Global Policy Forum

What the world's poorest countries need most is not simply debt relief, but a "New Deal" in international development cooperation, contends UNCTAD in its Least Developed Countries 2000 Report, released today.

Almost two thirds of the 48 least developed countries (LDCs) have an external debt burden which is unsustainable according to international criteria. But past efforts to substantially decrease their debt service payments have failed, and recent attempts to finally resolve the debt problem through the HIPC Initiative are not very promising either, the report says. This is because the Highly Indebted Poor Country (HIPC) Initiative, even in its enhanced form, provides an insufficient reduction of debt levels. The remaining debt burden, combined with a decrease of official development assistance (ODA) and a limited flow of foreign direct investment (FDI), precludes a much-needed increase in financial resources and thereby impedes much higher levels of investments in the economic and social infrastructure of the LDCs.

The LDCs have been placed in this category by the United Nations because of their poverty, weak human resources, and low levels of economic diversification. If the donor community steps up efforts to provide a truly sustainable exit from the debt trap, the LDCs may indeed hope for a brighter future. But if it does not, there is no reason to expect better results this time, warns UNCTAD, and the "most likely outcome at the end of the coming decade will be a new round of aid fatigue ... and a new round of debt relief".

The UNCTAD report suggests five key elements of a New Deal for the LDCs: reorienting national policies, ensuring adequate aid flows, implementing partnership based on genuine national ownership, undertaking adequate debt relief, and increasing systemic policy coherence.

Elements of the New Deal

Reorienting national policies

In successful development experiences, sustained and accelerated economic growth, and associated long-term poverty reduction, are built on the development of productive capacities and international competitiveness, and on a structural transformation that moves away from a narrowly specialized primary commodity economy. It is well understood now that this is best realized by giving a greater role to market forces and private initiative. However, leaving growth to market forces without adequate attention to the shortcomings of markets, institutions and infrastructure in LDCs is not going to do the trick. A pragmatic approach to the design of structural reforms is thus required.

The measures adopted should take advantage of the policy leeway which countries at low levels of development have, by right, within international trade regimes. Where appropriate, the measures should also adopt a regional or subregional approach. The goal of poverty reduction is crucial. But sustained and long-term success in poverty reduction depends on improving productive capacities through a virtuous circle of rising investment, savings and exports.

Ensuring adequate aid flows

Whatever domestic policies are undertaken, they are unlikely to be effective unless they are supported by adequate external finance. With prevailing savings propensities and investment efficiency, it has been estimated that external resources to sub-Saharan Africa, for example, must increase by more than 200% to achieve the UN goal of halving poverty by 2015. Moreover, UNCTAD's own estimates suggest that external resource flows to this region must increase by 50-100% to achieve annual growth rates of about 6%. Such average projections are likely to be relevant to most LDCs which have low savings rates and are caught in a vicious circle of low incomes, low savings and inadequate levels and efficiency of investment.

Private capital inflows - which are associated with technology transfers and employment creation - can positively contribute to local economic developments and fill some of the financing gaps. But policy makers in the LDCs should not have false expectations that FDI can lead the development process, and donors should not see the signs of rising private capital inflows into a number of LDCs as an opportunity for reducing ODA. For the immediate future most LDCs have no choice but to rely on ODA as their major source of external finance.

Implementing partnership based on genuine national ownership

All parties now realize that donor-driven policies usually fail, and thus genuine national ownership of policies is an essential precondition for implementing partnership. However, this is more than a question of requiring countries to prepare their own poverty reduction strategy papers which are then endorsed and monitored by the donors. Indeed, the strict monitoring of the LDCs, combined with the threat of withdrawing concessional flows based on the principle of selectivity, is not likely to perform better than old-style policy conditionality.

True ownership entails local control over the allocation of aid funds and is about having a voice in the formulation of the policy agenda and monitoring of outcomes. But this is a meaningless concept without effective state capacities. Accordingly, LDCs must make a serious effort to establish comprehensive and coherent budgets and medium-term expenditure plans that are realistic, transparent and accountable. Without these changes, the broader forms of political accountability vis-í -vis domestic constituents and international donors cannot be achieved.

Donors, on the other hand, must realize that a major constraint on the creation of a more effective public sector administration in LDCs is the lack of funds. It is essential that sufficient funds are made available to enable true national ownership.

Undertaking adequate debt relief

There is a need for deeper, faster and broader debt relief based on lower thresholds for judging debt sustainability; more realistic forecasts of economic growth, exports and imports; more up-front extinction of the debt stocks; and the front-loading of debt service relief. By assessing the real financing costs of debt relief, creditors should also account for the positive impact of a reduced debt burden on aid effectiveness.

Increasing systemic policy coherence

The New Deal for the LDCs advocated by UNCTAD must not only seek to reverse the negative synergies between the aid and debt relief policies of the 1990s. It must also enhance the impact of action by making those policies more complementary. Especially important in this context is the promotion of private capital flows to LDCs and the establishment of an international trading regime which better serves their development. Such a regime would ensure better market access for exports from LDCs, significant reductions in domestic support and export subsidies for agriculture in developed countries, and more remunerative and stable primary commodity prices. It is through trade that the LDCs must make their way in the world, and both aid effectiveness and the probability of a durable exit from the debt problem can be significantly improved through a supportive international trade environment.

2001 Conference Offers New Opportunity

The Third United Nations Conference on the Least Developed Countries (UNLDC-III) will be held at Brussels in May 2001. UNLDC-III will be an important forum in which the special problems of the least developed countries are brought into prominence in the hope that changes in international cooperation adequately address their development needs. The conference will be a major opportunity for the LDCs and their development partners to devise practical mechanisms of partnership and policy coherence and to steer development policies in the right direction.

There is a choice. At one extreme, the LDCs will remain trapped at a low level of economic development, with low incomes leading to low savings and with insufficient external finance available to break out of this vicious circle. They will be pockets of persistent poverty in the global economy, falling further behind other developing countries and obliged to call on the international community for aid to tackle humanitarian crises and for peace-keeping missions. They will also be epicentres for the global refugee population and major sources of international migrant workers.

At the other extreme, however, it is possible to envisage a progressive transition in which dependence on development aid is reduced as growth is increasingly sustained by domestic resource mobilization, the attraction of FDI and the tapping of international financial markets, resulting in the development of productive capacities and internationally competitive activities. It is towards this latter scenario that the LDCs and their development partners must work through UNLDC-III.

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