income countries, including LDCs, have sound macroeconomic policies in place,3 and according to the International Monetary Fund (IMF) index of trade restrictiveness, many have relatively open trade regimes. Despite decades of reform, LDCs remain marginalized in the world economy. While some LDCs, mostly in Asia, have managed to increase their share in world trade and income, and have also managed to reduce their high incidence of extreme poverty, most LDCs — mainly in Africa — have seen decreasing shares in world trade and income, and increasing incidence of extreme poverty.4The trends that can be observed for the different groups of LDCs, based on their geographic location, are closely related with trends in their export specializa- tion. The Asian LDCs that have done better have typically managed to diversify into manufactures and/or services, while the African LDCs which have done less well con- tinue to specialize in non-oil primary commodities.5
Marginalized despite reforms
In the 40-year period between 1960 and 1999, the income gap between the world’s 20 richest countries and the LDCs continued to widen, but the gap varied depending on the nature of the LDC exports.6Weighted by population, the average income per capita of the 20 richest countries was about 16 times higher than that of non-oil- commodity exporting LDCs in 1960, and 35 times higher by 1999. Thus, this gap more than doubled by 1999. By contrast, the income per capita of these 20 richest coun- tries was 8 times as high as that of LDCs that exported manufactures and/or services, in 1960, and 12 times higher in 1999.7
A similar difference between LDCs can be observed with regard to poverty inci- dence.8While LDCs that continue to specialize in non-oil commodities have seen an increase of extreme poverty in the past decades, the LDCs that specialize in manufac- turing have seen a decrease of extreme poverty. Between the late 1980s and the late 1990s, extreme poverty in non-oil-commodity exporting LDCs rose from 67 percent to 69 percent, an increase from the early 1980s, but it fell in manufacture-exporting
_______________________ 3. World Bank, 2002. 4. Karshenas, 2001.
5. UNCTAD, 2002, pages 49-61, 124.
6. UNCTAD estimates based on Summers and Heston International Comparison Programme and World Bank, World Development Indicators 2001, CD ROM (UNCTAD, 2002, pages 122-123). The income gap is the ratio of the weighted by population average GDP per capita (in 1985 PPP dollars) in the world’s 20 richest countries to that in the LDCs and LDC subgroups. The sample of the world’s 20 richest countries varies over time.
7. UNCTAD, 2002, page 123.
8. There is a lack of poverty data for the LDCs that makes it difficult to monitor poverty trends in these countries. The most comprehensive and latest figures on the incidence and depth of poverty in the LDCs are derived from UNCTAD’s The Least Developed Countries Report 2002 database (for further references and methodological notes, see UNCTAD 2002, pages 39-100, particularly pages 62-64). While this pauci- ty of data is very unfortunate, and has been highlighted by UNCTAD on various occasions (LDC Report 2002, LDC Report 2004 and background papers to both reports), very little had been done to rectify this lacuna till very recently. UNCTAD is now seeking to update its poverty estimates.
LDCs (even if Bangladesh is excluded) from 48 percent to 44 percent.9 The unfavourable poverty trends are particularly pronounced in LDCs which specialize in extractive industries, while positive poverty trends are particularly pronounced in Bangladesh which has successfully increased its specialization in low-tech manufac- tures. Incidence of extreme poverty between the late 1980s and late 1990s also increased in LDC exporters of services from 41 percent to 43 percent.10If past trends persist, extreme poverty in the LDCs will increase rather than decrease in the coming decades. While the developing world as a whole is on track to achieve the objective of reducing extreme poverty by half between the base year 1990 and the target year 2015, the group of LDCs as a whole will not achieve this objective.11
Because of these trends, policy makers in the LDCs are concerned that they should be better integrated in world trade, that their share of world trade should be larger, and that they should manage to reduce the incidence of extreme poverty in a sus- tainable manner. In this context, recent literature has placed great emphasis on fur- ther trade liberalization.12It is argued that a further liberalization of trade will increase trade flows, that this will stimulate growth, and that higher rates of economic growth will reduce poverty. However, empirical evidence shows that past trade liberalization has had ambiguous effects on growth and poverty reduction in the LDCs, and that further trade liberalization is unlikely to bring about the desired effects on growth and poverty reduction without a strong complementary policy package that changes the direction of development.13
Non-tariff trade barriers, commodity dependence and phase-out of preferences
Today, tariff barriers to trade affect fewer LDC exports than non-tariff barriers. Between 1999 and 2001, environment related trade barriers affected 20 percent of the merchandise exports of other developing countries, but no less than 41 percent of the merchandise exports of LDCs.
In the same period, 28 percent of LDC exports suffered from commodity price decline, compared with 15 percent in other developing countries. More recently, how- ever, the resurgence of global commodity prices has helped lift many commodity- dependent countries out of a prolonged period of economic stagnation. This is partly due to increased demand for commodity exports from LDCs in the most dynamic developing economies, particularly China and India. Strong demand for raw materials from these countries has had a remarkable impact on commodity prices and volumes of trade. For instance, there has been a considerable improvement in the terms of trade of sub-Saharan African countries (some 30 percent) between 1999 and 2004, far high-
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9. Using the same poverty estimate and including Bangladesh, poverty in manufacture-exporting LDCs fell from 28 percent to 25 percent during the same period. UNCTAD, 2002, Chart 36 ‘The incidence of pover- ty in LDCs grouped according to export specialization, 1981-1983, 1987-1989 and 1997-1999’ based on a $1 per day poverty line, page 124.
10. UNCTAD, 2002, page 124. 11. Ibid.
12. Sachs and Warner, 1995; Dollar and Kraay, 2000.
er than in any other region.14Also, the trade volume of rice was up 67.5 percent in the decade between 1993-1995 and 2003-2005, while cotton increased by 48.8 percent, fresh and chilled vegetables by 69.7 percent, and cut flowers by 72.9 percent during the same period.15Nevertheless, such price increases do not cover all commodities and their real magnitude has been diminished by exchange rate movements, especially the US dollar. Furthermore, while markets are likely to remain buoyant in the medium term, the secular trend of declining real commodity prices may eventually reassert itself. Price movements, moreover, are not the only disadvantage for countries specialized in com- modities, since commodity production is not associated with the technological exter- nalities and ‘learning by doing’ which characterizes much of manufacturing and the technology oriented service industries. The challenge for these countries is to sustain or accelerate their growth momentum over the coming years by gaining ground in more knowledge based activities whilst simultaneously upgrading the quality of their commodity production.16
Furthermore, LDCs, more than other developing countries, are affected by chal- lenges associated with the specialization in extractive industries, and are negatively affected by the phasing out of preferences on textiles and clothing.17While the EU has essentially compensated both African and Asian LDCs for phasing out market access preferences in textiles through the introduction of wider GSP preferences (i.e. EBA), the United States has compensated only African LDCs for phasing out (i.e. AGOA). Market access to the United States has thus eroded for many Asian LDCs, especially in textiles and clothing. This affects some of the largest exporters of textiles and clothing amongst the LDCs.18 Bangladesh’s RMG exports account for 76 percent of total export earnings; the United States is the destination of 42 per cent of RMG, yet clothing is excluded from the GSP. Furthermore, Nepal is deprived from the US DFQF treatment of apparel, which is a major export product.19