11:43 AM Apr 15, 1996

MODEST PROGRESS IN LDCS

Geneva 15 Apr (Chakravarthi Raghavan) -- After years of stagnation and even decline in per capital incomes, the Least Developed Countries (LDCs) have shown some modest progress in 1994 and 1995, according to the UN Conference on Trade Development in its 1996 Least Developed Countries Report.

Mr. Carlos Fortin, Deputy to the UNCTAD Secretary-General, said part of the explanation for the better performance of LDCs has been improvements in commodity prices in 1995, political and social stability and their management of domestic policy reforms.

However, he warned, there was no room for complacency.

The processes of globalization and liberalization in the world economy were, at least in the short run, resulting in growth of inequalities among countries -- with the gap between the top 20% of the world's rich and the bottom 20% of the poor countries having increased over the last three decades.

The globalization and liberalization processes would create new problems for the LDCs. Apart from the factors like short-term costs of increased food imports, increased costs of technology due to the TRIPs, and the lack of supply capabilities to take advantage of increased market access, they would also face considerable problems of compliance: The WTO secretariat had estimated that there were over 200 notification requirements for members to comply with, and the administrative costs of compliance and implementation also were burdens.

The low development in the LDCs inhibit flow of FDI, and lack of FDI makes development of infrastructures and other services development more difficult. The LDCs were thus caught in a vicious circle and they could get out of it only through domestic measures, supported adequately by international measures.

While many of them had undertaken financial reforms and liberalisation, an effect had been to make credits costlier and more difficult for the small-scale sectors and the small farmers.

Another UNCTAD official, Mr. Chandrakant Patel, said that though no factual analysis is available, it was probable that this global inequality between the rich and the poor was also reflected within countries.

There are some 48 countries now classified by the UN as LDCs and, together they have a population of 555 million. Of these, 33 are in sub-Saharan Africa and nine are in Asia, while others are in the Caribbean, and Asia-Pacific oceans.

Of the 48 LDCs, 14 had strong growth in 1995, with GDP growth of more than 5%, according to UNCTAD.

Barring adverse weather conditions, the prospects for LDCs growth in 1996 is expected to be sustained at the same level as in 1995.

The most notable improvement in performance has been among African LDCs whose growth rates, though modest compared to Asian LDCs, increased on aggregate to 2.2% compared to an average of 0.6% over 1990-1994, says the report.

The report has not attempted any estimate of per capita performance of African LDCs as a whole in 1995. An annex table, giving individual per capita in 1993-1994, shows 12 of them had a positive per capita growth, there was no data for nine of them, and the rest had fall in per capita.

Patel said that the better performance of the Asian LDCs, as compared to the Africans, was not due to the better integration of the Asian LDCs into the world economy, as a result of globalization, but rather is explainable in terms of the regionalisation and strong growth in Asia -- China, South-East Asia and India in South Asia -- which enabled the neighbouring Asian LDCs to benefit.

Africa, unfortunately, has not had a strong growth pole, though South Africa could emerge to be one, he said.

The devaluation of the CFA franc in franco-phone Africa in 1994 is seen as having stimulated economic activities and encouraged increased inflows of foreign capital to some of them.

The Asian LDCs did better, with their GDP increasing by 4.6% in 1995 and four percent in 1994. Two-thirds of them registered output growths of more five percent, and with three close to 7%.

While at the Second UN Conference on LDCs, in Paris in 1990, donors promised more aid to the LDCs, and this was reiterated at last year's the mid-term Global Review in New York, actual ODA has been less than half of the aid targets and commitments set in Paris, and with fewer donors meeting the targets than in 1990. In real terms ODA flows to the LDCs declined from a 0.09% of GNP of the OECD-DAC in 1990 to a 0.07% in 1994.

But with a declining aid, policy conditions have come even more to the forefront in donor-recipient relations - notably for access to the World Bank and IMF funds (Structural Adjustment loans and Structure Adjustment Facilities). Political conditionality, "good governance, has also come to the fore.

The LDCs, the report says, are struggling to meet these policy conditions. Besides economic reforms, many of them have also undertaken political reforms and instituted mechanisms for democratization and popular participation in development. But many have weak administrative and institutional capacities that hamper local design and "ownership" of reform and development programs and their implementation.

The external financing situation of the LDCs remain precarious and while effectiveness and targeting of aid is important, the volume of aid remains crucial. Current aid flows are based on past commitments on programs and projects, but commitments have fallen back.

And, during first half of the 1990s, net transfer of resources has been possible only in part due to default on debt service obligations - through debt relief and accumulation of arrears.

The report urges bolder actions on the external debt of the LDCs -- ODA relief, bilateral debt at the Paris Club and the multilateral debt. The ad hoc solutions adopted so far have had little impact on debt overhang of LDCs and a significant number of them are still unable to meet their debt-servicing obligations.

While the new Naples terms for debt relief to LDCs at the Paris Club are a welcome step forward, UNCTAD warns even full implementation of these terms would not bring down the debt-service ratios of LDCs to manageable levels.

Unless the Naples terms are applied to a sizeable part of the total outstanding debt and unless debt-stock reduction is extended to a much larger number of countries than initially, and other bilateral creditors rapidly follow suit, the impact on LDC debt overhang will remain limited, the Report says.

The report argues that the processes of globalization and liberalization offer LDCs important long-term opportunities to reverse their economic decline of the past two decades, but these processes also raise serious concerns for them.

With small exceptions, LDCs have become marginalized from the mainstream of global economic activity, and "globalization may do little to alleviate the trend towards this marginalization and may even accentuate it."

Referring to the fall in LDCs' share in world income (from a 0.6% share in 1980 to a 0.4% in 1993) -- due to stagnating output growth and deteriorating terms of trade -- and while some of the reasons are endogenous, the report underlines that it is reflective of more widespread trends in the world economy.

"Growing income inequality between countries appears to be a significant feature of the process of global integration with adverse effects not just on LDCs, but also on many other low-income developing countries, which are falling further behind the developed and the newly industrializing countries in terms of living standards."

The report also warns of a political marginalization effect for LDCs on top of the economic marginalization. Governments of developed countries may accord less consideration to LDCs, in distribution of ODA, if LDCs are perceived to be of diminishing economic importance in terms of trade and investment opportunities, the report adds.

The report views positively long-term beneficial effects of liberalization in the Uruguay Round. But it is difficult to make out whether in this assessment, the report is advancing the theoretical view of trade liberalization or something based on factual analysis of the outcome.

It merely says that on 'available evidence' the Uruguay Round will have beneficial effects globally, that in the long-term it will contribute to globalization by enhancing developing country exports to the developed countries, but that the initial gains will accrue to the already successful NIEs.

However, trade liberalization effects cannot be felt for nearly a decade hence and, at best, only projections from simulation models based on assumptions are possible and thus, views either way depend on assumptions and are at best 'guesses' of what would happen ten years hence and by then most of the guesses would be forgotten.

Even the World Bank, OECD and GATT projections and assertions of $250-500 billion world income gains made and publicised just two years ago are not being mentioned now. A 1995 World Bank organized seminar had a much more modest $40-50 billion figure after 10 years.

The UNCTAD LDC report however calls for some remedial measures in the short-term including measures to deal with preference erosion, tariff escalations and higher food-import costs. It also calls for national measures, with international support, to deal with supply constraints that would come in the way of LDCs seizing the market opening opportunities.