Vanuatu is scheduled to graduate from the LDC category in December 2020. Extensive national consultations have taken place over the past few years involving government, civil society, the private sector and development partners on a “smooth transition” strategy. The outcome of this process, Vanuatu’s Smooth Transition Strategy, is available below, in English and French.
The UN Committee for Development Policy (CDP), using a series of case studies, identified some possible lessons from building productive capacity in countries that are about to leave or have recently left the LDC category. Here are two of the most important:
First, context is queen.
If one lesson emerges from the Washington Consensus era and afterwards, then it’s that one size doesn’t fit all. For example, the policy recommendations for Nepal’s small and concentrated economy won’t be the same as for large, diversified Bangladesh, even if the countries are in close proximity.
The CDP study found that small, natural resources or tourism exporters that have left the LDC category or are about to do so, like Bhutan, Botswana, Cabo Verde, Maldives, Samoa, Solomon Islands and Vanuatu, concentrate on home-grown development governance and legitimacy, macroeconomic stability, and investments in health and education. While these policy imperatives might seem obvious and universal, they took a specific priority and form. In such small economies, political legitimacy is particularly crucial to avoid the perception that the state is acting just in the interests of a privileged elite. Without legitimacy, the state simply struggles to get things done, and civil servants have no overarching goal to rally behind. Since none of these countries followed the ‘developmental state’ model, their development pathways were much more devolved, organic and consensual. This therefore demanded a more multifaceted and sensitive approach to securing political legitimacy. Good development governance is as much about tailoring institutions to the traditional context as about avoiding corruption. Solid health and education policies further bolster legitimacy and help put in place the conditions for diversification away from resources.
A large, more diversified economy like Bangladesh, on the other hand, used a development-focused governance structure to actively promote economic transformation, with the rural economy as a launching pad. The active process of political legitimation was different and perhaps less pressing, owing to the country’s unique past, size and cultural composition.
Even though non-state actors play an unusually strong role in Bangladesh, in the early stages of economic transformation, the government recognised that rural sector development was constrained by limited physical access to markets, low food processing capacities as well as the absence of a functioning market to channel agricultural surplus into productive investment. The state therefore stepped in. It used such measures as setting a suitable price for agricultural produce, establishing a price policy for principal inputs, directly taxing agriculture that incentivised farmers to produce, as well as pursuing fiscal and monetary policies to support private investment. These and other interventions led to rapid growth in agricultural productivity and food production, contributing to food security, wage competitiveness and an expansion of non-farm rural economic activities.
Second, think outside the box and co-ordinate.
In many LDCs, macroeconomic, financial, social and industrial policies tend to be rather conventional, are conducted in isolation from each other, and aren’t subordinated to the goal of structural transformation.
Bangladesh, however, not only tailored various policies to its national context, but also successfully linked them together – often in unorthodox ways. The government initially enacted quite ‘hard’ sector-specific industrial policies such as tariffs, tax incentives and local content requirements. For health and economic reasons, the Drugs Control Ordinance of 1982, for example, allowed the authorities to fix prices and restrict the imports of any medicine if it or a substitute was produced in the country. But industrial policies also benefitted from macroeconomic and financial policies that stimulated investment in the targeted sector, the main one of which was garment manufacturing. These policies included strengthening banking to ease access to credit, investing in energy and transportation to remove infrastructure bottlenecks, and simplifying procedures to establish manufacturing enterprises.
This coordination of macro and industrial policies helped Bangladesh diversify away from raw material and agricultural production to become the world’s second-largest exporter of ready-made garments. And international market access was a key part of the success. The country’s human development successes – whether by design or not – also put in place a healthy and educated workforce to staff the garment industry. With improvements, this workforce looks likely to drive the country’s continuing economic transformation toward pharmaceuticals and IT services.
These are only two of the main lessons from the CDP’s research, which doesn’t cover every possible angle of promoting structural transformation in LDCs. For instance, considerably more work needs to be done to recognise environmental limits whilst simultaneously promoting industrial development for poverty reduction in LDCs. Another key lesson is using export processing zones (EPZs) to facilitate the task of getting things across borders, and often from a few target sectors, especially in national contexts where policy coordination is simply too time-consuming or difficult. Such quick wins help convince stakeholders that structural transformation and change are possible. EPZ policy can take place alongside more conventional country-wide policies.
What seems clear is that successfully graduating LDCs pursued different, often unconventional, policies aimed at structural transformation. Such policies were rarely enacted in isolation from one another and were almost always shaped to meet national needs.
Samoa graduated from the LDC category in January 2014. In 2018, its GNI per capita was estimated at $4,124 and was likely to be sustained near that level. Samoa has also continued to maintain high levels of human capital, as measured by the Human Assets Index. However, Samoa remains vulnerable and the Economic Vulnerability Index score was 39.7 in 2018, well above the graduation threshold of 32 (signalling high vulnerability).
The Government of Samoa continues to engage with its trading and development partners to minimize possible negative impacts of graduation. The smooth transition strategy is implemented as an integral part of the Strategy for the Development of Samoa 2016/2017-2019/2020: “Accelerating Sustainable Development and Broadening Opportunities for All.” Samoa has been receiving smooth transition support, including:
Although the Maldives has a high income per capita, at $9,200 in 2018, structural vulnerability continues to be a challenge, as indicated by the country’s high EVI. The Maldives has one of the highest EVIs among developing countries, largely on account of its high exposure to shocks due to the small size of its population (427,756), the share of its population living in low elevated coastal zones (100%), and high export concentration.
The international community has adopted provisions to phase out some specific LDC-support measures in an orderly manner after graduation. These provisions include several extensions of LDC benefits including of UN travel-related benefits and full EIF benefits, which the Maldives used to submit to the EIF board proposals for the approval of partial privatization of the international airport and the development of custom services. In addition, the EU extended DFQF access under the EBA, and Maldives continued to receive ODA, especially from Japan and the EU, for social infrastructure and humanitarian aid after tsunami devastation.
A note on the impact of graduation on fisheries can be accessed via this link.
Since graduation in 2007, Cabo Verde has continued to make progress on the GNI and HAI criteria, where it stands well above the thresholds. Nominal GNI per capita steadily increased from $2,430 in 2007 to slightly more than $6,000 on a purchasing power parity basis in 2016 ($3,161 in 2018 using the World Bank Atlas method). However, Cabo Verde remains mains economically vulnerable according to the EVI due to its reliance on the tourism sector and narrow export base.
Cabo Verde continues to be part of negotiations for a comprehensive Economic Partnership Agreement (EPA) between the EU and West Africa. This agreement could offer much broader trade and development prospects because it extends to areas beyond trade in goods, including tourism and investment. Finally, Cape Verde accessed the Enhanced Integrated Framework for trade-related technical assistance (EIF) before it graduated from the LDC category. After graduation, Cape Verde was given an additional three year transition period and a further two years subject to justification and approval by the EIF Board.
At Leather Wings, a small shoe-making outfit based in central Kathmandu, four women sit in a small room cutting up bright red cowhide imported from India. Next door a dozen of their colleagues stitch the shapes together on hand-powered sewing machines. The owner Samrat Dahal says the boots, designed by a German expat, sell via the Internet in India, China and Italy.
The company, founded in 1985, sums up some of the issues facing the Nepalese economy: entrepreneurial leaders at the helm of a committed workforce making a competitive and quality product for which there is ample overseas demand. The problem isn’t finding buyers; it’s scaling up production enough to meet that demand. Exports by the handful of players in Nepal’s shoe industry totalled only US$20 million in 2014.
Nepal, in turn, characterizes the problems facing many other LDCs (Least Developed Countries). At the risk of over-simplification, they just don’t produce enough.
The challenges of building productive capacity in LDCs like Nepal is central to the sustainable development goals (SDGs). Building sustainable production will be essential in achieving the 2030 Agenda. SDGs 8, 9, 10 and 17 relate directly to productive capacity.
Improving productivity is part of what economists call ‘structural transformation’ whereby the economy moves from low value-adding farming to more productive forms of agriculture, as well as services and manufacturing.
While some LDCs grew fast in recent decades, only a few managed to transform their economies. “Better access to foreign markets helped, but it wasn’t enough,” says CDP member Professor Diane Elson of Essex University.
For Leather Wings the bigger obstacles are finance, technology and the cost of inputs bought from abroad (Nepal has no tanning operation). Dahal would like to borrow enough money to invest in electric sewing machines. Mechanization would be more efficient and cut costs. But even basic technology is hard to come by, and banks are reluctant to lend.
LDCs need to tackle these issues and more, putting in place economic policies for growth as well as industrial policies that target and link specific sectors. “Ensuring that social outcomes match – and contribute to – economic progress means not only investing more in health and education, but also improving its quality and distribution,” says Elson.
Information and analysis on the LDCs, the LDC category and graduation
August 2018 report by the Secretary-General to the General Assembly on smooth transition measures, including initiatives to support countries during graduation from the LDC category, as well as ways to support graduated countries.
Advice from Committee for Development Policy specialists and others on what to look out for after the graduation process
Committee for Development Policy member Keith Nurse talks about climate change and vulnerability in small island developing states.