Habib Ouane, Director, Division for Africa, Least Developed Countries and Special Programmes

1. UNCTAD Economic Resilience Conference Islands and Small States Institute, Malta: 23-25 April 2007 UNCTAD's approach todeveloping productive capacitiesin LDCs and SIDS Habib Ouane, Director, Division for Africa,Least Developed Countries and Special Programmes UNCTAD http://www.unctad.org/

2. UNCTAD Economic resilience and vulnerability of SIDS • United Nations: UNDESA, UNCTAD work for over 20 years • Barbados Programme of Action 1994 • Mauritius Strategy 2005 • Malta International Workshops 2004-2007 Conceptual and policy work in international fora on SIDS http://www.unctad.org/

3. UNCTAD Outline of Presentation • Economic resilience and vulnerability of SIDS and the vision of UNCTAD • Developing productive capacities • International policy initiatives http://www.unctad.org/

4. UNCTAD Economic resilience and vulnerability of SIDS Vulnerability of SIDS: Exposure to adverse external shocks beyond countries' domestic control and structural handicaps: • small size => scarce natural and human resources, diseconomies of scale • remoteness from large markets => high transport costs • high degree of openness • dependence on strategic imports • strong export concentration • susceptibility to natural disasters exacerbated by climate change and sea level rise Resilience: countries' ability to economically cope with its inherent vulnerability http://www.unctad.org/

5. UNCTAD The vision of UNCTAD Singapore paradox:inherently economically vulnerable small state that manages to cope with its inherent vulnerability through deliberate economic development policies => remains the exception Key to resilience-building => Developing productive capacities http://www.unctad.org/

6. UNCTAD The vision of UNCTAD The Least Developed Countries Report 2006: Developing Productive Capacities => devoted to LDCs, but most elements and recommendations also valid for most SIDS: • common economic features between SIDS and LDCs • 10 SIDS are LDCs http://www.unctad.org/

7. UNCTAD The vision of UNCTAD http://www.unctad.org/

8. The vision of UNCTAD Economic characteristics of LDCs • low income=> under $900 per capita • weak human assets=> measured through a composite Human Assets Index • economic vulnerability=> measured through a composite Economic Vulnerability Index, composed of: • instability of agricultural production • instability of exports of goods and services • diversification from traditional economic activities • merchandise export concentration • economic smallness http://www.unctad.org/

9. Developing productive capacities: Concept • Productive resources – natural resources, human resources, financial capital, physical capital. • Entrepreneurial capabilities – core competences; technological capabilities. • Production linkages – exchange of goods and services; flows of information; human and financial resource flows – between sectors and between enterprises. What are productive capacities? http://www.unctad.org/

10. Developing productive capacities: Driving processes • Capital accumulation • Structural change • Technological learning What is required to develop productive capacities? http://www.unctad.org/

11. Developing productive capacities: Constraints • Institutions: Weak domestic private sector and domestic financial and knowledge systems. • Demand constraints. • Weak physical infrastructure. What are the key constraints and policy priorities? These are country-specific but the Report identifies three broad areas which are likely to applicable in most countries: http://www.unctad.org/

12. Developing productive capacities: Institutions • Weak development of formal sector SMEs, particularly medium-sized domestic enterprises, as typically informal sector enterprises do not develop into formal sector firms and small firms do not grow into large firms. • Investment climate reforms (to reduce red tape and costs of doing business) are not enough in a context of radical firm and structural heterogeneity. • Need to foster the development of domestic medium-sized firms and production linkages • Need to develop the domestic financial system • Disarticulation between traditional and modern knowledge systems; modern knowledge systems (universities, national research institutes, etc.) are not functioning as an integrated system, not demand-driven, not well-integrated internationally. • Develop national technology learning strategies to increase access to/effective use of foreign technology. http://www.unctad.org/

13. Developing productive capacities: Demand • Need to address dynamics of domestic demand as well as international competitiveness and access to international markets. • Sluggish domestic demand must be identified as a central deficiency of the investment climate. • The demand-side contribution of exports has been seriously reduced by declining terms of trade and currecy depreciation. • For exports – focus on upgrading the export structure towards more dynamic products. http://www.unctad.org/

14. Developing productive capacities: Infrastructure • Trade-related infrastructure alone is not enough (export growth but not economy-wide poverty reduction) • Best approach is a "joined-up" approach to infrastructure investment three elements: • 1. Rural infrastructure (vital for agrarian commercialization and prodcutiviy growth and development of off-farm activities). • 2. Large-scale national infrastructure (enables structural transformation, exercise of entrpreneurial capabilities and developemnt of production linakges). • 3. Cross-border infrastructure (for regional trade) • Closing the electricity divide is as significant for economic growth and poverty reduction as closing the digital divide. http://www.unctad.org/

15. Developing productive capacities: Conclusion: The paradigm shift required Focusing on the development and utilization of productive capacities requires a paradigm shift in national and international policy FROM • Integration/Exchange • Consumption • Framework • Supply-side • Tradables • FDI • Welfare State TO • Production • Employment • Ingredients • Supply and Demand • Tradables and Non-tradables • Private Domestic Investment plus FDI • Development State http://www.unctad.org/

16. International initiatives Recommendaitons for actionin favour of LDCs • Increase share of aid for in-country programmes and direct support for programmes run by LDC governments. • Re-balance the sectoral composition of aid towards production. • Advance beyond trade preferences. • International policy innovation to support the development and full utilization of productive capacities in the LDCs. http://www.unctad.org/

17. International initiatives:UNCTAD's work on SIDSand vulnerable economies • Support in formulating national strategies to secure "smooth transition" modalities in anticipation of the loss of concessionary treatment due to likely graduation from the LDC category => Cape Verde, Maldives, Samoa, Vanuatu • Technical cooperation on trade-related and investment-related policy matters => Cape Verde, São Tomé and Príncipe, St. Lucia, Samoa, Papua New Guinea, Vanuatu • Ad Hoc Expert Group Meeting on Structurally Weak, Vulnerable and Small Economies (Geneva, 25 June 2007) http://www.unctad.org/

18. Thank you http://www.unctad.org/