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The Least Developed Countries Report 2011 - Overview

Report by UNCTAD, 2011

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The Least Developed Countries Report 2011 puts forward a policy framework for enhancing the development impact of South–South cooperation, and proposes ways to leverage South–South financial cooperation for development in the LDCs.

THE LEAST DEVELOPED COUNTRIES
REPORT 2011


The Potential Role of South-South Cooperation for Inclusive and Sustainable Development


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


OVERVIEW


EMBARGO
The contents of this Report must not be


quoted or summarized in the print,
broadcast or electronic media before


17 November 2011, 17:00 hours GMT




UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
Geneva


The LeasT DeveLopeD CounTries
reporT 2011


The Potential Role of South-South Cooperation
for Inclusive and Sustainable Development



UNITED NATIONS


New York and Geneva, 2011


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 2011 (UNCTAD/LDC/2011), sales no.
E.11.II.D.5).


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/2011 (Overview)




1


Introduction


This year has been a significant one for the least developed countries (LDCs).
From 9 to 13 May, Heads of State and Government and Representatives
of States gathered in Istanbul for the Fourth United Nations Conference on
the Least Developed Countries (LDC–IV) to discuss the specific development
challenges facing the LDCs and to deliberate on actions which could best
enable their accelerated, inclusive and sustainable development. At the end
of the Conference, member States declared their collective commitment to
a renewed and strengthened global partnership for the development of the
LDCs, and they adopted a new Programme of Action for the Least Developed
Countries for the Decade 2011–2020.


The overarching goal of the Istanbul Programme of Action (IPoA) is “to
overcome the structural challenges faced by least developed countries in
order to eradicate poverty, achieve internationally agreed development goals
and enable graduation from the least developed country category” (para.
27). This goal is expected to be achieved through national policy actions and
international support, which focus on (a) achieving sustained, equitable and
inclusive economic growth in LDCs of at least 7 per cent per annum; (b)
building human capacities; (c) reducing the vulnerability of LDCs to economic
shocks and disasters, as well as climate change, and strengthening their
resilience; (d) ensuring enhanced financial resources and their effective use;
and (e) ensuring good governance at all levels. The aim is to enable half the
LDCs to reach the criteria for graduation by 2020 (para. 28).


An important feature of the IPoA is the enhanced importance given to
building the productive base of LDCs’ economies and promoting structural
change. In this regard, one third of the priority actions agreed by LDCs and
their traditional development partners focus on (a) productive capacity–
building; (b) agriculture, food security and rural development; (c) trade; and
(d) commodities.


Only two LDCs graduated from LDC status during the last decade. It will
therefore need a major up-scaling of effort at both national and international
levels to ensure that at least half the LDCs reach the graduation criterion over
the next 10 years. For part of the last decade, the gross domestic product
(GDP) of the LDCs as a group grew by over 7 per cent. However, this growth
did not generate sufficient productive employment opportunities, despite a




2


rapidly growing labour force. Poverty reduction has therefore been slow. A
shift in the development model is required to promote sustained and inclusive
economic growth.


The key to achieving the ambitious goals of the IPoA is implementation.
LDCs themselves have committed to integrate the policies and measures in
the IPoA into their national and sectoral development strategies. Development
partners have committed to integrate it into their respective national
cooperation policy frameworks, programmes and activities. And developing
countries have also committed to support effective implementation consistent
with their capacities and through South–South cooperation. As paragraph 12
puts it:


“Guided by the spirit of solidarity with least developed countries, developing
countries, consistent with their capabilities, will provide support for the
effective implementation of the programme of action in mutually agreed areas
of cooperation within the framework of South–South cooperation, which is a
complement to, but not a substitute for, North–South cooperation”.


The Least Developed Countries Report 2011 focuses in particular on
the potential role of South–South cooperation in supporting inclusive and
sustainable development in LDCs. It puts forward a policy framework for
enhancing the development impact of South–South cooperation. And it
proposes how to leverage South–South financial cooperation for development
in the LDCs.


Recent economic trends and long-term
outlook and development perspective


In 2010, LDCs grew by 5.7 per cent, one percentage point higher than
in 2009, but far below the average of 7.1 per cent attained during the boom
period. Asian LDCs fared better than African and island LDCs, both during
the crisis and afterwards, because of the “pull” effect of their regional trading
partners, and their more diversified export structure. Although the LDCs
taken as a group did not experience a contraction of economic activity during
the global recession, one fifth of them did fall into a recession. The growth
rate on a per capita basis was negative in 18 LDCs in 2009 and in 9 in 2010.
Finally, six LDCs saw their economic growth in per capita terms contract in
two consecutive years (2009 and 2010).




3


The outlook for the medium term is that the high growth rates of the pre-
crisis economic boom are unlikely to be achieved. The International Monetary
Fund (IMF) forecasts for the LDCs indicate that the growth rates from 2009
to 2016 would be on average around 5.8 per cent, i.e. almost one and a half
percentage points slower than during the boom period. Thus, in the next five
years, LDCs as a group would not be able to reach the growth rate of 7 per
cent, which is one of the main goals of the IPoA for the decade 2011–2020.
Forecasts by country indicate that only 10 LDCs of the total of 48 would
reach the target rate.


International trade has a decisive influence on the economic performance
of LDC economies. While the value of export of merchandise from the LDCs
grew five-fold from 2000 to 2008, the volume exported increased by only 97
per cent. This illustrates the strong effect of commodity prices on the export
boom during the 2000s. Exports declined sharply in value terms in 2009 (-28
per cent), driven by the slump in the exports of African LDCs (-33.6 per cent).
They have since recovered, partly owing to higher commodity prices. But the
exports of goods in 2010 were still below the 2008 level.


The substantial increase in fuel and food prices in the last two years has
again adversely affected many LDCs. Combined with a drought in Eastern
Africa, it has led not only to food insecurity but also to a widespread famine
affecting around 9 million people in 2011. Given the high commodity
dependence of the LDCs, both as net exporters and net importers, the volatility
of their prices has clear detrimental consequences for these economies.


One of the salient features of the high growth rate during the 2000s in the
LDCs was the increase in external financial flows. While the sum of foreign
direct investment (FDI) inflows and workers’ remittances barely reached $10
billion at the beginning of the decade, they were more than five times greater in
2008. However, the global recession reversed some of these previous trends,
so the FDI in 2010 ($26.4 billion) was $6 billion smaller than in 2008 ($32.4
billion). In contrast, workers’ remittances continued to grow even during the
crisis, albeit more slowly. Likewise, the net ODA disbursement, together with
the net debt relief, increased from almost $13 billion in 2000 to $38.6 billion
in 2008. The aid to LDCs has continued to increase, even during the crisis,
and reached a record level of $40.1 billion in 2009, the equivalent of 8.3 per
cent of their GDP.


The current external conditions are such that lower growth rates and
lower export dynamism of the LDCs may be expected in the present decade,




4


coupled with more volatility, especially in commodity prices, and most
worryingly, high fuel and food prices. The trends also portend somewhat
weaker private external capital inflows and possibly less aid. The recovery
from the recent food, energy and economic crisis is, at best, partial in the
LDCs, and the current world economic situation and the outlook in the mid-
term are not promising either.


The DeveLopmenT ChaLLenge in Long-Term perspeCTive


The scale of the development challenge facing LDCs is not simply a
matter of the new post-crisis global economic environment — it also must
be understood against the background of long-term economic and social
trends.


In this regard, the continuing marginalization of LDCs in the global
economy is apparent in a number of dimensions. While LDCs represent a
significant and increasing share of world population (12 per cent in 2009), their
contribution to global output remains below 0.9 per cent, considerably lower
than what it was in the mid-1970s. In other words, one eighth of the world’s
population produces less than one 100th of the world total GDP. With regard
to international trade, the LDCs’ share of world merchandise exports hovered
around 0.6 per cent between the 1980s and the early 2000s, and has climbed
to 1 per cent more recently. The bulk of the recent improvements, however, is
accounted for by fuels; excluding that product line, LDCs accounted for only
0.53 per cent of world exports in 2009.


The position of LDCs looks marginally better with regard to FDI flows.
In 2009, their economies received around 2.5 per cent of total FDI inflows
worldwide. This does indeed represent a small improvement compared to the
last couple of decades, but should be evaluated against a global context of
surging FDI flows to developing countries, and growing demand for primary
commodities.


Finally, relative to other country groups (developed economies and
developing economies excluding the LDCs), the real GDP per capita in LDCs
decreased from the beginning of the 1970s until the mid-1990s (chart 1).
During that period, the LDCs real GDP per capita, relative to that of developed
countries, declined from above 2 per cent to only 1 per cent. Relative to the
real GDP per capita of other developing countries, the LDCs had fallen from
almost 40 per cent of their level in 1970 to less than 20 per cent by the




5


mid-1990s. The increased dynamism of LDC economies during the 2000s
has reversed these trends. But the real GDP per capita of LDCs was only
1.5 per cent of that of developed economies in 2009. Moreover, despite the
economic boom in LDCs in the 2000s, there has been no improvement of
the real GDP per capita of LDCs relative to other developing countries. Thus,
even with the growth performance they recorded during the 2000s, LDCs
were not able to start a process of closing the gap with other developing
economies. To embark on a sustained catching-up path, the LDCs will have
to substantially improve their economic performance.


Turning to social trends, UNCTAD’s assessment of poverty reduction
trends and millennium development goals (MDG) achievements (Least
Developed Countries Report 2010: chapter 1) indicates that some progress
is being made in the LDCs, with an acceleration of achievement since 2000.
Poverty reduction is, however, particularly weak and most LDCs are off track
to meet most human development MDGs. Overall progress is very slow.


The main feature of poverty in LDCs remains its all-pervasive and persistent
nature: in 2007, 53 per cent of the population was living on less than $1.25
a day, and 78 per cent on less than $2 a day. This implies that 421 million
people were living in extreme poverty in LDCs that year. The incidence of


Chart 1. Real GDP per capita in LDCs relative to other country groups, 1970–2009


0


5


10


15


20


25


30


35


40


0


0.5


1.0


1.5


2.0


2.5


1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008


Developed economies (left scale)


P
er


ce
nt


ag
e


P
er


ce
nt


ag
e


Other developing economies (right scale)


Source: UNCTAD secretariat calculations, based on UNCTADstat database.




6


extreme poverty was significantly higher in African LDCs, at 59 per cent, than
in Asian LDCs, at 41 per cent. For the $2-a-day poverty line, however, the
difference was less marked: 80 per cent in African LDCs and 72 per cent in
Asian LDCs.


It is estimated that the number of extreme poor living in LDCs by 2015 will
be 439 million, while if the MDG target were achieved it would be only 255
million.


Another way of looking at these trends is to compare the share of total
number of people living in extreme poverty in developing countries who are
in LDCs (chart 2). In 1990, China and India accounted for 61 per cent of
the people living in extreme poverty in all developing countries. By 2007,
this figure has gone down to 42 per cent, largely owing to China, where the
number of poor people more than halved in 20 years. In contrast, the share of
the global extreme poor who were living in LDCs has increased from 18 per
cent in 1990 to 27 per cent in 2000, and reached 36 per cent in 2007. Given
current trends, and the continuation of business as usual, it is clear that, over
time, LDCs will become the major locus of extreme poverty in the world.


Chart 2. Distribution of people living in extreme poverty
across developing countries, 1990, 2000 and 2007


(Below 1.25 $/day)


1990 2000


18%


61%
21%


2007


China and India LDCs


Other developing countries, excl. China and India


21%


51%


27%


22%


36%42%


Source: UNCTAD, 2011f.




7


A major effort will be needed to make a difference now and achieve the
goals of the IPoA. This will require action in a variety of areas. This Report
focuses on the potential for South–South cooperation.


The rise of the South: Development
implications for LDCs


One of the key features of the last decade or so has been the rising
importance of some developing economies in the global economy and the
intensification of South–South economic relationships. From the point of
view of the LDCs, the multi-faceted process of reconfiguration of the world
economy has translated, most notably, into a remarkable strengthening of
their economic ties with Southern countries. As a consequence, although
traditional Northern partners remain crucial, South–South relations now play
an important and increasing role in LDCs’ integration into the world economy.
Further, they are likely to acquire an even greater prominence in the future,
given the significant downside risks that loom on the recovery in developed
economies, as well as the need for a global rebalancing.


A critical development issue for LDCs is whether the dynamism of
their intensifying relationships with Southern economies can serve as a
springboard for developing their productive capacities, facilitating structural
transformation, and providing more productive jobs and livelihoods, which are
the necessary basis for substantial poverty reduction.


The Type anD imporTanCe of LDC-souTh eConomiC reLaTions


The intensification of economic ties between the LDCs and other
developing countries is a complex and multifaceted process, encompassing
not only trade and investment, but also migration and official financial flows.


UNCTAD’s analysis of international trade shows that, throughout the
2000s, the rapid expansion in LDCs’ exports and imports has been driven by
a mounting prominence of Southern markets and sources of supply. By 2009,
LDCs’ merchandise exports to Southern partners were worth $68.5 billion.
This compares with $59.5 billion to developed and transition economies.
In other words, developing countries in 2009 absorbed more than half of
LDCs’ merchandise exports, up from 40 per cent at the beginning of the




8


decade. The above shift in LDCs’ export destinations has been paralleled by
the simultaneous evolution of their merchandise imports. In a decade during
which the LDCs’ imports bill rose from $42 billion in 2000 to almost $144
billion in 2009 (after the peak in 2008), developing countries expanded their
market share by roughly 10 percentage points. As a result, nowadays they
account for well over half of LDCs’ total merchandise imports.


An important feature of LDCs’ trade with Southern partners, however,
is its geographic concentration. A few large developing countries (mostly
in the Asian region) account for the overwhelming share of LDCs’ exports
to and imports from the South. Such a concentration is coupled with huge
asymmetries between individual LDCs and their main Southern partners, in
terms of economic size, as well as the dependency on each other’s market.
The two Asian giants, China and India, play a particularly prominent role in
LDCs’ growing integration with other developing countries. China and India
became respectively the first and fourth largest markets for LDCs’ exports,
and the second and third source of LDCs’ imports in 2009. Beyond them,
though, a much broader array of countries is involved in the multifaceted
process of South–South economic integration, ranging — just to name a
few — from Brazil to South Africa, from Thailand to Saudi Arabia, and from
Malaysia to Turkey.


A major feature of the composition of exports from LDCs to developing
countries is the important role of commodity exports. Indeed, the growth of
commodity exports has largely driven the expansion of LDCs’ exports to the
South while the growth of manufactures exports, often within the context
of preferential market access schemes, has played a more prominent role
in the expansion of LDCs’ exports to the North. In 2009, only 15 per cent
of LDCs’ total manufactures exports went to Southern markets, while the
latter received over half of LDC total exports of fuel and minerals. Besides,
as much as 68 per cent of LDC agricultural raw materials exports (including
products like cotton) were sent to Southern destinations. Manufactures
imports, particularly from China, India, South Africa and Thailand, dominate
the composition of imports of LDCs from developing countries.


Though less discussed in the literature, migration-related issues also
deserve great attention in the context of the growing South–South economic
relations. While data reliability is far from perfect, it is estimated that only
one of four migrants coming from the LDCs moved to a developed country.
One of five went to another LDC, and approximately half of all migrants went




9


to other developing countries. Accordingly, it is estimated that in 2010 two
thirds of the nearly $26 billion of remittances received by the LDCs originated
in Southern countries, despite the fact that migrants working in developed
nations tend to remit larger sums. In particular, Southern economies such as
India, Saudi Arabia, Gulf Cooperation Council countries and South Africa play
an important role for diasporas originating in many LDCs, including the largest
recipients of remittances, namely Bangladesh, Nepal and Sudan.


Finally, there are increasing financial flows between LDCs and other
developing countries, including both FDI and official financial flows. Between
2003 and 2010, when total FDI inflows to the LDCs were growing on average
at nearly 20 per cent per year, the share of FDI projects accounted for by
Southern investors climbed from 25 per cent to upwards of 40 per cent. While
these investments are still largely related to extractive industries, there are
signs of incipient diversification to other economic sectors, such as finance,
telecommunication, tourism and manufacturing, with promising implications
in terms of innovation and technological transfers. Southern official flows
to LDCs have also surged rapidly over the last few years. Though South–
South official financial flows are rather small in relationship to traditional ODA
disbursements to LDCs, their focus on infrastructure and productive sectors
render them very conducive to developing productive capacities.


DeveLopmenT impLiCaTions for LDCs


The Report suggests that the development implications of these
intensifying and multi-dimensional economic relationships between LDCs and
other developing countries can be analysed through three major approaches:
(a) the flying geese paradigm, (b) a traditional centre-periphery model, and (c)
a growth pole approach.


The first approach — the flying geese paradigm — presents a broadly
positive picture of evolving economic relationships between more advanced
and less advanced developing economies which occurs as the former
industrialize. It explains the successes of Newly Industrializing Economies by
relating the life cycle of particular sectors over their course of development,
with the relocation of industries from more advanced to less advanced
countries in the region in response to shifts in competitiveness. Once they
manage to emulate the “leader” and establish themselves as exporters of
a new product, the “followers” are gradually encouraged by competitive




10


pressures to repeat the same pattern of relocation to their less developed
neighbours. Simultaneously, more advanced economies not only climb up
the ladder of product sophistication, but also function as export markets for
the “followers”, by allowing reverse import. If the “follower” countries are in
the same region, then the whole process fosters greater regional integration.
The mental image of countries as flying geese, all advancing together but
at different stages of development, can act in this context as an important
indicative programme which establishes expectations.


The second approach is the traditional centre-periphery model. In
contrast to the flying geese paradigm, this presents a negative view of the
development impact of the rise of the South on LDCs. The centre-periphery
model emphasizes the reproduction of old North–South relationships within
the South, with the smaller and poorer countries being locked in to commodity
dependence, and with asymmetric bargaining power.


The third approach is a growth pole approach. This recognizes that in the
context of increasing global interdependence, large and dynamic developing
countries have emerged as growth poles in the global economy. Growth
poles can exert both positive and negative influences on the economic space
to which they are related through a complex field of multifaceted forces.


The evidence presented in this Report indicates that the emerging patterns
of trade and FDI flows are to some extent reminiscent of the centre-periphery
dynamic. However, the actual pattern is more complex, as growing demand
for natural resources from Southern countries is increasing the bargaining
power of LDCs and boosting domestic resource mobilization thus enabling
more policy space. Vibrant South–South trade is also broadening LDCs’
access to low-priced intermediates and consumer goods, with unambiguous
benefits for firms using those inputs, as well as final consumers, but some
potentially detrimental effects on import-competing industries.


But beyond trade, the emergence of Southern growth poles has provided
many LDCs with broader access to financial resources, through workers’
remittances, private and official flows, as well as greater opportunities for
technological upgrading. Partly in line with the flying geese paradigm, the
incipient insertion of some LDCs into regional and subregional production
networks may open up new opportunities of structural transformation, skills
acquisition, and technological upgrading. This is particularly evident in Asia,
where policy is playing an important role to facilitate the dynamic development
of the regional division of labour and growing regional interdependence.




11


The specificities of each country, the multiple channels through which
South–South relations take place, and the set of potential partners are so rich
that no single narrative could possibly account for all aspects. But the growth
pole approach, which recognizes an array of external effects from the rapid
growth and transformation of a few rapidly growing developing countries,
some of which are negative and some of which are positive, appears to be the
most rounded approach. The key question, from the point of view of LDCs’
development objectives, is to what extent these emerging relationships can
be leveraged to promote the development of productive capacities and the
diversification of their economies.


The next section of this overview summarizes a policy framework to
help LDCs forge a proactive and strategic approach to their integration with
Southern partners, while the final section presents a practical application of
this framework for leveraging South–South financial cooperation for LDCs’
development.


Activating the developmental State in LDCs:
The role of South–South cooperation


The argument developed in this Report is that the benefits of South–
South cooperation will be greatest when a dynamic (two-way) relationship is
established in which policies carried out by “catalytic” developmental States
in LDCs and South–South cooperation reinforce each other in a continual
process of change and development. In such a dynamic relationship, South–
South cooperation supports both the building of the catalytic developmental
State in LDCs and the successful achievement of its objectives. The catalytic
developmental State in LDCs in turn enhances and shapes the benefits of
South–South cooperation. New modalities and structures are required to
strengthen the interdependence between the two phenomena in the post-
crisis environment. In this regard, developmental regionalism is particularly
important.


The CaTaLyTiC DeveLopmenTaL sTaTe


There is a real and significant opportunity for rapid poverty reduction in
LDCs through the development of productive capacities and associated




12


expansion of productive employment. It can emerge from mobilizing
underutilized resources, as well as the addition of new capacity through (a)
investment in agricultural productivity, plant and equipment; (b) the diffusion
of available technologies; (c) public spending on infrastructure, skills and
capabilities; and (d) the creation of new products and markets.


There is no single way to combine these elements into a single “correct”
strategy for inclusive growth. However, if history is any guide, a cohesive,
strong, catalytic and effective State responsive to the needs of its constituents
is one of the prerequisites for defining the content of a long-term development
strategy.


The modalities, role and reach of the State in national economic
management have tended to fluctuate over time. However, in all dynamic
developing economies and in all countries now classified as developed market
economies, the government has played an influential role in promoting and
supporting economic development. In this context, the coordinating function
of the developmental State is stressed, as well as its role in formulating a
development vision and creating the policy space required to combine and
integrate policy measures in support of structural transformation.


The Report defines the developmental State as a set of institutions,
tools, capacities and capabilities committed to national development, with
a capacity to implement its articulated economic and social strategies. But
within this broad definition, it is possible to identify a number of different
visions of the developmental State, including the East Asian developmental
State and developmental State rooted in Latin American structuralism. Due
to the specific vulnerabilities and structural constraints of LDCs and their
initial conditions, there is a need to develop a more appropriate model of
developmental State, which is especially tailored for LDCs. This Report,
therefore, proposes the Catalytic Developmental State (CDS).


The CDS focuses on creating new productive capacities rather than “re-
allocating” given resources and putting given productive capacities to more
efficient use. In other words, its focus is on creating dynamic comparative
advantage, and ensuring financial resources for long-term investment and for
evolution of new productive capacities. The CDS approach is more holistic
and integrated, encompassing both economic and social development, and
needs to ensure that such development is served by finance rather than the
other way around.




13


Each CDS will need to choose the trajectory of development suited for its
own economy, ranging from the traditional path toward “modernity” through
Rostow’s well-established stages of development, including industrialization
via textile and garments and other labour-intensive commodities, or through
technological leapfrogging into services or skill-intensive capital goods. The
CDSs have to identify and promote the type of industrialization which is best
suited for the particular LDC. This type of search makes up a key component
of the new functions of the CDS. Rather than taking industrialization as a given
trajectory for all LDCs, the CDS “searches” (tries, experiments pragmatically)
for the optimal path of development in its own economy, including choosing
the optimal form of productive transformation, a process which requires
policy space.


At early stages of development, the initiatives of the CDS will not rely solely
on market forces to generate the desired structural change and economic
transformation. In order to accelerate growth, the CDS will need to carry
out significant shifting and reallocating of national and possibly international
assets and resources to the growth-enhancing sectors. For this purpose,
the CDS in LDCs should engage in a more strategic type of integration into
the global economy, rather than pursuing rapid trade liberalization based on
current and given comparative advantage. The CDS should assist LDCs in
achieving an optimal degree of economic openness according to their own
needs and circumstances, as well as the form of their integration into the
global economy.


The CDS model is thus underpinned by a theory of openness within a
managed trade policy that may enable a country to concentrate its relatively
scarce resources in areas of production where world demand is highly
income- and price-elastic; additionally from this analytical perspective, it
needs to promote the diffusion of knowledge of the kind of learning needed
for continuous upgrading of the quality of all of the local factors of production.
Essentially, trade needs to be managed in order to gain all of the above-
mentioned benefits, especially in the context of low income economies which
are overly specialized on natural resources. Openness works positively only
if the phenomenon of learning is suitably institutionalized on the policy side,
involving appropriate government interventions that would make the domestic
economy more responsive to change.


The success of the CDS will depend on effective development governance,
and in particular the capacity to achieve and sustain high rates of investment




14


and to implement policies that encourage the acquisition and learning of new
technologies. In all cases, the allocation of public investment is the primary
function of the CDS, along with setting up of a pro-investment regulatory
framework that would enable rapid catch-up growth that could accelerate
economic development along the lines discussed in previous Least
Developed Countries Reports. Moreover, the State needs legitimacy and to
be a truly representative State, which will enable it to ensure a consensus for
the development drive. This is a question of political will that involves what
the Report calls “development contracts” or a social consensus in support of
national development objectives.


The CaTaLyTiC DeveLopmenTaL sTaTe
anD souTh-souTh CooperaTion


The benefits of South-South cooperation will be greatest when there
is a dynamic two-way relationship in which South–South cooperation
supports the building of developmental State capacities and the objectives
of developmental States in LDCs, while the developmental State in LDCs
in turn generates and augments the development impact of South-South
cooperation. Action is required by both the LDCs and their Southern
development partners to create positive synergies between the catalytic
developmental State and South–South cooperation.


What LDCs can do


For LDCs, national ownership and leadership of policies are sine qua
non for enhancing the development benefits of any kind of development
cooperation, whether North–South or South–South. Mainstreaming South–
South cooperation, both interregional and intraregional, into the national
development strategies of LDCs is thus a necessary condition to ensure that
South–South cooperation promotes rather than hinders the achievement of
inclusive and sustainable development in LDCs. It is clear that, with current
policies, globalization has not fostered the desirable kind of structural change
in LDCs that could pull labour from less to more productive activities. A CDS
would seek to use South–South cooperation to reshape integration into the
global economy in way which would enable the structural transformations that
are necessary for creating decent and productive employment opportunities
and achieving substantial poverty reduction. The CDS in LDCs should also be




15


able to shape the integration into the global economy in a way that promotes
learning and enhances resilience.


Although intensified South–South economic relationships are likely to
become a central element of the approach of the CDS in shaping its strategic
integration into the global economy, this should not be treated as a simple
substitute for traditional North–South relationships. The latter remain crucially
important for most LDCs. Thus, the challenge for LDCs is to maximize the
development benefits of both North–South and South–South cooperation
and to articulate them in a positive way. This is a daunting task, particularly
given the different modalities of cooperation. However, the new opportunities
associated with South–South cooperation should enable greater policy space
for LDC governments.


To use this policy space effectively, it is important that LDCs develop
institutions which allow them to integrate different forms of cooperation at
the national level. As discussed in earlier Least Developed Countries Reports,
one possible tool is the establishment of an aid management policy, which
includes both an information system for tracking both North–South ODA
flows and South–South official financial flows, as well as regular national
forums in which LDC governments discuss with their cooperation partners
the development effectiveness of their support.


What Southern partners can do


While LDCs themselves must exercise leadership to make the most of
South–South cooperation, it is clear that South–South cooperation has
certain features which can particularly support the building of developmental
State capacities in LDCs and also help to overcome the constraints facing
CDSs. Southern cooperation partners can best support the LDCs if their
cooperation efforts accentuate these features.


Two features are particularly important.


Firstly, given the experience of major development partners in the
South, South–South cooperation is more likely to support and encourage
developmental State–building than traditional forms of development
cooperation.




16


This can happen through three main channels: (a) supporting capacity–
building efforts; (b) sharing policy lessons; and (c) providing alternative
sources of finance.


The great potential for knowledge-sharing which supports policy learning
and institutional experimentation in LDCs is rooted in the fact that all developing
countries face similar challenges. Thus, even the largest dynamic Southern
economies face problems with respect to poverty levels, technological gaps
and non-level playing fields, similar to those which LDCs face, though to a
much less severe degree. But on top of this, successful developing economies
continue to formulate and implement developmental policies and to build
developmental institutional arrangements. In short, policy-learning based on
experiences from the more advanced developing countries may help LDCs to
create new instruments and institutions to develop their productive capacities
in a way which promotes structural transformation, employment generation
and poverty reduction.


Policy learning can be encouraged in various ways, including (a) the
organization of seminars and round tables; (b) sponsoring internships and
visits of LDC officials in key development planning institutions and ministries;
and (c) enabling academic exchange on development policies and strategies
between research institutions and universities of LDCs and Southern partners.
However, it should be noted that this requires resources and commitment.
In general, technical capacity–building should be pursued as well as South–
South policy dialogues to draw policy lessons from experience.


The provision of alternative sources of finance is another major channel
through which South–South cooperation can support the building of the
CDS in LDCs. Financing public investment, particularly in productive sectors
and for physical and technological infrastructure, are critical functions of the
developmental State. At present, the effectiveness of the State in LDCs is
handicapped by a scarcity of public resources. Finance from other developing
countries can directly enable policy initiatives in LDCs which do not correspond
with the preferences of traditional donors. Moreover, new demand for natural
resources from Southern partners can help to boost natural resource rents
in LDCs, which can also support domestic resource mobilization. Helping
to lift the financial resource constraint of LDC governments, either directly
or through indirect effects on domestic resource mobilization, can be as
important a form of South–South cooperation as helping to lift the technical
capacity constraint through support for policy learning.




17


The second feature of South–South cooperation which is likely to be
particularly supportive to LDCs is that building productive capacities has
been much more integral to South–South cooperation than traditional
development assistance. Thus, South-South cooperation can not only
support developmental State–building, but also support the objectives of
developmentally effective States.


There are three main channels through which South–South cooperation
potentially supports the development of productive capacities in LDCs: (a)
through official financial flows for production and economic infrastructure; (b)
through investment and technology transfer and support for technological
learning at the enterprise-level in LDCs; and (c) through the provision of
preferential market access in a manner which permits, or even promotes,
learning. Currently, the first is most important while the second and third are
developing.


Although official financial flows from Southern partners to LDCs cover
a wide range of activities, they tend to focus more on infrastructure and
production sectors compared with traditional donors, who increasingly target
the social sectors. The situation is particularly striking in Africa, where China,
India and Arab countries are all active in the provision of infrastructure finance
to African LDCs.


South–South technology transfer is also an important channel for
developing productive capacities in LDCs. Technologies available in Southern
countries are often more suitable to the needs and requirements of LDCs,
at similar level of development, thereby confirming the scope for technology
transfer. Moreover, the necessary human capital requirements for utilizing
and adopting the new technologies, originating in the South, may be more
absorbable, cost-effective, and generally more available in other developing
countries than in the North.


One way in which Southern partners have been enabling learning in LDCs
is through implementing specially-designed regional and bilateral free trade
agreements in a way which provides LDCs with breathing space –– extra time
to liberalize –– so that they have the time to help their domestic enterprises
develop necessary capabilities to compete. In recent years, various Southern
countries have started preferential trade schemes for LDCs in the form of
duty-free, quota-free market access provisions. A critical issue is whether
these schemes will provide a training ground for LDC enterprises to upgrade




18


production. As discussed in the Report, this is not likely to be automatic. Thus,
designing these schemes in such a way that can realize the nascent potential
of South–South trade to support learning and upgrading is important.


The importance of mutual advantage


While a dynamic relationship can be established between CDSs in LDCs
and South–South cooperation, it is clear that, for this to occur in practice, the
relationship between LDCs and their Southern partners should not only be
valuable to the former but also lead to mutual advantage.


In this regard, the fundamental principles of solidarity and mutual respect
which underpin South–South cooperation are important. Given their shared
histories of colonialism and neo-colonialism, similar initial conditions and
familiar economic and political constraints, there are strong reasons to believe
that South–South cooperation and integration can avoid reproducing the
asymmetries and biases that have overshadowed traditional development
cooperation. However, South–South cooperation should not be thought
of as a panacea for development and should not be romanticized. While
the donor–recipient relationship characteristic of aid and development is
absent in the context of South–South cooperation, this does not mean that
all can participate on an equal basis. South–South trade, investment and
development aid also include both complementary and competitive relations
between the domestic interests of LDC nations and those of investors and
exporters from more advanced developing countries.


Nevertheless, it is possible to identify a number of reasons why Southern
partners may be motivated to engage in the types of cooperation suggested
above and mutual advantages obtained with LDCs. In particular:


• There is a potential to create mutually beneficial market gains and
opportunities for both partners. South–South cooperation should be
seen as a policy tool that can facilitate the building of new markets both
in terms of production and consumption.


• LDCsofferaccesstonaturalresourcesthattheirSouthernpartnersneed.
Southern investment in LDCs in exploitation of these resources can be
mutually beneficial for both parties provided the policy framework focuses
on its developmental impact in LDCs.




19


• Regional prosperity and regional stability cannot be achieved without
the participation of all the countries in the region, including the LDCs.
Strategic geopolitical interests also play an important rational that
provides motivation for cooperation with LDCs.


• Finally,itisclearthattheLDCscanworkjointlywithSouthernpartnersto
better articulate their common voice and exercise its collective influence
in all forums. Other Southern partners could also gain from broadening
the voice and participation of a larger membership of countries, in order
to better articulate the needs of developing countries in general.


DeveLopmenTaL regionaLism


Developmental regionalism is an important mechanism through which the
CDS and South–South cooperation can reinforce each other. Developmental
regionalism is understood here as a development-led regionalism that accepts
globalization as a historical trend, but rejects the market-led approach to
globalization. Developmental regionalism aims at maximizing the benefits of
regional cooperation with the goal of achieving an advantageous insertion of
the members’ economies into world markets. This goal is not an end in itself,
but only a means to accelerate economic, social and human development.


Developmental regionalism is concerned with both (a) internal economic
development and domestic integration, while at the same time, with (b)
strategic integration of the regional trading blocs into the world economy.
As it is the case with other forms of regionalism, the most basic level of
cooperation covered by developmental regionalism is that of trade. Most
LDCs lack a sufficiently large and diverse home market, (that could allow
diversification of the industrial structure) and thus regional markets provide
an important economic space within which learning over time can take place.


However, the concept of developmental regionalism goes beyond
the domain of trade per se, and includes other, more ambitious forms of
intervention, such as industrial policy. There are major opportunities for the
achievement of economies of scale through the provision of various kinds
of regional public goods which would benefit LDCs and other developing
countries within regional groupings. Such regional public goods include
various kinds of physical infrastructure supporting transport, communications
and energy, as well as regional science and technology infrastructure and
regional innovation systems.




20


In addition, with regard to the agricultural constraints to development in
LDCs, reflected in their inability to generate surplus and to guarantee food
security for all, joint adaptive research with neighbouring countries, regional
storage facilities and coordinated investment programmes at the regional
level can all make a difference. Financial deepening can also have a strong
regional dimension through regional development banks, as will be discussed
in more detail below. What all this can add up to is a type of regional
industrial policy which can involve a variety of policy tools, and not only those
traditionally associated to trade policies proper — from tariff and non-tariff
barriers, to subsidies, concessional loans, direct provision of infrastructure
and other public goods, promotion of research and development and science
and technology activities, State-owned enterprises and State-controlled
mixed enterprises, and many others. For greatest impact and efficiency,
these policies should be harmonized and coordinated among participating
countries in the regional association.


Under developmental regionalism, trade amongst regional partners is
favoured with respect to extraregional trade, implementing strategic trade
policies consistent with each member State’s domestic industrial policies.
Strategic trade policies may include traditional or less traditional tools — such
as tariffs, import and export quotas and bans, technical and phytosanitary
standards. In tandem with its holistic vision of development, regional trade can
also be promoted through coordination of investment to strategic areas such
as regional transport and other ancillary infrastructure. Prioritizing investment
in strategic areas of common interest and common constraints can help to
overcome the pre-existing bias against regional trade caused by the colonial
legacy that characterizes many LDCs and other poor countries.


The Report discusses various successful examples of developmental
regionalism, particularly in Asia, which illustrate the potential. These include
trilateral cooperation between China, the Republic of Korea and Japan on
developing new technologies and the catalytic role of the Asian Development
Bank and the Brunei Darussalam–Indonesia–Malaysia–Philippines East
Association of Southeast Asian Nations (ASEAN) Growth Area. Another
important example is the the development of economic corridors within the
Greater Mekong Subregion, that is coordinated by the Asian Development
Bank. This involves the development of economic corridors, which cover
Cambodia, the Lao People’s Democratic Republic and Myanmar and promise
to link them more closely economically with their neighbours. However, past
experience shows that the benefits of regionalism can be unequally shared.




21


Thus, the Report argues that LDCs will benefit more through a policy of regional
integration which involves an integrated regional development approach
linking trade, finance, investment, technology and employment policies and
also, where necessary, through specific regional support measures.


Leveraging South–South financial cooperation
for LDCs’ development


The Least Developed Countries Report 2011 provides a practical
application of this policy framework. It focuses on one of the most fundamental
challenges in implementing the new IPoA for LDCs, namely mobilizing
financial resources and directing them to productive use in a way which leads
to sustainable and inclusive growth and development.


The Report argues, firstly, that regional and subregional development
banks should play a larger role in supporting LDCs and also financing
developmental regionalism. It then goes on to make a proposal aimed at
mobilizing untapped resources from Southern partners in order to boost
the provision of development finance through regional and subregional
development banks. The central idea underlying this proposal is to channel
a very small proportion of the foreign exchange reserves increasingly held by
developing countries towards regional and subregional development banks.
These banks would, in turn, intermediate these financial resources in support
of development-oriented investments in the provision of regional, and also
national, public goods which would enable the LDCs to build and strengthen
their productive capacities.


As expressed in the IPoA, the policy suggestions should not be seen
as a substitute for North–South development assistance. They are rather
intended to improve the diversity and efficacy of development financing in
LDCs. Although the proposals would generate additional external resources
considering their implementation, it is also necessary to take account of the
development challenges facing southern partners, and their capacity.


The roLe of regionaL DeveLopmenT banks


Regional financial cooperation covers a wide spectrum of activities,
including (a) regional payments systems which provide financial incentives to




22


intraregional trade; (b) regional monetary systems which can provide liquidity
finance to cushion against external shocks; and (c) regional and subregional
development banks which provide long-term finance — development finance
— to support private and public investment.


Revitalizing and strengthening the role of regional and subregional
development banks is an important component of the agenda of reforming the
international financial architecture and such banks should play an increasing
role in financing development in the LDCs. Important regional development
banks for LDCs at the moment include (a) the Inter-American Development
Bank, created in 1959; (b) the African Development Bank, created in 1964;
and (c) the Asian Development Bank, created in 1966. In general, the regional
and subregional development banks in Asia and Latin America supply a much
greater share of total multilateral ODA within their respective regions than
the regional and subregional development banks in Africa do. Also, regional
development banks provide a relatively low share of total multilateral ODA
disbursements to LDCs.


There are a number of advantages of regional and subregional development
banks. First, because of their regional ownership structure, regional
development banks can facilitate a stronger voice to developing country
borrowers, as well as enhance regional ownership and control. Second, they
can be more effective because they tend to govern more through informal peer
pressure rather than imposing conditionality. Third, information asymmetries
are smaller at the regional level, given proximity as well as close economic
and other ties. In this regard, it has been proposed that there should be a
conscious effort to translate the principle of “subsidiarity” into the practice
of development finance. That is, where development investments aspire to
global or transregional objectives, there is an obvious rationale for a global
institution to play the dominant role. But where investments seek to meet
national or regional objectives, there is less need for a global institution to be
the key player. Accumulation of development-related knowledge and expertise
better occurs and is utilized closer to the ground. Regional or subregional
development banks can be particularly valuable for small and medium-sized
countries such as LDCs, which are unable to carry much influence in global
institutions. Their voice can be better heard and their needs better met by
regional and subregional institutions, rather than by global institutions.


Regional and subregional development banks may also be particularly
suitable for provision of regional public goods. Since industrial development




23


occurs increasingly within regional production networks, the provision
of “social overhead capital” — such as infrastructures, energy, or
telecommunication networks — at the regional level is likely to become more
and more critical. Regional development banks, in this context, appear to be
the most appropriate institutions to oversee the financing and implementation
of such large-scale investments projects, while ensuring that the interests of
even the smallest country involved are adequately taken into account.


However, for maximum success it is important that regional development
banks’ activities do not take place in a policy vacuum. They need to become
an integral part of a broader developmental regionalism framework, supported
by a catalytic developmental State. Indeed they should be regarded as
a key instrument of developmental regionalism through which the benefits
of integration accrue to least developed member countries. Moreover,
an important factor affecting the working of both multilateral and regional
development banks is their ownership structure. Some regional banks have
both developed and developing country members, in varying proportions;
others, notably subregional development banks such as the Andean
Development Corporation, have a membership composed almost exclusively
of developing countries. This matters because banks tend to respond to the
political agendas of their major shareholders.


Experience indicates that regional and subregional banks have worked
particularly well where their shareholders are also their clients. One good
example is the European Investment Bank. It provided a significant financial
mechanism to make economic integration in Europe equitable, providing
grants and guarantees for building regional infrastructure in less developed
areas. The Andean Development Corporation is also a good example. It is a
regional development bank exclusively owned by developing countries and
its features include the great average speed with which loans are approved,
and the absence of conditionality.


At present, non-borrowing countries still have a strong position in most
regional development banks. However, if an increasing share of regional
development banks’ financial resources comes from Southern countries, the
relations of power inside the regional development banks is likely to change,
with Southern countries being entitled to much higher quotas of capital and
more governing board members. Such a change in the legal ownership of
regional development banks could in itself powerfully enhance the sense of
political ownership of the programmes and projects financed by the banks on
the part of beneficiary countries.




24


sovereign weaLTh funDs as poLiCy TooLs To promoTe
souTh–souTh CooperaTion: a proposaL


Between December 2001 and the end of 2010, the value of global
reserves increased from $2.05 trillion to $9.30 trillion. The bulk of the increase
was due to reserves accumulated by developing countries which, as a whole,
accounted for more than 80 per cent of global reserve accumulation during
this period. By the end of 2010, their reserves approached $6.1 trillion.
Part of these reserves were held by commodity exporters, oil exporters in
particular, who have been accumulating foreign exchange holdings thanks
to the boom in commodity prices. Another part was by large and medium-
sized manufacturing exporters, who have enjoyed trade and current account
surpluses for many years. The latter group is made up by a small number of
Asian developing countries.


Such an extraordinary process of reserve accumulation is without
parallel in recent history. A significant proportion of those assets has been
accumulated in Sovereign Wealth Funds, (SWFs), which are generally run
independently from traditional reserve management by central banks and/
or finance ministries. Total SWF assets were estimated in March 2011 to be
valued at $4.3 trillion, of which $3.5 trillion were owned by developing and
emerging countries, including $7 billion by three LDCs — East Timor, Kiribati
and Mauritania.


Without underestimating the economic, institutional and political difficulties
that such an initiative would entail, one promising way in which Southern
countries could strengthen the role of regional financial institutions could be
through channelling towards them a very small share of the financial resources
presently managed by their SWFs. This proposal would provide the SWFs with
an opportunity to diversify their long-term financial position — currently held
mainly in developed countries. Moreover, SWFs could enhance the regional
development banks’ capacity for long-term lending and provide them with
opportunities to match their long-term assets to long-term liabilities.


Assessing the viability of such initiative is beyond the scope of this Report
and would require a full-fledged feasibility study; however, a “back-of-the-
envelope calculation” suggests that this strategy could boost significantly
the role of regional development banks, leading to large increases in the
availability of development finance. If only 1 per cent of Southern SWF assets
were invested into regional development banks, for example, this would




25


increase their paid-in capital by $35 billion. Assuming a conservative ratio
of authorized capital to paid-in capital of 2.8, this would translate into an
additional $98 billion of authorized capital, corresponding to an additional
annual lending capacity of over $84 billion. This figure would be higher than
the total lending disbursements to developing countries by all multilateral and
regional development banks — including the World Bank and the European
Investment Bank — in 2009, the year when their lending activities peaked (at
$64 billion) due to the extraordinary credit requirements caused by the global
financial crisis.


A similar boost in regional development banks’ lending capacities
could clearly play a central role in financing the provision of region-wide
infrastructures (thereby facilitating regional trade integration), as well as
supporting the development of domestic productive capacities, particularly
in the LDCs.


Two important caveats must be taken into account, however, when
promoting the development of South–South financial cooperation. First, it is
important to distinguish the growing opportunities for South–South financial
cooperation from the longstanding responsibilities underlying the traditional
development cooperation framework. South–South financial cooperation
should be viewed as a complement, rather than as a substitute for, traditional
North–South cooperation. The second caveat is that it is important that
Southern partners can actively use this new modality for mutual advantage.
Increased financial support should go hand-in-hand with increased voice in
the governance of regional development banks.


Dr. Supachai Panitchpakdi


Secretary-General of UNCTAD






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