How Sustainable is LDC’s Growth?

How Sustainable is LDC’s Growth?

The record rates of economic growth achieved by the Least Developed Countries (a group of 50 countries of which 35 are African, 8 Asian, and 7 island countries) in 2005 and 2006 were underpinned by a record level of exports – which was particularly associated with high commodity prices for oil and minerals – and record levels of capital inflows, particularly aid. 

The Importance of Trade

The record rates of economic growth achieved by the Least Developed Countries (a group of 50 countries of which 35 are African, 8 Asian, and 7 island countries) in 2005 and 2006 were underpinned by a record level of exports – which was particularly associated with high commodity prices for oil and minerals – and record levels of capital inflows, particularly aid. 

The export performance of the Least Developed Countries (LDCs) as a group was particularly remarkable.  In nominal terms, the value of merchandise exports from LDCs rose by some 80 percent from 2004 to 2006, reaching $99 billion in 2006.  This aggregate picture is being driven to a large degree by the enhanced export performance of oil-exporting LDCs (Angola, Chad, Equatorial Guinea, Sudan, Timor-Leste and Yemen), as well as by mineral exporters (Democratic Republic of the Congo, Guinea, Mali, Mauritania, Mozambique and Zambia).  Seventy-six percent of the total increase in LDCs’ merchandise exports from 2004 to 2006 can be attributed to these countries.  The increase is largely explained by rising international commodity prices.

For the LDCs as a group, dependence on commodities has increased since 2000, along with growth acceleration.  Primary commodities increased from 59 percent of total merchandise exports in 2000-02 to 77 percent in 2005-06.  Within this overall pattern, however, there was considerable divergence between African, Asian and island LDCs.  The Asian LDCs continued to diversify their economies away from commodities towards manufacturing, while African LDCs increased dependence on primary commodities.  Island LDCs remained primarily dependent on service exports, mainly tourism, which also exhibit high levels of volatility. 

The widening regional divergence between African and Asian LDCs in terms of the form of their integration into the global economy is evident in their different export structures.  In the period 2005-06, over 92 percent of all exports from African LDCs consisted of primary commodities, including fuels, while in Asian LDCs, this figure was less than half, 44 percent.  This type of specialization renders Asian LDCs much less vulnerable to external fluctuations.  Some of them also achieved high rates of export growth based on manufactures.  However, the share of medium- and high-tech manufactures exports originating from LDCs remained very small at 8.4 percent.  The slowness of the process of export upgrading, even in Asian LDCs, remains an issue of concern.

The ability to compete in global markets and increase manufacture exports has helped Asian LDCs promote a limited degree of structural transformation in which manufacturing is increasing as a share of gross domestic product (GDP).  However, for the LDCs as a group, the recent growth surge is not generally associated with a structural transition in which the share of manufacturing in total output is growing.  In fact, compared to ten years ago, half of the LDCs have experienced deindustrialization as measured by a declining share of manufacturing in GDP.

Whilst exports have boomed in LDCs, imports have also surged.  In 2006, 42 LDCs had trade deficit and, in 37 of them, this deficit was higher in 2006 than it was in 2003-04.  The merchandise trade deficit of oil-importing LDCs has increased from $25 billion in 2005 to $31 billion in 2006.  By contrast, the merchandise trade surplus of the oil-exporting LDCs rose from $11 billion in 2004 to $29 billion in 2006.  Together, oil and food constituted 30 percent of LDCs’ merchandise imports in 2006. 

Most LDCs are highly dependent on food imports.  In 2005-06, the food import bill of the LDCs as group reached $14.6 billion, which was equivalent to 4.4 percent of their GDP.  This is $6.1 billion higher than in 2000-02, an increase equivalent to some 2 percent of their GDP in 2005-06.  It is against this background that soaring food prices in 2007 and early 2008 are having such a negative impact on LDCs. 

Continuing High Dependence on External Finance

Despite record rates of economic growth, LDCs remain highly dependent on external finance.  The level of domestic savings continues to be low in many LDCs, including in countries that have achieved rapid economic growth.  In 2006, only one third of the LDCs had gross domestic savings rate above 15 percent of GDP.  Fifteen LDCs had negative domestic savings rate, meaning that they were relying on foreign savings not only to finance domestic investment but also their domestic consumption.

Official Development Assistance (ODA) inflows are particularly important.  In this regard, it is encouraging to know that net aid disbursements reached a record level of $28 billion in 2006.  Sixteen LDCs also received significant debt relief in 2006 through the Multilateral Debt Relief Initiative. 

Multilateral and bilateral aid commitments are increasingly concentrated on social infrastructure (education, health, population programmes, water supply and sanitation, and governance and civil society) and services.  ODA commitments to social infrastructure and services constituted 42 percent of total aid commitments to LDCs in 2006, up from an average of 34 percent during 2000-04.  This reflects the impact of the focus on the Millennium Development Goals as well as the concern to improve governance. 

In contrast, aid to build the productive sectors (including agriculture and industry) and economic infrastructure (transport, storage, energy, etc.) has continued to receive less priority.  The share of aid committed to these sectors constituted just 25 percent in 2006, which was at the same level during the period 2000-04.

LDCs remain marginalized from international capital markets.  There has been a trend towards increased FDI inflows, which reached a level of $9 billion in 2006 after faltering in the previous years.  Moreover, manufactures-exporting LDCs are now also attracting more FDI.  Nevertheless, most FDI still remains concentrated on natural resource extraction, particularly of oil and minerals, and profit remittances on FDI are rising rapidly. 

Migrant remittances reached a record level of $13 billion in 2006 and are particularly important for a few Asian countries.  However, channeling these resources to finance long-term development rather than just short-term poverty alleviation remains a challenge to policymakers. 

To sum up, the record rates of economic growth are welcome, but LDCs remain locked into a pattern of economic growth which makes them highly vulnerable to external shocks and in particular international commodity price volatility.  Given the high levels of poverty, there is little surplus to deal with shocks, and domestic savings are very low.  The development of productive capacities and diversification thus depends heavily on external finance.  ODA is particularly important because LDCs have very limited access to international capital markets and FDI is mainly resource-seeking and focused on a few countries.  However, ODA is mainly directed towards social sector development rather than building economic infrastructure and productive capacities.  The allocation of ODA to health, education, and other social purposes is of course important, and in itself makes a partial contribution to building productive capacities, but the key to strengthening the resilience of LDC economies is to build the capabilities of domestic producers and to diversify and strengthen linkages.

This article is drawn from The Least Developed Countries Report 2008: Growth, Poverty and the Terms of Development Partnership by United Nations Conference on Trade and Development. 

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Ajayi Olutayo

Ajayi Olutayo

11. October, 2012 |

People like you are needed on this continent to take us to where we should be. Keep it up man!

Marcus Edibogi Akor

Marcus Edibogi Akor

11. October, 2012 |

Thanks for this powerful article. I am very glad I read it. Keep up your great work and remain Blessed Law!

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