UNCTAD’s LDCs Report 2012: LDCs Still Growing Up

FAIR Report

Since the global crisis began there is speculation going on that least developed countries (especially small states) would be strongly heat by that and their economies will be grounded. Speculation is partially right but least developed countries (LDCs) show courageous resistance. LDCs jubilant performances of dealing with economic shocks demonstrate in United Nations Conference on Trade and Development’s (UNCTAD) Least Developed Countries Report 2012 Harnessing Remittances and Diaspora Knowledge to Build Productive Capacities. UNCTAD had published Least Developed Countries Report 2012 Harnessing Remittances and Diaspora Knowledge to Build Productive Capacities on 26th November, 2012. In the UNCTAD’s LDCs Report 2012 had show macroeconomic performances of LDCs. The Report highlighted the Diasporas and Remittance flows of LDCs and affects in Annual Growth ratio. UNCTAD’s LDCs Report 2012 gives special attention on Harnessing Remittances & Diaspora knowledge to build productive capacities for comprehensive development. The report said, the uncertain global economic recovery and the worsening Euro-zone crisis continue to undermine those factors that enabled the least developed countries (LDCs) as a group to attain higher growth rates between 2002 and 2008. Report visibly presented correlations among remittance flows by migrant communities & economic growth ratio. According to report remittance flows empowered the internal or domestic financial market and fueling the gross domestic production (GDP) growth. It in great extends help to tackle the evil effect of global financial crisis.

Reviews of UNCTADs LDCs Report 2012

According the report, despite seeing real gross domestic product (GDP) grow slightly faster in 2010, the group as a whole performed less favorably in 2011, signaling challenges ahead. Indeed, with the world’s attention focused on Europe, there is a danger that the international community may lose sight of the fact that in recent years, LDCs have been most affected by financial crises caused by other countries. With less diversified economies, LDCs have neither the reserves nor the resources needed to cushion their economies and adjust easily to negative shocks. Furthermore, if another global downturn hurts the growth prospects of emerging economies, LDCs, as major commodity exporters, will be directly affected. Therefore, LDCs require increased external assistance to better protect their economies against external shocks and help them manage volatility. Report also mentioned, Remittances have attracted increasing attention in the international discourse, partly owing to their significant growth over the last decade. A growing consensus is emerging that remittances constitute a significant source of external financing, whose availability, if managed through appropriate policies, could prove particularly valuable for capital-scarce developing countries (especially those with larger Diasporas).

GDP growth

LDCs profound both hope & hurdle of economy in the gross domestic production (GDP) growth. Maintain and increase the GDP growth ratio is the prime challenge of LDCs economies. GDP is a complicated segment of economics. GDP is relying on capital flows from internal & external financial sources in the production mechanism. Financial flows and productivity have to be a continuous process. Any barriers in this process will create crisis by default. Global economy is in a turmoil situation even though LDCs real GDP still not falling apart. The real GDP of the LDCs as a group grew by 4.2 per cent in 2011 which is lower by 1.4 percentage points than the preceding year. This downward trend mirrors the slowdown of growth worldwide (5.3 per cent in 2010 and 3.9 per cent in 2011).

While the coordinated fiscal and monetary easing in most developed and some developing countries provided a major stimulus for growth in 2010, the winding down of these measures in many countries, coupled with gradual intensification of fiscal austerity in most European countries, resulted in slower growth of GDP in 2011.

Given their high dependence on external economic conditions, LDCs could not escape this broad-based slowdown. Indeed, the rate of deceleration of their GDP growth in 2011 was broadly similar to that of developing countries (1.3 percentage points) and advanced economies (1.6 percentage points). It is thus evident that LDCs’ recovery in terms of real GDP growth in 2010 was short lived. As shown in table 1, the GDP growth rate for LDCs in 2011 was slightly lower than the result in 2009, when, despite global recession, LDCs were the best-performing group of countries. Also, the growth rate of LDCs in 2011 was about two percentage points lower than that of other developing countries. Most importantly, it was 3.7 percentage points below the average annual growth rate attained during the 2002–2008 boom period.

Thus, if the current investment trends continue, it is unlikely that LDCs will be able to catch up with other developing countries in the near future. In fact, the current level of investment is below the value of 25 per cent of GDP which is considered necessary to reach growth rates of real GDP of 7 per cent — one of the main goals of the Istanbul Programme of Action for LDCs.

Gross domestic saving rates have shown the opposite trend in the same period. The average saving rate for the LDCs as a group was 18.9 per cent of GDP in 2005–2007, declining to 17.7 per cent in 2008–2010. The biggest decline was in 2009, when it reached only 14.5 per cent of GDP. In comparison with the saving rate in 2000, however, the improvement is still significant, higher by 5.5 GDP percentage points in 2010.

According to IMF forecasts, real GDP worldwide will expand by 3.5 per cent in 2012, down from 3.9 per cent in 2011. If the downside risks do not materialize, real global GDP is set to grow by 4.1 per cent in 2013. For the LDCs as a group, the IMF currently forecasts growth rates of 5.1 per cent in 2012 and 5.5 per cent in 2013. Developing countries, in turn, should attain growth rates of 5.7 per cent in 2012 and 6.0 per cent in 2013.

Unemployment challenge

Due to the overwhelming heat of global financial crisis, global unemployment started to rise again in 2011 and it has been estimated by the ILO (IILS and ILO, 2012) that some 202 million people will be unemployed in 2012. The global rate of unemployment is projected to reach 6.2 per cent in 2013, its level at the height of the 2009 financial crisis. Equally worryingly, youth unemployment rates have increased in most advanced economies and in two-thirds of the developing countries. It is obvious that if financial organization erupted will create unemployment crisis. If there is no meaningful money, then there will be no job circulation either. The combination of slower economic growth and higher unemployment has resulted in an increase of the ILO’s Social Unrest Index for 2011.

International Trade Balance

Global financial crisis is making living of small economies tougher. Major challenge of LDCs is how to cope up with the squeezing global market and keep up status quo. The trade balance of LDCs as a group in 2011 shows that these economies recorded a deficit of $39.8 billion, up from $37.5 billion in 2010. This was a result of a small surplus in the trade of goods ($2,639 million), which offset somewhat a much larger deficit in trade in services ($42,460 million).

The gradual shift in the main markets for exports of LDCs continued in 2011, reflecting the long-term recalibration of the global economy as well as the weak economic performance of key destination markets in the North (UNCTAD, 2011a). As a group, LDCs exported more than 54 per cent of their total exports to other developing countries. China imported 26.4 per cent of total exports from LDCs, surpassing the European Union (20.4 per cent) and the US (19 per cent). Similar trends could be detected for LDC imports, with 67.8 per cent coming from other developing countries and only 29.8 per cent from developed ones. China has been growing in importance as a trade partner, and it is currently the second largest source of imports into LDCs (16.1 per cent of the total), behind the European Union (18.5 per cent).

Foreign Direct Investment (FDI)

LDCs still very much relying on external investment and financial flows from overseas market. Lion’s part of external financial flows comes from foreign direct investment (FDI). FDI inflows to LDCs have declined for three consecutive years after peaking in 2008 at a little less than $19 billion, and in 2011 amounted to only $15 billion. Whereas FDI inflows to LDCs are still predominantly to Africa, some shifts have occurred recently. Of the total FDI flows to LDCs of $15 billion in 2011, 79 per cent went to Africa, a slight decrease from the previous year. Meanwhile, Asian LDCs received $2.8 billion in 2011, up marginally from the previous year.

The concentration of FDI inflows appears to have diminished. In 2009, there were only five countries with inflows greater than $1 billion, whereas in 2011 there were nine such countries. In 2009, FDI outflows from all LDCs amounted to $1.1 billion, nearly tripling to $3.1 billion in 2010 and continuing to increase to $3.3 billion in 2011.

Official Development Assistance (ODA)

Official Development Assistance (ODA) declining since global economy step up into the new millennium. Crisis in international politics and later global financial crisis had creating vicious circle which trapped both creditor-debtors. No one is ready to lend and same way who want it can’t take it because of incapability of returning it. Data from the Development Assistance Committee (DAC) of the Organization for Economic Co-operation and Development (OECD) show that net Official Development Assistance (ODA) disbursements, together with net debt relief to the LDCs from all donors reporting to the OECD/DAC, reached a record level of $44.8 billion in 2010. This represents an 11 per cent increase in comparison with ODA disbursements in 2009. In nominal terms, aid inflows to LDCs in 2010 were 3.5 times higher than in 2000. As noted in LDCR 2011, ODA has played an important countercyclical role in the wake of the global crisis, cushioning the impact of the retreat of private financial flows.

External Debt Scenario

In past external debt are in higher side. But it is becoming higher since 2007. The LDCs’ total debt stock reached $161 billion in 2010, only marginally higher than in 2009. It is estimated that, external debts have increased to around $170 billion in 2011. LDCs’ debt service decreased slightly from $8.2 billion in 2009 to 7.6 billion in 2010. External debt in relation to GDP fell from 29.9 per cent in 2009 to 26.7 in 2010. Compared with the situation at the beginning of the decade, when the ratio was 79.2, this is a substantial improvement. However, it is still more than eight percentage points of GDP higher than the average of developing countries. While part of this improvement was due to various debt relief initiatives, the decrease in the debt/GDP ratio was mostly due to rapid GDP growth during the boom. Similarly, debt service as a share of exports declined from 13.2 per cent in 2000 to 4.8 per cent in 2010, primarily as a result of very strong export growth.

An overview on Remittance & Diasporas

The Istanbul Programme of Action for LDCs (IPoA) identified “Mobilizing financial resources for development and capacity-building” as one of the priority areas for LDCs for the decade 2011–2020. The programme stresses that “Remittances are significant private financial resources for households in countries of origin of migration. There is a need for further efforts to lower the transaction costs of remittances and create opportunities for development oriented investment, bearing in mind that remittances cannot be considered as a substitute for foreign direct investment, ODA, debt relief or other public sources of finance for development”. The report highlighted that governments of LDCs could enhance the developmental impact of remittances by providing additional incentives to migrants. There are new modalities for using remittances to enable greater domestic investment through securitization or collateralization of financial flows.

Report suggested policies on migration, remittances and Diaspora engagement should be formulated as an integral part of national development strategies, not in isolation. This is partly because different forms of migration — internal migration, emigration, immigration, and return migration — are all interlinked, and various macroeconomic and sectarian policies affect each of these. Agricultural and rural development policies influence rural–urban migration patterns. Trade policies affect domestic employment creation (or the lack thereof) and thus influence emigration trends. Monetary and exchange rate policies affect both remittance costs and sending channels. Educational policies influence brain drain processes, and so on. This being so, a piecemeal approach is inappropriate. Not only must migration policies be coherently included in a development strategy, but other policies need to take migration issues into account. This is complicated by the tendency of different ministries and agencies of government to work in a compartmentalized fashion that fails to take other factors and outcomes into consideration. LDCs could strengthen the provision of public goods by combining collective remittances and matching funds.

On the whole, both the effective mobilization of remittances and the successful engagement of the Diaspora for the development of productive capacities warrant a combination of policies at multiple levels. These range from “development-friendly” macroeconomic policies aimed at stimulating greater use of remittances for productive purposes and broadening the scope for a favorable transfer of skills, knowledge and technologies to prudential financial and regulatory reforms aimed at reducing transaction costs for remittances and providing stable and secure financial contexts, and meso-level policies to promote innovation in productive sectors. All this in turn requires a coherent policy framework related to migration and remittance issues, and the establishment of strategic partnerships to engage Diaspora communities in the promotion of business linkages, technology transfer, and skills and knowledge circulation.

The report suggested that on the macroeconomic level Brain drain-Brain gain correlations model need to be formed and on the microeconomic level, governments could enhance the developmental impact of remittances by offering migrants additional incentives. Building “trust” between Diasporas and home governments is central for sustaining the engagement and contributions of Diasporas. Brain drain is worst in certain sectors such as health, education and activities relating to science, technology and innovation. In the last four decades, several initiatives have been launched, aimed at facilitating knowledge transfer and knowledge sharing between the Diaspora and home countries. The report had been proposed a sort of Diaspora venture-capital initiative to help motivate and lead highly skilled Diaspora members to engage in home country development. The scheme would encourage investment in middle-to-high level technology industries and skill intensive activities.

UNCATD’s report addressed that on the one hand, LDCs with a critical mass of migrants need to strengthen their policy framework in order to better harness the development impact of remittances and engage Diasporas as agents of development and structural transformation. On the other hand, home country governments could assist Diasporas to create Diaspora knowledge networks and leverage resources. The international community could consider establishing an international support measure to harness Diaspora knowledge to build productive capacities in LDCs. If that so then Brain drain- Brain gain strategy will be cost-effective. Diversified remittance- Diasporas framework will be exploring more areas in financial market and intensify trade facilitation.

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