NGLS Roundup, no. 64, December 2000 THE LEAST DEVELOPED COUNTRIES: BUSINESS AS USUAL OR A NEW DEAL? INTRODUCTION The Third United Nations Conference on the Least Developed Countries (UNLDC III), to be held in Brussels (Belgium) in May 2001, will be an important forum for the international community to address the special problems of the 48 poor countries classified by the United Nations as least developed countries (LDCs). The Conference may be a major opportunity for these countries and their development partners to devise practical cooperative mechanisms capable of providing a sustainable basis for meaningful social and economic progress in LDCs over the next decade (see NGLS Roundup, no. 60). The Least Developed Countries 2000 Report (LDCR 2000)--produced by the secretariat of the United Nations Conference on Trade and Development (UNCTAD) which is also the secretariat of UNLDC III--aims at providing a better substantive basis for the preparations of UNLDC III, with a focus on financing development in the least developed countries. The report notes that ten years after the second UN Conference on LDCs (UNLDC II) held in Paris in 1990, the number of people living in poverty has continued to increase in various regions of the world. The poorest countries are failing to catch up with developed and developing countries, and some are getting stuck in vicious circles of economic stagnation and regress (see Box 1). Such trends are associated with the acceleration of globalization and liberalization in the 1990s and the uneven distribution of the costs and benefits of these processes. In response to these worsening conditions, the report says that a "radical rethinking" of international development cooperation is currently underway. The International Monetary Fund (IMF) has undertaken two major evaluations of its lending operations in low-income countries, and as a result has transformed its Enhanced Structural Adjustment Facility (ESAF) into the Poverty Reduction and Growth Facility (PRGF), which is now attempting to re-engineer the way it operates in poor countries. The World Bank has similarly conducted in-depth evaluations of its experience with adjustment lending. On this basis it has sought to create a "new development paradigm" embodied in its Comprehensive Development Framework--elements of which are now being put into practice by making poverty reduction strategies the basis for conditional lending to low-income countries, and debt relief to highly indebted poor countries. In addition, the Development Assistance Committee (DAC), regrouping the bilateral donor countries that are members of the Organisation for Economic Co-operation and Development (OECD), has thoroughly reassessed the effectiveness of bilateral development assistance and made comprehensive proposals for improving development cooperation through application of the principles of "partnership" and "policy coherence." The report recognizes that some preliminary assessments of the changes being made suggest that these are "symbolic rather than substantial," but it argues that these changes remain serious; they do offer a "window of opportunity in which the approach to international development cooperation is in flux." The problem--and this is the main analytical conclusion of the report--is that "the current diagnosis for change which is shaping the new approach to international cooperation is flawed in several crucial respects." Major elements of this include: -- continued reliance--despite the recent inclusion of social programmes--on standard macroeconomic and structural policy reforms attached to debt relief and aid conditionalities (rather than a more pragmatic and pluralistic approach to growth-enhancing reforms); -- continued emphasis on locating the problems almost exclusively in relation to domestic policies rather than also to major flaws in the international system (including a perverse systemic relationship between the current aid, trade and debt/conditionality systems); -- the untenable assumptions on which current debt relief initiatives are premised; and -- failure to address the financial bottlenecks that prevent meaningful debt relief and the provision of adequate aid flows to LDCs. The report insists that it is imperative for UNLDC III to end up with policy proposals and commitments that are based on a correct diagnosis of the weaknesses of past domestic and international policies. "If the diagnosis is wrong, with whatever ingenuity the implied policy changes are made, and with whatever energy and good faith they are implemented, there is no reason why we should expect better results this time round," says the report. "The most likely outcome at the end of the coming decade will be a new round of aid fatigue for the new approach and a new round of debt relief to pay off the latest wave of ineffective official loans." The report makes constructive proposals based on a "realistic diagnosis" for improving international cooperation. The Secretary-General of UNCTAD, Rubens Ricupero, described these proposals as a "New Deal" for LDCs, based on elements that include: ensuring adequate debt relief and aid flows; reforming the aid delivery system; reorienting national policies towards building-up domestic productive capacities; ensuring "genuine" national ownership of development policies; and increasing "systemic policy coherence" at the international level. *************************************************************************** Box 1 Social and Economic Trends in LDCs in the 1990s The LDCs are not just the poorest countries in terms of per capita income, but most of them also have by far the lowest human development and poverty indicators. They account for 32 of the 35 countries in the lowest category of the Human Development Index (HDI) of the United Nations Development Programme (UNDP). On average, 15% of all children born in LDCs do not survive to their fifth birthday--a rate almost double the developing country average--while the average life expectancy is no more than 51 years, compared to 65 years for the developing countries and 78 for the OECD countries. LDCs are also among the countries with highest illiteracy rates, the lowest rates of primary school enrolment and the widest gender disparities in education. The population growth rate for LDCs during the 1990s has also been significantly higher than the developing country average, and almost double that of the world average. The gap in social progress between LDCs and other developing countries, the report says, is related to the low levels of economic growth of most LDCs and the serious resource constraints they face in achieving social goals. The real gross domestic product (GDP) per capita in the LDCs grew at only 0.9% per annum during 1990-1998. A significant part of aggregate LDC growth is attributable to a single country, Bangladesh, which accounts for one-fourth of the economic size of the LDC group, and which grew at higher and more stable rates than most other countries in the group. Excluding Bangladesh, the average real GDP per capita growth rate was only 0.4% per annum. In comparison, the real GDP per capita growth rates in other developing countries was 3.6% per annum during the same period. There are, however, important divergences among LDCs. There is a group of 15 LDCs where real GDP per capita growth exceeded 2% per annum during 1990-1998. At the other end of the spectrum, there are 22 LDCs that have been stagnant or in economic regress during the same period. In 11 of these, all of which have experienced serious armed conflicts and internal instability during the 1990s, the real GDP per capita has been declining by over 3% per annum. Moreover, the terms-of-trade of the LDCs worsened in 1998 and 1999 with a drop in commodity prices, whose breadth and depth has not been seen since the early 1980s. The composite index of non-oil commodity prices fell by more than 30% during 1998-1999. Since March 1999, the precipitous increase in oil prices has meant that non-oil primary exporters have been doubly hit by low primary commodity prices and rising fuel import bills. A measure of the weakness and fragility of LDCs' economic performance in the 1990s, the report says, is their persistent and worsening debt burden. The nominal value of the total external debt stock for LDCs as a whole rose from US$121.2 billion in 1990 to US$150.4 billion in 1998. The total debt service paid by the LDCs amounted to US$4.4 billion in 1998 as compared with US$4 billion at the start of the decade. Total debt stocks corresponded to an estimated 101% of their combined gross national product (GNP), up from 92% in 1990. *************************************************************************** THE RECORD SINCE THE 1990 PARIS COMMITMENTS At UNLDC II in 1990, the international community committed itself to urgent and effective action to arrest and reverse deterioration in the socio-economic situation in the LDCs and to revitalize their growth and development. At the heart of the commitments set out in the 1990 Paris Declaration and Programme of Action was what the report describes as an "implicit partnership." The LDCs undertook to deepen the process of economic reform which they had begun in the 1980s, while their development partners undertook to make available a significant and substantial increase in the aggregate level of external support to the LDCs. The report suggests that current mainstream diagnosis of the relatively weak economic response to policy reforms in LDCs in the 1990s is a result of poor implementation of the reforms rather than inadequate policy design or underfunding. However, the report argues, the record of the 1990s shows that there has been an accelerating process of economic liberalization in many LDCs. In fact 33 out of the 48 LDCs have undertaken policy reforms under the IMF-financed Structural Adjustment Facility (SAF) or Enhanced Structural Adjustment Facility programmes since 1988. The available evidence suggests that the LDCs have kept up with other developing countries in the process of structural reform in all areas except financial sector reform and the reform of the public enterprise sector, and they have gone further than other developing countries in the area of pricing and marketing reform. IMF data actually shows that trade liberalization has proceeded further in the LDCs than in other developing countries. Similarly, UNCTAD data for the late 1990s show that most LDCs have adopted free or relatively free capital account regimes in areas such as remittances of dividends and profits, and capital repatriation. This contrasts sharply with the degree of implementation of the donor community's side of the Paris bargain (see Box 2). The share of aid to LDCs in the DAC donors' GNP fell from 0.09% in 1990 to 0.05% in 1998. In real per capita terms, net official development assistance (ODA) to LDCs has dropped by 45% since 1990 and is now back to its early 1970s levels. The report further notes that for most LDCs, private capital is in general such a small proportion of total capital inflows that even where private capital inflows have been increasing they have been unable to offset the decline in ODA in most LDCs. Moreover, the little foreign direct investment that does occur remains highly focused on natural resource exploitation. The report suggests that evidence over the long-term shows that when per capita income increases in LDCs, there is a strong domestic savings effort. Therefore if growth can be sustained, significant increases in domestic resource mobilization may be expected, which would reduce in due time dependence on external finance and usher in the possibility of a more self-sustained growth process. However, because of the very low income per capita of most LDCs and their sluggish or even negative per capita growth rates, this potential for domestic resource mobilization is not being realized. This not only limits domestically-financed economic growth but is also a fundamental source of the vulnerability of LDC economies. The size of external shocks in the LDC economies, in terms of income losses inflicted, are often many times the size of the resources that these countries can muster internally to cope with such shocks. "The LDCs are thus caught in a trap," the report says, "with low incomes and slow growth limiting the scope for domestic resource mobilization, and low rates of investment and low efficiency of resource use in turn limiting growth." The only way to escape this situation, it argues, is through external finance. *************************************************************************** Box 2 Donor Community's External Finance Commitments Made at UNLDC II In Paris in 1990, the donor community agreed to seek to implement the following targets. -- Donor countries already providing more than 0.20% of their GNP as ODA to least developed countries: continue to do so and increase their efforts. -- Other donor countries that have met the 0.15% target (set by the Substantial New Programme of Action for the Least Developed Countries for the 1980s): undertake to reach 0.20% by the year 2000. -- All other donor countries that have committed themselves to the 0.15% target: reaffirm their commitment and undertake either to achieve the target within the next five years or make their best efforts to accelerate their endeavours to reach the target. -- All other donor countries: exercise their best efforts individually to increase their ODA to LDCs. *************************************************************************** Flawed Structural Reform Conditionalities The report insists on the importance of distinguishing between the policy objectives of reform, and the ways and means of achieving them under empirically-given conditions in the countries concerned. It says that "the desirability of most of the objectives that formed the components of policy conditionality during the adjustment period remain undisputed--for example, the objectives of achieving macroeconomic stability, pursuit of internal and external balance [in the balance of payments], and creation of an efficient market economy. But the policies that have been advocated in the shape of ready-made blueprints to achieve these objectives are inadequate." The report says the main deficiencies of structural reforms in low-income country contexts had already been highlighted in earlier UNCTAD work, particularly in its critique of structural adjustment policies in Africa published in the Trade and Development Report, 1998. That report had argued, among other points, that mainstream assessment of Africa's growth prospects had proven almost invariably over-optimistic largely because it was based on "an act of faith in growth-enhancing market forces, rather that on a careful examination of constraints and opportunities." Public investment had borne the brunt of the adjustment impact, but private investment had not "as conventional wisdom might suggest, stepped into the breach." Trade policy reforms were driven by "theoretical notions of neutral incentives, to be attained through low and uniform tariffs, rather than pragmatism." Agricultural liberalization did not increase the proportion of export prices received by farmers, because private traders operating in imperfect and underdeveloped markets captured most of the benefit. As the current report remarks, this reflects a failure to understand that in low-income countries some key markets hardly exist or are so "thin" that they are characterized by monopolistic or oligopolistic pricing; the domestic entrepreneurial class, which hypothetically will act as the key agent of market-based growth, is weak; and foreign investors are not yet ready to step into the breach. The report further notes that trade liberalization, where formal sector enterprises have weak technological and managerial capabilities, has often undermined domestic industry. Moreover, measures to reduce the domestic budget deficit (and within that the current expenditure of governments) as part of stabilization and structural adjustment policies have also undermined economic progress in the LDCs: by eroding state capacities and undermining the quality and quantity of vital public services such as education and public administration. This is closely related to the "aid-cum-debt trap" discussed below. The Aid-Cum-Debt Trap The report uncovers a complex web of perverse inter-linkages between debt, conditionality and what it describes as a fragmented and dysfunctional multi-donor aid delivery system. During the era of adjustment and liberalization, donors have been able to coordinate their policy conditionality around IMF and World Bank adjustment programmes. However, strong coordination of policy conditionality has coexisted with great diversity in terms of aid delivery, reflecting the contrasting experiences and ideas and heterogeneous nature of the donor community. According to the report, "This tension has played a significant part in reducing aid effectiveness and in disrupting the developmental processes in the LDCs during the past two decades." Two important empirical findings support this conclusion, says the report. First, foreign aid flows are a major source of external shocks for LDCs. For most, aid flows are actually more volatile than already extremely volatile export revenues, and are also more volatile than current government revenue. "It appears, therefore," the report says, "that foreign aid by and large has not alleviated the effects of short-term external shocks in LDCs, and if anything has reinforced their effects." Second, it is apparent that aid has distorted the government finances of many LDCs as they have been subject to what the report describes as "the double squeeze of public finances" by the uncoordinated and non-integrated aid delivery system on the one hand, and the policy conditionalities of adjustment programmes on the other. Various elements contributing to the squeeze resulting from the diversity of the aid delivery include: rising debt service obligations; the increasing amount of time spent on aid coordination and debt negotiations; and a continuous haemorrhage of experienced government personnel to proliferating aid projects set up outside the government's planning framework. The IMF/World Bank-induced fiscal austerity measures have formed the other side of the bind. According to most accounts, the report says, state capacities in most of the LDCs in sub-Saharan Africa are now below the levels of two decades ago. Aid effectiveness has also been undermined by the external debt burden, which has not only reduced public and private investment in LDCs, but also adversely affected the aid practices of official creditor-donors. The report notes that since the 1980s, there has been a close relationship between the geographical allocation of aid flows and debt service payments. "For LDCs, throughout the 1990s," it says, "the debt-tail' has been wagging the aid-dog,' as official creditor-donors as a group have been putting their money in where they need to get money out." In other words, this aid-debt servicing system has subtracted from the volume of aid disbursements available for developmental purposes. For instance, the total amount of aid being diverted from bilateral budgets to fund debt relief by multilateral institutions is estimated at 50% of bilateral aid flows to highly indebted poor countries in 1998. "In effect," the report concludes, "both international creditor-donors and debtor countries have been caught up in an aid-cum-debt trap, in which high levels of indebtedness undermine aid effectiveness, and low levels of aid effectiveness in turn mean that concessional aid contributes to indebtedness." ASSESSING THE NEW IMF/WORLD BANK INITIATIVES The report closely examines two major initiatives introduced by the IMF and the World Bank, which are designed to work in tandem: the Heavily-Indebted Poor Country (HIPC) Initiative, introduced in 1996--then enhanced as HIPC II at the 1999 Group of Eight annual meeting in Cologne (Germany)--and the Poverty Reduction and Growth Facility, which replaced the IMF's earlier ESAF in late 1999. The HIPC Initiative is targeted at poor countries, rather than LDCs as such. However, almost three-fourths of all HIPCs (30 out of 41) are currently LDCs. So it is the HIPCs, including the HIPC LDCs that are setting the pace in the implementation of these new policy mechanisms. However, the report stresses that these mechanisms have much wider significance than for these categories of countries alone. The PRGF now will act as the "gatekeeper mechanism" for access to concessional finance as well as debt relief in all low-income countries, and the PRGF-funded country strategy papers are intended to become the framework for better aid coordination. The report outlines the lengthy and complex procedures and conditionalities attached to the HIPC/PRGF initiatives (see Box 3). "The requirements for producing a PRSP are incredibly demanding," the reports says. It notes that the World Bank and IMF estimate that a full poverty reduction strategy can be produced in two years. But Uganda, which is in the forefront of this approach, has been working on its strategy for five years. Even so, World Bank and IMF staff say that Uganda needs to provide additional estimates of the cost of poverty reduction programmes and must strengthen the links between expenditures on poverty reduction and indicators of poverty. However, the report insists that the problem is more fundamental than the speed with which countries reach a point where they can receive debt relief--even though that has been "painfully slow." The more fundamental problems are related to the scale and timing of debt relief, the conditionalities attached to it, and its financing. Inadequate Scale and Timing of Debt Relief The report contrasts two different approaches to linking debt relief and poverty reduction. One is the "direct" route, which uses welfare criteria as a basis for deciding the depth, breadth and speed of debt relief. The second and "indirect" route--the one taken by the HIPC Initiative--is to decide the depth, breadth and speed of debt relief according to the criteria of debt sustainability. "Simple comparison of HIPC relief with some proposals based on the first route," the report says, "indicates that the indirect approach is likely to lead to less debt relief, provided more slowly, for fewer countries." The report stresses that the primary role of debt relief should be to enable countries in a situation where their debt burden undermines economic growth and public and private investment to make a fresh start. This is best achieved, it says, through a significant "upfront reduction of debt stocks" rather than the way debt relief is provided under HIPC. The report also finds that the medium-term forecasts of a "durable exit" from the debt problem are unrealistic. They depend on very high rates of economic growth within HIPC LDCs--in most cases over and above rates in the 1990s--very high and stable export growth rates, and no increases in import intensity. "The lessons from the forecasting experience under HIPC I," the report says, "as well as the volatility of export earnings in LDCs, suggest that these expectations are unlikely to be met. The most probable outcome if export earnings are not achieved will be reduced imports and slower growth." This is all the more likely to happen, the report adds, "as the thresholds of debt sustainability are set at levels at which the debt overhang persists for a number of years and there is no cushion against adverse external shocks." The report argues that the major obstacle to deeper debt relief is how it can be financed. The degree of enhancement that occurred with the shift from HIPC I to HIPC II was constrained by the need to ensure that additional costs could be met. "And even now," it warns, "it is proving difficult to ensure that HIPC II is adequately financed." So the report insists it is "imperative that international policy efforts focus clearly on the financing bottleneck affecting debt relief for poor countries." Flawed Policy Design The IMF/World Bank's unrealistic medium-term forecasts of high rates of economic and export growth, the report says, are based on "the hypothesis that growth can be accelerated by adding social policies to the standard macroeconomic policies and to standard structural reforms designed to open economies to the rest of the world and promote privatization and deregulation." Based on the record of experiences in the 1990s with these policies in LDCs, the report says, this argument is "not very convincing." It notes that for some observers, the change from ESAF to PRGF is "cosmetic," entailing the repackaging of old economic reform programmes in new poverty language. But the report also stresses that the new approach to PRSPs considerably reduces the probability that "off-the-shelf" strategies, which are inappropriate to the particular situation of a country, will guide policy conditionality, particularly if countries are actually given sufficient space to develop their own innovative approaches. However, "national ownership" is still not unconstrained: "What is being owned," the report says, "is a model conceived by the Bank and the Fund which is keyed in to the achievement of international development targets which have been selected by the OECD. What is being owned is not the development agenda itself, but rather the means of implementing it." Moreover, the preparations of PRSPs are very demanding. In a number of LDCs the technical capabilities for producing poverty reduction strategies may be weak. It is likely that design of the programmes will draw upon expertise of the Bank and the Fund, which are expected to provide national authorities with advice in their appropriate areas. The report cites a recent field survey of bilateral donor views of how the PRSP process is working, which found that staff of the IMF and World Bank were perceived to be "in the driving seat in most cases." In addition, the report says the final endorsement process by the Boards of the Fund and Bank is critical for the degree to which genuine national ownership of the policies is created. "The test case," it says, "would arise if countries produce nationally owned strategies which do not incorporate all the elements of the poverty reduction approach favoured by the international financial institutions (IFIs)." It is unclear whether this would be endorsed or not. However, it may not reach open disagreement. Indeed it is envisaged that a joint Bank-Fund mission will be needed to prepare for the presentation of the PRSP to the Boards. This mission, the report notes, "would discuss with the authorities any modifications to the strategy which might be considered necessary to allow managements to recommend to the Boards that the PRSP be endorsed." The overall result, the report warns, is that the "country-owned" policy could be altered to fit expectations. "In essence," it says, "this could imply that ownership is actually deeper internalization of the norms of the IFIs." *************************************************************************** Box 3 HIPC/PRGF Procedures and Conditionalities The report notes that the HIPC Initiative is innovative in three important ways. First, it widens the coverage of the types of debts that are eligible for relief to include multilateral debt. Secondly it sets an explicit target for "debt sustainability," which is calculated as a threshold ratio to the present value of debt to exports (set at 150% under HIPC II) or to the present value of debt to government revenue (set at 250% under HIPC II). Thirdly, it introduces new sources and mechanisms for financing debt relief, including proceeds from IMF gold sales and the establishment of the HIPC Trust Fund to which bilateral donors may contribute to help the multilateral institutions provide debt relief. Under HIPC I, a country had to establish a three-year track record of "good performance" under an ESAF programme before it reached "decision point," and was expected to follow with a further three years of ESAF-based economic reforms before it reached completion point. Once there, debt relief would be provided unconditionally and irrevocably. Under HIPC II, a country still has to establish a three-year track record of good performance under IMF- and World Bank-supported adjustment programmes before the decision point. However, completion point is "floating" in the sense that it can be reached in less than three years if a country can implement reforms in less time, or in more than three years if implementation of reforms take longer. Achievement of the completion point is conditional on a track record that encompasses three main areas. First, appropriate macro-economic policies must be in place, as well as "a macroeconomic position conducive to sustainable growth and poverty reduction;" this would be indicated by low inflation, a fiscal policy consistent with a low and sustainable level of bank financing and an adequate reserve cushion. Second, as in ESAFs, agreed and "monitorable" structural reforms must be implemented. And third, agreed and "monitorable" social development policies must be implemented. The key change in the content of policy conditionality is that the goal of poverty reduction has been added to existing policy conditionalities. "As no policy conditionalities have been subtracted," the report says, "there is a net addition to the extent of conditionality faced by Governments that want to take advantage of HIPC assistance." The replacement of ESAF with PRGF signifies an important change in the procedures through which conditions are agreed. The programmes supported by the Facility are called Poverty Reduction Strategy Papers (PRSPs). They are intended to be country-owned documents prepared through participatory processes eliciting the involvement of civil society, other national stakeholders and elected institutions. Once it is finalized, the PRSP will be presented to the Boards of the IMF and the World Bank for endorsement. The latter would be a condition of Fund approval of a PRGF arrangement, or for completion of a review thereunder. A short assessment prepared by Fund and Bank staff would recommend to both Boards endorsement (or rejection) of the strategy as a basis for their concessional lending to the country concerned. *************************************************************************** CONCLUSIONS AND RECOMMENDATIONS The conclusions and recommendations that flow from the report's alternative diagnosis of the weaknesses of past domestic and international policies can be summarized as follows. Meaningful Debt Relief -- There is a need for deeper, faster and broader debt relief which is based on lower thresholds for judging debt sustainability, more realistic forecasts of economic growth, exports and imports, and more upfront extinction of debt stocks and the front-loading of debt service relief. In this context it is imperative that international policy efforts focus clearly on the financing bottleneck affecting debt relief for poor countries. -- To load the debt relief process with the type of conditionalities currently imposed under the HIPC Initiative would be counter-productive and self-defeating. Alternative Policy Design -- There is a need for more pragmatic policies than the standard macroeconomic and structural reform policies, which still place too much faith in market forces without adequate attention to the shortcomings of markets, institutions and infrastructure in LDCs. It is essential that the tension between policy conditionality and domestic ownership be managed in a way that accepts and promotes a pluralistic conception of development strategies and that is not wedded to a single model. -- Analysis of successful development experiences show that sustained and accelerated economic growth is built on the development of productive capacities and international competitiveness, and on a structural transformation away from a narrowly specialized primary commodity economy. Success depends on establishing a "virtuous circle" between investment, exports and savings--whereby exports support investment because they earn foreign exchange required for the import of goods and technology needed for domestic capital accumulation and growth, while investment supports exports by providing the basis for technological change, productivity growth, increased competitiveness and structural change. -- Poverty reduction occurs as an integral part of the circle of cumulative causation if employment opportunities expand rapidly. But this requires a better balance between public action and private initiative than that currently recommended. This depends on "meso" policies that effectively ensure such growth is translated into positive outcomes in terms of poverty reduction at individual and household levels through, among other measures, ensuring wide access to productive assets and creating linkages that incorporate marginal sectors into the space of productivity growth. -- The reorientation of public expenditure towards social sectors, and within those towards basic health and education, is certainly an aspect of such meso policies. However, the necessary meso policies should also focus on public action to animate private enterprise through the promotion of agricultural investment and productivity growth, and business development, as well as on public investment in physical and social infrastructure. -- The design of these measures should take advantage of the policy leeway that 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. Reinstating Lost Capacities -- A fundamental prerequisite for recipient country ownership is to reinstate countries' lost capacities, which is a particularly demanding task in the sub-Saharan African LDCs. A major constraint on the creation of more effective public sector administration in these economies is the lack of funds, for which sufficient domestic sources of finance cannot be relied upon, at least in the short term. -- This emphasizes the need for additional aid in the form of budget support or sector-wide programmes in order to relax the financial bind on governments. This should be regarded as an initial investment, necessary for creating a more effective civil administration, rather than an open-ended commitment to financing government consumption expenditure. -- It is important that flexibility governments have in the use of aid be increased, so that funds can be allocated in accordance with national developmental priorities, transcending the current artificial boundaries between what is regarded as developmental and what is seen as recurrent expenditure. Reforming the Aid System -- The political processes underlying the formulation and implementation of national budgets are at least as important as financial and accounting technicalities. Due consultations with relevant line ministries, and open discussions with relevant stakeholders are essential preconditions for transparency, accountability and credibility of national government efforts. -- However, without simultaneous support by donors, and without an effort by them to coordinate their aid with each other and with domestic economic processes, the efforts by the recipient governments in aid-dependent economies are likely to remain ineffective. -- The policy implications of the report's analysis of a dysfunctional aid delivery system are by and large in line with the OECD/DAC's recommendations on good partnership. These emphasize the need for recipient partners to formulate their own development strategies, and encourage donors to implement their aid programmes in a coordinated manner on the basis of locally owned strategies and accept their discipline. The recommendations also encourage donors to end the proliferation of projects and to provide their aid increasingly in forms of programme and budget assistance to support countries' strategic priorities for development. -- A step towards effective implementation of these recommendations would encompass a range of donor-performance monitoring indicators, such as the degree to which donors are willing to contribute to sectoral and cross-sector "basket funds," administered by the recipient government in accordance with objectives and priorities agreed with contributing donors. Enhanced Systemic Policy Coherence -- There is great potential for increasing positive synergies between international policies towards LDCs in the domains of aid, debt reduction and international trade. At present, policy discussion in each of these domains too often takes place in separate compartments, so not only are potential positive synergies missed but support measures in different domains can be mutually antagonistic. It is clear that the debt overhang on official creditor-donors is undermining aid effectiveness, and that economic reforms work better when the international trading environment is favourable for LDCs. -- Steps should be taken to reduce any negative synergies that exist between the current approach to the external debt problem and trade development and the promotion of private capital inflows, as well as between the international trade regime and aid effectiveness. -- Market access and remunerative commodity prices remain as vital as ever for the LDCs, and it is important that the rethinking of international development cooperation, which has moved so rapidly in the last three years in the areas of aid and debt policies, incorporates the trade dimension. Ensuring Adequate Aid Flows -- Given that few LDCs have been able to attract significant private capital flows, ODA remains the major source of external finance. The LDCs and their development partners are dependent on using aid to break out of the vicious circle of low incomes, low savings and inadequate investment in which many LDCs are caught. -- It has been estimated that external resources must be more than doubled for sub-Saharan Africa on average to achieve the goal of reducing the incidence of poverty by half by the year 2015. The UNCTAD secretariat's own estimates of external resource requirements for sub-Saharan Africa to achieve growth rates of 6% per annum are between 50% and 150% higher than the existing flows in the short run. Such average projections are likely to be relevant to most African and Asian LDCs. -- It is evident that such dramatic boosting of aid flows cannot be treated separately from the above-mentioned reforms of the currently dysfunctional aid delivery system and the need to enhance systemic policy coherence in general. Some NGOs have questioned the plausibility of UNCTAD's call for much greater amounts of aid flows to Africa and LDCs, in light of the record of stagnant or decreasing average aid contributions, and the overall poor willingness of donor countries to mobilize significant additional resources, whether for debt relief or development aid. At a press conference in Geneva on 12 October 2000, UNCTAD Secretary-General Rubens Ricupero said in this regard that it is UNCTAD's traditional role to push the frontier of economic development. "This means sometimes going against the current," he said. Informal discussions among UN officials after the launch of the report suggested that issues related to international tax cooperation to raise additional revenue for development--already part of the official agenda at the June 2000 five-year review of the World Summit for Social Development (see NGLS Roundup, no. 57)--may increasingly become critical in addressing existing financial bottlenecks for meaningful debt relief and ensuring adequate aid flows. Some NGOs have also suggested that the pattern of shallow savings in LDCs may be partly explained by widespread adoption of relatively free capital account regimes. Although difficult to measure, such regimes in LDCs may be associated with excessively high rates of domestic and foreign capital outflows. This possible correlation was not covered in the present report. However, in its Trade and Development Reports UNCTAD has thoroughly analyzed the systemic problems posed by relatively free and unregulated capital account regimes in middle-income countries, particularly in the context of the East Asian crisis. It is likely that, albeit taking different forms, such systemic problems also affect LDC economies and may become part of the discussion in the build-up to UNLDC III. In his overview of the report, Mr. Ricupero concludes with the following observations: "As the LDCs and their development partners work towards UNLDC III at Brussels in May 2001, they need to keep in mind alternative future scenarios for the LDCs. At one extreme, most LDCs will remain trapped at a low level of economic development. They will be pockets of persistent poverty in the global economy, falling behind other developing countries and obliged to call on the international community for aid to tackle humanitarian crises and peace-keeping missions. They will also be epicentres for the global refugee population and major sources of international migrant workers. At the other extreme, it is possible to envisage a progressive transition in which dependence on development aid is reduced as growth is sustained more and more by domestic resource mobilization, the attraction of FDI and the tapping of international financial markets, and productive capacities and internationally competitive activities develop as a result. In the end it is for UNLDC III to decide on the most appropriate national and international measures for the coming decade and the elements of a new partnership. But it is vital for it to make its decisions on the basis of a realistic diagnosis of what happened in the recent past. It will then be possible to achieve better results this time. There is a choice." CONTACTS UNCTAD Palais des Nations CH-1211 Geneva 10, Switzerland website (www.unctad.org) For information on LDCR 2000, contact: Charles Gore Senior Economic Affairs Officer Office of the Special Coordinator for Least Developed, Land-Locked and Island Developing Countries, UNCTAD telephone +41-22/907 5944 fax +41-22/907 0046 e-mail For information on NGO participation in UNLDC III, contact: Gloria-Veronica Koch Chief Civil Society Outreach UNCTAD telephone +41-22/907 5690 fax +41-22/907 0122 e-mail For information on the NGO Forum at UNLDC III, contact: Daphne Davis Coordinator NGO Forum Liaison Committee of Development NGOs to the European Union 10 Square Ambiorix B-1000 Brussels, Belgium telephone +32-2/743 8763 fax +32-2/732 1934 e-mail website (www.oneworld.org/liaison) This edition of NGLS Roundup was prepared by the United Nations Non-Governmental Liaison Service (NGLS). The NGLS Roundup is produced for NGOs and others interested in the institutions, policies and activities of the UN system and is not an official record. For more information or additional copies write to: NGLS, Palais des Nations, CH-1211 Geneva 10, Switzerland, fax +41-22/917 0049, e-mail or NGLS, Room DC1-1106, United Nations, New York NY 10017, United States, fax +1-212/963 8712, e-mail . The text of this NGLS Roundup and other NGLS publications are also available online (website:www.unsystem.org/ngls).