Catching Up: What LDCs Can Do, and How Others Can Help

Citation

Wilson Ndyetabula, D. (2012), "Catching Up: What LDCs Can Do, and How Others Can Help", African Journal of Economic and Management Studies, Vol. 3 No. 2, pp. 278-280. https://doi.org/10.1108/ajems.2012.3.2.278.1

In spite of the significant economic growth rates recorded in many of the less developed countries (LDCs) of the world in recent years, they still face significant challenges. These challenges include sustaining the growth process, reducing dependence on the extractive industries, strengthening the manufacturing sectors and reducing overall poverty levels. Collier's book provides additional insight into these issues, but with special focus on the following:

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  characteristics of the economic experiences of LDCs;

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  the opportunities and challenges from the rise of the BRIC countries of Brazil, Russia, India, and China; and

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  interventions that can improve market access for LDCs.

The book is organized in seven chapters, each chapter focusing attention on one of the issues and providing policy guidance on each of them.

Chapter 1 provides a review of economic performance and growth of LDCs during the immediate past decade. The results have been quite impressive seen against the background of several decades of economic stagnation and declining per capita income in some countries, especially those in Africa. Collier reports that per capita incomes have risen by about 4 percent per year in some LDCs. This has produced positive effects on infant mortality rates. The optimistic scenario is that some of these countries will achieve income levels that come closer to countries within the OECD. But the author reminds us that sustaining the high growth rates achieved between 2000 and 2008 will depend on continued adoption of business friendly policy reforms that ensure the diversification of the economies and reduce dependence on the extractive sectors.

In Chapter 2, the author presents opportunities and challenges faced by the LDCs in exploiting their natural resources. The challenges to natural resource exploitation to LDCs stem from the fact that natural resource extraction does not employ many people directly and that the incomes are very volatile. More importantly, the author indicates that the extractive sector provides very limited spillover effects on other sectors in the form of additional local investments. He asserts further that the interplay between opportunities and challenges calls for development of distinctive domestic policies by LDC governments, and that some assistance from the international community may be necessary in solving some of the problems. The policies that Collier indicates may be developed by LDCs are associated with processes of taxing natural resources, reducing environmental damage, prevention of corruption, and boosting savings and investments in the local economies. He advises the LDCs to have a common format (called auction) for selling the rights to natural resource extraction which will maximize rent capture through an explicit tax regime. Tax regimes give confidence to firms to invest in resource extraction. The common format (auction) brings forth common international standards in which firms (bidder for natural resource extraction) compete along the same dimensions. As for the protection of environment, Collier shows that since LDCs are in the high risks of environmental degradation, it is important that all costs of environmental damage are born by companies within the extractive industries. This is not the case in some LDCs and therefore a reason for high environmental degradation due to resource extraction.

Collier also calls for a transparent mechanism in the process of revenue management for LDC governments. This, in his view, will improve credibility and reduce conflicts of firms and local communities in which extraction activities are taking place. Corruption may also be reduced by the adoption of a more systematic approach to resource extraction contract under the aegis of WTO. Revenues from the extractive sector must be wisely invested in order to raise national average incomes that will stimulate additional growth.

In Chapter 3, Collier shows how trade preferences can be used to help LDCs break into global manufacturing sectors. The author points out that there is movement of labour into the manufacturing sectors, drawing on the experiences from the Asian countries as evidence. He argues that trade preferences can be designed to maximize their effectiveness in stimulating the manufacturing supply response to demand if they allow the importation of complementary inputs produced in countries with relevant skills and infrastructures. The author further suggests that LDCs may grow their manufacturing sectors more rapidly if they split the value chains of their production activities and allow different stages of the production process to be undertaken in different countries. But splitting the value chain in such a way carries the risks of interdependence, i.e. dependence of a firm in one location on firms in other locations and countries. The performance of these companies will therefore depend on the existence of a supportive business environment that places emphasis on security, contract enforcement, and trust. Good infrastructure is also a sine qua non. The author therefore warns that the current high trade cost and strict rules of origin constitute severe barriers to LDCs' participation in production networks. And this hampers the development of the manufacturing sectors.

For trade preferences to work in a particular industry, the author suggests that there should be three things:

1. 1.

   Redesigning of the rule of origin in such a way that it makes LDCs specialized in two or more tasks (not relabeling of products manufactured elsewhere) eligible.

2. 2.

   Formation of cluster of firms by LDCs in an appropriate export processing zone, not only for tax concessions but to reduce cost of production.

3. 3.

   Exclusion of established producers from entering the manufacturing in order to make new entrants equally competitive.

The author also suggests that trade preferences prove to be very useful when used as devices for pump‐priming manufacturing of particular goods such as apparel. They are ineffective when used as devices to transfer income to LDCs.

Chapter 4 deals with issues relating to regional integration and the expansion of regional markets. Both urbanization and competitive markets provide gains that LDCs need badly. However, integration process among developing countries has been very slow due to the limited political will to make it work.

In Chapter 5 the author creates a discussion platform on innovation in financing development. The core of the discussion is basically about development aid to the LDCs. The author suggests that there is a need for the OECD countries to re‐direct their development assistance to economic growth‐enhancing activities rather than to activities which seem to be of low priority to the LDCs. He argues in support of the need to rethink debt sustainability, reduce cost of commercial borrowing, and increase the absorptive capacity for investment. With this emphasis, the author suggests innovation in financing, the private investment, and innovation in remittances.

Chapter 6 discusses issues of climate change, Asian growth and food security in the LDCs. The author demonstrates that the world climatic changes pose challenges to almost all countries but severe impacts are being felt a lot more in the LDCs due to their dependence on rain fed agriculture. He indicates that climatic shocks and rapid population growth of Asian countries create an increase in demand for food. This problem is aggravated by the tendency of major food exporters to ban food exports as a means of protecting their domestic consumers. LDCs are more exposed to climatic shocks (global warming), and the author suggests that this group of countries need more adaptation strategies than mitigation. He points out that the adaptation needed by LDCs has to take place within the agricultural sector through innovation in crop varieties (research and extension), and between sectors through import‐export mechanism whereby domestic food deficits can be balanced through food imports, using revenues from exports of non‐climate sensitive activities (e.g. natural resource extraction and manufactures). To reduce the risk from global food shock, Collier, suggests that LDCs can lobby for policy improvements in the USA (to rethink its global food supply reduction for grain use in bio‐fuel), EU (to rethink the ban of genetically modified organisms), and emerging market economies (to rethink ban of grain export).

Chapter 7 provides a summary of international agenda for the LDCs. These include all the topics highlighted in the previous chapters, i.e. harnessing natural resources efficiently, re‐directing the focus of development assistance, strengthening the manufacturing and agricultural sectors of the economies and ensuring good governance and business friendly policies.

Put together, the book makes significant additions to our knowledge about the challenges that LDCs continue to face on their journey to fulfill the developmental dreams of their citizens. It is highly informative and presents complex issues in simpler terms than most other books that have discussed similar issues in recent years. I have enjoyed reading it and I recommend it to both researchers and policy makers looking for an overview of the topical issues on growth and development in the LDCs.