Development and Trade Strategies for LDCs
2001-2010 and Looking Ahead
Paper prepared for UNCTAD
March 13, 2011
Stephen Golub
Arielle Bernhardt
Michelle Liu
Swarthmore College
The authors would like to thank Mussie Delelegnarega of UNCTAD for inviting us to
write this paper.
i
Contents
I.
Introduction ............................................................................................................ 1
II.
1.
2.
3.
4.
Overview of Trade and Development Strategies, 1960-2000 ............................. 3
Import Substitution Industrialization (1960s&70s) ............................................ 3
Liberalization and the Washington Consensus (1980-2000) .............................. 5
Export Promotion in East Asia (1960-present) ................................................... 6
Assessment .......................................................................................................... 7
III.
Overview of Economic Policies and Performance of LDCs 2000-2009 ............ 8
1. Economic Outcomes .............................................................................................. 8
2. The Business Climate ......................................................................................... 12
3. Correlation between Economic Performance and the Business Climate ............. 15
IV. African LDCs .................................................................................................... 17
1. Overview ............................................................................................................. 17
2. Integration into the World Economy ................................................................... 18
3. Domestic Policies................................................................................................. 20
4. Angola Case Study............................................................................................... 23
5. Ethiopia Case Study ............................................................................................. 24
6. Mozambique Case Study ..................................................................................... 26
7. Senegal Case Study .............................................................................................. 28
8. The Gambia Case Study....................................................................................... 30
V.
1.
2.
3.
4.
5.
6.
7.
Asian LDCs ....................................................................................................... 31
Overview ........................................................................................................... 32
Macroeconomic Stability .................................................................................. 32
The Vietnamese Model ..................................................................................... 33
FDI and Ready Made Garments ....................................................................... 34
Other sectors ..................................................................................................... 36
Bangladesh Case Study ..................................................................................... 36
Cambodia Case Study ....................................................................................... 38
VI.
1.
2.
Island LDCs and Haiti ...................................................................................... 39
Overview ........................................................................................................... 40
Haiti Case Study ............................................................................................... 40
VII.
1.
2.
3.
Policies and Strategies for 2011-2020 Based on Lessons of 2001-2010 .......... 41
Private sector development ............................................................................... 42
Integration into the global economy. ................................................................ 43
The Crucial Role of the Developmental State .................................................. 44
VIII.
Concluding Observations .............................................................................. 49
References .................................................................................................................... 51
ii
I. Introduction
The United Nations’ group of Least Developed Countries (LDCs) numbers at
present 48 countries, 33 of which are in Africa, 14 in Asia, and 1 in Latin America.
Of the 14 in Asia, nearly half are very small island nations, which are not
representative of Asian countries. In Sub-Saharan Africa (SSA), however, the large
majority of the 46 countries are LDCs. Moreover, many of the non-LDC African
countries do not differ dramatically from LDCs, particularly when measured by the
per capita income criterion.1 For example, Ghana and Nigeria, though not included in
the list of LDCs, had GDP per capita levels of about $1,100 in 2009, barely above
LDC-classified Senegal’s $1,040. Growth and development of very poor countries is
therefore substantially, though not exclusively, an issue of African development.
The ultimate objective of economic growth is poverty alleviation and
improvement in quality of life. While social policies and redistribution of the fruits of
growth can play important supporting roles, the record is clear that economic growth
is a necessary condition and by far the most important force for poverty reduction and
human development. It is almost tautological that to reduce poverty in a very lowincome country growth of output per capita is required. The empirical evidence also
supports a strong link between growth and poverty reduction (Dollar and Kraay
2002). A crucial aspect emphasized in UNCTAD (2010a) is that sustainable poverty
reduction requires employment creation. LDCs are above all characterized by a nearabsence of employment opportunities outside of subsistence farming and the urban
informal sector. As the Lewis (1954) model of development stresses, industrialization
raises incomes through the absorption of low-productivity labor from subsistence
agriculture and informal petty trading into the “modern” sector. The labor-intensity
of industry is therefore also crucial. This explains in part why exports of
manufactured products have been so powerful for the economic progress of emerging
economies in East Asia and elsewhere: they create a lot of relatively well-paying jobs.
Should one be hopeful or despairing about the possibilities for Africa and for
LDCs? There are grounds for each. On the side of pessimism, LDCs are by
definition very poor, often tiny, land-locked or island countries, facing a variety of
“traps”, in the words of Paul Collier (2007). Even abundant supplies of natural
resources, which ought to be a boon, are more often a curse, and are listed as one of
Collier’s traps. Collier’s other traps are violent conflict, geographical handicaps
(land-locked status), and poor governance. Collier further argues that these countries
have now “missed the boat” of export-led industrialization and growth, putting them
at a nearly insuperable competitive disadvantage in entering the world market for
labor-intensive manufacturing. In addition, the international economic environment is
far from entirely benign, with LDCs having to contend with volatility of commodity
prices, unstable global financial markets, and world recessions. The severity of these
domestic and international obstacles is reflected in the fact that so far only three
countries have graduated from LDC status since the United Nations established this
The definition of LDC is based on three categories: per capita income; “human assets” which covers
human development indicators besides income; and “economic vulnerability” encompassing population
size, geographical variables, export concentration.
1
1
category in 1971: Botswana in 1994, Cape Verde in 2007, and most recently the
Maldives in January 2011.2
On the other hand, a number of developing countries have thrived over the past
fifty years, including some that many regarded as having little potential. Notable
examples include South Korea, now indisputably one of the great Asian Miracle
economies, and Mauritius, one of the few cases of sustained growth in Africa.3
Figure 1 shows the performance of selected countries’ per capita real GDP since
1960, illustrating the clear division between developing countries that have been
successful in growing at historically unprecedented rates and those that have
stagnated. All of these countries had very low per capita incomes in 1960. Senegal
and Nigeria are typical of much of SSA, with per capita GDP stagnating or rising
slowly, resulting in pervasive poverty. Mauritius and Botswana are the two most
pronounced success stories in Africa, with per capita incomes rising by five- to tenfold. This growth is similar to much of South-East Asia, as illustrated in the figure by
Malaysia. However, not all countries in East Asia have been successful, as shown by
Cambodia, a country with similar geographical characteristics to its rapidly-growing
neighbors. Note also that Botswana and Nigeria are both resource-dependent, while
Mauritius and Senegal are not. In short, while geographical location and resource
endowments may matter, they are clearly not decisive. The overriding question is
what has enabled Botswana and Mauritius, much of East Asia, and some countries in
Latin America to make great strides in growth and poverty alleviation, while other
countries have not, and what present-day LDCs can do to graduate from that status, as
Botswana and more recently Cape Verde and the Maldives have done.
Figure 1
Per Capita Real GDP, 1960 and 2009, Selected Countries (2000 US dollars)
Source: World Bank World Development Indicators online
Samoa’s graduation was slated for December 2010, but has been deferred to 2014 in view of damage
from the 2009 tsunami.
3
For example, Larry Westphal (1990, p. 42) writes about South Korea: “Observers of the Korean
economy in the late 1950s did not expect it become one of the world’s most dynamic. Quite the
contrary, it was considered something of a basket case,” heavily dependent on foreign assistance.
James Meade, a Nobel Prize recipient, was pessimistic about Mauritius’s scope for escaping
dependence on sugar in the 1960s. (Frankel 2010).
2
2
The last decade has provided further grounds for cautious optimism. A number
of developing countries, particularly in Africa, have witnessed higher and less
variable growth in recent years, despite a world economy beset by substantial
instability, in particular the global financial crisis and Great Recession of 2008-2010
(Radelet 2010).
Growth strategies for present-day LDCs must draw on the lessons of experience
over the past five decades. Although there are of course no definitive blueprints,
much has been learned over this time in terms of what does and does not work.
Several key messages emerge. As the Commission on Growth and Development
Report (2008) emphasizes, rapid growth necessarily occurs through integration into
the world economy, via access to markets and transfer of information, skills, and
capital. Also, the private sector must be the engine of growth. These propositions,
however, do not imply either laissez-faire or a one-size-fits-all approach. As
UNCTAD has long emphasized and is now increasingly accepted, the role of a
“Developmental State” is crucial in shaping the business environment and
engagement with the global economy, and strategies must be tailored to individual
country circumstances (UNCTAD 2010a).
Section II contains a condensed overview of the theory and practice of
development policy around the world over the previous decades, up to 2000.
Sections III-VI examine in some detail the experience of LDCs during 2001-2010,
with section III providing an overview and sections IV, V and VI focusing
respectively on Africa, Asia, and island LDCs (mostly Haiti). Section VII draws
lessons from the previous decade for development strategies in the coming decade.
Section VIII concludes.
II. Overview of Trade and Development Strategies, 1960-2000
The development strategies followed by LDCs over the last decade have been
affected by the theory and experience of development policy as it has evolved over
the past 50 years. In this section, key phases in the recent history of development
policy are briefly summarized and assessed, covering: 1. the period of import
substitution industrialization of the first few decades after World War II followed in
much of Latin America, Africa and South Asia; 2. the Washington Consensus of the
1980s and the 1990s; 3. the heterodox approach of export promotion in East Asia.
1. Import Substitution Industrialization (1960s&70s)
It is hardly surprising that developing countries turned inward and were
skeptical about reliance on market forces in the aftermath of the global instability
created by the Great Depression and World War II. The seemingly positive example
of the Soviet Union’s rapid growth and new theories of the global economy and
development promoted the view that industrialization led by a strong state was the
key to development. The Prebisch-Singer hypothesis (Prebisch 1950, Singer 1950)
focused on the instability and downward trend of commodity prices, implying termsof-trade deterioration for developing countries (“The South”) specializing in raw
materials and agriculture. Moreover, manufacturing was viewed as the source of
3
modern growth, given the historical precedents of developed countries (“The North”)
because of positive externalities and scale economies not available in primary
products. Other theories stressed that market failures and the structure of the global
economy kept developing countries in a vicious circle of underdevelopment, requiring
a “Big Push” (Rosenstein-Rodin 1943, Myrdal 1957, Rostow 1960). These arguments
strongly supported infant-industry protection of manufacturing.
Virtually all of Latin America, Asia, and Africa embraced import-substitution
industrialization (ISI) policies in the 1950s and 1960s, although a number of East
Asian countries moved away from this model by the early 1960s, as discussed further
below. ISI involved state-led industrialization and import protection. The goals were
to provide a general development “planning” framework, boost savings and
investment, and promote manufacturing. This approach opened the door to pervasive
government intervention in markets, particularly import tariffs and quotas, but also
including exchange control, state-owned enterprises (SOEs), marketing boards in
agriculture, interest-rate controls, direct and indirect subsidies, etc.
Initially, over 1950-1968, ISI policies were quite successful in boosting
growth (Bruton 1998), but problems increased over time. As was emphasized by the
cross-country studies of Little, Scitovsky and Scott (1970) and Balassa et al (1971),
ISI created distortions, including discrimination against agriculture and exports in
favor of import-competing manufacturing, increased capital-intensity of industry and,
most perniciously, complex and non-transparent government restrictions and
incentives conducive to rent-seeking (Krueger 1974). As industry became more
capital intensive, employment creation and poverty reduction lagged despite output
growth. Extreme distortions emerged in some countries, with enormous levels of
effective protection sometimes entailing industries producing negative value added at
world prices, e.g., in Pakistan (Little, Scitovsky, and Scott 1970). In Africa, some
SOEs or highly-protected private firms produced far below capacity and at very high
cost. High levels of protection were often more successful in spurring large-scale
smuggling from neighbors with lower trade barriers than modern industry4.
Over time, general disillusionment about ISI set in, partly but not wholly
justified. In South Asia, notably in India and Pakistan, growth was too slow to
significantly reduce poverty. The distortions induced by ISI were widely blamed for
setting the stage for the profound financial and economic crises in Latin America and
Africa in the 1980s that resulted in a “lost decade”. This is an exaggeration. ISI was
not directly responsible for the breakdowns of macroeconomic stability that were the
proximate sources of the debt crises in Africa and Latin America.5 In the 1950s and
1960s, growth was quite impressive, with limited macroeconomic imbalances.
Distortions increased in the 1970s, however, and there can be little doubt that the ISI
involved excessive government intervention leading to uncompetitive industries, rentseeking and corruption (Birdsall, de la Torre and Caicedo 2010, Radelet 2010), in part
because of lack of institutional capacity in many developing countries to administer
these types of policies.
4
See Golub and Mbaye (2003, 2009) for the case of Senegal.
The external debt crises in Africa and Latin America of the 1980s had both similarities and
differences. Foreign debt in both Latin America and Africa originated mainly from financing of fiscal
deficits but differed in that creditors to Latin America were overwhelmingly private banks whereas
African creditors were bilateral and multilateral official agencies.
5
4
2. Liberalization and the Washington Consensus (1980-2000)
Starting in the 1980s, the revulsion against the excesses of ISI led to a
pendulum swing in the opposite direction towards market liberalization and
deregulation in developing countries. These trends were spurred by a variety of
global forces as well: the manifest economic failures and collapse of Communism, the
rise of free-market ideology under Ronald Reagan and Margaret Thatcher, and oil and
commodity price booms casting doubt on the universal validity of the Prebisch-Singer
hypothesis.
Latin American and African countries adopted stringent stabilization and
structural adjustment policies in the 1980s and 1990s, often under the aegis of the
IMF and World Bank. A number of countries, especially in Latin America, pursued
sweeping liberalization and privatization schemes, with a radical reduction of the role
of the state in favor of markets. India also gradually liberalized the so-called “licenseRaj” economy.
The pro-market orientation of the period is often referred to as the
“Washington Consensus” (WC), coined by Williamson (1990). Williamson’s
formulation covered 10 recommendations:
1. Fiscal discipline
2. Public expenditure re-prioritization towards public goods
3. Tax reform to broaden the tax base
4. Positive real interest rates
5. Competitive exchange rates
6. Trade liberalization
7. Promotion of Foreign Direct Investment
8. Privatization
9. Deregulation of entry barriers
10. Property rights
As Birdsall et al (2010) note, these measures reflect the shift towards more
market-oriented policies, but are “a far cry from market fundamentalism” and omit
capital-account liberalization. It did not involve reducing state capacity as much as
redirecting the role of the state to focus on public goods. Nevertheless, the term
Washington Consensus has come to denote an excessive, and even ideological,
adherence to laissez-faire. As was the case for ISI, these criticisms are sometimes
overdone but reflect some real problems with the application of WC principles.
Fiscal and external imbalances and ensuing debt crises in Africa and Latin
America necessarily entailed painful cutbacks for which the WC is wrongly blamed.
Macroeconomic stabilization was inevitable regardless of the principles of the WC.
However, a good case can be made that the outcome of WC policies has been
disappointing. Growth in Africa and Latin America was generally mediocre in the
1990s and inequality worsened in many countries, resulting in lack of progress in
poverty alleviation.
5
In short, both ISI and WC have had mixed effects in Latin America and Africa.
Is a middle ground perhaps more likely to be successful? Or does the problem reside
elsewhere? Before addressing these questions, the crucial East Asian case is
reviewed.
3.
Export Promotion in East Asia (1960-present)
East Asia provides an altogether different perspective on development
possibilities and strategies. There is no disputing that many East Asian countries
experienced unprecedentedly rapid growth; debate instead focuses on the extent to
which this growth was driven by reliance on markets versus government intervention,
and the role of export orientation therein.
Beginning in the early 1960s, the four East Asian “tigers” or “dragons”—
South Korea, Taiwan, Singapore and Hong Kong— rejected import substitution in
favor of export orientation. Starting with low incomes in the 1950s, these countries
attained levels of per capita GDP and living standards comparable to some OECD
countries in a span of 50 years, an astounding feat. Their development strategies had
both similarities and differences (Westphal 2002). The balance of market and state
involvement differed sharply among them. Hong Kong has remained one of the most
laissez-faire countries in the world. Korea, on the other hand, practiced rather
intrusive industrial policies involving explicit infant industry protection, targeted
credit, and other non-neutral policies (Westphal 1990, Wade 2010). Public
enterprises played major roles in some sectors, such as steel. Korea also largely
excluded foreign multinationals, relying instead on licensing or reverse-engineering
technology. Taiwan and Singapore followed an intermediate strategy: they
selectively courted multinationals in targeted sectors with a mix of incentives and
restrictions (Westphal 2002).
On the other hand, the “Gang of Four,” as they are also known, shared strong
export orientation policies. Westphal (2002) presents detailed evidence that
participation in the global economy was integral to their development strategies
through absorption of foreign technology and rapid growth of manufactured exports
to developed countries. Some analysts attribute growth more to high investment rates
than export promotion (Rodrik 1995) but Westphal’s careful case studies demonstrate
the crucial role of exports in government strategies and in technological upgrading.
These four countries also all ensured that the “basics” of development policy were in
place: government investment in infrastructure and education, political and
macroeconomic stability, competitive exchange rates, and consistent and largely
corruption-free government administrations (Harrold, Jayawickrama, and Bhattasali
1996). Where industrial policy was practiced, it was “results-based,” with protection
temporary and contingent on attaining performance targets. In short, these four
countries’ governments were the prototypes of “Developmental States” (UNCTAD
2010a). Regardless of the particularities of the trade and industrial policies pursued,
the overriding goal of economic policy was international competitiveness and export
growth.
Other East Asian countries, starting later, have also exhibited very impressive
growth, relying again on manufactured exports. In South-East Asia, Malaysia,
6
Thailand and Indonesia boomed in the 1970s. In the 1980s, China, of course,
developed into a major export power, and more recently still, Vietnam has become an
emerging exporter of manufactured goods. These more recent Asian success stories
feature the same heterodox mix of opening to world markets, active government
promotion efforts, along with attention to the basics of macroeconomic stability,
infrastructure, competitive exchange rates, etc.—in short, governments committed to
development. Again, in all cases rapid growth has been closely tied to absorption of
foreign technologies, often through FDI, and to attainment of international
competitiveness as demonstrated by success in penetrating developed country markets
in manufactured products. Exports of labor-intensive manufacturing have been a
source of growth, equity and poverty reduction, generating employment for large
numbers of people and contributing to a virtuous circle of technological upgrading
and growth.
4. Assessment
To summarize, a large number of East Asian countries have demonstrated a
remarkable record of success in export-led growth, using an eclectic mix of openness
and activist government intervention that differed substantially by country. The record
in Africa, Latin America and South Asia is much more mixed. In South Asia, India
has recently experienced rapid growth with success in exporting services, following
partial liberalizations in the 1980s and early 1990s. Other South Asian countries,
such as Pakistan, have been held back by political instability. In Latin America and
Africa, there have been some notable success stories, including Costa Rica, Chile,
Botswana and Mauritius, all of whom have in recent decades experienced relatively
good governance, macroeconomic stability, and successfully taken advantage of
global opportunities, albeit in different ways. Brazil has also made substantial
progress in combining improved macroeconomic stability with efforts to more
equitably spread the gains from growth. Overall, however, Latin America and
especially Africa have had disappointing results both from ISI and WC policies.
Birdsall et al (2010) suggest three possible reasons for the generally
disappointing outcomes of market liberalizations 6:
i.
The reform agenda is misguided
ii.
Reform implementation is incomplete
iii. The reform agenda is incomplete.
Regarding (i), some countries clearly went too far in deregulating markets,
particularly in domestic and international financial liberalization, which has proven
problematic in developed as well as developing countries. It would be wrong,
however, to reject the overall principles of the WC. Its central idea that markets must
be at the center of economic development and that intrusive government interventions
have been damaging in many countries is not in doubt—this is a clear lesson of the
ISI era. There is some validity to both (ii) and (iii). While in some areas reforms have
been far-reaching, e.g., in trade liberalization and privatization, in others little
progress has occurred (tax reform) and in many countries the business climate
6
Birdsall et al (2010) focus on Latin America but the same questions apply to Africa. For Africa see
Ndulu et al (2008) and Radelet (2010).
7
remains adversarial. It has also become increasingly clear that the WC reform agenda
is incomplete. Indeed, perhaps the greatest shortcoming of economic reforms since
the 1980s is inadequate funding for infrastructure, especially in Africa (Estache and
Fay 2009). The importance of institutions or “social infrastructure” such as well
functioning judicial and legal systems is also increasingly recognized, although not
easy to implement (North 1993, Rodrik, Subramanian and Trebbi 2004). More
generally, the implementation of WC policies under the aegis of the World Bank and
IMF often failed to recognize country-specific institutional development and
constraints, resulting in misguided and sometimes damaging policies, e.g. during the
1997 East Asian crisis (Stiglitz 2002).
III.
Overview of Economic Policies and Performance of LDCs
2000-2009
1. Economic Outcomes
In this and the next three sections, the economic policies and outcomes of
LDCs over the last decade are examined. This section begins with an overview
before more detailed discussions of Africa, Asia, and Haiti are presented.
Table 1 shows the average annual growth rates of 36 LDCs. 7 GDP and export
growth for African LDCs improved markedly between the 1990s and the 2000s.
Output growth rose from 2.8 percent per year in 1990-99 to 5.3 percent in 2000-2009,
resulting in a rise in per capita GDP growth from 0.2 percent to 2.5 percent over the
same periods. Export growth also shot up from 2.1 percent in 1990-99 to 12.5 percent
in 2000-2009, with the improvement, however, in part due to higher export prices. In
terms of volumes, SSA exports rose about 5 percent during both decades. As
emphasized by Radelet (2010), Collier (2008) and Page (2008), the recent growth
experience in Africa varies widely. The main point, though, is that there is a general
improvement in the last decade, despite the volatile conditions of the global economy.
Asian LDCs performed even better on average than their African counterparts,
and their strong performance predates the 2000s decade. In the 1990s, the five Asian
LDCs shown in Table 1 averaged per capita GDP growth of 3.2 percent, rising to an
impressive 4.3 percent in the latest decade. Export growth was also strong among
these Asian LDCs, with the exception of Nepal, and due to rising export volumes
rather than terms of trade.
The record of other LDCs is mixed. Some island LDCs have done very well,
with Cape Verde and Maldives recently graduating from LDC status. On the other
hand, Haiti’s growth improved only slightly in the last ten years relative to the
previous ten, and not by enough to push per capita GDP growth into positive territory.
7
The focus of this report is on African and Asian LDCs, with less attention to island LDCs, due to the
very small size of these island countries and in some cases limited data availability. A few other LDCs
are also excluded from Table 1 due to missing data.
8
Table 1
Growth Rates of Real GDP, Per Capita Real GDP and Exports (in US dollars),
Annual Averages, 36 LDCs, 1990-99 and 2000-2009*
LDC Countries
Average Real
GDP Growth
(1990-1999)
Average Real Average Real
GDP Per
GDP Per
Average
Average
Average Real
Capita
Capita
Export
Export
GDP growth Growth (1990- Growth (2000- Growth (1990- Growth (2000(2000-2009)
1999)
2009)
1999)
2009)
Africa
11.5%
-2.4%
8.3%
3.2%
19.1%
4.1%
1.3%
0.8%
4.3%
11.6%
5.3%
2.8%
1.9%
-1.9%
18.8%
3.1%
-3.4%
0.3%
-4.1%
10.2%
0.8%
-0.9%
-1.1%
-6.7%
4.8%
8.8%
-0.6%
5.4%
2.1%
32.2%
4.5%
-8.5%
1.5%
-9.6%
0.6%
3.9%
-4.6%
2.0%
-2.2%
14.0%
17.7%
16.4%
14.5%
34.8%
22.6%
0.1%
6.3%
-3.5%
2.7%
-1.4%
8.2%
-0.7%
5.4%
3.5%
13.2%
5.0%
-0.8%
1.9%
0.5%
1.1%
2.9%
1.0%
0.8%
-1.1%
9.6%
0.7%
-1.6%
-1.6%
9.7%
-5.8%
3.0%
2.1%
2.0%
10.1%
13.7%
0.5%
-1.9%
-3.2%
-15.2%
10.2%
3.4%
-1.6%
0.5%
6.6%
8.9%
4.2%
1.5%
1.3%
1.2%
9.4%
5.6%
2.1%
3.1%
5.6%
16.3%
4.0%
0.2%
1.3%
0.7%
17.3%
8.0%
2.8%
5.3%
12.6%
15.0%
4.5%
-1.2%
0.8%
-5.5%
15.9%
7.1%
-0.9%
4.4%
-2.6%
13.1%
4.0%
0.3%
1.3%
-0.1%
10.0%
10.1%
-5.5%
6.5%
-6.0%
11.4%
7.0%
2.8%
4.7%
5.8%
17.7%
6.7%
-0.3%
3.8%
10.2%
12.6%
2.3%
-0.4%
-0.3%
-2.0%
14.4%
7.6%
4.2%
4.2%
10.0%
21.3%
5.4%
-2.4%
2.9%
-3.5%
17.7%
5.3%
0.2%
2.5%
2.1%
12.5%
Angola
Benin
Burkina Faso
Burundi
Central African Rep.
Chad
Congo, Dem. Rep.
Djibouti
Equatorial Guinea
Eritrea
Ethiopia
Gambia, The
Guinea
Guinea-Bissau
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mozambique
Niger
Rwanda
Senegal
Sierra Leone
Sudan
Tanzania
Togo
Uganda
Zambia
Africa Average
0.5%
4.7%
5.7%
-2.1%
1.6%
2.6%
-5.5%
-2.0%
20.4%
7.9%
2.4%
3.0%
4.3%
0.8%
3.8%
0.3%
1.4%
3.7%
4.1%
3.0%
5.9%
2.1%
-0.5%
3.1%
-5.5%
5.5%
2.7%
2.5%
7.2%
0.4%
2.8%
Bangladesh
Bhutan
Cambodia
Lao PDR
Nepal
Asia Average
4.7%
4.8%
7.2%
6.2%
4.9%
5.6%
5.8%
8.6%
8.0%
6.8%
3.7%
6.6%
2.6%
4.9%
4.5%
3.5%
2.3%
3.6%
4.1%
6.0%
6.2%
4.9%
1.7%
4.6%
14.1%
5.5%
9.7%
20.4%
13.0%
12.5%
11.4%
21.1%
13.6%
16.7%
4.9%
13.5%
Haiti
-0.3%
0.7%
-2.3%
-0.9%
4.3%
7.9%
Asia
*For some countries, the period covered differs slightly.
Source: World Bank World Development Indicators and authors’ calculations.
9
Table 2
Investment, Trade Balance and Current Account Balances, as a Share of GDP,
Annual Averages, 1990-1999 and 2000-2009*
LDC Countries
Angola
Benin
Burkina Faso
Burundi
Central African Rep
Chad
Congo, Dem. Rep.
Djibouti
Equatorial Guinea
Eritrea
Ethiopia
Gambia, The
Guinea
Guinea-Bissau
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mozambique
Niger
Rwanda
Senegal
Sierra Leone
Sudan
Tanzania
Togo
Uganda
Zambia
Africa Average
Average
Average
Average
Average
Current
Current
Average
Average
Trade
Trade
Account
Account
Investment Investment Balance to Balance to Balance to Balance to
to GDP
to GDP
GDP (1990- GDP (2000- GDP (1990- GDP (2000(1990-1999) (2000-2009)
1999)
2009)
1999)
2009)
Africa
19.9%
12.7%
0.7%
18.6%
-7.2%
4.6%
16.3%
19.8%
-10.1%
-9.9%
-4.9%
-6.2%
22.5%
16.8%
-14.0%
-16.3%
-1.7%
-12.1%
9.1%
10.0%
-14.5%
-26.4%
-3.0%
-8.3%
11.4%
8.8%
-10.3%
NA
-4.0%
NA
13.1%
30.9%
-14.9%
NA
-4.4%
NA
7.6%
14.3%
NA
NA
NA
NA
11.1%
18.6%
-15.9%
-16.0%
1.5%
-3.9%
59.5%
44.2%
-41.8%
NA
-37.0%
NA
26.1%
22.8%
-62.3%
-63.5%
0.3%
-16.5%
16.5%
22.6%
-7.1%
-18.0%
-1.0%
-5.8%
20.1%
23.5%
-11.4%
-14.9%
0.4%
-4.4%
21.3%
18.0%
-6.1%
-8.2%
-5.7%
-9.2%
25.9%
12.0%
-23.2%
-11.3%
-21.1%
-2.5%
64.3%
31.1%
-104.2%
-57.7%
-12.3%
-5.5%
NA
13.6%
NA
-164.3%
NA
-33.9%
12.4%
23.4%
-7.9%
-10.6%
-7.3%
-7.8%
17.7%
20.9%
-12.8%
-11.0%
-8.6%
-5.1%
22.5%
23.4%
-15.4%
-8.5%
-8.8%
-8.2%
13.6%
28.6%
-7.0%
NA
-1.5%
NA
20.7%
21.1%
-27.0%
-15.0%
-16.3%
-13.9%
8.9%
15.0%
-8.5%
-11.4%
-7.3%
-8.1%
14.5%
20.4%
-21.0%
-16.9%
-1.4%
-5.3%
12.5%
24.5%
-7.1%
-15.0%
-5.6%
-8.2%
7.3%
12.3%
-10.0%
-18.0%
-8.3%
-10.1%
16.3%
23.8%
-6.9%
-4.7%
-5.8%
-6.3%
21.3%
17.6%
-17.9%
-8.6%
-11.9%
-6.3%
16.3%
18.7%
-12.5%
-16.3%
-7.9%
-9.5%
16.1%
21.3%
-14.7%
-11.5%
-4.8%
-3.7%
42.7%
24.5%
-7.0%
-4.5%
-12.3%
-9.6%
20.3%
20.5%
-18.2%
-21.6%
-7.4%
-8.2%
Asia
Bangladesh
Bhutan
Cambodia
Lao PDR
Nepal
Asia Average
19.1%
41.7%
14.6%
NA
22.7%
24.5%
23.9%
51.9%
19.1%
31.4%
25.8%
30.4%
-5.8%
NA
-12.1%
-13.3%
-11.1%
-10.6%
-6.6%
NA
-9.3%
-2.2%
-16.7%
-8.7%
-0.5%
NA
-5.4%
-6.6%
-6.2%
-4.7%
0.7%
NA
-5.1%
-1.1%
1.2%
-1.1%
Haiti
22.6%
28.0%
-13.8%
-28.3%
-1.6%
-2.4%
*For some countries, the period covered differs slightly.
What does the star in the fifth column of the first row refer to?
Source: World Bank World Development Indicators and authors’ calculations.
10
Table 3
Selected Trade and Capital Flows, 2000-2009* or Latest Available
LDC Countries
Angola
Benin
Burkina Faso
Burundi
Central African Re.
Chad
Congo, Dem. Rep.
Djibouti
Equatorial Guinea
Eritrea
Ethiopia
Gambia, The
Guinea
Guinea-Bissau
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mozambique
Niger
Rwanda
Senegal
Sierra Leone
Sudan
Tanzania
Togo
Uganda
Zambia
Africa Average
Average
Average Exports
Average Foreign
Manufacturing
of Goods and
Average Offical Direct Investment
Average
Exports to Total
Services to GDP Aid Received to
to GDP (2000Remittances to
Exports (2000(2000-2009)
GDP (2000-2008)
2009)
GDP (2000-2009)
2009)
Africa
73.6%
2.4%
8.0%
NA
NA
14.1%
9.2%
1.9%
3.4%
9.9%
9.7%
12.8%
1.3%
1.4%
10.6%
8.7%
37.7%
0.2%
0.4%
2.1%
14.5%
8.2%
2.1%
NA
36.1%
39.4%
7.8%
12.0%
NA
NA
24.4%
25.5%
7.1%
NA
NA
40.7%
12.1%
8.3%
3.1%
NA
89.5%
0.7%
14.7%
NA
NA
8.1%
25.7%
1.1%
0.5%
NA
12.9%
14.5%
2.8%
1.0%
4.5%
38.8%
13.7%
10.4%
9.2%
1.3%
30.3%
7.1%
5.8%
1.9%
18.4%
NA
22.4%
1.4%
5.3%
NA
52.9%
7.6%
10.0%
28.7%
82.0%
28.9%
47.7%
23.6%
8.9%
NA
27.3%
12.9%
5.1%
0.3%
28.6%
24.6%
20.9%
2.2%
0.0%
9.4%
28.5%
13.1%
3.0%
3.8%
9.3%
40.0%
16.3%
11.1%
0.1%
NA
29.0%
25.2%
5.3%
1.1%
5.6%
17.1%
14.3%
2.5%
1.5%
8.0%
9.8%
21.1%
0.9%
0.9%
2.7%
26.7%
8.7%
1.8%
8.4%
27.4%
19.9%
31.4%
3.8%
1.7%
NA
16.6%
3.8%
6.0%
5.2%
1.2%
19.2%
13.5%
3.4%
0.1%
9.6%
36.0%
4.6%
3.0%
8.5%
38.5%
15.1%
13.9%
4.1%
4.6%
10.7%
33.0%
16.1%
6.3%
0.6%
9.1%
28.6%
15.7%
5.6%
4.0%
16.3%
Asia
Bangladesh
Bhutan
Cambodia
Lao PDR
Nepal
Asia Average
Haiti
16.8%
38.1%
60.1%
31.4%
16.5%
32.6%
2.3%
11.1%
9.3%
12.2%
6.2%
8.2%
0.8%
2.0%
5.2%
2.9%
0.1%
2.2%
7.6%
NA
3.4%
0.1%
13.3%
6.1%
85.1%
25.5%
73.7%
NA
NA
61.4%
13.7%
8.8%
0.8%
21.7%
NA
*For some countries, the period covered differs slightly. Source: World Bank World
Development Indicators and authors’ calculations.
11
Table 2 displays selected national accounts data, relative to GDP: investment,
the trade balance for goods and services, and the current account balance, for each of
the last two decades. For Africa, there was little change in the average investment
rate over the two decades, but this masks considerable variation across countries,
some of which may reflect poor data collection. In Asia, investment rates were
generally higher than in Africa and rose further in the 2000s to reach 30 percent of
GDP. Surprisingly, Haiti’s investment rate also rose to near 30 percent in the last
decade. Almost all countries show trade deficits—often very large—in both decades.
Current-account balances are also almost always negative, but smaller in absolute
value than trade deficits, reflecting the positive contributions of remittances and aid,
as shown in the following table.
Table 3 shows selected balance of payments components, focusing on sources
of foreign exchange, again scaled by GDP, for the latest decade only. Exports of
goods and services are quite large in many African and Asian LDCs, with the average
around 30 percent of GDP in both continents, again, however, with considerable
variation. Some African countries have export-to-GDP ratios of less than 10 percent,
as does Haiti. Imports are of course much larger than exports, given that trade
balances tend to be strongly negative. Overall, considering exports and imports
together, LDCs are quite open to trade. Official Aid is a very substantial source of
funding for trade deficits, especially in Africa, where it averaged nearly 16 percent of
GDP over 2000-2009. FDI and private transfers (remittances) have also been major
sources of foreign exchange for African LDCs. Remittances are very large in Haiti
and Nepal as well. In Asian LDCs, FDI is considerably lower on average than in
Africa, as a share of GDP, with the notable exception of Cambodia, and is also very
small in Haiti.
2. The Business Climate
Tables 4 and 5 turn to indicators of the business climate and public services.
Table 4 presents four well-known aggregate indicators: the Heritage Foundation Index
of Economic Freedom (scored on a 0-100 scale, with 100 the highest possible score),
the World Bank Country Policy and Institutions Assessment—(1-6 scale, 6 highest),
Transparency International’s Corruption Perception Index (CPI) (1-10 scale), and the
World Bank Ease of Doing Business Ranking (DB) (rankings for 183 countries—1
the highest ranking). The CPIA is available only for low-income countries; the other
three indicators are calculated for countries at all levels of development. For the latter
three indicators, LDCs tend to score poorly. The median score on the Heritage
Foundation IEF, for example, is 60, which is attained by very few LDCs. Likewise,
scores on Transparency International’s CPI and the World Bank DB indicators put
LDCs almost invariably at the bottom. There are some exceptions. For example,
Rwanda is ranked 58th in the DB indicators and has the best score in Africa on the
CPIA and the CPI indicators as well. A few other African countries have decent
rankings in one or more of the indicators, including Zambia, Tanzania, Mozambique
and Uganda. Typically, however, African countries are ranked in the last 30-40 in the
DB indicators, and their CPI score is near the bottom in the 1-3 range. The same is
true for Haiti, and to a slightly lesser extent the Asian LDCs.
12
Table 4
Aggregate Indicators of the Business Climate
Angola
Benin
Burkina Faso
Burundi
Central African
Chad
Congo, Dem. Rep.
Djibouti
Equatorial Guinea
Eritrea
Ethiopia
Gambia, the
Guinea
Guinea-Bissau
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mozambique
Niger
Rwanda
Senegal
Sierra Leone
Sudan
Tanzania
Togo
Uganda
Zambia
Africa Average
Heritage
World Bank
Transparency
Foundation
Country Policy
International
Index of
and Institutional
Corruption
Economic
Assessment Index
Perceptions
Freedom (2010)a
(2009)b
Index (2010)c
Africa
48
2.8
1.9
55
3.5
2.8
59
3.8
3.1
48
3.1
1.8
48
2.6
2.1
48
2.5
1.7
66
2.7
2.0
51
3.2
3.2
49
NA
1.9
35
2.2
2.6
51
3.4
2.7
55
3.3
3.2
52
2.8
2.0
44
2.6
2.1
48
3.5
3.5
46
2.8
3.3
63
3.5
2.6
54
3.4
3.4
56
3.7
2.7
52
3.2
2.3
56
3.7
2.7
53
3.3
2.6
59
3.8
4.0
55
3.7
2.9
48
3.2
2.4
NA
2.5
1.6
58
3.8
2.7
47
2.8
2.4
62
3.9
2.5
58
3.4
3.0
53
3.2
2.6
World Bank Ease
of Doing Business
Rank (2011)d
163
170
151
181
182
183
175
158
164
180
104
146
179
176
138
155
140
133
153
165
126
173
58
152
143
154
128
160
122
76
150
Asia
Bangladesh
Bhutan
Cambodia
Lao PDR
Nepal
Asia Average
51
57
57
51
53
54
3.5
3.9
3.3
3.2
3.3
3.4
2.4
5.7
2.1
2.1
2.2
2.9
107
142
147
171
116
137
Haiti
51
2.9
2.2
162
Notes
a
0-100 (100
highest, median =
60)
b
1-6 (6 is highest
score)
c
1-10, (10 highest
score)
d
183 countries, (1
is highest rank).
Sources: Heritage Foundation, Transparency International, World Bank.
13
Table 5
Selected Indicators of the Business Climate: Starting a Business, International
Trade and Electricity Outages
Starting a Business
Time (days)
Cost (% of
income per
capita)
International Trade
Electricity Outages
Value lost due Total duration
Cost to import
Time to
to power
of power
(US$ per
import (days)
outages (% of
outages
container)
sales)
(hours)
Africa
49
2840
4
158.1
32
1400
8
36.1
49
4030
6
35.8
71
4285
11
122.9
62
5554
NA
NA
101
8150
3
199.4
63
3735
6
75.6
18
911
NA
NA
48
1411
NA
NA
59
1581
0
8.3
45
2993
1
19.4
23
975
12
162.4
32
1391
14
229.9
22
2349
5
164.9
35
1610
7
37.3
15
1212
3
25.5
24
1555
8
31.5
51
2570
17
3.7
31
3067
2
16.2
42
1523
2
10.7
30
1475
2
13.0
64
3545
2
32.1
34
4990
9
60.5
14
1940
5
72.6
31
1639
7
162.4
46
2900
NA
NA
31
1475
10
94.6
28
963
10
63.2
34
2940
10
110.8
56
3315
4
10.6
41
2611
6
75
Angola
Benin
Burkina Faso
Burundi
Central African Rep.
Chad
Congo, Dem. Rep.
Djibouti
Equatorial Guinea
Eritrea
Ethiopia
Gambia, the
Guinea
Guinea-Bissau
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mozambique
Niger
Rwanda
Senegal
Sierra Leone
Sudan
Tanzania
Togo
Uganda
Zambia
Africa Average
68
31
14
32
22
75
84
37
136
84
9
27
41
216
40
20
7
39
8
19
13
17
3
8
12
36
29
75
25
18
42
163
153
50
129
228
227
735
170
104
69
14
200
147
183
26
55
13
108
80
34
14
119
9
63
111
34
31
178
94
28
119
Bangladesh
Bhutan
Cambodia
Lao PDR
Nepal
Asia Average
19
46
85
100
31
43
33
7
128
11
47
77
31
38
26
50
35
36
1390
2665
872
2040
2095
2069
11
4
2
0
27
7
114
7
71
2
338
74
Haiti
105
212
33
1545
27
338
Asia
Sources World Bank Doing Business and Enterprise Surveys.
14
Table 5 presents selected and more detailed indicators on the costs and time of
starting a business and engaging in international trade, and on power outages—
aspects often identified as crucial for investment by foreign and domestic firms alike.
In many LDCs it can take more than 40 days to complete the paperwork for starting a
business, with costs amounting to more than 100 percent of per capita income. In
contrast the average for the OECD is less than 15 days and 5 percent of per capita
income. Likewise, the time to complete import formalities (not including shipping
time) is very long in many LDCs and the costs of importing a container much higher
than in developed countries. Power outages are also frequent occurrences entailing
high costs. A number of countries have made dramatic improvements in these areas
in recent years, however. In Rwanda the time to start a business is only 3 days. In
Senegal the time to start a business is 8 days and the time to import is 14 days. In
contrast, in Chad it takes 75 days to start a business and 101 to import. The averages
for Africa and Asian LDCs are quite similar, again with substantial country variation.
3. Correlation between Economic Performance and the Business Climate
Figures 2 and 3 show a high degree of correlation for non-oil LDCs between
the CPIA and two key measures of performance: growth of per capita income and
growth in export values. The correlation is weaker although still positive if oil
exporters are included. Other indicators of the business climate show similar
correlations, although not as high as for the CPIA. This provides some evidence for
the importance of the business climate in determining economic growth and export
expansion. The case studies of LDCs analyzed below provide further evidence.
15
Figure 2
Correlation of Per Capita GDP Growth (2000-2009) and World Bank Country Policy
and Institutional Assessment (CPIA) Index (2005), Non-Oil LDCs
Figure 3
Correlation of Export Value Growth (2000-2009) and World Bank Country Policy
and Institutional Assessment (CPIA) Index (2005), Non-Oil LDCs
Sources: See Tables 1 and 4.
16
IV.
African LDCs
1. Overview
The analysis in this section relies on case studies of Angola, The Gambia,
Ethiopia, Mozambique, and Senegal that are summarized below, as well as other
evidence on country policies and outcomes.
LDCs in Sub-Saharan African economic performance was, on the whole,
disappointing in the 1960-1995 period, as discussed in section II, with a widening gap
in growth and living standards relative to other developing countries. Since the mid1990s, however, a number of countries in Africa including LDCs have had sustained
growth in GDP per capita and in exports, and even emerged relatively unscathed from
the global crisis (Radelet 2010, IMF 2010a). This improvement does mask some
important differences: a number of countries have had weak growth (e.g., Senegal,
Malawi, Benin, The Gambia), and a few have retrogressed (e.g., Central African
Republic, Eritrea, Guinea Bissau, Togo). Some relatively-developed non-LDCs in
Africa have had poor growth outcomes due to acute civil conflicts (Zimbabwe, Cote
d’Ivoire, and Kenya). There are also failed states—Somalia and other countries in
conflict situations the Democratic Republic of Congo (DRC)—that cannot achieve
economic growth until political and social stability are in place.
Among African LDCs on a strong expansion path, there are a few oil exporters
(Sudan, Chad, and Angola), but many that are not dependent on oil: Mali, Burkina
Faso, Mozambique, Tanzania, Ethiopia, Rwanda and Uganda. What explains the
marked differential performances? Of course, avoidance of violent conflicts is a
necessary condition. Beyond that, it is argued here that the quality of policy and
governance makes the key difference. Countries that have fostered a strong business
environment, invested in infrastructure, and demonstrated better governance saw
higher growth compared to those that did not. Though terms of trade improvements
and global conditions also played a role, policy was the differentiating factor.
African LDCs’ stronger growth over the past decade is due in part to improved
terms of trade for oil exporters and exporters of some other primary commodities, and
increased output of primary commodities. In this sense, growth relies on a fragile
base (UNCTAD 2010a). However, in an analysis of medium-term deviations from
long-run growth in Africa, Page (2009) found that changes in the terms of trade are
not correlated with increased probabilities of growth accelerations or declines. In fact,
they found that the terms of trade were less favorable during growth acceleration
episodes. Moreover, Radelet (2010) points out that many “emerging” African
countries did not experience terms of trade improvements over the 1996-2008 period,
suggesting that recent growth in African LDCs was caused by more than just good
luck. These conclusions also lend support to the assertion that policy is the keydetermining factor for growth.
Recent growth has had a mixed impact on poverty and development indicators
in African LDCs: although per capita GDP rose, the increased income was unevenly
distributed. Much of the output growth was a result of booming capital-intensive
17
commodity sectors, e.g. the mega-projects in Mozambique or the chemical industry in
Senegal, and so did little to alleviate the pressing issue of unemployment in African
LDCs. Agriculture remains the main source of employment, despite its continued low
productivity and decreasing contribution to GDP. Some promising labor-intensive
sectors such as horticulture, tourism, and even manufacturing have boosted
employment and contributed to poverty reduction, but usually on a small scale
(UNCTAD 2008a, UNCTAD 2010b). Overall, there has been some, though limited,
progress towards achieving the Millennium Development Goals (UNCTAD 2010a).
Poverty levels in African LDCs dropped from 44.6 percent in 1990 to 36 percent in
2005 based on the proportion of people living under $1 a day, but the proportion of
people living under $2 a day decreased only slightly, remaining near 80 percent
(UNCTAD 2008b). Those who passed from $1 a day but remain under the $2 limit
are especially vulnerable to a return to extreme poverty. Their vulnerability is
symptomatic of the fragile nature of African LDCs’ growth.
2. Integration into the World Economy
Role of FDI. FDI inflows and exports both increased significantly over the
past decade, playing an important role in fueling the boom. However, FDI remained
concentrated in natural resource extraction industries. Governments have also had
mixed success in responsibly and transparently managing FDI inflows. Some
countries, like Mozambique, have joined or are in the process of joining the
Extractive Industries Transparency Initiative (EITI) and have made progress in
governance of mineral-based FDI. In other countries, like Angola, opaque relations
between multinationals and governments characterizes FDI, particularly in the oil
industry.
Although small relative to commodity sectors, FDI inflows have played an
important part in the fledgling diversification of African LDCs. For example, FDI
helped revitalize Ethiopia’s leather and horticulture industries. The leather industry
suffered in the early 2000s when imports of cheap imitation leather shoes flooded the
domestic market. Ethiopian producers lacked the expertise and the equipment to
upgrade to higher-quality shoes. They were also unaware of global fashion trends, and
had a difficult time identifying export markets. It was not until the mid-2000s, when
the government removed restrictions on foreign investment that the leather industry
made progress. The cut flower industry, on the other hand, had strong FDI inflows
early on. The knowledge of profitable flower types and export markets that foreign
investors brought to the Ethiopian industry helped spur strong growth in the sector.
The Ethiopian government targeted FDI by subsidizing freight costs and lowering
import duties on inputs. Ethiopia was one of the few African LDCs whose
diversification index increased in the past decade; FDI in both the leather and
horticulture industries played a role in this diversification.
South-South Trade and Economic Relations. A new and important
dimension of globalization is growing South-South trade, particularly between
African countries and China. African trade with major developing trade partners
(MDTPs) has increased particularly quickly and at a much faster rate than trade either
with developed countries or with other African countries. Trade with MDTPs now
accounts for 31 percent of African LDC imports and 40 percent of exports (UNCTAD
18
2010a). Imports from MDTPs are mainly composed of low, medium and high skilland technology-intensive manufactures, while exports are concentrated in
commodities. Since MDTPs, especially China, are major exporters of manufactured
goods, these countries have not become important export markets for African LDCs’
manufactures. Therefore, the major difference between African LDCs’ exports to
developed countries and to MDTPs is that export baskets to developed countries
include a much higher proportion of labor and resource intensive manufactures
(UNCTAD 2010a).
Consequently, although trade with MDTPs has spurred growth in African
LDCs’ export sectors, it has also reinforced their overwhelming focus on commodities
(UNCTAD 2010a). However, it is also important to note that African LDCs have the
potential to tap into emerging Asia’s growing middle classes and increased demand
for non-traditional African exports such as processed commodities and manufactured
goods.
Along with trade between developing countries, South-South aid flows and
FDI have also greatly increased in recent years. Recently, FDI from other developing
countries has become more diversified; both China and India have invested in food
processing, construction, tourism, and commercial real estate and transport
(UNCTAD 2010a). China also plans to establish preferential trade and industrial
zones in Zambia and Ethiopia to ease entry of Chinese firms (Brautigam, Farole and
Yiaoyang 2010). Unlike developed country ODA, aid from developing countries,
China in particular, is heavily focused on infrastructure and productive sectors. Aid is
also often tied to market transactions between the donor and recipient countries.
Nevertheless, African LDCs welcome aid from MDTPs because they find commercial
conditions preferable to policy conditionality.
Regional Integration. Regional integration allows countries to benefit from
economies of scale and export diversification, especially in Africa where countries are
often very small. Moreover, Regional Trade Agreements (RTAs) can serve as a
support group to improve policies. Therefore, RTAs should have a positive effect on
African LDCs. Indeed, some RTAs in Africa have had some success. For example,
the Economic Community of Central African States (ECCAS) and the West African
Economic and Monetary Union (WAEMU) have achieved deep integration by
pursuing customs unions, harmonized fiscal policies, and a single currency. Likewise,
the Southern African Development Community (SADC) has successfully linked
insurance, stock exchanges, investment and taxation.
Overall, however, regional integration is marred by a “spaghetti bowl” of
proliferating and overlapping agreements (UNCTAD 2009, Gupta and Yang 2005).
There are more regional organizations in Africa than on any other continent, with
some countries belonging to as many as four groups. Furthermore, many RTAs are
undermined by bureaucratic and physical barriers, such as roadblocks, transit fees and
administrative delays at borders and ports (UNCTAD 2009). For example, The
Gambia is almost fully enclosed by Senegal, and the two countries share deep ethnic
and cultural ties. Both are members of ECOWAS, which until recently was a largely
ineffective RTA. However, unlike Senegal, The Gambia is not a francophone country,
and is shut out of the relatively more advanced WAEMU. Economically-illogical
trading bloc divisions like these reduce RTAs’ effectiveness. Moreover, African
19
countries often negotiate North-South trade arrangements such as Economic
Partnership Agreement (EPA) with EU, adding another complication to regional
integration initiatives. Despite RTAs’ goal to enhance trade across countries within a
region, trade liberalization within RTAs has been slow.
Despite these RTAs, recorded overall intra-regional trade is generally low in
Africa (UNCTAD 2009), although it has grown over time and there is considerable
variation across countries. Intra-African exports increased from 4.1 percent of total
African exports in 1960-1962 to a still rather small 11.4 percent in 2004-2006. For
some 15 countries, however, intra-regional exports accounted for 30 percent or more
of total exports in 2004-2006. For example, Kenya and other members of the East
African Community are the second most important market for Uganda, after the EU.
In addition, there is a large amount of unrecorded cross-border trade among
neighboring countries. For example, both Senegal and The Gambia report almost no
bilateral trade flows with each other (Golub and Mbaye 2009). Official statistics,
however, do not disclose the large amount of informal cross-border trade between
these two countries and others, e.g., among Benin, Togo, and Nigeria (Golub 2011).
Extensive smuggling reflects the lack of effective harmonization of trade policies and
the high level of official and unofficial impediments to legal trade.
3. Domestic Policies
Macroeconomic management. On the whole, African LDCs showed huge
improvements in macroeconomic management over the past decade. Average fiscal
deficits in African countries declined from 5.7 percent of GDP in the 1980s and 1990s
to 2.9 percent of GDP during 2000-2006 (Page 2009). Budget policies have become
more prudent, allowing a number of countries to adopt more countercyclical policies
during the recent global recession than previously (IMF 2010b). Inflation has also
been kept well below its 1990s levels, thanks to more conservative monetary policies.
Many countries have moved towards flexible exchange rates, reducing the presence of
black markets for foreign currency (Radelet 2010). The depreciation of nominal
exchange rates and better control of inflation also allowed for more competitive real
exchange rates. Consequently, these reforms have helped spur exports, increase
investments, and increase foreign exchange reserves, all of which helped buffer
African LDCs from the worst effects of the global financial crisis in 2009.
However, fiscal management remains subject to lapses especially in several of
the slower-growing African LDCs. Senegal, for example, saw its government
expenditures spin out of control in the mid-2000s, with rising fiscal deficits and
payment arrears. The Gambian government has at times resorted to costly issuance of
domestic debt and inflationary money supply growth to finance government
expenditures, some of which are off-budget. The Gambia’s erratic macroeconomic
management resulted in an acute bout of stagflation in the early 2000s.
Governance. Overall governance has improved among the fastest growing,
non-oil exporting, African LDCs. Most importantly, these countries have pulled away
from what Ndulu et al. (2008) call the four antigrowth syndromes: control or
regulatory policy regimes, ethno-regional distribution systems, intertemporal
redistribution policies, and state breakdown. Many governments have made concerted
20
efforts to increase transparency in policy. Mozambique, for example, is one of many
countries that have applied to the Extractive Industries Transparency Initiative (EITI)
to govern mega-projects in commodities sectors.
Nonetheless, corruption still remains a serious problem in a large number of
countries. Angola is one of a handful of countries that score 2.0 or lower on
Transparency International’s Corruption Perception Index. These countries fall victim
to anti-growth syndromes, and hamper investment opportunities with a burdensome
and unpredictable business environment and widespread barriers to entry. Although
Angola and other oil-exporting countries have shown strong growth, it is generally
neither inclusive nor sustainable. As a result of the recent global financial crisis and
drop in oil prices, Angola incurred large fiscal deficits and payment arrears; the crisis
exposed the country’s overwhelming dependence on oil revenues and lack of progress
in improving employment opportunities and living standards.
Institutions and infrastructure. Even among emerging African LDCs, lack
of diversification and low productivity remains a serious constraint to growth. Firmlevel productivity is hindered by low quality and high cost of business services, and
African firms are subject to substantially higher indirect costs than their Asian and
Latin American counterparts (Eifert, Gelb, and Ramachandran 2005). These indirect
costs reflect poor infrastructure and malfunctioning institutions. Nonetheless, many
faster-growing countries have made substantial improvements over the past decade to
infrastructure and investment climates. For example, Ethiopia prioritized basic
infrastructure, and has greatly improved the state of its roads, electricity capacity, and
its telecommunications framework. Firms within the country agree that the investment
climate has substantially improved over the course of the decade, and investments in
infrastructure played an important role in that improvement (World Bank 2009d).
Rwanda also stands out as a top reformer; in the World Bank’s Doing Business
indicators, it moved up from 150th in 2008 to 58th spot out of 183 countries in the
2011 rankings. Improving the Business Climate has been a priority for the
government, e.g. the establishment of a doing business task force in December 2007
(Rwanda Development Board 2011). It has reduced the cost to start a business from a
whopping 235.3 percent of income per capita in 2004 to 8.8 percent of income per
capita in 2010.
Improvements in countries’ business environments have had substantial
impacts on growth through increased domestic entrepreneurship and participation of
foreign firms. For example, Uganda’s coffee sector was fully controlled by the
government’s Coffee Board until the late 1980s. Liberalization of the sector entailed
the removal of the Coffee Board’s monopoly on marketing and price setting, and the
dissolution of the export tax on coffee (UNCTAD 2008b). Relaxing these constraints
contributed to increased quantity and quality of coffee exports (Bussolo et al. 2006).
Governments that failed to improve institutions and infrastructure have had
generally less successful outcomes. While the dissolution of marketing boards in
agriculture was viewed as an opportunity to improve and upgrade products, they have
often been replaced by disorganization in important cash crops such as cotton, coffee,
and cocoa. This can be seen in The Gambia’s groundnut sector. The industry, long a
major source of exports, income and employment in the country, has been in decline
for two decades due to politicization of pricing, mismanagement, and lack of
21
investment. Transport infrastructure has deteriorated, and poor storage and handling
facilities have caused Gambian groundnuts to be contaminated with a cancer-causing
fungus (Integrated Framework 2007). As a result, Gambian exports of groundnuts are
barred from the EU market, and are used mainly as birdseed. The poor investment
climate and deterioration of infrastructure are typical of many slower-growing African
LDCs.
Industrial policy. Three aspects of industrial policy can be distinguished: 1)
barriers to trade and FDI, 2) the overall business climate, and 3) sector-specific
interventions. In general, African LDCs are now more open to trade and foreign
investment compared to the 1980s and 1990s (Radelet 2010) but many economies are
still hindered by weak business environments.
Governments have taken a variety of approaches to encourage growth in the
private sector. The most successful approaches differ in the details but share a key
element: they recognize the importance of the private sector as an engine for growth,
and intervene to support, rather than limit, private sector development. Some
governments have largely confined their efforts to boosting the overall investment
climate and attracting FDI. Mozambique’s application to the EITI is a good example
of this type of support. Others, notably Ethiopia, have taken a more activist approach
to fostering the private sector.
Inspired by Korea and Taiwan, the Ethiopian government actively targets
sectors it judges have strong opportunities for growth. Though there are concerns that
the strategy lacks flexibility and feedback mechanisms (World Bank 2009d), it has
had some success. As noted above, Ethiopia’s leather industry has substantially grown
in the past few years, in part because of well-targeted government actions to
overcome coordination failures and attract foreign firms. The Ethiopian government
intervened by offering training and consulting to firms, as well as opening the sector
to FDI.
Several countries, including Ethiopia, Senegal and Malawi have recently
accorded subsidies to overcome perceived market failures, e.g., in the supply of
agricultural inputs. There is a general concern about the effectiveness and long-term
sustainability of these subsidies, given scarcity financial resources in poor countries.
On the other hand, there appears to be little if any infant-industry protection against
imports, given the general recognition that domestic markets are too small and that
boosting exports is more productive than limiting imports. Targeted infrastructure
investments to help exporters, such as cold storage facilities for horticulture, are more
widely adopted and appropriate (UNCTAD 2010b). Partnerships between the
government, domestic and foreign firms, NGOs and donors to develop high-quality
agricultural exports has been very successful in Rwanda, where specialty coffee
exports are growing strongly.
Agriculture. For growth to be inclusive, agricultural productivity must
increase because the sector remains the main source of employment in most African
LDCs. Yet, agricultural productivity remains low. The liberalization of entry and
price controls in the late 1980s improved incentives for farmers, but cash crops are
still subject to debilitating constraints and mismanagement. In Angola, fertile soil and
a good climate provide a strong opportunity for growth in agriculture. However, poor
22
infrastructure, shortage of skills, and the continued presence of land mines all hinder
increases in productivity. There are some exceptions to this trend; Rwanda’s
impressive growth has been driven by its strong agricultural sector (AfDB 2011), and
both Senegal’s and Ethiopia’s horticulture sectors are rapidly expanding. For growth
in African LDCs to be sustained, traditional cash crops and horticulture must see
improved product quality and productivity.
4. Angola Case Study
Overview. Angola’s average GDP growth over the past decade was one of the highest
in the world, as it has recovered from a long civil war. The country has made
important progress in national reconciliation, demobilizing UNITA fighters and
providing training and other measures to integrate them into the economy (World
Bank 2007d). Economic ties to China have become increasingly important, with
China investing in infrastructure and providing loans in exchange for Angolan oil and
access to the Angolan market for Chinese manufactured goods and influx of Chinese
labor (De Comarmond 2011). Economic growth has been led almost completely by its
natural resources sector. Angola’s most pressing challenges are to diversify output,
increase employment, and better manage oil revenue. Lack of competition and
widespread corruption impede these objectives. Angola was hard hit by the
temporary collapse of oil prices during the financial crisis. However, this crisis could
be a benefit in disguise if it encourages the government to undertake much-needed
structural reforms.
Macroeconomic Stability. The sharp drop in oil prices in second half of 2008
through the first quarter of 2009 exposed Angola’s failure to smooth spending of oil
revenues. The downturn in revenues entailed large payment arrears, leading to general
instability and exposing important weaknesses in public financial management. The
central bank’s policy of pegging the kwanza to the dollar led to an unprecedented
liquidity crisis. Fiscal expenditures were tightened sharply, but Angola still had to
resort to IMF loans. Clearly, better management of oil revenues and public
expenditures is in order (IMF 2010e).
Business Environment. Angola’s business environment is rated among the worst in
the world on all widely-used indicators of competitiveness. For example, Angola is
ranked 138th out of 139 countries in the World Economic Forum’s competitiveness
index and was one of a handful of countries to score 2.0 or lower on Transparency
International’s Corruption Perception Index (see Table 4). The private sector is
controlled by a small elite connected to the ruling party. Severe barriers to entry,
archaic property laws, and a lack of transparency in the granting of licenses and credit
all seriously hamper investment in the non-oil sectors. Most sectors are controlled by
monopolies or quasi-monopolies, and although a new competition law was enacted in
2010, it is unclear whether it will have any real impact. Angola has begun the process
of decentralization, but inefficiency, corruption, and weak absorptive capacities all
hamper its effectiveness. Since the end of the civil war in 2002, the government has
invested heavily in rebuilding its basic infrastructure. Yet, results have been limited,
mainly because of corrupt and inefficient procurement (World Bank 2007e).
Industrial Policy.
23
Oil. Angola is now Africa’s largest oil producer and the oil sector dominates the
economy, accounting for over 95 percent of exports. Like the non-oil sectors, the oil
industry has not been managed transparently or competitively. Sonangol, a stateowned enterprise is the sole owner of oil fields. But it also retains the responsibility
for regulation and contract negotiations in the oil sector. Sonangol’s multiple roles
have drawn criticism for giving rise to conflicts of interest. The government has
announced plans for Sonangol to go public in 2012; it has also entered into production
sharing agreements with Western oil companies. The government is establishing a
Sovereign Wealth Fund to manage oil revenue. The fund is meant to oversee the
intergenerational transfer of oil wealth. Angola’s oil reserves will run dry in the
foreseeable future, and better management is essential (World Bank 2007d).
Diamonds. Angola is the fifth largest producer of diamonds in the world. Diamond
mining is the next largest export sector after oil, and is more labor-intensive.
However, similar challenges exist in the diamond industry. There is a weak legal and
regulatory framework with little competition and excessive discretion in the disbursal
of mining rights. The government maintains a trading monopoly, and the state owned
enterprise acts as both regulator and operator in the industry. Angola has large
diamond reserves, and the sector could grow if the government were to remove the
many barriers to entry.
Agriculture. Although it accounts for only 6.8 percent of GDP, agriculture employs
half of the population. Angola was once one of Africa’s top agricultural exporters, but
has not recovered from the civil war. Angola has fertile soil and a favorable climate
but suffers from a shortage of skills, infrastructure constraints, and the continued
presence of land mines. Angola is one of 15 countries to benefit from the G8’s fund
for investment in agriculture, nutrition, and food security. If these funds are used
effectively to ease supply constraints, agriculture could become a good source of
diversification and growth.
Overall Assessment.
 Angola has made important progress in political reconciliation, but
governance receives low ratings in international comparisons.

The mixed effects of China’s engagement with Africa are illustrated in
Angola. China has provided funding for infrastructure but has reinforced
Angola’s dependence on natural resources with little impact on employment
creation. A large influx of Chinese workers has also caused tensions.

Oil revenues must be managed more transparently and wisely, with saving
during boom periods.

Diversification is important to boost employment and reduce poverty.

Far-reaching structural reforms to improve the investment climate and lower
corruption are a prerequisite for investment in non-traditional industries and
agriculture.
5. Ethiopia Case Study
24
Overview. Since transitioning from communism in 1991, the Ethiopian government
has displayed impressive pragmatism and determination to develop the economy,
qualifying as a "Developmental State". Inspired by Korea and Taiwan, it pursues
industrial policies by targeting selected sectors. In many respects, the policies have
been remarkably successful. Corruption is relatively low and Ethiopia has seen strong
growth over the past decade, particularly since 2004. Macroeconomic management
has improved, with declining budget deficits and inflation. Serious challenges remain,
however. Productivity in Ethiopia is low compared to other SSA countries, and
exports remain low in relation to GDP, despite wages that are a third of the average in
SSA and large investments in infrastructure in recent years. Competition is limited,
and progress in improving the investment climate, while substantial, has slowed
(World Bank 2008a).
Macroeconomic stability. Ethiopia has made major strides in macroeconomic
stability. Both private and public spending boomed over the past decade, resulting in
rising budget and trade deficits, low levels of international reserves, and double-digit
inflation. Recently, tighter controls on government expenditures have brought down
the fiscal deficit, raised international reserves, and lowered inflation down to single
digits (IMF 2010f).
Business Environment. Manufacturing competitiveness and the investment climate
have improved considerably over the past decade, due in part to large public
investments in basic infrastructure. Important business climate reforms were initiated
in the early 2000s, but have slowed in recent years. Ethiopia’s ranking in the World
Bank’s Doing Business indicators declined in the late 2000s, as other countries that
reform slipped past Ethiopia. Access to finance, government ownership of land, and
tax administration are cited as the most important constraints. There are also
pervasive barriers to entry: many sectors are reserved for government firms, domestic
investors, or Ethiopian nationals. Inefficient provision of public services by SOEs
harms both domestic firms and the government’s efforts to attract FDI. Lack of
competition is cited as one of Ethiopia’s most important weaknesses (World Bank
2008a, Altenburg 2010). Government exercises considerable discretion by
controlling access to resources through state-owned enterprises, directed credit
through state-owned banks and special incentives for firms. Although corruption is
low for the region, the perception of lack of transparency damages the government's
efforts to promote private sector development.
Industrial Policy. The Ethiopian government has taken a proactive role in addressing
market failures and encouraging growth with the Plan for Accelerated Growth and
Sustained Development to End Poverty (PASDEP), five-year plans started in 2005
and modeled after Korea and Taiwan’s outward-oriented and interventionist policies.
PASDEP's objective is to sustain growth at 7 to 10 percent, by targeting the
agricultural, leather, floriculture, and textile industries. Further goals are to boost FDI
and to bring down the trade deficit by diversifying exports. Very high growth and
improving diversification validate this strategy, but Ethiopia’s wide trade deficit and
low levels of industrial development and productivity mean that further progress is
necessary.
25
Leather industry. Ethiopia has a huge livestock population and a tradition of shoe
manufacturing. The industry slumped in the early 2000s as cheap Chinese imports
flooded the domestic market, while exports were limited by the low quality of all
steps in the domestic value chain, from skinning to tanning. The government
responded energetically with consulting, training, and marketing programs to boost
the quality of locally-produced shoes. It also set export and productivity targets, and
worked with firms to help them meet or re-adjust goals. These efforts have
contributed to a revival in recent years (Altenburg 2010). The market has only
recently been opened to FDI. While exports have increased, they remain quite small.
Floriculture. Ethiopia’s favorable climate and investor incentives have helped the cut
flower industry take off. Floriculture has seen rapid growth in recent years, coming
close to overtaking coffee as the main export product before the downturn associated
with the Great Recession. The industry initially evolved without sector-specific
support from the government, and, unlike the leather industry, has been dominated by
foreign firms. Cut flower firms did, however, benefit from the tax holidays and import
duty exemptions given to all exporters. The government later became involved by
building a close relationship with growers. The government recently created a semiautonomous agency to providing services to horticulture exporters (Altenburg 2010).
Services and incentives have helped the cut flower industry develop, but it is unclear
whether the government should continue assisting a now somewhat developed sector.
Overall, the government's sector-specific interventions seem to be well crafted, but
their effects are partially offset by the general weaknesses in the business climate.
Limited competition, privileged access to resources and to policymakers of large
SOEs, and restrictions on foreign investors are often cited as factors inhibiting further
diversification and productivity growth. The PASDEP framework monitoring,
evaluation and feedback mechanisms could be improved (World Bank 2009d).
Overall Assessment.
 Ethiopia has become a Developmental State, emulating the East Asian model
while avoiding large-scale corruption.
 Macroeconomic stability has improved, with declining budget deficits and
inflation, although the trade deficit remains large.
 The government’s strategy has paid off in the form of very strong growth,
improving diversification and lower poverty. Continued progress may require
further reforms.
 Ethiopia’s industrial policy has had considerable successes in the leather and
cut flower sectors.
 Industrial policy should perhaps evolve towards a strategy that focuses more
on discovery and experimentation rather than targeting.
 Increased competition and further easing of restrictions on FDI could
contribute to accelerated technological development and productivity growth.
6. Mozambique Case Study
Overview. Mozambique is a model for successful post-conflict development. Since
the termination of its civil war in 1992, Mozambique has seen exceptional growth and
poverty reduction. Over 1996-2006, Mozambique was the fastest growing non-oil
26
exporting country in Africa, due to sound macroeconomic policies, effective structural
reforms, and improved governance. FDI into several mega-projects in mining, natural
gas, and hydro-electricity has spurred growth, but concerns remain about their
potential for employment creation and contribution to government revenue. There is
political stability, but corruption remains a serious problem. Additionally, poverty
remains very high (Clement and Peiris 2008).
Macroeconomic stability. Both budget deficits and inflation have largely been kept
under control over the past decade. One of Mozambique’s main challenges is its
overdependence on ODA—half of government expenditure comes from aid. This
reflects Mozambique’s weak revenue-raising capacity, especially in regards to the
mega-projects. Recent reforms of the tax code for mining and oil, along with efforts to
reduce aid dependency, have helped reduce the aid-financing portion of the budget.
Nonetheless, further tax and spending reforms are still necessary. Although there has
been substantial progress in reporting and management of public expenditure, there
needs to be further strengthening of fiscal transparency. The ruling party, Frelimo, has
been in power for 23 years; no substantial opposition exists to ensure checks and
balances in governance. While Mozambique has risen in indexes for corruption, it still
remains one of the top five constraints to doing business (World Bank 2009f).
Business Environment. Mozambique has aggressively liberalized trade and capital
flows, but still has an extremely weak investment climate. Despite gaining five spots
on the World Bank’s recent Doing Business surveys, it ranks 129th out of 133 in the
World Economic Forum’s Global Competitiveness index. Regulations of business
activity at the small and medium enterprise level are especially poor; this is an
important constraint on sustained growth because Mozambique needs to raise
productivity of SMEs in order to increase job creation and diversify output structure.
Informal competitors and access to finance are the two constraints to doing business
most often cited in recent Enterprise Surveys. These areas, along with security,
transparency, and the judiciary system, are the most pressing areas for reform. Better
vocational training and education opportunities would also help increase productivity
in SMEs, and provide more skilled labor for the mega-projects (World Bank 2008b).
Industrial Policy. The structure of Mozambique’s economy has greatly changed in
the past decade. Agriculture, once the leading sector, has been declining, while the
services sector is now the largest contributor to GDP. Although they are still a small
segment of total GDP, mega-projects in mining, electricity, and natural gas have been
booming and account for 80 percent of exports. Various investment incentives have
been deployed to attract the mega projects. The Mozal aluminum smelter, created
with investments from Australia and South Africa has made Mozambique one of the
world’s leading exporters of aluminum. Other mega-projects include a natural gas
pipeline to South Africa, and the Cahora-Bassa hydro-electric facility. These projects
are an important source of foreign capital and growth for Mozambique, but do
relatively little in terms of job creation as most of them are capital-intensive.
Moreover, Mozambique has secured little tax revenue from these firms because of
large tax breaks. The government has recognized this issue, and applied for
membership of the Extractive Industries Transparency Initiative (EITI).
Overall Assessment.
27





Mozambique has seen exceptional growth over the past two decades thanks to
political stability, macroeconomic stabilization, large aid inflows, and greater
openness to trade and FDI.
FDI in the mega projects was boosted by generous tax breaks and subsidies.
Reduced aid-dependency requires improvement in domestic tax mobilization,
in particular by reducing tax holidays for the mega-projects.
Overall, as for other natural resource-intensive investments, the mega projects
can contribute to sustainable growth if revenues are well-managed and
invested in social and physical infrastructure.
To sustain expansion, Mozambique must broaden its output structure and
diversify the composition of FDI and exports. Investment and employment
creation by SMEs and foreign investors is hampered by a weak business
environment, corruption, and poor infrastructure, calling for a second wave of
reforms.
7. Senegal Case Study
Overview. As noted in the introduction, Senegal has a favorable geographical
location as a coastal country well situated for trading with North America, Europe and
West Africa, and a tradition of ethnic harmony. Yet current per capita GDP is no
higher than at independence in 1960. Since the CFA franc devaluation in 1994,
growth has picked up moderately to an average of about 4 percent but remains fragile
with little dynamism of private investment and exports (World Bank 2007c).
Macroeconomic stability. As a member of WAEMU, Senegal participates in the
common currency and customs union. For the past decade, following WAEMU
convergence criteria, Senegal largely achieved the target of a basic fiscal surplus each
year, but, beginning in 2006, government expenditures began to spin out of control,
resulting in rising deficits and sizeable payment arrears. In the last two years,
Senegal’s fiscal performance has improved considerably (IMF 2010h).
Industrial Strategy. In response to Senegal’s lackluster growth, the government
created the Accelerated Growth Strategy (AGS) in 2006, with the aim of raising
growth to 7 percent. The AGS targets five key areas: (i) agro-industries and food
processing; (ii) fisheries; (iii) tourism, crafts, and cultural industries; (iv) cotton,
textiles, and clothing; and (v) information and communication technologies (ICT
(Ndiaye 2008). In addition, the AGS aims to improve the business climate in Senegal,
which is crucial since deficiencies in infrastructure and the business environment have
been shown to impede exports (Golub and Mbaye 2002). Some has been achieved:
Senegal was ranked 5th best reformer by the World Bank’s Doing Business indicators
in 2008, but has slipped in recent years. The time required to pay taxes and the costs
of registering property are both more than double the regional averages.
Agriculture continues to be a weak link in the Senegalese economy, hampered by low
and erratic rainfall but also mismanagement. It accounts for only 8 percent of GDP,
yet it employs over 60 percent of the working population (PRSP II- Progress Report
2010). About three-quarters of rice consumption is imported (USDA 2010). The
GOANA (Great Agricultural Offensive for Food and Abundance) program aims to
boost growth in agriculture in line with the AGS objectives, and to achieve self28
sufficiency in rice production by 2012. Through the GOANA initiative, farmers in
several crop areas gain access to subsidized seeds and fertilizer, better equipment for
harvesting, and increased available land for harvesting. The goals seem overly
ambitious, however, particularly in view of the fiscal difficulties of the government
(USDA 2010).
Groundnut sector. Groundnuts have historically been Senegal’s most important cash
crop, with the vast majority processed and exported as peanut oil. Because of
declining productivity and competitiveness, groundnuts’ share of total agricultural
output has fallen; nevertheless, groundnuts still account for 60 percent of Senegal’s
agricultural exports (Hinshaw 2010). Until a few years ago, the government had a
quasi-monopoly on groundnut processing and purchasing through its parastatal
company, SONACOS. The inefficiency of SONACOS has been a major contributor
to the decline in peanut oil exports and Senegal’s loss of market share (Golub and
Mbaye 2002). The low quality of Senegal’s crop has also precluded success in
exporting premium edible groundnuts, which are far more lucrative than peanut oil
(Mbaye 2009). SONACOS was finally privatized in 2004 but government
involvement in the sector remains important, particularly in price setting. Many
groundnut farmers eschew this system and sell their crop on the parallel market. There
have been, however, some recent improvements. The GOANA initiative has
succeeded in greatly increasing available land for groundnut cultivation, as well as
distributing subsidized seeds and fertilizer. The groundnut crop for the 2010-2011
season is expected to be the largest in 35 years (Hinshaw 2010).
Fishing industry. Fishery products have been identified by the AGS as one of the key
areas for growth but fish stocks are threatened by overfishing. In 2007, the
government announced several reforms meant to reduce overexploitation but
implementation has been weak.
Textile and clothing industries. The French colonial system left Senegal with an
established textile industry, but it consisted mainly of inefficient and highly protected
enterprises (Golub and Mbaye 2002). Over the past few decades, the textile industry
has steadily declined. Though also identified by the AGS as a key area for growth,
clothing and textile manufacturing decreased by 51.9 percent in 2009, after falling
23.7 percent in 2008 (AfDB 2010). Weaknesses in the business climate and
competition from Asia undermine Senegal’s comparative advantage in high-quality,
African design printed cloth and possibly in labor-intensive garment exports.
Horticulture. Despite a climate and location favorable for off-season exports to the
European market, horticulture remains an underexploited sector. Senegalese
producers face supply-chain constraints in access to inputs, equipment, and water
supply. The increasing necessity of GlobalGAP quality certification and the entry of
multinational firms into Senegalese horticulture have led to consolidation (Maertens,
2007). Government agencies have given little support to horticulture in recent years
due to lack of capacity and to a food crisis precipitated by the increasing prices of
staple food imports, leading officials to prioritize self-sufficiency in traditional crops
like rice. There has been substantial donor support for horticulture in Senegal, so
much so that the multitude of external actors and the lack of coordination have
severely undermined the effectiveness of aid. The quantity and quality of
infrastructure in Senegal is substandard. The AGS targets agriculture including
29
horticulture as one of the poles of growth, but its effectiveness remains to be seen.
(UNCTAD 2010b).
Overall Assessment.




Despite moderately higher growth, Senegal shows few signs of structural
transformation and improved competitiveness.
Fiscal policy has been somewhat erratic in recent years.
The AGS industrial promotion strategy is ambitious but results so far are
limited.
Some improvements in the business climate have occurred, but further efforts
are needed to promote Senegal’s key industries and achieve AGS goals.
8. The Gambia Case Study
Background. The Gambia is the smallest country in continental SSA with a
population of 1.7 million, completely surrounded by Senegal except for a 60 km
coastline. Even more than for most African countries, The Gambia’s situation as a
very small English-speaking enclave within francophone Senegal reflects the
accidents of colonial history.
Macroeconomic Stability. The current government of The Gambia took power in a
1994 coup. It has periodically resorted to excessive government spending, financed
by expensive domestic debt and inflationary money supply increases, with a
particularly severe crisis in 2001-2003. Inflation rose to 15 percent and output fell 3
percent in 2002. The IMF suspended its Poverty Reduction and Growth Facility Loan
in 2002 when it was revealed that the government was secretly drawing down
international reserves to finance spending. Subsequently, the situation has improved,
due to debt relief and more prudent policies, but some slippages have continued.
Growth has averaged about 6 percent since 2004, with seemingly little negative effect
from the global financial crisis. The official statistics are questioned by some
observers, however, as reported growth is difficult to square with the weakness in key
industries. Remittances have also declined. Construction, banking and
telecommunications, however, have picked up (IMF 2010d).
Infrastructure. The government has made considerable investments in infrastructure.
Power outages, formerly very frequent, have diminished, although the cost and
reliability of electricity are still major constraints. Telecommunications have
improved dramatically in The Gambia as elsewhere in Africa, with the explosive
growth of mobiles. The road network has been upgraded considerably and spending
on health and education has increased (Integrated Framework 2007).
Trade and Industrial Strategy. The Gambian economy revolves around a few
industries: groundnuts, smuggling to Senegal, and tourism. The Jammeh
government’s “Vision 2020” aims to make The Gambia a developed country status by
2020. Little structural transformation has occurred, however.
Groundnuts remain the country’s main cash crop engaging directly or indirectly over
80 percent of the population. A Swiss Multinational took over the management of the
groundnut sector in the 1993 but left the country after a dispute with the government
30
in 1997. Since then, groundnut output and quality have plummeted as the sector has
remain politicized and disorganized (Integrated Framework 2007). River transport
infrastructure has deteriorated badly. Due to contamination with aflotoxin, a cancercausing fungus that results from poor storage and handling, Gambian groundnuts are
barred from the EU market, except for use as birdseed. Consequently Gambian nuts
sell at a discount relative to premium quality confectionary groundnuts. The collapse
of groundnut exports has had a dampening effect on poverty alleviation in addition to
overall growth, given the dependence of low-income farmers on this crop.
Re-exports (smuggling). For decades, The Gambia has served as a regional entrepôt.
Though ignored in official trade statistics, it is well known that there is a very large
volume of smuggling from The Gambia to Senegal. The Gambia has deliberately
maintained lower trade barriers than those of Senegal, acting as a sort of tax haven for
imports (Golub and Mbaye 2009). Smuggling is declining due to trade liberalization
in Senegal.
Tourism. With the decline of the groundnut and re-export sectors, tourism has
become The Gambia’s largest source of foreign exchange and a major source of
employment and income. Gambian tourism is focused on low-end beach holidays,
with limited up-market activities such as adventure-, culture-, and eco-tourism that
attract higher-income visitors (Integrated Framework 2007).
Regional Integration. The Gambia, along with Senegal, is a member of the
Economic Community of West African States (ECOWAS), a loose arrangement in
which progress towards a free trade agreement has been repeatedly delayed. Senegal
and the other francophone countries of West Africa are members of the smaller but
much more advanced West African Economic and Monetary Union (WAEMU),
which features a customs union and a single currency. That The Gambia is not a
member of WAEMU, despite being almost entirely enclosed by Senegal and with
long-standing ethnic and cultural ties between the two countries, is an extreme
example of the irrational nature of African regional trading blocs. Not being a
member of WAEMU, however, has paradoxically fostered trade with Senegal, but in
the form of illegal smuggling, hardly a path to sustainable development.
Overall Assessment.
 Macroeconomic management has improved but remains subject to slippages.
 Structural transformation is lagging. Much could be done. Government
investment in transport infrastructure and reprivatization of the groundnut
industry with a focus on production of high quality edibles would boost rural
incomes. The tourism industry could build on its strengths and move up
market into higher-end tourism. The Gambia could transition from a
smuggling haven to a regional commercial center for legitimate cross-border
exchange. All of this would require a much more favorable business climate,
improved governance and continued infrastructure investment.
 Cooperation between The Gambia and Senegal is minimal despite their
geographic and ethnic bonds.
V. Asian LDCs
31
This section draws on case studies of Vietnam, Cambodia, and Bangladesh as
well as other materials.
1. Overview
The past ten years have been a period of solid growth in Asian LDCs, with the
regional average rising from 5.9 percent in 1990-1999 to 6.7 percent in 2000-2009
(Table 1). Almost all of Asian LDCs are formerly centrally planned economies and/or
emerging from major conflicts. Following China’s and then Vietnam’s lead in the
1980s (Riedel 2009), East Asian and to a lesser extent South Asian developing
countries began to open up and liberalize their economies. Strong growth in
Cambodia, Bangladesh, Lao PDR, and Bhutan has translated into substantial poverty
reduction. Other countries, however (Myanmar, Nepal or Afghanistan), remain mired
in civil or external conflicts traps, impeding much progress.
Following the lead of the East Asian emerging economies discussed in section
II, several Asian LDCs achieved rapid economic development through exportoriented policies and FDI into labor-intensive industries, particularly garments
(Cambodia, Bangladesh) or natural resources (Lao PDR and Bhutan). Furthermore,
the “Bangladesh paradox” applies to several countries in this region: rapid economic
growth in spite of problems related to weak economic management, poor
infrastructure, and poor business climates. Bangladesh and Cambodia have been
partially able to insulate their crucial garment sector from the generally dysfunctional
business climate.
While some Asian LDCs are clearly success stories, they have a long way to
go before achieving middle income country status. The next round of reforms will be
more challenging, and will require deeper institutional change. Many Asian LDCs
retain a large number of inefficient SOEs (World Bank 2010a, World Bank 2010b)..
The requisite second-round reforms vary according to each country’s particular
circumstances, but generally include restructuring of SOEs, increasing investment in
infrastructure and improving the overall business climate.
The vulnerabilities of these developing countries were exposed by the
financial crisis. Although Bangladesh (Rahman, et al. 2010), Bhutan (World Bank
2010b) and Lao PDR (World Bank 2009c) were largely spared, Cambodia (Jalilian
and Reyes 2010) suffered contractions (Riedel 2009).
2. Macroeconomic Stability
Asian LDCs have generally maintained sound macroeconomic management
marked by low inflation, moderate debt levels and concessional repayment terms,
although some deterioration has resulted from the financial crisis. Cambodia, drawing
policy lessons from Vietnam, enacted stimulus programs in response to the recession,
pushing up budget deficits, but IMF continues to classify Cambodia in the low to
moderate risk category. Bangladesh’s fiscal deficit narrowed in 2009 (IMF 2010a). In
contrast, Bhutan and Lao PDR have experienced inflationary pressures from increased
government spending in connection with large investments in planned hydroelectric
projects, and in the case of Lao PDR, gold and copper mining (IMF 2007a, IMF
2007b). Unlike India and China, however, overheating from rapid capital inflows is
not a major worry for these LDCs (IMF 2010a). All Asian LDCs have managed
32
exchange rates, mostly pegged to the US dollar, although Bhutan is fixed to the Indian
rupee (IMF 2008c).
Fiscal policy faces the challenges of increasing development spending on
infrastructure while limiting debt buildup. Bangladesh and Cambodia have all passed
fiscal reforms aiming to increase government revenue. While physical infrastructure
and human capital are generally superior to that of other LDCs, sustaining growth
requires additional investments particularly in the fiercely competitive garment
industry, where delays in container transport or electrical power outages can be
decisive for attracting FDI.
3. The Vietnamese Model
In 1986, facing food shortages and successful economic reforms in China,
Vietnam launched Doi Moi or “economic renewal”. The Doi Moi policy involved
gradual market reforms in agriculture and industry, with an aim of reintegrating
Vietnam in the world economy. In the early 2000s, Vietnam adopted further
liberalization, in particular easing restrictions on foreign firms, and divestiture and
liquidation of a large number of SOEs (IMF 2002). As in China, reforms ushered in
rapid GDP growth of above 7 percent in the last ten years.
Vietnam has followed generally prudent macroeconomic policies although the
recent world recession has entailed rising fiscal and current-account deficits (World
Bank 2010a, IMF 2010c). The Vietnamese government has invested 9-10 percent of
its GDP into infrastructure improvement over the past decade but
telecommunications, transportation, and electricity are under supplied or inefficient.
Infrastructure is still primarily dominated by the state, with restrictions on FDI in
services (UNCTAD 2008c). Many transportation projects are planned without
consideration of rapidly developing industrial clusters (Dapice and Thanh 2009).The
tax base remains overly dependent on the oil sector, international trade, and SOEs.
Like in other successful emerging countries in this region, labor-intensive
garment manufacturing has played a key role in Vietnam’s development. Foreign
investors built up the garment industry in Vietnam because of the combination of low
labor costs, relatively high productivity, the MFA quota system, and political stability.
After the end of the MFA in 2005, Vietnam signed a bilateral trade agreement with
the US providing preferential access to the US market. Vietnam’s continued success
after the demise of the MFA reflects global buyers’ preference for limiting
dependence on China’s garment industry (Thoburn 2009). Almost 60% of Vietnam’s
FDI is from Singapore, Taiwan, South Korea, Japan, China and other ASEAN
members (UNCTAD 2008c).
Foreign firms, mostly from more developed Asian countries, account for
almost 60 percent of merchandise export earnings, particularly in the garment,
footwear, and textile industries, which increased from 6 percent of total exports in
1992 to 32 percent in 2002 (Thoburn 2009, IMF 2002). Relatively high-skilled labor
and low labor costs, along with relative political stability and a favorable investment
climate, make Vietnam attractive to foreign investors in manufacturing. A bilateral
33
trade agreement with the US contributed to a ten-fold increase of Vietnamese exports
to the US from 2001 to 2007 (UNCTAD 2008c).
Vietnam has achieved both geographic and product diversification, penetrating
export markets in Latin America and the Middle East (World Bank 2010a) and
expanding from garments to footwear and electronics (IMF 2002). Crude oil exports
have declined and reliance on garments has diminished. Price liberalization in the
early 1990s promoted the continued growth of agricultural cash crops including rice,
cashews, coffee, rubber, and sugar (Athukorala et al, 2009). Vietnamese
manufactured exports are transitioning from textiles and footwear to more complex
exports like electronics (World Bank 2010a).
Vietnam also typifies some of the weaknesses of the region. The downside of
Vietnam’s gradualist approach towards liberalization is that many sectors are still
dominated by inefficient SOEs. In particular, crucial services like
telecommunications, transportation, and finance are generally closed to FDI
(UNCTAD 2008c). Telecommunications in particular is often cited as a constraint on
investment, and FDI in this sector could greatly improve quality and cost of services,
as it has elsewhere. Furthermore, SOEs tend to be more capital intensive than private
companies (Riedel 2009).
Summary. Vietnam provides an encouraging model for Asian LDCs, showing
the way towards upgrading of technological capacities and export competitiveness
through a combination of ongoing government investment in infrastructure and
training along with success in attracting foreign investment.
4. FDI and Ready Made Garments
East Asian growth has been built on manufactured exports, as discussed in
section II. The four tigers and their followers started with the most unskilled-labor
intensive exports and have worked their way up the technological ladder. As just
seen, Vietnam’s case is typical, with export-oriented growth starting with the garment
industry and then progressively upgrading to more sophisticated products. What are
the prospects for other Asian LDCs in the garment sector? There were some concerns
that the end of the Multi-fiber Agreement (MFA) would entail the demise of many
exporting countries, particularly those with fledgling industries, which were created in
part because of binding quotas on the larger producing countries, particularly China.
Table 6 shows shares of the world market in clothing for selected developing
countries in Asia and Africa, since 2000. China’s share has indeed grown rapidly,
particularly in the aftermath of the end of the MFA in 2005. Interestingly, however,
some Asian developing countries, notably Vietnam, Bangladesh and Cambodia, have
withstood the end of the MFA and even increased market share. This stands in
contrast to some other relatively new entrants, particularly in Africa, where the three
largest exporters, Mauritius, Lesotho and Madagascar, have been experiencing
declines in market share since 2004. Equally surprising, these three Asian developing
countries have actually weathered the decline in the world market since 2007 better
than China, and have thus seen continued increases in market share. In 2009, as
34
world exports of clothing fell 13.5 percent, China’s exports dropped 10.9 percent
whereas Bangladesh, Cambodia and Vietnam had declines of less than 2 percent.
Table 6
Shares of World Exports of Clothing, Selected Asian and African Developing
Countries
2000
2004
2007
2009
China
18.26%
23.70%
33.28%
33.98%
Bangladesh
2.56%
2.41%
2.55%
3.40%
Cambodia
0.49%
0.76%
0.82%
0.94%
Myanmar
0.40%
0.22%
0.12%
0.16%
Viet Nam
0.92%
1.63%
2.13%
2.73%
Lesotho
Madagascar
Mauritius
0.08%
0.16%
0.48%
0.17%
0.16%
0.36%
0.15%
0.11%
0.26%
0.15%
0.14%
0.23%
Source: WTO Statistics Database, and authors’ calculations.
Even more so than Vietnam, Cambodia and Bangladesh have staked their fate
on exports of clothing, which accounted for 84 percent of Cambodian and 76 percent
of Bangladeshi total export earnings in 2005. In both of these countries, the garment
industry developed in spite of poor governance. In Transparency International’s 2010
Corruption Perception Index both countries continue to receive poor governance
ratings, with Bangladesh at 2.4 and Cambodia 2.1 on a 0-10 scale (Table 4). This
puzzle can be explained by these countries’ strong comparative advantage in the form
of low unit labor costs and special measures that largely insulated this crucial industry
from the generally unfavorable business environment.
Cambodia’s bilateral trade agreement with the US, the destination of 74
percent of Cambodia’s garment exports (Jalilian and Reyes 2010), played a crucial
role, providing preferential access, including relaxed rules of origin, conditional on
Cambodia’s compliance with international and domestic labor laws. This agreement
also served as a catalyst for cooperation between domestic and foreign firms and the
government in promoting the interests of the industry (World Bank 2009a). Similarly,
in Bangladesh, the garment sector has been protected from the general anti-export
bias in the economy because the government chose to comply and take advantage of
preferential trade arrangements in the EU and US. Other promising export industries
could also benefit from liberalization, but the government has failed to act.
In other respects, Bangladesh’s and Cambodia’s garment sectors are very
different. Cambodia has no domestic cloth industry, and instead relies on imported
cloth from China. Thus, Cambodia’s exports are overwhelmingly destined for the US
market because most of its exports cannot meet European rules of origin under the
EBA. In contrast, Bangladesh has a domestic textile industry producing knitted and,
to a lesser extent, woven fabrics, enabling it to export to the EU, its largest market
(IMF 2008a). Also, unlike Cambodia, where 90 percent of the firms are foreign
owned (Jalilian and Reyes 2010), Bangladesh’s garment sector, although started by
35
foreign firms, is now mostly comprised of small domestic firms. Prior to 2006, FDI
was confined to EPZs (Ahsan 2010). Since then, the government has relaxed these
restrictions, but manufacturing FDI remains low, unlike service-sector FDI which is
quite large in Bangladesh (World Bank 2007a).
Despite remarkable achievements in both Cambodia and Bangladesh, the
sustainability of the garment sector is open to question, given dependence on
preferential market access to the US and EU (Rasiah 2007). Furthermore, Bangladesh
and Cambodia face the challenge of upgrading to higher-end products, requiring
greater investment in skills.
Other Asian LDCs have had less success in garment exporting. Myanmar’s
promising start in the industry has been derailed by sanctions imposed by the US in
response to human rights violations. Consequently, Cambodia, Bangladesh and
Myanmar’s exports of clothing have declined in both absolute and relative terms
(Table 6). Lao PDR has a fledgling garment export sector, but because of its
relatively small labor force and large abundance of natural resources, has a
comparative advantage in natural-resource-based industries.
5. Other sectors
Mining and energy. Lao PDR has an abundance of natural resources including
over 570 identified mineral deposits and hydroelectric power (Rasiah 2007). The net
present value of gold and copper exports over 2007-2020 are expected to be 110
percent of 2007 GDP; hydroelectric exports are expected to be of similar magnitudes
(Bird and Hill 2010). Likewise, Bhutan’s hydroelectric sales to India account for 90
percent of exports in 2007 (Dhakal, Pradhan and Upadhyaya 2009). For these two
countries, the most important challenges in the upcoming years will involve
management of these natural resources. Moreover, although both countries have so far
avoided the Dutch Disease (IMF 2007a, Bird and Hill 2010), signs of inflationary
pressure is emerging, and diversification is low, especially in Bhutan.
Tourism. Most of these countries have excellent potential in tourism thanks to
natural and cultural attractions, but the legacy of social conflicts has until now limited
development. Investment in infrastructure and tourist facilities, along with measures
to protect culture, the environment, and even human rights (as Myanmar illustrates)
will be necessary to increase tourism’s importance (Dhakal, Pradhan and Upadhyaya
2009).
6. Bangladesh Case Study
Background. Since 1971, Bangladesh has experienced solid growth, and is on track
to meet the Millennium Development Goals (Ahmed 2006), largely due to great
success in exporting garments. Yet, international economic integration is low and the
business climate is poor, limiting diversification opportunities. State owned
enterprises account for a fifth of manufacturing output (WTO 2006).
36
Macroeconomic Stability. Although higher food prices pushed up inflation in early
2010, Bangladesh has had lower inflation than its South Asian neighbors. Public debt
is in the form of concessional multilateral loans, and is at a moderate 19 percent of
GDP (IMF and IDA 2008). According to the IMF, the real exchange rate of the taka is
approximately at its long run equilibrium value (Almekinders, Maslova and Abenoja
2010). On the other hand, at 8.5 percent, Bangladesh has one of the lowest tax to GDP
ratios in Asia (IMF-IDA 2008).
Infrastructure and Business Climate. The relative lack of both physical and human
infrastructure is one of the main development bottlenecks. Much of Bangladesh’s
infrastructure is operated by loss-making and inefficient state owned enterprises (IMF
2007c). For example, electricity is underpriced and subject to frequent outages (Table
5). Three quarters of firms say that lack of access to electricity is a key barrier to
investment, and 71 percent of firms share or own a generator (World Bank 2007a).
Likewise, in Chittagong Port, where over 80 percent of the country’s trade is
processed, bribes and complex procedures raise costs, container-handling equipment
is inadequate, and average wait times exceed regional averages. These inefficiencies
are estimated to lower garment exports by 30 percent (World Bank 2007a). SOEs are
also pervasive in manufacturing, banking and construction.
Trade and Industrial Policy. Manufactures constitute almost 90 percent of
Bangladesh’s exports, of which in turn about 90 percent are textiles (IMF 2008a).
The garment industry was attracted to Bangladesh in the 1980s by firms seeking an
alternative to the MFA quota restrictions on East Asian countries, preferential market
access to some countries, and the abundance of cheap labor. While FDI played a large
part in the development of the industry, it was restricted to EPZs until 2005. The
industry currently still has a hard time attracting FDI. The early establishment of
garments sector, trade preferences, and unusually low labor costs enabled the industry
to remain globally competitive despite the generally adverse business climate (World
Bank 2007a).
Cambodia and Vietnam are Bangladesh’s most direct competitors in the garment
industry in the EU, US, and Canadian markets. Bangladeshi garments still benefit
from trade preferences, particularly from Canada (WTO 2006). The US has a Bilateral
Trade Agreement with Bangladesh but excludes a list of twenty apparel items, which
includes most of Bangladesh’s garment exports (IMF 2007c). Bangladesh also faces
rules of origin restrictions in the EU, although these are being eased in 2011(Reuters
2010).
Bangladesh’s garment exports have grown but have lost market share to other Asian
countries, and its exports are concentrated in a few product lines (IMF 2008a). The
government’s efforts to promote other exports have largely failed despite various
promotion efforts and subsidies of up to 30 percent. Such measures are frustrated by
the high costs imposed by inadequate infrastructure, red tape, and corruption
(Mahmud, Ahmed, and Mahajan 2008).
FDI. These weaknesses in the business climate result in low levels of FDI,
particularly in the manufacturing sector, where sensitivity to the business climate is
greatest (WTO 2006). Lack of FDI has hampered competitiveness. In particular, in
the garments industry, productivity of foreign firms is 20 percent higher than
37
domestically owned firms, and these foreign firms are the source of technology
spillovers (Kee 2005).
Overall Assessment.
 Export competitiveness is hamstrung by weak infrastructure, especially
Chittagong Port and electric power supply.
 Poor economic governance and bureaucratic procedures also adversely affect
the business climate.
 Bangladesh needs to diversify exports both within the garment sector and into
other industries.
 FDI in the garment sector, and manufacturing more generally, is low for the
region. Bangladesh’s garment industry would benefit from greater FDI, which
should also indirectly increase worker productivity.
7. Cambodia Case Study
Background. Cambodia experienced very rapid growth from 1997 to 2007, driven
primarily by FDI and exports of clothing, enabled in turn by the end of the long
period of social conflict, favorable geography, relative political stability, and sector
specific agreements (Guimbert 2010). Growth of the garment sector has contributed
importantly to employment creation, especially for women, and poverty reduction,
both in urban and rural areas, due to remittances provided by urban workers (Natsuad,
Goto and Thoburn 2010). However, the global financial crisis has also exposed the
vulnerability of Cambodia’s economy (World Bank 2009a).
Macroeconomic Stability. Like many other countries in the region, Cambodia has
maintained relative macroeconomic stability, despite increasing deficits due to a
recent fiscal stimulus. Since 2004, the government has also worked with international
institutions to strengthen fiscal transparency and credibility (IMF 2008b). Exchange
rate overvaluation and banking sector stress are sources of concern (World Bank
2009a). Since the Cambodian riel is pegged to the dollar, the appreciation of the dollar
during the height of the financial crisis in 2008-2009 contributed to a loss of
competitiveness, however there are signs that competiveness has since been restored
in the global recovery (IMF 2011). Furthermore, a property price collapse following a
construction boom has been exacerbated by the global financial crisis (IMF 2009).
Infrastructure and Business Climate. Cambodia has sharply reduced barriers to
international trade and FDI, but in other respects the investment climate is poor.
Electrical outages and high shipping costs remain major constraints (Guimbert 2010).
Corruption and complex regulations are also impediments to domestic and foreign
investment (IMF 2006).
Trade and Industrial Policy. Cambodia’s garment sector originated in the 1970s,
and has become the country’s most important industry, accounting for 15 percent of
GDP and 65 percent of exports in 2008 (IMF 2009). 90 percent of the firms are
foreign owned and 75 percent of all exports are destined for the US market (Jalilian
and Reyes 2010). Cambodia’s role in the apparel value chain is limited to Cut-MakeTrim, i.e., low value added processes, with cloth and other inputs mostly imported.
38
Several factors explain the garment sector’s strong growth despite the generally
unfavorable business climate. The MFA’s quota restrictions on other Asian exporters
provided the initial impetus. The influence of a strong private sector trade group, the
Garment Manufacturers Association of Cambodia, along with a large role for foreign
firms, have to some extent insulated the garment sector for the dysfunctions of the
business climate. Also, a bilateral trade agreement with the United States granting
Cambodia increased quota allocations (contingent on compliance with international
and Cambodian labor standards) allowed for international oversight of the
development of the garment sector. Both agreements were phased out in 2005 as
Cambodia acceded to the WTO (Natsuda, Goto and Thoburn 2010). Unlike the US
preferential quota access that is contingent upon labor standards, Cambodia also
receives preferential access to European and Japanese markets. For both markets,
however, this access is contingent on restrictive rules of origin (Jalilian and Reyes
2010). Cambodia’s garment sector is losing market share in both the US and the EU
(IMF 2009). Lack of diversification and sophistication, along with reliance on
preferential agreements, contribute to the vulnerability exposed by the financial crisis
(Jalilian and Reyes 2010).
Formal regional integration within ASEAN has played little role in Cambodia’s
development, but the country benefits from its advantageous location as a coastal
country in a dynamic region.
Although Cambodia has natural assets for tourism, its regional competitors such as
Thailand and Vietnam have better infrastructure and less opaque and burdensome
regulations, giving them higher tourism competitiveness rankings. The lack of
sustainable management of natural resources (timber, fish) is also problematic. Oil
and mineral production also have promising prospects, but suffer from lack of a clear
regulatory framework (World Bank 2009a).
FDI. Greater China– Taiwan, Hong Kong, and Mainland– account for 60 percent of
FDI inflows to Cambodia (Jalilian and Reyes 2010), largely in garments, tourism, and
real estate (World Bank 2009a). Overt restrictions on FDI are low but weak
infrastructure and governance reduces attractiveness to FDI (IMF 2006).
Overall Assessment




Exports of clothing have played a decisive role in growth and poverty
reduction in Cambodia.
Foreign direct investment has been the driver of growth in clothing despite a
generally poor business climate, due to sector-specific agreements with the
United States and an effective trade group representing the industry.
Nevertheless, improving infrastructure and the business climate are essential
for export diversification and continued growth.
Greater attention to natural resource conservation is needed for the long-term
health of tourism as well as timber and fishing industries.
VI.
Island LDCs and Haiti
39
1. Overview
Small island economies face many of the same issues as other LDCs but their
geographical situation and tiny size exposes them to even greater vulnerability. Their
location and size limit the extent of feasible diversification. Moreover, they are
subject to hurricanes, tsunamis and other natural disasters to a greater extent than
other countries. Rising sea levels and severe weather episodes associated with global
warming may further exacerbate these problems (UNCTAD 2010a).
Despite these handicaps, some island LDCs have done remarkably well, with
two recently graduating from LDC status, Cape Verde and Maldives, and a third,
Samoa temporarily set back by the 2004 tsunami and the global financial crisis.
Tourism is a key sector for many island economies. The recent graduates
from LDC status (The Maldives and Cape Verde) along with other relatively
successful island LDCs (Samoa and Vanuatu) have built their strong growth on
tourism, managing natural assets carefully and encouraging growth in higher-end
tourism (UNCTAD 2008a). Tourism accounts for over 40 percent of export earnings,
is a major source of employment in these four countries, and has positive spillovers in
other services, handicrafts, transport, and agriculture (UNCTAD 2010c). Political
stability is also crucial for tourism. Overall, the factors that contribute to success in
other LDCs, such as adequate infrastructure and a well-functioning business climate,
are no less relevant for island economies. This is also illustrated by the comparison of
Haiti and the Dominican Republic.
2. Haiti Case Study
Background. Haiti has had a dismal economic performance, with steadily declining
per capita income since 1960, due to a combination of political instability, poor
governance, and natural disasters. Infrastructure has been neglected and Haiti ranks
near the bottom in indicators of the business climate and corruption. Some progress
was underway following the 2006 elections, with a 3.2 percent increase in GDP and
stabilizing inflation and current account deficits in 2007 (Government of the Republic
of Haiti 2010). The devastating earthquake on January 12, 2010 threatens these fragile
gains, but could spur much-needed fundamental reforms.
Comparison to Dominican Republic (DR). The Dominican Republic and Haiti have
very similar geography, with both located on Hispaniola Island in the Caribbean.
They also share an interconnected colonial history. Haiti was under French rule and
the Dominican Republic mostly under Spanish rule; however, the US occupation in
the early 1900s created similar historical and institutional legacies. While Haiti had
the lowest GDP growth in the region over 1960-2005, the DR had the highest; the vast
disparity in growth is a result of diverging government policies, especially since the
early 1980s as corruption and political instability worsened in Haiti. Over time, the
DR invested in education, maintained macroeconomic stability, and liberalized
exchange rates, interest rates, and prices. Meanwhile, Haiti sank into political turmoil
in the 1980s with the worsening repression, corruption and mismanagement of the
Duvalier regime leading to its overthrow in 1986. Unfortunately, the situation only
continued to worsen with a succession of coups, rebellions and forced resignations.
40
Both the DR and Haiti have a highly favorable location vis-à-vis the US market, wellsituated for export-oriented light manufacturing and tourism. These industries have
boomed in the DR, boosted by rising inflows of FDI averaging 3.2 percent of GDP
over 1990-2009, but have collapsed in Haiti due to the political turmoil and
deteriorating infrastructure, particularly after U.S. sanctions were imposed in the early
1990s when President Aristide was deposed in a coup (Jaramillo and Sancak 2007).
Poverty and Unemployment. 68 percent of the Haitian population lives under the $2
per day poverty line (Government of the Republic of Haiti 2010), and unemployment
is very high, averaging 23.5 percent in 2001, and around 50 percent for the 20-30 age
group (World Bank 2007b). Formal sector jobs are very scarce, especially outside the
capital. Crime and insecurity are pervasive. 58 percent of residents in the
metropolitan areas felt unsafe most or all of the time even within their own homes
(World Bank 2007b).
Earthquake. Natural disasters like earthquakes and tropical storms are not unusual in
Haiti. In fact, 96 percent of the population lives in constant danger of two or more
natural disaster related risks (Government of the Republic of Haiti 2010). The 7.3
magnitude earthquake in 2010 was particularly destructive. 220,000 people lost their
lives, and 1.5 million people were directly affected. The estimated damages range
from a low of $7.2 billion to high of $13.9 billion (Cavallo, Powell and Becerra
2010). A larger 8.8 magnitude earthquake in Chile had much less devastating effects,
in part because its epicenter was off the coast of Chile and seventy miles away from
Concepción, Chile’s second largest city, whereas the Haitian earthquake epicenter
was only 16 miles away from Port-au-Prince. More significantly, however, Chile has
much better infrastructure and social organization than Haiti, including enforcement
of strict building codes (NPR 2010). Insecurity and instability have worsened in Haiti
since the earthquake despite huge relief efforts (IMF 2010g). However, thanks to
generous debt relief, macroeconomic indicators have improved. Like most countries
recovering from a very large negative shock, Haiti is expected to have very strong
positive GDP growth at around 9 percent for the next year, but also increased
inflation.
Overall Assessment.
 Haiti is a near failed state, but has considerable geographic advantages, and
was beginning to make progress prior to the earthquake. With the help of
donors, the government could use the earthquake disaster to galvanize the
nation onto a better political and economic trajectory in the model of its
neighbor on Hispaniola.
 Private militias, police and judicial corruption, and fiscal mismanagement
have all undermined the state’s legitimacy. Governance must be improved
across the board. This will not be easy with the volatile second round of the
2010-2011 election process approaching and the possibility of violence with
the return of former Presidents Duvalier and Aristide (Pilkington 2011,
Thompson 2011).
VII. Policies and Strategies for 2011-2020 Based on Lessons of
2001-2010
41
The previous sections have documented encouraging but fragile and reversible
progress in a number of LDCs. In this section we draw some general conclusions
from the experiences of the previous decade and implications for national and
international strategies in the coming decade.
Several key lessons emerge from the regional and national case studies
reviewed in sections III-VI. These include measures that LDC governments can
adopt as well as steps that the international community can take to assist LDCs. A
number of constraints and measures to alleviate these constraints are discussed. As
emphasized by Hausmann, Rodrik and Velasco (2008) (HRV), not all these
constraints are equally binding, and governments must prioritize among them based
on each country’s particular situation. HRV propose a decision tree approach for
discerning the most binding constraints and this methodology has been widely applied
at the World Bank and elsewhere. Nevertheless, there are limitations to the HRV
approach in practice. It may not be easy to determine which constraints matter most,
and more importantly, there may be complementarities among various constraints
reflecting the general lack of commitment to development on the part of the
government. For example, there are good reasons to address weaknesses in
infrastructure and regulatory capacity simultaneously. Reforms in multiple areas may
reinforce each other. As long emphasized by UNCTAD, any successful reform
program at bottom depends on having a government committed to economic
development—a “developmental state”.
The focus of the developmental state must be on developing productive
capacities (UNCTAD 2006, 2010). While the emphasis on health and education in
Poverty Reduction Strategy Papers (PRSPs) is a welcome development in some
respects, it has diverted external assistance and government efforts away from
infrastructure investment. Without output and especially employment growth,
sustainable poverty reduction is impossible. In many LDCs, particularly in Africa,
formal jobs in the private sector are almost non-existent (Benjamin and Mbaye 2011)
and the vast majority of the population is involved in subsistence agriculture or urban
informal petty trade.
1. Private sector development
There is general recognition that the private sector is the engine of growth. In
many countries, however, relations between business and government are
unnecessarily adversarial and government has in some respects done too little (more
public investment in infrastructure and support services are needed) and in other
respects too much (excessive and counterproductive interventions in productive
sectors). In almost all LDCs, weak infrastructure, overly complex business
regulations, and ineffective support agencies hold back investment and
entrepreneurship.
a. Investment in infrastructure. Low investment in infrastructure translates into
poor service and high costs for business. Golub, Jones, and Kierzkowki
(2007) provide an analytical framework and empirical evidence showing that
FDI and manufactured exports are positively correlated with the quality of
infrastructure. Inadequate supply of electric power is a particularly serious
42
problem in many LDCs, resulting in frequent outages. In some instances,
especially in mobile telephony, private investors can take the lead in
improving services. Even here, however, government regulation is crucial in
enabling competition and preventing abuses. In the case of electric power and
transport, private investment is likely to be insufficient due to natural
monopoly and public good dimensions. In these cases, public investment and
funding from donors must play a larger role. Aid for and direct investment in
infrastructure from large developing countries, notably China, is an important
and promising new development in several LDCs. Overall, the roles of the
government, donors and the private sector in infrastructure provision must
vary based on local circumstances, but infrastructure development is a priority
everywhere (Estache and Fay 2008).
b. Simplify regulations and reduce costs of compliance. In many LDCs, as
documented above, the time required to start a business or to import a
container are much greater than in developed countries, due to inefficient
administration and corrupt practices. Some LDCs have made substantial
progress in streamlining regulations. Much more could be done in almost all
countries, however. Many LDCs still receive very low scores on business
climate indicators. The continued spread of the informal sector in many
economies is largely due to the high costs of doing business in the formal
economy (Benjamin and Mbaye 2011).
c. Improve the quality of public and private business support organizations.
Governments and donors in many LDCs, particularly in Africa, have created
an alphabet soup of business support agencies, often with overlapping
mandates and inadequate funding. Various agencies are created to promote
SMEs, exports, investment and other related issues. Many of these agencies
are staffed by government officials with little private sector experience.
Some progress has occurred in this area but much more is possible (Lederman,
Olarreaga and Payton 2006). For example, in Benin, several public agencies
operate to promote exports and investment: Centre Béninois du Commerce
Extérieur (CBCE), the Observatoire des Opportunités d’Affaires du Bénin
(OBOPAF), the Centre Béninois de Normalisation et de Gestion de la Qualité
(CEBENOR) and the Centre de Promotion des Investissements (CPI). In the
private sector, there is the Chambre de Commerce et d’Industrie du Bénin
(CCIB), the Conseil National des Exportations (C.N.Ex) and the Association
pour le Développement des Exportations (ADEX) (Integrated Framework
2005b). Well-functioning private trade organizations are perhaps most
important, as the Cambodian clothing case illustrates.
2. Integration into the global economy.
a. Raise and diversify exports. Increasing volume and quality of exports is a
feature of all successful emerging economies. This report has stressed that
there are many routes to export growth and diversification. Exports of labor
intensive manufactured goods are of course the best known. Several Asian
LDCs and a few African ones have experienced strong growth of clothing
exports over the past decade. However, manufacturing is hardly the only path
43
to export diversification. Upgrading the quality of agricultural commodity
exports provides much of the same types of dynamic gains as manufacturing:
high-labor intensity leading to employment gains and poverty reduction,
opportunities for technological upgrading and higher-value products, and the
discipline of international competition forcing efficiency improvements
(Brenton, et al 2008, UNCTAD 2008a). Rwanda’s exports of high-quality
specialized coffee are an example. Horticultural exports of fruits, vegetables,
and flowers are another important opportunity (UNCTAD 2010b), which a
number of African LDCs are exploiting. Many African LDCs, however, are
failing to take advantage of other lucrative market opportunities, e.g., The
Gambia and Senegal in edible groundnuts, and much of West Africa in handpicked organic cotton.
b. The role of FDI. FDI can contribute to growth in several important ways.
First, increased investment is an important part of raising growth (Commission
on Growth and Development 2008), and FDI can augment capital formation in
situations where domestic savings are low. Second, FDI in productive sectors
(especially agriculture and manufacturing) contributes to technology transfer,
attaining international competitiveness and market access (Cambodian textiles,
Ghanaian pineapples, Rwandan coffee), and is usually a crucial ingredient in
export growth and diversification. Third, FDI in labor-intensive productive
sectors (manufacturing, agriculture, tourism) also creates relatively wellpaying jobs. Fourth, FDI in services (finance, telecommunications, business
services, etc.) can improve the investment environment for other sectors,
although appropriate regulation is often necessary in such cases. FDI in oil
and minerals, on the other hand, often abets corruption, but the underlying
problem here is not so much FDI as it is weak domestic governance. Overall,
FDI is mostly but not always beneficial, but its effects depend on appropriate
domestic policies (UNCTAD 2005). The best way to attract FDI is to lower
discriminatory barriers and improve the overall business climate, as described
above. In some circumstances, tax breaks and other subsidies may be
necessary to attract footloose investors, but these measures are costly and can
easily be misused. Overly generous tax breaks deprive the government of
revenue, as in Mozambique’s mega-projects.
3. The Crucial Role of the Developmental State
A necessary condition for sustainable growth is a national government
committed to economic development. There is no blueprint for the measures such a
government should adopt, as policies must be adapted to local conditions.
Nevertheless, certain elements are essential.
a. Maintain macroeconomic stability. Microeconomic incentives are undermined
if macroeconomic conditions are unstable. Exchange rate overvaluation acts
like an export tax and vitiates the effects of export incentives no matter how
well designed. Fiscal and monetary prudence entailing moderate inflation,
and stable interest rates and exchange rates are a necessary, although not
sufficient, condition for encouraging investment. In the case of resource-rich
countries, these problems are particularly acute. Careful management of
44
revenues from diamonds and other minerals have been the foundation of
Botswana’s growth. Few other resource-rich countries in Africa have not been
undermined by the “resource curse” of mineral rents fostering patronage
politics rather than long-term growth, particularly in the case of oil exporters.
Collier (2008) recommends the use of “fiscal constitutions” to serve as a
restraint on overspending of revenues in good times. In non-oil countries in
Africa and Asia, considerable, although often fragile, progress has been made
in the last decade in establishing macroeconomic stability. For non-oil
exporters, the main longer term challenge is to increase fiscal revenues by
broadening the tax base and reducing exemptions.
b. Maintain political stability. Countries suffering from acute conflicts such as
Somalia are obviously not in a position to implement sound development
policies. The instability in Zimbabwe, Cote D’Ivoire and Kenya, while
falling short of all-out civil wars, also reveal the damage caused by political
instability and social unrest. Governments lacking in political legitimacy and
popular support are more likely to be tempted into opportunistic steps to
buttress their power, even if it undermines longer-run economic growth. For
example, in The Gambia, the government artificially raised producer prices of
groundnuts, leading to a chain of events which undermined the long-run
viability of the industry, not least through the forced exit of the leading foreign
firm. The vastly different outcomes in the Dominican Republic and Haiti
largely reflect political instability in Haiti. Recent events in Tunisia, Egypt and
elsewhere in the Middle East also reinforce the importance of political
legitimacy. Under some conditions, autocratic governments which are able to
focus on development and generate improving living standards can obtain
political legitimacy. There is increasing evidence, however, that democracy is
the best system for promoting accountability and responsible policies,
particularly in Africa (Radelet 2010).
c. Improved governance. Poor economic governance and mismanagement is a
scourge throughout much of the developing world. Korea switched from a
basket case to a miracle economy following a turnaround in governance.
Unfortunately, natural resource wealth, particularly from oil, provides a
temptation to misuse funds. This is the case in some natural resources rich
LDCs, where vast revenues have largely failed to generate sustainable growth
or poverty alleviation. There is considerable evidence that lowering
corruption and improving the functioning of institutions more generally
contributes to improved economic performance. A well-functioning,
transparent, and impartial judicial and legal system, with secure property
rights is essential for a market economy, but is still lacking in many LDCs.
While crucial, reducing corruption and ensuring property rights are not easy to
achieve. A possible interim strategy is to insulate key industries from
predation, as in the garment sector in Cambodia, where a well-functioning
trade organization defended the interests of the industry in an environment of
poor governance. Export processing zones (EPZs) are another such
mechanism, but have a poor record of success in Africa outside of Mauritius.
d. Targeted trade and industrial policies. Activist industrial policies are the
subject of a long-standing debate, as discussed in section II above. Proponents
45
point to successful use of infant-industry protection, subsidies, directed credit,
etc., in some East Asian countries. Critics retort by noting the failures of these
same strategies in Africa and Latin America. There is an emerging consensus
that more open-ended industrial policies focused on overcoming coordination
failures and discovery of new sources of comparative advantage can be helpful
(Rodrik 2008a, 2008b). Similarly, Harrison and Rodiguez-Clare (2010)
distinguish between “hard” and “soft” industrial policies, where the latter are
aimed at overcoming coordination failures rather than targeting particular
industries with import barriers and subsidies. “Soft” industrial policies are
less subject to capture by special interest groups and more easily modified in
response to changing conditions.
i. For most LDCs, infant-industry protection is a non-starter. The domestic
market is simply too small. High levels of protection are much more likely
to promote smuggling than industrialization, particularly in African
conditions of porous borders and weak enforcement capacity, as seen in
trade between The Gambia and Senegal and between Benin, Togo, and
Nigeria.
ii. The issue of subsidies is more ambiguous. It is sometimes alleged that
WTO rules inhibit proactive industrial policies. As UNCTAD (2010a)
points out, this is largely false. Only export subsidies are WTO-illegal;
other types of subsidies are generally permitted. Moreover, LDCs are
largely exempt from WTO rules on subsidies. The question instead concerns
the cost- effectiveness of any such subsidies. There is partial evidence of
successful use of subsidies in the Ethiopian flower industry and agriculture
in Senegal and Malawi. Caution is in order, however, given that subsidies
are costly and there is no guarantee that they pass cost-benefit tests and will
lead to international competitiveness. Further research on such experiments
would be helpful. In any case, targeted industrial policies should
complement the other measures described above rather than substitute for
them. For example, as previously noted, exchange-rate overvaluation acts as
an effective export tax, thereby offsetting the stimulative effect of sectoral
subsidies. So does poor infrastructure, costly trade facilitation, etc. Given
the highly competitive, quality-sensitive and fast-changing nature of global
value chains in which LDCs are attempting to participate, the key is to
upgrade technology while keeping costs down. Direct investment by foreign
firms at the technological frontier, a favorable climate for domestic
entrepreneurs and technical assistance from donors, are likely to be more
effective than government subsidies in the current global economy.
iii. These same issues apply to subsidized credit and development banks. While
firms everywhere bemoan the lack of credit, a problem in many countries is
that SMEs and farmers frequently fail to repay loans, particularly when they
have been granted based on patronage politics. In many LDCs, particularly
in Africa, development banks and directed credit have a dismal record,
greatly contributing to the continent-wide debt crisis of the 1980s.
Addressing more fundamental issues in the legal and judicial system can set
the stage for private financial systems to operate more efficiently.
iv. Government has an important role in addressing coordination failures, in
areas such as logistics, norms, training and skills development (Rasiah
2007). This issue is related to the streamlining of business support agencies
46
discussed above. Close business-government cooperation has been a crucial
part of the success of many emerging economies, with the search for
pragmatic solutions to problems as they develop.
4. International Support Measures
The analysis of development policies and outcomes overall, and of LDC
performance in the 2000-2009 decade, has stressed the importance of integration into
the global economy. What measures can be taken to boost integration and increase
the benefits that can be derived from the global economy?
a. Regional Integration. Regional trade agreements (RTAs) have played
relatively little role in the gains recorded by LDCs in the last decade. That
reflects the fact that the fast-growing low income countries in Asia, such as
Cambodia and Bangladesh , are not members of effective free trade zones.
ASEAN in South East Asia is more of a political than an economic grouping
at this point. In Africa, on the other hand, a proliferation of trade agreements,
with an excessive number of often-poorly functioning groupings, has
contributed little to positive outcomes. A rationalization of regional trade
arrangements, with a smaller number of more effective groups, could be
helpful. Incremental steps in this direction, for example by bolstering
ECOWAS in West Africa, could contribute to increased intra-regional trade.
b. Trade preferences. Preferential access to developed country markets through
which LDCs enjoy lowered tariffs and quotas have played an important role in
the garment industry and some other sectors. Nevertheless, there are
limitations to relying on preferences. Political pressures in developed
countries tend to result in tight conditions on eligibility of key products such
as clothing. For example, the EU Everything but Arms (EBA) program has
restrictive rules of origin on garments. The US African Growth and
Opportunity Act (AGOA) relaxes rules of origin for garment exports from
African LDCs, but only for short time horizons. Moreover, the margins
accorded to LDCs by preferences have been eroded as countries have reduced
tariffs across the board (UNCTAD 2010a).
c. Aid and Debt Relief. The value of foreign aid is much debated, with some
proposing large increases in aid to lift economies out of development traps
(Sachs 2004), and others viewing aid as counterproductive and contributing
only to dependency. Both aid flows and debt relief have increased
considerably over the past decade. ODA to LDCs as a whole doubled in real
terms from 2000-2008, reaching $37 billion in 2008 (UNCTAD 2010a). A
surge in debt relief also benefited LDCs’ external accounts. The Heavily
Indebted Poor Countries (HPIC) initiative and the Multilateral Debt Relief
Initiative (MDRI) had important impacts on LDCs’ debt-to-GDP and debt-toexport ratios and lessened the strain on debt servicing. Despite the increase in
ODA, aid flows still fell far short of the amounts agreed to in the Brussels
Program of Action (UNCTAD 2010a). On the whole, foreign aid over the past
decade was at times helpful in supplementing incomes, but was not key to the
success of emerging economies (Radelet 2010, Collier 2008), and nor is it
likely to be in the future. A reorientation of aid towards infrastructure and
47
technical assistance, even if at the expense of social sectors, may be justified
as a means of promoting sustainable development.
d. Aid for Trade. The WTO established an “Aid for Trade” program in 2005 in
recognition of the lack of capacity and infrastructure in LDCs for taking
advantage of global market access opportunities. The Integrated Framework
for Trade-Related Technical Assistance to Least Developed Countries (IF)
was established as the main vehicle for delivering Aid for Trade. The IF was a
promising initiative to assist LDCs by pooling the efforts of all the major
international organizations in identifying the constraints on LDC trade and
proposing measures to address those constraints. Diagnostic Trade Integration
Studies (DTIS) have provided detailed analyses and recommendations for
most LDCs. Effectiveness has been limited, however, by low funding; partly
as a result the implementation of DTIS recommendations has lagged
(UNCTAD 2010a). A new framework, the Enhanced Integrated Framework
(EIF), began operating in 2009 and it is too soon to assess whether it will have
greater results.
e. Technical Assistance. One of the most important and least appreciated forms of
aid is technical assistance at the country level. Botswana’s success is in no
small measure due to its rejection of Africanization and reliance of policy
advice from high-level international advisors (Collier 2008). As another
example, Rwanda’s coffee sector owes much of its success to a Coffee
Strategy and Action Plan supported by USAID and various NGOs. Until the
late 1990s, Rwanda’s coffee sector produced only low-quality coffee and was
in decline. The government’s action plan aimed to increase exports through
bettering the quality of coffee produced and moving its products into the highquality specialty market (Integrated Framework 2005a). USAID and NGO
support was instrumental in this process: it provided financial, marketing,
training and technical assistance to Rwandan firms, helping the industry
overcome coordination and knowledge-related market failures. Rwanda’s
coffee sector now exports to specialty coffee roasters in the United States,
Europe and Japan, including to Starbucks, the world’s largest coffeehouse
(UNCTAD 2008a).
f. Importance of an open world economy and the Doha Round. As argued
throughout this document, exports of traditional and non-traditional products
have played a key role in all of the success stories in development in the 20002009 period and before. An open world economy is therefore crucial.
Completion of the Doha Round would be a positive step in this regard.
Provisions for duty-free, quota-free market access for at least 97 percent of all
products, reduction of developed country impediments to LDC agricultural
exports, and facilitating LDC accession to the WTO are among the priorities
for LDCs in Doha Round negotiations, as enunciated in the Dar es Salaam
Declaration (UNCTAD 2010a). Regardless of the fate of the Doha Round,
however, the most important condition is to avoid a resurgence of
protectionism in developed countries. On the whole, the world did quite well
in maintaining open markets during the Great Recession.
48
VIII. Concluding Observations
There are no foolproof solutions, but the experience of the last decade as well
as previous decades gives rise to cautious optimism that LDCs can grow and develop
despite the severe handicaps that they face. Several ingredients are essential:

Boosting Supply Capacity. Growth of productive potential and employment
creation must be the focus of development efforts. Poverty Reduction Strategy
Papers (PRSPs), the focal point for external assistance to developing countries,
now emphasize investment in health and education but sometimes neglect the
development of productive activities.

Pragmatism. The eclectic and varied East Asian development strategies
reinforce the argument for pragmatism. Appropriate policies depend on
institutional development and other country-specific attributes, which may
change over time.

Global Integration. Very rapid growth necessarily requires integration into
the world economy as it is based on dissemination of modern technologies and
access to large markets. Exports have played a key role in development in all
successful emerging economies through 1) employment creation 2) foreign
exchange revenues and 3) the discipline of international competition. Foreign
direct investment is often a catalyst for obtaining market access and
technological upgrading. This is true even for very large developing countries
and it is all the more important for small countries with limited domestic
markets. However, the precise form of integration is variable. Exports of
manufactured consumer goods have been the dominant mode of integration in
East Asia but they are not the only or even the best way for present-day LDCs.
Previous research (UNCTAD 2008a, 2010b) has demonstrated the potential
for technological learning and employment creation in non-traditional sectors
such as horticulture, services, and tourism, and indeed even in traditional
primary products. With the notable exception of Korea, which relied on
licensing to obtain foreign technology, FDI has played a positive role in most
successful emerging countries.

Private Sector Development. The private sector is the engine of growth
everywhere. Attraction of FDI as well as nurturing of domestic enterprises
require a favorable business environment in which the government assists
private enterprises rather than predate and harass them. There is no shortage
of entrepreneurial talent in LDCs, but it is too often hamstrung by government
failures of omission (lack of public goods) and commission (excessive
interventions and restrictions). Export and investment promotion agencies, as
well as other forms of cooperation, between business and government have
been effective in East Asia but less so in Africa. More generally, privatization
and reduction of trade barriers are not sufficient to improve unfavorable
business climates. For example, in many countries trade facilitation (customs
and port administration) is much more of an impediment than trade taxes
(Wilson, Mann, and Otsuki 2005).

Foreign Assistance. Donors and NGOs can play a positive role, but often
more through technology transfer than financial aid. Reorienting aid towards
infrastructure financing would be a positive step.
49

A Developmental State. Most importantly, the government must be
committed to economic development. This means first and foremost, attention
to the basic public goods essential to any economy: physical and social
infrastructure. Although private firms can participate in infrastructure
construction and operation, experience has indicated that privatization of
utilities alone fails to deliver adequate investment, with the partial exception
of telecommunications. Beyond the basics of providing public goods,
selective trade and industries have been successfully pursued in some East
Asian countries, but more often than not have failed elsewhere. Again, a
pragmatic and flexible approach is in order depending on country
circumstances and state capabilities.
50
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