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Addressing Specific Structural Vulnerabilities of LDCs: some suggestions Giovanni Andrea Cornia University of Florence and CDP Member -------------------------------------------------------------

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Presentation on theme: "Addressing Specific Structural Vulnerabilities of LDCs: some suggestions Giovanni Andrea Cornia University of Florence and CDP Member -------------------------------------------------------------"— Presentation transcript:

1 Addressing Specific Structural Vulnerabilities of LDCs: some suggestions Giovanni Andrea Cornia University of Florence and CDP Member OHRLLS Brainstorming Meeting, NY 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 , 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

5 Country Year 2000Year 2007Difference (2007 minus 2000) Tax revenue Nontax Revenue Public expend. Tax revenue NonTax Revenue Public expend. Tax revenue Non tax Revenue Public expend. -Chad Congo Dem Rep Niger Senegal Malawi Tanzania Guinea Rwanda Mozambique Mali Burkina Faso Uganda Ethiopia Mauritania Sudan Madagascar Burundi Sierra Leone Central Afr.Rep Zambia Guinea-Bissau Equat. Guinea Angola Total Africa

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 theforeign 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 % 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 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 SSAinternational 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

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