Addressing Specific Structural Vulnerabilities of LDCs: some suggestions

1. Addressing Specific Structural Vulnerabilities of LDCs:some suggestions Giovanni Andrea Cornia University of Florence and CDP Member ------------------------------------------------------------- OHRLLS Brainstorming Meeting, NY 14-16 July 2010

2. Contents • 1. A new overall development strategy? (mention) • 2. A strategy befitting the special needs of the LDCs (mention) • 3. LDCs clusters & the need for taylor-made measures • 4. Elements of a strategy for the main LDCs clusters

3. 1. A new overall development strategy? • Major rethinking underway (including in part in IMF-WB) • WC reduced macro imbalances -but failed in terms growth, inequality, poverty, instability • Recently +/- un-orthodox models tried in China, VN, India, South America (last decade), etc. • They differ quite a bit among each in terms of policies & outcomes & governance (democracy) • E.g. China vs S. America

4. Common elements of a new dev strategy • 1. “New macroeconomic fundamentals” (pro-poor macroeconomics?) • countercyclical fiscal policy & accomodating monetary policy (low i.r.) • sharp reduction in public debt/GDP ratio • flexible-managed exchange rate + reserve accumulation • 2. A new “fiscal pact”:tax/GDP rose by 5 points in LA over 2000-8, and by 6 in China. Advantages • 3. Trade, FDI, portfolio flows regime. In L.A. only some regulation, but with better oversight of domestic banks. In China, VN, etc capital and trade controls • Key issue is whether ‘trade-finance should drive growth’ or ‘growth drive trade’. In latter case the emphasis fall more than before on domestic demand

6. Continues • 4. Inclusive labour market policies (grad. also in China) • Reduce informalization of l.m. – enphasis on job creation • rise in n. workers covered by collective contracts (in LA) • rise in minimum wage, + minimum social pensions • 5. Expanded social assistance and insurance • CT/CCT anti poverty programmes (0.5% GDP) • 6. “Loose ends” of the new model (in case of LA) • Raise domestic savings rate in (L.A) • Need for an explicit industrial policy (in L.A.) • In agriculture and manufacturing-services • Energy policy (in China and L.A.) • Inequality impact (in China , VN, etc)

7. 2. A strategy befitting the special needs of the LDCs (mention) • All LDCs are especially weak in terms of: • Human capital accumulation • Domestic savings • Trading capacity and market access • Ability to articulate their interest in intl arena • Hence the ISM focus on ODA (to fill the ‘savings gap’ and ‘human capital gap’), SDT to fill the ‘foreign exchange gap’, ‘TA for the ‘negotiating gap’

8. But… • Most-all of them are also increasingly: • Very vulnerable to exogenous shocks (as shown by the 3F crises) & have limited safety nets to respond to them • Vulnerable to CC shocks they did not trigger and have limited ability to do adaptation/mitig. • Unable to produce costly green technologies. Need for technological leapfrogging • They are also • Affected by specific problems …..

9. All this requires that the Istanbul PA… • Creates ‘compensation funds’ (based on international taxation, aid, insurance) to cover the costs of exogenous economic shocks • New financing for adaptation/mitigation. Allocation done on basis of index of vulnerability to CC? • Less costly access to green technologies • Considers specific solutions to the (domestic) problems observed in different country clusters

10. Country clusters • Identify 3-4 clusters of LDCs.The 4th PoA may introduce measures tailored to specific LDC groups, for instance: • economies (mostly in SSA) with a large share of pop and LF in rural areas, whose main problem is low land/labor yields • countries which despite relatively high income are vulnerable to climatic and economic shocks • ‘politically fragile states’ which face a high risk of internal conflicts.

11. Cluster 1. Low land productivity LDCs • In 33 LDCs agric. employs 50-70 % of LF but produce 20-30% of GDP. • Food production/c is on average 30 % lower than in 1960s and several countries moved from net food exporters to importers. • In 2006, 35 LDCs were net food importers and food aid recipients in 2006. • Land availab/c is falling, its distribution worsening. Access to irrigation and fertilizer is low. Limited nat/intl R&D on ‘African crops’, weak input mkts. Falling public-private investments. • Misguided adjustment policies (removing fertilizers subs.& price support) aggravated the situation and diverted focus on agriculture. • Yet, evidence shows that a 1% growth in agriculture has a much bigger poverty alleviation effect than a similar rise in mining/manufacturing

12. Measures for LDCs affected by low productivity in agriculture • subsidized provision of improved seeds and modern inputs and price support in egalitarian agriculture (as in Malawi) • Strengthen local capacities to develop, spread, adapt new farming technol. • increased public expenditure in agriculture supported by steady domestic fiscal effort and greater aid to agriculture. • CGIAR to raise research on African crops, support R&D in national or regional institutions. • The ‘improved seeds/technologies for SSA‘international public goods’. • Aid to R&D in food research in selected regional institutions in SSA • agricultural subsidies in developed countries need to be phased out. Otherwise, countervailing measures might be considered.

13. Cluster 2: Small- highly vulnerable SIDS • SIDS have high-ish GDP/c but narrow productive base, vulnerable to shocks (drops in migrants’ remittances or volatile export earnings from a few products and tourism) or climatic shocks. • Remoteness from major international markets pushes up transport costs. • Because of their location, these countries also suffer extensive damages by natural disasters, and have limited capacity to respond to them.

14. Measures for SIDS • encourage Mauritius-Laos type strategies of gradual diversification, • establish formal insurance mechanisms against catastrophic events (as in case of CCRI Fund) via catastrophe bonds, weather derivatives, and commodity indexed bonds, • In vulnerable LDC ex-ante insurance schemes best addressed their problems than ex-post aid • Ensure international financing for such instruments (earmarked international taxes, such as those on carbon emissions and foreign currency transactions). • establish ‘migrant quotas’ (i.e. quotas for the ‘temporary move of service providers’) for the LDCs within Mode 4 negotiations in GATS, • further reduce cost of flow of remittances to LDC,

15. Cluster 3: politically fragile LDCs • A third cluster includes countries that are exiting from a conflict and face a high risk of internal conflict resurgence • several of the 49 LDCs were affected from one or more conflicts over the past 2 decades • In such a fragile situation, exogenous shocks –unrelated to the causes for the conflicts - tend to aggravate the risk of falling into this vicious circle • There is a need to address the specific causes of the conflicts and the risk of their resurgence

16. Measures for ‘politically fragile states’ • monitoring of conflict predictors (e.g. horizontal inequality, large income drops, permanent climatic shocks), and the eruption of new • provide support to good governance, through policies directed at as the promotion of locally-adjusted ‘inclusive democracy’ and popular participation. • increase aid allocations to the reconstruction and pacification of war-thorn countries. • support domestic tax effort aiming at the re-construction of the social/fiscal contract.

17. In conclusion • In terms of its ‘strategic content’ the IPA should be articulated in four levels as follows: • Be inspired by a new ‘equitable overall development strategy’ valid for all developing countries (see above) • Strengthen the ‘traditional support measures’ (ODA, mkt access, TA) addressing the specific needs of all LDCs • Include ‘new support measures’ for all LDCs i.e. (i) ‘compensation funds’ to offset the shocks of an growingly unstable world economy (ii) new financing for adaptation /mitigation (iii) less costly access to to green technologies • Add changing solutions for the problems observed in specific country clusters