Fostering productive capacities to graduate with momentum

Graduation from the LDC category is accelerating

In the foreseeable future, a number of countries will graduate from the LDC category, a designation created by the United Nations in 1971 -—
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to depict those countries with particular development challenges due to their low level of development, who also require particular attention and support. The process of graduation is accelerating. For years, hardly any country graduated; between 1971 and 2021 only six did. Nevertheless, among those who have not yet graduated, 11 have fulfilled the criteria two or more consecutive times, whereas four LDCs are scheduled to graduate in 2023-2024 (see Map 1) - Bhutan in 2023, and Sao Tome and Principe, Solomon Islands and Angola in 2024. Others will undoubtedly follow suit. Graduation will be a milestone in the path of achieving SDGs, particularly those broadly defined as economic -—
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, namely, Goal 1 – no poverty, Goal 8 – decent work and economic growth, Goal 9 – industry, innovation, and infrastructure.

To be eligible for graduation a country needs to achieve two out of three thresholds – US$1 222 GNI per capita, HAI of 66 or above, EVI of 32 or below – in two consecutive triennial reviews by the CDP -—
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. As an exception, a country whose per capita income is sustainably above the “income-only” graduation threshold, set at twice the graduation level (US$2 444), also becomes eligible for graduation, even if it fails to meet the other two criteria.

Map 1. LDCs by graduation status, 2022

Source: CDP Secretariat -—
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The concern of the approaching wave of graduations is that an increasing number of graduating countries have exhibited a low level of economic diversification, usually relying for its development on a handful of sectors, examples being: Equatorial Guinea on natural gas, Samoa and Vanuatu on fisheries and tourism, Cape Verde on fisheries, tourism and remittances, whereas Angola, soon to graduate, relies on oil. Indeed, the latter country intends to graduate using “income only” criterion. Thus, the issue remains about countries’ economic vulnerability and subsequently sustainability of their development trajectory. Reliance on a very limited number of sectors makes a graduating country particularly fragile towards external shocks, e.g., fluctuations in the international price of the commodity it trades. One can easily imagine that a country risks falling back into the spiral of low growth, poverty and inequality, as state revenues diminish.

Vulnerability towards external shocks is not limited to unpredictability of international prices. The lack of economic resilience among developing countries has been particularly blatant since the onset of the COVID-19 pandemic and its adverse economic repercussions. In the case of graduating LDCs, the situation is exacerbated by the anticipated withdrawal of special treatment, including market access, initially guaranteed by the LDC status. To make the situation worse in terms of capability for long-term sustainable development, growth in many graduating countries has relied on sectors other than manufacturing, a labour-intensive industry traditionally considered very effective in poverty reduction and an important driver of industrialization and structural transformation -—
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The key role of productive capacities in progressing towards the SDGs

The solution for current LDCs and graduating countries lies in building and enhancing their productive capacities. Productive capacities are key to achieving the SDGs in a multidimensional and coherent manner. They enable kick starting structural economic transformation, which adds value to the economy and, if properly managed, leads to economic diversification, accelerated growth, greater resilience and ultimately faster poverty reduction and improved standard of living, with resources and space to ensure environmental sustainability and social cohesion.

To measure productive capacities, UNCTAD developed a multidimensional PCI which assists in identifying gaps and limitations in productive capacities -—
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. Within the PCI, there are eight categories – human capital, natural capital, energy, transport, ICT, institutions, private sector, structural change – measured by 46 indicators. Each of the categories refers to a particular aspect of productive capacities development and organic links between and among the categories. Out of these 46 indicators, 11 relate directly to SDG indicators (Table 1), thus contributing to the important interdependence between the PCI and the SDG indicators. PCI is also highly correlated with other conventional measures of economic and sustainable development -—
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Table 1. SDG Indicators included in UNCTAD PCI
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

Available evidence and development experience show that productive capacities are critically important in i) kickstarting structural transformation and export diversification; ii) breaking the low-income trap; iii) building socioeconomic resilience and reducing vulnerability to external shocks; iv) achieving sustained and inclusive growth; and v) taking advantage of regional and global trade and investment opportunities, including ISMs -—
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Africa’s LDCs show lower PCI scores

Productive capacities are crucial to enabling smooth transition from the LDC category. They are critical for graduating with a momentum and that the developmental drive which allowed for graduation continues beyond as it is essential for attaining sustainable development and achieving structural transformation.

Unfortunately, data show that productive capacities, as measured by the PCI, are limited among the majority of LDCs -—
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. This is equally valid for countries which will soon graduate, like Angola, and for those who for the first time met the graduation criteria, like Zambia, and those for whom the graduation process will take longer, like Ethiopia.

Despite relatively high GNI per capita, Angola has recorded a very low performance in the PCI, with a score of 22.16 in 2018 (figure 1), which is below the average of all LDCs (24.04). This performance ranks it 178th globally and 39th in Africa -—
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. Over time, Angola has shown improvement before plateauing around 2013, nevertheless its score is significantly lower than its peers’ both regionally and in similar stages of development, and too low to have a substantial impact on structural transformation in its economy -—
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Zambia’s performance in the PCI is also low, with a score of 24.24 on the composite index in 2018 (figure 1). This score is at par with the median score for LDCs (24.04), but lower than that of the LLDCs (26.09) - two groups to which Zambia belongs. Moreover, it is below the African and world best by 13.15 and 26.27 points, respectively. Zambia’s relatively poor ranking is further reflected in its global position (162nd) and average continental position (25th). At current rates of improvement, it will take 37 years for Zambia to reach the average level of PCI performance seen in other developing countries -—
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Ethiopia’s overall score is 23.5, hence lower than that of Zambia (Figure 1), though higher than Angola, making it 170th in the world, and 17th in Africa. Among the three countries it has achieved the greatest progress since 2000, when its score was 16.6, though it remains below the average for LDCs and LLDCs.

Figure 1. PCI for selected countries and regions

Source: UNCTADstat -—
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Interestingly, the same order in ranking is within the category on structural change, which depicts the movement of labour and other productive resources from low-productivity to high-productivity economic activities (Figure 2). Structural change category demonstrates the difficulties that Angola, Ethiopia, and, to some extent, Zambia and many other LDCs face with economic diversification, making their economies vulnerable to external shocks. In Angola, the low economic complexity and high merchandise export concentration with a persisting index value of more than 0.8 -—
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show the preponderance of extractive sectors in driving Angola’s socioeconomic development. This has been the case for a number of LDCs. UNCTAD’s National Productive Capacities Gap Assessment points to the economy’s low propensity to generate employment and inclusive growth -—
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Policies centred on fostering economy-wide productive capacities and structural transformation should be a priority for LDCs. Zambia’s economy has shown some structural shifts over the years with industry and services sector contributing a lion’s share to the country’s GDP. Within Africa, Zambia’s scores in structural change component show some volatility, but mostly the country has performed above its peers in the region and countries at similar stages of development for the period 2000-2018 -—
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. In Ethiopia, although agriculture makes up more than a third of GDP, its share has been steadily shrinking. Over the past decade, Ethiopia’s high growth rates have been driven primarily by the service and industrial sectors which, respectively, accounted for 36.5 per cent and 27.3 per cent of GDP in 2018. The substantial increase in the score between 2000 and 2018 gives hope for further advancements.

Figure 2. Structural change component of the PCI for selected countries and regions

Source: UNCTADstat -—
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Bolstering structural change with economic diversification

Angola’s, Ethiopia’s and Zambia’s development predicaments – as depicted by their PCI – are illustrative of the situation in many LDCs. Like many African LDCs, however, the countries are well placed to build up their productive capacities, eventually graduate with momentum and embark on the sustainable development trajectory. Ensuring that rents generated through resource extraction are used to foster productive capacities is among the first steps for Angola and Zambia; both have ranked relatively high in the natural capital category of PCI.

Enhancing productive capacities requires a greater focus on economic transformation and diversification, support for private sector, advancing technology use, modernisation of infrastructure, building resilience and strengthening trade and development linkages -—
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Sectoral policy focus should be on resilient and export-oriented sectors, whereas targeted investment and capacity building in services should support the development of backwards and forwards linkages that are essential for structural transformation and productive capacities.

References

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