SUNS 4302 Thursday 15 October 1998


DEVELOPMENT: LDCS GREW AGAIN 1997, BUT DOUBTS ON SUSTAINABILITY

Geneva, 14 Oct (Chakravarthi Raghavan) -- The world's poorest countries, as a group, recorded "another year of solid performance" in GDP growth, but the prognosis for the sustainability of this "is none too bright," UNCTAD Secretary-General Rubens Ricupero declared Tuesday at a press conference in Geneva to launch the report.

The United Nations has classified 48 countries as the least developed, based on criteria related to per capita income, education and industry in each of the countries. And UNCTAD, the focal point and lead agency within the UN system on LDCs, issued Wednesday the 1998 annual report on LDCs, the 14th in the series.

Based on preliminary estimates, the report said that the LDCs as a group registered a 4.8 percent GDP growth in 1997 - compared to the 3.2% for the world economy as a whole.

The growth for the group as a whole, measures divergences within the group.

The 1997 growth though is less than the 5.5% registered by them in 1996, but marginally better than the 4.5% in 1995.

The report has made no projections or estimates for this year, and a senior UNCTAD official at the briefing, John Cuddy who is the officer-in-charge of division on trade, services and commodities, said that there was so much uncertainty relating to the world economy that it was difficult to make any projections.

But given the heavy dependence of these countries on exports and earnings from commodities, many of them depending on one or two commodities, and the collapse in demand and prices for commodities as a result of the world financial crisis and the deflationary threat, the overall fall in official development assistance (the main source of external finance for these countries) as well in other flows, "the overall outlook is bleak," Ricupero commented.

The debt overhang, some $134 billion, also continues to hamper the efforts of the LDCs to mobilise resources. Many of the LDCs, unable to service or repay their debts, have had to seek repeated rescheduling: at the end of 1997, nineteen LDCs had rescheduled their debts at the Paris Club (of official creditors) on "Naples terms", and five of them had returned to the Paris club for rescheduling.

The financial crisis that began in Asia, in Thailand, in July last year, and has now spread to Russia and Latin America, and reaching into the industrialized countries, has also hit the LDCs in more than one way -- through the tightening up of foreign credits and loans, through the recession and import compression in the Asian countries (which had been the fastest growing export market for African LDCs) that had been taking in imports from LDCs, collapse of commodity prices and earnings, and a drying up of a nascent source of foreign direct investment from these countries.

Also, given the sheer size of the "rescue packages" for the Asian and other countries from the IMF and other industrialized countries -- mostly to rescue their own banks and financial institutions who had lent improvidently to these countries -- the availability of ODA to these countries could be even further endangered, more so if these include calls on the industrialized world in respect of schemes under the Heavily Indebted Poor Countries (HIPC) Debt Initiative.

The investment and savings ratios of these countries, in relation to GDP, remains very low, despite some improvements of late, and in many countries investment is insufficient to cover replacement needs, let alone support new productive capacity, the overview to the report notes.

FDI flows are also scarce, and concentrated in mineral rich countries, the report notes.

In assessing the short-term prospects, the report says that following several years of steady economic recovery, the LDCs are likely to face a slowdown in growth - the international economic environment and weather conditions, two major elements determining LDC performance, are
not expected to favour them in 1998, and could lead to a disappointing outcome on their "reform" efforts.

The UNCTAD's Trade and Development Report, and several of the assessments by non-governmental organizations of the structural reforms in Africa, and the LDCs, have come to the conclusion that not only have the reforms failed to achieve their objective, but the failure is due
to the design of the policies themselves, including such elements as deregulation and winding up state marketing boards in countries where neither domestic nor foreign private enterprises are ready or able to take on these tasks.

The growth prospects for African LDCs, the LDC report says, can improve if recovery in the European Union (their major export market) continues and South African economy rebounds quickly.

The report also says that the contagion effect of the Asian financial crisis will make themselves felt - by the weakening demand for primary commodities, and the tougher competition that manufacturing products will face from export goods of the countries in crisis. The Asian economies have been the fastest growing export market for African LDCs, albeit small in relation to their principal markets, and Asian investment has complemented the mineral resource oriented western investments in Africa.

And with so many of the Asian neighbours in trouble, the Asian LDCs who relied heavily on their neighbours for trade and investments, have also suddenly lost the advantage of being located in the most economically dynamic region in the world.

Also, foreign private financing for LDCs has become scarcer and more expensive.

In this decade the number of LDCs with an annual growth rate of five percent or more has increased steadily, with 20 LDCs accounting for 60% of the total population of the LDCs achieving this growth in 1997.

While three successive years of per capita growth is an encouraging sign, the vulnerability of LDCs to exogenous shocks, lack of trade diversification, shortage of trained personnel, weak and
under-developed financial systems, the threat of armed conflict and macro-economic ability are factors that inject caution before it could be concluded that the LDCs have achieved turning point towards sustainable growth.

The main conditions for robust or sustainable growth have not yet been fulfilled, despite some recent improvements in recent years. Their gross domestic savings and investment are still at very low levels, their demographic characteristics are not conducive to long-term growth, and they continue to be plagued by shortage of critical skills.
Their political and macro-economic stability has not yet been fully established, and inefficient financial intermediation, due to a weak financial sector and continuing lack of trade diversification are likely to hamper the future growth of LDCs.

"Paradoxically," adds the report, the most severe drag on the future growth of LDCs is likely to come from the agricultural sector, which so far has played a leading role in their recovery. But despite recent reforms, agricultural output and productivity are far below their potential levels and the sector is yet to be modernized.

Elsewhere, in dealing with the position of the LDCs in the WTO multilateral trading system and its effects on members and non-members, the report underlines the unfairness of the rules that prohibit further state subsidies by those who had not subsidised in the past, while allowing the heavy subsidisers as in the industrial world to continue it, albeit at a reduced level.

In terms of resources, the report notes that the net flow of resources to LDCs in 1996 saw a decline of $1 billion from the 1995 figure of $16.2 billion. ODA continues to account for most of the external flows to LDCs. Other official financing was negligible in 1996, and private capital flows (FDI, portfolio investments) amounted to $0.9 billion on a net basis in 1996. The apparent turn around in portfolio flows was also due to the swings in offshore flows to one of them, Liberia. Other LDCs received very little investment of this type.

According to UNCTAD data, in 1996, FDI flows to LDCs registered an annual $2 billion, but in 1997 there was a slight decrease. LDCs as a group have not benefited from the massive increase in FDI flows to the developing countries.

Only a few OECD donor countries, the report notes, have met the special targets for ODA flows to LDCs -- under the Paris Programme of Action for LDCs. ODA to LDCs have been lower in 1996 in 14 OECD-DAC member countries, than in 1990 when the programme was approved. In major donor countries, the ratio of ODA to GNP have actually fallen in the decade -- only Ireland and Luxembourg having improved it. But four Europeans continue to maintain the 0.20 percent target - Denmark, Norway, Sweden and the Netherlands.

The overall ODA outlook continues to remain bleak. The US is hesitant to take the lead, Japanese economy is in recession, and EU member states are focusing on their monetary union and further enlargement. As a result all targets for ODA, and increasing it to LDCs are likely to receive less priority attention.
And the pressure on the World Bank to assist East Asia would reduce the net income and surpluses of the Bank's IBRD window, whose profits have been used to support special programmes favouring the poorest countries.