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 capacitiesUNCTAD defines productive capacities as consisting of the productive resources, entrepreneurial capabilities and production linkages that together determine a country’s ability to produce goods and services that will help it grow and develop -—
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—- and structural transformationStructural transformation or change can be broadly defined as the reallocation of economic activity across three broad sectors, agriculture, manufacturing and services, which accompanies the process of economic growth -—
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—-. It usually refers to the transfer or shift of production factors — especially labour, capital and land — away from activities and sectors with low productivity to those with higher productivity, which are typically different in location, organization and technology -—
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—-. These productive capacities are essential to achieving the SDGsSustainable Development Goal in a comprehensive and integrated manner. They drive structural economic transformation, adding value to the economy, and leading to economic diversification, accelerated growth, greater resilienceThe ability of a system, community or society exposed to hazards to resist, absorb, accommodate, adapt to, transform and recover from the effects of a hazard in a timely and efficient manner, including through the preservation and restoration of its essential basic structures and functions through risk management -—
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—-. 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.

An enhanced metric of productive capacities to facilitate sustainable development

To measure productive capacities, UNCTAD developed the multidimensional PCIProductive Capacities Index (PCI) is a multidimensional composite index that measures productive capacities of economies by using eight categories: natural and human capital, energy, institutions, private sector, structural change, transport and information, and communication technologies, which together yield the multidimensional productive capacity index -—
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—- 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, ICTInformation and communications technology (ICT) is a diverse set of technological tools and resources used to transmit, store, create, share or exchange information. These resources include computers, the Internet, live broadcasting technologies, recorded broadcasting technologies and telephony -—
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—-., institutions, private sector, structural changeStructural transformation or change can be broadly defined as the reallocation of economic activity across three broad sectors, agriculture, manufacturing and services, which accompanies the process of economic growth -—
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—-. It usually refers to the transfer or shift of production factors — especially labour, capital and land — away from activities and sectors with low productivity to those with higher productivity, which are typically different in location, organization and technology -—
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—-. – measured by 42 indicators. Out of these 42 indicators, 11 directly relate to SDGSustainable Development Goal 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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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 GDPGross domestic product (GDP) is an aggregate measure of production, income and expenditure of an economy. As a production measure, it represents the gross value added, i.e., the output net of intermediate consumption, achieved by all resident units engaged in production, plus any taxes less subsidies on products not included in the value of output. As an income measure, it represents the sum of primary incomes (gross wages and entrepreneurial income) distributed by resident producers, plus taxes less subsidies on production and imports. As an expenditure measure, it depicts the sum of expenditure on final consumption, gross capital formation (i.e., investment, changes in inventories, and acquisitions less disposals of valuables) and exports after deduction of imports -—
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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

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 capital	9.5.1: Research and developmentResearch and development (R&D) comprise creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge -— – ‒ - – —--— – ‒ - – —--— – ‒ - – —--— – ‒ - – —- -— – ‒ - – —--— – ‒ - – —--— – ‒ - – —--— – ‒ - – —-. 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)**
ICTsInformation and communications technology (ICT) is a diverse set of technological tools and resources used to transmit, store, create, share or exchange information. These resources include computers, the Internet, live broadcasting technologies, recorded broadcasting technologies and telephony -— – ‒ - – —--— – ‒ - – —--— – ‒ - – —--— – ‒ - – —-.	17.6.1: Fixed Internet broadbandA general term meaning a telecommunications signal or device of greater bandwidth, in some sense, than another standard or usual signal or device. In data communications, this refers to a data transmission rate of at least 256 kbit/s. In the context of Internet, this can be delivered via fixed (wired) or mobile networks -— – ‒ - – —--— – ‒ - – —--— – ‒ - – —--— – ‒ - – —-. 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
Institutions	16.1.3: Proportion of population subjected to (a) physical violence, (b) psychological violence and (c) sexual violence in the previous 12 months**
Natural capital	15.1.1: Forest area as a proportion of total land area
Transport	9.1.2: 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

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 LDCsLeast developed country 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 GNIGross national income 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

PCI country scores for selected categories, 2022

Country	Overall	Human capital	Energy	ICT	Institutions	Structural Change
Djibouti	124	180	141	150	165	41
Senegal	138	155	157	136	94	68
Comoros	148	151	144	169	171	189
Cambodia	152	132	146	127	155	133
Zambia	161	164	169	174	130	111

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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 HAIHuman assets index threshold

2024 Graduation threholds
GNI per capita: $1 306 or above
HAI: 66 or above
EVIEconomic Vulnerability Index: 32 or below

	Cambodia	Comoros	Djibouti	Senegal	Zambia
Eligibility status	Met graduation criteria for the first time in 2021
GNI per capita	$1 590	$1 603	$3 238	$1 558	$1 113
HAI	77.8	68.7	66.9	66.7	71.4
EVI	24.1	37	54.7	42.3	39.8

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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

PCI scores for the category on structural change

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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 MVAManufacturing value added (MVA) is the net-output of all resident manufacturing activity units. It is obtained by adding up their outputs and subtracting intermediate inputs -—
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—-. Manufacturing can broadly be understood as "the physical or chemical transformation of materials, substances, or components into new products" -—
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—-, consisting of sector C in the International Standard Industrial Classification of all Economic Activities (ISIC) revision 4 -—
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—-.. This trend signifies a phenomenon of premature deindustrialization, particularly evident in Zambia, where the decline in MVA outpaces that of other LDCs, LLDCsLandlocked developing country and SSASub-Saharan Africa (figure 2).

Figure 2. Decline of manufacturing value addedManufacturing value added (MVA) is the net-output of all resident manufacturing activity units. It is obtained by adding up their outputs and subtracting intermediate inputs -—
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—-. in Zambia outpaced regional trends

Share of MVA in GDP

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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-19COVID-19 is an infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes coronavirus disease COVID-19 -—
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The US Centre for Disease Control uses a similar approach, but with a reduced set of criteria. It is very difficult to gauge whether the spread of a disease should be termed an outbreak, epidemic or pandemic. In other words, when to declare a pandemic isn’t a black and white decision -—
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—-. 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 debtExternal debt is understood as outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy -—
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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 remittancesThe term remittances can refer to three concepts, each encompassing the previous one. “Personal remittances” are defined as current and capital transfers in cash or in kind between resident households and non-resident households, plus net compensation of employees working abroad. “Total remittances” include personal remittances plus social benefits from abroad, such as benefits payable under social security or pension funds. “Total remittances and transfers to non-profit institutions serving households (NPISHs)” includes all cross-borders transfers benefiting household directly (total remittances) or indirectly (through NPISHs) -—
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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 171^st 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 169^th, attributed to exorbitant costs associated with utilizing ICT servicesICT services are defined in the alternate aggregation of the ISIC Rev.4 as a component of the ICT sector and include software publishing, telecommunications, computer programming, consultancy and related activities, data processing, hosting and related activities, web portals, and repair of computers and communication equipment -—
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—-., 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 NPCGAsNational Productive Capacities Gap Assessments by applying PCI to identify gaps, limitations, and challenges to foster productive capacities, structural transformation, and economic diversification.
3. Formulate HPCDPsHolistic Productive Capacities Development Programmes, 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 SIDSSmall island developing states (SIDS) were recognized as a distinct group of developing countries at the Earth Summit in Rio de Janeiro in June 1992. More information on UNCTAD official page.. 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

Workshop		Participants
National Capacity Building Training on Statistical, Methodological and Computational aspects of the Productive Capacities Index (PCI)	Year	Total	Women	Men
Nairobi, Kenya 14 – 15 March 2022	2022	35	11	24
Addis Ababa, Ethiopia 30-31 May 2022	2022	32	4	28
Abuja, Nigeria 13-14 September 2022	2022	35	4	31
Lusaka, Zambia 4-5 October 2022	2022	19	2	17
Lilongwe, Malawi 3-4 October 2023	2023	19	8	11
All PCI statistical trainings	2022-2023	140	29	111

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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