Amongst the least developed countries, the incidence of extreme poverty is highest in those that depend on primary commodity exports for their economic survival and development, says UNCTAD in its Least Developed Countries Report 2002(1), released today. Using a new set of poverty estimates (see TAD/INF/PR44), it shows that the percentage of people living on less than $1 a day in non-oil commodity-exporting LDCs has risen from from 63% in 1981-1983 to 69% in 1997-1999 (chart 1).
Eighteen of the 49 LDCs, comprising 42% of the LDC population, have diversified away from primary commodities and were exporting primarily manufactured goods and/or services by the end of the 1990s; 31 others continue to specialize in primary commodities, with oil the major export of Angola, Equatorial Guinea, Yemen and (since 1999) Sudan.
The type of export in which LDCs specialize makes a big difference in their economic success and patterns of poverty, the Report finds. It is the primary commodity exporters that are being left the farthest behind in global development (chart 2). In 1997-1999, 79% of the people living on less than $1 a day in the LDCs were living in these countries. In 1999, the average real GDP per capita (adjusted for purchasing power) was lower in non-oil commodity-exporting LDCs than it had been in 1970.
This link between extreme poverty and commodity dependence is the result of the interplay of national and international factors that together constitute an international poverty trap, according to the UNCTAD report. It argues that, contrary to the conventional wisdom, persistent poverty in poor countries is not due to insufficient trade liberalization or lack of trade integration: in fact, during 1997-1998, exports and imports of goods and services constituted on average 43% of their GDP, about the same as that of industrialized countries. That poverty is, rather, related to the form of trade integration, and in particular to the type of export specialization.
How the poverty trap works
At the national level, low income leads to low savings; low savings lead to low investment; and low investment leads to low productivity and low income. Between 1995 and 1999, for example, the average per capita income in the LDCs was $0.72 a day and the average per capita consumption, $0.57 a day (measured in terms of current prices and official exchange rates). This would leave an average $0.15 per person per day to spend on private capital formation, public investment in infrastructure and the running of vital public services, including health, education, administration and law and order.
With many people highly dependent on agriculture, simple survival often necessitates eating into the natural and environmental capital stock. High population growth rates, environmental degradation and increasing poverty are mutually reinforcing in many LDCs. State capacities are weak where extreme poverty is pervasive, and political conflict and instability associated with the struggle for survival can further worsen the situation. This is particularly acute in mineral-exporting LDCs. The percentage of people living on less than $1 a day has soared in these countries from 61% in 1981-1983 to 82% in 1997-1999, owing partly to the squandering of rich resources and armed conflict over control of resource revenues.
Within the non-oil commodity-exporting LDCs the poverty trap is actually being reinforced, and not broken, by international trade and finance relationships and by the current form of globalization, says UNCTAD.
While access to foreign savings, markets and technology, as well as international migration, could theoretically help the LDCs break out of the poverty trap, within the non-oil commodity-exporting LDCs the trap is actually being reinforced, and not broken, by international trade and finance relationships, UNCTAD asserts. In fact:
Trade -- The ability of international trade to act as an engine of growth and poverty reduction is being short-circuited by falling world commodity prices. At the end of 2001, real non-fuel commodity prices had plunged to one half of their annual average for the period 1979-1981. Large increases in export volume are not translating into large increases in export revenue and the capacity to buy imports.
Debt -- Associated with slow export growth, and also with large external shocks due to commodity price instability, there has been a build-up of unsustainable external debt in the non-oil commodity exporters. In 2000, only four of the 27 LDC non-oil commodity exporters (Bhutan, Eritrea, Solomon Islands and Uganda) did not have an unsustainable external debt, according to the criteria of the enhanced HIPC (Highly Indebted Poor Countries) Initiative.
Aid -- Finally, as debts -- which are mainly owed to official creditors -- build up, aid disbursements have increasingly been allocated, either implicitly or explicitly, to ensure that official debts are serviced. In this aid/debt service system, the developmental impact of aid has been undermined as the "debt-tail" has been wagging the "aid-dog".
The Report argues that recent changes in the structure of global commodity markets are reinforcing the cycle of economic stagnation and pervasive poverty. This is because they are leading to higher marketing margins between producers and consumers and greater commodity price instability. They are also increasing the probability of LDC commodity producers being excluded from global markets. The latter process occurs as buyers within commodity chains upgrade their volume, reliability and quality criteria for purchasing, and as ever larger investments are needed to meet buyers´ quality requirements and specifications.
The increasing polarization of the world economy is also having adverse effects on the LDCs. The inability of more advanced developing countries to move up the technological ladder and move out of simpler products exported by poorer countries is contributing to the saturation of commodity markets and increasing the vulnerability of those LDCs that have sought to escape the poverty trap by diversification out of commodities. The growth path of the new LDC exporters of manufactures and services is concentrated in low-skill products with few backward linkages within the domestic economy and low levels of local value-added. In the medium term, the erosion of special quotas under the Multi-Fibre Arrangement presents a major threat for LDCs exporting garments and textiles.
The central policy problem in the LDCs is to escape the poverty trap and realize the great opportunity for rapid poverty reduction that can occur through sustained growth and development. Vigorous and coherent national policies are necessary to develop export capacities in the LDCs, UNCTAD contends. Commodity-exporting LDCs have undertaken extensive trade liberalization in the 1990s, generally going further than the LDCs that export manufactures or services. However, the commodity exporters continue to be marginalized in world trade flows (chart 3).
There is thus a need for more proactive export promotion policies. A wide range of well-tried trade policy measures exist, which can still be used by LDCs under WTO rules. These include such measures as tariff rebates on imported inputs, tax exemptions, preferential credits for exporters, export credit insurance, market information provisions and subsidized infrastructure, which should be integrated into PRSPs (Poverty Reduction Strategy Papers) as part of a broader national development strategy (see TAD/INF/PR46).
An important strategic issue is whether LDC governments should develop exports of labour-intensive manufactures and services. The Report maintains that the LDCs would be ill-advised to ignore the opportunities that exist in primary commodity production. A relationship between primary commodity dependence and poverty is not inevitable. But successful commodity-exporting countries achieve their success through investment, productivity growth and quality improvement, which is difficult in situations where extreme poverty is as all-pervasive as it is in the LDCs. Commodity-dependent LDCs thus generally have a low-productivity, low-value-added and weakly competitive commodity sector that is concentrated on a very narrow range of products serving declining or sluggish international markets. The challenge is to upgrade primary commodity exports, which can, if economically desirable, be part of a strategy of diversification into exports of labour-intensive manufactures. Export promotion to exploit dynamically changing comparative advantage is most appropriate.
Another strategic issue is the role of import substitution in export development. Export industries have developed in both Africa and Asia through building up national sales and then expanding to international markets. This learning mechanism should not be ignored. The poverty-reducing effects of export growth are also likely to be enhanced if local suppliers provide inputs of various kinds to exporters. Governments need to give special attention to the food security implications of export development patterns.
The complex interplay of national and international factors which constitute the international poverty trap imply that international policies are also essential for effective poverty reduction in the LDCs. The identification of the link between commodity dependence and extreme poverty indicates that there are two key gaps in the current international approach to poverty reduction in the poorest countries. These are the lack of an international commodity policy, and insufficient attention being paid to South-South cooperation and to the adverse effects on LDCs of polarization of the global economy.
The first gap can be addressed through a renewal and recasting of international commodity policy with a view to poverty reduction. This should include:
- Measures to mitigate the consequences of excessive price instability: revamping compensatory financing schemes to deal with price shocks; breaking the link between commodity price behaviour and persistent indebtedness, for example, by making debt repayment schedules contingent on world commodity prices; and increasing the economic relevance of price risk management instruments in LDCs through innovative institutions and organizations.
- Tackling the long-term decline in world commodity prices: regular consultation among international organizations, international commodity bodies and governments with a view to assisting efforts to increase production away from crowded markets; support to assist high-cost producers in overcoming exit barriers that may prevent them reacting to declining prices; voluntary supply management schemes, application of fair trade principles, and the promotion of consumption; and analysis of the effects of agricultural subsidies in OECD countries on extreme poverty. In 2000, total agricultural support in OECD countries amounted to $327 billion, 26 times greater than net ODA disbursements from all donors to the LDCs, which stood at $12.5 billion.
- Increased technical, financial and managerial assistance to LDCs for upgrading commodity production. Improved market access is of no real value if the LDCs cannot produce in the sectors in which they are given preferential treatment, or if they lack the marketing skills, information and connections to convert market access to market entry. The Integrated Framework for Trade-related Technical Assistance (IF) should provide one important avenue to improve supply capabilities. It is essential that the IF moves speedily to implementing concrete capacity-building projects and providing tangible benefits to the LDCs. The disconnect between the IF and the commodity problem must also be bridged.
The second gap in international policies for effective poverty reduction is enhanced South-South cooperation. Important areas include the encouragement of regional trade and investment dynamics; technical assistance and the exchange of best practices; and a regional approach to transport infrastructure financing and to the management of transit transport systems. The latter is particularly important for export development in the 16 landlocked LDCs.
South-South cooperation should be a complement to, and not a substitute for, North-South cooperation, UNCTAD says. It will be difficult for the LDCs to get on and move up the ladder of development if more advanced developing countries face a glass ceiling that blocks their development. Under current international policy arrangements, the benefits of affirmative action measures designed for the LDCs are being undermined by a playing field for all the other countries which, although supposedly level, is actually tilted against developing countries. This is tending to make the relationship between the LDCs and more advanced developing countries competitive rather than complementary.
The policy challenge is to structure the relationships of both more advanced developing countries and the LDCs with developed countries in a way that enables the emergence of complementary synergies between the more advanced developing countries and the LDCs. All groups of countries can gain. In the end, addressing the socioeconomic marginalization and extreme poverty of the LDCs will require not only differentiated treatment for them, but also measures to reduce the polarization in the global economy and to facilitate the emergence of a "middle class" of world States that can serve as regional growth poles.