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The Least Developed Countries Report 2016 (Overview)

Summary by UNCTAD, 2016

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The 2016 Least Developed Countries (LDC) Report overview, subtitled 'The path to graduation and beyond: Making the most of the process' summarizes the key findings in the 2016 report. It outlines the deteriorating economic performance, the first steps to sustainable development, the priorities for graduation, and the need for international cooperation for development.

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


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THE LEAST DEVELOPED COUNTRIES
REPORT 2016


OVERVIEW


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


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




UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT


The LeasT DeveLopeD CounTries
reporT 2016


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


UNITED NATIONS


New York and Geneva, 2016


Overview




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.


All references to dollars ($) are to United States dollars. A “billion” means
one thousand million.


Material in this publication may be freely quoted or reprinted, but
acknowledgement is requested, together with a reference to the document
number. A copy of the publication containing the quotation or reprint should
be sent to the UNCTAD secretariat.


The Overview contained herein is also issued as part of The Least
Developed Countries Report 2016 (UNCTAD/LDC/2016).


This Overview can also be found on the Internet,
in all six official languages of the United Nations at www.unctad.org/ldcr


UNCTAD/LDC/2016 (Overview)


This publication has been edited externally.




1


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




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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 obstacles to achieving the
structural transformation needed to advance economically and socially. The




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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, the 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.




4


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 limited number of graduations to date reflects a marked divergence
of development paths among developing countries, with dynamic “emerging




5


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




6


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




7


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.




8


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.


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,




9


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);




10


• 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.


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




11


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.




12


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.




13


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




14


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.




15


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




16


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.




17


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.




18


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




19


of its underlying causes in the pre-graduation period and achieving the
structural transformation that characterizes graduation with momentum.


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




20


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




21


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.


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,




22


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




23


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.


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




24


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




25


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 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.




26


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




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