The Financial Express

LDC graduation: Momentum says it all

| Updated: October 24, 2017 07:24:21

LDC graduation: Momentum says it all

The attainment of low middle-income country status a couple of years ago was trumpeted as a monumental accomplishment; Bangladesh was projected to exit the club of the least developed countries (LDCs) and graduate to a relatively decent position alongside countries like China, India, Singapore and so on. In a country where hope for a little progress on the economic front defines the very essence of survival of its people, there is no choice but to remain hopeful, though at times at the cost of pathetic delusion. Unfortunately, exiting the LDC league was one such hope that the ruling elites thought was round the corner. Fantasy-driven or not, many in the country had hoped and believed so.
The picture now is clear - made so by the UNCTAD's (United Nations Conference on Trade and Development) Least Developed Country Report-2016. The text of the Report is available on the UNCTAD website. Country's lead think-tank Centre for Policy Dialogue (CPD), while releasing the Report the other day as part of its global release, has summed up the key points relevant to Bangladesh. In the light of the Report, Bangladesh is projected to graduate from its LDC status to developing country status in 2024 provided it meets the three crucial criteria: income criteria, Human Asset Index (HAI) and Economic Vulnerability Index (EVI). An LDC can graduate if it meets two of these three criteria, or riding on the income criteria, if the country's income doubles. At present, Bangladesh meets only the criteria under the EVI, according to the Report. The path thus is long.  
Graduation is the process through which a country ceases to be an LDC. This, besides meeting the critical requirements in terms of clear economic indicators, means that a country set to graduate is believed to have overcome the structural handicaps that warrant special treatment from the international community, beyond that generally granted to other developing countries. For a country like Bangladesh 'branded' as an LDC since its inception -- although much of its growth and successes owe hugely to its being termed so -- graduation is indeed a winning post, a milestone in the country's long-term economic and social development.
The UNCTAD Report argues that focus should not be on graduation  alone, but rather on 'graduation with momentum'. It is this momentum, the Report says, "that will lay the foundations for long-term development and allow potential pitfalls to be avoided far beyond the country's exit from the LDC category." This reminds of countries which in the past succeeded to graduate but because of lack of momentum to sustain their growth had to back-pedal to where they had earlier lodged. In keeping with UNCTAD's observations, the CPD briefing highlighted the fact that smooth and sustainable transition from the LDC category for Bangladesh will critically hinge upon a productive momentum of economic growth. Three key determinants vital for this smooth transition include accelerated transformation of rural economy, proactive sector-specific industrial policies, and adopting appropriate science, technology and innovation policy.
The UN classifies a country as an LDC if it has per capita income of little over $1,000 a year. A country with so low per capita is perceived as economically vulnerable and scores badly on a range of human indicators, including nutrition, child mortality and enrolment in schools.  Since the term LDC was coined 45 years ago, only four countries have graduated so far: Botswana (1994), Cabo Verde (2007), Maldives (2011) and Samoa (2014).
The UNCTAD Report-2016 says, number of countries graduating from LDC to developing status in the coming years is likely to fall short of the target projected earlier. LDCs, it says, are affected by three vicious circles. First, many LDCs suffer from a poverty trap, with low income and limited economic growth giving rise to high levels of poverty, which in turn act as a brake on economic growth. Second, many LDCs suffer from a commodity trap, as they depend heavily on commodity production and trade for employment, income, savings and foreign exchange. In the overwhelming majority of LDCs, commodities accounted for more than two-thirds of merchandise exports in 2013-2015. Third, weak productive bases and limited export diversification in LDCs give rise to very high import content in production and consumption, and chronic current account deficits. These factors in turn result in aid dependence and the accumulation of foreign debt.
The key message for Bangladesh in the Report is that graduation must not be seen as an end in itself in that meeting the vital parameters will require an element of dynamism in the economy to carry the progress further on towards sustainability. So, the need for Bangladesh is to move from graduation strategies focused on qualification for graduation to "graduation-plus" strategies that take a long-term perspective and foster structural transformation. Elements of such strategies, among others, include:
- coordinated measures to upgrade agriculture and promote non-farm activities
- a combination of cross-sectoral and sector-specific industrial policies.
- considerable scaling up of public and private investment, to strategically address bottlenecks in the productive and employment sectors
- addressing gender inequality across all policy areas, to ensure fuller and more effective use of human resources
- diversifying export basket, including accessing markets for value-added products
The important thing that has to match with the strategies is the awareness that graduation will cut into the preferences in terms of duty rebate now available for exports to most developed countries. Although preference erosion will take a few years after a country graduates, losing competitive edge looms as a potent threat. This is precisely why a definite momentum in the economy can only take care of the emerging difficulties.
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