 period. Given the current very low inflation
rate internationally, the income thresholds for graduation for 2015 were assumed to apply in both the 2018 and the 2021
revision (that is, no corrections for inflation were made either to the thresholds or to projected GNI per capita).


The 2018 and 2021 values of the HAI and EVI for each country were projected on the basis of the 2015 values, by applying
the logarithmic trend derived from the levels of the indices used in the revisions of 2006, 2009, 2012 and 2015. Following
CDP practice, the thresholds for graduation for 2018 and 2021 were assumed to remain at the levels set in 2012.


Only one landlocked country
has graduated, and only four are
projected to graduate by 2024,


all in Asia.




57CHAPTER 2. The National Dynamics of Graduation


Fi
gu


re
2


.1
. C


ou
nt


ry
g


ro
up


s:
L


DC
s,


L
LD


Cs
, S


ID
S,


a
nd


s
ub


-S
ah


ar
an


A
fr


ic
an


c
ou


nt
rie


s


Ba
ng


la
de


sh
Ca


m
bo


di
a


H
ai


ti
M


ya
nm


ar


Ye
m


en


KKi
riri


baib
at


i ti
SSo


lo
m


on
Is


la
nd


s
ol


om
on


Is
la


nd
s


TTi
m


or
im


or
-L-L


es
t


es
te


e
TTu


vuv
al


u
al


u
VVa


nu
a


an
ua


tu


tu


A
fg


ha
ni


st
an



Bh


ut
an



La


o
Pe


op
le


’s
D


em
oc


ra
tic


R
ep


ub
lic


N
ep


al


A A
rrm


en
ia



m


en
ia


AA
zze


rer
ba


ija
n


ba
ija


n
BB


ol
iv


ia
(P


ol
iv


ia
(P


lu
r


lu
rin


a
in


at
io


na
l S


tio
na


l S
tata


tte
o


f
e


of
))


KK
az


ak
az


ak
hs


ta
n


hs
ta


n
KK


yryr
gy


zs
ta


n
gy


zs
ta


n
MM


on
go


lia


on
go


lia
PP


arar
ag


ua
ag


ua
y y


RR
ep


ub
lic


o
f M


ep
ub


lic
o


f M
ol


do
ol


do
vva


a
TTa


jikaj
ik


is
ta


n
is


ta
n


TTh
e


f
he


fo
ror


m
er



m


er
YYu


go
sl


a
ug


os
la


vve
Re


Re
pu


bl
ic


o
f


ep
ub


lic
o


f


MM
acac


ed
on


ia
ed


on
ia


TTu
rur


kkm
en


is
ta


n
m


en
is


ta
n


UU
zb


ek
zb


ek
is


ta
n


is
ta


n


LD
Cs


A
nt


ig
ua


a
nd


B
ar


bu
da


Ba
ha


m
as


Ba
rb


ad
os


D
om


in
ic


a
Fi


ji
G


re
na


da
Ja


m
ai


ca
M


al
di


ve
s


M
ar


sh
al


l I
sl


an
ds


M
ic


ro
ne


si
a


(F
ed


. S
ta


te
s


of
)


N
au


ru
Pa


la
u


Pa
pu


a
N


ew
G


ui
ne


a
Sa


in
t K


itt
s


an
d


N
ev


is
Sa


in
t L


uc
ia


Sa
in


t V
in


ce
nt


a
nd


th
e


G
re


na
di


ne
s


Sa
m


oa
To


ng
a


Tr
in


id
ad


a
nd


To
ba


go


SI
D


S


A
ng


ol
a


Be
ni


n
D


em
. R


ep
ub


lic
o


f t
he


C
on


go
D


jib
ou


ti
Eq


ua
to


ria
l G


ui
ne


a
Er


itr
ea


G
am


bi
a


G
ui


ne
a


G
ui


ne
a-


Bi
ss


au


Li
be


ria


M
ad


ag
as


ca
r


M
au


rit
an


ia


M
oz


am
bi


qu
e


Se
ne


ga
l


Si
er


ra
L


eo
ne



So


m
al


ia
Su


da
n


To
go



U


ni
te


d
Re


pu
bl


ic
o


f T
an


za
ni


a


Su
b-


Sa
ha


ra
n


A
fr


ic
a


Bu
rk


in
a


Fa
so



Bu


ru
nd


i
Ce


nt
ra


l A
fr


ic
an



Re


pu
bl


ic
Ch


ad


Et
hi


op
ia


Le
so


th
o


M
al


aw
i


M
al


i
N


ig
er



Rw


an
da


B Bo
ts


w
ot


sw
an


a
an


a
SSww


az
ila


nd
az


ila
nd


Zi
m


ba
b


Zi
m


ba
bww


e e


Ca
m


er
oo


n
Co


ng
o



te


d
’Iv


oi
re


G
ab


on
G


ha
na


Ke
ny


a


Ca
bo


V
er


de
M


au
rit


iu
s


Se
yc


he
lle


sCC
om


or
om


or
os



os


SSa
o ao


TTo
m


e
an


d
P


om
e


an
d


Prr
in


ci
pe



in


ci
pe


N
am


ib
ia


N
ig


er
ia


So
ut


h
A


fr
ic


a


LL
D


LL
D


CCss


So
ut


h
Su


da
n


U
ga


nd
a


Za
m


bi
a


N
ot


e:


W
hi


le
s


ub
-S


ah
ar


an
A


fr
ic


an
is


a
g


eo
gr


ap
hi


ca
l g


ro
up


, r
at


he
r


th
an


a
c


at
eg


or
y


re
co


gn
iz


ed
b


y
th


e
U


ni
te


d
N


at
io


ns
, i


t
is


s
in


gl
ed


o
ut


h
er


e
b


ec
au


se
t


he
v


as
t


m
aj


or
ity


o
f i


ts
c


ou
nt


rie
s


b
el


on
g


to
t


he
se


c
at


e-
go


rie
s


(w
hi


ch
is


n
ot


t
he


c
as


e
fo


r
ot


he
r


re
gi


on
s)


.




The Least Developed Countries Report 201658


Beyond the structural problems common to LDCs (such as those discussed
in chapter 1), landlocked LDCs face some additional challenges, especially high
trade transaction costs, lack of export competitiveness, overdependence on
official development assistance (ODA), high external debt, inadequate foreign
reserves, and reliance on migrants’ remittances. A further challenge specific
to LLDCs is their dependence on the economic, political and environmental
situation of neighbouring countries, particularly transit countries for their foreign
trade. If these are large and dynamic economies, then they can provide a boost
to the economic growth of LLDCs (Paudel, 2014). All four landlocked LDCs
projected to graduate by 2024, as well as the one LLDC which has graduated
to date (Botswana), share borders with large (non-LDC) developing economies,
which in most cases have experienced relatively rapid growth.


The development of landlocked LDCs can, however, be hampered if their
neighbouring countries suffer from poverty, slow economic growth, political
instability and/or vulnerability to natural shocks. The dependence of LLDCs on,
and their close economic ties with, their neighbours makes them vulnerable to
external (economic and environmental) shocks and social and political instability
affecting neighbouring countries, as well as those impacting them directly (UN-
OHRLLS, 2014). The transit neighbours of African landlocked LDCs, in particular,
in most cases have broadly similar economic structures and are beset by similar
scarcity of resources to the landlocked LDCs themselves, seriously limiting the
potential for exploitation of economic complementarities.


Most economic studies that have analysed the impact of a landlocked
position on economic growth have found that lack of direct access to the sea
represents a constraint to economic growth (Collier and Gunning, 1999; Dollar
and Kraay, 2003; Friberg and Tinn, 2009). Controlling for other determinants,
the growth rate of landlocked countries has on average been found to be at
least 3½ percentage points below that of other countries; and this effect cannot
be entirely offset even by domestic policies conducive to growth (Paudel, 2014).


Landlocked LDCs also perform less well than other subgroups of developing
countries (including other LDCs) in terms of income and human capital
development. Landlocked LDCs are poorer than other LDCs, with an average
GNI per capita more than one quarter less than the LDC average and 37 per
cent less than that of other (coastal and island) LDCs (figure 2.2). Landlocked
LDCs on average also have a lower HAI than other LDCs (45.7 compared with
54.7), though by a smaller margin (figure 2.3).


The relative performance of landlocked LDCs is better in relation to the EVI.
Their average of 39.3 compares with 42.6 for non-landlocked LDCs (figure 2.3)
and 52.0 for SIDS LDCs (figure 2.4), but is well above the graduation threshold
of 32.0 (a lower figure indicating lower vulnerability). However, this partly reflects
the inclusion in the EVI of the share of population in low-lying coastal zones,
which is by definition zero in LLDCs.


In light of the challenges outlined above, it is not surprising that graduation
of landlocked LDCs is projected to remain limited for the foreseeable future.
While four landlocked LDCs are projected to graduate by 2024, it should again
be emphasized that all these countries share borders with relatively large and
growing ODC economies.


2. THE SMALL ISLAND DEVELOPING STATE FACTOR


Seven countries are currently classified as both LDCs and as SIDS:5 the
Comoros, Kiribati, Sao Tome and Principe, Solomon Islands, Timor-Leste,
Tuvalu and Vanuatu (figure 2.1). In contrast to landlocked LDCs, SIDS LDCs


Landlocked LDCs face
additional challenges compared


with other LDCs...


... but these challenges are more
limited for countries neighbouring


large and dynamic economies.


Landlocked LDCs tend to have
lower GNI per capita and more
limited human development.


The challenges to graduation
of being landlocked are not
insurmountable if the right
policies are implemented.




59CHAPTER 2. The National Dynamics of Graduation


Figure 2.2. Gross national income per capita of LDCs and subgroups, 2013–2015


LDCs SIDS
LDCs


Non-SIDS
LDCs


Landlocked
LDCs


Non-landlocked
LDCs


955.0


2 088.6


942.0


689.0


1 087.9


0


500


1 000


1 500


2 000


2 500


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development Indicators database (accessed September
2016); United Nations, National Accounts Main Aggregates database for Djibouti, Eritrea, Myanmar, Somalia, and Yemen (accessed
September 2016).


Notes: Aggregates are weighted averages.
Average 2012–2014 for the Comoros, Djibouti, Eritrea, the Gambia, Lesotho, Mauritania, Myanmar, Sao Tome and Principe, Somalia,
Tuvalu, Vanuatu and Yemen.


Figure 2.3. Selected structural indicators of landlocked LDCs


EVI Remoteness Economic structure
subindex


HAI


41.4


57.6


45.3


51.5


39.3


63.5


43.8
45.7


42.6


54.3


46.2


54.7


0


10


20


30


40


50


60


70


LDCs Landlocked LDCs Non-landlocked LDCs


Source: UNCTAD secretariat calculations, based on data from the CDP Secretariat prepared for the 2015 triennial revision of the list of
LDCs.


Note: Aggregates are simple averages. EVI: economic vulnerability index; HAI: human assets index.




The Least Developed Countries Report 201660


have performed remarkably well in terms of graduation, and are expected to
continue to do so. Three of the four countries that have graduated to date are
SIDS, as are the majority (6 of 10) of those projected to graduate by 2021.
This means that all but one of the seven current island LDCs (the Comoros) are
expected to graduate by that date.


Despite their good graduation performance, however, SIDS LDCs are
faced with an apparent “double structural handicap”, since they combine the
challenges and vulnerabilities of LDCs and those of SIDS. The major challenges
facing SIDS include their small size, their remoteness from large markets, the
limited scope for economies of scale resulting from the interaction of these two
features, and their particularly acute economic vulnerability to external economic
and natural shocks.


The significant overlap between the development challenges faced by
SIDS and those faced by LDCs are reflected in both the IPoA and the SIDS
Accelerated Modalities of Action (SAMOA) Pathway.6 These include:


• Limited productive capacities, which in turn inhibit economic diversification,
international competitiveness, diversification of trading partners and
integration into the world economy;


• The threat of climate change, extreme weather events and natural disasters;


• Widespread and acute infrastructural deficits, notably in transportation,
power generation (including sustainable energy), water, sanitation, and
information and communications technology (ICT);


• Lack of food and nutritional security, often coupled with heavy dependence
on food imports;


• Weak domestic resource mobilization and external debt sustainability.


As a result of their small economic size, SIDS economies also tend to be
particularly dependent on international trade and financial flows, and thus more
exposed to exogenous shocks.


Various models have been developed to explain the structure and dynamics
of their economies, which condition the development strategies that are available
to them (box 2.2).


Beyond the economic and environmental challenges common to all LDCs,
SIDS LDCs have several distinguishing features. First, they have particularly
acute economic vulnerability, with a higher EVI (52.0) than non-SIDS LDCs (39.6)
(figure 2.4). Kiribati has the highest EVI score of the 145 countries for which the
CDP has calculated this index. Of the 20 countries with the highest EVI scores,
13 are SIDS (4 of them LDCs), while 5 are non-SIDS LDCs and only 2 fall into
neither category. This shows that vulnerability is particularly high in both SIDS
and LDCs.


There are four major reasons for the particular vulnerability of SIDS LDCs.


• They are more remote from larger economies than other LDCs, scoring
71.2 on the remoteness index compared with 55.2 for non-SIDS LDCs
(figure 2.4).


• Their domestic markets are much smaller, weakening their competitiveness
by limiting the potential for economies of scale, while increasing their reliance
on export markets, and thus intensifying their exposure to the vagaries of
international markets and their vulnerability to global economic crises.


• Their economic structures are weaker than either other LDCs or other SIDS,
with greater export concentration and less diversified markets, increasing


Small-island LDCs have performed
remarkably well in terms


of graduation…


…despite their structural
disadvantages and greater


economic and environmental
vulnerability.




61CHAPTER 2. The National Dynamics of Graduation


Box 2.2. The MIRAB, PROFIT and SITE models for small island economies


The special economic needs and situations of small island economies started to be addressed in the social sciences
literature in the 1960s. Some early island scholars, building on the work of authors such as Robinson (1960), emphasized
the disadvantages of small island economies in terms of “a narrow production base, macroeconomic vulnerability to trade
fluctuations, high administrative costs and a tendency towards monopolistic markets”. Others, such as Kuznets, by contrast,
stressed the advantages of small island economies in terms of their rich social capital (solidarity, social cohesion and sense of
community) and their ability to adjust painlessly and continuously to changing economic circumstances (Oberst and McElroy,
2007).


In the 1980s, Bertram and Watters (1985) developed the MIRAB model as a characterization of several island economies
in the Pacific, also applicable to some other small island economies. MIRAB is an acronym for migration (MI), remittances (R),
foreign aid (A) and public bureaucracy (B). Essentially, the model posits that micro-States in the Pacific depend on these four
elements to sustain the standard of living of their populations in the face of apparently limited domestic economic production
and a small private sector characterized by slow growth (Oberst and McElroy, 2007; Tisdell, 2014).


The MIRAB model dominated the literature for almost two decades, until the development of the PROFIT and SITE
models. The PROFIT model (Baldacchino, 2006) highlights development based on people (that is, emigration) (P), resources
(R), overseas management (that is, diplomacy) (O), finance (F) and transport (T). What distinguishes PROFIT economies from
MIRAB economies is their active use of domestic policy, the dynamism of their private sector and strategic orientation towards
diversification (Oberst and McElroy, 2007:165). McElroy (2006) considered small (warm-water) island tourist economies (SITE),
often linked with export processing zones and offshore banking centres, as a subcategory of the PROFIT genre. On this
basis, Oberst and McElroy (2007) proposed a classification of small islands as either MIRAB or PROFIT-SITE types, shown
for SIDS in box table 2.1.


According to their exercise, the seven current SIDS LDCs (the Comoros, Kiribati, Sao Tome and Principe, Solomon
Islands, Timor-Leste, Tuvalu and Vanuatu) are all MIRAB economies, as are two of the three SIDS that have graduated from
the LDC category (Cabo Verde and Samoa). The other SIDS graduate (Maldives) is classified as a PROFIT-SITE. However,
the classification of some SIDS LDCs and SIDS graduates as MIRAB economies may be affected by recent changes in their
economic circumstances: Cabo Verde, for example, is now clearly in the SITE category, given the extent of the relatively
recent development of its tourism industry.


Box table 2.1. Classification of island economies according to the MIRAB
and PROFIT-SITE models


MIRAB PROFIT-SITE


Cabo Verde Antigua and Barbuda


Comoros Bahamas


Dominica Barbados


Kiribati Fiji


Marshall Islands Grenada


Federated States of Micronesia Jamaica


Nauru Maldives


Samoa Mauritius


Sao Tome and Principe Palau


Solomon Islands Saint Kitts and Nevis


Timor-Leste Saint Lucia


Tonga Saint Vincent and Grenadines


Tuvalu Seychelles


Vanuatu Trinidad and Tobago


Source: UNCTAD secretariat, based on Oberst and McElroy (2007), and on the UNCTAD list of SIDS.
Note: For the meaning of the models, see the box text.


their exposure to trade shocks. None of the SIDS LDCs has a developed
export base for manufactured goods.


• SIDS LDCs are also particularly vulnerable environmentally. Overall, 34.3 per
cent of their population lives in coastal zones with low elevation, compared
with 20.4 per cent for non-LDC SIDS, and only 3.9 per cent for non-SIDS
LDCs.




The Least Developed Countries Report 201662


A second distinguishing feature of SIDS LDCs lies in their particularly heavy
dependence on ODA and debt relief. Their external financing gaps need to be
filled through a combination of ODA, borrowing and other external resources
such as workers’ remittances. SIDS LDCs’ net ODA receipts per capita in 2014
ranged from $96 (in the Comoros) to $3,480 (in Tuvalu), compared with an LDC
average of $47 per capita.


SIDS LDCs also have substantially better human asset endowments and
higher per-capita incomes on average than do non-SIDS LDCs, a reflection of
the so-called “island paradox”. On average, SIDS LDCs score 73.9 on the HAI,
compared with only 47.7 for non-SIDS LDCs (figure 2.4). The average GNI per
capita of SIDS LDCs was $2,088.6 in 2013–2015, more than double that of
other LDCs ($942) (figure 2.2).


Because LDCs can graduate by reaching the threshold levels of GNI per
capita and HAI alone, the advantages of island LDCs on these two indicators
are sufficient to outweigh their multiple disadvantages in terms of vulnerability. All
three of the historical cases of SIDS graduation were based on income per capita
and the HAI (or its predecessor, the augmented physical quality of life index), as
are five of the six cases projected up to 2024. The one exception, Timor-Leste,
is projected to graduate on the basis of the income-only criterion.7 Thus, while
several landlocked LDCs are prevented from graduating in the medium term by
low incomes and relatively weak HAIs, the higher income per capita and HAI
characteristic of most SIDS LDCs allows them to graduate more readily than
other LDCs, despite their much greater vulnerability as measured by the EVI.


Figure 2.4. Selected structural indicators of SIDS LDCs


41.4


57.6


45.3


51.552.0


71.2


53.1


73.9


39.6


55.2


44.0


47.7


0


10


20


30


40


50


60


70


80


EVI Remoteness Economic structure
subindex


HAI


LDCs SIDS LDCs Non-SIDS LDCs


Source: UNCTAD secretariat calculations, based on data from the secretariat of the CDP prepared for the 2015 triennial revision of the list
of LDCs.


Note: Aggregates are simple averages. EVI: economic vulnerability index; HAI: human assets index.


Vulnerability leaves small-island
LDCs particularly dependent


on ODA and debt relief.


Higher incomes and human
development allow island LDCs to
graduate more readily than others.




63CHAPTER 2. The National Dynamics of Graduation


D. National processes leading to graduation


Notwithstanding the underdevelopment “traps” outlined in chapter 1
and the geographical challenges described in section C above, the success
of some LDCs in graduating, and the progress of many others towards
graduation, demonstrates that these do not represent insurmountable
obstacles to graduation. Overcoming (or at least mitigating) these obstacles is
a defining objective of ISMs; but national policies, strategies, mechanisms and
measures are also critical, to overcome these structural handicaps and unlock
LDCs’ development potential. This section discusses the national strategies
that enabled those countries that have graduated to date to do so, and the
graduation strategies of the current LDCs.


1. STRATEGIES OF THE GRADUATES TO DATE


One of the commonalities of the strategies that led Botswana, Cabo Verde,
Maldives and Samoa to graduation from the LDC category is that none of
them had articulated policies specifically aimed at graduation. Rather, each
Government pursued national, regional and international policies directed
towards broader development objectives, and graduation occurred as an
indirect result. Elements that contributed to their success included, in varying
degrees, macroeconomic stability; support to productive investment; good
governance; investment in health and education; and strategic use of each
country’s endowments, advantages and opportunities to support a broadly
based development process.


(a) Botswana


A critical factor in the success of Botswana’s development policies has
been the quality and nature of its governance, based on a mixture of Tswana
traditions and customs with the Romano-Dutch and British system adopted
at independence. During the 23 years that Botswana remained an LDC, the
following national policies made an important contribution to its graduation from
the category in 1994 (Mogae, 2016).


Economic and social planning: Ever since its independence in 1966, the
Government of Botswana has issued five-year National Development Plans
(NDP). These were, in effect, rolling plans, overlapping if circumstances required
them to be modified. Since the beginning of NDP 1, which ran from 1968
until 1973, the Government has focused its development efforts on raising
the standard of living of all Botswanans. Poverty alleviation and the provision
of basic infrastructure and social services have thus served as the bedrock of
development policy. Each plan included both economic and social goals, which
were considered to be inseparable. The planning process was designed to
ensure the maximum possible gain from the limited financial resources available
to the Government through prioritization of policies, programmes and projects.
It also allowed the Government to set goals and objectives against which its
performance could be objectively evaluated. The Government also engaged
proactively in aid management and donor coordination, requiring development
partners to direct their funds to those projects classified as national priorities in
the plan.


Between 1966 and 1974, Botswana was one of the fastest growing
economies in the world. Real GDP growth averaged 16 per cent between
1970 and 1974, and remained in high single figures until 1989. Following the
discovery of diamonds in 1967, and the subsequent adoption of an explicit


National policies and strategies
are critical to overcome LDCs'


structural handicaps.


None of the countries that have
graduated to date has had an
explicit graduation strategy.


Economic and social planning
helped Botswana achieve


graduation.




The Least Developed Countries Report 201664


industrial policy to promote private-sector-oriented development of the mineral
sector, mining became (as it remains) the leading economic sector of Botswana,
surpassing agriculture since 1977/78. The ratio of government revenue to GDP
averaged 50 per cent (peaking at some 64 per cent in 1988), allowing a fiscal
surplus. Domestic savings started to exceed investment and the trade account
also generated a surplus.


Harnessing mineral resources for development: Ever since independence,
mineral rights have been vested in the central Government, allowing the
Government effective control when diamonds were discovered. This was critical
to the establishment of the authority of the State and provided a guaranteed
source of government revenue. An effective mineral taxation policy was put
in place under which the State charged a modest fixed royalty rate and took
an equity stake in the mining company, ensuring a share of the future profits
of mining operations. When De Beers discovered diamonds, the Government
initially took a 15 per cent stake in the diamond mines, but renegotiated the
contract as the true scale and value of the diamond deposits became apparent
(Hazleton, 2002). The De Beers Botswana Mining Company (Proprietary) Limited
was created and now (renamed Debswana), is jointly owned by De Beers and
the Government of Botswana as equal partners. The creation of a sovereign
wealth fund (the Pula Fund) in 1994 has allowed the Government both to save
a portion of the income from diamond exports for future generations and to use
the resources generated to fund promotion of economic diversification.


Developing transport corridors and good infrastructure: As a landlocked
country, Botswana is critically dependent on its transit neighbours’ transport
infrastructure to move goods to and from ports. Diamond exports provided
an important advantage in this respect, as their high value-to-volume ratio
allows them to be transported economically by air. The creation of an efficient
transport corridor through South Africa has further reduced the impact of
Botswana’s landlocked position by reducing trade costs for other goods; and
the Government has invested in other regional corridors, notably with Namibia
and Mozambique. It has also focused on improving its domestic infrastructure,
particularly for road and air transport, to facilitate trade and attract investors.


Improving education: To achieve basic education for all and address skilled
labour and human capital shortages, Botswana devoted an increasing share of
its budget to education, raising it from 15 per cent in the 1970s to more than 20
per cent in the 1990s. School fees were abolished; and school enrolment rates
have risen considerably at all levels. To facilitate the transfer of skills, knowledge
and experience, localization exercises were implemented in both the public and
private sectors, through which expatriates mentored suitably qualified Botswana
counterparts to ensure adequate training.


(b) Cabo Verde


Like Botswana, Cabo Verde has enjoyed peace and political stability since its
independence in 1975, with a vibrant multiparty democracy, credible institutions
and relatively good governance. Its development strategies have emphasized
the following features (Resende dos Santos, 2016).


Prudent and forward-looking macroeconomic management: Lacking
both exploitable mineral resources and an adequate size for economic self-
sufficiency, Cabo Verde has ably managed its vulnerability, while maximizing the
developmental impact of external resources (primarily ODA and remittances).
State modernization, especially in the area of public financial management,
has substantially strengthened the country’s macroeconomic management
capacity; and the introduction of an integrated system for budget and
financial management in 2002 contributed to improvements in both revenue


The vesting of mineral rights in
the State and an effective mineral


taxation policy played a central role.


Diamond exports made
Botswana's landlocked position


less problematic.


Cabo Verde has maximized
the development impact of


external resources…




65CHAPTER 2. The National Dynamics of Graduation


collection and national planning. The Government also introduced a forward-
looking strategy to improve rural infrastructure, financing labour-intensive rural
development projects with the proceeds of domestic sales of food aid, thereby
also generating employment and reducing rural poverty.


State-driven policies with private support: The Government also invested
in major social infrastructure projects, including water supply, sanitation, public
health systems and schools, as well as in economic infrastructure, which has
made a major contribution to growth and employment creation. About 90 per
cent of all public investment has been financed by ODA (including concessional
borrowing) since the 1980s, when it represented the largest share of domestic
expenditure. Combined with a reduction in the rate of corporate taxation, these
investments also encouraged foreign direct investment (FDI) inflows. Opening
the economy to the private sector, including through the privatization of State
enterprises in telecommunications, water, energy, and banking, also contributed
to growth. The creation of special emigrant savings accounts in the national
banking system helped to increase private investment and domestic credit,
allowing remittances to become an important source of domestic private
investment and spurring growth in various industries and construction activities.
By 1996, these measures had increased the share of the private sector in total
investment to more than 50 per cent.


Developing tourism: With limited scope for either agricultural or industrial
development, Cabo Verde has been a services-based economy. The tertiary
sector has generated most of the economic growth experienced since 1990,
essentially due to the strong performance of tourism, which has also fuelled the
growth of transport, construction, banking and insurance.


Improving education and health: The Government devoted substantial
resources, amounting to around 10 per cent of GDP, to healthcare and
education. This has allowed the achievement of free, universal and compulsory
schooling for at least six years.


(c) Maldives


Strategies adopted by the Government of Maldives that contributed to the
country’s graduation from the LDC category in 2011 include the following (Lui,
2016).


Developing tourism-led growth: During the 1980s and 1990s, the
Government invested heavily in tourism-related construction, transport and
communication, and attracted investments in resort development. This led to
employment creation and high GDP growth rates, resulting in tourism overtaking
fisheries as the largest sector in 1985 and contributing more than two thirds
of GDP by 2013. The growth of tourism has been driven in part by the foreign
private sector, with the support of government incentives and strategies, and
facilitated by the absence of taxes and low rents. In 1983, the First Tourism
Master Plan laid the foundations for the sustainable development of tourism and
its integration into the social and economic development of the country, including
the establishment of regulations governing the quality of services and facilities
provided to tourists (Kundur, 2012). However, the narrow economic base arising
from this heavy concentration on tourism leaves the economy vulnerable to
external shocks, particularly the vagaries of international travel trends.


Reviving the fisheries sector: Fisheries have been the traditional mainstay
of the Maldivian economy. The Government has modernized the previously
informal fishing sector to include more advanced and efficient techniques. The
Marine Zones of Maldives Act No. 6/96, which took effect on 27 June 1996,
specified a 12-mile territorial sea, a 24-mile contiguous zone and a 200-mile


Tourism has been an important
driver of economic growth


in Cabo Verde.


…financing 90 per cent of
public investment with ODA.


In Maldives, tourism was also
a key pillar of development …


…and it became more
important than fisheries.




The Least Developed Countries Report 201666


exclusive economic zone (United States Department of State, 2005). The
number of vessels operating in the exclusive economic zone was subsequently
increased by opening it to foreign as well as domestic investors.


Prudent macroeconomic and fiscal policy: The Maldives’ economic growth
was at times sustained by proactive use of macroeconomic policies. During the
early 1990s, for example, economic growth slowed partly as a result of the sharp
decline in tourist arrivals due to a recession in Europe and the Gulf War, and partly
as a result of reduced world tuna prices. This led to severe macroeconomic
imbalances, including large fiscal deficits and strong pressure on the balance
of payments. However, the increase in fiscal deficits was reversed by measures
to enhance revenue and reduce expenditure (including on wages and salaries),
cutting the deficit from around 10 per cent of GDP between 1990 and 1993
to less than 5 per cent from the late 1990s until 2004. This allowed Maldives’
strong growth performance of the 1980s to be maintained during the 1990s.


Strengthening education and health services: The Government devoted
considerable effort to meeting the learning needs of both children and adults.
Its educational strategies were designed to facilitate access to employment and
self-employment opportunities, and proved very effective in achieving universal
access to basic education. Health outcomes were also improved considerably
as a result of devoting 10 per cent of the government budget to health, including
improvements to services and infrastructure. Child mortality fell from 48 per
1,000 live births in 1990 to 13 per 1,000 live births in 2010, while life expectancy
at birth has increased from 63.5 years to 72.6 years for males and 74.4 years
for females.


Labour policy and migrant labour: To help meet the needs of investors, the
Government has allowed foreign labour to supplement the domestic labour
force in sectors such as tourism. During Maldives’ third phase of tourism
development, between 1989 and 1997, the Government addressed the local
labour shortages faced by the tourist industry by allowing immigration of foreign
workers and exercising flexibility in the application of domestic regulations. By
the end of 2006, 11,095 of the 22,000 jobs in the tourism sector were filled
by expatriates, despite a limit of 50 per cent on the proportion of expatriates
among total employees in tourist resorts (Kundur, 2012).


(d) Samoa


Samoa’s graduation from the LDC category in 2014 was achieved through
the Strategies for the Development of Samoa (2002–2004, 2005–2007, 2008–
2012),8 which were based on the following key pillars (Enari, 2016).


Agricultural upgrading and diversification: Two thirds of households are
engaged in agriculture, which remains the backbone of the Samoan economy.
An agricultural diversification strategy sought to combine production for local
consumption, to improve food security, with commercial investment (including
investment large-scale farming) to improve crop production, fisheries, livestock
and forestry development. Investment was promoted in new high-value crops
(vanilla, pepper and nonu), as were the processing of existing products and
diversification into niche markets, notably organic production (for example,
of virgin coconut oil, bananas and nonu products). Government measures to
support diversification included strengthening research and extension services
for product development, a Tuna Management Plan, and investment in
supportive infrastructure, such as cooling facilities.


Promoting tourism: The Government also stimulated tourism development,
in particular through the development of the necessary infrastructure and
proactive marketing of Samoa as a destination, emphasizing Samoan culture and


Strengthening education and health
services was a major priority.


In Samoa, agricultural diversification
and upgrading played an important


role, as did tourism.


Policies were aimed at creating
an enabling environment, promoting
health and education, and improving


disaster preparedness.




67CHAPTER 2. The National Dynamics of Graduation


traditions. FDI and domestic investment were encouraged in hotel development,
and a Land Leasing Committee for tourism investment was created to negotiate
with landowners and investors to maximize their benefits, reflecting the scarcity
and high value of land.


Strengthening the private sector: The Government sought to create an
enabling environment for private sector development, and promoted investment
in areas where Samoa had a comparative advantage. Investment policy was
supported by an accommodative fiscal policy stance and improvements to utility
services and infrastructure, notably electricity and water supply, information and
communication technologies (ICTs) and transport. Investment promotion policies
were implemented to reduce transaction costs, rationalize charges, and provide
financial and other incentives for the development of small businesses in rural
areas. The Government also implemented a number of initiatives to facilitate the
supply of credit.


Improving education and health services: An important objective has been the
improvement of educational levels and health provision for the average Samoan,
in part by strengthening the role of communities in supporting education.
The Government has also acted to improve health through preventive health
programmes and improvements to health facilities.


Disaster preparedness and environmental sustainability: Environmental
considerations, including climate change and disaster management, have
featured prominently as a cross-cutting consideration in all planning activities.
The Government has also increased expenditure for recovery and reconstruction
following external shocks such as tsunamis, cyclones and financial crises.


Emigration has also played a significant role in Samoa’s development and
graduation, both by easing pressure on domestic employment, education and
health services, and by generating remittances, which represented 20 per cent
of GDP in 2015.


2. STRATEGIES, PLANS AND POLICIES OF
CURRENT LEAST DEVELOPED COUNTRIES


This section provides a non-exhaustive review of national strategies and
priorities in LDCs, from a perspective of the structural transformation required
to achieve graduation with momentum. In terms of the graduation criteria, the
primary focus of national governments is typically economic growth, which
impacts the income criterion directly, while having secondary effects on the EVI
(especially in terms of export instability and the structure of GDP)9 and the HAI.


(a) National goals: Graduation versus income classification


Most of the countries whose graduation is expected by 2024 have included
graduation as an explicit goal in their development plans and programmes,
and five of these countries (Bangladesh, Bhutan, the Lao People’s Democratic
Republic, Myanmar and Nepal) have set explicit timetables (United Nations,
2015b). Bhutan’s eleventh Five Year Plan (2013–2018), for example, establishes
graduation by 2020 as a top priority, while Nepal’s Thirteenth Plan includes a
target of graduation by 2022 (brought forward from 2030 in the Twelfth Plan in
light of the IPoA graduation target).


In some cases, this includes an explicit focus on attainment of the graduation
criteria themselves. In Nepal, the National Planning Commission’s approach
paper on graduation by 2022 includes “strategic directions and actions”
for each of the three criteria as well as for monitoring and evaluation (Nepal,


Most of the countries projected to
graduate by 2024 have adopted
graduation as an explicit goal…


…while most LDCs projected
to graduate later have goals


related to income.




The Least Developed Countries Report 201668


National Planning Commission, 2014). Bangladesh is focusing primarily on the
HAI criterion, as it has already fulfilled the EVI criterion and remains far below the
graduation threshold for GNI. Here, civil society has been active in discussing
the prospects for and policies towards graduation, led by the Centre for Policy
Dialogue, a local think tank.


Some of the countries approaching graduation have also established
institutions to support and oversee the process. Myanmar, for example, has
established a high-level committee on graduation headed by the Vice-President,
and specific subcommittees for each of the graduation criteria. The Government
of Angola (scheduled to graduate in 2021) has also set up a high-level committee
to oversee the graduation process.


Most LDCs that are not expected to graduate until after 2024, by contrast,
emphasize goals related to income classifications, rather than graduation
from LDC status. Such aspirations are expressed, for example, in the national
development plans of Ethiopia, Rwanda, Uganda, the United Republic of Tanzania
and Zambia. The aim of Ethiopia’s Growth and Transformation Plan is to take the
country to middle-income status10 between 2020 and 2025; Zambia’s National
Vision is to become “a prosperous middle-income nation by 2030”; and both
Rwanda’s Second Economic Development and Poverty Reduction Strategy and
Uganda’s Second National Development Plan set a goal of achieving middle-
income status by 2020. For Senegal, the Plan Sénégal Emergent aims to make
Senegal an “emerging” country by 2035, while Cambodia’s Rectangular Strategy
Phase Three aims “at graduating from a low-income country to a lower-middle-
income status in the very near future and further to become an upper-middle
income country by 2030”.


(b) Laying the foundations for structural transformation


Structural transformation of the economy entails increasing productivity within
sectors, and shifting productive resources from lower- to higher-productivity
sectors and activities. The poverty-oriented structural transformation needed to
attain the Sustainable Development Goals requires increasing labour productivity
to be accompanied by increasing employment, particularly in a context of high
underemployment and a rapidly expanding workforce due to past reductions in
child mortality rates outpacing reductions in birth rates (UNCTAD, 2015a). LDCs
have adopted a series of sectoral and industrial policies directed towards these
ends, some of which are reviewed below.


The energy sector is of particular importance to structural transformation,
particularly where access to modern energy sources is limited. In African
LDCs particularly, falling costs for small-scale renewable energy offer a major
opportunity for the transformation of rural economies (UNCTAD, 2014: box 5). A
number of LDCs report new and ongoing energy projects to exploit renewable
energy potential, though mostly on a larger scale. For example, completion
of the Grand Renaissance Dam on the Nile in 2017 is expected to quadruple
Ethiopia’s power generation capacity, while the Democratic Republic of the
Congo has a number of hydropower initiatives and is considering solar and wind
alternatives (UNECA, 2016). A new utility-scale solar energy project in Zambia
has the lowest price yet recorded for such a project in Africa (Pothecary, 2016).
Outside the renewables sector, the Hongsa Power Company lignite power plant
located in the Lao People’s Democratic Republic is aimed at removing domestic
bottlenecks in energy supply, as well as generating export revenues through
sales to Thailand.


Improved transportation also contributes to structural transformation, notably
by reducing costs along the supply chain. In Ethiopia, the road network doubled
between 1997 and 2011. Road rehabilitation can also have a major impact on


Many LDCs have adopted sectoral
and industrial policies to promote


structural transformation.


Energy and transportation are
particular priorities, both within


countries and regionally.


Several LDCs have recently
implemented tax system reforms
to strengthen domestic resource


mobilization.




69CHAPTER 2. The National Dynamics of Graduation


transport costs, for example reducing transport costs over a 17–20 kilometre
route in Rwanda by two thirds between 1999–2000 and 2009–2010 (Lunogelo
and Baregu, 2014).


Regional initiatives are particularly important in transportation, especially for
LLDCs. The Lao People’s Democratic Republic and Nepal aspire to become
“landlinked” rather than “landlocked” by addressing their transportation
problems. An initiative to build a new East Africa railway connecting Burundi,
Kenya, Rwanda, South Sudan and Uganda was launched in 2014. Other new
initiatives include railways connecting Ethiopia and Djibouti, and linking Bhutan
and Nepal with China and India. The Benguela railway, connecting Angola, the
Democratic Republic of the Congo and Zambia, has already been completed
(United Nations, 2015a).


An essential underpinning to structural transformation is the mobilization
of domestic resources for sustainable development, which has been stressed
by the Addis Ababa Action Agenda of the Third International Conference on
Financing for Development and the 2030 Agenda for Sustainable Development
(2030 Agenda) (both adopted in 2015). LDCs face a very considerable financing
gap, due to a combination of low income levels, narrow tax bases, weak tax
collection and management systems, and various forms of illicit financial flows
(Bhattacharya and Akbar, 2014; Langford and Ohlenburg, 2015; UNCTAD,
2016a). This affects both economic performance and the attainment of social
goals by limiting public sector investments and other government expenditures,
notably on health and education. Tax reforms aimed at improving government
revenues by simplifying and modernizing tax collection and expanding the tax
base have been implemented by several LDCs in recent years, including Angola,
Bangladesh, Burundi, Ethiopia, Guinea-Bissau, Liberia, Mauritania, Mali,
Myanmar, Senegal and Uganda (IMF, 2011).


Several natural-resource-rich LDCs are acting to strengthen tax collection
and management, as a means of redirecting resources towards fostering
sustainable development. In this regard, transparency in public resource use
can help to promote effective use of public revenues. A large number of LDCs
have embraced the principles of the Extractive Industries Transparency Initiative
(EITI), which promotes revenue transparency and accountability in extractive
industries, and which is explicitly mentioned in the IPoA. Currently, 13 LDCs are
EITI-compliant (Chad, the Democratic Republic of the Congo, Guinea, Liberia,
Mauritania, Mozambique, Mali, the Niger, Sierra Leone, Timor-Leste, Togo, the
United Republic of Tanzania and Zambia); 9 are candidates for EITI membership
(Afghanistan, Burkina Faso, Ethiopia, Madagascar, Malawi, Myanmar, Sao Tome
and Principe, Senegal and Solomon Islands); and 2 are suspended (the Central
African Republic and Yemen). The fact that most of the current candidates have
joined the list since 2013 is suggestive of increasing attention to the issue of
transparency among LDCs. A positive example of management of resources
rents is Timor-Leste, whose oil fund has been a successful example of directing
resource rents to sustainable development, in contrast with the experiences of
some other natural-resource-rich LDCs (Cornia and Scognamillo, 2016).


Another key aspect of structural transformation is the development of human
capital through education and training. As well as increasing labour productivity
directly, this provides the human resource base needed for the development of
more sophisticated production sectors and the development and adoption of
better technologies. Most LDCs have made substantial advances in education
in recent years, most notably at the primary level, although the Millennium
Development Goal target of universal primary enrolment has not generally
been achieved (UNCTAD, 2014). Several LDCs have introduced programmes
designed to increase school attendance, including conditional cash or in-kind
transfer programmes, such as the Education Sector Support Programme in


Many LDCs are compliant with,
or candidates for, the Extractive


Industries Transparency Initiative.


Most LDCs have made
substantial advances in


education in recent years.




The Least Developed Countries Report 201670


Cambodia and the Nationwide Female Stipend Programme in Bangladesh.
Nepal has also enacted several cash transfer programmes in the areas of
pensions, child grants and single women’s allowances.


(c) Sectoral priorities


Traditionally, development strategies have tended to focus on industrialization,
and particularly the development of manufacturing production (UNCTAD,
2016b). In the current phase of globalization, this is often initiated by joining a
global value chain (GVC). However, the developmental benefits of a country’s
insertion into GVCs depend on its nature, and are subject to important caveats
(UNCTAD 2007, 2015b). Analysis of GVC participation in Asian LDCs indicates
that the local private sectors in Bangladesh and Cambodia have been effective
both in diversifying their production and in entering high-technology GVCs
(DiCaprio and Suvannaphakdy, 2015). In Bangladesh, particularly, backward
linkages from the garments sector have played an important role. In the Lao
People’s Democratic Republic, Myanmar and Nepal, however, it has been FDI
rather than the domestic private sector that has taken the lead, giving rise to
weaker incentives for the development of backward linkages.


Ethiopia has adopted an active industrial policy (UNCTAD, 2016b): the
Growth and Transformation Plan (2010–2015) designated priority manufacturing
industries, selected on the basis of resource availability, labour intensity,
linkages to agriculture, export potential, and (relatively) low technological entry
barriers. Priority sectors include garments and textiles, agro-processing, meat
processing, leather and leather products, and construction. For each of these
industries, supporting institutes were established to coordinate value chains and
assist firms with technological upgrading. The Growth and Transformation Plan
2 (2015–2020) accords the highest priority to the leather products sector and
the textile and garments sector. This active industrial policy has contributed to
rapid growth in manufacturing value added and exports in recent years, though
from a relatively low base, spurred in part by FDI inflows.


In many LDCs, growth has been led by construction and services rather than
by manufacturing. In Rwanda, for example, the main drivers of growth have
been tourism (supported by the establishment of the Rwanda Tourism University
College in 2006) and ICT-related services. In Mali, growth has been led by
telecommunications and transport activities, and to a lesser extent by trade and
financial services. Senegal has experienced a relatively diversified growth path,
services contributing more than one third of economic growth, compared with
a quarter for industry. In the Lao People’s Democratic Republic, construction
and services have played a significant complementary role to natural resources
(primarily water, minerals and forests).


As highlighted in UNCTAD (2015a), rural development, combining agricultural
upgrading and parallel diversification into non-farm activities, plays a central
role in structural transformation in LDCs. Key aspects of agricultural upgrading
are increasing productivity in the sector and diversification, particularly
towards higher-value crops. An important instrument for both is research and
development, to develop and adapt inputs and production methods appropriate
to local conditions, and to promote their uptake by producers. Research and
development expenditures in agriculture have been increasing recently, in
particular in Burundi, Madagascar, the Sudan, the United Republic of Tanzania
and Uganda.


Ethiopia provides a good example of combining agricultural diversification
and the development of high-value crops with increasing food production.
Under its Agriculture Development-Led Industrialization Strategy, food
production per capita increased by 70 per cent between 2001 and 2012 (Cornia


Some Asian LDCs have joined
GVCs and stimulated linkages


with their local economies.


In many LDCs growth has been
led by construction and services


rather than manufacturing.


Ethiopia has successfully combined
agricultural diversification with


increased food production.




71CHAPTER 2. The National Dynamics of Graduation


and Scognamillo, 2016), while cut flower exports increased from just 3 tons
in 2003–2004 to more than 50,000 tons in 2011–2012, and export earnings
from $0.32 million to about $200 million, creating employment both directly
and indirectly through forward and backward linkages. While production was
initiated by Ethiopian firms, foreign firms have increased their investment in the
sector, accounting for 63 per cent of all firms operating in it in 2012, and have
contributed significantly to technological development and marketing (UNECA,
2016).


Several LDCs have adopted a value chain approach to agricultural
development. Burkina Faso’s Agricultural Development Programme (2004–
2015), for example, is aimed in part at “analysing and eliminating bottlenecks
at every stage in the agricultural production chain”, and the concept of value
chains provides a policy framework for cereals, dairy products, ginger and
coffee in Nepal. It also underpins the United Nations Development Assistance
Framework for the Republic of Yemen 2012–2015 and Rwanda’s Third Rural
Sector Support Project. The African Cashew Initiative of the German Federal
Ministry for Economic Cooperation and Development and the Bill and Melinda
Gates Foundation, implemented in Benin, Burkina Faso and Mozambique (as
well as in two non-LDCs, Côte d’Ivoire and Ghana) provides an interesting
example of organizational assistance based on a sectoral supply chain.


(d) Reducing vulnerability: Peace, security and disaster
preparedness


Though not included explicitly in the graduation criteria, peace and security
are a critical foundation for development and progress towards graduation,
given the often considerable negative effect of conflict and insecurity on trade,
investment and development (Ikejiaku, 2009). Countries that experienced major
violence between 1981 and 2005 had average poverty rates 21 percentage
points higher than those that experienced no violence (World Bank, 2011). The
negative externalities of conflicts also spill over to other countries; for example,
75 per cent of refugees are hosted by neighbouring countries. Moreover, while
inter-State conflicts have declined, they have given way to new security risks,
notably terrorism (Dahlman and Mealy, 2016). This highlights the importance of
building State capacities to ensure peace and security, as well as to design and
implement effective development policies.


However, several post-conflict States have been able to improve their security
situations. Timor-Leste, for example, has emerged successfully from conflict,
while the restoration of peace and security has contributed to rapid economic
growth in Cambodia. In the Comoros, constitutional reforms adopted in 2009
transformed relations between the islands, significantly reducing tensions (World
Bank, 2016).


Given the vulnerability of most LDCs to natural disasters, extreme weather
events and climate change impacts, disaster preparedness is a critical issue
for development. LDCs are increasingly adopting a preventive approach rather
than relying on ex-post disaster response, and many have recently implemented
institutional changes related to disaster reduction management. Eight LDCs
(Burkina Faso, Ethiopia, the Lao People’s Democratic Republic, Mauritania,
Nepal, Solomon Islands, Vanuatu and Zambia) were among the 34 countries that
reported integrating disaster risk reduction into their national development plans
under the Hyogo Framework for Action 2005–2015: Building the Resilience of
Nations and Communities to Disasters (United Nations, 2015a).


International support can play an important role in disaster preparedness
in LDCs. In Eritrea, the Drought Resilience and Sustainable Livelihoods
Programme 2015–2021, supported by the African Development Bank, provides


Some LDCs have adopted a value
chain approach to agricultural


development.


Conflict and insecurity tend to have
a strong negative impact on trade,


investment and development.


Many LDCs are adopting a
preventive approach to disaster


preparedness.




The Least Developed Countries Report 201672


resources to mitigate the effects of recurrent droughts. In Kiribati, an LDC
Fund project, Enhancing Food Security in the Context of Climate Change, is
aimed at increasing resilience to climate change impacts through agricultural
training, support to outer-island fisheries development initiatives, support for
the establishment of community-based gardening and school gardening, and
assistance with marketing of agricultural products.


E. The least developed countries group in 2025:
Implications of the UNCTAD projections


Overall, the UNCTAD projections reported in section B above imply a
reduction in the total number of LDCs from 48 at the time of writing to 32 in
2025 (table 2.3).11 Although this represents a reduction of only one third in
the number of LDCs, it has the potential to alter the composition of the LDC
group disproportionately, in terms of its geographical composition, structural
characteristics, income level, poverty and social features. It will also affect the
economics and geopolitics of the group, as well as its collective negotiating
power in international forums, and has potentially important implications for the
ISMs needed by LDCs from 2025 onwards. While the group is projected to
shrink, its development challenges are expected to become greater, highlighting
the need for increased support from the international community.


This section seeks to provide an indication of some of the likely features of
the LDC group in 2025, based on the results of these projections. In interpreting
these results, the caveats regarding the projections themselves (as outlined
in section B) should be borne in mind, particularly the potential effects of
extraneous factors such as prolonged conflict. It should also be emphasized
that the analysis is based on the current characteristics of each country rather
than their projected characteristics in 2025, as it is not feasible within the scope
of this exercise to project the socioeconomic characteristics of each LDC some
10 years into the future. The analysis also highlights differences between those
LDCs expected to achieve graduation based on two criteria (including those that
are progressing towards graduation with momentum) and those graduating via
the income-only route.


1. GEOGRAPHICAL FEATURES


If graduation were to take place as projected in table 2.2, by the mid-2020s
30 of the 32 LDCs would be in Africa, the sole exceptions being Cambodia and
Haiti. Only one SIDS LDC would remain (the Comoros, which is also located
in Africa). Since all but one of the current small island LDCs are expected to
graduate by 2024, virtually all the remaining LDCs would be either LLDCs or
coastal countries. Coastal countries would constitute the majority of the group,
but the balance between coastal and landlocked countries would remain virtually
unchanged (figure 2.5).


2. OUTPUT STRUCTURE AND INCOME


As a result of the less advanced stage of structural transformation in the
countries not expected to have graduated by 2024, the LDC group is projected
to be more rural and agriculturally based than at present. In the 32 countries
projected to be LDCs in 2025, the sector generates 29.5 per cent of GDP,
double the proportion in the 16 countries projected to graduate in 2017–2024.
Even in the latter group, however, this figure is much higher than in ODCs (table
2.3). These different levels of structural transformation are reflected in the income


The graduations projected by 2024
will have a disproportionate impact


on the composition of the LDC
group.


Of the 32 countries projected still
to be LDCs in 2025, only two are
outside Africa and only one is a


small island economy.


The GNI per capita of the countries
projected to graduate by 2024
is almost double that of those


projected to remain in the group
in 2025.




73CHAPTER 2. The National Dynamics of Graduation


Figure 2.5. Geographical features of the present and projected group of LDCs


2016


Africa and Haiti Asia Islands


2025


2016


SIDS LLDCs Coastal


2025


30


1417


18


23


33


17


7


8


1 1


A. Location


B. Geographic characteristics


Source: UNCTAD secretariat elaboration.
Note: Figures indicate the number of countries.


Table 2.3. Structural indicators of LDCs and ODCs, 2010–2015


Output structure
(Share of gross value added,


per cent)a
Population
(Per cent)b


Productivity
and poverty


Financing for
development


(Per cent of GDP)


Agri-
culture


Mining
and


utilities


Manu-
factures


Services
Share of


rural
population


Agricultural
share of


employmentc


Labour
productivity


(2005 $/
worker)a


Population
below


$1.25 a day
(Per cent)d


ODA
inflowsa


Remit-
tancesa,e


Present group of LDCs (48 countries) 21.8 16.1 10.1 44.7 69.4 59.7 3 015 45.7 5.1 4.4


Expected to graduate in 2017–2024 (16) 15.1 22.2 11.0 44.3 67.9 46.6 4 351 35.5 3.0 5.8


Expected to graduate
based on two criteriaf


21.1 7.0 15.3 50.2 68.5 46.7 1 903 34.8 4.2 8.2


Expected to graduate
based on income onlyg


4.7 48.9 3.4 33.8 60.9 45.4 10 066 42.4 0.4 0.1


Projected group of LDCs by 2025h (32) 29.5 9.1 9.1 45.2 70.4 68.1 1 606 50.3 7.8 2.8


Other developing countries 8.6 11.5 20.7 52.6 48.6 30.3 17 445 12.7 0.2 1.4


Sources: UNCTAD secretariat calculations, based on data from UNCTAD, UNCTADstat database (accessed August 2016); International Labour Organization,
World Employment and Social Outlook, Trends 2016 database (accessed August 2016); and World Bank, World Development Indicators database
(accessed August 2016).


Notes:
a 2012–2014.
b 2013–2015.
c Data on employment are missing for the following countries: Djibouti, Kiribati, Sao Tome and Principe, Tuvalu and Vanuatu.
d 2010–2011. The $1.25/day poverty line is used because at the time of writing poverty data based on the revised $1.9/day poverty line were not avail-


able for several LDCs.
e Data on remittances are missing for the following countries: the Central African Republic, Chad, Equatorial Guinea, Eritrea, Mauritania, Somalia and


South Sudan.
f Countries expected to graduate based on two criteria: Afghanistan, Bangladesh, Bhutan, Djibouti, Kiribati, the Lao People's Democratic Republic,


Myanmar, Nepal, Sao Tome and Principe, Solomon Islands, Tuvalu, Vanuatu and Yemen.
g Countries expected to graduate based on income only: Angola, Equatorial Guinea and Timor-Leste.
h Projected group of LDCs by 2025: Benin, Burkina Faso, Burundi, Cambodia, the Central African Republic, Chad, the Comoros, the Democratic Republic


of the Congo, Eritrea, Ethiopia, the Gambia, Guinea, Guinea-Bissau, Haiti, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, the
Niger, Rwanda, Senegal, Sierra Leone, Somalia, South Sudan, the Sudan, Togo, Uganda, the United Republic of Tanzania and Zambia.




The Least Developed Countries Report 201674


levels of the two subgroups of LDCs. In 2014, the average GNI per capita of the
projected graduates of 2017–2024 was $1,377, nearly double that of the LDCs
projected to graduate later ($731). Thus the LDC group in 2025 will be much
poorer than the current group.


Among the countries projected to graduate in 2017–2024, there is a sharp
contrast between those projected to graduate based on two criteria and the three
income-only graduates. Since the latter rely heavily on extractive industries, the
mining sector contributes almost half of their output, compared with just 7 per
cent in the former group.12 Conversely, manufacturing contributes 15.3 per cent
of total output in the countries graduating on the basis of two criteria compared
with only 3.4 per cent in the income-only countries, reflecting the much greater
degree of structural transformation in the former group. The contribution of
services to total economic activity in the 2017–2024 graduates is approximately
half, similar to ODCs (table 2.3).


3. URBANIZATION AND THE RURAL ECONOMY


Differences in the extent of structural transformation are also reflected to some
extent in relative levels of urbanization. In the countries projected to graduate in
2017–2024, 67.9 per cent of the population lives in rural areas, slightly below the
current LDC average of 69.4 per cent. Hence, their graduation is projected to
increase the rural population of the group to 70.4 per cent in 2025. The contrast
is much sharper in the case of agricultural employment, which accounts for
46.6 per cent of total employment in the next wave of graduates, but 68.1 per
cent in the post-2025 group. The projected graduations will thus increase the
agricultural share of employment substantially, from 59.7 per cent in the current
LDC group to 68.1 per cent in 2025. In all cases, the contribution of agriculture
to employment is still much higher than in ODCs (30.3 per cent) (table 2.3).


Thus, the graduations from the group projected up to 2025 will increase the
critical importance of rural development still further. The much greater differences
observed between pre- and post-2025 graduates in agricultural employment
than in rural population underlines the key role of rural economic diversification
and the development of non-farm rural activities in structural transformation
(UNCTAD, 2015a).


4. PRODUCTIVITY AND POVERTY


Differences in the sectoral composition of employment and output have
major implications for the level of labour productivity, which is almost three times
as high in the countries projected to graduate in 2017–2024 as in the post-2025
LDC group. However, even in the former group, labour productivity is only a
quarter of that in ODCs (table 2.3).13


Poverty is significantly less prevalent in the LDCs projected to graduate in
2017–2024 than in the post-2015 graduates, with a headcount ratio of 35.5 per
cent as compared with 50.3 per cent (table 2.3). The former group have also
achieved greater progress in poverty reduction than the latter. Among the 2017–
2024 graduates, poverty is significantly lower in those expected to graduate
based on two criteria (34.8 per cent) than in the income-only graduates (42.4 per
cent), reflecting the limited potential of extractive industries to generate inclusive
economic growth. Poverty rates are much higher in all the country groups
identified in table 2.3 than in ODCs, demonstrating the very considerable further
improvement required to eradicate extreme poverty (Sustainable Development
Goal 1).


Income-only graduates have a much
weaker manufacturing base than
those graduating based on two


criteria.


Agriculture accounts for 46.6 per
cent of employment in the LDCs


projected to graduate by 2024, but
68.1 per cent in other LDCs.


The projected graduations further
increase the importance of rural


economic transformation after 2025.


Poverty is significantly lower in LDCs
projected to graduate on the basis
of two criteria than in income-only


graduates.




75CHAPTER 2. The National Dynamics of Graduation


5. FINANCING FOR DEVELOPMENT


Patterns of external financing are also significantly different between the two
subgroups of LDCs. In the countries projected to graduate in 2017–2024, ODA
is equivalent to 3 per cent of GDP (compared with 0.2 per cent for ODCs) (table
2.3). For the post-2025 graduates, aid dependence is much greater, with ODA
equivalent to 7.8 per cent of GDP, leaving these countries particularly prone
to the negative aspects of aid dependency (as discussed in chapter 3 of this
Report).


Remittances have become an increasingly important financial inflow for
many LDCs since the 1990s, and are of particular significance in the LDCs
projected to graduate in 2017–2024, where they are equivalent to 5.8 per cent
of GDP. They are especially important to Bangladesh, Kiribati, Nepal, Tuvalu
and Yemen, helping to lower poverty and, in some cases, to finance productive
investment (UNCTAD, 2012). Remittances to the projected group of LDCs in
2025 are much more limited, equivalent to just 2.8 per cent of GDP. They are
nonetheless important to some of the countries that are making faster progress
towards graduation in this group, such as Lesotho and Senegal. This confirms
the potential role of remittances, with appropriate policies, not only in boosting
household incomes, but also in supporting productive investment and structural
transformation.


6. MAJOR EXPORTS


Extractive industries will remain a major source of foreign exchange earnings
for the LDC group in 2025, as well as a major driver of the domestic economic
change. None of the current exporters of minerals, ores and metals is projected
to graduate by 2024; and two of the five current fuel exporters are also
projected to be unable to graduate in this period (Chad and South Sudan).14


The largest group of exporters in the 2025 LDC Group is mixed exporters,
representing 12 of the remaining 32 LDCs (figure 2.6). However, this would be
a very heterogeneous group, ranging from countries still relying on extractive
industries for the bulk of foreign exchange earnings, but without either fuels or
minerals predominating (Burkina Faso, Mozambique, the Niger and the Sudan),
to countries that have diversified their productive structures substantially (for
example, Ethiopia and Senegal). The relatively weak graduation prospects of the
former group, in particular, reflects the difficulties encountered by most LDCs in


Figure 2.6. Export specialization of the present and projected group of LDCs


2016


Mixed Manufactures Minerals, ores & metals
Services Food & agriculture Fuels


6


2025


12


4


6 6


3


3


25


5


14


14


Source: UNCTAD secretariat elaboration.
Note: Figures indicate the number of countries.


The LDC group in 2025 will be more
aid dependent, and receive much


more limited remittances.


None of the mineral exporting
LDCs and only three of the five fuel
exporters are projected to graduate


by 2024.




The Least Developed Countries Report 201676


transforming their extractive industries into growth poles that generate spillovers
of income, employment, productivity and technology to other economic sectors.


The group of LDC services exporters in 2025 would also be quite
heterogeneous, encompassing both countries with limited productive capacities
(for example, the Central African Republic, the Comoros and Eritrea) and others
that have been more successful in diversifying their economies and developing
their productive capacities (for example, Rwanda and Uganda).


At first sight, it might seem surprising that not all manufactures exporters
are expected to have graduated by 2025. In principle, diversification towards
manufactures is a major sign of structural transformation, as it provides a means
of increasing overall labour productivity and diffusing technological innovation
into the wider economy. However, even among manufactures exporters, the
extent to which these processes occur varies considerably. Nonetheless, while
only two manufactures exporters (Bangladesh and Bhutan) are projected to
graduate by 2025, two others are expected to be close to graduation: Cambodia
is projected to satisfy all three graduation criteria by 2021, and Lesotho to be
close to all three graduation thresholds. The one exception to this favourable
performance is Haiti, which is projected to remain some way from graduation
thresholds, particularly for income per capita and the HAI.


Among the exporters of food and agricultural goods, the only SIDS in the
group (Solomon Islands) is projected to graduate by 2024, while the other three
countries (Guinea-Bissau, Malawi and Somalia) remain in the initial stages of
structural transformation and will therefore require more time to develop their
productive capacities and reach graduation thresholds.


7. EXPORT CONCENTRATION


There is a very marked differentiation between the LDC subgroups based
on graduation status in terms of export concentration. The countries projected
to graduate on the basis of two criteria before 2024 have achieved significant
export diversification since the mid-1990s, reducing their export concentration
from 0.46 in 1995 (where 1 represents absolute concentration) to 0.38 in 2014,
significantly below the figure for the post-2025 graduates (0.42). By contrast,
those projected to graduate via the income-only route have maintained an
extremely concentrated export structure, reflecting their heavy dependence on
energy exports: their average export concentration was 0.91 in 2014, having
increased from an already high level of 0.88 in the mid-1990s, particularly
during the so-called commodity super-cycle of 2003–2011 (table 2.4). This
further underlines the potential for LDCs to graduate without having undergone
significant structural transformation of their economy, particularly (though not
exclusively) in the case of those graduating on the basis of the income-only
criterion.


Only two manufactures exporters
are projected to graduate by 2024,
but two others are projected to be


close to graduation.


Income-only graduates have much
less diversified exports than other


projected graduates.


Some of the 2025 LDC group have
already diversified their exports


substantially.


Table 2.4. Export concentration index of LDCs and ODCs, 1995–2014, selected years
1995 2002 2011 2014


Present group of LDCs (48 countries) 0.55 0.57 0.65 0.58


Expected to graduate in 2017–2024 0.60 0.65 0.74 0.68


Expected to graduate based on two criteria 0.46 0.46 0.43 0.38


Expected to graduate based on income only 0.88 0.90 0.92 0.91


Projected group of LDCs by 2025 0.51 0.44 0.51 0.42


Other developing countries 0.21 0.22 0.26 0.24


Source: UNCTAD secretariat calculations, based on data from UNCTAD, UNCTADstat database (accessed June 2016).
Note: For the compostion of groups, see notes to table 2.2.




77CHAPTER 2. The National Dynamics of Graduation


Just as there is differentiation among the pre-2025 graduates, so there are
significant differences among the countries projected to remain in the group in
2025 in terms of export concentration. Benin, Ethiopia, the Gambia, Liberia,
Rwanda and Uganda, in particular, have all made considerable progress in
export diversification, reducing their concentration indices by at least 0.2
between 1995–1996 and 2013–2014. This is indicative of the different rates of
progress towards diversification and structural transformation among this group.


8. CONCLUSIONS


Three key points emerge from the above analysis. First, the graduation
projections imply significant changes in the nature of the LDC group by 2025.
In particular, it will be poorer and exhibit more features associated with earlier
stages of development (for example, larger shares of agriculture in output and
employment, more limited urbanization, higher export concentration, greater aid
dependency and lower access to social services) than in 2016. Without decisive
and efficient measures, nationally and internationally, to promote accelerated
development in the 32 countries projected to remain in the group, the projected
graduations would thus widen the gap between the LDC group and the ODCs
still further.15 As discussed in chapter 5, averting this outcome would require
heightened attention from both national authorities and the international
community.


Second, there are substantial differences among the countries on the
economic trajectory leading to graduation; and the different paths, patterns and
motors of the graduation process have crucial implications for the development
process in the post-graduation phase. There is a particular distinction between
those countries graduating via the income-only route, which tend to achieve
limited structural transformation, and those that graduate on the basis of two
criteria, many of which experience a more broadly based process of economic
and social development, including some degree of structural transformation and
economic diversification. The latter course corresponds more closely with the
concept of “graduation with momentum”, providing a more solid foundation for
development in the post-graduation phase. By contrast, while more narrowly
based economic growth (for example, associated with enclave sectors) may
well increase income per capita, it is unlikely to lead to social and economic
inclusion or to provide a basis for sustainable development progress, unless
effective policies and strategies are put in place to reinvest resource rents in
productive capacity development in other sectors.


Third, while the LDC group in 2025 is expected to be more homogeneous
geographically – with only two countries outside Africa, and only one SIDS – it
will in other respects be quite differentiated. Some of the countries projected
to remain in the group are achieving visible progress in the development of
productive capacities, economic diversification and the development of higher-
value-added sectors and products; but others remain in the initial stages of
these processes.


F. Summary


• Only 16 countries are projected to achieve graduation by 2024, well short
of the graduation target established by the IPoA.


• While some of these countries are expected to graduate through a broadly
based process of development, this is by no means always the case,
particularly among countries graduating via the income-only route.


The projected graduations will widen
the gap between the remaining


LDCs and ODCs still further.


Countries projected to graduate on
the basis of two criteria are closer


to the "graduation with momentum"
model than income-only graduates.


While the 2025 LDC group will be
more homogeneous geographically,
there will be marked differences in


productive capacities.




The Least Developed Countries Report 201678


• While LLDCs have experienced some difficulty in attaining graduation, SIDS
perform very well, as the design of the graduation criteria means that their
relatively high incomes and human development offset their particularly
acute vulnerability.


• None of the four countries that have graduated to date pursued policies
explicitly aimed at graduation; but most of those now close to graduation
have adopted graduation as a specific goal.


• The four countries that have graduated to date have done so in part by
virtue of quality of governance, peace and social stability, economic and
social planning, good infrastructure, emphasis on education, and prudential
and forward-looking macroeconomic management.


• In the current LDCs, national strategies and domestic policies that could
contribute to graduation include those aimed at laying the foundations
of structural transformation through infrastructure investment, domestic
resource mobilization, economic diversification and education.


• Almost all of the Asian and island LDCs are projected to graduate by 2024,
implying that the 32 countries comprising the LDC group in 2025 would
include only one SIDS, and only two countries outside Africa.


• By 2025, the LDC group is also projected to exhibit more features associated
with earlier stages of development: lower income, higher poverty, larger
shares of agriculture in output and employment, more limited urbanization,
higher export concentration and greater aid dependency.


• This implies a wider development gap between the remaining LDCs and
ODCs than at present, unless effective national and international action is
taken to address their needs.




79CHAPTER 2. The National Dynamics of Graduation


Notes


1 Timor-Leste is classified in this Report as a services exporter because a large part of
its fuel exports are accounted as service exports. Therefore, the basis of the country’s
services exports is fuel extraction.


2 See notes to table 2.2 for caveats on the graduation prospects of this country.
3 This does not include the three countries that at the time of writing of that document


had already been scheduled to graduate or found eligible for graduation (Equatorial
Guinea, Tuvalu and Vanuatu).


4 Available at https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx
(accessed 28 October 2016).


5 The UNCTAD list of SIDS is based on the following three criteria: (a) islandness: only
“genuine” islands are considered; (b) Stateness: only self-governing island States
are taken into account; (c) smallness: a population not exceeding 5 million (except
for Papua New Guinea, whose population was within the bounds when the list was
established). Only island States with a clear developing status, in terms of socioeconomic
characteristics (national income and/or income distribution) are considered (UNCTAD,
2004). The list is composed of 29 countries, as shown in figure 2.1.


6 The SAMOA Pathway (United Nations, 2014b) was adopted by the Third International
Conference on Small Island Developing States, held on 1–4 September 2014 in Apia.


7 As mentioned previously in this chapter, the basis for the graduation of Timor-Leste
is fuel extraction.


8 Somoa, Ministry of Finance (2002, 2005, 2008).
9 For the structure and composition of the EVI, see box figure 1.1 in chapter 1.
10 In development policy discourse a shortcut is often taken, which states that upon


graduation countries stop being LDCs and become middle-income countries. This
is not precise. Upon graduation, countries stop being LDCs and become non-LDC
developing countries (which this Report series calls “other developing countries”).
Typically, they have already become middle-income countries prior to graduation and
in exceptional cases have even reached the group of high-income countries.


11 According to the projections, in 2025 the following countries would be LDCs: Benin,
Burkina Faso, Burundi, Cambodia, the Central African Republic, Chad, the Comoros,
the Democratic Republic of the Congo, Eritrea, Ethiopia, the Gambia, Guinea, Guinea-
Bissau, Haiti, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique,
the Niger, Rwanda, Senegal, Sierra Leone, Somalia, South Sudan, the Sudan, Togo,
Uganda, the United Republic of Tanzania and Zambia.


12 These figures refer to the share of mining and utilities (such as water and electricity
services).


13 The very high labour productivity achieved by the countries bound to graduate based
on income-only (table 2.2) is the result of the combination of very high capital intensity
of the extractive industries on which their economies are based with relatively small
populations.


14 South Sudan has not been formally classified according to export specialization for
this Report due to the absence of reliable trade figures, and hence it is excluded
from the statistical aggregates built according to this criterion presented elsewhere.
However, for the projections of the expected features of the LDC group by 2025, we
have supposed that the country is and will remain mainly a fuel exporter.


15 The economic and social gap between the present group of LDCs and ODCs is
analysed in chapter 1.




The Least Developed Countries Report 201680


References


Baldacchino G (2006). Managing the hinterland beyond: Two ideal-type strategies of
economic development for small island territories. Asia Pacific Viewpoint. 47(1):45–60.


Bertram G and Watters RF (1985). The MIRAB economy in South Pacific microstates. Asia
Pacific Viewpoint. 26(3):497–520.


Bhattacharya D and Akbar MI (2014). Domestic resource mobilisation in the LDCs:
Trends, determinants and challenges. In: Istanbul Programme of Action for the LDCs
(2011–2020): Monitoring Deliverables, Tracking Progress – Analytical Perspectives.
Commonwealth Secretariat. London:422–454.


Collier P and Gunning JW (1999). Explaining African economic performance. Journal of
Economic Literature. 37(1):64–111.


Cornia GA and Scognamillo A (2016). Clusters of least developed countries, their evolution
between 1993 and 2013, and policies to expand their productive capacity. CDP
background paper No. 33. Committee for Development Policy. New York.


Dahlman CJ and Mealy S (2016). Obstacles to achieving the Sustainable Development Goals:
Emerging global challenges and the performance of the least developed countries. In:
LDC IV Monitor, ed. Tracking Progress, Accelerating Transformations: Achieving the
IPoA by 2020. Commonwealth Secretariat. London:49–61.


DiCaprio A and Suvannaphakdy S (2015). Are LDCs Sidelined in advanced manufacturing
production networks? Paper presented at the Eleventh Annual Conference of the
Asia-Pacific Economic Association. National Taiwan University. Taiwan Province of
China. 7-10 July.


Dollar D and Kraay A (2003). Institutions, trade, and Growth. Journal of Monetary Economics.
50(1):133–162.


Drabo A and Guillaumont P (2016). Prospects of graduation for least developed countries:
What structural change? In: LDC IV Monitor, ed. Tracking Progress, Accelerating
Transformations: Achieving the IPoA by 2020. Commonwealth Secretariat.
London:30–38.


Enari ATS (2016). Report on Samoa’s post-graduation assessment. Background paper
prepared for The Least Developed Countries Report 2016. United Nations Conference
on Trade and Development. Geneva.


Friberg R and Tinn K (2009). Landlocked countries and holdup. Stockholm School of
Economics. Available at http://www2.hhs.se/personal/Tinn/files/trade%20and%20
holdup.pdf (accessed 23 October 2016.


Hazleton R (2002). Diamonds: Forever or for good? The economic impact of diamonds in
Southern Africa. The Diamonds and Human Security Project. Occasional paper No. 3.
Partnership Africa Canada. Ottawa. Available at http://www.pacweb.org/Documents/
diamonds_KP/3_diamonds_Forever_Eng_March2002.pdf (accessed 23 October 2016).


Ikejiaku B-V (2009). The relationship between poverty, conflict and development. Journal
of Sustainable Development. 2(1):15–28.


IMF (2011). Tax policy and administration: Topical Trust Fund (TPA-TTF). Revenue mobilization
and reform in action. International Monetary Fund. Washington, D.C. Available at https://
www.imf.org/external/np/ins/english/pdf/TPA-TTF-SS.pdf (accessed 23 October 2016).


IMF (2016). World Economic Outlook: Too Slow for Too Long. International Monetary
Fund. Washington (DC).


Kawamura H (2014). The likelihood of 24 least developed countries graduating from the
LDC category by 2020: An achievable goal? CDP background paper No. 20. United
Nations Department of Economic and Social Affairs. New York.


Kundur SK (2012). Development of tourism in Maldives. International Journal of Scientific
and Research Publications. 2(4):1–5.


Langford B and Ohlenburg T (2015). Tax revenue potential and effort: An empirical
investigation. IGC working paper. International Growth Centre. London.


Lui D (2016). Country case study on Maldives. Background paper prepared for The
Least Developed Countries Report 2016. United Nations Conference on Trade and
Development. Geneva.


Lunogelo HB and Baregu S (2014). Agriculture and rural development status in LDCs.
In: LDC IV Monitor, ed. Istanbul Programme of Action for the LDCs (2011–2020):
Monitoring Deliverables, Tracking Progress – Analytical Perspectives. Commonwealth
Secretariat. London: 167–194.


McElroy JL (2006). Small island tourist economies across the life cycle. Asia Pacific
Viewpoint. 47(1):61-77.




81CHAPTER 2. The National Dynamics of Graduation


Mogae C (2016). The road less travelled: Botswana’s journey from least developed country
to middle-income country. Background paper prepared for The Least Developed
Countries Report 2016. United Nations Conference on Trade and Development. Geneva.


Nepal, National Planning Commission (2014). An approach to the graduation from the least
developed country by 2022. Draft for comments. Available at http://www.npc.gov.np/
images/download/LDC_Final_draft.pdf (accessed 23 October 2016).


Oberst A and McElroy JL (2007). Contrasting socio-economic and demographic profiles
of two, small island, economic species: MIRAB versus PROFIT/SITE. Island Studies
Journal. 2(2):163–176.


Paudel RC (2014). Economic growth in developing countries: Is landlockedness destiny?
Economic Papers. 33(4):339–361.


Pothecary S (2016). Zambia to be home to Africa’s cheapest solar. PV Magazine. 15 June.
Available at http://www.pv-magazine.com/news/details/beitrag/zambia-to-be-home-
to-africas-cheapest-solar_100024977/#axzz4N4GRsRLf (accessed 23 October 2016).


Resende dos Santos J (2016). Cape Verde: Impacts and lessons of graduation from the
LDC list. Background paper prepared for The Least Developed Countries Report 2016.
United Nations Conference on Trade and Development. Geneva.


Robinson E (1960). Economic Consequences of the Size of Nations. Palgrave Macmillan.
London.


Somoa, Ministry of Finance (2002). Strategy for the development of Samoa (SDS) 2002–2004:
Opportunities for all. Ministry of Finance of Samoa, Treasury Department Economic
Policy and Planning Division. Apia.


Somoa, Ministry of Finance (2005). Strategy for the development of samoa (SDS) 2005–2007:
For every Samoan to achieve a better quality of life. Ministry of Finance of Samoa,
Treasury Department Economic Policy and Planning Division. Apia.


Somoa, Ministry of Finance (2008). Strategy for the development of Samoa (SDS) 2008–2012:
Ensuring sustainable economic and social progress. Ministry of Finance of Samoa,
Treasury Department Economic Policy and Planning Division. Apia.


Tisdell C (2014). The MIRAB model of small island economies in the Pacific and their
security issues: A draft. Working papers in Social Economics, Policy and Development
No. 157. School of Economics, University of Queensland.


UNCTAD (2004). Is a Special Treatment of Small Island Developing States Still Possible?
United Nations publication. UNCTAD/LDC/2004/1. New York and Geneva.


UNCTAD (2007). The Least Developed Countries Report 2007: Knowledge, Technological
Learning and Innovation for Development. United Nations publication. Sales No. E.07.
II.D.8. New York and Geneva.


UNCTAD (2012). The Least Developed Countries Report 2012: Harnessing Remittances
and Diaspora Knowledge to Build Productive Capacities. United Nations publication.
Sales No. E.12.II.D.18. New York and Geneva.


UNCTAD (2014). The Least Developed Countries Report 2014: Growth with Structural
Transformation – A Post-2015 Development Agenda. United Nations publication.
Sales No. E.14.II.D.7. New York and Geneva.


UNCTAD (2015a). The Least Developed Countries Report 2015: Transforming Rural
Economies. United Nations publication. Sales No: E .15.II .D.4. New York and Geneva.


UNCTAD (2015b). From Decisions to Actions: Report of the Secretary-General of UNCTAD
to UNCTAD XIV. United Nations publication. UNCTAD (XIV)/1 Rev.1. New York and
Geneva.


UNCTAD (2016a). Economic Development in Africa Report 2016: Debt Dynamics and
Development Finance in Africa. United Nations publication. Sales No. E.16.II.D.3.
New York and Geneva.


UNCTAD (2016b). Trade and Development Report 2016: Structural Transformation for
Inclusive and Sustained Growth. United Nations publication. Sales No. E.16.II.D.5.
New York and Geneva.


UNECA (2016). Experiences of industrial policy in the past and the present. In: Transformative
Industrial Policy for Africa. United Nations publication. United Nations Economic
Commission for Europe. Addis Ababa.


United Nations (2014a). Vienna Programme of Action for Landlocked Developing Countries
for the Decade 2014–2024. A/CONG.225/L.1. Second United Nations Conference
on Landlocked Developing Countries. United Nations General Assembly resolution
69/137. New York.


United Nations (2014b). SIDS accelerated modalities of action (Samoa) pathway. United
Nations General Assembly resolution 69/15. United Nations. New York.




The Least Developed Countries Report 201682


United Nations (2015a). Implementation of the Programme of Action for the Least
Developed Countries for the Decade 2011–2020. Report of the Secretary-General.
A/70/83–E/2015/75. United Nations Economic and Social Council. New York.


United Nations (2015b). Implementation, effectiveness and added value of smooth
transition measures. Report of the Secretary-General. A/70/292. United Nations
General Assembly. New York.


United States Department of State (2005). Limits in the seas No. 126: Maldives maritime
claims and boundaries. United States Department of State Bureau of Oceans and
International Environmental and Scientific Affairs. Washington, D.C.


UN-OHRLLS (2014). Building productive capacities to enhance structural transformation in
landlocked developing countries. The United Nations Office of the High Representative
for the Least Developed Countries, Landlocked Developing Countries and Small
Island Developing States. New York. Available at http://unohrlls.org/custom-content/
uploads/2013/09/Structural-Transformation.pdf (accessed 23 October 2016).


World Bank (2011). World Development Report 2011: Conflict, Security and
Development. Washington, D.C. Available at https://openknowledge.worldbank.org/
handle/10986/4389 (accessed 23 October 2016).


World Bank (2016). Comoros overview (2016). Washington, D.C. Available at http://www.
worldbank.org/en/country/comoros/overview#1 (accessed 23 October 2016).




CHAPTER


THE CONTRIBUTION OF
INTERNATIONAL SUPPORT


MEASURES TO GRADUATION




The Least Developed Countries Report 201684


A. Introduction


Over the years, the growing recognition by the international community of
least developed countries’ (LDCs) special needs has led to the establishment of
a number of international support measures (ISMs) in their favour, beyond those
available to other developing countries (ODCs). The continued relevance of the
LDC category and of related ISMs has been reaffirmed repeatedly in the key
international agreements of 2015, including the 2030 Agenda for Sustainable
Development (2030 Agenda), the Addis Ababa Action Agenda of the Third
International Conference on Financing for Development (Addis Ababa Action
Agenda), the Sendai Framework for Disaster Risk Reduction and the Paris
Agreement of the twenty-first session of the Conference of the Parties (COP21)
to the United Nations Framework Convention on Climate Change (UNFCCC).


The effectiveness of such ISMs is gradually coming under closer scrutiny,
reflecting a growing emphasis on the monitoring and evaluation of international
support, notably in the context of the Midterm Review of the Implementation
of the Programme of Action for the Least Developed Countries for the Decade
2011–2020 (Istanbul Programme of Action (IPoA))1 and the biennial Global
Reviews of Aid for Trade. The effectiveness of the ISMs should be assessed
not only in terms of their direct outputs, but also, more fundamentally, against
the rationale for the establishment of the LDC category. As noted in chapter 1,
the ultimate purpose of LDC-specific ISMs is to enable LDCs to overcome the
constraints and vicious circles that undermine their ability to benefit fully from
participation in international markets.


In principle, graduation reflects the achievement of greater resilience and/or
reduced exposure to the structural challenges that are the raison d’être of the
LDC category.2 This is the key to narrowing the gap between LDCs and ODCs.
As argued in earlier chapters, addressing these handicaps to achieve “graduation
with momentum” requires structural transformation. Thus the effectiveness of
ISMs may be assessed in part on the basis of their contribution to the structural
transformation, upgrading of production and export diversification that form the
basis for graduation with momentum.


Three caveats should be highlighted at the outset. First, the multiplicity of ISMs
— spanning areas as diverse as finance, trade, technology, climate change and
technical assistance — makes analysis particularly complex and challenging,
especially given the wide differences in the initial conditions of LDCs. Second, as
noted in chapter 2, there are various possible paths towards graduation. Hence,
even if an ISM has proved decisive in one case, this does not necessarily mean
that it will play an important role elsewhere. Third, even using sophisticated
econometric techniques, the attribution of an LDC’s progress to one or more
ISMs is unlikely to be definitive and is necessarily subject to qualifications.


Subject to these caveats, the present chapter seeks to shed some light on
the effectiveness of LDC-specific ISMs in the context of graduation. It examines
the extent to which ISMs contribute to transformative change in the LDCs and
thus enhance their prospects for graduation, in line with the IPoA objectives. It
begins with an overview of the key ISMs available to the LDCs (section B) before
moving on to a brief assessment of their overall effectiveness in each of the
main areas of finance, trade and technology (sections C–E). Section F discusses
the contribution of ISMs to past graduation cases, and section G presents the
findings of a survey of the views of LDCs on the developmental impact of ISMs,
conducted for this Report. Finally, section H provides some conclusions from
the foregoing discussion.


The relevance of LDC-specific ISMs
has been reaffirmed in several recent


international agreements…


…but their effectiveness is coming
under closer scrutiny.


ISMs should be assessed in part on
the basis of their contribution
to structural transformation.




85CHAPTER 3. The Contribution of International Support Measures to Graduation


B. International support measures -
An overview


Over the years, the increasing recognition of LDC development needs has
been mirrored in the establishment of a growing number of dedicated ISMs
intended to support their development, beyond those available to developing
countries generally. The Support Measures Portal for Least Developed Countries
— established and maintained by the Committee for Development Policy (CDP)
Secretariat3 — lists 136 such measures across the fields of development finance,
trade, technology and technical assistance. Table 3.1 provides a schematic
overview of the major ISMs in each of these four areas, which are discussed in
greater detail in the following sections of the chapter.4


As table 3.1 demonstrates, despite their common objective, existing
ISMs encompass widely different instruments in terms of their nature, focus
and content. While some are clearly defined and directly implementable by
the international community (for example, preferential market access and
LDC-specific facilities such as the LDC Fund and the Enhanced Integrated
Framework (EIF)), others require action by LDCs themselves, including many
special and differential treatment (SDT) provisions. These ISMs thus depend on
LDCs’ institutional capacities, including legal and technical skills and/or effective
interministerial coordination. Other ISMs are essentially indicative in nature, with
no concrete mechanisms for mutual accountability or enforcement, resulting
in limited implementation. This last case is epitomized by the commitment
by donor countries, dating back to 1990 but still unfulfilled, to provide official
development assistance (ODA) to LDCs equivalent to 0.15–0.20 per cent of
their gross national income (GNI).


Given this heterogeneity, and the very different circumstances of LDCs
themselves, the relative importance of different ISMs in fostering progress
towards graduation varies across LDCs, according to each country’s structural
characteristics and ability to leverage support in different areas. In general,
however, access to development finance and trade preferences are regarded as
the most significant and readily accessed ISMs.


While ISMs are undoubtedly helpful, especially in these two areas, their long-
term development impact is typically circumscribed and their adequacy relative
to LDCs’ needs for productive-capacity development is at best questionable
(UNCTAD, 2010). Moreover, as the following assessment highlights, the
limitations and shortcomings of existing ISMs have been compounded by the
ambitious targets agreed upon by the international community in the context of
the IPoA and the 2030 Agenda.


C. Finance-related
international support measures


Financial support and aid flows have historically received considerable
emphasis in the policy discourse around LDCs (and developing countries more
generally), particularly in the context of the global partnership for development.
This partly reflects the fact that ODA remains the largest source of external
finance for LDCs as a whole and a key source of public revenues, although
its importance in both respects varies widely between individual countries.5


However, the high visibility of the issue and the major financial and development
role of ODA contrasts markedly with the limited number of financial ISMs for


There are 136 LDC-specific ISMs,
which vary widely in nature,


focus and content.


Development finance and trade
preferences are regarded as the


most readily accessed ISMs.


There are a limited number of
financial ISMs for LDCs.




The Least Developed Countries Report 201686


Table 3.1. Main international support measures in favour of LDCs


International
support measure Observations Legal sources


Fi
na


nc
e


ODA target 0.15-0.20
per cent of donor
countries GNI


Some targeted budget/funds available by some multilateral organizations
(UNDP, UNICEF, WFP, GEF-LDCF, UNCDF, etc.)


Paris Programme of Action for
the LDCs (1990)


Aid modalities:
untied aid


The DAC recommendation explicitly aims at (i) untying ODA to the LDCs
to the greatest extent possible; (ii) promoting and ensuring adequate
ODA flows; and (iii) achieving balanced efforts among DAC members in
untying aid


Recommendation of DAC High
Level Meeting (2001)


Aid modalities:
grant element


The recommendation stipulates that the average grant element of all
committments should be a minimum of 90% for all LDCs (on a given
year) or at least 86% to each LDC (over 3 years)


Recommendation on terms and
conditions of aid (1978)


LDC Fund Established by the United Nations Framework Convention on Climate
Change (UNFCCC) to assist LDCs to carry out the preparation and
implementation of national adaptation programmes of action


Cap to contributions
to United Nations
regular budget
and peacekeeping
operations


LDC contributions to the regular budget of the United Nations are
capped at 0.01 per cent of the total United Nations budget (in 2015 six
LDCs benefitted from the cap, namely Angola, Bangladesh, Equatorial
Guinea, Myanmar, the Sudan and Yemen)


General support
measures


LDC officials receive travel support to attend meetings of the General
Assembly and other UN-related meetings and conventions


Tr
ad


e


LDC accession
to WTO


Guidelines aim at streamlining and facilitating LDCs’ accession to the
WTO, keeping in mind that WTO members should exercise restraint in
seeking concessions from acceding LDCs.


Decision of the Sub-committee
on LDCs of the WTO WT/
COMTD/LDC/21 (2012),
WT/L/508


Preferential
market access


Preferential schemes are typically unilateral and non-reciprocal (as
exceptions to the MFN principle), and provide variable extents of
preference margins. Some but not necessarily all of them are LDC-
specific; for instance, most GSP schemes encompass some LDC-
specific sub-schemes.


GATT enabling clause (1979),
General Council Decision
WT/L/304 (1999) and WT/L/759
(2009), Hong Kong ministerial
declaration WT/MIN(05)/DEC
(2005). In addition, unilateral
decisions by preference-
granting countries


Preferential rules
of origin for LDCs


Best endeavour calling for more flexible rules of origin applied to LDC-
originating exports; implementation requires LDCs to negotiate with
trading partners


Annex F of the Hong Kong
Ministerial Declaration WT/
MIN(05)/DEC (2005); Ministerial
Decisions WT/MIN(13)/42,
WT/L/917 (2013) and WT/
MIN(15)/47 — WT/L/917 (2015)


SDT in GATS Special priority is given to LDCs with a view to increase their
participation to services trade (art. IV.3), including through special
treatment (art. XIX.3) and cooperation on telecommunications provision
(annex on Telecommunications)


General Agreement on Trade in
Services (1995)


Services waiver Waiver from MFN treatment (under GATS) for LDC services and service
providers. Operationalization is still on-going, and full implementation
requires LDCs to negotiate with trading partners


WTO Ministerial Declarations
WT/L/847 (2011), WT/L/982
(2015)


SDT in Trade
Facilitation
Agreement*


LDCs are granted more flexible terms for the categorization of various
measures and their implementation. Other developing countries are also
granted SDT, though on less flexible terms


Part II of the Trade Facilitation
Agreement WT/MIN(13)/36,
WT/L/911 (2013)


Agreement on
Agriculture


Under article 15.2, LDCs are not required to commit to reduce tariffs
or subsidies. Under article 16, besides, developed countries shall take
action according to the Decision on Measures Concerning the Possible
Negative Effects of the Reform Programme on Least-Developed and Net
Food-Importing Developing Countries; and the Committee on Agriculture
shall monitor, as appropriate


Agreement on Agriculture (1994)
Decision on Measures
Concerning the Possible
Negative Effects of the Reform
Programme on Least-Developed
and Net Food-Importing
Developing Countries (1994)


Agreement on Trade-
Related Investment
Measures (TRIMs)


Under art. 5.2 and 5.3 LDCs are granted a 7-year transitional period
(potentially renewable) to eliminate investment measures inconsistent
with the provisions of the TRIMS Agreement. So far only Uganda notified
TRIMs to the WTO


Agreement on Trade-Related
Investment Measures (1994)
Annex F of the Hong Kong
Ministerial Declaration WT/
MIN(05)/DEC (2005).


Subsidies and
countervailing
measures


Under art. 27.2 and Annex VII, LDCs are exempted from the prohibition
of subsidies contingent upon export performance


Agreement on Subsidies and
Countervailing Measures (1994)


Dispute settlement Under art. 24 WTO members should exercise due restraint in raising
matters involving LDCs (to date no LDC participation as defendant), and
LDCs could request good offices of Director General in settling a dispute


Rules and Procedures
Governing the Settlement of
Disputes - annex 2 of the WTO
Agreement (1994)




87CHAPTER 3. The Contribution of International Support Measures to Graduation


LDCs. As well as the widely cited target for ODA to LDCs as a proportion of
donors’ GNI, these include commitments to untie aid to LDCs and to ensure
a minimum average grant element, as well as access to LDC-specific financial
windows, notably in the context of climate finance.


Aid-related issues have been addressed in several previous editions of The
Least Developed Countries Report (UNCTAD, 2006, 2009, 2010, 2014a). These
reports have consistently emphasized the importance to LDCs’ sustainable
development of adequate ODA to support the expansion of productive
capacities, and the role of ODA as a complement to LDCs’ domestic resource
mobilization, which plays a key role in limiting aid dependency. They have also
highlighted several key issues in the traditional aid architecture:


• The inadequacy of ODA flows relative to LDCs’ needs, notably in terms
of infrastructural and technological gaps, and shortfalls from the long-
standing international targets enshrined in Millennium Development Goal
8 and reaffirmed in Sustainable Development Goal 17;


• The tendency of the sectoral allocation of ODA to privilege social sectors
at the expense of the productive sectors and social overhead capital (the
systems and services on which production in all sectors depends);


• The need to leverage development cooperation more effectively for the
consolidation of LDCs’ domestic resource mobilization (notably by supporting
tax revenue collection and management systems);


• The limited alignment of ODA with recipient countries’ own development
strategies, undermining their ownership of the development agenda;


International
support measure Observations Legal sources


Te
ch


ni
ca


l
as


si
st


an
ce


Enhanced Integrated
Framework (EIF)


The EIF is a multi-donor programme which supports LDCs to
increase their participation in the international trade, focusing on:
(i) mainstreaming trade into national development strategies; (ii)
coordinating the delivery of trade-related technical assistance; and (iii)
building trade capacities. Set up in 1997, it was subsequently reviewed
in 2005, and its mandate has been extended until 2022


Te
ch


no
lo


g
y


TRIPS
implementation:
extension of the
transition period


Transition period for LDCs (under article 66.1) extended until July 2021 Decision of the Council for
TRIPS of the WTO IP/C/64
(2013)


TRIPS agreement
in relation to
pharmaceutical
products: extension of
the transition period,
and waiver from
obligations under art.
70.8 and 70.9


Transition period further extended until January 2033; waiver for
obligations under art. 70.8 and 70.9 extended to the same date


WTO General Council Decision
WT/l/971 and Decision of the
Council for TRIPS IP/C/73
(2015)


TRIPS obligations on
technology transfer


Under article 66.2, developed country members shall provide incentives
to enterprises and institutions to promote and encourage technology
transfer to LDCs


Agreement on Trade-Related
Aspects of Intellectual Property
Rights (1994)


Technology Bank The Istanbul Programme of Action calls for the establishment of a
Technology Bank and Science, Technology and
Information supporting mechanism dedicated to LDCs. The Governing
Council of the new institution met for the first time in July 2016, and full
operationalization is stated to be undertaken


Istanbul Programme of Action
(2011)


Source: UNCTAD secretariat compilation, based on CDP (2010), UN (2011), and WTO (2016).
Notes: Most of the measures mentioned in the table are LDC-specific. However, some of them are also available to some ODCs.


EIF: Enhanced Integrated Framework, GATS: General Agreement on Trade in Services, GATT: General Agreement on Tariffs and
Trade, GEF-LDCF: Global Environment Facility - LDC Fund, GSP: Generalized System of Preferences, MFN: Most-favoured na-
tion, SDT: (special and differential treatment, TRIMs: Agreement on Trade-Related Investment Measures, TRIPS: Agreement on
Trade-Related Aspects of Intellectual Property Rights, UNCDF: United Nations Capital Development Fund, UNDP: United Nations
Development Programme, UNFCCC: United Nations Framework Convention on Climate Change, WFP: World Food Programme.


* The Trade Facilitation Agreement had not yet entered into force at the time of writing this Report.


Table 3.1 (contd.)


Past LDC Reports have emphasized
the importance of adequate ODA


to support the expansion of
productive capacities,




The Least Developed Countries Report 201688


• Uneven progress on the aid effectiveness agenda, and the consequent
persistence of unpredictability, proliferation of aid channels, fragmentation
and lack of harmonization of administrative requirements, all of which
unnecessarily overstretch the institutional capacities of recipient countries;


• The importance of building on synergies and complementarities between
development cooperation with traditional donors and with Southern
development partners, taking account of their different priorities and
operational approaches.


Many of these concerns are reflected to varying degrees in the IPoA (notably
paras. 113–116). While these sections of the IPoA refer to aid from a more
general perspective, based on the ample (and often controversial) literature on
its developmental impact, they provide a useful starting point for an assessment
of the contribution of financial ISMs to graduation with momentum.


Notwithstanding the critical role ODA has traditionally played in most LDCs,
the significance and effectiveness of LDC-specific financial ISMs is debatable,
not least because of the lack of mutual accountability in their delivery. While LDC
graduates have benefited from substantial financial support from international
donors and development partners, it is open to question to what extent this
has been driven by their LDC status and access to financial ISMs rather than
by geopolitical considerations. Moreover, while past LDC graduates have been
able to harness aid resources for productive-capacity development, this may
not be the case for all current LDCs, especially those in conflict or post-conflict
situations or with weak institutional frameworks.


1. VOLUME OF OFFICIAL DEVELOPMENT ASSISTANCE


The Report of the Secretary-General of the United Nations Conference on the
Least Developed Countries to the first such conference in 1981 (United Nations,
1983a) called for the establishment of a specific target for ODA to LDCs of 0.15
per cent of donors’ gross national product (GNP) by the first half of the 1980s,
rising to 0.20 per cent during the second half of that decade. This proposal was
reflected in the Substantial New Programme of Action for the LDCs adopted at
the same conference, and reiterated in various forms in subsequent Programmes
of Action for the LDCs (United Nations, 1983b). Accordingly, in 2011 the IPoA
stated that (United Nations, 2011: para. 116.2):


(a) Donor countries will implement the following actions … as soon as
possible:


(i) Donor countries providing more than 0.20 per cent of their GNP as
ODA to least developed countries: continue to do so and maximize
their efforts to further increase ODA to least developed countries;


(ii) Other donor countries which have met the 0.15 per cent target:
undertake to reach 0.20 per cent expeditiously;


(iii) All other donor countries which have committed themselves to
the 0.15 per cent target: reaffirm their commitment and undertake
either to achieve the target by 2015 or to make their best efforts to
accelerate their endeavours to reach the target;


(iv) During the period of the Programme of Action, the other donor
countries: exercise individual best efforts to increase ODA to least
developed countries with the effect that collectively their assistance
to least developed countries will significantly increase;


While this quantitative target was intended to provide LDCs with some degree
of priority in terms of ODA allocation, there is little evidence suggesting that LDC
status in fact plays a significant role in this respect. Only a few bilateral donors
have established LDC-specific programmes; and, while multilateral institutions


The significance and effectiveness
of LDC-specific financial ISMs is


debatable.


The target of 0.15-0.20 per cent of
donor GNP for ODA to LDCs was


set in 1981…


...but there is little evidence that
LDC status affects aid allocations.




89CHAPTER 3. The Contribution of International Support Measures to Graduation


have some financing windows earmarked for LDCs, these do not play a major
role in terms of overall disbursements.


Overall, more than 35 years after the above commitments were first agreed,
progress towards stepping up development assistance to the LDCs remains far
short of fulfilling them (United Nations, 2015). While net ODA disbursements to
LDCs doubled in real terms during the early and mid-2000s, this upward trend
ceased following the 2008–2009 financial and economic crisis. Since then, net
ODA disbursements to LDCs have stagnated at approximately $45 billion per
year at constant 2014 prices (figure 3.1). Relative to recipients’ GNI, LDCs’ net
receipts of ODA fell by more than half between 1992–1994 and 2012–2014,
from 12.3 per cent to 5.5 per cent (figure 3.2). Unpredictability and year-to-year
fluctuations also continue to be an issue, net disbursements amounting to some
85 per cent of commitments (95 per cent including debt relief).


Though somewhat improved relative to earlier decades, ODA to LDCs from
Development Assistance Committee (DAC) donors was 0.09 per cent of their
GNI during the 2012–2014 period, including both bilateral aid and their imputed
shares of multilateral aid.6 This is only half of the 0.15–0.20 per cent target,
which, under the 1981 Substantial New Programme of Action, donors were to
achieve at the end of the 1980s. Only seven DAC donors (Denmark, Finland,
Ireland, Norway, Luxembourg, Sweden and the United Kingdom of Great Britain
and Northern Ireland) met the targets over the 2012–2014 period (figure 3.3).
This translates into an annual delivery gap of between $26 billion and $50 billion
at constant 2014 prices, a shortfall that has been increasing since 2010 (figure
3.4). Moreover, a preliminary assessment by the Organisation for Economic
Co-operation and Development (OECD), based on country programmable aid
(OECD, 2015), indicates a bleak outlook for aid globally until 2018.


Given the overall shortfall of ODA to LDCs, its concentration in a few countries
also raises potential concerns, especially as beneficiary countries’ needs are not


Figure 3.1. ODA commitments and net disbursements to LDCs
(Billions of 2014 dollars)


0


10


20


30


40


50


60


70


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014


Bi
llio


ns
o


f 2
01


4
do


lla
rs


Net ODA disbursement ODA commitments


Source: UNCTAD secretariat calculations, based on data from the OECD, International Development Statistics database (https://www.oecd.
org/development/stats/idsonline.htm) (accessed September 2016).


ODA to LDCs was only half
the target level in 2012–2014,
a shortfall of $26–50 billion.




The Least Developed Countries Report 201690


Figure 3.2. Net ODA received as share of recipient country’s GNI


0 10 20 30 40 50 60


LDC average


Zambia


Yemen


Vanuatu


United Rep. of Tanzania


Uganda


Tuvalu


Togo


Timor-Leste


Sudan


South Sudan


Somalia


Solomon Islands


Senegal


Sao Tome and Principe


Rwanda


Niger


Nepal


Myanmar


Mozambique


Mauritania


Mali


Malawi


Madagascar


Liberia


Lesotho


Lao People’s Dem. Rep.


Kiribati


Haiti


Guinea-Bissau


Guinea


Gambia


Ethiopia


Eritrea


Equatorial Guinea


Djibouti


Dem. Rep. of the Congo


Comoros


Chad


Central African Rep.


Cambodia


Burundi


Burkina Faso


Bhutan


Benin


Bangladesh


Angola


Afghanistan


2012–20142002–20041992–1994


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development Indicators database (http://databank.
worldbank.org/data/reports.aspx?source=world-development-indicators) (accessed September 2016).


always the decisive factor in explaining aid allocations (Alesina and Dollar, 2000;
Dollar and Levin, 2006; Mishra et al., 2012). Around half of all ODA to LDCs goes
to just eight countries: Afghanistan, Bangladesh, the Democratic Republic of the
Congo, Ethiopia, Mozambique, Myanmar, Uganda and the United Republic of
Tanzania.




91CHAPTER 3. The Contribution of International Support Measures to Graduation


The effectiveness of ODA in promoting structural transformation and
productive capacities has also been weakened in recent years by a shift in
allocations from economic infrastructure and productive sectors towards social
sectors, notably health and education. It is noteworthy in this context that the
proportion of ODA allocated to economic infrastructure and productive sectors
has been substantially above the average for LDCs in all three of the most recent
graduates (Cabo Verde, Maldives and Samoa), but is lower than the average in
comparable small-island LDCs such as the Comoros, Sao Tome and Principe,
and Solomon Islands (box 3.1).


Figure 3.3. Net ODA to LDCs from individual DAC member countries, 1992–2014 (selected years)


1992–1994 2002–2004 2012–2014


Aid
target


0 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45


Slovakia


Greece


Poland


Slovenia


Czechia


Spain


Italy


Republic of Korea


United States


Portugal


New Zealand


Austria


DAC countries
average


Australia


Japan


Germany


Iceland


Canada


France


Switzerland


Netherlands


Belgium


Finland


Ireland


United Kingdom


Denmark


Norway


Sweden


Luxembourg


Per cent of donor country GNI


Source: UNCTAD secretariat calculations, based on data from the OECD, International Development Statistics database (https://www.
oecd.org/development/stats/ idsonline.htm); and the UNdata database (http://data.un.org/) (accessed September 2016).


Notes: Net disbursements including imputed flows through multilateral channels. Donor countries in ascending order of the ODA to
GNI ratio in 2012–2014.


Eight countries account for
half of all ODA to LDCs.




The Least Developed Countries Report 201692


Box 3.1. Sectoral aid allocation in LDC graduates


The governments of the countries that have graduated to date have proactively engaged development partners, not only
to mobilize financial support, but also to ensure that ODA is closely aligned with their development priorities, thereby retaining
ownership of their development agenda (section F). In all four cases, development of productive capacities has also played
a fundamental role in their development strategies.


In the case of the three most recent graduates (Cabo Verde, Maldives and Samoa), this can be seen in the sectoral allocation
of their ODA receipts prior to their graduation (box figure 3.1). (Data for Botswana are unavailable for the relevant period.) To
smooth out yearly fluctuations, sectoral allocations are averaged over the three years preceding each country’s graduation.


In all three of these countries, ODA disbursements for economic infrastructure and productive sectors accounted for
between 34.5 per cent and 37.4 per cent in the three years preceding their graduation, substantially higher than the figure
for LDCs as a whole (27.4 per cent in 2012–2014, the latest period for which data are available). The proportion is typically
still lower in comparable SIDS LDCs such as the Comoros, Sao Tome and Principe and Solomon Islands. While such a
comparison can only be illustrative, it corroborates the finding of the country case studies conducted for this Report (Enari
2016; Lui 2016; Mogae 2016; Resende dos Santos 2016) that development of productive capacities represented a major
pillar of these countries’ paths towards graduation.


Box figure 3.1. Sectoral composition of aid disbursements,
present LDC total and LDC graduates before graduation


Action relating
to debt 0.8


Action
relating to


debt 0.0


Humanitarian aid 0.4Other 0.9


Other 0.3 Other 0.0


A. Gross aid disbursements to LDCs,
by sector, 2012–2014 (per cent)


D. Gross aid disbursement to Samoa,
by sector, 2010–2013 (per cent)


B. Gross aid disbursement to Cabo Verde,
by sector, 2005–2007 (per cent)


C. Gross aid disbursement to Maldives,
by sector, 2008–2010 (per cent)


45.8 48.5


34.5


12.0


8.1


5.9


3.5


4.9
4.4


12.3


27.3


36.4


54.835.6


37.4


18.0


7.9


Soc ia l i n f ras t ruc tu re and ser v ices


Ac t ion re la t ing to deb t


Human i ta r ian a id


Other


Economic in f ras t ruc tu re , p roduc t ion sec to r, mu l t i sec to r


Commodi t y a id /genera l p rogramme ass is tance


Action relating
to debt 0.2


Source: UNCTAD secretariat calculations, based on data from the OECD, International Devel-
opment Statistics database (https://www.oecd.org/development/stats/idsonline.htm)
(accessed September 2016).


Notes: Given that OECD-Creditor Reporting System data are annual, for the purpose of this
analysis Cabo Verde, Maldives and Samoa are considered graduated respectively at
the beginning of 2008, 2011 and 2014. No pre-graduation data are available in the
case of Botswana.




93CHAPTER 3. The Contribution of International Support Measures to Graduation


2. OFFICIAL DEVELOPMENT ASSISTANCE MODALITIES


Two further finance-related ISMs pertain to the modalities of aid rather than
its magnitude. In 1978, the OECD’s Recommendation on Terms and Conditions
of Aid stipulated that ODA to LDCs “should be essentially in the form of grants
and, as a minimum, the average grant element of all commitments from a given
donor should either be at least 86 per cent to each least developed country over
a period of three years, or at least 90 per cent annually for the least developed
countries as a group” (OECD, 1978: para. 8).


While a full assessment of the fulfilment of this commitment is beyond the
scope of this Report, as it would be both complex and data-intensive,7 a broader
assessment indicates some progress between the 1990s and the early 2000s,
when the proportion of grants in ODA commitments increased from around 80
per cent to more than 95 per cent. However, the last two years for which data
are available have witnessed a partial reversal of this improvement, grants falling
back to 85 per cent of the total (figure 3.5).


This increase in the proportion of grants in total ODA commitments
remains when non-DAC donors (which do not necessarily abide by OECD
recommendations) are included, although this also reduces the share of grants
throughout the period, reflecting the greater use of loans by other donors,
notably multilateral agencies.


The second finance-related ISM pertaining to ODA modalities stems from
the 2001 DAC Recommendation on Untying Official Development Assistance
to the Least Developed Countries, and was also enshrined in the 2005 Paris
Declaration on Aid Effectiveness (Paris Declaration) (OECD, 2008: para. 31).
Like other aid effectiveness commitments, however, progress in this regard has
been uneven. At the global level, only one of the 13 targets established for 2010,
that for coordination of technical cooperation, was met, and only by a narrow
margin (OECD, 2012).


Figure 3.4. Net ODA to LDCs: Annual delivery gap vis-à-vis United Nations targets for DAC donors


0


10


20


30


40


50


60


70


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014


Bi
llio


ns
o


f c
on


st
an


t 2
01


4
do


lla
rs


Delivery gap against 0.20 per cent targetDelivery gap against 0.15 per cent target


Source: UNCTAD secretariat calculation, based on data from the OECD, International Development Statistics database (https://www.oecd.
org/development/stats/idsonline.htm) (accessed September 2016).


The last two years for which data
are available have witnessed


a partial reversal of this
improvement.


Between the 1990s and the early
2000s the proportion of grants in


ODA commitments increased from
around 80 per cent to more than


95 per cent.




The Least Developed Countries Report 201694


The modest aspiration of the Paris Declaration “to continue to make progress”
(OECD, 2008: para. 31) in untying ODA to LDCs is no exception to this limited
progress: between 2010 and 2012, the proportion of ODA that was untied rose
in only 12 of 21 LDCs for which data are available, while falling in nine. The
proportion of untied aid in 2012 was below 90 per cent in nine of the LDCs for
which data are available (Bangladesh, Cambodia, the Democratic Republic of
the Congo, Ethiopia, Madagascar, Mozambique, Senegal, the Sudan and the
United Republic of Tanzania), and as low as 76 per cent in Bangladesh (table
3.2).


3. CLIMATE FINANCE


Climate change is a critical development challenge for developing countries,
and especially LDCs. It can impose major economic, environmental and social
costs, including on production and trade, particularly in a context of limited
adaptive capacities. It is therefore essential to mainstream climate change
adaptation and mitigation8 fully in development strategies.


Adequate international financial support is essential to meeting this
challenge. The necessity of financial and technological support to LDCs to adapt
to climate change was recognized under para. 9 of article 4 of the UNFCCC,
which mandates Parties to the Convention to “take full account of the specific
needs and special situations of the least developed countries in their actions
with regard to funding and transfer of technology”. However, while various funds
have been established to provide finance for climate adaptation, accessing
them remains time-consuming and complicated even for ODCs (Uprety, 2015).
For LDCs, access is further impaired by their limited technical and administrative
capacities.


This is partly a result of the proliferation of funds and mechanisms devoted to
climate finance. The OECD Accra Agenda for Action included a clear undertaking
that “As new global challenges emerge, donors will ensure that existing channels
for aid delivery are used and, if necessary, strengthened before creating separate


Figure 3.5. ODA commitments to LDCs by DAC donors, by aid type


0


10


20


30


40


50


60


70


80


90


100


0


5


10


15


20


25


30


35


40


45


50


1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014


Pe
rc


en
ta


ge


Bi
lli


on
s


of
c


on
st


an
t 2


01
4


do
lla


rs


Grants Loans and other long-term capital Share of grants (rhs)


Source: UNCTAD secretariat calculations, based on data from the OECD, International Development Statistics database (https://www.oecd.
org/development/stats/idsonline.htm) (accessed September 2016).


The UNFCCC recognizes LDCs'
need for financial and technological


support for climate change
adaptation.


LDCs' access to climate finance
remains limited.




95CHAPTER 3. The Contribution of International Support Measures to Graduation


new channels that risk further fragmentation and complicate coordination at
country level” (OECD, 2008: para. 19(c)). In practice, however, the emphasis
has been strongly on the creation of new channels and institutions (LDC-specific
or otherwise), resulting in further fragmentation. This has been particularly
conspicuous in the field of climate finance, which is now characterized by an
immensely complex architecture encompassing 29 implementing agencies, 21
multilateral funds and initiatives, and 7 bilateral funds and initiatives (figure 3.6).


Such complexity adds considerably to the burdens on the limited
administrative and technical capacities of LDCs, thereby also limiting and
slowing access to the available funding. Such administrative burdens are
further increased by often onerous application processes and the very limited
progress by donors in fulfilling their commitments under the Paris Declaration to
“Implement, where feasible, common arrangements at country level for planning,
funding … disbursement, monitoring, evaluating and reporting to government
on donor activities and aid flows” (OECD, 2008: para. 32).


This may be a particular obstacle where LDCs must compete for funding
with ODCs, which typically face less serious capacity constraints, particularly
as a growing number of recipient countries have established dedicated national
climate change funds to coordinate funding from multiple sources and align
donor interests with national priorities (for instance, Brazil’s Amazon Fund and
Indonesia’s Climate Change Trust Fund).


Multilateral climate funds have broken new ground in helping countries
to confront the implications of climate change for development. However,
a recent review of their effectiveness (ODI, 2014) found considerable scope
for improvement, to increase their flexibility, reduce risk aversion, increase


Table 3.2. ODA from OECD DAC member countries to LDCs reported as untied
Total bilateral aid as
reported to the DAC,


2012*


Untied aid,
2012


2005
(for


reference**)


2010
(for


reference)
2012


(Million dollars) (Percentage of untied aid)


Bangladesh 1 207.2 917.1 89 80 76


Benin 365.6 327.7 80 91 90


Burkina Faso 740.5 680.9 89 90 92


Burundi 303.4 275.2 90 93 91


Cambodia 596.8 478.2 85 82 80


Democratic Republic of the Congo 1 765.2 1 558.2 92 81 88


Ethiopia 1 935.2 1 681.5 66 70 87


Kiribati 59.5 57.3 91 96


Lesotho 75.7 70.1 98 93


Madagascar 402.4 333.8 78 83


Malawi 897.9 840.7 97 92 94


Mali 542.6 513.8 97 87 95


Mozambique 1 357.7 1 172.8 95 84 86


Nepal 750.5 696.1 89 93


Niger 629.3 589.1 85 71 94


Rwanda 442.7 399.2 85 92 90


Senegal 719.1 634.6 94 89 88


Sudan 578.8 517.7 78 89


Timor-Leste 311.2 288.6 83 93


Togo 233.3 210.1 96 90


United Republic of Tanzania 1 483.3 1 312.6 97 91 88


Sources: UNCTAD secretariat, based on OECD (2012, 2014), table A.8 and table A.10, respectively.
Notes: * Excludes donor administrative costs and in-donor refugee costs; ** data are taken from OECD (2012).


The complexity and fragmentation
of the climate finance architecture


adds to the burdens on LDCs’
limited capacities.




The Least Developed Countries Report 201696


Figure 3.6. Global climate finance architecture diagram


Implementing Agencies and Institutions


AfDB African Development Bank


AFD French Develo pment Agency


ADB Asian Develo pment Bank


BMZ FederalMinistry of Economic Cooperationand Development


CIDA Canadian International Develo pment Agency


DECC Department of E nergy and Clim ate C hange


DEFRA Department for Environment, Food and Rural Aff airs


DFAT Department of Foreign Affairs and Trade (Australia)


DFID Department for International Development


EBRD European Bank fo r Reconstruction and Development


EIB European Investment Bank


Ex-Im Export-Import Bank of the United States


FAO Food and A griculture O rganisation


FFEM French Global E nvironment Facility


GIZ German Technical Cooperation


IADB Inter American Development Bank


IFAD International Fund for Agricultural Develo pment


JBIC Japan Bank of International Coo peration


JICA Japan International Cooperation Agency


KfW German Development Bank


MIES Inter-ministerial Taskforce on Clima te Ch ange


MOFA Ministry of Foreign Affairs


NORAD Norwegian Agency for Development Cooperation


ODIN Ministry of Foreign Affairs


OPIC Overseas Private Investment Corporation


UNDP United Nations Development Programme


UNEP United Nations Environment Programme


USAID US Agency for International Develo pment


WB World B ank


Multilateral Funds and Initiatives


AF Adaptation Fund (GEF acts as secretariat and WB as trustee)


ACCF Africa Climate C hange Fund


ASAP Adaptation for Smallholder Agriculture Programme


CBFF Congo Ba sin Forest Fund (hosted by AfDB)


CDM Clean Development Mechanism (implemented under the Kyoto Protocol)


CIF Climate Investment Funds (implemented through WB, ADB, AfDB, EBRD, and IADB)


CTF Clean Technology Fund (implemented through WB, ADB, AfDB, EBRD, and IADB)


FCPF Forest Carbon Partnership Facility


FIP Forest Investment Program (implemented through WB, ADB, AfDB, EBRD, and IADB)


GCCA Global Clima te C hange Allia nce


GCF Green Climate Fund


GEF Global E nvironment Facility


GEEREF Global E nergy Efficiency and Renewable E nergy Fund (hosted by EIB)


JI Joint Implementation (implemented under the Kyoto Protocol)


LDCF Least Developed Countries Fund (hosted by the GE F)


PMR Partnership for Market Readiness


PPCR Pilot Program o n Climate Resilience (implemented through World Bank, ADB, AfDB, EBRD, and IADB)


SCCF Special Clima te C hange Fund (hosted by the GE F)


SCF Strategic Climate Fund (implemented through WB, ADB, AfDB, EBRD, and IADB)


SREP Scaling Up Renewable E nergy Program (implemented through WB, ADB, AfDB, EBRD, and IADB)


UNREDD United Nations Collaborative Programme o n Reducing Emissions from Deforestation and Forest Degradation


Bilateral Funds and Initiatives


GCCI Global Clima te C hange Initiative (US)


GCPF Global Clima te Partnership Fund (Germany, UK and Denmark)


ICF International Clim ate Fund (UK)


ICFI International Clim ate Forest Initiative (Norway)


ICI International Clim ate Initiative (Germany)


NAMA f acility Nationally Appropriate Mitigation Action facility (UK and Germany)


REM REDD Early Movers (Germany and UK)


P


P


F O


FCPF C


F


F


P


P


PPC


FF


F


Regional


GCC


C


C


F


FF


F


OF


C


C


CF


O


O


GCC


OP C


GCF


P


F G F˚


CF


CF


F


˚


CF


C G


C


G


COP


GCPF


Regional and National Funds


Source: UNCTAD secretariat, based on Nakhooda et al. (2015).


transparency in the reporting of their results and impact, lower transaction
costs, increase the efficiency of decision-making processes, and strengthen
support to the development of national capacity. The review also proposed that
funds should allow support to a wider range of stakeholders within countries,
and place greater emphasis on appropriate approaches to engage private
businesses and investors, as well as developing innovative relationships with
financial institutions active in climate-relevant sectors, notably infrastructure.




97CHAPTER 3. The Contribution of International Support Measures to Graduation


Of the $7.6 billion approved through climate funds by 2014, half was
concentrated in just ten countries, none of which was an LDC, largely reflecting
the focus of the Clean Technology Fund on countries with rapidly growing
emissions. The pool of funds available for adaptation is more focused on
LDCs, but also much smaller. Multilateral funds have approved $1.33 billion of
adaptation finance, of which 69 per cent has been for LDCs. Allocations are
again concentrated, 43 per cent accruing to the ten largest recipient countries,
seven of which are LDCs (Bangladesh, Cambodia, Mozambique, Nepal, the
Niger, Yemen and Zambia) while one (Samoa) is a recent graduate from the LDC
category. While Bangladesh, Nepal and the Niger have each received more than
$110 million to invest in early warning systems and other resilience-enhancing
activities, overall climate funding to LDCs remains modest in absolute terms
due to the small size of the funds, and not all LDCs have received adaptation
finance. Globally, the climate funds need to mobilize financing on a much larger
scale, and to focus more on strengthening the underlying policy, regulatory and
enabling environments in recipient countries alongside investment activities
(ODI, 2014).


An LDC Fund (LDCF),9 was established in 2001 under the administration of
the Global Environmental Facility (GEF) to meet the particularly acute adaptation
needs of LDCs, and to finance the preparation and implementation of country-
driven national adaptation programmes of action (NAPAs) identifying priority
activities to address their urgent and immediate adaptation needs. In all the
LDCs except South Sudan, NAPAs have been prepared and implementation of
up to three priority adaptation projects has been started. In 2010, in Cancun,
Mexico, Parties to the UNFCCC decided to establish a process to enable LDCs
to formulate and implement national adaptation plans — broader and longer-
term strategies to identify and address medium and long-term adaptation needs
more comprehensively. The national adaptation plan process is intended to be
a continuous, progressive and iterative process that follows a country-driven,
gender-sensitive, participatory and fully transparent approach (UNFCCC, 2011;
Uprety, 2015).


Despite this substantial progress, however, the LDCF continues to have
several shortcomings. In particular, its financing remains both inadequate and
insecure, reflecting its dependence on voluntary contributions from developed
countries. This lack of resources has resulted in the scope of NAPA processes
being narrowed from a wide set of priority actions to a handful of the most
critical projects (UNCTAD, 2010). Even so, the contributions to the LDCF in
the 14 years from its inception to 2015 — estimated at $962 million from 25
countries — are less than one fifth of the estimated cost of implementing even
these relatively limited NAPAs across all LDCs (Tenzing et al., 2015). The funding
gap faced by the LDCF has become so severe that in October 2014 the GEF
declared the LDCF “empty”. While $1.5 billion of further pledges were made to
climate funds, including the LDCF, at the COP21 in Paris, it remains to be seen
to what extent these pledges will be fulfilled.


A further problem is the weak integration of the LDCF’s project-based
approach into national development processes, which further limits the potential
for more systematic and comprehensive solutions to the LDCs’ adaptation
and mitigation needs. The LDCF’s governance structure also affords limited
accountability to LDCs and gives them little control over its resources, limiting
their negotiating power vis-à-vis the GEF agencies (UNCTAD, 2010). While the
LDC Group has called for direct access to LDCF resources, akin to the modality
used by the Adaptation Fund under the Kyoto Protocol, this has yet to be fully
taken on board by the Parties to the Convention (Tenzing et al., 2015).


In addition to the LDCF, LDCs also in principle have access to the Green
Climate Fund (GCF), the Adaptation Fund and the Special Climate Change


There is considerable scope
for improvement of multilateral


climate funds, which are currently
concentrated in a small number


of ODCs.


Though more focused on LDCs,
finance for adaptation is limited,


and much more is needed.


LDC Fund financing remains
inadequate, insecure and weakly


integrated into national
development processes.




The Least Developed Countries Report 201698


Fund. About 50 per cent of the resources of the GCF are to be allocated for
adaptation in LDCs, SIDS and African countries. However, many of these
pledge-based funds remain seriously underfinanced. There are also obstacles
to LDCs accessing funding from these and other sources, including lack of the
capabilities required to meet the rigorous multi-tiered accreditation processes
necessary to secure direct access to funds such as the GCF and the Adaptation
Fund, and the need to secure co-financing (as mandated by the UNFCCC) in
order to benefit from GEF funding.


While many LDCs have secured funding to implement some of their NAPA-
prioritized actions, this has so far remained limited to $900 million (including
LDCF funding), compared with an estimated cost of $5 billion for implementing
NAPAs in all the LDCs (Uprety, 2015). Moreover, “These costs are also
expected to increase as more time passes between the completion of NAPAs
and their actual implementation, as well as with the advent of new information
on adaptation costs and needs and the identification of new and additional
challenges” (Tenzing et al., 2015:2).


As well as issues regarding the scale, availability and predictability of
resources, the LDC Group has raised numerous other concerns in relation to the
functioning of the LDCF and other climate funds (Tenzing et al., 2015), including:


• The complexity of LDCF procedures, especially in relation to co-financing
requirements and identification of baseline (business as usual) and additional
(adaptation) costs;


• The constraint imposed by LDCs’ limited human and institutional capacities
on their ability to access and absorb resources from the GCF, where they
need to compete against ODCs;


• Weaknesses in the LDCF’s approach to gauging “country ownership” in
project proposals;


• Limited LDC negotiating power vis-à-vis GEF agencies;


• The use by GEF agencies of international rather than local consultants;


• The time-consuming process taken to obtain resources for NAPA actions.


A possible approach to addressing these issues, both in the context of climate
financing and in development finance more broadly, is outlined in chapter 5. In
the longer term, however, major reforms are clearly needed in climate finance
to mobilize financing commensurate with the adaptation and mitigation needs
of LDCs, to enhance their access to the existing funds, and to increase the
effectiveness of delivery.


D. Trade-related international support measures


Trade-related ISMs in favour of the LDCs encompass four major areas:
support for accession to the World Trade Organization (WTO), preferential
market access, other SDT provisions, and trade-related technical assistance.
These areas are discussed in turn in the following four subsections, which
provide a brief description of the main existing ISMs and a critical assessment
of their effectiveness.


Overall, while some trade-related ISMs (especially preferential market access)
provide significant benefits to LDCs, their overall impact remains inadequate vis-
à-vis the Sustainable Development Goal target 17.11 of doubling LDCs’ share
of global exports by 2020. Their effectiveness is undermined by several factors,
including the narrow scope, vague formulation and non-binding nature of many


Other pledge-based funds such
as the GCF and the SCCF remain


seriously under-financed.


Funding for priority actions in LDCs
has been $900 million, compared
with estimated needs of $5 billion.


Multiple shortcomings in trade-
related ISMs mean they are


inadequate to double LDCs' share of
global exports by 2020.




99CHAPTER 3. The Contribution of International Support Measures to Graduation


existing ISMs (notably best-endeavours clauses in SDT provisions); inadequate
commitment by the international community (notably in relation to technical
assistance); slow operationalization of new ISMs (as in the case of the services
waiver); and other developments in the international trade environment, most
importantly tariff reductions leading to preference erosion and the increasing
relevance of non-tariff barriers (NTBs) to trade relative to traditional tariff barriers.


1. ACCESSION TO THE WORLD TRADE ORGANIZATION


The process of WTO accession for LDCs is of considerable significance. Six
LDCs acceded to WTO between 2012 and 2016 (Afghanistan, the Lao People’s
Democratic Republic, Liberia, Samoa, Vanuatu and Yemen) and six more
(Bhutan, the Comoros, Equatorial Guinea, Ethiopia, Sao Tome and Principe, and
the Sudan) were negotiating their accession at the time of writing.10 The terms
of accession are detailed in a Protocol of Accession negotiated between each
acceding country and a working party composed of interested WTO members.
The process is long and complex, encompassing negotiations both with the
working party on the country’s trade regime, and with each of its bilateral partners
on its tariff schedule for trade in goods and on offers in trade in services.


In the 2001 Doha Ministerial Declaration, WTO members agreed “to work to
facilitate and accelerate negotiations with acceding LDCs” (WTO, 2001: para.
42). An initial set of guidelines to this end, adopted in December 2002, included
provisions to facilitate the negotiation process and to provide technical assistance.
These guidelines also called on WTO members to “exercise restraint in seeking
concessions and commitments on trade in goods and services from acceding
LDCs” (WTO, 2002). As concerns were repeatedly raised on the effectiveness of
these provisions (UNCTAD, 2010), they were further strengthened, streamlined
and operationalized by a subsequent set of guidelines in 2012. These introduced
specific flexibilities for acceding LDCs, including a quantitative benchmark (in
terms of binding coverage of a country’s tariff structure and the level of bound
tariff rates) for market access negotiations on goods; a qualitative benchmark
for the bidding process on services; and provisions relating to transparency in
the accession process, SDT and transition periods.


While these guidelines represent a significant step towards facilitating LDC
accession to the WTO, the process remains skewed against the acceding
country. The acceding country receives requests for trade concessions from
existing WTO members, both multilaterally and bilaterally, but is not entitled to
request tariff concessions or services commitments (Van Grasstek, 2013). As
a result, accession has typically entailed significant costs for acceding LDCs,
and the process remains long and cumbersome. The accessions of Cambodia
(completed in 2004), Nepal (2004), Samoa (2012), Vanuatu (2012), the Lao
People’s Democratic Republic (2013), Yemen (2014) and Liberia (2016) have
taken an average of 13 years to complete. The LDCs that have sought to join
the WTO since its creation have faced difficulties in the accession process; and
LDCs have complained, both individually and collectively, about the nature of the
procedures and the excessive demands that have been made on them in the
course of the negotiations (Cortez et al., 2014).


2. PREFERENTIAL MARKET ACCESS


Preferential market access is one of the most important ISMs available to
LDCs (and ODCs), as preferential tariffs on their exports help to offset the higher
production and trade costs associated with their structural and geographical
handicaps.11 In the WTO context, the 2001 Doha Ministerial Declaration,
which launched the eponymous round of WTO negotiations, included an


Six LDCs acceded to WTO in
2012–2016, and six more are


negotiating accession.


WTO members agreed in 2001 “to
work to facilitate and accelerate


negotiations with acceding LDCs”
but progress remains inadequate.


Preferential market access is an
important ISM for LDCs.




The Least Developed Countries Report 2016100


explicit commitment “to the objective of duty-free, quota-free market access
for products originating from LDCs“ (WTO, 2001: para. 42). In 2005, this
commitment was reiterated and further clarified by annex F of the Hong Kong
Declaration, which urged developed countries, and those developing countries
declaring themselves in a position to do so, to “provide duty-free and quota-free
market access on a lasting basis, for all products originating from all LDCs …
[or] at least 97 per cent of products originating from LDCs, defined at the tariff
line level, by 2008 or no later than the start of the implementation period” (WTO,
2005: annex F, 36 (a)(i) and (ii)).


Notwithstanding these clear statements, WTO members have long struggled
to achieve a satisfactory agreement on duty-free quota-free (DFQF) market
access, and the last Ministerial Declaration to address the subject — the Bali
Ministerial Declaration (WTO, 2013a) — weakened previous commitments and
also remained in non‐binding language.12 This underlines the importance of
LDCs forging a united position on the issue.


The lack of agreement within the WTO has not precluded some significant
progress in terms of preferential market access on a unilateral basis. On the
contrary, a growing number of developed and developing countries have
adopted unilateral preferential schemes for merchandise exports originating
from LDCs (see chapter 4). These schemes vary in terms of coverage, exclusion
lists and in some cases even beneficiary countries, since some schemes
(notably the African Growth and Opportunity Act (AGOA) of the United States of
America) are not directly applicable to all LDCs. Developed countries generally
provide preferential market access to LDCs through the Generalized System
of Preferences (GSP) or through regional and bilateral agreements, while many
developing countries have adopted dedicated schemes for this purpose.13


Among members of the Group of Twenty (G20), average preferential tariff rates
on LDC exports are substantially lower in developed than in developing countries
(2.6 per cent compared with 8.1 per cent (World Bank, 2015)); but some major
developing countries, notably China and India, have granted extensive unilateral
preferences to LDCs.14


As might be expected, by reducing tariffs faced by LDC exporters,
preferential schemes contribute significantly to boosting LDC export revenues
(Klasen et al., 2016). This is confirmed by the assessment of the costs to LDCs
of losing LDC-specific trade preferences discussed in chapter 4. However, the
very limited change in the composition of LDC exports, despite the plethora
of preferential schemes, highlights the importance of productive capacities in
translating preferential market access into economic diversification as well as
higher export revenues.


The potential development impact of preferential trade arrangements in this
respect is constrained by at least three key factors. First, the potential boost that
preferential schemes can provide to LDC exports is limited by their incomplete
product coverage, as LDCs’ typically high levels of export concentration mean
that excluding even a few tariff lines may have a disproportionate effect. For
example, an analysis by Bouët and Laborde (2011) of the impacts of alternative
potential outcomes for the Doha Development Round estimated that raising
DFQF coverage in the same set of preference‐granting countries from 97 per
cent to 100 per cent would nearly double the export opportunities available to
LDCs.


Second, the competitive advantage conferred by preferential tariffs depends
on tariff rates relative to competitors — that is, preference margins — more than
the absolute rates. In this respect, many primary products at the core of LDC
export baskets, most notably minerals and fuels, would be subject to relatively
low (and possibly zero) tariffs even on a most-favoured-nation (MFN) basis, so


A growing number of developed and
developing countries have adopted
unilateral preferential schemes for
merchandise exports originating


from LDCs.


Preferential schemes have
contributed to increasing LDC


exports, but have not been
translated into diversification…


...due to incomplete product
coverage, low preference margins


and high compliance costs...




101CHAPTER 3. The Contribution of International Support Measures to Graduation


that preference margins for these products are generally limited.15 Moreover, the
preference margins for LDC exports are gradually eroded over time as the tariff
rates faced by ODCs are reduced by liberalization at multilateral, regional and
bilateral levels. Nonetheless, LDC preference margins remain significant, at least
for some key products in some export markets (ITC, 2010).


Third, preference margins may be limited or offset by the cost of compliance
with the scheme’s regulations and associated administrative procedures, notably
rules of origin. It is widely acknowledged that the combination of low preferential
margins and high compliance costs may undermine the appeal of preferential
schemes, resulting in a low rate of preference utilization. Rules of origin and
other NTBs are of particular importance in this respect in LDCs, as a result
of higher compliance costs to potential exporters (reflecting limited supplies
of local inputs and/or productive capacities in the case of rules of origin), and
weaker institutional frameworks for quality assurance and standard setting. This
problem is further exacerbated by the lack of harmonization of rules of origin,
which gives rise to different compliance requirements across different export
markets, with additional costs and inefficiencies.


The potential adverse effects of restrictive rules of origin acquire even greater
relevance in global value chains, as production processes become progressively
more fragmented and trade in intermediate products plays a growing role. In
this context, stringent rules of origin are likely to be particularly burdensome
in the manufacturing sector (especially apparel and clothing) and in phases of
production in the middle of the value chain (that is, adding value to imported raw
materials and intermediate products), and much less so for the export of wholly
obtained products, such as fuels and unprocessed agricultural commodities
(WTO, 2014).


At the Ninth WTO Ministerial Conference in December 2013, recognizing the
above problems and their detrimental impact on LDCs’ integration into global
markets, WTO members agreed on a set of guidelines for preferential rules of
origin for LDCs, which were further elaborated at the Tenth WTO Ministerial
Conference in Nairobi in 2015 (WTO, 2013b; WTO, 2015b, respectively). These
guidelines are based only on best-endeavours clauses, and thus not legally
binding. However, if fully implemented, they could represent a substantial
step towards enhancing the flexibility accorded to LDCs, including by allowing
up to 75 per cent of value added to be imported from outside the exporting
LDC, facilitating cumulation across LDCs and other beneficiaries of preferential
schemes, and simplifying documentation requirements. Since no preference-
granting country has yet implemented the Nairobi guidelines, their effectiveness
and impact can only be a matter of speculation. However, evidence of other
reforms (notably in Canada and the European Union) suggests that introducing
additional flexibilities in the rules of origin would be likely to increase the
effectiveness of LDC-specific preferential market access by increasing utilization
rates.


The scope of preferential market access for LDCs can be illustrated by data
from the UNCTAD database on GSP utilization on tariff treatment and eligibility in
the Quad markets (Canada, the European Union, Japan and the United States).
In all four markets, preferential GSP schemes include a more favourable sub-
scheme in favour of LDCs, the United States also providing preferential treatment
to a number of eligible (LDC and ODC) African countries under AGOA. In 2013
— the latest year for which data are available — the Quad countries accounted
for some 40 per cent of LDCs’ total merchandise exports: $48 billion imported
by the European Union, $23 billion by the United States, $8 billion by Japan and
$4 billion by Canada.


...particularly as a result of restrictive
rules of origin and other NTBs.


WTO guidelines on rules of origin,
if implemented, could


help significantly.


More than half of LDC exports to
major developed country markets
would have faced zero tariffs even
without preferential market access.




The Least Developed Countries Report 2016102


On average, as shown in figure 3.7, more than half of these flows were non-
dutiable, and would therefore have been subject to zero tariffs even on an MFN
basis. Thus, preferential schemes conferred no net gain (that is, a zero preference
margin) to beneficiary countries on these exports. Dutiable imports accounted
for a variable share of the total, ranging from 29 per cent of total imports in the
case of Japan, to around 47 per cent in Canada and the European Union, and
93 per cent in the United States. However, only a subset of the dutiable imports
is potentially eligible for preferential treatment (“covered”); and only a subset of
covered imports actually receives preferential treatment, as this depends on
compliance with rules of origin and other administrative rules governing each
preferential scheme.


Figure 3.8 provides further analysis of the potential coverage and utilization
rates of LDC trade preferences in Quad markets.16 With the exception of the
United States, almost all of each Quad country’s dutiable imports were covered
by GSP preferential treatment, with coverage rates of at least 99 per cent (in line
with the provisions of annex F of the Hong Kong Ministerial Declaration). The
rates of preference utilization are also relatively high by international standards,
ranging between 85 per cent in Japan and 95 per cent in the European Union,
with Canada at 89 per cent. In Canada and the European Union, these figures in
part reflect reforms of their rules of origin in 2003 and in 2011 respectively, which
boosted both utilization rates and import values (WTO, 2014).


In the case of the United States, the situation is complicated by the
coexistence of two preferential schemes, GSP and AGOA. Since the latter offers
broader coverage and more attractive tariff rates, but with more limited country
coverage, it is generally the preferred option for AGOA-eligible African LDCs.17


This results in a very low rate of utilization for United States GSP preferences,
and a higher rate of utilization for AGOA (figure 3.8).


Clearly, such aggregate figures hide considerable heterogeneity across
products and sectors, as rules of origin are more critical for manufacturing
than for extractive sectors and agricultural raw materials. Nonetheless, despite
some undoubted progress in recent years, there remains considerable scope


Figure 3.7. Quad imports originating from LDCs by tariff treatment, 2013


0


10


20


30


40


50


60


Canada European Union Japan United States


Bi
llio


ns
o


f d
ol


la
rs


Total imports Dutiable imports Imports covered Imports receiving GSP preferences


Source: UNCTAD secretariat calculations, based on data from the UNCTAD database on GSP utilization (accessed August 2016).


LDCs made greater use of
preferences in Canadian and


European Union markets when
these markets reformed their


rules of origin.




103CHAPTER 3. The Contribution of International Support Measures to Graduation


to improve the utilization of preferential trade arrangements, and thus their
effectiveness. The potential of key LDC exports (for example, apparel and fish
products) could be significantly enhanced, supporting efforts to foster economic
diversification in LDCs, if the restrictiveness of rules of origin were relaxed along
the lines recommended by the Bali and Nairobi Ministerial Declarations.


Looking ahead, however, it should be emphasized that the strategic relevance
of preferential market access is inevitably set to decline over the long term, for
two main reasons. First, preference erosion is set to continue in the future, as
the process of trade liberalization continues, and may well be accelerated by the
successful conclusion of so-called mega-regional trade agreements. Second, a
growing body of research suggests that the trade-restrictive effect of non-tariff
measures has, over time, become more relevant than traditional tariff barriers
(UNCTAD, 2013). This is particularly the case for LDCs, whose export products
are typically subject to numerous non-tariff measures, and whose exporters are
likely to face higher compliance costs than those of ODCs (Nicita and Seiermann,
2016). There are also some concerns that the discretionary nature of unilateral
preference schemes, which in principle allows them to be withdrawn at any
time, introduces an element of unpredictability; and that this could discourage
export-oriented investment, notably in value chains with high turnover, such as
clothing (CDP secretariat 2012).


Beyond merchandise trade, the rationale for preferential market access in
favour of LDCs has begun to be extended to trade in services, which plays
an increasingly important role in a number of LDCs, as well as some LDC
graduates. In September 2003, the WTO Council for Trade in Services adopted
Modalities for the Special Treatment for Least-Developed Country Members in
the Negotiations on Trade in Services. However, it was only eight years later,
in December 2011, that trade ministers adopted a waiver enabling developing
and developed-country members to grant preferential treatment to services
and service suppliers of LDCs in breach of MFN obligations under the General
Agreement on Trade in Services (GATS). Initially valid for 15 years, the waiver
was extended by four years to the end of 2030 at the 2015 Nairobi Ministerial
Conference, where a review process was also established.


Figure 3.8. Quad preference coverage and utilization rate, 2013


100 99 99


56


100


89
95


85


8


76


0


10


20


30


40


50


60


70


80


90


100


Canada-GSP European Union-GSP Japan-GSP United States-GSP United States-AGOA


Potential coverage Rate of utilization


Source: UNCTAD secretariat calculations, based on data from the UNCTAD database on GSP utilization (accessed August 2016).


Considerable scope remains to
improve preference utilization,
particularly by relaxing rules of


origin.


Preferential market access will
become less important over time,
due to preference erosion and the
increasing importance of NTBs.


Preferential market access has been
extended to trade in services…




The Least Developed Countries Report 2016104


To date, 23 WTO members,18 including several developing countries, have
notified the WTO of services preferences for LDCs (WTO, 2016b; Rodriguez
Mendoza et al., 2016). As the operationalization of the services waiver is still
ongoing, it remains unclear to what extent it will translate into meaningful
commercial gains or additional opportunities for structural transformation. As
discussed in box 3.2, a preliminary assessment of the offers notified to date
suggests that preferences may be of some significance, but that some caution
is required in their interpretation.


Box 3.2. An early assessment of the services waiver


UNCTAD has commissioned an analysis of the more than 2,000 preferences to LDCs notified to the WTO in the context
of the services waiver, to provide a preliminary assessment of their relevance and usefulness. While this analysis indicates
that the offers to date are of some significance, it also suggests a need for some caution.


A comparison of the preferences notified under the services waiver with the offers made (to all WTO members) by the
countries concerned in the course of the Doha Round negotiations (which started in 2001) found that 12 per cent provided
less favourable terms, 40 per cent more favourable terms, and 48 per cent equivalent terms. Since most of the Doha Round
offers represented MFN treatment at the time when they were made, and most WTO members have liberalized trade in
services further since, this suggests that at least half of the preferences offered to LDCs do not offer actual preferential
treatment relative to any other WTO member.


A comparison with the terms of existing preferential trade agreements (PTAs) found that 68 per cent of the preferences
notified under the services waiver provided terms equal to those of PTAs, 7 per cent less favourable terms, and 25 per cent
more favourable terms. However, these results may have a positive bias, as the PTAs used for comparison were not necessarily
the most favourable. The large proportion providing equal terms is likely to be indicative of the use of approaches already
used in PTAs as a basis for offers to LDCs.


A third comparison was made with the LDCs’ own collective request of July 2014 (WTO, 2014). Here the comparison
appears positive, in that 46 per cent of the offers exceeded what was requested, 23 per cent matched the request, and 31 per
cent fell short. However, this may be indicative of offers that were not requested because they are of limited relevance to LDCs.
For example, two fifths of the offers exceeding the collective request (18 per cent of all offers) represented preferences in mode
2 (consumption abroad), which is of very limited relevance in most sectors (except tourism, health care and education), and is
generally subject to very few trade restrictions. The figure is also likely to include offers in sectors and subsectors considered
of insufficient economic interest to LDCs to merit inclusion in the request, or in which they are insufficiently competitive to
compete successfully even with significant preference margins.


Among other findings of the analysis are:


• Approximately one third of offers concerned mode 4 (movement of natural persons), one quarter mode 3 (commercial
presence), and about one fifth each mode 1 (cross-border supply) and mode 2 (consumption abroad);


• The most important sectors for offers were business services, followed by transport and logistics, in both cases predominantly
in mode 1 (cross-border supply);


• 86 per cent of offers were in the form of market access, virtually all the remainder being in the form of national treatment.


Source: Rodriguez Mendoza et al. (2016).


3. OTHER SPECIAL AND DIFFERENTIAL TREATMENT


The WTO, in its latest (22 September 2016) compilation, lists a total of
145 provisions in the WTO agreements that provide SDT to the LDCs and/or
developing countries (or other subgroups of developing countries). This total
encompasses a broad range of provisions with distinct objectives (WTO, 2013c):


• 15 provisions are aimed at increasing developing countries’ trade
opportunities;


• 47 require WTO members to safeguard the interests of developing countries;


• 41 entail flexibilities in commitments, actions and use of policy instruments;


• 20 refer to transitional periods;


• 18 relate to technical assistance;


• 16 relate to LDCs.19


…but caution is required in
interpreting the effects of


preferences on services exports.


145 provisions in WTO agreements
provide SDT to developing
countries, but only 16 are


specific to LDCs…




105CHAPTER 3. The Contribution of International Support Measures to Graduation


As can be gauged from table 3.1, these provisions have different degrees
of reach and legal impact. Some do no more than reaffirm, in broad terms,
the necessity of taking into account the interests and/or needs of developing
countries, including LDCs. This is the case, for instance, for article XXXVI of the
GATT and of many of the provisions aimed at increasing trade opportunities.
Other provisions seek to simplify reporting to WTO bodies. These include, for
example, potentially longer periods for trade policy reviews (annex 3 of the
Marrakesh Agreement) and simplified procedures for balance-of-payments
consultations (article 8 of the Understanding on the Balance-of-Payments
Provisions of the GATT). Other SDT provisions call on WTO members to provide
assistance to LDCs, notably in developing telecommunications infrastructure
and a viable technological base (articles 66.2 and 67 of the Agreement on
Trade-related Aspects of Intellectual Property Rights (TRIPS Agreement)), or
in complying with technical barriers to trade and sanitary and phytosanitary
requirements (articles 11.8 and 12.7 of the Agreement on Technical Barriers to
Trade, and articles 9.1 and 9.2 of the Agreement on the Application of Sanitary
and Phytosanitary Measures, respectively). While helpful and well-intentioned,
these SDT provisions are clearly unlikely to play a decisive role in relation to LDC
graduation, owing to their nature — generally related to procedural aspects of
the multilateral trading system — and their often vague formulation (notably in
terms of commitments for technical assistance).


More tangible impacts can in principle be expected from SDT provisions
related to transitional periods and flexibilities in commitments, which allow
LDCs, on a temporary or a permanent basis, slightly greater policy space than is
available to ODCs. A number of SDT provisions grant LDCs extended transitional
periods for the implementation of clearly-defined legal obligations, in recognition
of their institutional constraints. Some of them are no longer relevant, as the
extended implementation periods have now elapsed. However, an important
exception is the TRIPS Agreement, whose implementation period for LDCs
(under article 66.1) has subsequently been extended (subsection E.1, below).


Measures providing for greater flexibilities in commitments, action and use of
policy instruments for LDCs include, for example, article 15.2 of the Agreement
on Agriculture, which exempts LDCs from commitments to reduce tariffs and
subsidies. Similarly, LDCs are exempted from the prohibition of subsidies
contingent on export performance under article 27.2 and annex VII of the
Agreement on Subsidies and Countervailing Measures. However, the ability of
LDCs to take advantage of these flexibilities is seriously constrained by their lack
of financial resources for such subsidies.


Although the Trade Facilitation Agreement has not yet entered into force it
contains an innovative form of SDT. Section II of the Agreement allows LDCs,
on an individual basis, to group some of the relevant commitments into three
categories to be notified to the Trade Facilitation Committee at the WTO:


• Category A: to be implemented upon entry into force of the agreement;


• Category B: to be implemented after a transitional period;


• Category C: to be implemented after a transitional period, contingent on
the provision of assistance and support to capacity-building.20


Notwithstanding the substantial number of SDT provisions, their overall
impact is circumscribed by their relatively narrow scope. They are thus insufficient
either to improve the terms of LDC integration into the global market decisively
or to provide substantial support to their progress towards graduation. A first
concern in this regard stems from the limitation of many SDT provisions to
vague principles or “best-endeavours” language, so that their practical effect
depends on the goodwill of other WTO members, rendering their implementation


Some WTO SDT provisions have
little concrete impact, and are


unlikely to contribute significantly
to graduation.


Extended transitional periods and
flexibilities in commitments may


have a greater impact…


…but LDCs' ability to make use of
some flexibilities is limited by their


financial and institutional constraints.


Many SDT provisions amount to
mere "best endeavours" language


or vague principles.




The Least Developed Countries Report 2016106


unreliable and unpredictable. Examples include article 24.2 of the Rules and
Procedures Governing the Settlement of Disputes, under which WTO members
are to “exercise due restraint in raising matters” involving an LDC. While no LDC
has yet been a defendant in a dispute settlement case, such vague language
does little to enlarge LDCs’ policy space. Another such provision is article IV
para. 3 of the GATS, which states that “Particular account shall be taken of
the serious difficulty of the least-developed countries in accepting negotiated
specific commitments in view of their special economic situation and their
development, trade and financial needs”.


A second factor undermining the usefulness of SDT provisions is their uneven
utilization, partly reflecting a lack of awareness and technical knowledge on the
part of LDCs (UNCTAD, 2010; WTO, 2013c). These elements are critical, as the
utilization of many ISMs is contingent on appropriate legal action within the WTO
by the LDC concerned. A report by the CDP secretariat (2012), based on survey
responses from 18 LDC WTO members, found wide differences in knowledge
of specific SDT provisions and related procedures among LDCs, and greater
benefits to those countries with greater awareness. This underlines the need
for enhanced technical assistance and capacity-development efforts to address
institutional bottlenecks in LDCs and support their full and active participation in
the multilateral trading system, including through full and appropriate use of the
available SDT provisions. Financial constraints are also critical. As recognized
in the findings of the CDP survey, SDT provisions are likely to remain ineffectual
unless LDC governments are able to mobilize adequate financial resources to
make full use of the policy space they afford.


More broadly, these considerations highlight the inevitable limitations to
the effectiveness of SDT provisions in the absence of a broader process of
productive-capacity development. Addressing supply-side constraints is the
main rationale behind the Aid-for-Trade initiative, including trade-related technical
assistance, which is discussed in the next subsection.


4. TRADE-RELATED TECHNICAL ASSISTANCE


The international community has devoted increasing attention and resources
to trade-related technical assistance — an implicit recognition of the structural
constraints faced by LDCs in harnessing trade and leveraging trade-related
ISMs for sustainable development. This has resulted in efforts to build LDC trade
capacities, including by addressing supply-side constraints, and to promote a
more conducive policy framework to mainstream trade into LDC development
strategies. The Aid-for-Trade initiative thus has a critical role for LDCs, and,
though not specific to LDCs, it has paid increasing attention to their needs.
While mentioned as a “valuable complement” to the Doha Round in the 2005
Hong Kong Ministerial Declaration of the WTO (para. 57), the initiative has been
progressively decoupled from the Doha negotiations (Hallaert, 2012).


Of particular relevance in the context of trade-related technical assistance
is the LDC-specific EIF, a multi-donor programme involving six core partner
agencies (the International Monetary Fund, the International Trade Centre,
UNCTAD, the United Nations Development Programme, the World Bank and
WTO) established at the WTO in 1997, and subsequently reviewed in 2005. The
EIF’s support to LDCs focuses on three key objectives:


• Mainstreaming trade into national development strategies;


• Establishing structures to coordinate the delivery of trade-related technical
assistance;


• Building capacity to trade, including by addressing critical supplyside
constraints.


The overall impact of SDT provisions
is limited by their narrow scope and


often limited specificity.


The effectiveness of SDT provisions
will remain limited in the absence of
productive-capacity development.


The Aid-for-Trade initiative has
a critical role for LDCs and the EIF is


of particular relevance.




107CHAPTER 3. The Contribution of International Support Measures to Graduation


The EIF has also assisted LDCs in the WTO accession process, through
analysis of accession-related issues in their diagnostic trade integration studies
and support to their participation in accession-related meetings.


Several other international agencies also provide trade capacity-building
activities for LDCs, including UNCTAD, relevant United Nations regional
commissions and the CDP secretariat. LDCs are also accorded particular
priority in the delivery of WTO trade-related technical assistance activities, and
on average benefit from more than 40 per cent of such activities (WTO, 2016).
LDCs are also entitled to participate in three national training and technical
assistance activities per year, in addition to regional courses, as against two for
ODCs (WTO, 2015c).


It should be noted that, conceptually, Aid for Trade largely overlaps with ODA,
and potentially with other forms of financial ISMs discussed in earlier sections of
this chapter. Indeed, Aid for Trade is defined as the subset of ODA provided for
programmes and projects that are “explicitly identified as trade-related priorities
in the recipient country’s national development strategies” (WTO, 2006:2).21 This
overlap is also apparent in the sectoral composition of Aid for Trade to LDCs, the
overwhelming majority of which is devoted to transport, energy and agriculture
(figure 3.9). While this emphasis is certainly warranted (and closely aligned with
UNCTAD’s traditional focus on productive capacities), the overlap between Aid
for Trade and broader definitions of ODA raises some concerns in relation to the
additionality of support mobilized under the Aid-for-Trade initiative.


Figure 3.9. Aid for Trade disbursements to LDCs by broad sector (all donors)


0


2


4


6


8


10


12


2002–2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Bi
llio


ns
o


f c
on


st
an


t 2
01


4
do


lla
rs


Transport & storage Communications Energy Banking & financial services
Business & other services Agriculture Forestry Fishing


Industry Mineral resources & mining Trade policies & regulations Tourism


Source: UNCTAD secretariat calculations, based on data from the OECD, Creditor Reporting System database (http://www.oecd.org/dac/
aft/aid-for-tradestatisticalqueries.htm) (accessed September 2016).


Aid for Trade is part of ODA, raising
concerns about its additionality.




The Least Developed Countries Report 2016108


The continuing relevance of trade-related technical assistance is explicitly
recognized in para. 66.3(e) of the IPoA, which calls on development partners
to “Implement effective trade-related technical assistance and capacity-building
to LDCs on a priority basis, including by enhancing the share of assistance
to least developed countries for Aid for Trade and support for the Enhanced
Integrated Framework, as appropriate”. The importance of Aid for Trade, and of
the EIF in particular, is also reaffirmed explicitly by Goal 8.a of the 2030 Agenda,
to “Increase Aid for Trade support for developing countries, in particular least
developed countries, including through the Enhanced Integrated Framework for
Trade-Related Technical Assistance”.


Since Aid for Trade is thus largely encompassed within ODA, which is
discussed in section C, this subsection focuses on the extent of progress
towards these more specific objectives.


As shown in table 3.3, the total amount of financial resources available
under the Aid-for-Trade initiative has approximately doubled in real terms since
2005, both for developing countries as a whole and for LDCs, and in terms of
both commitments and disbursements. As for ODA in general, however, there
tends to be a significant gap between commitments and disbursements, the
latter being more than 40 per cent greater than the former in the 2012–2014
period (UNECA, 2013). However, despite the doubling of Aid for Trade in real
terms, there is little evidence of an expansion of LDCs’ share of the total, as
called for in the IPoA. Over the period as a whole, LDCs have accounted for
an average of 29 per cent of total Aid-for-Trade commitments and 27 per cent
of disbursements (with some year-to-year variation). In 2014, the last year for
which data are available, the share of LDCs in total Aid-for-Trade disbursements
fell to 25 per cent, the lowest level for at least a decade.


While support for trade policy and regulations represents only 2–3 per cent of
total Aid for Trade, it is of particular importance to LDCs because of their limited
institutional capacities. In this area, real disbursements to LDCs have increased
substantially since 2005, at an average rate of 16.8 per cent per year, although
this partly reflects the very low base, and growth was strongly concentrated
at the beginning of the period and near the end (2005–2007 and 2011–2013).
While their share in total disbursements increased strongly between 2005 and
2007, it has since fluctuated widely within a band between 16 per cent and 26


Table 3.3. Aid for Trade to LDCs and other developing countries
(Billions of constant 2014 dollars)


2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Total Aid for Trade


Total developing countries
Commitments 26 792 27 614 30 430 40 147 41 142 43 539 43 515 52 371 56 185 54 447


Disbursements 19 968 20 895 22 807 26 179 29 286 32 428 36 197 37 587 40 582 42 436


LDCs
Commitments 8 289 7 363 9 597 11 448 12 638 13 395 13 156 12 304 18 442 14 429


Disbursements 5 552 5 366 6 161 7 379 8 607 9 212 9 652 9 625 10 913 10 532


LDC share of the total (%)
Commitments 31 27 32 29 31 31 30 23 33 27


Disbursements 28 26 27 28 29 28 27 26 27 25


Of which trade-related policies and regulations


Total developing countries
Commitments 793 1 218 868 1 127 1 443 1 274 1 362 1 380 1 520 967


Disbursements 558 565 812 816 878 1 140 1 004 1 139 1 248 1 168


LDCs
Commitments 85 278 98 259 325 204 158 503 320 219


Disbursements 47 62 179 166 162 187 189 228 320 222


LDC share of the total (%)
Commitments 11 23 11 23 22 16 12 36 21 23


Disbursements 8 11 22 20 18 16 19 20 26 19


Source: UNCTAD secretariat calculation, based on data from the OECD, Creditor Reporting System database (http://www.oecd.org/dac/aft/
aid-for-tradestatisticalqueries.htm) (accessed September 2016).


The IPoA and the 2030 Agenda have
reaffirmed the importance of Aid for


Trade to LDCs.


While Aid for Trade has doubled in
real terms, the share allocated to


LDCs has not expanded.




109CHAPTER 3. The Contribution of International Support Measures to Graduation


per cent, and has on average been lower than their share of total Aid-for-Trade
disbursements.


Given the difficulties faced by LDCs in leveraging trade-related ISMs in areas
such as WTO accession and other SDT provisions, as discussed above, these
figures highlight the need to strengthen capacity-development efforts in the area
of trade policy. As demonstrated by the experiences of LDC graduates such as
Cabo Verde and Samoa (section F below), EIF support to trade mainstreaming,
and thus to strengthening the related institutional framework, is of particular
importance.


E. Technology-related
international support measures


Innovation and technological change are important parts of the development
of productive capacities, together with the accumulation of productive resources
and structural change (UNCTAD, 2006: chap. II.1). In the LDCs technological
change requires a combination of two factors: technological learning and efforts
by domestic economic agents (such as firms, workers and agencies); and,
crucially, knowledge transfer from technologically more advanced countries,
developed and developing (UNCTAD, 2014b).


There are important weaknesses in both these areas, limiting progress
towards graduation with momentum. Technology flows to LDCs currently occur
through market-based mechanisms such as international trade, foreign direct
investment (FDI), intellectual property licensing and movement of people (visiting
or resident foreign specialists, circular migration and training abroad) (UNCTAD,
2007; UNCTAD, 2012: chap. 4). Progress in technological learning and in
building domestic capacity to innovate has been inadequate in many LDCs,
limiting their ability to absorb internationally available technologies or to harness
them effectively for development (for example, by creating stronger linkages and
knowledge flows between more modern and less advanced sectors), and hence
the benefits in terms of economic transformation and productive capacities.
Consequently, these market-based channels have contributed little to narrowing
the knowledge divide between LDCs and more technologically advanced
countries (UNCTAD 2010: chap. 3). This has been an important factor underlying
the widening technological gap between LDCs and ODCs (chapter 1).


Given the central importance of technology to development, these
shortcomings highlight the need for effective ISMs in this area. Some measures
have been put in place to address these issues, notably ODA allocations for
science, technology and innovation (STI) in LDCs and technology transfer
provisions in some international agreements. However, their contribution to
building technological capabilities in LDCs has as yet been very limited, as shown
by the analysis below of the major LDC-specific ISMs in the field of technology.


1. AID FOR SCIENCE, TECHNOLOGY AND INNOVATION


STI has not traditionally been a priority for ODA to LDCs. During the era of
structural adjustment programmes (starting in different LDCs in the 1980s or
1990s), reductions in domestic funding of STI activities were not compensated
by increased donor disbursements. ODA allocations for STI tended to reflect
donors’ priorities in terms of sectors and activities, rather than being aligned
with national priorities (Enos, 1995). This pattern has largely continued.


Support to trade policy and
regulations is of particular


importance to LDCs, and has grown
more strongly.


Weaknesses in technological
learning and technology transfer are
limiting progress towards graduation


with momentum.


Market-based technology flows
have not prevented the widening
technological gap between LDCs


and ODCs.


LDC-specific ISMs in technology
have contributed little to building


technological capabilities.




The Least Developed Countries Report 2016110


Since the 1990s, as discussed in subsection C.1 above, donors have generally
shifted the balance of ODA away from economic and physical infrastructure and
productive sectors, and towards social sectors and governance. Support to
the development of technological capabilities in LDCs also currently receives
very limited aid allocations, STI accounting for only 0.49 per cent of total ODA
disbursements in 2012–2014, barely one third even of the small proportion in
ODCs (1.44 per cent) (figure 3.10).22


In the case of bilateral ODA for STI, allocations often focus on traditional areas
of specialization, notably agriculture (particularly traditional or higher-value cash
crops such as cotton, coffee, mango and nuts). Technological improvements in
these areas can increase productivity, and the development of non-traditional
crops may contribute to diversification within the agricultural sector. However,
this sectoral concentration limits the effect of ODA for STI on diversification
across the economy as a whole, tending rather to perpetuate historical patterns
of production and to reinforce LDCs’ current comparative advantage (Foray,
2009).


2. THE AGREEMENT ON TRADE-RELATED ASPECTS OF
INTELLECTUAL PROPERTY RIGHTS


While several WTO agreements include provisions on the transfer of
technology or knowledge, the most important in this respect (as in terms of
intellectual property and technology in general) is the TRIPS Agreement. This
includes two major SDT provisions specific to LDCs. First, under article 66.1,
LDC members are not required to implement the provisions of the Agreement,
except for articles 3, 4 and 5 (relating to national treatment and the MFN principle)
for 11 years after the entry into force of the WTO agreement (1 January 1995).
This waiver has since been extended to July 2021, and to 1 January 2033 in the
case of pharmaceutical products.


Figure 3.10. ODA gross disbursement for STI in LDCs and ODCs, 2002–2014
(Percentage of total ODA)


0.0


0.2


0.4


0.6


0.8


1.0


1.2


1.4


1.6


1.8


2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


LDCs ODCs


Source: UNCTAD secretariat calculations, based on data from OECD, Creditor Reporting System database (accessed September 2016).
Note: ODA to science, technology and innovation (STI) is the sum of ODA disbursements to Educational research, Medical research,


Energy research, Agricultural research, Forestry research, Fishery research, Technological research and development, Environmental
research, Research / Scientific institutions.


STI has not been a priority for
donors, and aid allocations have
been very limited and focused on
traditional areas of specialization.


The WTO TRIPS Agreement
includes a longer implementation
period for LDCs, now extended


to 2021.




111CHAPTER 3. The Contribution of International Support Measures to Graduation


The second LDC-specific SDT provision relates to technology transfer. The
stated objective of the TRIPS Agreement, as defined in its article 7 (emphasis
added), is that


The protection and enforcement of intellectual property rights should
contribute to the promotion of technological innovation and to the transfer
and dissemination of technology, to the mutual advantage of producers
and users of technological knowledge and in a manner conducive to
social and economic welfare, and to a balance of rights and obligations.


However, the only major substantive reference to technology transfer or
dissemination in the text of the Agreement is in article 66.2,23 which provides
that “Developed country Members shall provide incentives to enterprises and
institutions in their territories for the purpose of promoting and encouraging
technology transfer to least-developed country Members in order to enable
them to create a sound and viable technological base”.


This text is stronger than a best-endeavours clause, in that it creates a legal
obligation for developed country governments to foster the transfer of technology
to LDCs; and it has been interpreted as imposing obligations beyond their
ODA practices at the time of adoption of the Agreement in 1994. However, the
Agreement does not define what constitutes technology transfer, neither does it
detail how compliance with obligations under article 66.2 should be monitored
(Moon, 2008). At the request of LDCs, the TRIPS Council requested developed
countries to report on their activities in respect of their obligations under article
66.2, later (in a decision of February 2003) establishing that they should submit
a full report on such activities every three years, with annual updates in the
intervening years.


While it is possible to analyse specific projects, transactions and cases,
an overall evaluation of the extent or the effects of technology transfer from
developed countries to LDCs is problematic (UNCTAD, 2014b; UNCTAD,
2014c). However, a narrower assessment of the implementation of article 66.2
of the TRIPS Agreement can be made on the basis of developed countries’
submissions to the TRIPS Council. An evaluation of such activities reported in
submissions between 1999 and 2011 shows that, even with a broad definition
of technology transfer, only 11 per cent refer to specific operations of technology
transfer to LDCs.


In response to criticisms of limited technology transfer, developed countries
emphasize the constraints arising from ownership of the vast majority of the
relevant technologies by private sector entities, and the limited ability of
governments to force such entities to transfer the technologies that they control.
Technology transfer thus depends on efforts to encourage or facilitate actions by
companies, rather than direct action by governments themselves (WTO, 2012).


Technologies originating in public entities of developed countries are
sometimes transferred through bilateral assistance projects. In general, however,
such projects do not have technology transfer as a primary objective, and the
resulting transfers do not constitute a coherent programme of technology transfer.
Rather, such technology transfer as occurs is generally incidental to projects with
specific technical objectives such as providing clean water, combating particular
diseases or eradicating crop pests. Even where development projects focus on
STI, intellectual property capacity-building and technology transfer training are
typically included only incidentally, if at all.


Article 66.2 of the TRIPS Agreement has thus had very little effect in fostering
the adoption of additional incentives for technology transfer to LDCs, making a
minimal contribution to their graduation.


While TRIPS Article 66.2 imposes
legal obligations on developed


countries for technology transfer,
these are poorly defined…


…and few reported activities
refer to specific operations of


technology transfer.


While bilateral assistance projects
sometimes transfer public


technologies, this is generally
incidental to their main purpose.




The Least Developed Countries Report 2016112


Article 67 of the TRIPS Agreement provides that “developed country Members
shall provide, on request and on mutually agreed terms and conditions, technical
and financial cooperation in favour of developing and least-developed country
Members”. However, between 2008 and 2012, the number of LDCs benefiting
from technical assistance under this article declined dramatically from 25 to 8,
while the number of cooperation partners providing such assistance fell from 13
to 5 (UNSGHLP, 2015).


3. CLIMATE CHANGE-RELATED TECHNOLOGY TRANSFER


The transfer of climate-friendly technologies among Parties to the UNFCCC
is considered a key means of achieving the Convention’s primary objective of
stabilizing greenhouse gas emissions. Article 4 para. 9 of the UNFCCC, quoted
in section C.3 above in the context of climate finance, requires Parties to take
account of LDCs’ needs and situations in relation to technology as well as
finance.


Under the UNFCCC, there are several mechanisms to monitor whether
Parties are taking the actions necessary to facilitate technology transfer. These
include national communications and biennial reports, in which developed
countries periodically document their implementation of the Convention to the
COP. Like other developing countries, LDCs are encouraged (under the 2001
Marrakesh Technology Framework) to submit technology needs assessments
(TNAs) identifying their technology needs for mitigation and adaptation, based on
a consultative process to identify barriers to technology transfer and measures
to address them.


In light of the specific structural handicaps of LDCs, the COP has pledged to
fund the TNA process in LDCs in full, and funding is provided under the Poznan
Strategic Programme on Technology Transfer of the GEF. However, many LDCs
are still in the process of finalizing their TNAs, and relatively few have developed
technology action plans prescribing measures to address the needs and barriers
identified. As of 2015, half of the 48 LDCs had completed a TNA and submitted
it to the UNFCCC, but only nine of these TNAs included technology action plans
(Craft et al., 2015).


LDC negotiators have repeatedly highlighted the need for the existing
technology programmes under the UNFCCC to be strengthened in three major
ways: by increasing funding, to provide full support both to the formulation of
detailed TNAs and to the implementation of technology activities; by supporting
capacity-building for the elaboration of TNAs and proposals for technology-
related activities; and by full implementation of the Poznan Strategic Programme
on Technology Transfer.


In 2010, the COP established the Technology Mechanism, which was
subsequently enshrined in article 10 of the 2015 Paris Agreement. This consists
of two complementary bodies that work together to promote the development
and transfer of climate technologies to developing countries: the Technology
Executive Committee and the Climate Technology Centre and Network (CTCN).


A primary function of the CTCN is to respond to requests from national
designated entities (NDEs) in developing countries to accelerate technology
development and transfer in these countries. NDEs have responsibility for
translating TNAs into specific requests to the CTCN so that project proposals
can be formulated and implemented. While many LDCs have set up NDEs,
technical assistance is needed to build their capacities and allow them to function
effectively. As yet, only a few LDCs have sent requests to the CTCN though their
NDEs for the formulation of project proposals. However, the CTCN has set up


The number of LDCs receiving
technical assistance under TRIPS


Article 67 fell from 25 to 8
between 2008 and 2012.


Technology transfer is a key means
of stabilizing global greenhouse gas


emissions.


LDCs have repeatedly called
for strengthening of technology


programmes under the UNFCCC.




113CHAPTER 3. The Contribution of International Support Measures to Graduation


a Request Incubator Programme to support LDCs in accessing its technical
assistance, to strengthen their institutional capacities on climate technologies,
and to reinforce their efforts towards technology transfer. At the time of writing,
11 African LDCs and 2 Asian LDCs were participating in the Programme.


Climate-related technologies are also transferred under the Clean
Development Mechanism (CDM), established under the 1998 Kyoto Protocol
to the UNFCCC. This operates by issuing tradable certified credits for emission-
reduction projects in developing countries, which can be purchased by
developed countries to meet a part of their emission-reduction targets under
the Kyoto Protocol to the UNFCCC. In principle, such projects should use
technologies that are not currently available in host countries, and thus entail
technology transfer. However, of 4,984 registered and proposed CDM projects
in 2010, only 30 per cent claimed to involve technology transfer. Moreover, the
majority of CDM projects were in large emerging economies — 1,993 in China,
1,254 in India and 338 in Brazil — while hardly any were in LDCs. By the end
of 2012, there were only 12 registered CDM projects in 7 LDCs. The paucity
of CDM projects in LDCs partly reflects its primary focus on mitigation rather
than adaptation, the use of market-based approaches, and the more favourable
balance of risk and return available to private investors in ODCs than in LDCs
(Craft et al., 2015). Limited institutional capabilities in LDCs represent a further
constraint to their access to the CDM. Thus, while the CDM is an important tool
for fostering technology transfer under the UNFCCC, its relevance and benefits
to LDCs have remained extremely limited.


4. THE TECHNOLOGY BANK


Recognizing the importance of STI for development and graduation, and the
limited progress to date in accelerating technology transfer to LDCs, the IPoA
envisaged the establishment of “a Technology Bank and Science, Technology
and Information supporting mechanism, dedicated to the least developed
countries” (United Nations, 2011: para. 52.1). Four years later, the Addis Ababa
Action Agenda aspired to operationalize this proposal fully by 2017, an objective
that was later adopted under the 2030 Agenda as target 17.8 of the Sustainable
Development Goals.


The United Nations Technology Bank for the Least Developed Countries
is expected to consist of two components: the Science, Technology and
Innovation-supporting Mechanism and the Intellectual Property Bank. The
former is intended to “help LDCs articulate their STI policies and priorities as
part of their overall development strategy; assist them in finding and accessing
those programmes that are most appropriate to their STI aspirations; and then
act as their advocate with other institutional development actors” (UNSGHLP,
2015:8).


The Intellectual Property Bank is to (UNSGHLP, 2015:7):


[C]reate new opportunities for the dissemination of key technologies.
These involve: direct transfers of protected IP — as well as the know-
how to implement it — to LDC recipients, including entrepreneurs
and SMEs; maximum transfer of technical knowledge through Foreign
Direct Investment (FDI), including supporting LDCs in complex contract
negotiations; support of IP protection in LDCs; and, training to IP-
enforcement officials as well as strengthening IP Offices in LDCs …
Ultimately, the IP Bank’s goal should be that LDCs beneficially integrate
themselves into the worldwide IP system


Clean Development Mechanism
projects are strongly concentrated
in ODCs, and relatively few entail


technology transfer.


A Technology Bank for LDCs
is scheduled to become


operational in 2017.




The Least Developed Countries Report 2016114


It is anticipated that the Bank will begin its operations in 2017, in accordance
with Sustainable Development Goal target 17.8, and that it will be funded by
Member States of the United Nations and other stakeholders on a voluntary
basis, with an annual budget in the order of $10 million. The intention is that
it should grow progressively over time, building on the experience gained and
lessons learned from its work. Possible means of enhancing the effectiveness of
the Technology Bank in fulfilling its mandate are discussed in chapter 5.


F. The role of international support measures
in past graduation cases


ODA played a major role in the graduation of all four of the countries that
have graduated from LDC status to date. As might be expected, given their
small populations (which at the time of graduation varied between 0.2 million
and 1.5 million), all four countries had relatively large ODA receipts per capita,
averaging $163 in Maldives, $181 in Botswana, $387 in Cabo Verde and $437
in Samoa (at 2013 prices) in the decade prior to their graduation. These figures
are between 3.3 and 9.0 times that for LDCs as a whole in 2005–2014.24


At least as important as the volume of ODA, however, was the graduates’
policy towards their ODA receipts. Botswana and Samoa, in particular, adopted a
very proactive role in management of ODA receipts, maintaining clear leadership
and ownership of their respective development processes, and ensuring that
ODA was clearly oriented towards their own development strategies.


As noted in chapter 2, Botswana’s development strategy from the late 1960s
was shaped by a planning cycle of five to six years. National development
plans were approved by Parliament and enshrined into law, and parliamentary
approval was required for any public sector endeavour that did not appear in
the current plan. Donors were thus required to direct ODA into projects that
had already been recognized in the plan as national priorities. Planning was also
integrated into the budgetary cycle, so that projects could not be initiated unless
provision had been made for their recurrent costs. This model appears to have
been highly effective (Mogae, 2016).


Samoa, likewise, had a reputation for particular effectiveness in coordinating
and managing its ODA. The Government was effective in identifying the need
for projects and seeking donor assistance in accordance with its broader
development strategy; and donors frequently noted the authorities’ unusual
willingness, not only to articulate the country’s needs, but also to reject
approaches and individual activities that did not accord with national priorities.
This contributed to a much stronger sense of ownership of aid-funded activities
than in some nearby countries (Delay, 2005). The aid coordination process
was centred on a clear leading role of the Government, and had three main
institutional elements:


• Two national committees with overlapping staff, one for coordinating
national development planning and one specifically for donor coordination,
which integrated donor assistance into the broader national development
framework;


• A close relationship between the donor coordination process and a well-
developed system of national planning based in the Ministry of Finance;


• A system of sectoral donor meetings, initially in education and health and
later extending to other sectors.


ODA has played a major role in all
four past graduation cases...


…partly reflecting proactive
approaches to aid management,


particularly in Botswana and Samoa.




115CHAPTER 3. The Contribution of International Support Measures to Graduation


The cases of Botswana and Samoa highlight the importance of a proactive
and strategic approach to ODA, integrating it effectively into nationally owned
and driven development planning processes. In both cases, institutional and
human capacity were important factors, as well as strong government leadership
of the process. Other factors, at least in Samoa, were stability and continuity of
key players in donor coordination, allowing donor confidence and knowledge
of donor approaches to be built over time; and the relatively small number of
major donors (the Asian Development Bank, Australia, Japan and New Zealand)
(Delay, 2005).


In Cabo Verde, too, ODA played a major role in the development process
leading up to graduation. It was an important source of non-debt-creating
external financing, and financed major investments in economic and social
infrastructure, resulting in infrastructure spending among the highest in Africa at
around 15 per cent of gross domestic product (GDP) (Briceño-Garmendia et al.,
2011). As well as contributing directly to economic and social development, this
also (together with migrants’ remittances) permitted a higher level of domestic
consumption demand and investment than would have been possible from
domestic resources alone. Food aid also played an important role, not only in
stabilizing food supply (given the country’s high level of food insecurity, drought-
induced famine and poverty), but also in generating resources for public
works projects in rural areas, through the proceeds of sales of food aid to the
population. The resources thus raised were an important instrument for rural
development and poverty reduction.


Trade-related ISMs played a more limited role in these countries’ progress
towards graduation, reflecting the dominance in exports of primary commodities
(principally diamonds) in the case of Botswana, and of services (particularly
tourism) in Cabo Verde, Maldives and Samoa.


In Maldives, prior to graduation, fish represented more than 98 per cent
of merchandise exports, nearly 90 per cent of which was tuna. The fisheries
sector also accounted for 5 per cent of GDP and employed 11 per cent of the
total workforce. As an LDC, Maldives benefited substantially from preferential
access to the European Union and Japanese markets for fish, driving rapid
growth in production from the early 1980s. While the main market was Thailand,
accounting for 30 per cent of the total, and Sri Lanka accounted for most
exports of dried fish, the European Union was the major market for canned fish.


A clearer case of a graduating country that has benefited from a preferential
trade agreement (PTA) — though not a PTA specific to LDCs — is the development
of automobile components manufacture in Samoa for export to Australia under
the 1980 South Pacific Regional Trade and Economic Cooperation Agreement
(SPARTECA). When local content requirements for the Australian motor industry
were modified to include content from member countries of the Pacific Islands
Forum in the early 1990s, the Japanese company Yazaki relocated a component
factory from Australia to Samoa to take advantage of lower wages. However, the
continuation of this operation depended on a number of increasingly generous
ad hoc derogations of the terms of the SPARTECA provisions, particularly in
relation to rules of origin, as value added in Samoa fell below the required 50
per cent soon after the relocation. The benefits to Samoa have been substantial,
as the plant employ 950 Samoans, making it the single largest private sector
employer in Samoa (Morgan, 2012).


ODA also played a major role in
Cabo Verde's graduation.


The nature of past graduates'
exports has limited the role of trade-


related ISMs.


Samoa benefited from ad hoc
derogations to a non-LDC-specific
preferential trade arrangement with


Australia.




The Least Developed Countries Report 2016116


G. The utilization of international support
measures by present least developed countries


and their perceived usefulness


To provide a more complete picture of ISMs from the perspective of LDCs
themselves, the UNCTAD secretariat carried out a survey in 2016 on LDCs’
utilization of ISMs and perceptions of their usefulness. Survey questionnaires
were sent to LDC government officials (all but one from ministries of trade and
industry) and United Nations country economists based in LDCs. These elicited
eight responses, all from WTO members in Africa, Asia and the Americas.25


While the findings cannot be considered statistically significant, due to the small
sample size and the limitations inherent in exercises of this nature, they are
nonetheless informative, particularly when considered in conjunction with the
findings of similar surveys and supporting data (CDP secretariat, 2012; WTO,
2013c).


The majority of respondents (some 75 per cent) confirmed that their
countries had made use of SDT provisions in the context of the WTO, but the
extent of reported use varied significantly across agreements and provisions.
Respondents singled out preferential market access, flexibilities in commitments,
and support extended through the EIF on trade-related matters as the most
effective and/or most widely used measures. Conversely, few countries reported
having made use of the flexibilities available to the LDCs under the agreements
on TRIMs, Technical Barriers to Trade, and the Application of Sanitary and
Phytosanitary Measures.26 Comments by respondents trace the uneven use of
the available flexibilities to a variety of causes, ranging from lack of specialized
skills and superficial understanding of the agreements to limited involvement of
the private sector and poor coordination across different ministries (particularly
in relation to notifications to the relevant WTO committees). Lack of funding was
also mentioned as one of the main constraints limiting the use of available policy
space, notably with respect to export and agricultural subsidies.


Questionnaire responses also pointed to continuing difficulties in the
accession process, a consideration that resonates with the concerns voiced
by those LDCs currently in the process of accession. More generally, budget
constraints have long been recognized as a stumbling block to the proactive
participation of LDC delegations in WTO activities, their regular presence in
relevant committee meetings, and ultimately their negotiating capacities.


Despite some significant improvements since the turn of the century, the
quest for development finance remains a key challenge for most LDCs, and
85 per cent of respondents deemed their respective countries’ access to such
finance insufficient to achieve the IPoA targets by 2020. In this respect, FDI
and technical assistance were identified as the areas where the scope for
improvement was greatest.


The large majority of respondents reported some improvements in terms of
aid-management policies, incipient use of innovative sources of development
finance, and to some extent increasing involvement in public–private
partnerships. However, the findings on the management of resource rents
were less encouraging, despite the fact that several of the responding LDCs
are members of the Extractive Industries Transparency Initiative (chapter 2,
subsection D2(b)). Only about half of the respondents considered that there had
been improvements in their respective countries’ ability to retain and manage
resource rents. This sobering assessment is consistent with the mounting
international pressure to tackle illicit financial flows linked to trade mispricing,


LDCs' use of SDT in the context
of WTO varies widely across
agreements and provisions.


LDC officials report continuing
difficulties in the WTO accession


process.


Management of aid flows is seen
as having improved, but that of


resource rents less so.




117CHAPTER 3. The Contribution of International Support Measures to Graduation


which deprive many African fuel and mineral exporters, in particular, of much-
needed financial resources (UNECA, 2015; UNCTAD, 2016).


Serious concerns were also raised by all respondents on the effectiveness
of ISMs related to technology transfer, notably those under article 66.2 of the
TRIPS Agreement. In particular, many responses highlighted the modest overall
pace of technology transfer and adoption, and the intrinsic difficulties of tracing
successful cases of technology transfer to the existence of the ISMs rather than
purely profit-driven private sector investment decisions. While some technical
assistance has been delivered for implementation of the TRIPS Agreement,
further action is also needed to support the development of comprehensive
and coherent STI policy frameworks. The central feature of the development
of productive capacities is a progressive increase in the sophistication of the
productive base; and this depends on absorptive capacities as well as the
transfer of technologies. To be fully effective, technology transfer therefore needs
to be accompanied by broader support, to foster the emergence of vibrant
innovation systems.


Following the Paris Agreement, the overwhelming majority of respondents
acknowledged that the needs and priorities of LDCs in relation to climate
change adaptation and mitigation were increasingly taken into account by the
international community. Beyond this broad acknowledgement, however, “the
devil is in the detail”. Many LDC respondents lamented the lack of systematic
information and technical administrative capacity, which impede access to
climate finance. The two greatest concerns in relation to climate finance were
the uncertainties surrounding the magnitude of disbursements (as opposed
to pledges), and the degree of additionality vis-à-vis development assistance.
Officials also underlined the need to strengthen technical assistance for the
integration of climate change adaptation and mitigation into national development
strategies.


Overall, the survey findings suggest that existing ISMs are often perceived
as insufficient relative to LDCs’ development challenges, while also highlighting
the disadvantages LDCs face in using the available flexibilities effectively and in
accessing adequate funds and technical assistance as a result of their weak
institutional capacities. These findings indicate the need for a two-pronged
approach, aimed at:


(a) Scaling up international commitments towards the LDCs, and
strengthening the available ISMs in line with the ambitious targets of
the IPoA and the Sustainable Development Goals;


(b) Strengthening ongoing capacity development activities in the LDCs,
notably in key ministries, to enable these countries to reap the benefits
of ISMs more fully.


H. Conclusion


Notwithstanding the inevitable limitations to any assessment of their
effectiveness, it seems clear that the existing ISMs are inadequate to the
developmental needs of the LDCs, particularly in the context of the IPoA
graduation target and the Sustainable Development Goals. This confirms and
reinforces the conclusion of The Least Developed Countries Report 2010
(UNCTAD, 2010). Though many existing ISMs are useful and promising in
principle, their effectiveness in practice is often undermined by vague formulation
(notably in the case of best-endeavours clauses), inadequate commitment on
the part of the international community (notably on ODA), insufficient funding
(for example, of climate finance), slow operationalization (for example, of the


Serious concerns remain about the
effectiveness of ISMs related to


technology transfer…


…as well as the magnitude and
additionality of climate finance.


Efforts to strengthen ISMs need
to be complemented by greater
capacity development in LDCs.


Existing ISMs remain inadequate,
particularly in light of the IPoA


graduation target.




The Least Developed Countries Report 2016118


services waiver) and exogenous developments (notably the effects of preference
erosion and the increasing importance of NTBs on preferential market access).


The track record of the most recent initiatives, such as the LDC services
waiver and the Technology Bank, highlights the critical dependence of ISM
effectiveness on viable institutional frameworks (whose establishment may be
time-consuming) and concrete operational mandates aligned with LDCs’ needs
and developmental interests, as well as adequate funding. In the absence of
any of these three elements, even the most laudable initiatives are in danger of
becoming little more than symbolic, and may have the unintended consequence
of overstretching LDCs’ scarce institutional and negotiating capacities in the
quest for benefits of limited economic value.


Nonetheless, the experience of past LDC graduates suggests that at least
some of the existing ISMs, notably preferential market access and ODA, can
play an important role in supporting the graduation process. The findings of the
UNCTAD secretariat survey whose results are reported in this chapter appear
to confirm that current LDCs consider ISMs to be of some value in this context.


The effectiveness of ISMs is also influenced by the capacity of individual LDCs
to leverage them strategically in pursuit of their own development and graduation
agendas. More successful LDCs have capitalized on preferential trade schemes
with their key trade partners to support an incipient process of diversification and
sophistication, moving progressively into new products embodying greater value
addition. Others, however, have failed to translate existing preference margins
into opportunities for export diversification into new products or to new markets.
Likewise, utilization of trade-related SDT varies widely across LDCs, depending
in large part on their awareness and technical capacities, and development of
the necessary productive capacities. The experience of past LDC graduates
also highlights the importance of proactive aid management policies and strong
ownership of a country’s development agenda in enhancing aid effectiveness.


These considerations underline the critical role of LDCs’ institutional
capacities, as well as their productive capacities, as determinants of the
relevance and effectiveness of ISMs. Institutional capacity constraints need to
be taken fully into account in the establishment and design of ISMs to enhance
LDCs’ informed access to them, including through dissemination of information
and technical knowledge, and capacity-building among stakeholders. The
examples of the EIF and NAPAs underline the potential impact of combining the
establishment of ISMs with the provision of related technical assistance.


The international community could undoubtedly do more to improve the
terms of LDCs’ integration into the world economy and to deliver on its own
commitments to support LDCs’ development process through more ambitious
and relevant ISMs; but country ownership remains essential to graduation
with momentum. ISMs should not dictate a country’s graduation strategy, but
rather provide a set of instruments to facilitate its implementation. Accordingly,
LDCs themselves need to exercise strong leadership of their own development
processes, defining their own strategic priorities for structural transformation
and harnessing dedicated support for it. Greater policy consistency, on the part
both of LDCs and of their development partners, is also essential to ensure that
the effectiveness of ISMs is not undermined by external factors, such as the
outcome of bilateral and regional arrangements, or unlawful practices such as
illicit financial flows.


ISM effectiveness depends on
viable institutional frameworks,


alignment with LDCs' needs
and adequate funding…


… but also on LDCs' capacity
to leverage them strategically in


support of their own development
strategies.


The potential contribution of
ISMs to graduation highlights the


importance of institutional capacities
and of countries' ownership of their


development strategies.




119CHAPTER 3. The Contribution of International Support Measures to Graduation


I. Summary


• There are a growing number of ISMs for LDCs, which vary widely in nature,
focus and content. Their relative importance thus differs widely among
LDCs according to their structural characteristics and capacities.


• Despite more than doubling in real terms between 2000 and 2010, ODA
to LDCs remains only half the target level of 0.15–0.20 per cent of donor
GNI to which donors have been committed since the early 1980s, and
progress on aid effectiveness commitments remains very uneven.


• While climate finance has increased, the financing of the LDC Fund is
inadequate and insecure, and LDCs’ access to other funds is limited by
the need to compete with better-resourced ODCs.


• Despite WTO members’ long-standing commitment to facilitate accession
by LDCs, the process remains skewed, and LDCs have continued to face
obstacles.


• Preferential market access is one of the most important ISMs for LDCs,
and progress in this area has boosted their export revenues significantly;
but the benefits are limited by exclusions of sensitive products, small
preference margins for non-agricultural commodities, preference erosion
and restrictive rules of origin.


• While trade preferences for LDCs have been extended to services under
the WTO services waiver, and a substantial number of preferences have
been notified, it is too early to assess their significance.


• SDT provisions under WTO agreements vary widely, from non-binding
“best-endeavours” language to extended implementation periods and
exemptions from commitments; but their overall impact is limited by their
relatively narrow scope and obstacles to their utilization.


• Aid-for-Trade disbursements to LDCs have doubled in real terms since
2005, but the IPoA target of increasing their share of ODA has not been
fulfilled.


• Technology-related ISMs have had little impact in building LDC technological
capacities, but may be enhanced by the operationalization of the Technology
Bank, scheduled to begin in 2017.


• In the past graduation cases, ODA generally played a greater role than
trade preferences, reflecting the large ODA receipts per capita associated
with their small populations, their proactive management of ODA flows, and
the nature of their exports (which limited the effects of trade preferences).


• A survey of LDC officials carried out for this Report highlights both the
insufficiency of existing ISMs and the importance of institutional constraints
in LDCs as an obstacle to their effective use.




The Least Developed Countries Report 2016120


Notes


1 The Midterm Review of the IPoA was held on 27–29 May 2016 in Antalya, Turkey.
2 As mentioned in chapter 1, the concept of graduation from the LDC group was


established only in 1991, 20 years after the establishment of the category itself.
3 Available at www.un.org/ldcportal.
4 A few of the ISMs listed in table 3.1 are also available to some non-LDC developing


countries, notably preferential market access under the African Growth and Opportunity
Act (AGOA) and the Generalized System of Preferences (GSP).


5 In 2012–2014 (the last three years for which data are available) net ODA received
accounted for an average of 8 per cent of GNI in the median LDC, with considerable
heterogeneity across individual countries. In Tuvalu, for example, it accounted for
some 50 per cent of GNI, compared with less than 1 per cent in Angola and Equatorial
Guinea.


6 The imputed share of multilateral aid is the portion of aid delivered by multilateral
institutions which is estimated to have been funded by each donor country. The donor’s
total ODA is estimated by adding this to its bilateral aid (based on https://www.oecd.
org/dac/stats/oecdmethodologyforcalculatingimputedmultilateraloda.htm, accessed
October 2016).


7 Such an assessment would require computing the grant element for each individual
loan, based on its interest rate, maturity and grace period, and aggregating the results
for all loans to each recipient country in each year.


8 Climate change adaptation is understood by the Intergovernmental Panel on Climate
Change (IPCC) as “Adjustment in natural or human systems in response to actual or
expected climatic stimuli or their effects, which moderates harm or exploits beneficial
opportunities”, while mitigation is “An anthropogenic intervention to reduce the
anthropogenic forcing of the climate system; it includes strategies to reduce greenhouse
gas sources and emissions and enhancing greenhouse gas sinks” (Parry et al. 2007,
Appendix I: Glossary).


9 A more detailed explanation of LDCF operations is provided in UNCTAD (2010:71–74).
10 At the time of writing, five LDCs were outside the WTO system, namely Eritrea, Kiribati,


Somalia, Timor-Leste and Tuvalu.
11 For WTO members, preferential market access is legally covered by the “enabling


clause” of the General Agreement on Tariffs and Trade (GATT).
12 No further progress on DFQF was reported during the Tenth WTO Ministerial Conference,


and the Ministerial Declaration issued at the Conference (WTO, 2015a) does not
mention the issue.


13 It should be noted that neither AGOA nor the GSP is LDC-specific, in that both also
apply to some ODCs.


14 Some South-South regional trade agreements also contain SDT provisions for their
LDC members. The South Asian Free Trade Area, for example has SDT provisions in
favour of Afghanistan, Bangladesh, Bhutan and Nepal.


15 While major importing markets generally apply low tariffs to raw materials, it should be
noted that tariff escalation continues to be a hindrance to vertical diversification and
upgrading of LDC exports, including in the minerals sector (UNECA and AUC, 2013,
chapter 3).


16 The potential coverage rate is the ratio between covered and dutiable imports. The
utilization rate is the ratio between imports receiving preferential treatment and those
potentially covered.


17 Eligibility for preferential treatment under AGOA is available to sub-Saharan African
countries that comply with a series of criteria, including protection of private property,
rule of law, elimination of barriers to United States investment, protection of intellectual
property, implementation of social policies and human rights protection. The list of
eligible countries is revised annually by the United States Government. As of October
2016, 27 of the 34 African LDCs were AGOA-eligible, the exceptions being the Central
African Republic, the Democratic Republic of the Congo, Equatorial Guinea, Eritrea,
Guinea-Bissau, Somalia and the Sudan (based on http://trade.gov/agoa/eligibility/
index.asp, accessed October 2016).


18 Australia, Brazil, Canada, Chile, China, the European Union, Hong Kong (China),
Iceland, India, Japan, Liechtenstein, Mexico, New Zealand, Norway, the Republic
of Korea, Singapore, South Africa, Switzerland, Taiwan Province of China, Thailand,
Turkey, the United States and Uruguay.




121CHAPTER 3. The Contribution of International Support Measures to Graduation


19 This does not include the SDT provisions envisaged in the Agreement on Trade Facilitation
as it was not yet in force at the time of writing this Report. The discrepancy between
the total number of SDT provisions (145) and the sum of the provisions of each type
(157) arises because nine provisions are classified in more than one category.


20 SDT provisions in the Trade Facilitation Agreement are not included in the compilation
by WTO (WTO, 2013c), which was the latest available at the time of writing.


21 Aid for Trade is generally divided into four broad areas: economic infrastructure,
productive capacities, trade policy and regulations, and trade-related adjustments.


22 It is important to emphasize that data on aid for STI do not include ODA allocations to
education, which can make an important long-term contribution to building absorptive
capacity.


23 Aside from articles 7 and 66.2, the only explicit references to transfer or dissemination
of technology in the Agreement are in article 8.2 (which recognises the need for
appropriate measures, consistent with the Agreement, “to prevent … the resort to
practices which … adversely affect the international transfer of technology”); and
article 40.1 (which recognizes that “some licensing practices or conditions pertaining
to intellectual property rights which restrain competition … may impede the transfer
and dissemination of technology”).


24 Data from the World Bank, World Development Indicators (accessed 15 September
2016).


25 The respondents were Burkina Faso, Burundi, Cambodia, the Central African Republic,
the Gambia, Haiti, Nepal and the Niger.


26 This confirms the findings of CDP secretariat (2012).


References


Alesina A and Dollar D (2000). Who gives foreign aid to whom and why? Journal of
Economic Growth. 5(1):33–63.


Bouët D and Laborde D (2011). Duty free, a round for free and the least developed countries.
In: Martin W and Mattoo A, eds. Unfinished Business? The WTO’s Doha Agenda.
World Bank. Washington, D.C.


Briceño-Garmendia CM and Benitez DA (2011). Cape Verde’s infrastructure: A continental
perspective. Policy Research Working Paper No. 5687. World Bank. Washington, D.C.


CDP (2010). Strengthening International Support Measures for the least developed
countries. CDP Policy Note. Committee for Development Policy, United Nations
Department for Economic and Social Affairs. United Nations publication. Sales No.
E.10.II.A.14. New York.


CDP secretariat (2012). Survey on international support measures specific to the least
developed countries related to WTO provision and preferential market access:
Responses by LDCs. Committee for Development Policy secretariat, United Nations
Department of Economic and Social Affairs. New York.


Cortez AL, Kinniburgh I and Mollerus R (2014). Accelerating development in the least
developed countries through international support measures: findings from country
case studies. CDP Background Paper No. 22. United Nations Department of Economic
and Social Affairs. New York.


Craft B, Tshering K, Manchulu Onduri F and Funsani Gama S (2015). Technology
development and transfer, the least developed countries and the future climate regime:
considerations for the post-2020 international response to climate change. LDC Paper
Series. International Institute for Environment and Development. London.


Delay S (2005). Why does aid management in Samoa succeed? A note. Public Administration
and Development. 25(5):433–435.


Dollar D and Levin V (2006). The increasing selectivity of foreign aid, 1984–2003. World
Development. 34(12):2034–2046.


Enari ATS (2016). Report on Samoa’s post-graduation assessment. Background paper
prepared for The Least Developed Countries Report 2016. UNCTAD. Geneva.


Enos J (1995). In Pursuit of Science and Technology in sub-Saharan Africa: The Impact
of Structural Adjustment Programmes. Routledge. London.


Foray D (2009). Technology transfer in the TRIPS age: The need for new types of partnerships
between the least developed and most advanced economies. ICTSD Intellectual
Property and Sustainable Development Series No. 23. International Centre for Trade
and Sustainable Development. Geneva.




The Least Developed Countries Report 2016122


Hallaert JJ (2012). Aid for Trade: Chronicle of a WTO attempt at coherence. Global
Education Monitoring Policy Brief. Social Science Research Network. Rochester, New
York. Available at https://ssrn.com/abstract=2155793 (accessed 14 October 2016).


ITC (2010). Export Impact for Good 2010: Market Access, Transparency and Fairness in
Global Trade. International Trade Centre. Geneva.


Klasen S, Martínez-Zarzoso I, Nowak-Lehman F and Brückner M (2016). Trade preferences
for least developed countries. Are they effective? Econometric evidence. Unpublished
manuscript.


Lui D (2016). Country case study on Maldives. Background paper prepared for The Least
Developed Countries Report 2016. UNCTAD. Geneva.


Mishra T, Ouattara B and Parhi M (2012). International development aid allocation
determinants. Economics Bulletin. 32(2):1385–1403.


Mogae C (2016). The road less travelled: Botswana’s journey from least developed country
to middle-income country. Background paper prepared for The Least Developed
Countries Report 2016. UNCTAD. Geneva.


Moon S (2008). Does TRIPS art 66.2 encourage technology transfer to LDCs? An analysis
of country submissions to the TRIPS council (1999–2007). ICTSD Policy Brief No. 2.
International Centre for Trade and Sustainable Development. Geneva.


Morgan W (2012). New rules to expand Pacific exports? Only if action is taken fast. March.
Available at http://devpolicy.org/new-rules-to-expand-pacific-exports-only-if-action-
is-taken-fast20120326/ (accessed 2 November 2016).


Nakhooda S, Watson C, Schalatek L and Caravani A (2015). The global climate finance
architecture. Climate Funds Update. Overseas Development Institute, London, and
Heinrich Böll Stiftung North America, Washington, D.C.


Nicita A and Seiermann J (2016). G20 policies and LDC export performance. Policy Issues
in International Trade and Commodities, Study Series No. 25. UNCTAD/ITCD/TAB/77.
UNCTAD. Geneva.


ODI (2014). Climate finance: Is it making a difference ? A review of the effectiveness of
multilateral climate funds. Overseas Development Institute. London.


OECD (1978). Recommendation on Terms and Conditions of Aid. Organisation for
Economic Co-operation and Development. Paris. Available at http://www.oecd.org/
dac/stats/31426776.pdf (accessed 2 November 2016).


OECD (2008). Paris Declaration on Aid Effectiveness and the Accra Agenda for Action.
Organisation for Economic Co-operation and Development. Paris.


OECD (2012). Aid Effectiveness 2011: Progress in Implementing the Paris Declaration.
OECD Publishing. Organisation for Economic Co-operation and Development. Paris.


OECD (2014). Making Development Co-operation More Effective: 2014 Progress Report.
OECD Publishing. Organisation for Economic Co-operation and Development. Paris.


OECD (2015). 2015 global aid prospects and projections. Organisation for Economic
Co-operation and Development. Paris. Available at http://www.oecd.org/dac/aid-
architecture/2015%20FSS%20Survey%20flyer.pdf (accessed 30 September 2016).


Parry ML, Canziani OF, Palutikof JP, van der Linden PJ and Hanson CE, eds. (2007).
Contribution of Working Group II to the Fourth Assessment Report of the
Intergovernmental Panel on Climate Change. Cambridge University Press. Cambridge.


Resende dos Santos J (2016). Cape Verde: Impacts and lessons of graduation from the
LDC list. Background paper prepared for The Least Developed Countries Report
2016. UNCTAD. Geneva.


Rodriguez Mendoza M, Schloemann H, Bellmann C and Hijazi H (2016). The LDC services
waiver – operationalized? A first look at preferences granted, constraints persisting,
and early conclusions to be drawn. Background paper prepared for UNCTAD. Geneva.


Tenzing J, Gaspar-Martins G and Jalow BP (2015). LDC perspectives on the future of
the Least Developed Countries Fund. LDC Paper Series. International Institute for
Environment and Development. London.


UNCTAD (2006). The Least Developed Countries Report 2006: Developing Productive
Capacities. United Nations publication. Sales No. E.06.II.D.9. New York and Geneva.


UNCTAD (2007). The Least Developed Countries Report 2007: Knowledge, Technological
Learning and Innovation for Development. United Nations publication. Sales No. E.07.
II.D.8. New York and Geneva.


UNCTAD (2009). Enhancing the Role of Domestic Financial Resources in Africa’s
Development: A Policy Handbook. United Nations publication. UNCTAD/ALDC/
AFRICA/2009/1. New York and Geneva.


UNCTAD (2010). The Least Developed Countries Report 2010: Towards a New International
Development Architecture for LDCs. United Nations publication. Sales No. E.10.II.D.5.
New York and Geneva.




123CHAPTER 3. The Contribution of International Support Measures to Graduation


UNCTAD (2012). The Least Developed Countries Report 2012: Harnessing Remittances
and Diaspora Knowledge to Build Productive Capacities. United Nations publication.
Sales No. E.12.II.D.18. New York and Geneva.


UNCTAD (2013). Non-tariff Measures to Trade: Economic and Policy Issues for Developing
Countries. Developing Countries in International Trade Studies. United Nations
publication. UNCTAD/DITC/TAB/2012/1. New York and Geneva.


UNCTAD (2014a). The Least Developed Countries Report 2014: Growth with Structural
Transformation – A Post-2015 Development Agenda. United Nations publication.
Sales No. E.14.II.D.7. New York and Geneva.


UNCTAD (2014b). Transfer of Technology and Knowledge Sharing for Development: Science,
Technology and Innovation Issues for Developing Countries. UNCTAD Current Studies
on Science, Technology and Innovation No. 8. United Nations publication. UNCTAD/
DTL/STICT/2013/8. New York and Geneva.


UNCTAD (2014c). Studies in Technology Transfer: Selected cases from Argentina, China,
South Africa and Taiwan Province of China. UNCTAD Current Studies on Science,
Technology and Innovation No. 7. United Nations publication. UNCTAD/DTL/
STICT/2013/7. New York and Geneva.


UNCTAD (2016). Trade misinvoicing in primary commodities in developing countries: The
cases of Chile, Côte d’Ivoire, Nigeria, South Africa and Zambia. UNCTAD/SUC/2016/
2. UNCTAD. New York and Geneva.


UNECA (2015). Economic Report on Africa 2015: Industrializing through Trade. United
Nations Economic Commission for Africa. Addis Ababa.


UNECA (2013). Building Trade Capacities for Africa’s Transformation – A Critical Review of
Aid for Trade. United Nations Economic Commission for Africa. Addis Ababa.


UNECA and AUC (2013). Economic Report on Africa 2013: Making the Most of Africa’s
Commodities: Industrializing for Growth, Jobs and Economic Transformation. United
Nations Economic Commission for Africa. Addis Ababa.


UNFCCC (2011). Report of the Conference of the Parties on its sixteenth session, held
in Cancun from 29 November to 10 December 2010. FCCC /CP/2010/7/Add.1.
United Nations Framework Convention on Climate Change. New York and Geneva.
Available at http://unfccc.int/resource/docs/2010/cop16/eng/07a01.pdf (accessed
13 October 2016).


United Nations (1983a). The least developed countries in the 1980s: Report by the Secretary-
General of the United Nations Conference on the Least Developed Countries. The
Least Developed Countries and Action in Their Favour by the International Community:
Selected Documents of the United Nations Conference on the Least Developed
Countries (Paris, 1–14 September 1981). United Nations. New York.


United Nations (1983b). Substantial New Programme of Action for the 1980s for the Least
Developed Countries. The Least Developed Countries and Action in Their Favour by the
International Community. Selected Documents of the United Nations Conference on the
Least Developed Countries (Paris, 1–14 September 1981). United Nations. New York.


United Nations (2011). Programme of Action for the Least Developed Countries for the
Decade 2011–2020. A/CONF.219/3/Rev.1. United Nations. New York. Available at
https://documents-dds-ny.un.org/doc/UNDOC/GEN/N11/351/51/PDF/N1135151.
pdf?OpenElement (accessed 13 October 2016).


United Nations (2015). Taking Stock of the Global Partnership for Development. MDG Gap
Task Force Report 2015. United Nations publication. Sales No. E.15.I.5. New York.


UNSGHLP (2015). Feasibility Study for a United Nations Technology Bank for the least
developed countries, by the United Nations Secretary-General’s High-Level Panel on
the Technology Bank for the least developed countries. United Nations. New York.


Uprety B (2015). Financing climate change adaptation in LDCs April. Available at http://
www.iied.org/financing-climate-change-adaptation-ldcs.


Van Grasstek C (2013). The History and Future of the World Trade Organization. World
Trade Organization. Geneva.


World Bank (2015). Low-income developing countries and G-20 trade and investment
policy. Trade and competitiveness global practice. World Bank report No. 99933.
Washington, D.C.


WTO (2001). Ministerial Declaration. Adopted on 14 November 2001. WT/MIN(01)DEC/1.
World Trade Organization. Geneva.


WTO (2002). Annex 4. Guidelines for accession for least-developed countries. WT/L/508.
World Trade Organization. Geneva.


WTO (2005). Doha Work Programme. Ministerial Declaration. Adopted on 18 December
2005. WT/MIN(05)/DEC. World Trade Organization. Geneva.


WTO (2006). Recommendations of the Task Force on Aid for Trade. WT/AFT/1. World
Trade Organization. Geneva.




The Least Developed Countries Report 2016124


WTO (2012). Report on the implementation of article 66.2 of the TRIPS Agreement. TRIPS
Council. IP/C/W/580. World Trade Organization. Geneva.


WTO (2013a). Bali Ministerial Declaration. Adopted on 7 December 2013. WT/MIN(13)/
DEC. World Trade Organization. Geneva.


WTO (2013b). Preferential rules of origin for least developed countries – Draft ministerial
decision. WT/MIN(13)/W/14. World Trade Organization. Geneva.


WTO (2014). Challenges faced by LDCs in complying with preferential rules of origin under
unilateral preference schemes. Committee on Rules of Origin. G/RO/W/148. World
Trade Organization. Geneva.


WTO (2015a). Nairobi Ministerial Declaration. Adopted on 19 December 2015. WT/MIN(15)/
DEC. World Trade Organization. Geneva.


WTO (2015b). Preferential Rules of Origin for Least Developed Countries. Ministerial decision
of 19 December 2015. WT/MIN(15)/47–WT/L/917. World Trade Organization. Geneva.


WTO (2015c). WTO and least developed countries: Twenty years of supporting the
integration of least developed countries into the multilateral trading system. WT/
COMTD/LDC/W/61. World Trade Organization. Geneva.


WTO (2016a). Special and differential treatment provisions in WTO agreements and
decisions. Committee on Trade and Development. WT/COMTD/W/219. World Trade
Organization. Geneva.


WTO (2016b). LDC Group post-Nairobi priorities in the WTO. Communication from Benin
on behalf of the Least Developed Countries (LDC) Group. WT/GC/W/717. General
Council, Trade Negotiations Committee – Sub-Committee on Least Developed
Countries. World Trade Organization. Geneva.




CHAPTER


POST-GRADUATION
PROCESSES AND CHALLENGES




The Least Developed Countries Report 2016126


A. Introduction


Since the adoption of the 2011 Programme of Action for the Least Developed
Countries for the Decade 2011–2020 (the Istanbul Programme of Action (IPoA)),
the feasibility of its graduation target has received considerable attention
(Guillaumont and Drabo, 2013; Kawamura, 2014). Much less attention has
been devoted to the question of least developed countries’ (LDCs) development
trajectory beyond graduation, apart from discussion among practitioners of
the smooth transition process. This may reflect the focus of the international
community on achieving the graduation target itself, or a perception that, once
LDCs have graduated, they will be similar to other developing countries (ODCs),
and thus face analogous development challenges.


This Report has argued that the process of development beyond graduation
merits much greater attention, even during the pre-graduation period — that
graduation itself should not be the primary focus of LDCs and their development
partners, but should rather be viewed as one milestone in LDCs’ longer-term
sustainable development. Graduation does not represent a solution to all
the graduating country’s development challenges; neither does a new set of
challenges emerge out of nothing at this point. Rather, the challenges of the
post-graduation period are a continuation of those that characterized the pre-
graduation period.


Equally, the development trajectory that leads a country to graduation has
critically important implications for the challenges and vulnerabilities it will face
after graduation, and the means at its disposal to address them. This highlights
the importance of the path dependency of the development process — that is,
the considerable role of the past processes that have led a country to its present
situation in determining its future course. In planning a national graduation
strategy, it is thus imperative to look ahead to the post-graduation period and
anticipate the new and continued challenges this will present, while also taking
account of the loss of access to LDC-specific support measures as a result of
graduation itself.


This chapter is devoted to the post-graduation period, outlining the key
implications of LDC graduation, and outlining the main development challenges
LDCs may face in this period. Section B discusses the smooth transition
process, providing some examples from the four countries that have already
graduated. Section C focuses on the economic implications of LDC graduation,
including an analysis of the potential costs of losing LDC-specific preferential
access to Group of Twenty (G20) markets.1 Section D examines some of the
main development challenges that graduating countries are likely to face beyond
graduation: the persistence of commodity dependence; the risk of reversion to
LDC status; and the “middle-income trap”.


B. Smooth transition


The concept of smooth transition embodies the principle that LDC-specific
support should be phased out in a gradual and predictable manner following
graduation, so as not to disrupt the development progress of the graduating
country, pursuant to General Assembly resolutions 59/209, 66/213 and 67/221,
among others. The smooth transition period does not have a prescribed length,
although the few systematic provisions that have been granted are of three
years (CDP and UNDESA, 2015). However, monitoring of development progress
by the Committee for Development Policy (CDP) is limited to a maximum of nine


The process of development beyond
graduation merits attention
as well as graduation itself.


How LDCs achieve graduation
matters for their post-graduation


performance.


The challenges and vulnerabilities
a country will face after graduation


depend on the process leading
to graduation.




127CHAPTER 4. Post-Graduation Processes and Challenges


years beyond graduation, as is the relevant intergovernmental process (figure
4.1). While smooth transition arrangements are of importance to all graduating
countries, they are particularly critical in the case of island LDCs, due to their
greater openness to international trade, reliance on external aid and exposure to
exogenous shocks, as discussed in chapter 2 of this Report.


Notwithstanding various General Assembly resolutions calling for effective
smooth transition measures, the evidence is mixed. While many trading partners
have adopted a policy of extending their LDC-specific trade preferences
to graduating countries for a transition period, in line with General Assembly
resolution 59/209, this is not universal.2 Moreover, with the notable exception
of access to the Enhanced Integrated Framework (EIF), there is a lack of
formal procedures for smooth transition in relation to the special and differential
treatment (SDT) provisions accorded to LDCs at the World Trade Organization
(WTO). There is also little clarity regarding smooth transition procedures for
other international support measures (ISMs), such as bilateral and multilateral
official development assistance (ODA) allocations, aid modalities, and technical
assistance.


As well as arguably discouraging LDC governments from seeking graduation
in the past, this lack of clarity has been an obstacle to graduating countries’
preparation of smooth transition strategies during the three-year period preceding
their effective graduation, as mandated by General Assembly resolution 59/209.
In the absence of a systematic approach to smooth transition, the ability of a
graduating country to retain access to ISMs for a transition period is heavily
dependent on its ability to mobilize technical, financial and political support from
its trade and development partners, bilaterally and multilaterally. As well as a
thorough understanding of the availability and relevance of LDC-specific ISMs,
this requires proactive engagement by the government with its partners and
strong negotiating capacities (box 4.1).


Overall, while the impacts of graduation should not be exaggerated, this
assessment confirms that “further work needs to be done on smooth transition
in order to provide assurances to LDCs that the international community will
ensure that the continued development progress is a shared objective, and
that assistance to the country will not be withdrawn in a manner inconsistent
with that objective” (CDP, 2012:12). The importance of addressing this issue
effectively is all the greater in the context of the IPoA graduation target, whose
fulfilment would imply a much greater number of graduation cases than in the
past.


Figure 4.1. Smooth transition procedures reporting by graduating and graduated countries and the CDP


Preparation of transition
strategy, 3-year period


Graduation
Implemention of transition strategy


3-years Triennially


Transition period
report procedures


3 years after
General Assembly takes


note of CDP recommendation
Post-graduation report procedures


Graduating country


Invited to report annually to
CDP on the preparation of the


transition strategy


Graduation becomes effective


Graduated country


Reports annually to the CDP
on the implementation of the
smooth transition strategy for


3 years


Graduated country


Reports to the CDP as a
complemenet to two triennial


reviews on implementation of the
smooth transition strategy


CDP


Monitors development progress in
its annual reports to ECOSOC


CDP


Monitors development
progress in consultation


with graduated country for 3
years and reports results to


ECOSOC


CDP


Monitors development progress in
consultation with graduated country


as a complement to two triennial
reviews and reports results to


ECOSOC


Source: CDP and UNDESA (2015).


ISMs are phased out gradually
after graduation under a “smooth


transition” process.


There is a lack of formal procedures
and clarity regarding smooth


transition for most ISMs…


…so that maintaining access to
ISMs depends on the graduating
country's negotiating capacities.




The Least Developed Countries Report 2016128


Box 4.1. The smooth transition experience of recent LDC graduates


This box outlines the smooth transition and post-graduation experiences of the three recent LDC graduates, on the basis
of country case studies conducted for this Report. Since specific procedures and principles to guide graduating LDCs through
the transition from the category were introduced only in 2005 (with General Assembly resolution 59/2092), they were not
applicable to the case of Botswana at the time of its graduation.


Cabo Verde


Cabo Verde is characterized by heavy dependence on external financing — notably ODA and remittances — and a high
level of structural vulnerability. Consequently, concern about the effects of its graduation centred on the potential loss of ODA,
which averaged 18 per cent of gross national income (GNI) in the 10 years before its graduation. While ODA has fallen since
graduation, it has remained relatively high at 14 per cent of GNI (section E.3).


Cabo Verde’s main trade partner is the European Union, from which the Government succeeded in obtaining a three-
year extension of its eligibility under the Everything But Arms initiative (currently the standard practice for beneficiaries of the
initiative), followed by an additional two-year transition period until 1 January 2012. In late 2013, Cabo Verde became one
of the first 10 countries to qualify for the European Union’s enhanced Generalized System of Preferences-plus (GSP+) trade
regime, which is available to vulnerable countries that have ratified and implemented international conventions relating to
human and labour rights, environment and “good governance”.


In 2007, Cabo Verde signed a Special Partnership Agreement — a cooperation facilitation framework (unrelated to the
Economic Partnership Agreement (EPA) under negotiation in the context of the Economic Community of West African States)
covering a broad set of issues, from stability and regional integration to development and poverty reduction. It also concluded
a Mobility Agreement with five European Union member States (France, Luxembourg, Netherlands, Portugal and Spain)
allowing temporary and circular migration by Cabo Verdeans. Cabo Verde also approached multilateral agencies, including the
World Bank and the African Development Bank, to ensure that it retained partial access to concessional financing (though at
somewhat greater cost) through classification as a “blend” country. It also benefited from an additional three-year transitional
period for access to the EIF, with a further two years subject to approval by the EIF Board.


While growth of the tourism sector provided a means of reducing Cabo Verde’s dependence on aid and remittances, it
was adversely affected by the global financial and economic crisis and by weak recoveries in key partner countries (notably
in the European Union). Partly as a consequence, the country is now at a crossroads, facing challenges to the development
of a more sustainable growth model and a more diversified productive base.


Maldives


Maldives has continued to experience relatively robust economic performance and significant progress in terms of human
capital accumulation since its graduation from the LDC category in 2011. However, it remains heavily dependent on tourism
and highly vulnerable to shocks, as indicated by the persistently high level of its economic vulnerability index (EVI).


Like Cabo Verde, Maldives benefited from a three-year extension of trade preferences under the Everything But Arms
initiative, until the beginning of 2014. However, it ceased to be eligible for GSP preferences at the beginning of 2014 (as a
result of its classification by the World Bank as an upper-middle-income country for three consecutive years), compounding
the effect of its loss of preferential treatment. While the country’s fishery industry survived the loss of trade preferences in the
European Union market and Japan, this has certainly contributed to the sector’s declining importance, notably in the case
of the tuna industry.


The graduation of Maldives from the LDC category was instrumental in the negotiation of General Assembly resolution
65/286, which extended travel benefits (for example, to attend meetings of the United Nations and WTO) for a period of three
years after graduation. The country also retained full access to EIF funds until 2013, and partial funding on a project-by-project
basis for an additional two years, until the end of 2015.


While the success of Maldives’ smooth transition strategy to date has been somewhat mixed, the latest (2015) CDP
monitoring report found no sign of significant reversal in socioeconomic progress since the country’s graduation in January 2011.


Samoa


Since Samoa graduated only in 2014, the conclusions that can be drawn about the transition process are limited. Like
other Cabo Verde and Maldives, Samoa continues to enjoy duty-free quota-free (DFQF) treatment under the Everything But
Arms initiative for a period of three years; and a similar transition period has been negotiated, at least for some key products,
with other trading partners. China has agreed to extend zero tariff treatment on noni juice and other agro-processing products
until 2017, while discussions are under way with Japan on a similar arrangement for noni juice, fish exports and organic
products such as honey, vanilla and cocoa.


Samoa also continues to enjoy access to concessional borrowing from multilateral financial institutions, and to receive
technical assistance and financial support to attend United Nations meetings. As in other cases, the country has also been
granted a three-year transition period by the EIF.




129CHAPTER 4. Post-Graduation Processes and Challenges


In this context, the international community should consider, in particular:


• Promoting a deeper understanding of the technicalities of LDC graduation
and its implications;


• Ensuring that countries continue to receive support appropriate to their
respective development situations during the graduation process and in
the post-graduation period;


• Defining a systematic and “user-friendly” set of smooth transition procedures
applicable to all LDC graduates (notably in relation to international trade,
where ISMs appear to be more significant);


• Providing enhanced technical assistance for the preparation of smooth
transition strategies.


C. Economic implications of graduation


Notwithstanding the smooth transition process, graduation from the LDC
category ultimately entails the phasing out of the graduating country’s access
to LDC-specific ISMs; and this has potentially wide-ranging implications for the
economy. Although the graduation process itself lasts at least six years, and
smooth transition procedures may extend LDC treatment somewhat longer,
these implications need to be taken into account in developing a national
graduation strategy, to avoid sudden shocks to the economy. The main purpose
of the monitoring process summarized in figure 4.1 is to ensure a thorough
assessment of these graduation-related challenges in the specific context of
each graduating country.


While this process is, by its nature, context-specific, the present section
outlines some more general considerations and potential challenges relating
to LDC graduation, from the perspective of “graduation with momentum”. This
discussion is divided into three subsections, examining respectively external
financing, trade preferences, and SDT provisions in relation to WTO. The last
of these subsections focuses on the extended implementation period for
LDCs in the WTO Agreement on Trade-related Aspects of Intellectual Property
Rights (TRIPS Agreement), reflecting the importance of technology in the post-
graduation period.


1. EXTERNAL FINANCING


Since the great majority of LDCs run structural current account deficits and
are heavily reliant on external finance to support their capital accumulation,
the implications of graduation for external financing are potentially critical.
Disruptions to access to such financing may result in balance-of-payments
problems, which could jeopardize the continuation of the development process
that led to graduation.


There is little reason to expect LDC graduation as such to have any
direct effect on private capital flows such as foreign direct investment (FDI),
remittances and portfolio investment. While a graduating country’s ceasing to be
an LDC might in principle lead to some improvement in investors’ perceptions
of its attractiveness as a destination for investment, the major determinants
of FDI flows are unlikely to be directly affected by LDC status (as opposed to
the development that underlies graduation).3 Such determinants include, in
particular, market size, resource and/or skill endowments, infrastructure, labour
costs, tax and regulatory frameworks, and trade and investment agreements
(Blonigen, 2005; Blonigen and Piger, 2014; Walsh and Yu, 2010; UNCTAD,


Further work is needed to ensure
smooth transition and support
commensurate with graduating
countries' development needs.


LDCs' graduation strategies need
to take account of the phasing
out of ISMs after graduation.


The implications of graduation
for access to external finance


are potentially critical…


…but there is little reason to expect
significant direct effects on private


capital flows.




The Least Developed Countries Report 2016130


2012b, 2013). These factors appear to have a differential impact across sectors.
As might be expected, natural resource endowments are the main driver of
resource-seeking FDI flows, while competitive exchange rates and flexible
labour markets appear to attract FDI in manufacturing, and FDI in the tertiary
sector appears to be sensitive to independence of the judiciary and the quality
of infrastructure (Walsh and Yu, 2010).


Similarly, good macroeconomic performance and a reliable financial sector
tend to increase the likelihood that remittances are sent through official channels
and are mobilized into diaspora investment (UNCTAD, 2012a); but there is little
reason to expect LDC status to have any direct effect.


In principle, graduation could have a more significant effect on access to
ODA and other concessional financing, to the extent that donors use the LDC
status of recipient countries explicitly as a criterion for aid allocations, as some
studies have proposed (Guillaumont, 2008; Guillaumont et al., 2015). However,
surveys conducted by the CDP suggest that donors rarely use LDC status to
guide their ODA allocations, and that few bilateral donors have established LDC-
specific programmes (CDP, 2012). Thus, despite the target of 0.15–0.20 per
cent of donor countries’ gross national income (GNI) for ODA to LDCs, there
is little apparent evidence of an “LDC effect” on aid allocations.4 Equally, it has
long been recognized that aid allocations are affected, not only by recipient
countries’ needs, but also by donors’ perceptions of their institutional quality,
and by strategic and political considerations (Alesina and Dollar, 2000; Dollar
and Levin, 2006). A recent analysis suggests that recipient countries’ needs
(represented by income per capita and the physical quality of life index5) are
relatively weak determinants of ODA receipts, particularly in the case of bilateral
aid (Mishra et al., 2012).


In the case of multilateral donors, a more important issue is that of eligibility
criteria for concessional financing windows. As of 2016, all LDCs except
Equatorial Guinea (classified by the World Bank as a high-income country)
maintained at least partial access to concessional lending both from the World
Bank (through the International Development Association (IDA)) and from their
respective regional development banks (table 4.1). Four LDCs (Kiribati, Sao Tome
and Principe, Tuvalu and Vanuatu) and all three recent graduates (Cabo Verde,
Maldives and Samoa)6 retain IDA eligibility under the “small-island exception”,7


and six LDCs through the World Bank’s “blend” category (which combines IDA
resources with non-concessional lending to provide a more limited degree of
concessionality).


However, eligibility for concessional financing windows is not generally linked
to LDC status as such, but rather to GNI per capita — although the GNI-per-
capita threshold used for this purpose by the World Bank and the regional
development banks is very close to the LDC graduation threshold.8 Thus the
fact of graduation (as opposed to the increase in income that allows the income
criterion to be met) does not have a direct effect on access to concessional
finance. Even where access to concessional financing windows is reduced
or lost as a result of increasing GNI per capita, access to non-concessional
windows is generally maintained, so that the effect is on the cost of multilateral
financing rather than its availability.


At the same time, the development progress underlying graduation should,
in principle, give rise to a progressive reduction in the need for ODA and other
concessional financing during the course of the pre-graduation period. Similar
considerations apply to the more specific case of Aid for Trade: LDCs tend
to receive more Aid for Trade funding than ODCs relative to GDP, but not in
absolute per-capita terms (De Melo and Wagner, 2016). Thus, there seems to be
little reason to anticipate a sudden decline in Aid for Trade following graduation,


While graduation could have a
greater effect on ODA, LDC status is
rarely used to guide aid allocations.


In the case of multilateral donors,
eligibility for concessional financing


windows is more important and
it is not affected by graduation.


Eligibility for concessional financing
affects the cost of financing


rather than the amount.


The development progress
underlying graduation reduces


the need for ODA.




131CHAPTER 4. Post-Graduation Processes and Challenges


Table. 4.1. LDCs' and LDC graduates' access to concessional windows, selected multilateral development banks, 2016


International Development
Association (IDA)


African Development
Fund (AfDF)


Asian Development
Fund (AsDF)


Inter-American
Development


Bank


Afghanistan IDA only AsDF only


Angola IDA only


Bangladesh IDA only
Blend AsDF - ordinary


capital resource
Benin IDA only AfDF only


Bhutan Blend IDA-IBRD AsDF only


Burkina Faso IDA only AfDF only


Burundi IDA only AfDF only


Cambodia IDA only AsDF only


Central African Republic IDA only AfDF only


Chad IDA only AfDF only


Comoros IDA only AfDF only


Democratic Republic of the Congo IDA only AfDF only


Djibouti Blend IDA-IBRD AfDF-Gap


Equatorial Guinea


Eritrea IDA only (inactive) AfDF only


Ethiopia IDA only AfDF only


Gambia IDA only AfDF only


Guinea IDA only AfDF only


Guinea-Bissau IDA only AfDF only


Haiti IDA only Grant resources


Kiribati Small-island exception AsDF only


Lao People's Democratic Republic Blend IDA-IBRD AsDF only


Lesotho Blend IDA-IBRD AfDF-Gap


Liberia IDA only AfDF only


Madagascar IDA only AfDF only


Malawi IDA only AfDF only


Mali IDA only AfDF only


Mauritania IDA only AfDF only


Mozambique IDA only AfDF only


Myanmar IDA only AsDF only


Nepal IDA only AsDF only


Niger IDA only AfDF only


Rwanda IDA only AfDF only


Sao Tome and Principe Small-island exception AfDF-Gap


Senegal IDA only AfDF only


Sierra Leone IDA only AfDF only


Solomon Islands IDA only AsDF only


Somalia IDA only (inactive) AfDF only


South Sudan IDA only AfDF only


Sudan IDA only (inactive) AfDF only


Timor-Leste Blend IDA-IBRD
Blend AsDF - ordinary


capital resource
Togo IDA only AfDF only


Tuvalu Small-island exception AsDF only


Uganda IDA only AfDF only


United Republic of Tanzania IDA only AfDF only


Vanuatu Small-island exception AsDF only


Yemen IDA only


Zambia Blend IDA-IBRD Blend


Botswana


Cabo Verde
Blend IDA-IBRD and


Small-island exception
Graduating to AfDB


Maldives Small-island exception AsDF only


Samoa Small-island exception AsDF only


Source: UNCTAD secretariat compilation, based on http://ida.worldbank.org/about/borrowing-countries; http://www.afdb.org/en/about-us/
corporate-information/african-development-fund-adf/adf-recipient-countries/; http://www.adb.org/site/adf/adf-partners, and http://
www.iadb.org/en/about-us/idb-financing/fund-for-special-operations-fso,6063.html (accessed July 2016).




The Least Developed Countries Report 2016132


especially as the main LDC-specific programme (the EIF) has well-established
smooth transition procedures.


This assessment is broadly supported by the experiences of the three most
recent LDC graduates (Cabo Verde, Maldives and Samoa) as shown in figure
4.2.9 In both Cabo Verde and Maldives, a greater share of total official flows
took the form of loans following LDC graduation, indicating some reduction in
the degree of concessionality. (While this was not apparent for Samoa, data
are available for only one year after graduation.) It is possible, however, that
this pattern partly reflects country-specific issues, such as dependence on a
small number of donors and/or limited capacity to negotiate favourable smooth
transition terms, as well as the impact of the global financial and economic crisis
on bilateral ODA budgets. The progressive reduction of the share of grants in
official flows following LDC graduation is also consistent with bilateral donors’
responses to the survey conducted by the CDP secretariat (CDP, 2012).


Graduation has a more direct impact on financing for climate change
adaptation, as graduating countries lose access to LDC-specific funding
sources, most notably the LDC Fund. While they retain access to other
sources of climate financing, such as the Green Climate Fund, their access to
such sources depends on their ability to compete effectively with ODCs – a
competition in which they would continue to be hampered even after graduation
by their relatively limited institutional and human capacities (UNCTAD, 2009).
In principle, 50 per cent of Green Climate Fund financing is to be allocated to
particularly vulnerable countries, including small island developing States (SIDS)
and African States as well as LDCs. However, graduating Asian LDCs would not
benefit from this target, while graduating African countries and SIDS would need
to compete with better-resourced ODCs within these categories.


Overall, while graduation may entail some costs in terms of reduced
concessionality of official flows and reduced access to climate financing, it is


Figure 4.2. Composition of total official flows before and after LDC graduation


73


57
55 56


75


94


27


35
29


34


24


6
0


7


16
10


1 00


10


20


30


40


50


60


70


80


90


100


4 years before
graduation


4 years after
graduation


Pe
r c


en
t


4 years before
graduation


4 years after
graduation


4 years before
graduation


1 year after
graduation


Cabo Verde Maldives Samoa


Average share of
ODA grants and grant-like


Average share of
ODA loans


Average share of
other official flows


Source: UNCTAD secretariat calculations, based on data from the OECD, Creditor Reporting System database (https://stats.oecd.org/
Index.aspx?DataSetCode=CRS1) (accessed June 2016).


Notes: The periods used to compute the four-year averages are as follows (pre-graduation and post-graduation, respectively):
Cabo Verde 2004–2007 and 2008–2011; Maldives 2007–2010 and 2011–2014; and Samoa 2010–2013 and 2014.
In the case of Samoa, only one year after graduation is considered because no data are available after 2014.
No pre-graduation data are avfailable for Botswana.


Graduation has a more direct impact
on financing for climate change


adaptation.


Overall, graduation is unlikely
to trigger abrupt changes in access


to development finance or
private flows.




133CHAPTER 4. Post-Graduation Processes and Challenges


unlikely to result in abrupt changes in countries’ access to other development
finance or to private flows such as FDI. The experiences of the LDC graduates to
date also suggest that governments can attenuate graduation costs related to
ODA flows significantly by engaging proactively with key development partners
at an early stage to negotiate ad-hoc transitional arrangements.


2. TRADE PREFERENCES


The most visible trade-related implication of LDC graduation is the loss of
preferential market access under LDC-specific schemes such as the European
Union’s Everything But Arms initiative and of the concessions granted to the
LDCs under the Global System of Trade Preferences among developing
countries (GSTP).


The impact on a graduating country’s exports of losing preferential market
access is determined by three main factors:


(a) The coverage and structure of preferential schemes for which the LDC
is currently eligible, but will cease to be eligible (possibly after transition
period) as a result of graduation;


(b) The product composition of exports, and their distribution across markets;


(c) The fallback tariffs to which the country’s exports will be subject after
graduation.


With respect to the first element, a growing number of developed countries
and ODCs have adopted some form of preferential schemes for LDCs over time,
making significant progress towards the goal (enshrined in both the Sustainable
Development Goals and the WTO Doha Agenda) of providing duty-free quota-
free (DFQF) market access to LDCs’ exports.10 However, these schemes differ
significantly in terms of product coverage, exclusion lists (that is, tariff lines for
which no liberalization is granted) and preference margins (Laird, 2012) (table 4.2).
Their overall impact thus depends on the interplay between the specific features
of the various schemes, and the composition and geographical distribution
of LDCs’ exports. It is well-established that the effectiveness of preferential
schemes is weakened by their incomplete coverage, particularly given the heavy
concentration of LDC exports in a very narrow range of products. Moreover,
the remaining tariffs and tariff peaks often affect sectors that are commercially
relevant for LDCs, notably agricultural products, textiles and apparel (Borchert
et al., 2011; Laird, 2012). Utilization of preferential schemes, and hence their
effectiveness, also appears to be affected positively by the size of preference
margins, and negatively by the costs of compliance with the associated rules
of origin (International Trade Centre, 2010; Keck and Lendle, 2012; Hakobyan,
2015).


While graduation ultimately results in ineligibility for such LDC-specific
preference schemes, this does not necessarily mean that the graduate’s exports
will be subject to most-favoured nation (MFN) treatment, as graduating countries
may continue to benefit from bilateral, regional or other (non-LDC-specific)
preferential arrangements with trade partners. In these circumstances, LDC
graduates may retain a significant margin over the MFN rate, at least limiting
the degree of preference loss. For example, on graduation, an LDC participating
in the GSTP agreement would lose the benefits of the special concessions
accorded to LDCs by other GSTP members; but it would retain the broader
preferential treatment stemming from GSTP membership.


Similarly, in cases where the LDC preferential scheme is part of the broader
GSP, an LDC graduate would cease to benefit from some special concessions,
but would in principle retain some degree of preferential access as an ODC.11 In
some cases, graduating countries may even escape preference losses in some
markets entirely, for example through unilateral preference schemes such as the


LDC graduation entails the loss of
preferential market access under


LDC-specific schemes.


The impact of graduation depends
on the interplay between the
features of each scheme and
each LDC's export patterns…


…and the tariffs applicable to its
exports after graduation, which
may be affected by other trade


agreements.




The Least Developed Countries Report 2016134


United States’ African Growth and Opportunity Act (AGOA) or membership of
a bilateral or regional trade agreement whose provisions are not dependent on
LDC status.12


Since all the above factors are context-specific and depend on the particular
trade pattern and trade agreements of each country, their potential impacts
should be carefully assessed in preparation for graduation, taking into account
the future trade context. The ex-ante impact assessment and vulnerability profile
produced at the time of graduation are intended in part to provide the basis for
such an assessment.


While such an exercise is beyond the scope of this Report, this section
seeks to estimate the order of magnitude of potential preference losses in G20
markets related to LDC graduation, based on the methodology presented
in annex 1. Figure 4.3 shows the results of this analysis for the 38 LDCs for
which data are available, based on simulations of two hypothetical scenarios,
representing the upper and lower bounds of the potential impacts. In the first,
a single LDC graduates, so that only its own tariffs are affected. Consequently,
the changes in the tariffs it faces are translated directly into an equivalent change
in its preference margins. In the second, all LDCs graduate, and the effects on
each are estimated. In this case, the direct effect on preference margins of the


Table 4.2. Overview of selected preferential market access schemes in favour of LDCs


Preference-
granting country/


economy


Number of
dutiable tariff
lines (national


tariff lines)*


Duty-free coverage (major exclusions)
References on
notifications


Australia 0 100% WT/COMTD/N/18


Canada 105 98.6% (dairy, eggs and poultry) WT/COMTD/N/15/Add.1,
WT/COMTD/N/15/Add.2
and WT/COMTD/N/15/
Add.3


China .. 97% WT/COMTD/N/39 and WT/
COMTD/N/39/Add.1/Rev.1
WT/COMTD/LDC/M/76


European Union 91 99.0% (arms and ammunitions) WT/COMTD/N/4/Add.2,
WT/COMTD/N/4/Add.4,
WT/COMTD/N/4/Add.5 and
WT/COMTD/N/4/Add.6


India 674 94.1% (meat and dairy products, vegetables, coffee, tobacco, iron
and steel products, copper products, etc.)


WT/COMTD/N/38


Japan 197 97.9% (rice, sugar, fishery products, articles of leather) WT/COMTD/N/2/Add.14
and WT/COMTD/N/2/
Add.15


Republic of Korea 1 180 90.4% (meat, fish, vegetables, food products, etc.) WT/COMTD/N/12/Rev.1
and WT/COMTD/N/12/
Rev.1/Add.1


Russian
Federation (2012)


6 885 38.1% (exclusions cover a wide range of tariff lines including
petroleum products, copper, iron ores, articles of leather, articles of
apparel and clothing, etc.)


WT/COMTD/N/42


Turkey (2011) 2 384 79.7% (meat, fish, food, steel products, etc.) -


United States**
1 864 82.6% (dairy products, sugar, cocoa, articles of leather, cotton,


articles of apparel and clothing, other textiles and textile articles,
footwear, watches, etc.)


WT/COMTD/N/1/Add.7 and
WT/COMTD/N/1/Add.8


Source: UNCTAD secretariat compilation, based on Laird (2012) and WTO (2014).
Notes: The table only reports preferential trade arrangements by G20 member countries; in addition, as of June 2016 the following countries/


territories have notified to the WTO some preferential market access schemes in favour of the LDCs: Chile, Iceland, Kazakhstan,
Kyrgyzstan, Morocco, New Zealand, Norway, Switzerland, Taiwan Province of China, Tajikistan, and Thailand.


* Tariff lines may vary from year to year due to change in national tariff nomenclature.
** In addition to the GSP, the United States provides two other major preferential schemes of relevance for LDCs, namely the Car-


ibbean Basin Trade Partnership Act (CBTPA) - which grants duty-free access for most products originating from Haiti and other
Caribbean countries - and the African Growth and Opportunity Act (AGOA) granting further tariff reductions (compared to the GSP)
to 37 qualifying African countries, 24 of which LDCs.


The potential impact of losing
LDC-specific trade preferences is
estimated at $4.2 billion annually


for LDCs as a whole.




135CHAPTER 4. Post-Graduation Processes and Challenges


Figure 4.3. Effects of preference losses related to LDC graduation vis-à-vis G20 countries


-20.0 -17.5 -15.0 -12.5 -10.0 -7.5 -5.0 -2.5 0.0 2.5 5.0 7.5


LDCs total


Zambia


Yemen


Vanuatu


Percentage of exports


Uganda


Togo


United Republic of Tanzania


Sudan


Somalia


Solomon Islands


Sierra Leone


Senegal


Rwanda


Niger


Nepal


Myanmar


Mozambique


Mauritania


Mali


Malawi


Madagascar


Liberia


Lesotho


Haiti


Guinea


Gambia


Ethiopia


Eritrea


Djibouti


Chad


Central African Republic


Cambodia


Burundi


Burkina Faso


Bhutan


Benin


Bangladesh


Angola


Afghanistan


If each LDC is the only one to graduateIf all LDCs graduate


Source: UNCTAD secretariat calculations.


reduction in tariffs faced by each country is at least partly offset by the reduction
in tariffs faced by others, so that the effect on preference margins is ambiguous.


This analysis indicates a potential effect on LDCs of losing LDC-specific
preferential treatment in the G20 countries equivalent to a reduction of 3–4 per
cent of their merchandise export revenues. If extrapolated to all 48 LDCs, this
would amount to more than $4.2 billion per year (table 4.3). It should be noted,
however, that these effects may be diminished over time to the extent that tariffs
on imports from ODCs are reduced (for example, under mega-regional trade
agreements). This would have the effect of reducing LDCs’ preference margins
in the markets concerned, and thus the costs of losing preferential market
access on graduation.


The greatest adverse effects would be on exports for which tariffs are
generally highest for non-LDCs, namely agricultural commodities, textiles and


The greatest trade effects are
on agricultural commodities,


textiles and apparel.




The Least Developed Countries Report 2016136


apparel (figure 4.4). At the other end of the scale, low tariffs on energy, mining
and wood products (regardless of LDC status), mean that exports in these
categories would not be greatly affected by loss of preferential market access.


Consequently, the potential impact of loss of preferential market access
differs widely between LDCs and across regions, primarily reflecting differences
in their export patterns and fallback tariffs. African LDCs are typically less
adversely affected than Asian LDCs for two main reasons.


• First, African LDCs’ exports are more dominated by primary commodities,
whose tariffs tend to be lower regardless of LDC status (with the exception
of agricultural commodities and animal products).


• Second, while existing regional trade agreements — the Association of
Southeast Asian Nations (ASEAN)–China and ASEAN–India agreements —
would allow Asian LDCs to retain significant preference margins in regional
markets after graduation, they would experience a significant worsening
of their access to key developed country markets. Many African LDCs,
conversely, would retain significant preference margins in major Western
markets even after graduation, owing particularly to AGOA and the EPA
initiative.13 It should be noted, however, that reciprocal trade agreements
have implications on the import side as well as the export side, and that
EPAs require a progressive opening of some 80 per cent of the domestic
markets of signatory countries to European Union exports.


For Asian LDCs, the greatest adverse effects would be on textile and apparel
exports. In the case of African LDCs, the main impact would be on exports of
agricultural commodities other than wood and animal products, and to a lesser
extent on non-agricultural exports other than energy and mining products,
textiles and apparel. In a few cases, such as Mali and Vanuatu, exports of animal
products or fish would also be substantially affected, mainly because of high
fallback tariffs in key export markets.


It may be observed in figure 4.3 that two countries — Afghanistan and
Bhutan — show the apparently perverse result of a positive impact of losing
preferences in the scenario of all LDCs graduating. This highlights an important
point: that the cost of graduation depends in part upon which other LDCs have
already graduated.


As noted above, in the scenario of all countries graduating, each LDC’s
loss of preferences is partly offset by the effects of competing LDCs also losing
preferences, which limits the impact on preference margins. Afghanistan and
Bhutan represent outliers in this respect, in that the cost of their own loss of
LDC-specific market access is more than offset by the gains resulting from
other LDCs losing such access. This arises largely because both countries have
preferential bilateral trade agreements with India, so that the effect of graduation


Table 4.3. Annual effects of preference losses extrapolated to all LDCs, by region


Exports to G20
countries


($ millions)


Percentage effect
(weighted average of
LDCs in the region)


Overall effect of losing LDC
preferential market access


($ millions)


Total LDCs 145 497 -2.9 -4 270


African LDCs 104 572 -1.7 -1 817


Asian LDCs 40 475 -5.2 -2 093


Island LDCs 450 -2.4 -11


Source: UNCTAD secretariat calculations.
Notes: Exports of all LDCs (including those without detailed tariff data) to the G20 countries


mentioned in annex 1 of the main text. Since the table refers to LDCs by region, effects
are computed in the hypothetical scenario where all LDCs have graduated, and should
be regarded as a "lower bound" of potential export losses related to the phasing out of
LDC-specific preferential schemes.


African LDCs will be typically less
adversely affected than Asian LDCs.


The cost of graduation depends in
part upon which other LDCs have


already graduated…


…because the value of preferential
market access increases as other


LDCs lose such access
on graduation.




137CHAPTER 4. Post-Graduation Processes and Challenges


on access to the Indian market will at most be very limited. Conversely, other
LDCs will face much greater tariff increases on graduation, so that the preference
margins of Afghanistan and Bhutan in the Indian market will be increased
significantly. This has a considerable impact, as both Afghanistan and Bhutan
are landlocked countries neighbouring India, which is consequently their major
export destination.


Though an extreme case, this illustrates a more general issue — while each
country loses from its own loss of preference at graduation, it gains (generally
only slightly) from an increase in its preference margins when other LDCs
graduate. Equally, as other LDCs graduate, the value of preferential market
access is increased, as the group of countries receiving market preferences
becomes progressively smaller, increasing overall preference margins. Thus,
the cost of graduation becomes somewhat greater over time as other LDCs
graduate.


It should also be noted that the analysis presented above takes account
only of the direct effects on trade of loss of preferences, based on the current
geographical distribution and product composition of exports. Additional
dynamic costs may arise to the extent that the reduction in competitiveness
associated with loss of preferential access limits opportunities for export
diversification through sales of new products and/or entry into new markets.


Beyond its direct trade benefits, preferential access to major export markets
can play a significant role in attracting FDI, notably in the context of buyer-
driven global value chains (UNCTAD and UNIDO, 2011; UNCTAD, 2013). For
example, the locational decisions of investors from Taiwan Province of China
who have established clothing factories in Lesotho and Madagascar have been
motivated not only by relatively low labour costs, but also, more importantly,
by the opportunity to exploit preferential access to the United States market
under AGOA (Staritz and Morris, 2013; Morris and Staritz, 2014). Where LDC-
specific market preferences play a similar role, loss of preferential market
access following graduation (and any related uncertainty with respect to smooth
transition provisions) could affect a country’s attractiveness for FDI in certain
sectors.


There are two possible means of avoiding or limiting the impact of loss of
preferential market access, although neither is costless or necessarily reliable.
First, a graduating country may be able to maintain preference margins following
graduation, at least in part, through bilateral negotiations with its trade partners.
However, this would require a proactive effort, matched by the required
negotiating capacities, and (as in any negotiation) success might well require
concessions to be made in other areas. Much also depends on the goodwill
of trade partners. Bilateral negotiations over preferential treatment may also
be influenced by other factors, such as geographical proximity, geopolitical
considerations, and natural resource endowments considered to be of strategic
importance. Such considerations create a playing field that is by no means level,
and by no means always advantages those in greatest need.


Second, policy measures can be implemented to counter the reduction
in competitiveness arising from loss of preferential market access. However,
this may entail substantial costs, for example for additional investments in
infrastructure. Such measures are also needed, over time, as a result of
preference erosion. This is a subject of concern for Bangladesh, for example,
whose successful development of manufacturing and export integration into the
world economy has depended significantly on its preferential market access as
an LDC, under WTO, GSP schemes with bilateral partners such as the European
Union and Canada, and regional trade agreements such as the South Asian
Free Trade Area and the Asia–Pacific Trade Agreement (Rahman, 2014).


Additional indirect costs may arise
from the loss of opportunities for


export diversification or entry
into new markets…


…or reduced attractiveness to
foreign investors seeking market


access.


Graduating countries can reduce
graduation costs if they negotiate


market preferences with their
trading partners.


It may be possible to maintain
preference margins after graduation.


Preference loss can be
compensated by measures


to increase competitiveness.




The Least Developed Countries Report 2016138


Figure 4.4. Effects of preference losses related to LDC graduation by sector


-20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0%


Zambia


Yemen


Vanuatu


United Rep. of Tanzania


Uganda


Togo


Sudan


Somalia


Solomon Islands


Sierra Leone


Senegal


Rwanda


Niger


Nepal


Myanmar


Mozambique


Mauritania


Mali


Malawi


Madagascar


Liberia


Lesotho


Haiti


Guinea


Gambia


Ethiopia


Eritrea


Djibouti


Chad


Central African Rep.


Cambodia


Burundi


Burkina Faso


Bhutan


Benin


Bangladesh


Angola


Afghanistan


Panel A: if all LDCs graduate


Animal products Vegetable products Wood products, furniture Other, agricultural


Energy products Mining and metal ores Metals


Apparel Textile Other nonagricultural




139CHAPTER 4. Post-Graduation Processes and Challenges


Figure 4.4 (contd.)


-18% -16% -14% -12% -10% -8% -6% -4% -2% 0%


Zambia


Yemen


Vanuatu


United Rep. of Tanzania


Uganda


Togo


Sudan


Somalia


Solomon Islands


Sierra Leone


Senegal


Rwanda


Niger


Nepal


Myanmar


Mozambique


Mauritania


Mali


Malawi


Madagascar


Liberia


Lesotho


Haiti


Guinea


Gambia


Ethiopia


Eritrea


Djibouti


Chad


Central African Rep.


Cambodia


Burundi


Burkina Faso


Bhutan


Benin


Bangladesh


Angola


Afghanistan


Panel B: if only individual LDC graduates


Animal Products Vegetable Products Wood Prod. Furniture Other, agricultural


Energy products Mining and Metal Ores Metals


Apparel Textiles Other, nonagricultural


Source: UNCTAD secretariat calculations.
Note: The following LDCs are not included in this figure due to lack of data: the Comoros, the Democratic Republic of the Congo, Equa-


torial Guinea, Guinea-Bissau, Kiribati, the Lao People’s Democratic Republic, Sao Tome and Principe, South Sudan, Timor-Leste
and Tuvalu.




The Least Developed Countries Report 2016140


3. SPECIAL AND DIFFERENTIAL TREATMENT


By the end of the smooth transition period, graduating countries have lost
access to all LDC-specific SDT provisions under WTO rules and WTO-compliant
regional trade agreements, as well as those afforded by their trading partners,
retaining access only to the typically less generous provisions available to ODCs.


As discussed in chapter 3, the substantive content of many such provisions
is relatively limited (as, for example, in the cases of the General Agreement on
Trade in Services and the Agreement on Trade-related Investment Measures);
and LDCs’ ability to make full and optimal use of them is constrained by their
institutional and productive capacities (UNCTAD, 2006, 2009). Nonetheless,
this loss of entitlement can limit policy space and flexibility in designing and
implementing economic policies and strategies for economic diversification and
development of productive capacities in the post-graduation period. There are
also some other adjustment costs, for example arising from the need for bilateral
negotiations with trading partners on new trade and investment arrangements
and for more rapid implementation of WTO rules as a result of shorter transition
periods.


The TRIPS Agreement is possibly the most significant case of potential
graduation costs arising from loss of eligibility for SDT provisions (although
the benefits of such provisions may be limited in WTO member countries that
have bilateral or regional trade or investment agreements that include TRIPS-
like or “TRIPS-plus” provisions on intellectual property rights). The extended
implementation periods to which LDCs are entitled under the TRIPS Agreement
(as discussed in chapter 3) provide potentially important policy space for the
development of technology-related sectors. The still longer implementation
period for the pharmaceuticals sector has provided the policy space and the
legal certainty needed to foster the development of a pharmaceutical industry in
Bangladesh, for example.


The loss of eligibility for the extended implementation period for LDCs under
the TRIPS Agreement also gives rise to substantial additional financial costs
and administrative burdens for graduating countries, to establish domestic legal
and institutional intellectual property frameworks consistent with the TRIPS
Agreement requirements for non-LDCs, as well as potentially higher prices
for technology-intensive products. In principle, the SDT provisions under the
TRIPS Agreement also provide a basis for LDCs to request specific technical
assistance for technology transfer and the adaptation of foreign technologies
to local conditions, although the extent of such assistance provided under such
provisions appears to have been limited to date.


Despite the limitations of SDT provisions for LDCs and the constraints to their
utilization, their loss as a result of graduation can give rise to some additional
costs beyond those arising from loss of preferential market access. However,
such costs may be more limited for those countries that have attained a certain
level of productive capacities and economic diversification and have thus
established a self-sustaining sustainable development trajectory – that is, those
that have achieved graduation with momentum. Thus, the nature of graduation
itself is a significant factor in determining the SDT-related costs of graduation.


4. CONCLUSION


Overall, the above assessment suggests that any losses arising from the
phasing out of LDC-specific support are in most cases likely to be relatively
limited. Graduating countries can generally fall back on non-LDC-specific
support measures (such as different financing windows, other types of


Loss of access to SDT provisions
can limit policy space and flexibility
and give rise to adjustment costs…


…most notably in the case of the
TRIPS Agreement…


…but such costs may be more
limited for countries which


have achieved graduation with
momentum.


Overall, the costs of losing access
to LDC-specific ISMs are likely


to be limited.




141CHAPTER 4. Post-Graduation Processes and Challenges


preferential treatment, and SDT provisions for ODCs), which, though less
generous than those available to them before graduation, still provide a certain
degree of support. This is the counterpart of the shortcomings of LDC-specific
ISMs discussed in chapter 3 — that the loss of eligibility for them can be
expected to have a commensurately limited impact, and certainly should not be
insurmountable. This is confirmed by the experiences of past graduates.


This by no means negates the need for a smooth transition. On the contrary,
strong leadership and sound preparation of the transition towards the post-
graduation phase is essential, to anticipate the needs and challenges arising
from graduation, to devise appropriate strategies, and to limit the adjustment
costs. This includes early efforts to map and address the changes needed to
institutional and legal frameworks to comply with newly applicable disciplines,
notably in the context of WTO agreements. The expected increase in the
number of LDC graduates in the coming years highlights the need for the
international community to systematize smooth transition procedures, to
increase understanding of them, and to enhance their overall effectiveness, so
as to ensure that future graduates continue to receive support commensurate
with their development needs.


D. Post-graduation challenges


As highlighted in chapter 1 of this Report, graduation should be regarded
as a milestone in a country’s long-term development trajectory, and not as a
goal in itself. Development challenges neither disappear nor begin anew upon
graduation. Rather, the challenges of the post-graduation period represent an
evolution of those experienced prior to graduation; and this evolution is itself, in
part, a product of the development process that leads to graduation. Equally,
while graduation in principle indicates greater resilience and/or reduced exposure
to structural vulnerabilities, many LDCs (notably SIDS) can be expected to remain
particularly prone to exogenous shocks even after graduation. It is noteworthy in
this context that no LDC graduate has yet reached the graduation threshold for
the EVI. Moreover, loss of eligibility for SDT provisions may result in a narrowing
of the policy space available to address these challenges.


This indicates a substantial degree of path dependency, in that a graduating
country’s economic prospects after graduation are significantly affected by
the economic and social development trajectory that leads it to graduation, as
well as its use of the smooth transition process and the broader international
environment following its graduation. In this respect, many LDCs are likely to
face one or more of three major challenges beyond graduation: persistence
of commodity dependence; a risk of reversion to LDC status; and the middle-
income trap. These challenges are discussed in turn below.


1. PERSISTENT COMMODITY DEPENDENCE


Despite low international commodity prices, recent trends suggest that
commodity dependence will remain a major feature of several LDC graduates
(notably Angola, Equatorial Guinea and Timor-Leste), as it is of many ODCs,
particularly in the lower-middle-income range (UNCTAD, 2015a). As discussed
in chapter 2 of this Report, commodity exports are expected to play a major
role in generating export revenues in most of the pre-2025 graduates, with
the exception of manufactures exporters (Bangladesh, Bhutan and Lesotho)
and service exporters (Nepal, Sao Tome and Principe, and Vanuatu). Unless
graduating countries in the other (fuel, mineral and agricultural) export categories


There is a need to systematize
smooth transition procedures.


The challenges of the post-
graduation period represent an


evolution of those experienced prior
to graduation.


Such challenges include persistent
commodity dependence, the risk
of reversion to LDC status and


the middle-income trap.


Many graduates will remain heavily
dependent on commodities.




The Least Developed Countries Report 2016142


can find some means of escaping commodity dependence, they can be
expected, in varying degrees, to face similar problems after graduation to those
they have confronted as LDCs.14


In the overwhelming majority of LDCs, primary commodities account for a
considerable proportion of export revenues and play a key role as a source of
employment and livelihoods (in the case of agricultural commodities) or public
revenues (in the case of fuels and minerals). This is unlikely to change abruptly
on graduation.15 While numerous African LDCs, in particular, depend heavily
on fuels and minerals for export revenues, LDCs’ commodity-dependence is
exemplified across LDCs more generally by the role of the agricultural sector.
While this employs some two thirds of the LDC labour force, it is characterized by
slow labour productivity growth, chronic underinvestment, limited transformation
of raw materials and intermediate inputs, and widespread poverty among
smallholder farmers and landless labourers (UNCTAD, 2015b).


While commodity dependence is in itself an important source of economic
vulnerability, in the case of LDCs it is typically exacerbated by two additional
factors: a high import propensity (notably of fuels), which plays an essential role
in ensuring the full utilization of productive capacities (UNCTAD, 2004); and
chronic current account deficits (figure 4.5).16 Not only do LDCs rely on foreign
savings to sustain their capital accumulation, but this reliance is frequently
reinforced by major adverse terms-of-trade shocks. While such shocks may be
mitigated to some extent by official finance, this exposes LDCs to risks of real
exchange rate depreciation, import compression, reductions in much-needed
investment and slowdowns of economic activity (Cavallo et al., 2016).


Figure 4.5. Commodity dependence and current account balance, 2012–2014


Angola


Bangladesh


Nepal


Timor-Leste


Tuvalu


Zambia


0


10


20


30


40


50


60


70


80


90


100


-50 -40 -30 -20 -10 0 10 20 30 40 50


Sh
ar


e
of


c
om


m
od


iti
es


in
m


er
ch


an
di


se
e


xp
or


ts


Current account balance as share of GDP


Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed July 2016).


In LDCs, commodity dependence
is compounded by high import


propensities and chronic current
account deficits.




143CHAPTER 4. Post-Graduation Processes and Challenges


2. THE RISK OF REVERSION


The LDC classification system has four features designed to limit the risk of
graduating countries falling back into the LDC category. First, the thresholds for
graduation are set at levels significantly more demanding than those for inclusion
in the group, to reduce the risk that economic setbacks after graduation will
result in the country again becoming eligible for LDC status. Second, unlike
the inclusion criteria, graduation criteria must be met in two consecutive
triennial reviews, to ensure that statistical eligibility for graduation is not a result
of temporary changes in indicators; and the transition process is designed to
ensure that graduation actually reflects long-term structural progress (section B).
Third, several of the indicators used are averaged over time, so as to reduce the
impact of short-term fluctuations. Fourth, rather than recommending graduation
automatically on the basis of the graduation criteria alone, the CDP also takes
account of broader considerations not captured by the criteria. On several
occasions, consideration of qualitative factors has led to graduation being
delayed (chapter 1).


Despite these in-built precautions, reversion of graduates to the LDC
category is not impossible. A country could, in principle, graduate by narrowly
meeting the graduation threshold(s), without having acquired sufficient resilience
or having built a sufficiently solid and diversified productive base to sustain its
development progress.


This is by no means only a theoretical possibility. Some ODCs that have
never previously been classified as LDCs have met the thresholds for inclusion
in the LDC category, but have not entered the group because their governments
have declined to accept LDC status (CDP and UNDESA, 2015). While any
country can encounter growth setbacks, this is a greater risk for LDCs due to
their particular vulnerability, whose structural causes do not necessarily end with
graduation.


For some LDCs, environmental risks are of particular importance (figure 4.6).
Most LDCs are characterized by a high level of vulnerability to environmental
threats, as a result of their particular exposure to the multidimensional impacts
of climate change; their less resilient infrastructure; and their heavy reliance
on natural resources, and particularly on rain-fed agriculture. As the effects of
climate change are expected to intensify in the coming years, these factors
pose considerable and multifaceted challenges to LDCs, reinforcing the
already considerable pressure on their natural resources (IPCC, 2015). This
may negatively affect the prospects of LDCs and LDC graduates alike, in some
cases potentially increasing the risk of a standstill or reversal of the development
process.


The risk of reversion may be increased for countries that graduate in the near
future to the extent that the international context for development becomes more
challenging in the short and medium term. The sluggish growth rate of the world
economy and global trade has led to concerns about “secular stagnation”, which
translates directly into weak demand for exports from LDCs and graduates by
limiting the ability of large economies to absorb additional imports. This may
be expected to dampen the effect of foreign demand on LDCs’ growth and
structural transformation (Teulings and Baldwin, 2014; UNCTAD, 2016b).


The LDC classification system
is designed to limit the risk of


graduating countries reverting to
LDC status…


…but such reversion is
not impossible.


For some LDCs, environmental
vulnerability is particularly


important…


…and the risk of reversion may be
increased by a more challenging
global economic environment.




The Least Developed Countries Report 2016144


Fi
gu


re
4


.6
. C


lim
at


e-
re


la
te


d
ris


ks
a


nd
p


ot
en


tia
l f


or
ri


sk
re


du
ct


io
n


Re
gi


on
al


ke
y


ri
sk


s
an


d
po


te
nt


ia
lf


or
ri


sk
re


du
ct


io
n


G
la


ci
er


s,
sn


ow
, i


ce


an
d/


or


pe
rm


af
ro


st


Ri
ve


rs,
la


ke
s,


flo
od


s a
nd


/o
r


dr
ou


gh
t


Te
rr


es
tr


ia
l


ec
os


ys
te


m
s


M
ar


in
e


ec
os


ys
te


m
s


Co
as


ta
l e


ro
si


on


an
d/


or
s


ea
le


ve
l


eff
ec


ts
W


ild
fir


e
Li


ve
lih


oo
ds,


h
ea


lth
an


d/
or


e
co


no
m


ic
s


Fo
od



pr


od
uc


tio
n


Ph
ys


ic
al


s
ys


te
m


s
Bi


ol
og


ic
al


s
ys


te
m


s
H


um
an


a
nd


m
an


ag
ed


s
ys


te
m


s


A
us


tra
la


si
a


A
si


a


In
cr


ea
se


d
ris


ks
to



co


as
ta


l i
nf


ra
st


ru
ct


ur
e


an
d


lo
w


-ly
in


g
ec


os
ys


te
m


s


In
cr


ea
se


d
flo


od
d


am
ag


e
to


in
fr


as
tr


uc
tu


re
a


nd


se
tt


le
m


en
ts


Si
gn


ifi
ca


nt
c


ha
ng


e
in


c
om


po
si


tio
n


an
d


st
ru


ct
ur


e
of


c
or


al
re


ef
s


ys
te


m
s


In
cr


ea
se


d
m


as
s


co
ra


l
bl


ea
ch


in
g


an
d


m
or


ta
lit


y


In
cr


ea
se


d
da


m
ag


es


fr
om


ri
ve


r a
nd


c
oa


st
al



ur


ba
n


flo
od


s
H


ea
t-


re
la


te
d


hu
m


an
m


or
ta


lit
y


In
cr


ea
se


d
da


m
ag


es


fr
om


w
ild


fir
es


Ri
sk


s
fo


r l
ow


-ly
in


g
co


as
ta


l a
re


as


Lo
ss


o
f l


iv
el


iho
od


s,
se


tt
le


m
ent


s,
in


fra
st


ru
ct


ure
,


ec
os


ys
te


m
se


rv
ic


es
an


d
ec


on
om


ic
st


ab
ili


ty


H
ea


t-
re


la
te


d
hu


m
an


m
or


ta
lit


y


In
cr


ea
se


d
dr


ou
gh


t-
re


la
te


d w
at


er
a


nd


fo
od


s
ho


rt
ag


e


Re
du


ce
d


fo
od


p
ro


du
ct


io
n


an
d


qu
al


ity


In
cr


ea
se


d w
at


er
re


st
ric


tio
ns


In
cr


ea
se


d
da


m
ag


es
fr


om


riv
er


a
nd


c
oa


st
al


fl
oo


ds


Ve
ct


or
- a


nd
w


at
er


-
bo


rn
e


di
se


as
es




Re
du


ce
d


cr
op


p
ro


du
ct


iv
ity


a
nd



liv


el
ih


oo
d


an
d


fo
od


s
ec


ur
ity




Co
m


po
un


de
d


st
re


ss


on
w


at
er


re
so


ur
ce


s


In
cr


ea
se


d
flo


od
d


am
ag


e
to



in


fr
as


tr
uc


tu
re,


li
ve


lih
oo


ds


an
d


se
tt


le
m


en
ts




In
cr


ea
se


d
da


m
ag


es


fr
om


e
xt


re
m


e
he


at


ev
en


ts
a


nd
w


ild
fir


es


Re
du


ce
d w


at
er


av
ai


la
bi


lit
y


an
d


in
cr


ea
se


d
flo


od
in


g
an


d
la


nd
sl


id
es


N
or


th
A


m
er


ic
a


Ce
nt


ra
l a


nd
S


ou
th


A
m


er
ic


a


A
fr


ic
a


Eu
ro


pe


Th
e


O
ce


an


Sm
al


l i
sl


an
ds


Co
as


ta
l i


nu
nd


at
io


n
an


d
ha


bi
ta


t l
os


s


Ri
sk


s
fo


r e
co


sy
st


em
s


Ri
sk


s
fo


r h
ea


lth


an
d


w
el


l-b
ei


ng


U
np


re
ce


de
nt


ed
c


ha
lle


ng
e


s,
es


pe
ci


al
ly


fr
om


ra
te


o
f c


ha
ng


e


Po
la


r R
eg


io
ns


(A
rc


tic
a


nd
A


nt
ar


ct
ic


)


Sp
rea


d
of


ve
cto


r-b
or


ne
d


ise
as


es


D
ist


rib
ut


ion
al


sh
ift


a
nd


re
du


ce
d


fis
he


rie
s c


at
ch


po
te


nt
ia


l a
t lo


w
la


tit
ud


es


Ri
sk


le
ve


lw
ith


cu
rr


en
ta


da
pt


at
io


n
Ri


sk
le


ve
lw


ith
hi


gh
ad


ap
ta


tio
n


V
e


ry


lo
w


N
ea


rt
erm


(2
03


0–
20


40
)


Pr
es


en
t


Lo
ng


te
rm


(2
08


0–
21


00
)2


°C 4°
C


V
e


ry


h
ig


h


R
is


k
le


ve
l


M
ed


iu
m


Po
te


nt
ia


lf
or


ad
di


tio
na


l
ad


ap
ta


tio
n


to
re


du
ce


ris
k


no
t a


ss
es


se
d


no
t a


ss
es


se
d


Re
p


re
se


nt
at


iv
e


ke
y


ri
sk


s
fo


r
e


ac
h


re
g


io
n


fo
r


R
is


k
le


ve
ls


a
re


n
ot


n
ec


es
sa


ril
y


co
m


pa
ra


bl
e


ac
ro


ss
re


gi
on


s.


S
ou


rc
e:


IP
C


C
(2


01
5)


.




145CHAPTER 4. Post-Graduation Processes and Challenges


3. THE MIDDLE-INCOME TRAP


Like ODCs, graduating LDCs may face challenges in sustaining economic
growth sufficiently to progress from low to middle income and from middle
to high income, rather than being caught in the middle-income trap.17 While
this issue is often regarded as lying well beyond LDCs’ graduation horizon, 18
of the 48 LDCs are currently classified by the World Bank as middle-income
countries, and one as a high-income country.18 Equally, all LDC graduates
remain in the middle-income group, suggesting that the persistence of structural
vulnerabilities, from infrastructure gaps to low levels of human capital, may limit
their ability to progress to the high-income category.


The challenges of economic convergence are demonstrated by the relatively
low (and arguably declining) probability of moving from low- and middle-income
groups to high-income level, and the increasing probability of falling back
into a lower category (UNCTAD, 2016b). While there is no consensus on a
rigorous definition of the middle-income trap (box 4.2), or even on its existence,
the concept can provide insights into the policy challenges that productivity
slowdowns and other key transitions present for structural transformation and
graduation with momentum (Gill and Kharas, 2015; Agenor, 2016) it has become
popular among policy makers and researchers.


Explanations of the middle-income trap can be divided into three broad
categories. The first emphasizes the transition from a growth paradigm driven
primarily by capital accumulation to one founded on a knowledge-based
economy and growth of total factor productivity (Eichengreen et al., 2013;
Abdychev et al., 2015). According to this interpretation, the middle-income
trap arises from the progressive exhaustion of potential gains from capital
accumulation and of underemployed labour, progressively weakening the
country’s growth prospects.19


The second interpretation focuses primarily on the evolution of a country’s
comparative advantage (Jankowska et al., 2012). As domestic labour costs
increase, countries may become squeezed between lower-cost economies that
progressively crowd out their labour-intensive exports and more sophisticated
countries with greater competitiveness in high-value-added products. This
suggests that the process of structural transformation is far from automatic, and
that countries may become stalled at a middle level of export sophistication.


The third proposed explanation focuses on political and institutional
frameworks, including the corrosive role of inequality on social capital and
reform coalitions. According to this account, the transition to a knowledge-
based society requires complex policies and considerable coordination, which
may tax existing administrative capacities. This may be especially problematic
where political capacities are weakened by the fragmentation of social groups
and potential support coalitions (Keijzer et al., 2013; Doner and Schneider,
forthcoming).


None of these explanations, in itself, is fully satisfactory (UNCTAD, 2016b).
However, they have a fundamental commonality: the central role of structural
transformation in the development process. From an LDC perspective, the
debate about the middle-income trap thus represents an important reminder
of the imperative of maintaining the momentum of structural transformation,
and of establishing the foundations for a viable future development trajectory
as an integral part of graduation strategies. In particular, it demonstrates that
the importance of structural transformation and the challenges to achieving it
are not limited to the earliest stages of development, but remain throughout the
course of development.


Graduating LDCs may later be
caught in a “middle-income trap”.


This concept can be useful to
understand some of the policy
challenges for graduation with


momentum.


The middle-income trap highlights
the key role of structural


transformation in development.




The Least Developed Countries Report 2016146


As elaborated in greater detail in chapter 5, overcoming these challenges
requires:


• Supportive macroeconomic policies that address supply-side bottlenecks,
while also stimulating aggregate demand;


• Financial policies that combine mobilization of resources for productive
investment with adequate regulation and supervision;


• Industrial policies that foster the continuous development of productive
capabilities, nurturing infant industries and fostering backward and forward
linkages, to support a continuous upgrading of the sophistication of the
productive base;


• Proactive science, technology and innovation policies that foster the
emergence of a skilled workforce, in line with the needs of the labour market;


• Employment generation and redistributive policies, to strengthen popular
support for a developmental agenda.


Box 4.2. The middle-income trap and LDCs’ growth performance


The expression “middle-income trap” was originally coined with reference to the “uphill struggle” middle-income countries
may face in maintaining a growth rate sufficient to converge towards the high-income level (Gill and Kharas, 2007:18). However,
despite a growing literature on the middle-income trap, consensus on its definition and underlying causes remains elusive
(Kanchoochat, 2015; UNCTAD, 2016b). Empirical assessments of its existence have adopted three broad approaches,
although none is entirely free of possible econometric concerns or issues regarding its robustness (Agenor, 2016).


The first approach rests on the observation that transitions between income groups are relatively rare and occur only over
long periods, resulting in a clustering of countries in the middle-income range (Spence, 2011; World Bank, 2013; Felipe et al.,
2014). This is mirrored in the experiences of LDCs and LDC graduates: based on the Word Bank’s classification, 33 LDCs
and two of the four past graduates have remained in the same income category since 1987 (box table 4.1). Moreover, the
few transitions that have occurred during this period have generally entailed a movement from low- to lower-middle-income
level, while only two LDCs (Angola and Tuvalu) have reached the upper-middle level and one (Equatorial Guinea) the high-
income level.


A second approach is to consider countries’ convergence towards a benchmark advanced country. Studies using this
approach have generally found a relatively low probability of middle-income countries converging towards the income level
of the frontier economy (Im and Rosenblatt, 2013; Arias and Wen, 2016). Applying this approach to LDCs’ long-term growth
performance suggests that relative convergence is the exception rather than the rule. Box figure 4.1 shows the distribution
of the 39 current LDCs for which data are available according to their income per capita relative to the United States. While
the overwhelming majority of LDCs (34 of 39) had an income per capita exceeding 4 per cent of that of the United States in
the 1950s, a growing number started to lag behind from the 1970s onwards. While some rapidly growing LDCs managed to
reverse this divergence partially during the 2000s, others have fallen below the 2 per cent level.1


The third strand of empirical studies suggests that middle-income countries tend to be more prone to growth slowdowns
than either high- or low-income countries (Aiyar et al., 2013; Eichengreen et al., 2013). Although the precise definitions of
a growth slowdown vary among such studies, and are not aimed at capturing the specificities of LDCs,2 this observation is
clearly applicable to LDCs, whose growth performance has historically been erratic, being marked by a high incidence of both
accelerations and collapses (UNCTAD, 2010). In the 1950–2010 period, LDCs on average experienced more than 20 years
of declining real GDP per capita, compared with around 15 years for ODCs and fewer than 10 years for developed countries
(box figure 4.2).3 While growth rates were similar across the three groups in years of positive growth, the average contraction
in LDCs (-4.0 per cent) was sharper than in ODCs (-3.7 per cent) or developed countries (-2.8 per cent).


1 The experience of the two LDC graduates for which data are available, Botswana and Cabo Verde, is only slightly more encouraging. While
these two countries experienced some long-term income convergence relative to the United States, this progress was not consistent, but
punctuated by years of divergence.


2 Unlike Aiyar et al. (2013), who examine deviations from the growth rate predicted by a standard neoclassical growth model, Eichengreen
et al. (2013) define a growth slowdown as a period in which the seven-year average annual growth rate declines by at least 2 percentage
points, having averaged at least 3.5 per cent in the previous seven years, in a country with GDP per capita greater than $10,000 (at 2005
international purchasing power parity).


3 The analysis included in this paragraph and in the following two paragraphs is based on data from the Maddison Project database, which
contains time-series data for real GDP per capita — measured in constant 1990 international dollars — for the period 1950–2010 (Bolt and
van Zanden, 2014).


Appropriate macroeconomic,
financial, STI , industrial and


employment policies are needed
to avoid the middle-income trap.




147CHAPTER 4. Post-Graduation Processes and Challenges


Box table 4.1. Transition matrix across World Bank income categories,
for LDC and LDC graduates


Current
category


2016
Starting
category
1987


Low income Lower-middle income
Upper-middle


income
High


income


Low Income


Afghanistan Bangladesh Angola (1988) Equatorial Guinea


Benin Bhutan Maldives


Burkina Faso Lao People’s Democratic Republic


Burundi Myanmar


Cambodia Sao Tome and Principe


Central African Republic Sudan


Chad Timor-Leste (2001)


Comoros Zambia


Democratic Republic of the Congo Lesotho


Eritrea (1992) Mauritania


Ethiopia Solomon Islands


Gambia


Guinea


Guinea-Bissau


Haiti


Liberia


Madagascar


Malawi


Mali


Mozambique


Nepal


Niger


Rwanda


Sierra Leone


Somalia


Togo


Uganda


United Republic of Tanzania


Lower-middle
income


South Sudan (2011) Djibouti (1990) Tuvalu (2009)


Kiribati Botswana


Vanuatu


Senegal


Yemen


Cabo Verde (1988)


Samoa
Source: UNCTAD secretariat calculations, based on http://databank.worldbank.org/data/download/site-content/OGHIST.xls


(accessed June 2016).
Note: Unless data were available from 1987, the first year in which the country was included in the World Bank income


classification is reported in the parenthesis.


Box 4.2 (contd.)




The Least Developed Countries Report 2016148


Box figure 4.1. Distribution of current LDCs in terms of GDP per capita
relative to the United States


0


10


20


30


40


50


60


70


80


90


100


19
50


19
52


19
54


19
56


19
58


19
60


19
62


19
64


19
66


19
68


19
70


19
72


19
74


19
76


19
78


19
80


19
82


19
84


19
86


19
88


19
90


19
92


19
94


19
96


19
98


20
00


20
02


20
04


20
06


20
08


20
10


>2% <4% >4% <6% >6 %<2%


Source: UNCTAD secretariat calculations, based on data from the Maddison Project database
(http://www.ggdc.net/maddison/maddison-project/home.htm), 2013 version (accessed
June 2016).


Note: Data are only available for 39 current LDCs, except for 2009 and 2010 when only 17
LDCs are covered.


Box figure 4.2. Real GDP per-capita growth, 1950–2010


-5.0


-4.0


-3.0


-2.0


-1.0


0.0


1.0


2.0


3.0


4.0


5.0


6.0


-50


-40


-30


-20


-10


0


10


20


30


40


50


60


Average LDC Average ODC Average developed


Pe
rc


en
ta


ge
g


ro
w


th


Nu
m


be
r o


f y
ea


rs


Number of years with negative growth Number of years with positive growth


Average recession Average growth in years of positive growth


Source: UNCTAD secretariat calculations, based on data from The Maddison Project database (http://
www.ggdc.net/maddison/maddison-project/home.htm), 2013 version (accessed June 2016).


Box 4.2 (contd.)




149CHAPTER 4. Post-Graduation Processes and Challenges


E. The post-graduation development paths
of the past graduates


The four countries that have graduated from the LDC category to date have
maintained their development momentum since graduation. Not only has no
graduate country suffered a reversal of its development progress sufficient to
merit consideration for reinclusion in the LDC category, but all have continued
to increase their national income and improve their human assets (table 4.4).
Despite rapid growth, however, all four countries have remained very vulnerable
economically and environmentally, their EVI indices remaining well above the
threshold for inclusion in the LDC category even in 2015. Even Botswana,20


which graduated from the LDC category more than 20 years ago, still has a
vulnerability level similar to that of Samoa, a SIDS that graduated only in 2014.
This highlights the major risk of continued vulnerability far beyond graduation,
even in a context of an apparently very successful development process.


1. EXTERNAL DEBT


Figure 4.7 shows the level of external debt for all graduated countries relative
to its level at the time of graduation. Indebtedness has increased substantially


Table 4.4. Performance of graduated countries, 2015 indicators


GNI per capita ($) EVI HAI


Threshold for inclusion < $1 035 < 36.0 > 60.0


Threshold for graduation > $1 242 < 32.0 > 66.0


Botswana 7 410 43.4 75.9


Cabo Verde 3 595 38.8 88.6


Maldives 6 645 49.5 91.3


Samoa 3 319 43.9 94.4


Source: CDP secretariat.


Figure 4.7. External debt level of the graduated countries, index, graduation year = 100


0


50


100


150


200


250


1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014


In
de


x,
g


ra
du


at
io


n
ye


ar
=


1
00


Botswana Cabo Verde SamoaMaldives


Source: UNCTAD secretariat calculations, based on data from World Bank, World Development Indicators database (accessed May 2016).
Note: The graduation years were as follows: 1994 for Botswana, 2007 for Cabo Verde, 2011 for Maldives and 2014 for Samoa.


While all four past graduates have
continued to increase national


income and human assets, they
remain economically vulnerable.


Indebtedness has risen substantially
since graduation in all three recent
graduates, though not in Botswana.




The Least Developed Countries Report 2016150


in all three recent graduation cases. This trend is of particular concern in the
case of Cabo Verde, whose debt has doubled since graduation, accelerating
the increasing trend over the previous decade, to reach 86 per cent of GNI
in 2014. External debt has also followed a strong upward trend in Maldives
and Samoa, reaching 39 per cent and 58 per cent of GNI, respectively. This
partly reflects increased expenditure for recovery and reconstruction following
severe seismological and meteorological shocks, as well as the effects of
the international financial crisis. In addition to expenditure for infrastructure
reconstruction, both Governments have implemented several initiatives to
provide income support and other assistance to affected households, as well as
facilitating credit and subsidized lending.


Increasing debt in these countries appears to be a continuation of upward
trends established in the pre-graduation phase rather than being attributable
to graduation, but it is indicative of persistent weaknesses in their external
balances. While their debt currently appears to be sustainable, use of debt-
creating flows as a source of development finance in the face of inadequate ODA
can give rise to an upward spiral of debt to unsustainable levels. This highlights
the importance of identifying other financing options (UNCTAD, 2016a).


Botswana, by contrast, has succeeded in reducing its external debt in recent
years, to an average of 15–17 per cent of GNI since the 2008 financial crisis
— a level previously reached in the early 1990s. While this partly reflects debt
forgiveness of $459 million in 2008, exceptional planning and Government
management have also contributed to keeping debt relatively low.


2. OFFICIAL DEVELOPMENT ASSISTANCE
AND FOREIGN DIRECT INVESTMENT


Table 4.5 presents a comparison of ODA flows to the four graduate countries
in the 10 years preceding graduation and the post-graduation period (limited
to 10 years in the case of Botswana). This shows a systematic reduction in net
ODA receipts relative to GNI following graduation, although the ratio remained
high in Cabo Verde and Samoa, at 14 per cent and 12 per cent respectively.
For the three recent graduates, however, this comparison is complicated by the
relatively short periods since their graduation (especially in the case of Samoa)
and temporary increases in ODA in response to acute external shocks during
the pre-graduation period (for example, the devastating tsunami of 2004 in
Maldives, which gave rise to considerable reconstruction needs in the following
year).


Table 4.5 also shows increases in FDI flows to the three recent graduate
countries (though not Botswana) following graduation, particularly in the
cases of Cabo Verde and Maldives. However, graduation itself is only one of
many potential influences on such flows, including the introduction by some


Table 4.5. Net ODA receipts
Net ODA as share of GNI FDI as share of GDP


Pre Post Pre Post


Botswana 2.9 1.3 2.5 2.2


Cabo Verde 18.2 14.0 5.5 8.0


Maldives 3.4 1.7 5.8 12.9


Samoa 12.4 12.0 2.8 3.3


Source: OECD Creditor Reporting System; World Bank, World Development Indicators database;
UNCTADstat database (accessed August 2016).


Note: Ten-year average prior to graduation (“Pre” in the table) and ten-year average, or less,
post-graduation (“Post” in the table). The post-graduation periods are: 1994–2003 for
Botswana, 2007–2014 for Cabo Verde, 2011–2014 for Maldives and 2014 for Samoa.


Growing debt reflects persistent
weaknesses in external balances.


ODA declined upon graduation,
but remained relatively high
in Cabo Verde and Samoa.


FDI flows have increased,
except in Botswana.




151CHAPTER 4. Post-Graduation Processes and Challenges


governments of new laws aimed at attracting foreign investors, promoting
domestic investment and facilitating entrepreneurial activities.


3. ECONOMIC DIVERSIFICATION POLICIES


The four graduates have achieved varying degrees of structural changes in
their economies since graduation (table 4.6). The share of the primary sector in
value added has decreased dramatically in all four cases, mainly to the benefit of
the tertiary sector. In the three SIDS, this has been driven by tourism, reflecting
their largely tourism-driven growth strategies. However, while these strategies
have been successful in raising growth rates, they also appear to have increased
export concentration, and may thus have intensified economic vulnerability.


The share of industry in value added decreased between the pre- and post-
graduation periods in all cases except Maldives, where increased tourism-
related construction raised the overall share of construction in GDP from 7 per
cent to 11 per cent, more than offsetting a small decline in manufacturing. The
reduction in the share of manufacturing in value added following graduation in
all four cases, from already very low levels, is a matter of concern, and this trend
may well continue.


Those countries that were dependent on one sector for their growth prior
to graduation have remained dependent on the same sector since. The export
concentration index of Cabo Verde and Maldives has been substantially higher
in the post-graduation period than prior to graduation, reflecting increased
dependence on tourist receipts (table 4.7). While data for such a comparison
are unavailable for Botswana, it has remained heavily dependent on diamond
exports. By contrast, Samoa’s export concentration index has fallen substantially,
reflecting an extensive programme to revitalize its agricultural and fishery exports.
It should, however, be noted that the post-graduation period in this case covers
only a single year.


Table 4.6. Sectoral composition of gross value added, averages before and after graduation, selected countries
Botswana Cabo Verde Maldives Samoa


Pre Post Pre Post Pre Post Pre Post


Agriculture, hunting, forestry, fishing 5.8 3.3 13.4 9.3 5.7 3.7 10.6 9.2


Industry 55.1 47.3 24.5 20.8 14.1 17.8 27.7 24.9


Manufacturing 6.3 6.2 7.3 6.2 5.4 5.3 13.1 10.0


Construction 7.0 6.2 10.0 12.2 7.0 11.3 10.7 10.1


Services 39.1 49.4 62.1 69.9 80.3 78.6 61.7 65.8


Wholesale, retail trade, restaurants and hotels 7.2 11.9 15.3 19.6 32.9 31.1 27.6 33.6


Transport, storage and communications 3.2 3.7 17.0 16.4 13.5 12.6 10.2 7.6


Other activities 28.7 33.9 29.8 34.0 33.9 34.9 23.8 24.6


Source: UNCTADstat database (accessed September 2016).
Note: Ten-year average prior to graduation (“Pre” in the table) and ten-year average, or less, post-graduation (“Post” in the table). The


post-graduation periods are: 1994–2003 for Botswana, 2007–2014 for Cabo Verde, 2011–2014 for Maldives and 2014 for Samoa.


Table 4.7. Export concentration index, ten years pre- and post-graduation
Pre Post


Botswana .. 0.72


Cabo Verde 0.35 0.41


Maldives 0.52 0.73


Samoa 0.43 0.28


Source: UNCTADstat (accessed August 2016).
Note: As for previous table.


The four graduates have achieved
varying degrees of structural


change…


…but they all remain dependent
on the export sector that led them


to graduation.




The Least Developed Countries Report 2016152


These results further underscore the continued vulnerability of the graduate
countries to external shocks as a result of their narrow economic bases and
minimal vertical and horizontal economic diversification. Even after graduation,
sustained and sustainable growth thus requires policies to promote diversification
into other activities, sectors and markets, and to enhance the competitiveness
of domestic industries through systemic productivity improvements.


4. POVERTY AND INEQUALITY


Botswana achieved substantial poverty reduction after graduation, the
headcount ratio declining from 34.8 per cent in 1993 to 18.2 per cent in 2009 - a
rate of reduction significantly faster than that implied by Millennium Development
Goal 1. While inequality increased (from an already very high level) between 1993
and 2002, it had fallen back to its 1993 level by 2009. Nonetheless, poverty
remains high by the standards of ODCs, and inequality (as measured by the Gini
index) remains among the highest in the world.


Data on poverty and inequality in the post-graduation period are unavailable
for the three recent graduation, due to the relatively short periods since their
graduation and the irregular nature and infrequency of household income and
expenditure surveys. Data from around the times of their respective graduations
indicates that poverty is moderate in Cabo Verde and Maldives, at 7–8 per
cent, but less than 1 per cent in Samoa. Inequality is relatively low in Maldives,
moderate in Samoa, and above average in Cabo Verde (table 4.8).


While all four countries have maintained relatively high education expenditures
and achieved favourable educational enrolment rates, this has not produced
the skilled workforce necessary to diversify their economies. The coexistence of
unemployment (ranging 9.2 per cent in Cabo Verde to 18.2 per cent in Botswana
in 2014) with vacant posts in the job market that employers find difficult to fill
suggests a possible mismatch between educational curricula and labour market
needs. The University of Botswana, for example, has reported significant
mismatches between supply and demand in the labour market and highlighted
concern about the job placement ratio (Nthebolang, 2013). There is a clear need
for policies to reduce such skills mismatches as a means of crowding in private
sector employment and reducing poverty and inequality.


Table 4.8. Poverty rates, Gini index and unemployment rate for the graduated
countries, various years


Poverty ratesa Gini index (per cent) Unemployment rate, 2014


Botswana 18.2 60.5 18.2


Cabo Verde 8.1 47.2 9.2


Maldives 7.3 36.8 11.6


Samoa 0.8 42.7 ..
Source: World Bank, World Development Indicators database (accessed August 2016).
Note: Data for the poverty rates and the Gini index for Botswana and Maldives refer to 2009,


data for Cabo Verde refer to 2007, while data for Samoa refer to 2008. More recent
data were not available.


a Measured using the poverty headcount ratio at $1.90/day (2011 purchasing power
parity), % of population.


Graduates’ experience underlies
the need for policies to promote


diversification even after graduation.


Botswana has achieved substantial
poverty reduction since graduation,


but inequality remains very high.


Despite improvements in education
in the graduates, skill shortages


appear to persist.




153CHAPTER 4. Post-Graduation Processes and Challenges


F. Summary


• While the smooth transition process can play a significant role in supporting
graduation with momentum, good preparation and proactive engagement
with development partners are critical.


• The prospect of a substantial increase in the number of graduation cases
in the coming years highlights the need for the international community
to define a more systematic and “user-friendly” set of smooth transition
procedures.


• While graduation does not appear to cause sharp reductions in the
availability of development finance, it may be accompanied by a reduction
in concessionality and loss of access to climate finance.


• Loss of preferential market access at graduation may entail substantial
costs, in the order of $4.2 billion per year across LDCs as a whole.


• Loss of eligibility for SDT provisions in WTO agreements may result in some
shrinking of policy space following graduation, but this effect is limited by
the narrow scope of such provisions and constraints on LDCs’ capacity
to exploit them effectively.


• Commodity dependence may persist after graduation; and a reversion to
LDC status, though unlikely, cannot necessarily be ruled out.


• LDCs may be at particular risk of encountering a middle-income trap after
graduation. Minimizing this risk requires graduation with momentum and
early preparations to avoid the root causes of such traps.




The Least Developed Countries Report 2016154


Notes


1 The G20 is an international forum comprising the world’s largest developed and
developing economies, together accounting for some 85 per cent of global gross
domestic product (GDP). The G20 members include Argentina, Australia, Brazil, Canada,
China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico,
the Russian Federation, Saudi Arabia, South Africa, Turkey, the United Kingdom of
Great Britain and Northern Ireland, the United States of America and the European
Union. Details of the coverage and methodology of the assessment of potential costs
of losing LDC-specific preferential access are provided in annex 1.


2 The European Union extends preferential treatment under its Everything But Arms
initiative to LDC graduated countries for an initial period of three years; and Australia,
Canada, New Zealand, Norway, Switzerland and Turkey have applied some form of
smooth transition procedures to past LDC graduates, as, to some extent, has the
United States of America. At the other end of the scale, Japan applied most-favoured-
nation (MFN) treatment to Maldives as early as six months after the country’s effective
graduation (CDP, 2012).


3 However, the empirical literature on the determinants of international financial flows
has not investigated the impact of LDC status as such.


4 However, there do not appear to be any published studies formally testing the effect
of LDC status on aid allocations.


5 The physical quality of life index is based on life expectancy at age 1, infant mortality,
and literacy (Morris, 1980).


6 The other past graduate, Botswana, is no longer eligible for IDA lending.
7 The small-island exception allows a waiver to the IDA eligibility threshold for small


islands that have a population less than 1.5 million, significant vulnerability due to their
size and geography, and very limited creditworthiness and financing options.


8 For the fiscal year 2016, IDA eligibility threshold was $1,215, compared to an LDC
graduation threshold of $1,242 (as applied in the 2015 triennial review).


9 In the case of Botswana, no ODA data are available for the pre-graduation period,
that is to say, earlier than 1995.


10 As of July 2015, according to the WTO database, the following WTO members provided
preferential arrangements of some kind to LDCs, either through specific schemes or as
part of the broader GSP: Australia, Belarus, Canada, Chile, China, the European Union,
Iceland, India, Japan, Kazakhstan, Kyrgyzstan, Morocco, New Zealand, Norway, the
Republic of Korea, the Russian Federation, Switzerland, Tajikistan, Taiwan Province
of China, Thailand, Turkey and the United States (http://ptadb.wto.org/ptaList.aspx,
accessed 25 October 2016).


11 This is the case, for instance, in Canada, where most LDC graduates benefit from
the General Preferential Tariff regime, and in the European Union, where they would
ultimately become ineligible for the Everything But Arms initiative, but would continue
to benefit from GSP or possibly GSP+ (unless they became high-income or upper-
middle-income countries).


12 The key legal distinction in this respect is whether preferential market access originates
from unilateral schemes (which in principle could be revoked at any time), or from
bilateral/regional trade agreements. The former entail a somewhat lower degree of
certainty and predictability, but are generally non-reciprocal, and thus impose no
obligations on LDC members. The latter provide a greater degree of predictability, but
tend to encompass some reciprocal obligations.


13 For example, graduation by those LDCs that have concluded EPAs with the European
Union would arguably entail no significant change in their market access, as the EPAs
envisage complete liberalization of European Union imports from signatory countries
– that is, essentially the same market access that LDCs currently enjoy under the
Everything But Arms initiative.


14 Exports diversification reduces the export concentration index, which is one of the
components of the EVI.


15 Despite falling fuel prices, primary commodities on average represented three quarters
of LDC exports in the period 2012–2015.


16 The only LDCs with current account surpluses over the 2012–2014 period are two fuels
exporters (Angola and Timor-Leste); one mineral exporter (Zambia); two economies
receiving large inflows of remittances (Bangladesh and Nepal); and one outlier service
exporter (Tuvalu).


17 Unlike the World Bank income group classification on which this terminology is based
(at least implicitly), the LDC criteria take into account a much broader set of dimensions,




155CHAPTER 4. Post-Graduation Processes and Challenges


encompassing 13 different socioeconomic, geographical and environmental indicators.
However, as a result of their greater complexity and the technicalities of their application,
the broader public and even policymakers tend to equate LDC graduation with the
attainment of middle-income status, even though many LDCs are already classified
by the World Bank as middle-income countries, and one (Equatorial Guinea) even as
a high-income country.


18 The World Bank’s income classification of countries is based on GNI per capita (computed
using the Atlas method). As of June 2016, the income categories were defined as
follows: low-income economies were defined as those with GNI per capita of $1,045
or lower; lower-middle income between $1,046 and $4,125; upper middle-income
between $4,126 and $12,735; and high-income economies above $12,735. On this
basis, 16 LDCs (Bangladesh, Bhutan, Djibouti, Kiribati, the Lao People’s Democratic
Republic, Lesotho, Mauritania, Myanmar, Sao Tome and Principe, Senegal, Solomon
Islands, the Sudan, Timor-Leste, Vanuatu, Yemen and Zambia) are in the lower-middle-
income group, two (Angola and Tuvalu) in the upper-middle-income group, and one
(Equatorial Guinea) in the high-income group.


19 The originators of the concept of a middle-income trap argue that many of the
challenges of middle-income countries are related to the transition between augmented
Solow models and endogenous growth models, the former being better suited to
characterizing the performance of low-income countries, and the latter to that of
high-income countries (Gill and Kharas, 2015:14).


20 Up to 70 per cent of Botswana’s territory is composed of the Kalahari Desert and only
5 per cent of its land mass is suitable for the purpose of arable agriculture.




The Least Developed Countries Report 2016156


References


Abdychev A, Jirasavetakul L-B, Jonelis A, Leigh L, Moheeput A, Parulian F, Stepanyan A
and Touna Mama A (2015). Increasing productivity growth in middle income countries.
IMF Working paper No. 15/2. International Monetary Fund. Washington, D.C.


Agenor P-R (2016). Caught in the middle? The economics of middle-income traps.
FERDI working paper No. P142. Fondation pour les Etudes et Recherches sur le
Développement International. Clermont-Ferrand.


Aiyar S, Duval RA, Puy D, Wu Y and Zhang L (2013). Growth slowdowns and the middle-
income trap. IMF working paper No. 13/71. International Monetary Fund. Washington,
D.C.


Alesina A and Dollar D (2000). Who gives foreign aid to whom and why? Journal of
Economic Growth. 5(1):33–63.


Arias M and Wen Y (2016). Relative income traps. Review. 98(1):41–60.
Blonigen BA (2005). A review of the empirical literature on FDI determinants. Atlantic


Economic Journal. 33(4):383–403.
Blonigen BA and Piger J (2014). Determinants of foreign direct investment. Canadian


Journal of Economics. 47(3):775–812.
Bolt J and van Zanden JL (2014). The Maddison Project: Collaborative research on historical


national accounts. The Economic History Review. 67(3):627–651.
Borchert I, Gootiiz B and Mattoo A (2011). Services in Doha: What’s on the table? In: Martin


W and Mattoo A, eds. Unfinished business? The WTO’s Doha agenda. Report No.
65456. The World Bank. Washington, D.C.


Cavallo E, Eichengreen B and Panizza U (2016). Can countries rely on foreign saving for
investment and economic development? Working paper No. 07-2016. Economics
Section, Graduate Institute of International and Development Studies. Geneva.


CDP (2012). Strengthening smooth transition from the least developed country category.
CDP background paper No. 14. ST/ESA/2012/CDP/14. Committee for Development
Policy (CDP). New York.


CDP and UNDESA (2015). Handbook on the Least Developed Country Category:
Inclusion, Graduation, and Special Support Measures. Second edition. Committee for
Development Policy and United Nations Department of Economic and Social Affairs.
United Nations publication. Sales No. E.15.II.A.1. New York.


De Melo J and Wagner L (2016). Aid for trade and the trade facilitation agreement: What they
can do for LDCs. Working paper No. 153. Fondation pour les Etudes et Recherches
sur le Développement International. Clermont-Ferrand.


Dollar D and Levin V (2006). The increasing selectivity of foreign aid, 1984–2003. World
Development. 34(12):2034–2046.


Doner RF and Schneider BR (forthcoming). The middle-income trap: More politics than
economics. Princeton Institute for International and Regional Studies. World Politics
Journal.


Eichengreen B, Park D and Shin K (2013). Growth slowdowns redux: New evidence on
the middle-income trap. Working paper No. 18673. National Bureau of Economic
Research. Cambridge, Massachusetts.


Felipe J, Kumar U and Galope R (2014). Middle-income transitions: Trap or myth? ADB
Economics Working Paper Series No. 421. Asian Development Bank. Manila.


Gill I and Kharas H (2007). An East Asian Renaissance: Ideas for Economic Growth. The
World Bank. Washington, D.C.


Gill I and Kharas H (2015). The middle-income trap turns ten. Policy Research Working
Paper Series No. 7403. The World Bank. Washington, D.C.


Guillaumont P (2008). Adapting aid allocation criteria to development goals. Working paper
2008. Fondation pour les Etudes et Recherches sur le Développement International.
Clermont-Ferrand.


Guillaumont P and Drabo A (2013). Assessing the prospects of accelerated graduation of
the least developed countries. Working paper No. P72. Fondation pour les Etudes et
Recherches sur le Développement International. Clermont-Ferrand.


Guillaumont P, Guillaumont Jeanneney S and Wagner L (2015). How to take into account
vulnerability in aid allocation criteria and lack of human capital as well: Improving the
performance based allocation. World Development. 28 November.


Hakobyan S (2015). Accounting for underutilization of trade preference programs: The US
generalized system of preferences. Canadian Journal of Economics. 48(2):408–436.


Im FG and Rosenblatt D (2013). Middle-income traps: A conceptual and empirical survey.
Policy Research Working Paper Series No. 6594. The World Bank. Washington, D.C.




157CHAPTER 4. Post-Graduation Processes and Challenges


IPCC (2015). Climate Change 2014: Synthesis Report. Intergovernmental Panel on Climate
Change (IPCC). Geneva.


International Trade Centre (2010). Market Access, Transparency and Fairness in Global
Trade: Export Impact for Good 2010. Geneva.


Jankowska A, Nagengast A and Perea JR (2012). The product space and the middle-income
trap: Comparing Asian and Latin American experiences. OECD Development Centre
working paper No. 311. Organization for Economic Cooperation and Development
Publishing. Paris.


Kanchoochat V (2015). The middle-income trap and East Asian miracle lessons. In: Rethinking
Development Strategies after the Financial Crisis. Volume I: Making the Case for Policy
Space. UNCTAD and Hochschule für Technik und Wirtschaft Berlin. United Nations
publication. Sales No. E.15.II.D.9. New York and Geneva:55–66.


Kawamura H (2014). The likelihood of 24 least developed countries graduating from the
LDC category by 2020: An achievable goal? CDP background paper No. 20. United
Nations Department of Economic and Social Affairs. New York.


Keck A and Lendle A (2012). New evidence on preference utilization. WTO Staff Working
Paper ERSD-2012-12. World Trade Organization (WTO). Geneva.


Keijzer N, Krätke F and van Seters J (2013). Meeting in the middle? Challenges and
opportunities for EU cooperation with middle-income countries. ECDPM discussion
paper No. 140. European Centre for Development Policy Management. Maastricht,
Netherlands.


Laird S (2012). A review of trade preference schemes for the world’s poorest countries.
ICTSD Programme on Competitiveness and Development. Issue paper No. 25.
International Centre for Trade and Sustainable Development. Geneva.


Mishra T, Ouattara B and Parhi M (2012). International development aid allocation
determinants. Economics Bulletin. 32(2):1385–1403.


Morris MD (1980). The physical quality of life index (PQLI). Development Digest. 18(1):95-109.
Morris M and Staritz C (2014). Industrialization trajectories in Madagascar’s export apparel


industry: Ownership, embeddedness, markets, and upgrading. World Development.
56(c):243–257.


Nicita A and Seiermann J (2016). G20 policies and LDC export performance. Policy Issues
in International Trade and Commodities, Study Series No. 25. UNCTAD/ITCD/TAB/77.
UNCTAD. Geneva.


Nthebolang OE (2013). Human resource development: Vocationalizing the curriculum in
Botswana. International Journal of Scientific Research in Education. 6(3):271–278.


Rahman M (2014). Trade benefits for least developed countries: The Bangladesh case.
Market access initiatives, limitations and policy recommendations. CDP background
paper No.18. ST/ESA/2014/CDP/18. United Nations Department of Economic and
Social Affairs. New York.


Spence M (2011). The Next Convergence: The Future of Economic Growth in a Multispeed
World. Farrar, Straus and Giroux. New York.


Staritz C and Morris M (2013). Local embeddedness, upgrading and skill development global
value chains and foreign direct investment in Lesotho’s apparel industry. Capturing
the Gains working paper 2013/20. Capturing the Gains. University of Manchester.


Teulings C and Baldwin R, eds. (2014). Secular Stagnation: Facts, Causes, and Cures.
CEPR Press and VoxEU. Available at http://voxeu.org/content/secular-stagnation-
facts-causes-and-cures (accessed 26 October 2016).


UNCTAD (2004). The Least Developed Countries Report 2004: Linking International Trade
with Poverty Reduction. United Nations publication. Sales No. E.04.II.D.27. New York
and Geneva.


UNCTAD (2006). The Least Developed Countries Report 2006: Developing Productive
Capacities. United Nations publication. Sales No. E.06.II.D.9. New York and Geneva.


UNCTAD (2009). The Least Developed Countries Report 2009: The State and Development
Governance. United Nations publication. Sales No. E.09.II.D.9. New York and Geneva.


UNCTAD (2010). The Least Developed Countries Report 2010: Towards a New International
Development Architecture for LDCs. United Nations publication. Sales No. E.10.II.D.5.
New York and Geneva.


UNCTAD (2012a). The Least Developed Countries Report 2012. Harnessing Remittances
and Diaspora Knowledge to Build Productive Capacities. United Nations publication.
Sales No. E.12.II.D.18. New York and Geneva.


UNCTAD (2012b). World Investment Report 2012: Towards a New Generation of Investment
Policies. United Nations publication. Sales No. E.12.II.D.3. New York and Geneva.


UNCTAD (2013). World Investment Report 2013: Global Value Chains: Investment and
Trade for Development. Sales No. E.13.II.D.5. New York and Geneva.




The Least Developed Countries Report 2016158


UNCTAD (2015a). State of Commodity Dependence 2014. United Nations publication.
UNCTAD/SUC/2014/7. New York and Geneva.


UNCTAD (2015b). The Least Developed Countries Report 2015: Transforming Rural
Economies. United Nations publication. Sales No. E.15.II.D.7. New York and Geneva.


UNCTAD (2016a). Economic Development in Africa Report 2016: Debt Dynamics and
Development Finance in Africa. United Nations publication. Sales No. E.16.II.D.3.
New York and Geneva.


UNCTAD (2016b). Trade and Development Report 2016: Structural Transformation for
Inclusive and Sustained Growth. United Nations publication. Sales No. E.16.II.D.5.
New York and Geneva.


UNCTAD and UNIDO (2011). Economic Development in Africa Report 2011: Fostering
Industrial Development in Africa in the New Global Environment. United Nations
publication. Sales No. E.11.II.D.14. New York and Geneva.


Walsh JP and Yu J (2010). Determinants of foreign direct investment: A sectoral and
institutional approach. IMF Working Paper No. 10/187. International Monetary Fund
(IMF). Washington (DC).


World Bank (2013). China 2030: Building a Modern, Harmonious, and Creative Society.
World Bank. Washington (DC).


WTO (2014). Market access for products and services of export interest to least-developed
countries. World Trade Organization (WTO). Geneva.




159CHAPTER 4. Post-Graduation Processes and Challenges


Annex 1. Simulation of the effects of loss of
trade preferences due to graduation: Methodology


This annex outlines the methodology used for the analysis of the effects of trade preferences whose results
are presented in the text. It extends Nicita and Seiermann’s (2016) analysis of LDCs’ export performance vis-à-vis
10 G20 countries and the European Union, which account for more than 70 per cent of total LDC exports, at the
Harmonized System six-digit (HS6) level of product disaggregation.1


The methodology employed here follows three steps. First, a counterfactual post-graduation scenario is
constructed on the basis of pairwise trade relations between each LDC and each G20 partner, replacing the tariffs
currently faced by each LDC with those faced by the most similar non-LDC developing country in terms of preferential
trade agreements with the G20 partners concerned, geographical location and level of development.2 This yields a
matrix of 418 (38 LDCs with available data multiplied by 11 trade partners) counterfactual tariff structures, each at the
HS6 level of disaggregation, representing a situation in which LDCs no longer benefit from LDC-specific preferential
treatment.


Second, potential changes in applied tariffs and preference margins are computed for each HS6 tariff line by
comparing the current situation with the counterfactual scenario. Since graduation implies the phasing out of some
preferential market access, the effect on tariffs is unequivocally negative; but the effect on preference margins is
ambiguous. Technically, however, since each country’s preference margin also depends on the tariff faced by other
LDCs, its precise value at graduation point will depend on which of the other LDCs have already left the LDC category.3


To bypass this potential complication, two alternative approaches are used to compute preference margins: (a)
keeping the average tariff of the rest of the world constant at its current level, as if each given LDC were the first one
to graduate; and (b) changing the tariffs faced by all LDCs simultaneously, to simulate the effect of all LDCs having
graduated. In the first case, the effect of graduation on the preference margin is unequivocally negative, whereas in
the second case it is ambiguous. The “true” effect of graduation will lie between these two extremes, and depend on
when each country graduates relative to its LDC competitors (for the same HS6 product in the same export market).


Third, having thus obtained the simulated changes in tariffs and preference margins, the coefficients of the gravity
model estimated by Nicita and Seiermann (2016) are used to derive the overall impact on export revenues. Since
these impacts are initially obtained by export destination and product, and then aggregated, they take into account
the three elements mentioned above, namely, the structure of existing preferential schemes; the export pattern and
its product composition; and the fallback tariffs faced by each LDC upon graduation.


While the results reported here provide a reasonable order of magnitude for the potential effects of LDC graduation,
three important limitations should be noted. First, the analysis captures only the first-round impact of changes in
tariffs and preference margins on exports, and as such only considers effects on the exports of products traded
with the same destinations before and after graduation. Second, they take no account of complications arising
from limited utilization of preferential schemes or of interactions between the tariffs applied and non-tariff barriers,
particularly rules of origin. Should LDC status allow countries to benefit from more flexible rules of origin, adverse
effects of graduation may well be amplified by the requirement to comply with more stringent procedures. Third, the
effect of preference losses will ultimately depend on the international trade landscape at the time of graduation, which
may have changed significantly from the present. For example, to the extent that LDC preference margins are further
eroded (for example, as a result of mega-regional trade agreements or other bilateral agreements negotiated in the
meantime), the “commercial value” of their preferential treatment as LDCs will be reduced, thus also lowering the cost
of graduation (that is, the potential reduction in export revenues arising from the loss of preferential market access
following graduation).


1 The G20 members considered in the analysis are Argentina, Australia, Brazil, Canada, China, the European Union, India, Indonesia, Japan,
Mexico, and the United States. The Republic of Korea, the Russian Federation and Saudi Arabia are excluded because the necessary
data are unavailable, while the other members of the G20 are members of the European Union, and therefore included in the European
Union data. Detailed tariff data at HS6 level are not available for the Comoros, the Democratic Republic of the Congo, Guinea-Bissau,
Equatorial Guinea, Kiribati, the Lao People’s Democratic Republic, Sao Tome and Principe, South Sudan, Timor-Leste and Tuvalu, so
that only 38 of the 48 LDCs are included in the analysis.


2 The choice of the counterfactuals reflects the status of the AGOA and EPA negotiations as of June 2016, as reported respectively at
http://agoa.info/about-agoa/country-eligibility.html and http://trade.ec.europa.eu/doclib/docs/2009/september/tradoc_144912.pdf (both
accessed 26 October 2016).


3 This can be seen by considering two LDC countries, X and Y, competing in a market to which they have preferential access. Intuitively, the
loss of preferential treatment resulting from the graduation of X makes Y temporarily better off, so that its preferential treatment becomes
“more valuable”. However, this also implies a higher cost of graduation when country Y graduates and thus loses its preferential access.




The Least Developed Countries Report 2016160


Annex table A.1. Counterfactuals used in the analysis
G20


LDCs
Argentina Australia Brazil Canada China


European
Union


India Indonesia Japan Mexico
United
States


Afghanistan Tajikistan Pakistan Tajikistan Pakistan Tajikistan Pakistan Sri Lanka Tajikistan Pakistan Tajikistan Pakistan


Angola Gabon Gabon Gabon Gabon Gabon Gabon Gabon Gabon Gabon Gabon Botswana


Bangladesh Pakistan Pakistan Pakistan Pakistan Sri Lanka Pakistan Pakistan Pakistan Pakistan Pakistan Pakistan


Benin Ghana Ghana Ghana Ghana Ghana Ghana Ghana Ghana Ghana Ghana Botswana


Bhutan Tajikistan Pakistan Tajikistan Pakistan Tajikistan Pakistan Sri Lanka Tajikistan Pakistan Tajikistan Pakistan


Burkina Faso Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Botswana


Burundi Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Botswana


Cambodia Tajikistan Viet Nam Tajikistan Viet Nam Viet Nam Pakistan Viet Nam Viet Nam Viet Nam Tajikistan Viet Nam


Central African Republic Gabon Gabon Gabon Gabon Gabon Gabon Gabon Gabon Gabon Gabon Zimbabwe


Chad Gabon Gabon Gabon Gabon Gabon Gabon Gabon Gabon Gabon Gabon Botswana


Djibouti Kenya Kenya Kenya Kenya Kenya Kenya Kenya Gabon Kenya Gabon Botswana


Eritrea Kenya Kenya Kenya Kenya Kenya Kenya Kenya Gabon Kenya Gabon Zimbabwe


Ethiopia Kenya Kenya Kenya Kenya Kenya Kenya Kenya Gabon Kenya Gabon Botswana


Gambia Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Botswana


Guinea Ghana Ghana Ghana Ghana Ghana Ghana Ghana Ghana Ghana Ghana Botswana


Haiti Dominican
Rep.


Dominican
Rep.


Dominican
Rep.


Dominican
Rep.


Dominican
Rep.


Dominican
Rep.


Dominican
Rep.


Dominican
Rep.


Dominican
Rep.


Dominican
Rep.


Haiti*


Lesotho Botswana Botswana Botswana Botswana Botswana Botswana Botswana Botswana Botswana Botswana Botswana


Liberia Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana Ghana Ghana
Côte
d'Ivoire


Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Botswana


Madagascar Botswana Zimbabwe Botswana Zimbabwe Zimbabwe Zimbabwe Botswana Botswana Zimbabwe Botswana Botswana


Malawi Botswana Botswana Botswana Botswana Botswana Kenya Botswana Botswana Botswana Botswana Botswana


Mali Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Botswana


Mauritania Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Botswana


Mozambique Zimbabwe Botswana Zimbabwe Botswana Botswana Botswana Zimbabwe Zimbabwe Botswana Zimbabwe Botswana


Myanmar Viet Nam Viet Nam Viet Nam Viet Nam Viet Nam Pakistan Viet Nam Viet Nam Viet Nam Viet Nam Viet Nam


Nepal Tajikistan Pakistan Tajikistan Pakistan Tajikistan Pakistan Sri Lanka Tajikistan Pakistan Tajikistan Pakistan


Niger Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Botswana


Rwanda Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Botswana


Senegal Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Botswana


Sierra Leone Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Botswana


Solomon Islands Fiji Fiji Fiji Fiji Fiji
New
Caledonia


Fiji Fiji Fiji Fiji Fiji


Somalia Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Zimbabwe


Sudan Egypt Kenya Egypt Kenya Gabon Gabon Egypt Egypt Kenya Egypt Zimbabwe


United Rep. of Tanzania Zimbabwe Kenya Zimbabwe Kenya Kenya Kenya Zimbabwe Zimbabwe Kenya Zimbabwe Botswana


Togo Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Ghana Ghana Ghana
Côte
d'Ivoire


Côte
d'Ivoire


Ghana
Côte
d'Ivoire


Botswana


Uganda Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Kenya Botswana


Vanuatu Fiji Fiji Fiji Fiji Fiji
New
Caledonia


Fiji Fiji Fiji Fiji Fiji


Yemen Oman Oman Oman Oman Oman Oman Oman Oman Oman Oman
Saudi
Arabia


Zambia Botswana Botswana Botswana Botswana Gabon Kenya Botswana Botswana Botswana Botswana Botswana


Source: UNCTAD secretariat.
Notes: * tariffs were left unchanged in the counterfactual, because of bilateral arrangements with the respective G20 partner.




CHAPTER


THE PATH TO
GRADUATION AND BEYOND




The Least Developed Countries Report 2016162


A. Introduction


The 2011 Programme of Action for the Least Developed Countries for the
Decade 2011–2020 (the Istanbul Programme of Action (IPoA)) included a target
that half of the 49 countries with least developed country (LDC) status at the
time should meet the statistical criteria for graduation by 2020. This was the
first time that the international community had adopted an explicit target for
graduation from the LDC category. Now, halfway from the setting of the target to
the date for its attainment, it seems clear that it will not be met. The projections
presented in chapter 2 of this Report suggest that only 16 (one third) of the
current LDCs (in addition to Samoa, which graduated in 2014) can be expected
to satisfy the full graduation criteria by 2021. This suggests that policies at the
national and/or international level — that is, national graduation strategies and/
or the international support measures (ISMs) for LDCs — have so far fallen
significantly short of the expectations of the IPoA.


However, this Report has argued that approaches to graduation should
go beyond the minimum requirement — fulfilment of the statistical criteria (as
discussed in chapter 1) — to aim for the more ambitious, but more substantive
and sustainable, goal of “graduation with momentum”. LDCs should seek not
merely to qualify for graduation, but also to establish the essential foundations
for their subsequent development, to avoid the traps and pitfalls of the later
stages of the development process. It seems clear that not all of those countries
that are projected to meet the statistical criteria for graduation by 2021 will
have achieved this. While they may graduate by 2024, they may thus expect
to remain subject, to some degree, to some of the structural weaknesses and
vulnerabilities characteristic of LDCs even after graduation.


This raises the question of what can and should be done at the national and
international levels, not only to accelerate progress towards graduation in line
with the IPoA target, but also to ensure that those countries that reach graduation
do so with the momentum needed to sustain them through the post-graduation
development process. This is the theme of the present chapter. Following a
further elaboration of the concept of graduation with momentum (section B),
the chapter sets out elements of “graduation-plus” strategies to achieve this
(section C). It then analyses how the international community can support such
a process, both by ensuring a conducive global economic environment (section
D) and by establishing effective ISMs (section E). The chapter concludes with a
discussion of issues which might usefully be considered in reviewing the LDC
criteria (section F).


B. Graduation with momentum


A recurrent theme throughout this Report has been the concept of graduation
with momentum. This highlights the importance of viewing graduation as the first
milestone in a marathon of development rather than the winning post in a race
to escape LDC status,1 and of focusing primarily on longer-term development
processes rather than on the technicalities of the graduation criteria. While
several countries close to the graduation thresholds have adopted graduation
as a major national goal, as discussed in chapter 2, it is important that this
is seen only as an initial step. The country’s development process continues
indefinitely beyond this point, and its subsequent success depends critically on
the foundations built in the course of graduation. How graduation is achieved is
thus as important as when it is achieved.


Several LDCs will meet the
graduation criteria by 2021, but


it seems clear that the IPoA
graduation target will not be met.


How a country graduates is as
important as when, to allow it to
engage in global markets on an


equal footing with ODCs.




163CHAPTER 5. The Path to Graduation and Beyond


When an LDC graduates, it should have escaped from the vicious circles
discussed in chapter 1 sufficiently to engage in international markets on an
equal footing with other developing countries (ODCs), without relying on LDC-
specific ISMs, for which it will no longer be eligible. As discussed in chapter
2, however, the extent to which the statistical criteria for graduation capture a
country’s ability to do this is open to debate. For example, none of the countries
that have graduated to date has even now attained the graduation threshold
for the economic vulnerability index (EVI), the graduation criterion that most
closely reflects structural vulnerabilities (chapter 4). Thus, policies leading to
graduation should not be aimed narrowly at achieving statistical eligibility, but
rather oriented towards broader developmental goals. Equally, fulfilment of the
criteria should be viewed, not as an object in itself, but rather as a by-product
of an effective strategy oriented towards graduation with momentum. It is
noteworthy that none of the four countries that have graduated from the LDC
category to date adopted graduation as an explicit development goal (chapter
2). Rather, their actions towards graduation were essentially taken in response
to recommendations of the Committee for Development Policy (CDP) and the
initiation of the graduation process.


UNCTAD’s Least Developed Countries Report series has long ascribed
LDCs’ weak economic and social performance and persistent vulnerability to
exogenous shocks to the limited development of their productive capacities
(diversification and increasing sophistication of their productive bases) and
slow and unbalanced processes of structural transformation (increasing
productivity and reorientation of production from low-value-added to high-
value-added sectors and activities). These shortcomings seriously limit LDCs’
ability to derive developmental benefits from integration into the international
economy (UNCTAD, 2006, 2014a). Their situation is aggravated by a volatile
and often unfavourable international economic environment; and the existing
ISMs have proven inadequate to counter these problems (UNCTAD, 2010). It
is this combination of domestic and international shortcomings that has driven
the divergence between the LDCs and ODCs documented in chapter 1 of this
Report.


Thus the keys to ensuring sufficient momentum at the point of graduation are
the development of productive capacities and structural transformation of the
economy. These are the primary means of redressing LDCs’ structural handicaps
(such as the poverty trap, the commodity-dependence trap and balance-of-
payments constraints to growth, all examined in chapter 1), of coping with the
adverse effects of geographical factors such as remoteness and landlocked
location, and of establishing a more sustainable long-term development path.
This emphasis is also closely aligned with the avowedly transformative 2030
Agenda for Sustainable Development (2030 Agenda), which includes explicit
targets for both structural transformation and industrialization, and places greater
emphasis on the interconnectedness of the economic, social and environmental
pillars of sustainable development than did the Millennium Development Goals.


Beyond graduation, the possibility of falling into the “middle-income trap”
(discussed in chapter 4) highlights the continuing importance of structural
transformation and continuous development of productive capabilities
throughout the course of development. This is further reinforced by global
value chains (GVCs), which tend to realign patterns of trade and investment
flows to divide production processes into ever-smaller segments based on
existing comparative advantage, rather than fostering a dynamic evolution of
comparative advantage (UNCTAD, 2015a: paras. 35–41).


Graduation with momentum is of particular relevance to those countries
projected to graduate via the income-only route (Angola, Equatorial Guinea and
Timor-Leste), whose remarkable growth performance during the commodity


…but so far this is not fully
captured in the statistical


criteria for graduation.


Productive capacities and structural
transformation are critical to


graduation and beyond...




The Least Developed Countries Report 2016164


super-cycle has led to little economic diversification or generation of productive
employment. Such a trajectory provides at best a weak foundation for future
development. Unless it is effectively directed to the development of productive
capacities and economic diversification, even the sizeable wealth accumulated
through fuel extraction may provide limited resilience to exogenous shocks. This
has been highlighted by the sharp downward revisions of estimates for these
countries’ economic growth following the recent fall in commodity prices.


Three factors may make the concept of graduation with momentum
particularly appealing to LDC policymakers. First, while the costs of graduation
arise directly from the graduation process itself, as ISMs are phased out at the
end of the smooth transition period, its benefits arise from the improvement
in socioeconomic conditions that underlies graduation. For example, the fact
of graduation often entails some loss of preferential market access; but it is
primarily the development progress underlying graduation that increases the
country’s capacity to mobilize domestic resources, to strengthen its financial
system and to direct financing to productive investment. Thus, the extent of real
development progress underlying graduation is an important determinant of the
balance of its impacts.


Second, as can be seen from the past cases of graduation, it is a moment
of national pride, conferring international recognition on the country’s long-
term developmental vision, and potentially strengthening the social and political
coalitions supporting it. While the technicalities of the graduation process are
remote from the general public, the inclusiveness of the pattern of growth
leading to graduation plays a key role in ensuring its sustainability (UNCTAD,
2013a). By generating employment (particularly in non-traditional sectors) and
raising incomes, policies aimed at economic diversification and productive-
capacity development are likely to be more inclusive, and thus to engender
greater domestic support.


Third, graduation with momentum is critical to addressing development
challenges and coping with shocks in the post-graduation phase, after access
to LDC-specific ISMs has been lost. As emphasized in chapter 4 of this Report,
structural transformation, productivity growth and increasing sophistication of the
economy are the driving forces behind convergence towards higher income levels
throughout the course of development. They are thus of continued importance
beyond graduation, to avoid the middle-income trap and build resilience to
growth slowdowns, particularly in a context of continued geographical and/
or structural vulnerability to economic and environmental shocks. Such
vulnerability is highlighted by the experiences of past LDC graduates: while they
have sustained their development trajectories without major disruptions since
graduation, there are indications of persistent vulnerability, including rising debt
levels, limited economic diversification, volatile official development assistance
(ODA) flows, and in most cases moderate or high levels of poverty.


C. “Graduation-plus” strategies
for graduation with momentum


A more conducive international environment and more effective ISMs are
critical to graduation with momentum (see sections D and E below). Nonetheless,
as the Addis Ababa Action Agenda of the Third International Conference on
Financing for Development emphasizes: “each country has primary responsibility
for its own economic and social development and … the role of national policies
and development strategies cannot be overemphasized” (United Nations, 2015:
para. 9). It is thus incumbent upon the policymakers of each LDC to assume


Graduation with momentum can
offset the costs of losing access


to LDC-specific ISMs…


…strengthen social and political
coalitions in support of the


country's development strategy…


...and help to address challenges
and shocks beyond graduation.


National development strategies
play a central role in “graduation-


plus” strategies.




165CHAPTER 5. The Path to Graduation and Beyond


full ownership of their country’s development agenda, making the most of their
respective circumstances and redoubling their efforts to leverage the existing
ISMs effectively.


The key importance of attaining graduation with momentum, rather than
merely satisfying the statistical criteria, indicates a need to move from graduation
strategies to “graduation-plus” strategies centred on a longer-term perspective
and laying the foundations for the continuing development process. Such
strategies should thus focus on the need for structural transformation, both before
and after graduation, and apply different instruments and planning techniques to
address the macroeconomic and sectoral challenges of development.


A logical starting point for such strategies is to determine the factors that
constrain the country’s growth and to identify potential products and sectors of
specialization and comparative advantage.2 This can provide the starting point for
the design and implementation of policy actions and programmes to overcome
the former and to foster development of the latter. The international dimension of
such an exercise can be addressed by the diagnostic trade integration studies
produced under the aegis of the Enhanced Integrated Framework (EIF). The
strategies, policies and programmes generated by these processes should be
embodied in a long-term national development plan aligned with the Sustainable
Development Goals, as a basis both for medium-term plans such as Poverty
Reduction Strategy Papers and for donor alignment. UNCTAD’s “Specializing
smartly” toolkit can provide an important source of technical assistance
(UNCTAD, 2016a).


An important part of graduation-plus strategies is an assessment of the
country’s use of ISMs and the constraints to more effective exploitation of the
opportunities they provide, to optimize the utilization and developmental impacts.
It is also important to plan for the phasing-out of access to these ISMs following
graduation, including through the identification of alternatives (for example, non-
LDC-specific preferential market access instruments).


It should be emphasized that the policies adopted as part of a graduation-
plus strategy in any country must reflect its own particular circumstances and
priorities and be adapted to its institutional framework and capacities, as one-
size-fits-all approaches may be counterproductive. Nonetheless, some types
of policies can be identified as being of particular relevance to graduation with
momentum, having been identified in previous editions of The Least Developed
Countries Report as fundamental to accelerating the development of productive
capacities through capital accumulation, technological progress and structural
change (UNCTAD, 2006: chap. II.1). While such policies are closely interrelated
in their contribution to graduation with momentum, they are grouped into six
broad areas for presentational purposes: rural transformation; industrial policy;
science, technology and innovation (STI); finance; macroeconomic policy; and
employment generation. Gender is also a key issue, cross-cutting these and
other policy areas.


1. RURAL TRANSFORMATION


Rural development is a critical dimension of structural transformation in LDCs.
Two thirds of the LDC labour force is employed in agriculture, which also plays a
critical role in the supply of inputs and wage goods, and in domestic demand for
the output of other sectors. In the context of the 2030 Agenda, the importance
of rural development is further increased by its role in Sustainable Development
Goals 1 (“End poverty in all its forms everywhere”) and 2 (“End hunger, achieve
food security and improved nutrition and promote sustainable agriculture”).
An accelerated and broadly based transformation of rural economies is thus


"Graduation-plus" strategies are
needed, focusing on graduation with


momentum…


…starting from a diagnosis
of constraints to growth and
identification of economic


opportunities...


…and optimizing use of ISMs.


Key areas of “graduation-plus”
strategies are rural transformation,


industrial policy, STI, finance,
macroeconomic policy,


employment and gender.




The Least Developed Countries Report 2016166


central to the process of poverty-oriented structural transformation essential to
achieving the Goals (UNCTAD, 2015b).


Redressing chronic underinvestment in agriculture is a key priority for most,
if not all, LDCs. With due consideration of each country’s specific needs, this
is likely to require a combination of the following mutually supportive elements:


• Appropriately sequenced investment in key elements of infrastructure,
notably electrification, irrigation, drainage, water supply, storage facilities
and road networks;


• Upgrading farming technologies and practices, to enhance productivity
and sustainability;


• Financing research on improved and more resilient seeds and cultivation
techniques, and deploying extension services throughout agricultural areas
to provide technical assistance and foster the adoption of such seeds and
techniques, particularly by under-resourced small producers;


• Actively assisting smallholders or producers with limited access to finance
and technology in raising their productivity and upgrading their production,
for example through support to producers’ associations and cooperatives,
programmes to improve access to credit and appropriate land-titling policies.


For certain agricultural products, it may be beneficial to complement support
for local transformation with dedicated technical assistance to allow small
producers to connect to GVCs on more favourable terms, as in the case of
Ethiopian coffee producers under the Ethiopia Trademark and Licencing Initiative
(Balgobind, n.d.). In this context, graduation with momentum is also likely to
require measures to redress the limited availability of skills, for example through
appropriate vocational training schemes and initiatives to match school curricula
with the market’s needs.


Diversification of the rural economy through the promotion of rural non-farm
activities also plays an important role, given the complementarities between
agriculture and the rural non-farm economy. It provides a source of demand
for agricultural outputs and of finance for agricultural investment; facilitates
the supply of agricultural inputs; and can increase the tradability of agricultural
produce and provide opportunities for greater value addition.


The development of non-farm activities also allows producers to diversify
their income sources beyond agriculture, to smooth their incomes over time
(particularly across seasons), and to diversify risks related to their productive
activities. It can thus also help to reduce risk aversion, which is a major
impediment to agricultural investment and technological innovation. Coordinated
measures to promote rural non-farm activities in tandem with agricultural
upgrading, maximizing the synergies between the two, can thus play a critical
role in rural development strategies. These measures include the mutually
supportive elements listed above with policies to support rural entrepreneurship
by choice (rather than by necessity) and the creation of employment through
rural infrastructure works (UNCTAD, 2015b).


2. INDUSTRIAL POLICY


There is a growing consensus that structural transformation does not occur
automatically, but rather requires proactive policy action to address the widely
recognized obstacles to the shifting of production to new sectors and activities
with higher productivity and greater technological potential. This also relates to
the spillovers, informational asymmetries and coordination issues that impede
innovation and price-discovery processes (UNCTAD, 2010, 2014a, 2016d;


Rural development requires
redressing chronic under-investment


in agriculture…


…and it results in diversifying
rural economies through


promotion of non-farm activities.


There is scope for both “vertical”
and “horizontal” industrial policies to


tackle market failures.




167CHAPTER 5. The Path to Graduation and Beyond


UNECA, 2015a). In this context, there is scope for both “vertical” (sectoral) and
“horizontal” (functional) policies to tackle specific market failures across sectors.
By beginning from the country’s existing capacity, and fostering the emergence
of backward and forward linkages, such policies can contribute significantly to
increasing value addition. Bolder and more strategic industrial policy frameworks,
including in STI (subsection 3, below), could also enable LDCs to harness more
fully such policy space as is available to them.


In seeking to “nudge” producers to move from lower- to higher-productivity
sectors, LDC policymakers need to strike a balance between exploiting more
intensively those productive activities that are consistent with current comparative
advantage and encouraging the expansion of activities at progressively higher
levels of sophistication. This represents a combination of what have been called
“passive” with “active” industrial policies (UNCTAD, 2016d: chap. VI). A second
challenge is to devise industrial policy strategies in such a way as to ensure
that support for emerging activities does not promote rent-seeking behaviours.
Potentially useful approaches to this issue include (a) sunset clauses, to ensure
that support does not become entrenched; (b) a combination of “carrots” and
“sticks”, penalizing losers as well as rewarding winners; and (c) institutional
arrangements that ensure a high degree of accountability in the conduct of
industrial policy.


3. SCIENCE, TECHNOLOGY AND INNOVATION POLICY


Structural transformation in LDCs requires building capabilities in STI, which
are critical to closing the productivity gap between LDCs and more advanced
economies. Such capacities play two distinct roles. First, they contribute to a
catching-up process, increasing efficiency in the use of productive resources by
moving production processes closer to the technological frontier, and thus also
improving competitiveness. Second, they play a fundamental role in fostering
the emergence of new activities that offer high value-added and growth
potential, allowing the country to reap the benefits of dynamic gains from trade.
These processes occur through a combination of absorption and adaptation of
imported technologies and development of indigenous technological capacities.


However, this process is far from spontaneous, and requires a conducive
policy framework. A key objective of such a framework is to increase capacity
for the absorption of more sophisticated technologies imported or transferred
from other countries and to adapt them to local conditions. This can help
LDCs to reap some of the strategic opportunities offered by technology-related
ISMs, such as the extension of the transition period for their implementation
of the World Trade Organization (WTO) Agreement on Trade-related Aspects
of Intellectual Property Rights (TRIPS Agreement) and support for technology
transfer under the Agreement’s article 66.2 (see section E.4 below). Increasing
capacity for absorption and adaptation of imported technologies requires, inter
alia, the development of a pool of skilled and talented labour through vocational
training, tertiary education and competence-building, especially in engineering,
science and mathematics.


In the Addis Ababa Action Agenda, governments committed themselves
to adopting STI strategies as an integral element of their national sustainable
development strategies, and to crafting policies to incentivize the creation of
new technologies and research and to support innovation (United Nations,
2016b). Given the interconnection between STI policy and industrial policies, this
requires an integrated approach to the two areas, to promote the emergence of
viable and progressively more sophisticated activities, notably in manufacturing
and modern service sectors.


Industrial policies need to strike
a balance between current
comparative advantage and
increasing sophistication.


STI capabilities are needed
to absorb, adapt and develop


technologies...


…which requires a conducive
policy framework.




The Least Developed Countries Report 2016168


However, STI tends to be a neglected policy area in many LDCs. Moreover,
the objectives of fostering innovation and promoting structural transformation
have often been pursued by different institutions with weak coordination,
resulting in gaps, redundancies and inconsistencies in industrial and STI policies
(UNCTAD, 2015c). The experiences of several LDCs highlight the need for a
more strategic approach, in order to boost absorptive capacities and harness
intellectual property to promote radical innovation and technological leap-
frogging (UNCTAD, 2012a, 2015c; UNECA et al., 2016). However, technological
learning and innovation need to be appropriate to each country’s level of
technological development, its economic structure and the capabilities of its
public institutions and private sector (UNCTAD, 2007).


While the policies appropriate to each LDC are clearly dependent on its
particular circumstances, some general observations may be made, particularly
in terms of priorities and institutional arrangements.


In order to be effective, STI policies need to be coordinated with policies
in other areas, including education, competition, regulation, tax, development
finance, international trade, investment and public-sector management.
Effective coordination is thus important to improve policy coherence in the
conceptualization and design of STI policies, to articulate their linkages to the
country’s broader development vision, and to integrate them effectively with
industrial and other policies.


STI capabilities depend not only on the existing stock of technological
knowledge, but also on the quality of interactions among actors that are part
of the innovation system, particularly between institutions of research and
advanced education and domestic and foreign firms, to improve absorptive and
innovative capacities (United Nations, 2016a). Measures to strengthen such
interactions at an economy-wide level might include, for example, the creation
of national online knowledge and learning resources to allow enterprises,
researchers and domestic and foreign universities to interact and exchange
ideas, and to network on STI-related issues. National intellectual property
systems can encourage national firms and advanced educational institutions
to engage in technological learning and local research and innovation. Sector-
specific initiatives to foster technology transfer, incentivize joint ventures, and
promote closer collaboration between domestic firms and foreign investors
can also make a major contribution, by increasing domestic value addition and
strengthening backward and forward linkages (UNCTAD, 2012a).


As well as ODA, regional and South–South cooperation can play an important
role in STI strategies. Pooling scarce resources, at regional and/or subregional
levels, could allow the establishment of joint research and technology incubator
facilities and the implementation of joint research projects. This has been
done in the agricultural sector through research institutes coordinated by the
Consultative Group on International Agricultural Research, such as AfricaRice,
the International Institute of Tropical Agriculture, the International Livestock
Research Institute and the International Maize and Wheat Improvement Center.
In all these cases, LDCs participate in the research efforts and derive benefits
from research results.


Equally, there are growing opportunities for South–South technology transfer.
Knowledge flows and technical cooperation have become major components of
South–South economic relations, diversifying the sources of knowledge transfer
and partnership for LDCs (UNCTAD, 2010: chaps. 4, 7; UNCTAD, 2012a).
South–South technology transfer is complementary to North–South knowledge
flows, the two sometimes being combined in triangular cooperation, whereby
South–South knowledge flows are facilitated and boosted by developed country
donors (UNDP, 2009).


STI tends to be a neglected
policy area in many LDCs.


STI capabilities also depend on the
quality of interactions among actors


in the innovation system.


Regional and South-South
cooperation can play an


important role in STI strategies,
as well as ODA.




169CHAPTER 5. The Path to Graduation and Beyond


4. DEVELOPMENT FINANCE


Finance plays a fundamental role in productive-capacity development,
mobilizing domestic and foreign resources and intermediating them in support
of transformative productive investment and technological upgrading (McMillan
et al., 2014). The need to reinforce domestic resource mobilization, strengthen
the fiscal base of LDCs and curb illicit international financial flows has been
repeatedly stressed, both by UNCTAD (2014b, 2015d) and by the international
community as a whole (for example, in the Addis Ababa Action Agenda).


For most LDC firms, the bulk of investment financing is initially from internal
resources. However, to grow and upgrade their productive capacities, firms
need to shift towards bank financing, which requires an efficient banking
system. Development banks and central banks have an essential role in
ensuring that finance is available for long-term investment, as it is only at higher
levels of dynamic growth and development that a profit-investment nexus can
be established (UNCTAD, 2016d: chap. V). This process also strengthens the
country’s attractiveness to foreign investors, through its effects on determinants of
foreign direct investment (FDI) allocation such as macroeconomic fundamentals,
institutional factors and cost competitiveness.


A greater transformational impact is likely to be achieved through development
banks, which can foster agricultural modernization and industrial upgrading,
following the model of some newly industrializing countries (UNCTAD, 2015b,
2015d: chap. VI). Their role in financing long-term development and structural
transformation has been recast in a more positive light since the outbreak of
the financial and economic crisis of 2008 (Griffith-Jones et al., 2016a). Ethiopia
has long made use of its national public development bank (the Development
Bank of Ethiopia) to provide long-term credit (for example, to manufacturing and
structural transformation), contributing to the country’s structural transformation
(Griffith-Jones et al., 2016b).


There is also scope to strengthen the surveillance and regulatory framework
of the financial sector, to enhance trust and mobilize savings more effectively.
Improvements to the overall institutional framework underpinning the credit
market — for example, improving credit report systems and property titling —
may also help to broaden credit provision by reducing risks to lenders.


Despite accelerated progress in recent years, largely as a result of mobile
banking systems, financial inclusion remains very limited in most LDCs. Many
people remain unbanked, particularly among rural populations, those living in
poverty, women and young people. Programmes to address the constraints to
access to financial services among poor rural populations, such as the United
Nations Capital Development Fund’s (UNCDF) MicroLead programme (box 5.1),
can make an important contribution to addressing this issue.


Lack of access to credit can be a major challenge, particularly for
microenterprises, small and medium-sized enterprises (SMEs) and smallholder
farms, an overwhelming majority of which are credit rationed (UNCTAD, 2014a,
2015b). Policymakers can consider using credit allocation to provide support
to credit and savings cooperatives. Microfinance is potentially useful to support
microenterprise, but unlikely to be sufficient.


In many LDCs (such as Bangladesh, Senegal, the United Republic of Tanzania
and Uganda), information and communications technologies (ICTs) are opening
up new opportunities for domestic resource mobilization beyond the traditional
banking sector, notably through mobile banking and money transfer services
(UNCTAD, 2012b: chap. 3). Such mechanisms have considerable potential,
particularly where the outreach of formal banks is inadequate, and in a context


Finance plays a fundamental role in
productive-capacity development.


Development banks can have a
transformational impact.


Despite accelerated progress and
new opportunities opened by ICT


penetration, financial inclusion
remains very limited in most LDCs.




The Least Developed Countries Report 2016170


of substantial rural–urban migration. Innovative approaches may be helpful in
tailoring such financial services to the particular needs of potential customers,
although the need for an adequate regulatory framework to ensure the reliability
and integrity of the system should not be overlooked.


5. MACROECONOMIC POLICIES


A development-oriented macroeconomic policy framework should combine
macroeconomic stability with investment dynamism and employment generation.
While sound macroeconomic fundamentals are part of an enabling environment
for development, they are not sufficient to spur structural transformation.
Graduation with momentum in most cases requires a considerable scaling
up of investment to address the infrastructural and technological gaps that
undermine both productivity and competitiveness and leave many LDCs
exposed to structural vulnerabilities (as seen in chapter 1). The long-standing
investment needs of LDCs are now magnified by two additional demands: first,
to fulfil the social objectives of the Sustainable Development Goals, which will
require considerable investment, especially in rural areas (UNCTAD, 2015b); and
second, to meet the increased need for resilient infrastructure as a result of
climate change. While recent trends indicate that LDCs have achieved an overall
ratio of investment to gross domestic product (GDP) above the 25 per cent level
deemed necessary for sustained economic growth (Introduction to this Report),
maintaining this progress in the face of a slowing global economy remains a key
challenge.


Fiscal policy has a key role to play in this context, both in financing public
investment directly and through its potential to crowd in private investment
in productive sectors. Particularly beneficial in the latter regard are strategic
infrastructure projects to address bottlenecks that constrain the productive


Box 5.1. UNCDF’s MicroLead and MicroLead Expansion programmes


UNCDF’s MicroLead and MicroLead Expansion programmes have been in operation since 2009, with support from
private philanthropic sources. Through these programmes, UNCDF is seeking to extend the frontier of finance into unbanked
communities by investing in delivery innovations, including a variety of digital channels, agent networks and community-based
savings groups. While these programmes are not exclusively dedicated to LDCs, 18 of the 21 countries in which they are
active are LDCs (Benin, Bhutan, Burkina Faso, Burundi, the Democratic Republic of the Congo, Ethiopia, the Lao People’s
Democratic Republic, Liberia, Malawi, Myanmar, Rwanda, Sierra Leone, Solomon Islands, South Sudan, Timor-Leste, Uganda,
the United Republic of Tanzania and Vanuatu), while one (Samoa) is a graduate from the LDC category.


The MicroLead and MicroLead Expansion programmes focus on providing safe, secure deposit accounts to unbanked
and under-banked populations. Through the MicroLead Expansion programme, UNCDF is challenging formal financial
service providers to reach rural unbanked populations, particularly women, with deposit products and financial education,
both tailored to these unbanked populations’ needs. By deploying alternative delivery channels, such as agency banking and
digital financial services, and working predominantly through informal groups, the programme has increased understanding
amongst financial institutions and their capacity to serve those who were previously considered unbankable. Its savings-led
financial inclusion strategy has the potential to make a significant contribution in countries where exclusion is widespread and
financial depth is limited. As of June 2016, MicroLead Expansion had reached more than 650,000 active clients with savings
accounts and other services through the use of technology, alternative delivery channels, and informal savings group linkage
models. 80 per cent of these active accounts were located in LDCs. By the end of the programme (scheduled for June 2017),
it is expected to reach more than 1.3 million active customers in 11 countries, while moving further into rural markets with
demand-driven, responsibly priced products.


Women are an important beneficiary group of the MicroLead Expansion programme, representing more than 70 per cent of
its active clients. A meta-analysis of evidence from randomized control trials shows consistently positive economic outcomes
as a result of increased access to savings, particularly for rural women, including increasing their productivity, profits and
investment, as well as reducing asset sales to address health emergencies, improving consumption smoothing in the face of
economic shocks, and increasing their legal and psychological control over funds (Buvinic and Furst-Nichols, 2014). Digital
financial services also support women’s participation in the labour force and increase their financial autonomy (GPFI, 2015).


Source: UNCDF.


Macroeconomic policy frameworks
should combine stability with


investment dynamism and
employment generation.


Investment needs are increased by
the SDGs and the need for climate


change adaptation.




171CHAPTER 5. The Path to Graduation and Beyond


sector. Public investments in road networks and electricity provision in African
countries such as Ethiopia, for example, demonstrate the potential for such
projects to enhance firms’ competitiveness and unlock supply responses (Oseni
and Pollitt, 2013; UNCTAD, 2015b). By using labour-intensive construction
techniques where appropriate, infrastructure projects can also generate
substantial multiplier effects, thereby contributing significantly to employment
generation and inclusive growth (UNCTAD, 2013a: chaps. 4, 5).


However, in most LDCs, an increase in public investment on the necessary
scale would require broadening the available fiscal space. As well as considerable
improvements in taxation and revenue collection systems, this requires reforms
to broaden the tax base and diversify public revenues sources; elimination
of exemptions and regulatory loopholes; reinforcement of property taxation
(especially in urban areas); and reducing tax evasion (UNCTAD, 2009a, 2014a:
chap. 6). For those LDCs with abundant natural-resource endowments, it is also
important to capture a greater share of resource rents. In particular, this requires
avoiding a “race to the bottom” to attract resource-seeking investors and
strengthening regulatory frameworks to prevent illicit financial flows related to
trade mis-invoicing (UNCTAD, 2014b: chap. VII). Botswana may be regarded a
success story in this respect, in that its State has successfully captured a major
share of mining rents, which it has devoted to funding economic diversification
(chapter 1).


Accelerated progress in this direction is critical to graduation with momentum,
to reduce aid dependency and prepare graduating countries to cope with post-
graduation changes in their development finance landscape.


The effect of a proactive fiscal stance could be enhanced by the adoption of
accommodative monetary policies, shifting away from a narrow focus on price
stability, especially while inflationary pressures are continue to be dampened by
low international commodity prices. Monetary policy should take full account of
the implications of national circumstances, notably policy regimes and financial
development, for transmission mechanisms (UNCTAD, 2009b: chap. 2; Berg
et al., 2013). Given the limited availability of credit to the private sector, due
attention should also be given to the impact of monetary policy decisions on
credit aggregates, and not only on interest rates.


Although a competitive exchange rate can be an instrument for the
maintenance of export competitiveness, its use for this purpose is constrained
in most LDCs by a combination of import sensitivity, structural current account
deficits and external debt (chapter 1). Exchange rate stability may be enhanced
through the appropriate use of capital controls and/or taxes on inflows of equity
and portfolio investment, both to reduce the volatility of private capital flows
and to increase their contribution to the achievement of overall development
objectives. Ethiopia, for example, has traditionally limited its international
financial vulnerability by limiting its opening to capital inflows mainly to FDI and
government borrowing on international bond markets, while also making use
of outflow controls (Alemu, 2016). Angola, the Democratic Republic of the
Congo and Mozambique, among others, have implemented stronger controls
on capital inflows than the sub-Saharan African average, while Burkina Faso,
Guinea-Bissau and Senegal have put in place stronger-than-average controls
on capital outflows (Massa, 2016).


6. EMPLOYMENT GENERATION


Graduation with momentum requires LDCs to generate jobs on a substantially
larger scale than in the recent past, to provide productive employment for the
growing cohorts of young entrants to the labour market, and thus to reap


Strategic infrastructure investments
can crowd in private investment by


easing supply constraints…


…but increasing investment requires
broadening fiscal space.


A proactive fiscal stance can be
more effective with accommodative


monetary policies.


Exchange rate stability can be
enhanced through capital controls.




The Least Developed Countries Report 2016172


the demographic dividend (UNCTAD, 2013a). The need for poverty-oriented
structural transformation in LDCs to achieve the Sustainable Development
Goals also requires employment creation to be combined with increased labour
productivity (UNCTAD, 2014a). “[F]ull and productive employment and decent
work for all” is not only explicitly included in the Sustainable Development Goals
(Goal 8), but is also closely related to Goals 1 (poverty eradication) and 10
(reduced inequalities).


This combination of employment creation and increased labour productivity
can be promoted by a three-pronged strategy:


• A transformative rural development agenda, synchronizing increased
agricultural productivity with the complementary development of rural non-
farm activities;


• Support to the development of microenterprises and SMEs, including by
improving their access to capital and technical assistance on managerial
and technology issues, and facilitating formalization;


• Public-sector-led employment creation, notably through the use of labour-
based construction methods in large-scale infrastructure projects where
appropriate.3


Complementary measures are also needed in education, including
improvement of vocational training and reform of school curricula to increase
their relevance to the needs of the labour market and the economy as a whole.


7. GENDER


The structural transformation and development of productive capacities
required for graduation with momentum will inevitably be limited to the extent that
certain population groups are constrained in their ability to engage in economic
activities. A particularly important dimension of this broader issue of inclusivity
is gender, as women constitute half of the human resource base and are
systematically disadvantaged in most LDCs (chapter 1). Women’s engagement
in economic activities is constrained by a wide range of obstacles to their
access to labour and other markets, and to education, which interact with other
market imperfections to diminish their productivity and entrepreneurial potential.
Only if these constraints are addressed can the supply response to incentives
aimed at increasing production be fully effective. Key issues are equal access for
women to education, employment and other economic opportunities, finance
and factors of production.


Thus, policies cannot be fully effective in promoting development and
contributing to graduation with momentum unless women are empowered to
realize their potential economic contribution to a much greater extent than is
generally the case in LDCs at present. Consequently, reducing gender inequality
needs to be a cross-cutting consideration across all policy areas, including (but
not limited to) those discussed above.


Appropriate strategies in this area are particularly dependent on local
circumstances, given the role of locally-specific cultures and traditions in many
discriminatory practices. In general, however, tackling gender inequality requires
a combination of policies, which are important both before and after graduation.
These include:


• Actions to remove de facto discrimination in existing public policies and
institutional frameworks (for example, educational systems, agricultural
extension services, procedures for formalization of enterprises and land
titling);


Employment creation is as
imperative as productivity


increases...


…requiring rural transformation,
enterprise development and public-


sector-led employment creation.


Structural transformation and
productive-capacity development
are limited by gender inequality


and economic exclusion.




173CHAPTER 5. The Path to Graduation and Beyond


• Efforts to ensure that new policies and interventions do not lead to such
discrimination, and where appropriate are skewed towards women in such
a way as to counter the disadvantages that they face (for example, in public
employment, support to smallholder farmers and microenterprises and
small enterprises, and support to producer groups and cooperatives);


• Implementation of policies and other interventions to counter market
mechanisms that lead to gender-differentiated outcomes (for example, in
employment markets and access to finance);


• Proactive efforts to identify and harness new opportunities to counter the
obstacles and disadvantages faced by women (for example, the spread of
access to the Internet and mobile telephone networks, and the emergence
of related financial services).


D. The international environment


As discussed in chapter 2, LDCs’ economic performance is extremely
vulnerable to changes in the international environment. Their exposure to
exogenous shocks originating from the fluctuations of international markets is
accentuated by geographical challenges, high levels of export concentration
and commodity dependence, structural dependence on foreign savings and
high (though declining) aid dependence.


While the economic environment for LDCs was relatively favourable in the
years after 2000, reflecting global economic conditions (UNCTAD, 2010: chap.
1), it has been considerably less conducive to their development since the global
financial and economic crisis. Following some encouraging signs of resilience
in the immediate aftermath of the crisis, the uneven global recovery and slow
world demand growth have since impacted on LDCs’ economic performance
(as discussed in the Introduction). Moreover, the external environment may well
deteriorate further, if the effects of anaemic global demand and weak commodity
prices are compounded by increased financial volatility. UNCTAD has already
highlighted the dangers of mounting external and internal debt in a number of
African LDCs (UNCTAD, 2016b). Further downside risks may stem from growing
exchange rate volatility, most notably of the euro, whose effects are directly
transmitted to those African LDCs in the CFA franc zone.


There is little doubt that a more stable and development-oriented international
environment would contribute greatly to improving the economic outlook for
LDCs. Such an environment should include, in particular, the resolution of two
issues long highlighted by UNCTAD: volatility in commodity markets and the
absence of a multilateral debt structuring mechanism (UNCTAD, 2010, 2015d).
Less volatile and more predictable commodity markets would reduce the
uncertainty of LDC export revenues and current account balances, as well as
facilitating the mobilization of resource rents for the development of productive
capacities (UNCTAD, 2008: chap. II; Nissanke, 2011).


Capital-scarce LDCs would also gain considerably from reform of the
international financial architecture to redress its chronic instability, tackle
the current crisis and address their particular vulnerabilities and concerns
(UNCTAD, 2015d). Of particular importance to these countries is more stable
and predictable provision of international liquidity, to enhance their access to
development finance and allow them to address their distinctive needs (UNCTAD,
2014a). While official finance is only one of the pillars of resource mobilization,
the recent decline in ODA disbursements to LDCs is a source of concern,
especially in the context of the Sustainable Development Goals. Similarly, while
the external debts of many LDCs were reduced through the Heavily Indebted


The global economic environment
for LDCs has become more
challenging since 2008, and


may deteriorate further.


Reducing commodity price volatility
and reforming the international


financial architecture would
greatly contribute to improving the


economic outlook for LDCs...


…including by establishing a
multilateral debt restructuring


mechanism.




The Least Developed Countries Report 2016174


Poor Countries Initiative and the Multilateral Debt Relief Initiative, recent trends
indicate that they would benefit considerably from the establishment of a
multilateral debt restructuring mechanism, as well as from the ongoing reform
of the debt sustainability framework. In order to contribute to international policy
action, UNCTAD has formulated a coherent set of principles for sovereign debt
resolution mechanisms (UNCTAD, 2015d: chap. V).


Strengthening regional integration and forging stronger financial and trading
partnerships within the global South can also contribute to a more supportive
international environment, both for LDCs and for graduates from the LDC
category. Exports to regional and other Southern markets tend to be more
sophisticated than those to developed country markets, providing greater
scope for growth and structural transformation (Klinger, 2009; UNCTAD, 2010;
UNECA, 2015a). Deepening regional integration could be particularly beneficial
to LDCs in Africa, where negotiations for the establishment of a Continental
Free Trade Area are underway and member countries of the Common Market
for Eastern and Southern Africa, the East African Community and the Southern
African Development Community have already reached an initial agreement
on the establishment of a tripartite free-trade area (Mevel and Karingi, 2013;
UNECA, 2015a).


Likewise, closer regional cooperation in the financial sphere could contribute
significantly to resource mobilization for the development of productive
capacities. Potentially beneficial initiatives include measures to strengthen the role
of regional development banks; foster the emergence of regional bond markets;
reduce transaction costs for migrant remittances; and establish currency swap
arrangements to reduce the need for reserve accumulation (UNCTAD, 2010,
2015d). Most African LDCs are involved in some form of initiative aimed at
monetary and financial integration, in the context of regional trade agreements.
These initiatives are currently at different stages of advancement, ranging from
existing monetary unions (for example, the West African and Central African
CFA zones, and the Common Monetary Area of the Southern African Customs
Union) and planned monetary unions (for example, the West African Monetary
Zone) to schemes for cooperation and convergence on monetary and financial
issues (for example, in the Common Market for Eastern and Southern Africa and
the East African Community) (UNECA, 2008).


E. International support measures


As the discussion in chapter 3 of this Report highlights, there is unquestionably
considerable scope to enhance the effectiveness of ISMs for LDCs. Sustainable
development and graduation with momentum require the international
community to move beyond symbolic acts, such as “best-endeavours” clauses
and aid targets that remain unfulfilled for decades, to the establishment of
specific and concrete measures providing tangible and predictable support that
is appropriate to and commensurate with LDCs’ development needs. There is
thus a need for continued pressure on the international community to deliver
such ISMs, as well as to fulfil their existing commitments and remove obstacles
to LDCs’ utilization of existing ISMs.


1. DEVELOPMENT FINANCE


The current development finance architecture is conducive neither to
graduation with momentum nor to the achievement of the Sustainable
Development Goals in the LDCs. ODA plays a critical role as the main source
of external financing to LDCs, amounting to an average of $47 per person and


Stronger regional integration and
South-South cooperation can
contribute to graduation with


momentum in the financial sphere
as well as in trade.


Graduation with momentum
requires concrete ISMs providing


support commensurate with LDCs’
development needs.




175CHAPTER 5. The Path to Graduation and Beyond


some 5 per cent of gross national income in 2014. Achieving the Goals and the
objectives of the IPoA will require a major increase in ODA to LDCs, to meet the
international target of 0.15–0.2 per cent of donor country gross national income.
All donors should also fulfil their commitment (under paragraph 52 of the Addis
Ababa Action Agenda) to allocate at least 50 per cent of their net ODA to LDCs.
This is of particular importance to those countries expected to make up the LDC
group in 2025 and beyond.


Development partners should take account of the structural handicaps
and vulnerabilities that characterize LDCs, and make aid more stable, more
predictable and less procyclical (Guillaumont, 2015). The General Assembly (in
resolution 67/221 (United Nations, 2013)) has also called upon development
partners to consider the LDC criteria explicitly in their ODA allocations. In
practice, however, donors have proved reluctant to link their aid in a consistent
way to recipient countries’ needs or levels of development (Alonso, 2015).


Graduation with momentum (and fulfilment of the Sustainable Development
Goal and IPoA targets) also require improvements in development financing
practices, to increase the effectiveness of ODA in promoting structural
transformation and building resilience. A key aspect of this is closer alignment of
ODA with recipients’ national development strategies, in accordance with donor
commitments under the Paris Declaration on Aid Effectiveness (OECD, 2005).
As discussed in chapters 2 and 3, a key lesson of the graduation experiences of
Botswana and Samoa was the importance of harnessing development finance
to national goals.


Another important consideration is the sectoral allocation of ODA. Prior to
the 2030 Agenda, influenced by the orientation of the Millennium Development
Goals towards social goals, donors shifted ODA allocations towards social
infrastructure and services, which accounted for 47 per cent of their total aid in
2014, compared with 30 per cent for productive-capacity-building, of which only
one fifth was for agriculture. While ODA to social infrastructure and services is
undoubtedly important, productive capacities require at least equal prominence,
given the critical importance to all LDCs of removing constraints to productive
investment, innovation and upgrading.


FDI flows to LDCs have increased over time, and now account for 3.5 per
cent of their GDP. However, LDCs’ capacity to attract private capital flows
continues to be weakened by their structural conditions, including small
domestic markets, limited financial sector development, weak regulation, limited
human capital and inadequate infrastructure. Many LDCs have responded by
seeking to attract FDI by offering foreign companies privileges and exemptions
that are often not provided to domestic firms. However, as argued in The
Least Developed Countries Report 2010, “the excessive focus on promoting
FDI and neglect of domestic investment [is] … a biased and counterproductive
approach”, particularly in view the role of a vibrant domestic private sector in
attracting sustained foreign capital flows (UNCTAD, 2010:167).


The more recent graduate countries (Cabo Verde, Maldives and Samoa)
have succeeded in increasing FDI in the post-graduation period, mostly in
the tertiary sector, average net inflows rising from 2.4 per cent of their GDP in
2000–2002 to 5.9 per cent in 2013–2015. However, such an increase cannot
be relied upon in all graduating countries. It is also important to ensure that
financing is oriented towards the specific needs of each LDC. Where there is the
prospect of a post-graduation increase in FDI, governments should therefore
introduce policies ahead of graduation to promote domestic investment in, and
orient foreign investment towards, development-oriented activities rather than
extractive industries.


Donors should fulfil their ODA target
commitments, and make aid more


stable and predictable,
and aligned with national
development strategies.


Productive-capacity development
should be as high a priority for ODA
as social infrastructure and services.


Policies to direct FDI towards
development-oriented activities
may usefully be adopted before


graduation.




The Least Developed Countries Report 2016176


Graduation with momentum requires the use of all appropriate financing
sources, including borrowing (where this is possible within the limits of debt
sustainability) as well as ODA and FDI. Combining financing from different
sources can contribute to the advancement of wider development objectives
(such as SME development, risk reduction, environmental benefits and improved
access to financing opportunities), in addition to the direct benefits of individual
investment projects.


Blended finance — combining ODA and/or philanthropic funds with other
private development finance — has been argued to offer an opportunity to
leverage public resources to mobilize additional private finance for infrastructure
and other investments, while underwriting risks and providing technical
assistance and market incentives (AFD and UNDP, 2016). While large-scale
projects can attract FDI, blended finance can also mobilize private domestic
financing (for example, from pension funds and commercial banks), particularly
for local development projects.4 It also has the potential to leverage diaspora
direct investment in projects with transformational impact (UNCTAD, 2012b).


However, while blended finance may thus have the potential to contribute
to graduation with momentum, caution is warranted in its use, due to the
complexity of the related financial instruments and the risk of creating contingent
liabilities for the public sector. It is also important that the share and terms of
the concessional element appropriately reflect the level of development and
vulnerability of the recipient country. The use of blended finance should therefore
be restricted to projects that would not be undertaken in the absence of such
financing, and should prioritize projects with clear benefits for economic and
social development (UNCTAD, 2015d: chap. VI).


Public participation in blended finance can also be used as an instrument of
industrial policy, through use of the concessional element (typically funded by
ODA) to orient investments towards activities with a potentially transformational
impact (for example, in new sectors or in technological upgrading), or which
promote inclusiveness (for example, through job creation, rural development, or
economic empowerment of women or marginalized groups) or environmental
sustainability. Blended finance projects may also contribute to institutional
development, through technical assistance to local banks, pension funds, and
national and local authorities for project financing, impact assessment and risk
mitigation techniques, for example (UNDP and UNCDF, 2016).


Financial instruments such as GDP-indexed bonds, countercyclical loans and
weather insurance may have some potential to reduce vulnerability and improve
risk management — an issue of particular importance to the 40 LDCs that have
relatively high economic vulnerability, as measured by the EVI. It may also be
possible to build domestic resilience through appropriately designed insurance
policies to offset the losses associated with underdeveloped infrastructure.


Despite their negligible historical contribution to climate change, it is LDCs
that are most affected by its impacts. Various types of external financing, some
of them LDC-specific, are available to help LDCs to strengthen their resilience
to such impacts. Such funds should conform to the United Nations Framework
Convention on Climate Change, in particular the principles of common but
differentiated responsibility and respective capacities. Development partners
should both increase technical assistance to LDCs to incorporate climate
adaptation needs into their national development strategies, and ensure that the
LDC Fund has adequate resources to finance these needs in full and in a timely
manner.


Graduation from the LDC category must not prevent countries from
accessing climate funds. Rather, graduating countries should retain access


Blended finance can offer
opportunities, but needs to be


treated with caution.


Climate funds should conform
to the principle of common but
differentiated responsibilities.


Technical assistance is needed
to develop and secure adequate
financing for green investment


projects.




177CHAPTER 5. The Path to Graduation and Beyond


commensurate with the needs and risks they face, in line with smooth transition
practices. The Green Climate Fund, a stand-alone multilateral financing entity
that aims to deliver equal amounts of funding for mitigation and adaptation,
could be extremely beneficial to LDCs and graduating countries alike.


Technical assistance is also needed to enable LDCs and graduating
countries to develop green investment projects and secure adequate financing
for them, including through innovative financing mechanisms such as green and
blue bonds, whose proceeds are tied to environmentally friendly investments.
However, effective mobilization of all these financing mechanisms requires
significant improvements in LDCs’ managerial and institutional capacities.


2. PROPOSAL: AN LDC FINANCE FACILITATION MECHANISM


Chapter 3 highlighted the problems arising, not merely from the limited
fulfilment of international commitments to financial ISMs, but also of the
constraints LDCs face in securing access to those that are available. This applies
both to LDC-specific ISMs and to those open to all developing countries, under
which LDCs are in principle equally entitled to support.


A key issue is access to finance. Over recent decades, an increasingly
complex architecture of international finance for development has evolved,
encompassing an ever-growing multitude of separate but interrelated multilateral,
regional, bilateral and public–private institutions and mechanisms, and separate
funding windows within institutions. While the case of climate finance, highlighted
in chapter 3, is particularly acute, the issues of fragmentation and complexity
extend across the development finance architecture as a whole.


This has two consequences. First, while the 2030 Agenda emphasizes
the holistic and interdependent nature of the various elements of sustainable
development, funding is increasingly compartmentalized, potentially impeding
financing for (and thus discouraging) investments based on cross-cutting or
holistic approaches. Second, increasing fragmentation has given rise to multiple
potential funding sources for projects within certain areas. This may be an
obstacle to locating an appropriate funding source, as each agency has its own
particular criteria and priorities, as well as its own (often complex) application and
monitoring procedures. These two aspects give rise to an unnecessary obstacle
to funding and an excessive burden on the institutional capacities of LDCs.
There is also a risk that they will give rise to a corresponding fragmentation
of investments in recipient countries at the expense of more systemic and
holistic approaches, and that investment programmes will become driven by the
priorities of funders rather than countries’ own needs and priorities.


These issues argue for a considerable streamlining of the development
finance architecture across all sectors; for much faster progress towards the
coordination and harmonization of donor requirements; and for greater efforts
to ensure that such requirements take full account of the constraints facing
recipient countries, particularly LDCs. However, the limited progress made
towards fulfilment of commitments in these areas in the decade since the Paris
Declaration (OECD, 2005) indicate the need for an alternative approach if this is
not to be a serious obstacle to the achievement of the Sustainable Development
Goals.


Specifically, the effectiveness of financial ISMs could be greatly enhanced by
the establishment of an LDC finance facilitation mechanism (FFM) as a “one-stop
shop” to identify potential funding sources for the investment projects contained
in their national development plans across all areas of sustainable development,
and to support funding applications from LDCs. By developing the necessary


The architecture of international
finance for development has


become increasingly complex and
fragmented…


...giving rise to an unnecessary
obstacle to funding and an
excessive burden on LDCs'


institutional capacities.


A considerable streamlining
is needed and a finance facilitation
mechanism for LDCs could address


the issues more immediately.




The Least Developed Countries Report 2016178


knowledge of donor requirements, priorities and preferences, and monitoring
the constantly evolving architecture of development finance, this could provide
a valuable public good to LDCs. It could greatly enhance the efficiency of the
process by which the investment needs identified by each country are matched
with funders’ priorities; reduce funding delays and uncertainties; lessen the
administrative burden on LDCs associated with securing investment financing;
and support the movement towards greater country ownership and more
country-led development strategies, as envisaged in the Paris Declaration and
the 2030 Agenda.


Appropriately designed and implemented, such a mechanism could also
contribute to national capacity development through secondments and
“shadowing” of FFM staff on country missions, as well as through capacity-
building and training programmes. It could also play an important role as an
advocate, both for improved delivery on financial commitments to financial
ISMs, and for improved donor coordination and harmonization.


Adequate funding would be essential to the effectiveness of such a
mechanism. While costs could be limited by locating it within an existing
institution, the demands of matching the investment needs of 48 countries
with the priorities of many hundreds of potential funding sources would be
considerable; and with inadequate funding or staffing it could potentially
become a bottleneck, which would obstruct the process as much as facilitating
it. However, in light of the key role of LDCs in the achievement of the Sustainable
Development Goals, and of development (and climate) finance in the attainment
of the Goals in these countries, this might be expected to be a high priority for
donors. In view of its long-standing work on financing for development and on
LDCs, UNCTAD could play a useful role as a member of the board of the FFM,
which would decide its priorities, policies and practices.


3. TRADE5


Although not all countries have adopted preferential trade schemes for
LDCs, and the coverage of existing duty-free quota-free (DFQF) arrangements
remains incomplete, preferential market access stands out as one of the most
effective ISMs in favour of LDCs. Achieving 100-per-cent DFQF coverage for all
exports from all LDCs would thus represent an important step, both towards
the Sustainable Development Goal target of doubling LDCs’ share in global
exports (target 17.11) (Bouët and Laborde, 2011; Nicita and Seiermann, 2016)
and towards graduation with momentum. By the same token, the loss of
preferential market access represents the most serious negative factor in the
economic calculus of graduation, giving rise to potential annual losses of export
revenues in excess of $4.2 billion across LDCs as a whole. The implications vary
greatly across countries according to their respective trading patterns, export
compositions and alternative trade arrangements (chapter 4). In some Asian
LDCs in particular, there is a risk that the competitiveness of manufactured
exports may be undermined. In a context of footloose foreign investment, and
given outsourcing practices in buyer-driven value chains (notably in the apparel
sector), this could trigger some relocation along global production networks,
jeopardizing these countries’ diversification efforts.


Thus, a key feature of a successful smooth transition strategy is to ensure
that some degree of preferential access is retained in key export markets
through other unilateral preference schemes (such as the Generalized System
of Preferences), or through bilateral or regional agreements. This requires both
a proactive role on the part of the graduating country and collaboration and
flexibility on the part of its developed and developing trade partners, to prevent
the disruption of trade relations along established value chains. The experience


Achieving 100 per cent DFQF
coverage for LDC exports would be


an important step.


A key objective of smooth transition
should be to maintain some degree


of preferential market access
in key export markets.


Successful smooth transition
requires a proactive role of the


graduating country and collaboration
of development partners.




179CHAPTER 5. The Path to Graduation and Beyond


of Cabo Verde is paradigmatic in this regard: shortly after losing its eligibility
under the European Union’s LDC-specific Everything But Arms initiative, the
country successfully applied to its Generalized System of Preferences Plus
scheme, hence retaining a significant preference margin relative to its non-LDC
competitors (chapter 4).


Notwithstanding the tangible benefits of preferential market access, however,
it is important not to overemphasize its strategic value. Preference erosion can
be expected to continue as liberalization of trade continues, and may well
accelerate with the conclusion of “mega-regional” trade agreements currently
under discussion; and this will inevitably reduce the commercial value of
preferential treatment for LDCs over time (UNECA, 2015a). To offset the effects
of preference erosion, preference-granting partners could review their respective
rules of origin, to bring them into line with the WTO Ministerial Decision on
Preferential Rules of Origin for Least Developed Countries, originally adopted in
2013 in non-binding language and further elaborated two years later.


The strategic value of preferential market access is further weakened by the
growing relevance of trade-restrictive non-tariff measures (NTMs) relative to tariff
barriers, which has been identified in a growing body of research (UNCTAD,
2013b).6 This is particularly pertinent in the context of LDCs, many of which
are specialized in products (notably agricultural goods) that are subject to
numerous NTMs, and whose producers face particular difficulty and/or expense
in complying with them (Nicita and Seiermann, 2016).


This highlights the importance of strengthening technical and financial
assistance to LDCs on NTM-related issues in the context of the Aid-for-Trade
initiative. Key elements of such assistance include:


• Strong and tangible support for the upgrading of hard and soft infrastructure
in LDCs;


• Capacity-building for the private sector, particularly SMEs, on NTM
compliance and related challenges;


• Capacity development and institution-building in the areas of quality
assurance and standard-setting and -monitoring;


• Assistance for systematic data collection and dissemination on NTMs and
their restrictiveness;


• Technical assistance for the implementation of the Trade Facilitation
Agreement, to reduce trade-related costs (notably for SMEs), and exploit
the flexibilities in part II of the Agreement to ensure that the sequencing of
implementation measures supports each country’s development objectives.


Ongoing efforts to streamline NTMs should also be maintained, and should
aim to ensure convergence, to the extent possible, towards commonly accepted
international standards so as to reduce compliance costs (UNCTAD, 2013b).


Trade facilitation is of particular importance because of the alarming
prevalence of trade mis-invoicing practices in LDCs, and their serious impact on
domestic resource mobilization. The considerable scale of illicit financial flows, in
particular from African LDCs, highlights the need to strengthen the international
cooperation framework between customs agencies, revenue authorities and
other related agencies to tackle such practices (UNCTAD, 2016c; UNECA,
2015b). Realizing the potential to leverage the customs cooperation provisions
of the Trade Facilitation Agreement to curb trade misinvoicing is thus a priority
for LDCs, as well as strategic use of the flexibilities enshrined in part II of the
Agreement to reduce administrative obstacles to trade and reduce the high
trade-related costs faced by LDC producers.


The strategic importance of
preferential access should not


be overemphasized given
preference erosion and the
growing relevance of NTMs.


Technical and financial assistance
to LDCs on NTM-related issues


should be strengthened.


Trade facilitation reforms and
customs cooperation should be


leveraged to curb trade misinvoicing.




The Least Developed Countries Report 2016180


Further progress is also needed towards operationalizing the so-called LDC
services waiver, to enable LDCs to take greater advantage of the expansion of
international trade in services (UNCTAD, 2015e). A number of LDCs, particularly
small island developing states, could benefit significantly from increases in
the number of preference-granting countries and of the commercial value of
preferences under the waiver. This could contribute to reducing the chronic
commodity dependence of many LDCs (although services trade can also be
volatile). As technological change and the emergence of GVCs have blurred
the distinction between goods and services, there may be particular merit in
boosting high-value-added services that have strong complementarities with
manufacturing, notably in areas such as finance and ICTs.


More generally, it is clear that LDCs stand to benefit from a reinforcement of
the regime of special and differential treatment (SDT) granted to them in the WTO
context, and efforts are needed to break the current stalemate on this issue. The
Monitoring Mechanism adopted at the Ninth WTO Ministerial Conference could
offer a useful means for LDCs (as well as ODCs) to advocate for a strengthening
of SDT provisions. Efforts are also required to preserve the existing flexibilities to
the extent possible. LDCs should carefully consider the strategic advantages and
disadvantages of proposed “WTO-plus” arrangements in regional and bilateral
trade arrangements, especially those among countries at largely different levels
of development.


An emerging concern is the current lack of a systematic set of smooth
transition procedures within the WTO legal framework to ensure that eligibility
for SDT provisions is not lost abruptly on graduation. In the absence of such
provisions, graduation requires simultaneous modifications to existing legislation
across several areas to implement multiple WTO obligations from which LDCs,
but not ODCs, are exempt. This demands considerable time and resources,
and can give rise to significant uncertainty and disruption for producers and
investors. Technical assistance to preparations for this transition phase may also
be helpful, particularly to those graduating countries with limited institutional
capacities.


4. TECHNOLOGY


Technology has, to a great extent, been the missing link of the ISM
architecture for LDCs. Despite the key role of technological upgrading in
structural transformation and the development of productive capacities, ISMs in
this field have hitherto been very limited.


In principle, the establishment of the United Nations Technology Bank, with
the stated objective of contributing to LDCs’ efforts to build a solid and viable
technological base, represents a first step towards filling this gap. However, its
effective fulfilment of this role will depend, inter alia, on:


• Implementation proceeding on the current schedule without further delay,
particularly in light of the considerable lapse of time since the initial proposal
of the Bank (2011);


• Establishment of a continuous monitoring mechanism to ensure that the
Bank’s stated objective is fulfilled;


• Adequate financing, especially as activities are expanded, to ensure that
the Bank’s effectiveness is not impaired by insufficient funding, as many
other ISMs have been;


Further progress is needed towards
operationalizing the LDC services


waiver.


The absence of a systematic set of
smooth transition procedures in the


WTO is an emerging concern.


Technology has been the missing
link of the ISM architecture.




181CHAPTER 5. The Path to Graduation and Beyond


• Due consideration of the development level of each LDC in the provision of
technical assistance to intellectual property management. Different levels
of economic development require different systems of intellectual property,
as they typically become more stringent at higher levels of development
(Hoekman et al., 2005; Gehl Sampath and Roffe, 2014). Therefore it is
important to avoid encouraging LDCs to adopt more strict intellectual
property protection systems than are compatible with their development
level.


The Bank could play a particular role in the transfer of technologies not
subject to intellectual property (for example, those generated by collaborative
processes for incremental innovations based on free access such as open-
source innovation) and those that are at the end of intellectual validity, which are
often as relevant to LDC development as those subject to continuing intellectual
property protection.


The establishment of the Technology Bank by no means obviates the need to
implement other ISMs in the field of technology. In particular, the ISM foreseen in
article 66.2 of the TRIPS Agreement could be advanced through implementation
by the TRIPS Council of its own 2003 decision to review the system for monitoring
developed countries’ compliance with their obligations under this article. The
Council could usefully require developed countries to adopt a standard format
for reporting to provide comparable information on programmes and policies,
on the basis of an agreed definition of technology transfer. Such reports could
also provide information on the financing involved and, critically, on the impacts
of the measures taken. LDCs could move beyond their current focus on TRIPS-
Agreement implementation to report on the contribution of such technology
transfer to the establishment of a sound and viable technological base, and/or
submit needs assessments indicating priority areas and sectors for technology
transfer (Foray, 2009; Moon, 2011). This would provide greater clarity to the
processes and programmes by which developed countries provide incentives
for the transfer of technologies that contribute to the building of technological
capabilities in LDCs and thus to their long-term sustainable development.


Technology-transfer activities by developed countries could usefully focus on
technologies whose transfer is unprofitable to technology owners, due to high
costs associated with a limited absorptive capacity in the receiving country, but
has a high social return because the technologies correspond to local needs
and contribute to technological upgrading and/or social development. In these
circumstances, market incentives are insufficient to bring about technology
transfer, and additional incentives are therefore required. Such technologies might
include, for example, those needed for the production of drugs and vaccines for
tropical diseases. A second area of focus is medium-level technologies oriented
towards entrepreneurs serving local markets, which may better reflect the factor
endowments characteristic of LDCs than more advanced and capital-intensive
technologies, and be more readily absorbed (UNCTAD, 2014c; Foray, 2009).


Developed countries could also contribute to improving the effectiveness of
technology transfer by funding agencies specialized in linking donor agencies,
private firms holding particular technologies and entrepreneurs in LDCs, acting as
“one-stop” brokerage services for buying and selling intellectual property. Such
agencies would identify the technology needs of firms in LDCs, locate potential
providers of these technologies, and act as intermediaries in the technology-
transfer process, while addressing intellectual-property-related issues and
acting to ensure the effectiveness of technology transfer in the recipient country
(Foray, 2009).


The Technology Bank, once in
operation, could be a first


step towards filling the gap…


…but does not obviate the need for
other technology-related ISMs, such


as operationalizing article 66.2
of the TRIPS Agreement.


Technology transfer could focus
on technologies whose transfer is
unprofitable, despite high social


returns.


Aid could support "one-stop"
brokerage services for
intellectual property.




The Least Developed Countries Report 2016182


F. Least developed country criteria


The political declaration of the Comprehensive High-level Midterm Review
of the Implementation of the IPoA (United Nations, 2016a: para. 48) states that:


We recognize the importance of the reviews by the Committee for
Development Policy of the graduation criteria for the least developed
countries. We recommend the reviews be comprehensive, taking into
account all aspects of the evolving international development context,
including relevant agendas.


Given its broader scope compared to previous development frameworks,
the 2030 Agenda would seem to suggest a possible need for revision of the
criteria, particularly in light of the growing economic divergence between LDCs
and ODCs (chapter 1). There is also a case for considering modifications to the
criteria to take greater account of the considerable heterogeneity of the LDC
group, not least with respect to their geographical vulnerabilities.


In the context of graduation with momentum, there may also be some
potential to improve the ability of the graduation criteria to capture the extent to
which LDCs have overcome the structural impediments to their development.
The experiences of the countries that have already graduated or are expected
to graduate in the coming years (chapter 2) highlight two particular issues: the
potential for LDCs to graduate without having achieved substantial structural
transformation; and the failure of any LDC graduate to date to achieve the
graduation threshold for the EVI.


In addition to increasing the alignment of the LDC criteria with the 2030
Agenda and the Sustainable Development Goals, consideration could be
given to incorporating the perspective of graduation with momentum, to
embed graduation in a longer-term process of sustainable development. This
could be done by improving the measurement of structural transformation in
the criteria and increasing its weight. The share of agriculture, fisheries and
forestry in GDP, used as a proxy for structural transformation within the EVI
(see box figure 1.1 in chapter 1), is at best a partial and imperfect indicator in
this context. On the one hand, agricultural upgrading increases the indicator
(other things being equal) because it expands agricultural production, which
goes against improvements in the EVI; but agricultural upgrading is a critical
component of what The Least Developed Countries Report 2015 calls “poverty-
oriented structural transformation” in LDCs (UNCTAD, 2015a), a precondition
of graduation with momentum. On the other hand, the expansion of low-value
services in the informal sector reduces the agriculture indicator, but this type of
growth of the services sector does not contribute to structural transformation.
These considerations show the shortcomings of the component of the EVI under
analysis. The component might therefore be replaced with a composite index
more fully reflecting the extent of structural transformation, encompassing the
structure and diversification of production, employment and trade; technological
capabilities; labour productivity; urbanization; and demographic dynamics. It
would also be possible to increase the weight of structural transformation in
the EVI, by according a far greater weight to this composite indicator than that
accorded to the agriculture index in the current criterion. One approach would
be to off-set this by reducing the weights of geographical variables (size and
remoteness), which are essentially static rather than dynamic, and thus change
little over time.


Consideration could also be given to improving the environmental aspect
of the EVI. The environmental subindex is currently limited to the share of


The 2030 Agenda suggests a
possible need for revision of


the graduation criteria.


The role of structural transformation
in the criteria could be improved


and strengthened.


The environmental aspect of the EVI
could also be improved to reflect


a broader range of issues.




183CHAPTER 5. The Path to Graduation and Beyond


population in low-elevated coastal zones and victims of natural disasters (see
box figure 1.1 in chapter 1). However, while the former is clearly of critical
importance to some LDCs (notably Bangladesh, Kiribati and Tuvalu), it is not
an effective indicator across all LDCs, particularly those that are landlocked,
where it is zero. It might therefore be beneficial to extend the environmental
subindex. Possible approaches would include adding components reflecting
environmental issues of particular relevance to LDCs, such as the frequency of
extreme weather events and/or the volatility of precipitation; or using existing
environmental indices.7


Given the importance of gender inequality as an obstacle to structural
transformation and development, there might also be a case for adding a gender
component to the graduation criteria. A relatively straightforward approach
would be to add a gender component to the HAI.8


Beyond possible modifications to the formulae used for the criteria,
consideration could also be given to establishing a “vulnerability ceiling” — that
is, a maximum level of the EVI that all countries would need to meet in order to
graduate, in addition to satisfying the existing criteria.9 It could be set at half the
level of the graduation threshold. Given the key importance of reducing structural
vulnerabilities to reach sustainable development beyond graduation, this might
be seen as representing a maximum level of structural vulnerabilities compatible
with graduation with momentum.


A more far-reaching proposal, in line with the concept of graduation with
momentum, would be to separate the structural transformation and environmental
dimensions and build separate indices. The structural transformation index
could also be made a mandatory condition for graduation.


G. Summary


• There is a need to move from graduation strategies focused on meeting
the statistical criteria for graduation to “graduation-plus” strategies that
take a longer-term perspective and lay the foundations for subsequent
development by building productive capacities and fostering structural
transformation.


• Accelerated transformation of rural economies is essential, through
coordinated measures to upgrade agriculture and promote non-farm
activities, taking full advantage of the synergies between the two.


• Structural transformation requires proactive policy action encompassing a
combination of cross-sectoral and sector-specific industrial policies.


• A considerable scaling up of public investment is required, especially in
rural areas, including projects that strategically address bottlenecks in
the productive sector. This requires increasing the available fiscal space
by improving taxation and revenue collection systems, diversifying public
revenue sources and addressing the challenge of illicit financial flows, which
besets fuel- and mineral-exporting countries in particular.


• Addressing gender inequality as a cross-cutting issue across all policy
areas is essential, to ensure that human resources are used more fully and
more efficiently, and entrepreneurship and creativity are harnessed more
effectively for development.


• A more stable and development-oriented international environment is
conducive to graduation with momentum, as well as better and more
effective ISMs. Key issues are reforms to reduce volatility in financial and
commodity markets and to resolve debt crises effectively.


A gender component could
be added to the HAI.


A "vulnerability ceiling" could be
considered as a condition


for graduation.




The Least Developed Countries Report 2016184


• Donors should meet their long-standing commitments both on the level
of ODA to LDCs and on aid effectiveness, including by making aid more
stable and predictable and aligning it with national development strategies
to support the development of productive capacities.


• An LDC finance facilitation mechanism could increase and accelerate LDCs’
access to official finance and reduce the burden on their limited institutional
capacities – but adequate funding and staffing would be essential. UNCTAD
could play a useful role as a member of its board.


• Fulfilment of the commitment to 100-per-cent DFQF market access for
all exports from all LDCs would represent an important step; and trading
partners should bring their rules of origin into line with the 2015 WTO
Ministerial Decision on the issue.


• Efforts are needed to break the current stalemate on reinforcing the existing
SDT regime in the WTO, since that would ensure that SDT measures
become more meaningful and effective.


• Technology has been the missing link of the ISM architecture. Once
operational, the Technology Bank should help to fill this gap; but other
measures are also needed to promote technology transfer to LDCs and
the strengthening of their technological capabilities.


• Consideration could be given to revising the graduation criteria to give
greater weight to structural transformation; to improve their environmental
dimension; to take account of gender inequality; and/or to impose a ceiling
on the level of vulnerability at graduation.




185CHAPTER 5. The Path to Graduation and Beyond


Notes


1 The political declaration of the Comprehensive High-level Midterm Review of the
Implementation of the IPoA states: “It is also important that graduation be seen not
as a cut-off point, but as a resolute move towards better and sustained economic
development and virtuous and inclusive sustainable development.” (United Nations,
2016a: para. 46).


2 Various tools have been developed which could be used in this context, including
growth diagnostics (Hausmann et al., 2008), industrial strategy design (UNCTAD and
UNIDO, 2011), operationalizing the product space (Fortunato et al., 2015) and the
Growth Identification and Facilitation Framework (Lin and Monga, 2010).


3 “Labour-based in relation to the production process and technologies used in the
production of goods and materials and in Construction Works means methods of
production and technologies that are designed and managed so as to promote the
creation of employment with predetermined socio-economic benefits” (ILO, 2002:
Glossary of terms).


4 In the case of the Local Finance Initiative of UNCDF (which finances transformative
investment with impact on local communities) for example, the leverage ratio between
the ODA (grant) element and domestic finance is 1 to 10 (UNDP and UNCDF, 2016).


5 The rise of global production networks has dramatically intensified the interconnection
between international trade and investment flows. Thus, while the following discussion
essentially takes an international trade perspective, reflecting the more tangible
nature of ISMs in this area, much of it also pertains, mutatis mutandis, to international
investment.


6 Despite the overall weakening of tariffs as trade barriers, their role is uneven across
products and industries. Thus, tariff escalation in metal products still can act as a
deterrent to export upgrading in LDCs, as seen in chapter 3.


7 Examples of environmental indices are the Environmental Performance Index (Hsu,
2016) and the Physical Vulnerability to Climate Change Index (Guillaumont and Simonet,
2011).


8 An indicator of the gender gap which can be used is the Gender Development Index
calculated by the United Nations Development Programme as part of the Human
Development Index.


9 It is important to recall that improvements in the vulnerability situation of a country are
reflected in reductions of the EVI. This is the opposite of the other two LDC criteria
(Income and HAI), where improvements are measured as increases in the indicators.




The Least Developed Countries Report 2016186


References


AFD and UNDP (2016). Financing the SDGs in the Least Developed Countries (LDCs):
Diversifying the Financing Tool-box and Managing Vulnerability. Agence Française de
Développement and United Nations Development Programme. Paris and New York.


Alemu G (2016). Financial inclusion, regulation and inclusive growth in Ethiopia. In: Griffith-
Jones S and Gottschalk R, eds. Achieving Financial Stability and Growth in Africa.
Routledge. Abingdon and New York:137–157.


Alonso JA (2015). Supporting LDCs’ transformation: How can ODA contribute to the
Istanbul Programme of Action in the post-2015 era? CDP background paper No. 28.
United Nations Department of Economic and Social Affairs. New York.


Balgobind J (n.d.). Local institutions, small-scale coffee farmers and bargaining power:
The case of the Ethiopia Trademark and Licensing Initiative. University of Amsterdam.
Available at: http://dare.uva.nl/cgi/arno/show.cgi?fid=569206 (accessed 30 October
2016).


Berg A, Charry L, Portillo RA and Vlcek J (2013). The monetary transmission mechanism
in the tropics: A narrative approach. IMF Working Paper No. 13/197. International
Monetary Fund. Washington, D.C.


Bouët A and Laborde D (2011). Duty free, a round for free and the least-developed countries.
In: Martin W and Mattoo A, eds. Unfinshed Business? The WTO’s Doha Agenda. World
Bank and Centre of Economic Policy Analysis. Washington, D.C.:145–178.


Buvinic M and Furst-Nichols R (2014) Promoting women’s economic empowerment. What
works? Policy Research Working Paper No. 7087. World Bank. Washington, D.C.


Foray D (2009). Technology transfer in the TRIPS age: The need for new types of partnerships
between the least developed and most advanced economies. ICTSD Intellectual
Property and Sustainable Development Series No. 23. International Centre for Trade
and Sustainable Development. Geneva.


Fortunato P, Razo C and Vrolijk K (2015). Operationalizing the product space: A road map
to export diversification. UNCTAD Discussion Paper No. 219. UNCTAD. Geneva.


Gehl Sampath P and Roffe P (2014). LDCs and the TRIPS Agreement: Exploring a viable,
long-term win-win. Bridges Africa. 3(8):4–8.


Griffith-Jones S, Karkowski E and Dafe F (2016a). A financial sector to support development
in low-income countries’. In: Griffith-Jones S and Gottschalk R, eds. Achieving Financial
Stability and Growth in Africa. Routledge. Abingdon and New York:1–20.


Griffith-Jones S, Gottschalk R and Spratt S (2016b). Conclusion. In: Griffith-Jones S and
Gottschalk R, eds. Achieving Financial Stability and Growth in Africa. Routledge.
Abingdon and New York:158–178.


GPFI (2015). Digital financial solutions to advance women’s economic participation: How
governments, private sector and development organizations can bring more women
into the global economy through digital financial services - A report by the World Bank
Development Research Group, the Better Than Cash Alliance, the Bill & Melinda Gates
Foundation and Women’s World Banking to the G20 Global Partnership for Financial
Inclusion. Global Partnership for Financial Inclusion (GPFI). Istanbul.


Guillaumont P (2015). Measuring structural vulnerability to allocate development assistance
and adaptation resources. Development Policies Working Papers No. 68. Fondation
pour les Etudes et Recherches sur le Développement International. Clermont-Ferrand.


Guillaumont P and Simonet C (2011). To what extent are African countries vulnerable to
climate change? Lessons from a new indicator of physical vulnerability to climate
change. Development Indicators Working Paper No. 8. Fondation pour les Etudes et
Recherches sur le Développement International. Clermont-Ferrand.


Hausmann R, Rodrik D and Velasco A (2008). Growth diagnostics. In: Serra N and Stiglitz JE,
eds. The Washington Consensus Reconsidered: Towards a New Global Governance.
Oxford University Press. Oxford and New York:324–355.


Hoekman BM, Maskus KE and Saggi K (2005). Transfer of technology to developing countries:
Unilateral and multilateral policy options. World Development. 33 (10):1587–1602.


Hsu A (2016). 2016 Environmental Performance Index. Yale University. New Haven
(CT). Available at http://epi.yale.edu/sites/default/files/2016EPI_Full_Report_opt.pdf
(accessed 20 October 2016).


ILO (2002). Best practice guide to labour-based methods and technologies for employment
intensive contruction works. International Labour Office. Geneva. Available at: http://
www.ilo.org/wcmsp5/groups/public/@ed_emp/@emp_policy/@invest/documents/
instructionalmaterial/wcms_asist_8390.pdf (accessed 28 October 2016).


Klinger B (2009). Is South–South trade a testing ground for structural transformation?
Policy Issues in International Trade and Commodities Studies Series No.40.
UNCTAD. New York and Geneva.




187CHAPTER 5. The Path to Graduation and Beyond


Lin, JY and Monga C (2010). Growth identification and facilitation: The role of the State in
the dynamics of structural change. Policy Research Working Paper No. 5313. World
Bank. Washington, D.C.


Massa I (2016). Literature survey on capital account management in low-income countries.
In: Griffith-Jones S and Gottschalk R, eds. Achieving Financial Stability and Growth
in Africa. Routledge. Abingdon and New York:46–60.


McMillan M, Rodrik D and Verduzco-Gallo Í (2014). Globalization, structural change, and
productivity growth, with an update on Africa. World Development. 63(c):11–32.


Mevel S and Karingi S (2013). Towards a continental free trade area in Africa: A CGE
modelling assessment with a focus on agriculture. In: Cheong D, Jansen M and Peters
R, eds. Shared Harvests: Agriculture, Trade, and Employment. International Labour
Office and UNCTAD. Geneva:281–324.


Moon S (2011). Meaningful technology transfer to the LDCs: A proposal for a monitoring
mechanism for TRIPS article 66.2. ICTSD Policy Brief No. 9. International Centre for
Trade and Sustainable Development. Geneva.


Nicita A and Seiermann J (2016). G20 policies and LDC export performance. Policy Issues
in International Trade and Commodities, Study Series No. 25. UNCTAD. UNCTAD/
ITCD/TAB/77. Geneva.


Nissanke M (2011). Commodity market and excess volatility: Sources and strategies to
reduce adverse development impacts. Common Fund for Commodities. Amsterdam.


OECD (2005). Paris Declaration on Aid Effectiveness and the Accra Agenda for Action.
Organisation for Economic Co-operation and Development. Paris. Available at http://
www.oecd.org/dac/effectiveness/34428351.pdf (accessed 18 October 2016).


Oseni MO and Pollitt MG (2013). The economic costs of unsupplied electricity: Evidence
from back-up generation among African firms. Cambridge Working Papers in Economics
No. 1351. Energy Policy Research Group. University of Cambridge. Cambridge.


UNCTAD (2006). The Least Developed Countries Report 2006: Developing Productive
Capacities. United Nations publication. Sales No. E.06.II.D.9. New York and Geneva.


UNCTAD (2007). The Least Developed Countries Report 2007: Knowledge, Technological
Learning and Innovation for Development. United Nations publication. Sales No. E.07.
II.D.8. New York and Geneva.


UNCTAD (2008). Trade and Development Report 2008: Commodity Prices. Capital Flows
and the Financing of Investment. United Nations publication. Sales No. E.08.II.D.21.
New York and Geneva.


UNCTAD (2009a). Enhancing the Role of Domestic Financial Resources in Africa’s
Development: A Policy Handbook. United Nations publication. UNCTAD/ALDC/
AFRICA/2009/1. New York and Geneva.


UNCTAD (2009b). The Least Developed Countries Report 2009: The State and Development
Governance. United Nations publication. Sales No. E.09.II.D.9. New York and Geneva.


UNCTAD (2010). The Least Developed Countries Report 2010: Towards a New International
Development Architecture for LDCs. United Nations publication. Sales No. E.10.II.D.5.
New York and Geneva.


UNCTAD (2012a). Technology and Innovation Report 2012: Innovation, Technology and
South–South Collaboration. United Nations publication. Sales No. E.12.II.D.13. New
York and Geneva.


UNCTAD (2012b). The Least Developed Countries Report 2012: Harnessing Remittances
and Diaspora Knowledge to Build Productive Capacities. United Nations publication.
Sales No. E.12.II.D.18. New York and Geneva.


UNCTAD (2013a). The Least Developed Countries Report 2013: Growth with Employment
for Inclusive and Sustainable Development. United Nations publication. Sales No.
E.13.II.D.1. New York and Geneva.


UNCTAD (2013b). Non-tariff Measures to Trade: Economic and Policy Issues for Developing
Countries. Developing Countries in International Trade Studies. United Nations
publication. UNCTAD/DITC/TAB/2012/1. New York and Geneva.


UNCTAD (2014a). The Least Developed Countries Report 2014: Growth with Structural
Transformation: A Post-2015 Development Agenda. United Nations publication. Sales
No. E.14.II.D.7. New York and Geneva.


UNCTAD (2014b). Trade and Development Report, 2014: Global Governance and Policy
Space for Development. United Nations publication. Sales No. E.14.II.D.4. New York
and Geneva.


UNCTAD (2014c). Transfer of Technology and Knowledge Sharing for Development: Science,
Technology and Innovation Issues for Developing Countries. UNCTAD Current Studies
on Science, Technology and Innovation. No. 8. United Nations publication. UNCTAD/
DTL/STICT/2013/8. New York and Geneva.


UNCTAD (2015a). From Decisions to Actions: Report of the Secretary-General of UNCTAD
to UNCTAD XIV. UNCTAD (XIV)/1 Rev.1. New York and Geneva.




The Least Developed Countries Report 2016188


UNCTAD (2015b). The Least Developed Countries Report 2015: Transforming Rural
Economies. United Nations publication. Sales No. E.15.II.D.7. New York and Geneva.


UNCTAD (2015c). Technology and Innovation Report 2015: Fostering Innovation Policies
for Industrial Development. United Nations publication. Sales No. E.15.II.D.3. New
York and Geneva.


UNCTAD (2015d). Trade and Development Report, 2015: Making the International Financial
Architecture Work for Development. United Nations publication. Sales No. E.15.II.D.4.
New York and Geneva.


UNCTAD (2015e). Economic Development in Africa Report 2015: Unlocking the Potential
of Africa’s Services Trade for Growth and Development. United Nations publication.
Sales No. E.15.II.D.2. New York and Geneva.


UNCTAD (2016a). UNCTAD Toolbox for Least Developed Countries: Specializing Smartly.
Available at http://unctad14.org/Documents/U14_TC_LDCtoolbox_en.pdf (accessed
21 October 2016).


UNCTAD (2016b). Economic Development in Africa Report 2016: Debt Dynamics and
Development Finance in Africa. United Nations publication. Sales No. E.16.II.D.3.
New York and Geneva.


UNCTAD (2016c). Trade misinvoicing in primary commodities in developing countries:
The cases of Chile, Côte d’Ivoire, Nigeria, South Africa and Zambia. Special Unit on
Commodities. UNCTAD/SUC/2016/2. New York and Geneva.


UNCTAD (2016d). Trade and Development Report 2016: Structural Transformation for
Inclusive and Sustained Growth. United Nations publication. Sales No. E.16:II.D.5.
New York and Geneva.


UNCTAD and UNIDO (2011). Economic Development in Africa Report 2011: Fostering
Industrial Development in Africa in the New Global Environment. UNCTAD and United
Nations Industrial Development Organization. United Nations publication. Sales No.
E.11.II.D.14. New York and Geneva.


UNDP (2009). Enhancing South-South and Triangular Cooperation. United Nations
Development Programme. New York. Available at http://ssc.undp.org/content/ssc/
library/publications/expo/books/EnhancingSouth-SouthandTriangularCooperation.
html (accessed 3 November 2016).


UNDP and UNCDF (2016). Getting to the last mile in least developed countries. United
Nations Development Programme (UNDP) and United Nations Capital Development
Fund (UNCDF). New York.


UNECA (2008). Assessing Regional Integration in Africa III: Towards Monetary and Financial
Integration in Africa. United Nations Economic Commission for Africa. United Nations
publication. Sales No.E.08.II.K.4. Addis Ababa.


UNECA (2015a). Economic Report on Africa 2015: Industrializing through Trade. United
Nations Economic Commission for Africa. United Nations publication. Sales No. E.15.
II.K.2. Addis Ababa.


UNECA (2015b). Illicit financial flows. Report of the High-level Panel on Illicit Financial Flows
from Africa. United Nations Economic Commission for Africa. Addis Ababa. Available at
http://www.uneca.org/sites/default/files/PublicationFiles/iff_main_report_26feb_en.pdf
(accessed 9 October 2016).


UNECA, African Union and African Development Bank Group (2016). Assessing Regional
Integration in Africa VII: Innovation, Competitiveness and Regional Integration. United
Nations Economic Commission for Africa. Sales No. E.16.II.K.1. Addis Ababa.


United Nations (2013). Resolution adopted by the General Assembly on 21 December 2012.
67/221. Smooth transition for countries graduating from the list of least developed
countries. A/RES/67/221. New York.


United Nations (2015). Resolution adopted by the General Assembly on 27 July 2015.
69/313. Addis Ababa Action Agenda of the Third International Conference on Financing
for Development (Addis Ababa Action Agenda). A/RES/69/313. New York.


United Nations (2016a). Comprehensive High-level Midterm Review of the Implementation
of the Istanbul Programme of Action for the Least Developed Countries for the Decade
2011–2020. A/CONF.228/L.1. New York.


United Nations (2016b). Addis Ababa Action Agenda: Monitoring Commitments and Actions.
Inaugural report 2016. Inter-agency Task Force on Financing for Development. United
Nations publication. Sales No. E.16.I.7. New York.




Ph
ot


o
cr


ed
its


: ©
M


ax
im


us
F


ilm
G


m
bH


2
01


4


IL
O:


M
. C


ro
ze


t,
A.


F
io


re
nt


e,
A


. M
irz


a.


FRONT COVER
The top picture signifies the importance of a forward-looking view of graduation, looking beyond qualification
to the challenges that lie ahead. The remaining photos depict the transition of economic activities towards
progressively higher levels of sophistication and diversification that underlies the development of productive
capacities – starting from agriculture, through handicrafts and light manufacturing, to high-technology
production.


The 2011 Istanbul Programme of Action (IPoA) set a target that at least half of the least developed countries (LDCs)
should satisfy the criteria for graduation from the LDC category by 2020. At the midpoint between the adoption of
this target and the target date, UNCTAD’s The Least Developed Countries Report 2016 evaluates the prospects for the
fulfilment of this target, and reviews the significance, nature and process of graduation.


Graduation is the process through which a country ceases to be an LDC, having in principle overcome the structural
handicaps that warrant special support from the international community, beyond that generally granted to other
developing countries. However, the Report argues that it should be regarded, not as a winning post, but rather as a
milestone in a country’s long-term economic and social development. Thus, the focus should not be on graduation itself,
but rather on “graduation with momentum”, which will lay the foundations for long-term development and allow potential
pitfalls to be avoided far beyond the country’s exit from the LDC category. Structural transformation, the importance of
which is explicitly recognized in the 2030 Agenda for Sustainable Development, plays a fundamental role in this process.


Projections conducted for the Report suggest that only ten of the 48 current LDCs are likely to fulfil the graduation criteria
by 2020, well short of the IPoA target. Unless effective national and international action is taken, the ensuing graduations
are also likely to widen the development gap between the remaining LDCs and other developing countries still further.


While there are numerous international support measures (ISMs) for LDCs, their contribution towards graduation is
undermined to varying degrees by vague formulation, non-enforceability of commitments, insufficient funding, slow
operationalization and exogenous developments in international trade and finance. Their effectiveness also depends
critically on the institutional capacities of each LDC to leverage them in support of its own development agenda.
Nonetheless, loss of access to LDC-specific trade preferences after graduation may entail substantial costs, estimated
by the Report to be in the order of $4.2 billion per year across LDCs as a whole. Such losses underscore the importance of
effective smooth transition procedures, and of strong leadership and sound preparation on the part of LDC governments.


The Report highlights the need for LDCs to move from graduation strategies focused on qualification for graduation to
“graduation-plus” strategies that take a long-term perspective and foster structural transformation. Elements of such
strategies include:
t$PPSEJOBUFENFBTVSFTUPVQHSBEFBHSJDVMUVSFBOEQSPNPUFOPOGBSNBDUJWJUJFT
t"DPNCJOBUJPOPGDSPTTTFDUPSBMBOETFDUPSTQFDJýDJOEVTUSJBMQPMJDJFT
tA considerable scaling up of public investment, especially in rural areas, to strategically address bottlenecks in the
QSPEVDUJWFTFDUPS
tAddressing gender inequality across all policy areas, to ensure fuller and more effective use of human resources.


Better and more effective ISMs are needed, as well as a more stable and development-oriented international environment.


Printed at United Nations, Geneva
1624902 (E)–November 2015–5,184


UNCTAD/LDC/2016


United Nations publication
Sales No. E.16.II.D.9
ISSN 0257-7550


ISBN 978-92-1-112905-2




Login