Growth with structural transformation: A post-

2015 development agenda

David Woodward

Brussels, 27 November 2014

The Least Developed Countries Report 2014

The Post-2015 Agenda and the LDCs

• The Post-2015 Development Agenda

• currently under discussion in the UN

• “sustainable development goals” (SDGs) will be the framework for development 2015-2030

• much more ambitious than the MDGs – eg poverty eradication

• The LDCs are the battleground on which the Post-2015 Agenda will be won or lost

– Poverty can be halved with no improvement in LDCs

– But poverty can only be eradicated if it is eradicated everywhere

– It is in the LDCs that this will be most challenging

• The success or failure of the Post-2015 Agenda will depend critically on learning from LDCs' performance against the MDGs

Why Structural Transformation?

• The LDC Paradox:

– LDCs have displayed record growth performance since 2000

– But human development has fallen far short of MDG targets

– Most LDCs will miss most of the MDG targets

• The key reason is the lack of economic transformation – a combination of

– increases in labour productivity within sectors and

– a shift of labour from low to high productivity activities

• For the Post-2015 Agenda to succeed, the SDGs need – to encompass structural transformation and

– to be much stronger than the MDGs on global action

LDC Report 2014 - A Roadmap

I. LDCs' Progress Towards Achieving the MDGs

II. From MDGs to SDGs: Reconnecting Economic and Human Development

III. Structural Transformation and Labour Productivity in LDCs - Different patterns, different results

IV. A Post-2015 Agenda for LDCs: Policies for Structural Transformation

I. LDCs’ Progress Towards the MDGs

Asian LDCs are broadly on course to halve poverty by 2015.

But African LDCs fall well short of the MDG poverty target

I. LDCs’ Progress Towards the MDGs

Asian LDCs perform better than African LDCs across all MDGs targets, but only one country (Laos) is on track on all the MDGs

I. LDCs’ Progress Towards the MDGs

These failures partly reflect an external problem, i.e. limited progress on MDG 8, for a "global partnership for development"

– Major donors have fallen far short of their commitments on ODA quantity and quality

– LDCs’ debt problems have not been dealt with comprehensively

– LDCs’ trade preferences relative to other developing countries have been seriously eroded

– The global financial architecture did not prevent the triple crises

This partly reflects an asymmetry in the MDGs:

– Detailed, specific, quantified targets for human development outcomes

– Broad, unquantified aspirations at the global level

I. LDCs’ Progress Towards the MDGs

But the LDC paradox arises mainly from a structural problem: LDCs' inability to translate economic growth into employment

Productive employment is the best and most sustainable pathway out of poverty

– Most dignified

– Most feasible (logistics of income support)

– Most economically sustainable

– Generates public revenues for health, education, etc

Economic and human development are inseparable

II. Reconnecting Human and Economic Development

• The nexus of human under-development

II. Reconnecting Human and Economic Development

• Economic and human development are interdependent

– Weak economic performance limits the ability of a country to achieve poverty reduction and improve health/education

II. Reconnecting Human and Economic Development

• Economic and Human Development are inextricably linked

– Weak economic performance limits the ability of a country to reduce poverty and improve health/education

– Poverty, under-nutrition, ill-health and lack of education undermine labour productivity and limit investment

– This weakens economic performance, creating a vicious circle

II. Reconnecting Human and Economic Development

• The LDC paradox is a result of LDCs' failure to break out of this vicious circle

• This is partly a reflection of the nature of the MDGs themselves

– The MDGs focused narrowly on ends (human outcome indicators), neglecting the means (economic development)

Economic development is not the same as economic growth - it also requires structural transformation: a combination of

– increasing productivity within sectors through technological change, investment and innovation; and

– increasing productivity through a shift of resources between sectors and activities, from less productive to more productive

III. Structural Transformation and Productivity in LDCs

In the last 20 years, growth in LDCs has been closely associated with structural change (i.e. contributions to aggregate productivity both from changes within sectors and movement between sectors)

III. Structural Transformation and Productivity in LDCs

The less labour moves out of agriculture, the more slowly overall productivity increases

III. Structural Transformation and Productivity in LDCs

The more labour moves into industry, the faster overall productivity increases

III. Structural Transformation and Productivity in LDCs

LDC exporters of manufactured goods experienced a 16% decline in agriculture’s share of employment

This transformation was supported by – increased labour productivity in agriculture (2%+ per year), allowing a

progressive shift of the workforce towards industry and services

– labour productivity in industry (4%+ per year)

LDC food/agricultural and minerals exporters showed little sign of transformation, and labour productivity in agriculture stagnated

In all LDCs, employment in services rose but labour productivity in services remained stagnant

– Agriculture has shed labour, but urban industry has not been able to absorb the resulting rural-urban migration

– A large part of the urban workforce has been pushed into low-productivity informal service activities

III. Structural Transformation and MDGs in LDCs

Structural transformation improves the translation of growth benefits into human development, through higher wages and job creation. (The correlation between per capita GDP growth and MDG performance is stronger in transforming LDCs.)

IV. A Post-2015 Development Agenda for LDCs

The Post-2015 agenda needs to pursue economic development/structural transformation and human development together

IV. A Post-2015 Development Agenda for LDCs

The Post-2015 agenda needs to pursue economic development with structural transformation and human development together…

…to translate increased potential into increased incomes and revenues…

IV. A Post-2015 Development Agenda for LDCs

The Post-2015 agenda needs to pursue economic development with structural transformation and human development together…

…to translate increased potential into increased incomes and revenues…

…and reverse the vicious circle

IV. A Post-2015 Development Agenda for LDCs

This means including economic development with structural transformation and the changes this requires at the global level within the SDGs

IV. A Post-2015 Development Agenda Learning from Experience

• Every country is unique, and the LDCs are extremely diverse

• The development path of each country depends on its particular circumstances and initial conditions

• But successful cases (eg China, Chile, Mauritius and Viet Nam) can offer some indirect and context-specific policy lessons

• While these four countries are very different, their policy frameworks reveal important common features

IV. A Post-2015 Development Agenda Learning from Experience

Pragmatism: policy-makers modified conventional economic policies, adapting policy instruments and institutional arrangements to their particular circumstances and objectives

Holistic vision: policies in different areas were part of a coherent overall strategy aimed at changing the structure of the economy

Gradualism: policy-makers adopted a gradual and strategic approach to liberalization and integration into the global economy

Primacy of rural development: rural development provided much of the momentum for development

Plurality of finance: diversification and upgrading of production was achieved through a combination of private and public investment, from domestic and foreign resources

IV. A Post-2015 Development Agenda Key Policy Dimensions

Three interrelated areas of domestic policy are particularly important for sustaining economic transformation:

• resource mobilization for public and private investment

• industrial and sectoral policies to channel resources into the most productive and development-oriented sectors and activities

• macroeconomic policies which foster economic transformation

Achieving the SDGs will also require efforts by the international community as ambitious as the goals themselves

IV. A Post-2015 Development Agenda Resource Mobilisation

• Balance domestic investment and FDI according to their different advantages in different contexts – FDI where it offers access to markets and technology

– But local investment is likely to offer stronger forward/backward linkages, more jobs per $, more reinvestment of profits

– Diaspora investment may combine the best of both

• Local investment requires credit and profitable opportunities at low risk

– Industrial and macroeconomic policies are critical

• ODA impact can be maximized through labour-intensive infrastructure investment, and local procurement

IV. A Post-2015 Development Agenda Macroeconomic Policy

• Avoid over-emphasising inflation: local investment requires credit and demand growth

• Keep the long-term fiscal deficit within the limits of financial sustainability

• Keep demand growth steady through countercyclical policies (including commodity stabilisation funds)

• Increase and diversify public revenue sources and strengthen tax collection capacity to increase fiscal space – A priority use for ODA, to reduce financial dependency rather

than increasing it

IV. A Post-2015 Development Agenda Industrial Policy

• Active industrial policy is essential – horizontal (economy-wide) policies and

– vertical (specific activities) policies

• Focus on job creation

• Key principles: industrial policy should – allow strategic public/private cooperation without capture

– balance "carrots" and "sticks"

– be accountable to the population as a whole and benefit the whole economy

• Innovation requires experimentation: – not "picking winners" but "picking possibles"

– even "failures" provide valuable information about what does not work

– don't minimise failures - minimise the costs of failures if they happen

IV. A Post-2015 Development Agenda Industrial Policy

• Dual strategy: – Develop sectors in line with current comparative advantage, but also

– Promote and anticipate changes in comparative advantage

• Opportunities – Forward/backward linkages, eg natural resource-based clusters

– Opportunities created by Post-2015: ODA; changes in demand arising from faster poverty reduction, etc

• Instruments: development banks, fiscal incentives, trade policies, export promotion, formalisation, ICT….

• Evaluate alternatives carefully and realistically in terms of impacts on development and transformation: what works best?

IV. A Post-2015 Development Agenda Rural Development and Diversification

• Rural development is essential to poverty eradication – Two thirds of the LDC population live in rural areas

– Industry will not create enough jobs, and cities cannot absorb enough people, to take all out of poverty by 2030

• Agricultural upgrading and rural economic diversification are critically interdependent

– Agricultural upgrading releases surplus labour; diversification absorbs it

– Diversification produces goods to meet the demand arising from higher agricultural income, and demand for more/higher-value food

– Diversification generates increased income for agricultural investment and inputs

• Rural electrification using renewable energy technologies can be a major driver of rural development

• Labour-intensive infrastructure investment can provide a "kick start"

IV. A Post-2015 Development Agenda International Measures

• ODA - donors should fulfil long-standing commitments on

– Quantity (commitment to 0.15-0.2% of GNI for LDCs)

– Quality (especially basing ODA on recipients' priorities/strategies)

• International finance reform

– Effective and development-friendly crisis prevention and response

– Improved global tax governance

• Trade - a more development-oriented trading system, including

– Special and Differential Treatment; Aid for Trade; easier WTO accession for LDCs; technology transfer under TRIPs;

– Review of bilateral agreements' compatibility with SDGs, and changes where required

• Prompt, effective and equitable action on climate change

Female Rural Entrepreneurship for Economic Diversification (FREED)

• Two key objectives of a Post-2015 Agenda for LDCs are – to translate increased productive potential into higher incomes

– rural economic diversification, as a key part of structural transformation

• Rural women – would increase productive potential most from achieving the SDGs, and

– could be an important force for rural economic diversification in LDCs

– But they are constrained by cultural norms, including traditional roles in unpaid household and care work

• UNCTAD is proposing FREED – an international support mechanism, funded primarily from ODA

– to provide financial and other support to the establishment and consolidation of women's enterprises in rural areas of LDCs

• The LDCs are the battleground on which the Post-2015 Development Agenda and the SDGs will be won or lost

• The international community must learn from the LDC paradox - most LDCs' failure to achieve most MDGs despite strong growth

• Meeting the much more ambitious SDGs requires completing a virtuous circle of economic and human development

• This requires economic transformation in LDCs, and changes in the global economic system

• This means – a major shift in LDCs' own policies

– greater attention to rural development

– action by the international community as ambitious as the proposed goals

– including economic transformation and global economic change in the SDGs

LDC Report 2014 - Key Messages

Thank you