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UNCTAD Policy Brief No. 20D/2012: LDCs' Boom and Bust in the 2000's: the Turbulent Decade

Policy brief by UNCTAD, 2011

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This policy brief describes the unsustainable growth of LDCs during the 2000s,and the effect of the global recession on these economies, and advocates structural transformation of the LDC economies to become more resilient to external shocks.

N° 20/D, May 2011

Least deveLoped countries series





FS The recent global financial, economic, food and fuel crises reaffirmed the unsustainable foundations of
LDCs’ growth during the 2000s, and their propensity
to boom-bust cycles. LDCs weathered the global
recession better than anticipated but their apparent
macroeconomic resilience clearly reflected the
pickup of commodity prices in the second half of
the year, and the increased lending by multilateral
donors (in Sub-Saharan Africa the IMF financing
commitments increased fivefold between 2008 and
2009. The medium-term outlook is fraught with risks:
many LDCs’ debt burdens have increased, peaking
food prices, and uncertainty regarding increased
ODA flows from crises-stricken developed countries.
The economic downturn should be seen as a wake-
up call, highlighting the weaknesses of the prevailing
development paradigm, which pays little attention to
LDCs’ structural dynamics. LDCs’ recent performance,
even prior to the crisis, demonstrate that in most cases
their pattern of growth contributed only modestly to
the development of productive capacities. Moreover,
the growth acceleration of LDCs during the 2000s was
not inclusive, and led to sluggish progress in terms
of MDG achievements. Looking ahead, unless LDCs
actively pursue economic diversification and reorient
their economies toward a path of inclusive growth,
there is little hope that they will increase their resilience
to shocks, and put an end to the boom-bust cycles.
Prior to the crises many LDCs improved in key
macroeconomic variables, e.g., in the period from
2002 to 2007, 16 individual LDCs, and the LDC group
as a whole, achieved a GDP growth rate of over 7%
per annum, in line with the Brussels Programme of
Action target. The boom was largely underpinned by
external factors, such as the expansion of world trade
(in value and volume), soaring international prices for
key primary commodities, and record levels of ODA,
foreign direct investment (FDI) and remittances inflows
into the LDC region. In turn, the favorable international
environment led to some improvements in LDCs’
macroeconomic situation and wider access to foreign
Growth was, however, unevenly distributed across
countries according to their structural conditions. Oil
and mineral exporters benefited disproportionately from
improved terms of trade, booming export revenues,
and growing inflows of FDI. Conversely, 14 individual
countries posted declining or sluggishly increasing
GDP per capita. Furthermore, LDCs’ performance
shows that the pattern of growth followed by most
during the 2000s was unsustainable, fragile and not
inclusive. This document focuses on the unsustainable
foundations of the boom and its ephemeral nature.

The unsustainable foundations of the boom:
commodity dependence
Beyond macroeconomic variables the export-led
growth model, which underpinned most LDCs’

development strategies during this period, contributed
weakly to redress LDCs structural vulnerabilities. Rapid
GDP growth and export expansion were accompanied
by heightened primary commodities dependence, to
the extent that the share of fuel and mineral in LDCs’
total exports increased from 43% in the year 2000 to
67% in 2007. The increasing concentration of exports
on primary commodities was associated with faster
depletion of environmental capital, leading to a decline
in LDCs’ net adjusted savings. Similarly, the boom left
LDCs’ distance from the productivity frontier basically
unchanged, while agriculture productivity gaps
between developed economies and other developing
countries widened. Agricultural stagnation constrained
the supply-response of the farming sector, leading to
increased dependence on food imports - LDCs’ food
import bill increased from over USD 9 billion in 2002, to
USD 24 billion in 2008.

Sluggish capital accumulation and structural
Despite high rates of GDP growth, the boom did
not address the longstanding issue of inadequate
investment in LDCs. Although gross fixed capital
formation increased slightly, reaching 21% of GDP
in 2007, it continued to be significantly lower than in
other developing countries, and lower than what was
required to overcome the infrastructural gap and foster
investment and technological upgrading. Throughout
this period domestic savings remained stagnant at
around 10% of GDP, with the notable exception of oil
exporters, which witnessed a surge in saving rates.
As a consequence, the majority of LDCs in the 2000s
increased their reliance on foreign savings to finance
capital accumulation. LDCs’ heavy reliance on natural
resources is also testified to by the fact that net
adjusted savings, which take into account the imputed
cost of natural resources’ depletion, fell steadily since
the mid 1990s.
Moreover, the pattern of structural change underlying
LDCs’ boom witnessed the expansion of extractive
industries, whereas the agricultural and manufacturing
sectors, which employ the majority of the labor force,

LDCs’ boom and bust in the
2000s: the turbulent decade











experienced a fall in public revenue at a time when countercyclical
interventions were needed. Again, owing to the free fall of commodity
prices in the international markets, these adverse fiscal effects were
particularly sharp in countries like Angola, Chad, Niger and Zambia,
where mineral-related proceeds played a prominent role in the
revenue structure.

Overall impact of the bust
The overall macroeconomic impact of the crisis has been somewhat
attenuated by the rebound of commodity prices in the second half of
2009, and by substantial increases in concessional financing from
the IMF, the World Bank and regional development banks. Despite
these factors, the fallout of the global recession has slashed GDP
growth rates in most LDCs. The growth slowdown in 2009 was, on
average, in the range of 3 percentage points, but the outcome was
significantly worse for several oil-and mineral-exporters, as well as
various island LDCs. Angola, Cambodia, Chad, Equatorial Guinea
and Maldives all suffered double-digit decelerations in their GDP
growth, while Madagascar, Mauritania, Myanmar, Samoa, Sierra
Leone, and the Solomon Islands saw their growth rates curtailed by
more than 5 percentage points.
Beyond the heterogeneity which characterized the impact of the global
recession on individual countries, the shock was so severe that in
2009 GDP per capita declined in 19 LDC economies. This suggests
that, behind some apparent macroeconomic resilience, the downturn
entailed severe social costs; all the more so since it came on top of the
distress provoked by the food and fuel price hikes of 2008.

Looking ahead
Overall, though LDCs have weathered the crisis better than initially
feared, recovery in 2010 is likely to be weaker than in other developing
countries, and LDCs medium-term outlook remains fraught with risks.
With slowdowns in investment levels, LDCs’ economic recovery will
depend largely on the speed of rebound in the rest of the world and,
notably, on the increased support by international donors.
The global recovery, however, is uneven and fraught with risks, while
most donors seem reluctant to increase their external assistance at a
time of mounting pressureto cut public deficits. Meanwhile, a number
of LDCs continue to be prone to debt vulnerabilities and many others
have incurred additional debt in order to cope with the effects of the
crises. In spite of the HIPC and MDRI initiatives, a total of 10 LDCs
suffered debt distress (4 HIPCs at pre-decision point, 5 interim HIPCs
and 1 non-HIPC), and another 10 were at high risk of debt distress
in 2010.
Faced with this scenario, the proneness of LDC economies to
boom-bust cycles, the lack of structural transformation and their
vulnerability to external shocks call for a far-reaching reappraisal of
the prevailing development paradigm, and for the creation of new
international development architecture (NIDA). It is imperative that
the LDC economies alter their current course toward a new more
inclusive development path. Structural transformation conducive to
the expansion of their productive capacities, and the diversification
of their economies should be at the core of their new development

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and offer the largest scope for increasing returns respectively,
were largely by-passed. In addition, 27 LDCs experienced some
degree of de-industrialization in the 2000-2008 period. Particularly
in the case of African LDCs, the unbalanced pattern of growth led
to an ‘employment challenge’, as the economic expansion did not
generate sufficient productive employment in manufacturing and
services to absorb those seeking work outside the agricultural sector.
The limited effects of growth in terms of employment creation largely
explain why the boom translated only weakly into poverty reduction
and progress towards the MDGs.

The bust: spillovers of the ‘great recession’
The unsustainable foundations of the boom period surfaced in early
2008 but became even more obvious later in the year, when the
LDCs were hit by the global recession. The series of external shocks
exerted a differential impact across LDC economies depending on
their structural conditions, such as pattern of specialization, main
export destinations, size of FDI and remittances flows relative to the
domestic economy.

Financial contagion
Direct financial contagion has been particularly acute in countries
such as Uganda and Zambia, where foreign investors played a
prominent role in the banking and financial sectors. The direct fallout
of the financial turmoil had rather limited effect in LDCs, owing to
their anemic financial development and shallow integration in the
international capital markets. In contrast, the adverse spillovers of the
global recession have been harsher, and exacerbated LDCs’ chronic
debt vulnerabilities.

Falling exports
The contraction of export revenues (-26% in 2009) has been the main
transmission channel of the crises in LDCs, due to the slump in the
world demand and the free fall of commodity prices between the last
quarter of 2008 and the first quarter of 2009. In this respect, exports’
concentration and structural composition were amongst the major
determinants of the differential impact of the crisis, underscoring
once more the importance of economic diversification. In fact, price
and demand shocks have varied largely by product, hitting fuels and
mineral commodities disproportionately. Services exports, notably
tourism and maritime transport, were also affected by the downturn,
with severe consequences for island LDCs.

Capital flows and fiscal adjustments
In 2009 FDI inflows to LDCs contracted by 13% compared to 2008;
simultaneously, there were signs of rising profit repatriations on
the part of companies trying to consolidate their balance sheets.
Remittances inflows to LDCs proved more resilient to the crisis,
although their expansion slowed considerably relative to the double
digit growth of the previous years. While the decline in private capital
flows was less than for other developing countries, the LDCs were in
a more difficult situation because of their chronic external vulnerability
and their limited resources to cope with the shock.
Furthermore, due to the slowdown in economic activity, many LDCs