Habib Ouane, Director, Division for Africa, Least Developed Countries and Special Programmes UNCTAD UNCTAD Economic Resilience Conference Islands and Small States Institute, Malta: April 2007 UNCTAD's approach to developing productive capacities in LDCs and SIDS

UNCTAD Economic resilience and vulnerability of SIDS  United Nations: UNDESA, UNCTAD work for over 20 years  Barbados Programme of Action 1994  Mauritius Strategy 2005  Malta International Workshops Conceptual and policy work in international fora on SIDS

UNCTAD Outline of Presentation  Economic resilience and vulnerability of SIDS and the vision of UNCTAD  Developing productive capacities  International policy initiatives

UNCTAD Economic resilience and vulnerability of SIDS  small size => scarce natural and human resources, diseconomies of scale  remoteness from large markets => high transport costs  high degree of openness dependence on strategic importsdependence on strategic imports strong export concentrationstrong export concentration  susceptibility to natural disasters exacerbated by climate change and sea level rise Vulnerability of SIDS: Exposure to adverse external shocks beyond countries' domestic control and structural handicaps: Resilience: countries' ability to economically cope with its inherent vulnerability

UNCTAD The vision of UNCTAD Singapore paradox: inherently economically vulnerable small state that manages to cope with its inherent vulnerability through deliberate economic development policies => remains the exception Key to resilience-building => Developing productive capacities

UNCTAD The vision of UNCTAD => devoted to LDCs, but most elements and recommendations also valid for most SIDS:  common economic features between SIDS and LDCs  10 SIDS are LDCs The Least Developed Countries Report 2006: Developing Productive Capacities

UNCTAD The vision of UNCTAD

UNCTAD8 UNCTAD 1.low income => under $900 per capita 2.weak human assets => measured through a composite Human Assets Index 3.economic vulnerability => measured through a composite Economic Vulnerability Index, composed of: a.instability of agricultural production b.instability of exports of goods and services c.diversification from traditional economic activities d.merchandise export concentration e.economic smallness Economic characteristics of LDCs The vision of UNCTAD

UNCTAD9 UNCTAD What are productive capacities? 1.Productive resources – natural resources, human resources, financial capital, physical capital. 2.Entrepreneurial capabilities – core competences; technological capabilities. 3.Production linkages – exchange of goods and services; flows of information; human and financial resource flows – between sectors and between enterprises. Developing productive capacities: Concept

UNCTAD10 UNCTAD What is required to develop productive capacities?  Capital accumulation  Structural change  Technological learning Developing productive capacities: Driving processes

UNCTAD11 UNCTAD  Institutions:  Institutions: Weak domestic private sector and domestic financial and knowledge systems.  Demand  Demand constraints. infrastructure.  Weak physical infrastructure. Developing productive capacities: Constraints What are the key constraints and policy priorities? These are country-specific but the Report identifies three broad areas which are likely to applicable in most countries:

UNCTAD12 UNCTAD  Weak development of formal sector SMEs, particularly medium- sized domestic enterprises, as typically informal sector enterprises do not develop into formal sector firms and small firms do not grow into large firms.  Investment climate reforms (to reduce red tape and costs of doing business) are not enough in a context of radical firm and structural heterogeneity.  Need to foster the development of domestic medium-sized firms and production linkages  Need to develop the domestic financial system  Disarticulation between traditional and modern knowledge systems; modern knowledge systems (universities, national research institutes, etc.) are not functioning as an integrated system, not demand-driven, not well-integrated internationally.  Develop national technology learning strategies to increase access to/effective use of foreign technology. Developing productive capacities: Institutions

UNCTAD13 UNCTAD  Need to address dynamics of domestic demand as well as international competitiveness and access to international markets.  Sluggish domestic demand must be identified as a central deficiency of the investment climate.  The demand-side contribution of exports has been seriously reduced by declining terms of trade and currecy depreciation.  For exports – focus on upgrading the export structure towards more dynamic products. Developing productive capacities: Demand

UNCTAD14 UNCTAD  Trade-related infrastructure alone is not enough (export growth but not economy-wide poverty reduction)  Best approach is a "joined-up" approach to infrastructure investment three elements:  1. Rural infrastructure (vital for agrarian commercialization and prodcutiviy growth and development of off-farm activities).  2. Large-scale national infrastructure (enables structural transformation, exercise of entrpreneurial capabilities and developemnt of production linakges).  3. Cross-border infrastructure (for regional trade)  Closing the electricity divide is as significant for economic growth and poverty reduction as closing the digital divide. Developing productive capacities: Infrastructure

UNCTAD15 UNCTAD Developing productive capacities: Conclusion: The paradigm shift required TO  Production  Employment  Ingredients  Supply and Demand  Tradables and Non-tradables  Private Domestic Investment plus FDI  Development State Focusing on the development and utilization of productive capacities requires a paradigm shift in national and international policy FROM  Integration/Exchange  Consumption  Framework  Supply-side  Tradables  FDI  Welfare State

UNCTAD16 UNCTAD  Increase share of aid for in-country programmes and direct support for programmes run by LDC governments.  Re-balance the sectoral composition of aid towards production.  Advance beyond trade preferences.  International policy innovation to support the development and full utilization of productive capacities in the LDCs. International initiatives Recommendaitons for action in favour of LDCs

UNCTAD17 UNCTAD  Support in formulating national strategies to secure "smooth transition" modalities in anticipation of the loss of concessionary treatment due to likely graduation from the LDC category => Cape Verde, Maldives, Samoa, Vanuatu  Technical cooperation on trade-related and investment-related policy matters => Cape Verde, São Tomé and Príncipe, St. Lucia, Samoa, Papua New Guinea, Vanuatu  Ad Hoc Expert Group Meeting on Structurally Weak, Vulnerable and Small Economies (Geneva, 25 June 2007) International initiatives: UNCTAD's work on SIDS and vulnerable economies

UNCTAD18 UNCTAD Thank you