United Nations: LDCs' outlook improving, but fraught with uncertainties

While real GDP growth for the Least Developed Countries (LDCs) as a group is forecast to strengthen somewhat to 5 per cent in 2017 and 5.4 per cent in 2018, the modest improvements in the international context fall short of what would be needed to spur growth and structural transformation in the LDCs.

This is one of the main conclusions of the United Nations Conference on Trade and Development (UNCTAD) in a new report titled "Selected Sustainable Development Trends in the Least Developed Countries 2018".

The report was released at the sixty-sixth executive session of the Trade and Development Board of UNCTAD on Monday (5 February). The Board is meeting here from 5-7 February.

The report provides a brief assessment of recent economic trends and progress towards selected Sustainable Development Goals (SDGs) targets and indicators in the LDCs.

According to the report, most African and island LDCs, in particular, might find it hard to re-embark on the sustained growth trajectory that characterized the pre-crisis period, while growth resumption might be somewhat more in reach for Asian LDCs.

"Although LDCs as a group have so far continued to display positive (albeit weakening) rates of economic growth, their resilience to the unfolding conditions at the worldwide level is gradually weakening, and their outlook for the near to medium-term future remains somewhat improving but fraught with uncertainties," it said.

Lacking any decisive and coordinated policy action to strengthen global demand, redress the extreme levels of inequality across and within countries, and tackle financial vulnerabilities associated with rising indebtedness and volatile capital flows, the international economic scenario remains lacklustre.

Globally, economic growth is expected to somewhat strengthen in the coming years. However, the moderate improvements expected for 2018 are likely to fall short of the robust and sustained expansion necessary to support a decisive advance in LDC performance, said UNCTAD.

Withstanding the slowdown without cutting key investment spending will be critical for LDCs to maintain their economic momentum, and keep tackling their multi-faceted infrastructural gaps.

Meanwhile, in the context of feeble recovery of international trade and moderate commodity prices, LDCs remain unlikely to find in international trade a meaningful solution to their growth slowdown, and this meagre outcome could further affect FDI flows (which have already deteriorated in 2016).

Coupled with the levelling-off of aid flows, as well as workers' remittances, this suggests that the vast majority of LDCs will continue facing sizeable current account deficits, possibly exacerbated by foreign exchange fluctuations (an appreciation of the dollar, or a depreciation of their local currencies), inflating import bills and foreign-denominated debt.

If these risks materialize, the increasing pressure on the balance of payments will intensify external financing requirements of the countries concerned.

"Outbreaks of civil unrest in politically unstable LDCs, humanitarian crises, and adverse environmental shocks will only increase economic vulnerabilities further, hindering investments and jeopardizing the hard-won progress made on the social development front."

Similar prospects for the global economy make it all the more imperative for the international community at large to embark in renewed concerted efforts for a "global new deal", capable of delivering inclusive growth worldwide.

At the same time, recent trends suggest that the ongoing tepid recovery alone is unlikely to provide sufficient support for most LDCs to reverse their long-standing marginalization and income divergence, while embarking on a sustainable development path.

Redressing such widening global inequalities and leaving no one behind thus requires meeting long-standing commitments towards the LDCs, as well as matching the level of ambition of the SDGs with a corresponding enhancement of the international support measures in favour of the world's most vulnerable countries, said the report.

Economic growth and structural transformation

According to the report, after weathering reasonably well the aftermath of the 2009 great recession, in the 2015- 2016 biennium the LDCs bore the brunt of the global trade slowdown and of the anaemic recovery associated with insufficient global demand and mounting levels of inequality.

In 2016, the LDC combined gross domestic product (GDP) experienced its lowest real growth rate since the beginning of the century (3.8 per cent), with as many as 14 LDCs (out of 45 for which individual country data is available) suffering a deterioration of real GDP per capita.

Preliminary data for 2017 and projections thereafter suggest that some improvements are indeed taking place, with the LDC growth rate back at 5 per cent in 2017 and a projected 5.4 per cent for 2018.

"The picking up of the global economy, however, may well take some time to consolidate and touch a greater number of countries. Moreover, a number of risk factors, including unresolved flaws in the prevailing economic policy framework, as well as heightened policy uncertainties, loom large on this tepid recovery."

UNCTAD said the above situation can be traced to the prevailing conditions of the world economy, and most notably to:

1. the anaemic recovery of developed economies, where aggregate demand has remained stifled by austerity measures, high levels of inequality, and uncertain "animal spirits" on the part of investors, notwithstanding expansionary monetary policies and bullish financial markets;

2. the slowdown of other (i.e. non-LDC) developing countries (especially outside the East Asian region), with several so-called "emerging economies" becoming increasingly vulnerable to trade and financial shocks; and

3. the consequences of the strategic reorientation towards domestic-led growth in China, which has affected world demand for key commodities.

"Unless these issues are tackled through adequate and concerted policy efforts, there is a risk that a protracted lukewarm recovery will render it difficult for LDCs to generate and mobilize sufficient resources to strengthen their productive capacities, and foster economic diversification," said UNCTAD.

International prices for most primary commodity categories have trended upwards since the late 2016, but this modest recovery barely made a dent to the significant drop experienced since 2011, particularly in the case of crude petroleum and minerals, ores and metals.

Moreover, while the modest increase in commodity prices is projected to continue throughout 2018, large price swings are unlikely given slack supply capacities.

UNCTAD noted that growth performances across individual LDCs have continued to display wide (albeit somewhat declining) variation in 2017, as they did in the earlier biennium.

It said three of the 45 LDCs for which data is available suffered full-fledged recessions (i.e. negative real GDP growth), mainly because of idiosyncratic shocks, such as internal conflict/insecurity situations.

This is the case of Yemen (-2.0 per cent), South Sudan (-6.3 per cent), and Burundi (where a virtual stagnation in 2017 followed two consecutive years of recession).

At the other end of the spectrum, several LDC economies have featured among the world's most dynamic economies, and attained in 2017 the SDG 8.1 target of seven per cent GDP growth rate.

This is the case of Bangladesh (+7.1 per cent), Djibouti (+7.0 per cent), Ethiopia (+8.5 per cent), Myanmar (+7.2 per cent), and Nepal (+7.5 per cent).

Though slightly missing the SDG target, various other LDCs posted real GDP growth in excess of six per cent.

These were: Burkina Faso, Cambodia, Guinea, Lao People's Democratic Republic, Rwanda, Senegal and Sierra Leone.

Notwithstanding some encouraging performers, it is sobering to note that in 2017 only five of the 45 LDCs for which data is available achieved the SDG 8.1 target.

This represents only a marginal improvement over 2016: the year with the smallest number of LDCs meeting the seven per cent growth target since its first adoption in the 2001 Brussels Programme of Action for the LDCs.

According to the report, this situation raises even more concerns, considering that the number of LDCs achieving the above-mentioned objective is projected to remain well below pre-crisis levels also for 2018.

Considered in conjunction with LDCs' comparatively rapid demographic growth - on average 2.4 per cent per year in 2017- this faltering dynamism is mirrored in the sluggish rise of real GDP per capita, which, for the LDCs as a group, went from $639 in 2016 to $655 in 2017 (at current prices).

This implies for 2017 a real growth rate of GDP per capita reaching barely 2.5 per cent, higher than in 2016 (1.6 per cent) but roughly half of its pre-crisis level (and lower than that in the 2012-2014 window).

Looking at the performance of individual countries, the generalized slowdown of LDC economies over the last two-three years has been accompanied by an increase in the number of LDCs experiencing gradual deteriorations in the average standards of living, as measured by real GDP per capita.

In 2017, as many as nine LDCs were in this situation, including two countries where the decline exceeded three per cent: Afghanistan (-7 per cent) and Yemen (-4.8 per cent).

The uneven and somewhat erratic growth trends are accompanied by sluggish structural transformation, with many LDCs falling short of the inclusive and sustainable industrialization envisaged in SDG target 9.2, said the report.

The report said although there have been some encouraging signs, notably in terms of rising output per worker and manufacturing value added, in many instances economic expansion has failed to provide the foundations for sustained structural transformation.

This concern is confirmed by the evolution of the sectoral composition of output for LDCs as a group, between 2000 and 2016 (the latest year for which data is available).

Although value added (measured in constant 2010 dollars) rose visibly in both agriculture and industry, these sectors experienced a slight contraction of their relative contribution to GDP: from 30 to 25 per cent in the case of agriculture, and from 28 to 25 per cent in the case of industry.

Services, conversely, increased their weight from 41 per cent to nearly 50 per cent of GDP.

"This sector conflates, however, widespread traditional activities such as trade or transport, with circumscribed pockets of high productivity services, such as finance or information and communication technologies."

Notwithstanding a considerable heterogeneity across individual LDCs, these sobering considerations seem to apply also at country level.

If the importance of agriculture declined in more than two thirds of the LDCs for which data is available - in line with the long-established stylized facts - only in a handful of cases this coincided with a significant expansion of the industrial sector; more often than not, services enjoyed by far the largest relative expansion.

In fact, more than half of the LDCs actually display a shrinking of the industrial sector's weight over the period considered (2006-2016), including nearly all the LDCs where agriculture increased its share of GDP.

On the positive side, between 2006 and 2016 real manufacturing value added (MVA) increased in nearly all LDCs, with some of the top performers (typically those experiencing the sharpest growth accelerations) reaching annual growth rates exceeding 7 per cent.

On the negative side, though, in most countries this was accompanied by a relative decline in the manufacturing share of total value added, pointing to a widespread risk of premature deindustrialization among LDCs.

The evidence presented validates UNCTAD's views that, even during phases of rapid economic growth, LDC economies have often struggled to foster the emergence of high-productivity activities in the manufacturing and specialized services sectors.

This situation, coupled with the capital-intensive nature of extractive industries underpinning much of the pre- crisis boom, has failed to generate sufficient employment outside (mainly small-holder) agriculture, leaving the growing labour force to be re-absorbed mainly through the expansion of (often low-productivity) services.

UNCTAD said LDCs' infrastructural gaps and supply-side bottlenecks play a key - though by no mean exclusive - role in constraining productivity growth and dampening prospects for economic diversification.

Modern energy provision deserves explicit mention in this respect, not only because it is the specific object of SDG 7, but more fundamentally because it is identified as a major constraint for 42 per cent of LDC firms, and LDC countries nowadays account for the majority of people lacking access to electricity worldwide.


According to UNCTAD's estimates, worldwide volume growth rates over the previous year attained roughly 4 percent for the first three quarters of 2017. International trade flows are expected to continue picking up, but significant downside risks continue looming.

More fundamentally, even the expected modest expansion in world trade is unlikely to reverse LDCs' long- standing marginalization in the international trade arena; all the more so if it is coupled with a protracted slack in global demand, and with tepid pickup in commodity prices.

If between 2005 and 2013 LDCs' share of global exports of goods and services had climbed up gently - from 0.75 per cent to 1.09 per cent, respectively - much of these gains have evaporated in the last few years. In 2016, LDCs accounted for barely 0.92 per cent of the total; roughly the same level as in 2007.

Moreover, said UNCTAD, even though their share of world exports remains higher with respect to merchandise goods than services, nearly all the relative decline in LDC weight in world total exports can be traced to the former element.

"Only three years away from the 2020 timeline, this worrying situation underscores the difficulties in meeting the SDG 17.11 target of doubling LDCs share of global exports, particularly in a context of rather modest rebound of international commodity prices," said the report.

It also noted that in 2017 the LDCs as a group are projected to register a current account deficit of $50 billion, the second-highest deficit posted so far, at least in nominal terms.

This stands in contrast with other developing countries, which, as a group, registered a current account surplus.

Moreover, projections for 2018 suggest that the combined LDCs current account deficit is expected to expand further, exacerbating possible balance of payment weaknesses and external debt vulnerabilities.

Resource mobilisation in LDCs

According to the UNCTAD report, in most LDCs, efforts to mobilize domestic resources for investment are often undermined by the poor development of domestic financial markets, the narrow tax base and weak tax collection and administration systems, as well as by the pervasiveness of illicit financial flows, notably through trade misinvoicing.

By virtue of national accounting identities, the weaknesses in the development of LDCs' productive capacities, which typically lead to structural trade deficits, is reflected in LDCs' heightened reliance on external sources of funding in order to finance investments in capital accumulation.

The external resource gap (that is, the difference between the gross fixed capital formation rate and the gross domestic savings rate) of LDCs as a group averaged 6.9 per cent of GDP in 2015, up from 4.9 per cent in 2014.

Recent data suggest that levels of external indebtedness have been surging across LDCs, both in terms of debt stocks (relative to gross national income - GNI), and - even more so - in terms of burden of debt services (measures as interest payments relative to exports of goods and services plus primary income).

Between 2014 and 2016, the external debt stock in the median LDC has increased from 25.7 per cent of GNI to 27.8 per cent; simultaneously, external debt service has climbed by roughly 25 per cent in two years, attaining 1.32 per cent of exports of goods and services plus primary income. This situation has raised some concerns especially in the African region, where several countries have experienced sharp rise in their level of external indebtedness.

According to the report, total net ODA disbursed to LDCs in 2016 amounted to $43.1 billion, representing an estimated 27 per cent of net ODA disbursements to all developing countries.

This implied a 0.5 per cent increase in real terms year-on-year compared to 2015. This trend corroborates the fears of a levelling-off of aid flows to LDCs in the wake of the global recession, to the extent that in 2016 net ODA disbursements to LDCs remained lower - even in real terms - than in 2013 ($43.3 billion).

The levelling-off of ODA flows to LDCs in the wake of the global recession has thus contributed to the gradual shrinking of their magnitude in relation to LDCs' own economic size, with net ODA accounting for roughly 4.5 per cent of LDCs' combined GDP in 2016, compared to 7.7 per cent ten years before.

Equally important in the context of the 2030 Agenda for Sustainable Development, ODA disbursements to LDCs remain far below the target of 0.15-0.20 per cent of donor countries' GNI - a target which had been first adopted in 1981.

UNCTAD said that only a handful of donor countries appear to have met the SDG 17.2 commitments in 2016: specifically, Denmark, Luxembourg, Norway, Sweden, and United Kingdom provided to LDCs over 0.20 per cent of their own GNI, while the Netherlands met the 0.15 per cent threshold.

Averaging over all members of the Development Assistance Committee (DAC), donor countries barely disbursed 0.09 per cent of their GNI to LDCs.

Had donor countries instead delivered on their pledges, LDCs should have received additional development assistance worth $32-53 billion in 2016, which might have supported much-needed investments and productive capacity development, said UNCTAD.

Despite some improvements over the last 15-20 years, LDCs continue to play a relatively marginal role in the global economy, accounting for only 2.2 per cent of global FDI inflows, down from a peak of 3 per cent in the 2013-2014 biennium.

In 2016, inflows of FDI to LDCs as a group attained nearly $38 billion, down 13 percent from the levels of the previous year. They amounted, on average, to 3.6 per cent of LDC GDP in the same year, with a declining weight in relation to LDCs' combined GDP.

Despite the reduction in FDI inflows, LDCs' stock of inward FDI has continued its expansion unabated, and is now estimated to be worth $326 billion (1.2 per cent of the global figure, or 33 per cent of LDC GDP).

Given the importance of building strong backward and forward linkages between foreign and domestic firms, it is imperative for LDCs to pursue strategic policies to attract FDI while avoiding a "race-to the bottom", and to enhance FDI development potential with a view to accelerating structural transformation, said the report.

By Kanaga Raja.

Source: SUNS - South North Development Monitor #8615 Tuesday 6 February 2018.