Constraints and Opportunities for Growth in the LDCs: Research to Support Action

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1 Constraints and Opportunities for Growth in the LDCs: Research to Support Action John S. Wilson Development Economics Research Group Trade and International Integration World Bank April 19,

2 Outline Challenges and Opportunities for LDCs Focus on Trade, Technology, Regulation New Structural Economics as Framework Looking Ahead World Bank Research 2

3 Primary Goal to 2020 Achieve sustained, equitable and inclusive economic growth in least developed countries, to at least the level of 7 percent per annum? Istanbul Declaration - Programme of Action ( ) 1. UN, Bank, Bilateral Donors, others - and LDCs. 2. New and Focused Research and Analysis Agenda 3. Need to Link Analysis to Action 3

4 Summary - Key Challenges for LDCs Economic Structural Global Low contribution to global GDP; Limited participation in Trade; Low FDI Post-crisis jobless growth Domestic barriers; governance, regulation Reliance on commodity exports, remittances, and ODA Poverty and inequality limiting human development Limited Technology Availability Vulnerability to natural disasters Global macroeconomic factors Small size and voice 4

5 # of people (millions) Progress on Poverty Reduction But Much More to be Done 2500 Number of people (in millions) below $1.25 a day in 2005 PPP Sub-Saharan Africa South Asia Middle East and North Africa Latin America and The Caribbean Eastern Europe and Central Asia East Asia and Pacific Source: Ravaillon and Chen, World Bank Development Economics Research Group

6 % of Total Population Critical Challenge: Jobs Youth bulge - Generating work for the young LDC Population Age % 29% 28% 28% 27% 27% 26% 26% 25% 25% 24% 24% Source: United Nations. World Populations Prospects Revision. 6

7 (billions of Dollars) The Importance of Investment Private Capital Flows to LDCs, (Billions of Dollars) Source: UNCTAD secretariat calculation based on UNCTAD 2011a. 7

8 % of Total GDP Opportunities for LDCs? Changing Patterns of International Integration Offers New Opportunities for LDCs LDC Growth Rates *In constant USD, Except Angola and Equatorial Guinea. Source: WDI database. 8

9 Rise of South-South FDI South-South FDI rising, although small % of world average South-South FDI Flows, Worldwide,

10 Opportunities for LDCs in Trade Trade increasingly important share of GDP for LDCs 10

11 % of Total Imports Trade As Engine of Growth Rise of South-South Trade Harnessing growth from emerging markets 30 Developing Country Imports from Other Developing Countries (% of Total Imports) s 1970s 1980s 1990s 2000s Source: WDI 11

12 % of Total Merchandise Exports Export-Led Growth Increased Scope for Export-Led Growth Merchandise Exports from Developing Countries (in % of Total Merchandise Exports) 35% 30% 25% LDCs China Other BRICs Other Developing Countries 20% 15% 10% 5% 0% World Development Indicators

13 World Bank Research underscores aid for trade opportunities for LDCs Lowering trade costs and increasing transparency results in a significant increase in trade for even the poorest countries Improvements in infrastructure quality of Chad halfway to the level of South Africa, trade levels of the former would increase by 79.3 percent (Portugal-Perez, Wilson 2010) With limited resources in post-crisis context, targeted interventions are necessary to maximize effectiveness of aid measures 1% increase in aid to for trade facilitation results in an increase of $347 million in recipient countries exports (Helble, Mann, Wilson 2011); 13

14 What About Technology in LDCs Source: ITU World Telecommunications / ICT Indicators Database 14

15 Technology Adoption in LDCs Source: ITU World Telecommunications / ICT Indicators Database 15

16 But Technology Gaps Remain Infrastructure deficiencies In Only 9 LLDCs are > 50% of total roads paved 8 countries between 20-40% (UN-OHRLLS 2011) Underdeveloped market structures In mobile services - 50 developing countries lack a regulator; 60 boast monopoly or partial competition (World Bank IEG 2011) Dependence on commercial viability In Benin, the cost of a generic PC = a teacher's salary for 8 months (World Bank 2012) 16

17 What About Regulatory Reform? New research would help prioritize interventions: e.g. roads or ports or customs? E.G. Portugal Perez and Wilson (2010) investments to improve the business environment would reduce trade costs and boost exports Tariff cut equivalent rise in trade 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Business Environment South Africa Zambia Kenya Cameroon Zimbabwe Uganda 17

18 Regulatory Reform 18

19 New Structural Economics (NSE) Provides framework to realize LDC opportunities and address these challenges Key elements of NSE Approach Economic development driven by i) changes in factor endowments; ii) technological innovation Develop industries according to comparative advantage determined by endowment structure Industrial upgrading needed to solve coordination problems; Implies need for a facilitating state 19

20 Example Structural Transformation China versus LDCs Sectoral Contribution to GDP (in %) China LDCs 100% 100% 90% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1980s 1990s 2000s Agriculture Non-Manufacturing Industry Manufacturing Services 80% 70% 60% 50% 40% 30% 20% 10% 0% 1980s 1990s 2000s Agriculture Non-Manufacturing Industry Manufacturing Services 20

21 NSE in practice Growth Identification and Facilitation Identify fast-growing economies with similar endowment structure; Identify growing tradable industries in those economies Check private firm involvement in home country; Identify and remove constraints to firm entry and/or quality upgrading Attract FDI; Organize new firm incubation programs Overcome barriers to FDI economic zones or industrial parks; encourage firm entry and industrial clustering 21

22 Concluding Remarks Changing patterns of international integration offer new opportunities for LDCs; Given tight fiscal budgets and lagging global economic recovery, understanding most effective interventions are crucial - Enhanced role for research Develop new project to support research, data, and analytical tools to support Istanbul Programme of Action/UNLDC IV (trade, investment, regulatory reform, and technology) 22

23 Thank You John S. Wilson Lead Economist, Development Economics Research Group Trade and International Integration The World Bank 23