Case studies and examples of good practice

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.

Vanuatu Smooth Transition Strategy

Strategie de Transition Sans Heurt de Vanuatu

The UN Committee for Development Policy (CDP), using a series of case studiesidentified 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.

Maldives graduated from the LDC category on January 1, 2011 after a longer than usual transition period. The country met graduation criteria in two successive triennial reviews (2001 and 2004) on the basis of its high GNI per capita and human assets index (HAI). CDP recommended the country’s graduation in 2004, and the recommendation was endorsed by the ECOSOC Council. Graduation was originally scheduled to take place three years later. However, following the devastation caused by the Indian Ocean tsunami of 26 December 2004, the UN Assembly decided to defer the commencement of the three year period preceding graduation to January 1, 2008, thus pushing the country’s graduation to January 1, 2011.

In anticipation of the need to adjust to changes in development and trading partners’ support, the UN recommended the Government to adopt several smooth transition policies to avoid any possible disruption in its development progress. In this regard, the Maldives Donor Forum was held in 28-29 March 2010, in which the Government introduced the challenges it faces and the measures it has taken to its development partners. It also presented five priority areas—macroeconomic reform, public sector reform, social development, governance, and climate change—which require external resources to ensure positive outcomes.

GNI per capita in 2018 was $3,161 using the World Bank Atlas method, well above the income graduation threshold, while the HAI was far above the graduation threshold. These achievements reflect the implementation of effective policies, support by the international community, and the strong commitment to social development by the Government.

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.

Port Vila harbour, Efate, Vanuatu

Drive west round the ring road from Port Vila, Vanuatu’s capital, and you pass some warehouses near the airport. After some outlying villages overlooking the beach, a steep grind over the hill takes you to Havannah harbour and a cluster of fancy resorts. At the north of the island you might pass women in pick-up trucks carrying fruit and vegetables to market. More resorts follow. The trip, mostly on smooth asphalt, takes a couple of hours depending on how long you stop to gaze at the ocean.

A decade ago the story was very different. A potholed road petered out after town, leaving only the sturdiest of 4X4s to struggle along a progressively rockier track, scoured harsh by rain. There were no warehouses. The tourists at the resorts in town rarely ventured far. Those ladies took a day to travel to market.

The revolution wrought by the ring road is part of a long-term economic boom. Driven by tourism and real estate investment, income per head in the Pacific island state rose by over 2.5 times in real terms in the 15 years from 2002 onwards. The economy bounced back from cyclone Pam in 2015, paving the way for graduation in 2020.

At about $3,000, Vanuatu’s per-capita GNI is more than double the LDC threshold making the country eligible for graduation based on this criterion alone. But, in addition, Vanuatu’s Human Asset Index (HAI) is well above the LDC threshold. Vanuatu’s main problem is its economic vulnerability, as measured by the EVI, which stems primarily from its remoteness and exposure to natural disasters. Vanuatu ranks as one of the highest disaster-prone countries in the world due to its location in the Pacific Rim of Fire and the Pacific Cyclone Belt. Cyclone Pam is one example of the vulnerabilities that will continue to affect the island state as its coastal areas continue to be hit by climate change.

LDC status has allowed Vanuatu to benefit significantly from the preferential trade terms extended by developed countries. In this sense, graduation poses a challenge because Vanuatu’s main exports, such as fish and coffee, beef, kava, copra and cocoa, are likely to face higher tariffs in key exports markets such as Japan, where exports of boneless beef and certain types of fish would face tariffs of 38.5 per cent and 3.5 per cent, respectively, on the basis of the current tariff schedule. Graduation could also bring unintended consequences in the form of withdrawal of access to concessional finance.

In preparation for graduation, the Government of Vanuatu has established a National Coordinating Committee that will formulate strategies and policy interventions to address the possible negative impact of graduation. The government is working in close collaboration with development partners and UN agencies on building a resilient and sustainable economy and to deal with unforeseen natural disasters and economic shocks. To strengthen the economy and increase productive capacity the government has given priority to infrastructure investments that support its two main economic activities: tourism and construction. To reduce economic vulnerability, the Government will work with international donors including the UN system, development partners, and financial institutions to ensure that financial aid, insurance coverage, and humanitarian help are readily in place before and immediately after natural disasters occur.

In many ways Vanuatu’s experience typifies the LDC story. Until 2017 only five had left the category since its formation in the early 1970s – Botswana in 1994, then in recent years Cape Verde, the Maldives and Samoa. Higher oil prices in recent years have meant Equatorial Guinea left the category in 2017, followed by Angola and Vanuatu in 2020 and 2021.

Several more were likely to follow shortly after, having met two of the criteria for the first time in 2015 at the most recent triennial review of the UN Committee for Development Policy (CDP), the body which monitors the category and makes recommendations on Least Developed Country (LDC) graduation.

While the economic and human development successes of LDCs are testament to the work of government policymakers and businesses in conjunction with donors (Vanuatu’s ring road was built with grant assistance from the United States), the UN has played a vital role.

The UN Office of the High Representative for The Least Developed Countries, Landlocked Developing Countries and Small Island Developing States (UNOHRLLS) launched and helped promote the LDC programmes of action. The recent mid-term review of the Istanbul Programme (IPoA) among other things urged official donors to recommit to their target of sending aid worth 0.15% to 0.2% of gross national income to LDCs, and to continue promoting LDC trade and investment.

UNOHRLLS has helped integrate many IPoA targets into the sustainable development goals (SDGs), including those on doubling the LDC share of global trade and raising productive capacity.

Behind the scenes, UNOHRLLS has also conducted inter-governmental work, promoting LDC issues at the UN. Partly as a result of this work and at the UN Conference on Trade and Development, LDC trade, investment and aid receive more global attention than ever before. A range of international support measures are offered by the UN system.

The CDP, part of the UN Department of Economic and Social Affairs, periodically reviews the category, monitoring LDCs and determining which meet the official criteria. These criteria, measured by objective indexes reflecting per capita income, human assets and economic vulnerability, have been carefully chosen to reveal the broad determinants of sustainable development, moving beyond the view that progress is just about income. LDCs must meet two of the three criteria or exceed double the per capita income criteria for two consecutive triennial reviews of the CDP to be considered eligible for graduation.

Despite these successes, much remains to be done. Cyclone Pam is one example of the vulnerabilities that will continue to affect the LDCs, particularly the island states and countries with coastal areas hit by climate change. Inequality within and between LDCs remains a particular challenge. Insecurity and conflict are increasing.

Many of the graduating countries prospered on the basis of the commodities boom. Economic growth for the LDC group as a whole has faltered during the global economic slowdown. The services-based successes of the graduating island states aren’t replicable everywhere. Diversification remains weak, and many LDCs are excluded from international supply chains.

That’s why the focus of the IPoA and SDGs on productive capacity is so important. LDCs need to develop and enact their own specific, targeted industrial policies in order to boost production and to move from low to high productivity activities. Vanuatu’s ring road demonstrates the multiplier effect of infrastructure investment, which is too low in most LDCs.

In the meantime, Vanuatu’s story provides hope for others. With good policies, increased investment and the backing of the international community, more will follow.

Cabo Verde graduated from LDC status on 20 December 2007. In preparation for its graduation, the Government set up a donor support group called GAT to prepare a transition strategy to adjust to the eventual phasing out of the support measures associated with LDC membership. In June 2007, GAT adopted a declaration supporting Cabo Verde’s socioeconomic transformation agenda. Additionally, a budget support group (BSG) composed by the Government and participating multilateral and bilateral donors was created in 2005 to align and harmonize donor support around the Growth and Poverty Reduction Strategy.

Cabo Verde smooth transition strategy is here (en Français).

Samoa graduated from LDC status in January 2014 after meeting GNI and HAI criteria in 2003 and 2006. On this basis, UN’s CDP (Committee for Development Policy) recommended that graduation took place in January 2010, but the Government of Samoa requested deferral after the tsunami of 29 September 2009. Also, in 2011, Samoa joined the World Trade Organization (WTO).

In accordance with UN resolutions, Samoa began working on a smooth transition strategy plan in 2009. In 2011, it agreed with its DPs (development partners) on a Joint Policy Matrix, which became the basis for the delivery of aid once graduation became effective. The MFIs (multilateral financial institutions) confirmed that there would be no change to Samoa’s ability to access concessional financing provided it complied with the policy matrix. Likewise, the bilateral partners indicated their commitment, and Samoa continued to see an increase in aid volumes up to the present.

The UN assisted through the conduct of impact assessments and a program for the accelerated achievement of the MDGs (Millennial Development Goals) through a policy review that contributed to the 2012-2016 national development strategy for sustainable development.

To prevent the abrupt loss of preferential market access under the DFQF (duty-free, quota-free) arrangement granted to LDCs, the government negotiated with some of its export partners including the USA and Japan the continuation of DFQF schemes beyond graduation. Under Everything but Arms, a transitional period of three years was allowed after graduation for access of Samoa’s exports to the EU market. In addition, Samoa continues to receive preferential bilateral market access to Australia and New Zealand.

In terms of access to concessional loan financing, in the case of the World Bank and ADB (Asian Development Bank), what was lost as an LDC can still be accessed as a small island developing state. Because of Samoa’s classification as a country at high risk of debt distress by the IMF, the government has continued with ongoing reforms including the implementation of a medium-term debt strategy. Given the high level of the public debt, the government was able to secure 100 percent grant financing for reconstruction after cyclones and other natural disasters. At the same time, considerable efforts have gone into improving revenue collection.

As a small island developing state (SIDS) that faces severe and permanent economic and environmental challenges, Samoa has been actively engaged with the international community and in constant dialogue with its development partners to ensure that any LDC-specific concessions lost as a result of graduation could legitimately be retained on SIDS-specific grounds.

Samoa’s 2015 smooth transition strategy can be found here.

Samoa’s 2014 smooth transition strategy is here.

Background reading

Information and analysis on the LDCs, the LDC category and graduation

UNCTAD LDC reports

The UNCTAD Least Developed Countries Report provides a comprehensive and authoritative source of socio-economic analysis and data on the world´s most impoverished countries. The Report is intended for a broad readership of governments, policy makers, researchers and all those involved with LDCs´ development policies. Each Report contains a statistical annex, which provides basic data on the LDCs.

Link to 2016 Report, 'The path to graduation and beyond: Making the most of the process'

Expert views

Advice from Committee for Development Policy specialists and others on what to look out for during the graduation process

Vanuatu’s success in LDC graduation

Daniel Gay, Inter-Regional adviser with the Committee for Development Policy, presents the case of Vanuatu’s LDC graduation, which can be seen as a long-term success story.

Human development and the environment

Committee for Development Policy member Leticia Merino talks about the importance of human development and environmental sustainability, as well as the need to involve civil society in the graduation process.

Beyond income: the environment, equality and graduation

Committee for Development Policy member Diane Elson talks about how LDC graduation is about more than income per capita, and how environmental sustainability and equality need not come at the cost of economic growth.