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Aid, Debt & Development

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The State Is Back, Announces UNCTAD
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The state is back, neo-liberal policies have failed, and the liberalisation of trade should be halted. These are some of the findings and recommendations from the United Nations Conference on Trade and Development (UNCTAD) for the poorest countries, writes Isolda Agazzi.

17th July 09 - Published by Inter Press Service

Link to report: The Least Developed Countries Report 2009

In least developed countries (LDCs), the market has not been able to produce inclusive growth, according to the UNCTAD 2009 report on LDCs, launched yesterday. The United Nations currently classifies 49 countries as least developed, 33 of which are in Africa.

Major changes are needed in macro-economic, agricultural and industrial policies. After decades of budgetary cuts, the state must spend again. "Monetary policies have been at the forefront in the past, but fiscal policies should play a bigger role now", said Dr Charles Gore, senior UNCTAD economist and one of the authors of the LDCs report.

"This means fostering private investment and giving priority to domestic resource mobilisation, in addition to official development assistance." Tax extraction is weak in African LDCs. In 2000 to 2006, tax revenue amounted to only 12.2 percent of gross domestic product in these countries.

Countries should implement expansionary fiscal policies and mobilise fiscal revenues to invest in productive sectors, like agriculture, infrastructure, health and education.

They should refrain from further trade liberalisation; increase value-added taxes on luxury goods; increase the taxation of high incomes and corporations; and strengthen property taxes.

Agriculture is another key sector. "Food security is a major problem in the LDCs and it reflects decades of under-investment in agriculture. There is a need to increase agricultural productivity, not only by focusing on the farmers, but also by improving the agricultural system and paying attention to research extension," Gore added.

Agricultural policy must be complemented by developmental industrial policy to move towards higher value activities, in services or manufacturing, the latter being the weak area of LDCs economies, particularly in Africa.

Asian LDCs, most notably Bangladesh, were less severely hit by the global economic crisis because they are less dependent on commodities export and have strengthened their manufacturing sector.

The state needs to turn to "development governance", adapted to the 21st century, and boost public investment. This needs additional fiscal resources and stopping further trade liberalisation.

After the emphasis on good governance by President Barack Obama during his recent visit to Ghana, UNCTAD stresses the importance of governance too. But not just any type.

Under the heading of "The state and development governance", the LDCs report doesn’t advocate for a return to old developmental, state-centred models, nor to introducing the institutions of advanced economies into poor countries.

Rather, LDCs have to find a new mix between state and market and create their own institutions. "Business as usual is no longer possible," exclaimed Gore. "The economic crisis has exposed the shortcomings of the current development paradigm and LDCs should seize it as an opportunity for change."

The report warns against the tendency of introducing institutions of advanced economies into poor countries.

"Tanzania and Uganda have set up an institution for aid management policies where people themselves look at aid effectiveness," Gore explained. "Domestic arrangements are quite successful in ensuring that aid is used more effectively for national development purposes."

Another positive example is the use of indigenous knowledge of agricultural practices. "To increase agricultural productivity, one should build upon these agronomic practices and not only copy western technology," he added.

UNCTAD stresses the need to identify areas of excellence within the public administration of LDCs, like in ministries of finance, to build on.

Rwanda, for example, is seeking to formulate a national vision and to come up with its own strategy. Zambia is identifying sector priorities for a competitiveness strategy. Malawi has reached great success through the provision of fertiliser subsidies that have enabled a major net food importer to achieve food self-sufficiency and even export food.

LDCs’ per capita income is lower than 905 dollars per year; they have poor health, nutrition and literacy rates; and are particularly vulnerable to natural and economic shocks. With a population of 843 million and a high proportion of youngsters, the main challenge for these countries is to create productive employment.

After experiencing an average growth rate of seven percent annually between 2002 and 2008, LDCs have been severely hit by the financial crisis. Falling commodity prices, reduced external demand for low skilled manufactured exports, decreasing tourism revenue, declining remittances and lower capital flows have affected the real economy.

In 2009 they are expected to grow only by 2.9 percent. Excluding Bangladesh, the growth rate drops to 2,1 percent – less than the population growth. Poverty will increase.

The crisis has proved the inefficiency of the neo-liberal development model applied for the past three decades.

UNCTAD believes in the capacity of the poorest countries to recover, provided they implement a new developmental state, adapted to the 21st century. "Yes, they can," declared Gore, echoing Obama’s election slogan.

"The change in the productive structure is going to take time, but we can already advocate for a change in governance and the role of the state. The challenge is to design new ways for the state and the market to interrelate."

The remodeled state then has to apply development governance practices based on the core principles of participation, fairness, decency, accountability, transparency and efficiency.

Implementing these reforms will take time. But as a matter of urgency, LDCs governments should build up domestic growth coalitions to mitigate the impact of the economic crisis. "These exist when national governments and domestic business elites actively cooperate to promote investment, technological progress and structural change.

"Such cooperation was an important ingredient in the success of developmental states, for example in East Asia, in the past," according to the report.

It adds optimistically that: "The crisis in fact presents an opportunity for change.

"It may be used to spur transformations in the way states act and it may help them to build alliances that link the interests of the rural and urban areas – including the agricultural and industrial sector – and that build on the shared interests of the public and the private sector."

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