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11/8/2018 4 ways the world’s least developed countries can improve trade and investment | World Economic Forum

4 ways the world’s least developed


countries can improve trade

Image: REUTERS/Navesh Chitrakar

27 May 2016

Joakim Reiter
Director of External Affairs , Vodafone Group

Ratnakar Adhikari
Executive Director, Enhanced Integrated Framework Executive Secretariat, World Trade Organization

We all accept that the world divides between developed and developing countries. But what is
less widely known is that some developing countries fall so far behind in the size and shape of
their economies that they merit special categorization and differentiated relationships with other
nations.

This category of Least Developed Countries (LDCs) was devised in 1971 by the United Nations
Conference on Trade and Development (UNCTAD). As of today, there are 48 of them. Their
problems are among the most intractable development challenges facing the international
community. In fact, only four countries have "graduated" from LDC status: Botswana in 1994,
Cabo Verde in 2007, Maldives in 2011 and Samoa in 2014.
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This poor record prompted the UN, in Istanbul, in 2011, to establish a dedicated programme of
action with the target of enabling at least half of the LDCs to "meet the criteria for graduation" by
the end of this decade. With a mid-term review taking place in Antalya, Turkey, from 27 to 29
May, it is now time to look again at the future of the world's most disadvantaged and vulnerable
states.

Image: Source: OECD-DAC/Creditor Reporting System-Aid Activity Database

There is some good news. Equatorial Guinea, Vanuatu and Angola will shed LDC status in 2017,
2020 and 2021, respectively. Meanwhile, Bhutan, Nepal, São Tomé and Príncipe, Solomon
Islands and Timor-Leste have been found "pre-eligible" for graduation and are expected to
graduate by 2021. Also, data relevant to the latest three graduation cases show that these
countries have fared better, or at least did not get worse, after their graduation in terms of
income, exports, foreign direct investment and aid for trade. Human development indicators like
levels of education and healthcare also continued to improve.

But we are far from the set target of halving the number of LDCs.

Importantly, economic vulnerability has not diminished significantly. Many LDCs are dependent
on commodity exports and, due to insufficient export diversification, are struggling significantly
with the latest slump in commodity prices. LDCs also remain heavily exposed to severe economic
and natural shocks, including threats related to climate change, and are far less equipped to deal

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with such challenges. This is true not least for small island developing States, which account for
10 of the 48 LDCs.

Many LDC governments also continue to view graduation as a threat rather than an opportunity.
They stand to lose unilateral preferential market access and may face a reduction in aid levels.

The challenges of graduation can be shown by the case of Nepal, which is pre-eligible for
graduation on grounds of better social indicators and improved economic resilience. But the
Himalayan nation is faced with a double bind: having to prepare for a loss of preferential market
access – a vital benefit to its major textile and clothing industry – while at the same time
reconstructing large parts of its economy after massive earthquakes struck the country last year.
The decision to take Nepal off the list of LDCs by 2021, if confirmed by another review in 2018,
may look premature. The country still faces serious risks beyond its control and will have difficulty
in keeping up its gains in areas such as education after the 2015 disaster, in which about 25,000
classrooms in some 8,000 schools were destroyed.

For these reasons, many LDCs consider that more needs to be done to facilitate a smooth
transition to post-LDC life. In this respect, they see a need for a more supportive international
framework, want the United Nations system to play a leading role, and understand that there are
positive examples that can be built on and replicated.

Part of this picture is the offer made by the European Union in 2008 to extend the preferential,
duty-free, quota-free access that an LDC has to the EU market for three years after it graduates.
Likewise, the Enhanced Integrated Framework (EIF) – the only multi-donor programme that
exclusively helps LDCs to use trade as a vehicle for poverty reduction and growth – offers any
graduating LDC the chance to continue to receive technical assistance for a period of up to five
years after it moves out of the category. All recently graduated LDCs have taken full advantage of
this support to develop or enhance their trade and development strategies, both before reaching
graduation thresholds and after they step up from LDC status.

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Image: Source: OECD-DAC/Creditor Reporting System-Aid Activity Database

In order to enable more LDCs to achieve a smooth transition to post-LDC life, the EIF and
UNCTAD are proposing a four-point pathway for promoting trade, attracting private investment
and achieving export diversification:

Cut red tape to make cross-border trade cheaper and diversify LDC economies,
making full use of untapped potential of deepened regional integration, which
contributes to improved economic growth and resilience.

Create a regulatory and legal regime that promotes domestic and foreign
investment so that private capital can be exploited. Incentives and other active
policies for investment in small and medium-sized enterprises are particularly
important for this to happen.

Create an enabling environment for improved trade in services, including


preferences for LDC services exports and, within LDCs, addressing supply-side
constraints and investing in infrastructure services. This is a new frontier for the
LDCs, with a wealth of opportunities not only in mainstream services, such as
tourism, but also in modern international services, including data processing.
Cultural and creative services are an area in which many LDCs are richly endowed,
and this can be more productively exploited.

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Get early-mover advantage in e-commerce. By one recent estimate, this has the
potential to reduce trade costs associated with distance by as much as 65%.
Online technology can make international trade happen, including in poor
countries with weak institutions, so the LDCs that have limited digital access and
low credit-card use should invest in this. UNCTAD's Aid for eTrade Initiative, to be
launched at its four-yearly conference taking place in Nairobi, Kenya, in July 2016,
will help policy-makers and the private sector to coordinate action on this new
development opportunity.

In short, a bottom-up and concerted effort by the LDCs and their trade and development partners
will help to create an environment that is better at meeting the goal of graduation.

The EIF and UNCTAD stand ready to help the LDCs to escape the trap of low income and
structural handicaps. It is long overdue to offer genuine hope to millions of people who for too
long have been denied the prosperous future they deserve.

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Written by

Joakim Reiter, Director of External Affairs , Vodafone Group

Ratnakar Adhikari, Executive Director, Enhanced Integrated Framework Executive Secretariat, World Trade
Organization

The views expressed in this article are those of the author alone and not the World Economic Forum.

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