Productive capacities analysis key to reducing vulnerabilities in graduating LDCs

The Bridgetown Covenant underscores UNCTAD’s pivotal role in “formulating and promoting policies fostering productive capacities and structural transformation in developing countries” -—
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. These productive capacities are essential to achieving the SDGs in a comprehensive and integrated manner. They drive structural economic transformation, adding value to the economy, and leading to economic diversification, accelerated growth, greater resilience and ultimately faster poverty reduction and improved living standards, while ensuring environmental sustainability and social cohesion.

Productive capacities are defined as “the productive resources, entrepreneurial capabilities and production linkages, which together determine the capacity of a country to produce goods and services and enable it to grow and develop” -—
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. This definition highlights the latent nature of productive capacities and indicates that measuring them is a complex task. However, UNCTAD has pioneered efforts in this measurement challenge.

No nation has ever developed without building the requisite productive capacities, which are key to enabling countries to achieve sustained economic growth with accelerated poverty reduction, economic diversification and job creation.UNCTAD Secretary-General Rebeca Grynspan.

An enhanced metric of productive capacities to facilitate sustainable development

To measure productive capacities, UNCTAD developed the multidimensional PCI which helps countries identify gaps and limitations in productive capacities -—
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. The PCI comprises eight categories – human capital, natural capital, energy, transport, ICT, institutions, private sector, structural change – measured by 42 indicators. Out of these 42 indicators, 11 directly relate to SDG indicators (table 1), illustrating the interdependence between the PCI and the SDG indicators. Moreover, the PCI shows a strong correlation with other conventional measures of economic and sustainable development -—
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The PCI covers 194 economies over the period 2000-2022

In June 2023, UNCTAD released a second-generation PCI to enable countries to make more accurate diagnostics and measurements of their economic performance -—
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. This improved PCI can assist in shaping the formulation and effective implementation of sound policies. Available through a dedicated online portal, the PCI is accompanied by analytical publications, manuals, resources and tools. It maps the productive capacities of 194 economies over the period 2000–2022, offering a broader measure of development outcomes than other traditional benchmarks such as GDP -—
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. It emphasizes economic inputs and potential rather than just outputs, offering a comprehensive perspective on development.

Table 1. Eleven PCI indicators relate directly to SDG Indicators Table 1. Eleven PCI indicators relate directly to SDG Indicators
PCI Categories*SDG indicators included
Energy 7.1.1: Proportion of population with access to electricity
7.2.1: Renewable energy share in the total final energy consumption
Human capital9.5.1: Research and development expenditure as a proportion of GDP
9.5.2: Researchers (in full-time equivalent) per million inhabitants
1.a.2: Proportion of total government spending on essential services (education, health and social protection)**
ICTs17.6.1: Fixed Internet broadband subscriptions per 100 inhabitants, by speed
5.b.1: Proportion of individuals who own a mobile telephone, by sex**
17.8.1: Proportion of individuals using the Internet
Institutions16.1.3: Proportion of population subjected to (a) physical violence, (b) psychological violence and (c) sexual violence in the previous 12 months**
Natural capital15.1.1: Forest area as a proportion of total land area
Transport9.1.2: Passenger and freight volumes, by mode of transport
* Only PCI categories including SDG indicators are shown here.
** The SDG indicator is taken in a slightly different form in the PCI.

Source: UNCTAD

High-quality PCI requires reliable and harmonized source statistics that are consistent over time.

Ensuring a high-quality PCI requires availability of reliable and harmonized source statistics that are consistent over time. In the years ahead, concerted efforts are necessary to improve data availability which calls for statistical capacity building, particularly in low-income countries.

PCI reveals weak productive capacities in LDCs considered for graduation

The PCI has been used to complement UNCTAD’s vulnerability profiles for the five least developed countries considered for graduation at the 2024 triennial review of the Committee for Development Policy (CDP), namely Cambodia, Comoros, Djibouti, Senegal and Zambia. The PCI brings new insights into the conventional LDCs eligibility graduation criteria.

The analysis reveals that the productive capacities of the five examined countries slightly surpass those of other LDCs but significantly trail behind other developing economies. This gap is particularly evident in critical areas such as human capital, energy, ICT and institutions (table 2). Despite recorded GNI growth, sizable segments of these economies persist in a state of stagnation or underperformance, rendering them highly vulnerable to various shocks. This vulnerability underscores that crucial productive linkages within these economies are absent or have broken down.

Table 2. The five LDCs are lagging behind particularly in human capital, energy, ICT and institutions Table 2. The five LDCs are lagging behind particularly in human capital, energy, ICT and institutions
PCI country scores for selected categories, 2022
CountryOverallHuman capitalEnergyICTInstitutionsStructural Change
Djibouti12418014115016541
Senegal1381551571369468
Comoros148151144169171189
Cambodia152132146127155133
Zambia161164169174130111

Source: -—
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The diagnosis reveals a concerning trend where structural transformation in these economies has stalled or subdued with GNI increases failing to generate significant spillover effects. Moreover, economic growth is erratic, unsustainable, and lacks inclusivity. Notably, the GNI growth fails to adequately translate into poverty alleviation, inequality reduction or substantial employment generation, thereby resulting in HAI scores hovering just above the graduation threshold (table 3). Additionally, there is a looming risk of these economies falling into the "Middle-Income Trap” after graduating, emphasizing the need for targeted policy interventions and structural reforms to avert this scenario.

Table 3. The majority of countries eligible for graduation in 2024 barely exceed the HAI threshold Table 3. The majority of countries eligible for graduation in 2024 barely exceed the HAI threshold
2024 Graduation threholds
GNI per capita: $1 306 or above
HAI: 66 or above
EVI: 32 or below
CambodiaComorosDjiboutiSenegalZambia
Eligibility statusMet graduation criteria for the first time in 2021
GNI per capita$1 590$1 603$3 238$1 558$1 113
HAI77.868.766.966.771.4
EVI24.13754.742.339.8

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Stalled structural transformation

The evidence of stalled structural transformation is stark, as indicated by the structural change category across the five studied LDCs. Comoros ranks 189th out of 194, Cambodia 133rd, and Zambia 111th, underscoring significant challenges in transitioning their economies.

In Djibouti and Senegal, their relatively better performance is primarily attributed to GFCF (figure 1), which has nearly doubled as a share of GDP since the early 2000s. However, the benefits of this investment remain limited due to a lack of diversification, with most capital concentrated in select sectors. Consequently, the absence of production linkages hampers the creation of spillover effects.

Figure 1. Senegal's PCI improvement largely led by GFCF growth Figure 1. Senegal's PCI improvement largely led by GFCF growth
PCI scores for the category on structural change

Source: UNCTAD calculations based on data from -—
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Note: The indicators are standardized. The line y = 0 represents the average for all countries over the whole time period 2000-2023.

In Djibouti, capital formation has largely focused on the transport sector, particularly trade and logistics services, with minimal spillage into other sectors -—
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. Similarly, in Senegal, a substantial portion of fixed capital investment is directed to construction, with little emphasis on research and development or technological assets -—
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. This pattern reflects a broader issue of limited economic and export diversification, mainly reliant on primary products with limited value addition or transformation.

Signs of premature deindustrialization

Except for Cambodia, where the structural change score remains relatively stable, other countries’ scores are adversely affected by significant declines in the industrial ratio, notably in the share of MVA. This trend signifies a phenomenon of premature deindustrialization, particularly evident in Zambia, where the decline in MVA outpaces that of other LDCs, LLDCs and SSA (figure 2).

Figure 2. Decline of manufacturing value added in Zambia outpaced regional trends Figure 2. Decline of manufacturing value added in Zambia outpaced regional trends
Share of MVA in GDP

Source: UNCTAD calculations based on -—
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These challenges underscore the hurdles in initiating structural transformation and enhancing value addition and economic diversification through industrialization. Zambia's economy remains heavily reliant on the mining and export of copper, exacerbating the resource curse1 marked by exchange rate fluctuations, governance issues, rents, and price volatility -—
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. The COVID-19 pandemic further exacerbated Zambia's economic woes, with the sharp decline in copper prices resulting in significant revenue loss from exports and ultimately leading to the country's default on external debt obligations.

Heightened vulnerabilities and informality as obstacles of structural transformation

Among the five LDCs under consideration, Cambodia stands out with a notable decline in agriculture's value-added share and a corresponding rise in manufacturing, primarily driven by export-led strategies. However, this export-oriented model, centered on low-skilled and labor-intensive manufacturing, like garments and footwear, faces limitations in achieving structural transformation -—
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. Challenges include excessive trade deficits, high informality rates in the labor market, and vulnerability to external shocks due to concentrated exports and persistent deficits in international trade and the current account balance.

Moreover, high labor market informality hampers poverty reduction and limits social protection, impeding economic adaptability. Political and social pressures to maintain outdated production structures further hinder long-term economic development. Additionally, high dollarization curtails the government's ability to deploy effective monetary policies and stabilize the financial sector. High lending rates also constrain innovation, private sector growth, and structural transformation efforts.

Comoros faces significant challenges, marked by excessive trade deficits and remarkably high informality rates. The country’s growth model relies heavily on household consumption and services, largely fueled by remittances from the Comorian diaspora, rendering the country highly vulnerable to external shocks -—
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. Structural transformation remains elusive, with Comoros ranking 189th in this category, indicating critical deficiencies, such as a pronounced lack of investment (figure 3).

Figure 3. Comoros faces challenges in structural transformation Figure 3. Comoros faces challenges in structural transformation
PCI scores for the category on structural transformation

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Moreover, institutional weaknesses, reflected in Comoros' ranking of 171st in that category, are exacerbated by low government effectiveness, regulatory quality, and the rule of law. The country's ICT sector also suffers from underperformance, ranking 169th, attributed to exorbitant costs associated with utilizing ICT services, stemming from a dysfunctional monopolistic structure and market inefficiencies. These complex challenges underscore the urgent need for holistic interventions to bolster Comoros' economic resilience and foster sustainable development.

★ UNCTAD in Action ★

UNCTAD fosters productive capacities and structural economic transformation

Weak productive capacities lead to economic vulnerability to shocks, making the fostering of productive capacities crucial for socioeconomic resilience. Developing economies in the three regions have sought support for new policies focused on productive capacities and structural transformation due to past policy failures in delivering inclusive growth and sustainable development.

To this end, UNCTAD has developed a comprehensive programme on fostering productive capacities and structural economic transformation in support of developing economies. The project is structured around four main activities, co-led by UNCTAD and relevant ministries in the country:

  1. Strengthen countries’ statistical capacity for improving data collection on and measurement of productive capacities and related vulnerabilities.
  2. Develop NPCGAs by applying PCI to identify gaps, limitations, and challenges to foster productive capacities, structural transformation, and economic diversification.
  3. Formulate HPCDPs, which are holistic, economy-wide, and long-term roadmaps to address the gaps and facilitate the development of critical economic sectors based on comparative advantages.
  4. Train policymakers, national technical experts, private sector entities, academia, and civil society stakeholders in addressing gaps in productive capacities and facilitating structural transformation and economic diversification.

HPCDPs have been designed for Angola, Ethiopia, Kenya, and Zambia and are being prepared for Malawi, Mozambique, Nigeria, and Zimbabwe. Moreover, the gaps in productive capacities have been assessed for Cambodia, Comoros, Djibouti, and Senegal, while a number of other countries, including Honduras, Jamaica, and Mongolia, have expressed interest in the programme.

Building on the HPCDPs and by applying the PCI, UNCTAD has finalized a new strategy for SIDS. The holistic UNCTAD strategy for SIDS is designed to effectively address the multiple and systemic vulnerabilities of SIDS by sustainably harnessing their comparative advantages and unlocking key binding constraints to their development. It articulates a new development approach in SIDS, combined with a revamped global partnership in support of their development efforts.

In 2022-2023, UNCTAD delivered five trainings to national statisticians from a wide range of ministries, organizations, and the academic sector, enabling them to compute and interpret the PCI scores and facilitating knowledge-sharing on statistical, methodological, and computational aspects of the PCI. In total, over that period, UNCTAD trained 140 national statisticians from 74 different institutions and civil society, with 21 per cent being women (Table 4).

Table 4. In 2022-2023, UNCTAD trained 140 people in five countries on the statistical aspects of PCI Table 4. In 2022-2023, UNCTAD trained 140 people in five countries on the statistical aspects of PCI
WorkshopParticipants
National Capacity Building Training on Statistical, Methodological and Computational aspects of the Productive Capacities Index (PCI)YearTotalWomenMen
Nairobi, Kenya
14 – 15 March 2022
2022351124
Addis Ababa, Ethiopia
30-31 May 2022
202232428
Abuja, Nigeria
13-14 September 2022
202235431
Lusaka, Zambia
4-5 October 2022
202219217
Lilongwe, Malawi
3-4 October 2023
202319811
All PCI statistical trainings 2022-202314029111

Source: UNCTAD

Notes

  1. The resource curse describes the economic underperformance of countries rich in natural resources. It happens when a country heavily focuses on resource-dependent sectors, leading to dependency on commodity prices and hindering broader economic development.

References

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