Lessons learned from structural transformation in least developed countries


By Daniel Gay[1], Inter-Regional Adviser on LDCs, UN Department of Economic and Social Affairs

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At Leather Wings, a small shoe-making outfit based in central Kathmandu, four women sit in a small room cutting up bright red cowhide imported from India. Next door, a dozen of their colleagues stitch the shapes together on sewing machines. The owner Samrat Dahal says the boots, designed by a German expat, sell via the Internet in India, China and Italy.

The company, founded in 1985, sums up some of the issues facing the Nepalese economy: entrepreneurial leaders at the helm of a committed workforce making a competitive and quality product for which overseas demand is ample. The problem isn’t finding buyers; it’s scaling up production to meet that demand. Exports by the handful of players in Nepal’s shoe industry totalled only USD 23 million in 2015. The task of boosting production in Nepal is doubly pressing given that the country already meets the criteria to graduate from the least developed country (LDC) category, something that the government wants to happen as soon as 2022. Nepal’s productive capacity predicament is typical of many LDCs. Moving onto a path of long-term prosperity requires structural transformation that expands production via manufacturing, services and higher-productivity agriculture.

The UN Committee for Development Policy (CDP), using a series of case studies, identified some possible lessons from building productive capacity in countries that are about to leave or have recently left the LDC category. Here are two of the most important:

 First, context is queen

If one lesson emerges from the Washington Consensus era and afterwards, then it’s that one size doesn’t fit all. For example, the policy recommendations for Nepal’s small and concentrated economy won’t be the same as for large, diversified Bangladesh, even if the countries are in close proximity.

Our study found that small, natural resources or tourism exporters that have left the LDC category or are about to do so, like Bhutan, Botswana, Cabo Verde, Maldives, Samoa, Solomon Islands and Vanuatu, concentrate on home-grown development governance and legitimacy, macroeconomic stability, and investments in health and education. While these policy imperatives might seem obvious and universal, they took a specific priority and form. In such small economies, political legitimacy is particularly crucial to avoid the perception that the state is acting just in the interests of a privileged elite. Without legitimacy, the state simply struggles to get things done, and civil servants have no overarching goal to rally behind. Since none of these countries followed the ‘developmental state’ model, their development pathways were much more devolved, organic and consensual. This therefore demanded a more multifaceted and sensitive approach to securing political legitimacy. Good development governance is as much about tailoring institutions to the traditional context as about avoiding corruption. Solid health and education policies further bolster legitimacy and help put in place the conditions for diversification away from resources.

A large, more diversified economy like Bangladesh, on the other hand, used a development-focused governance structure to actively promote economic transformation, with the rural economy as a launching pad. The active process of political legitimation was different and perhaps less pressing, owing to the country’s unique past, size and cultural composition.

Even though non-state actors play an unusually strong role in Bangladesh, in the early stages of economic transformation, the government recognised that rural sector development was constrained by limited physical access to markets, low food processing capacities as well as the absence of a functioning market to channel agricultural surplus into productive investment. The state therefore stepped in. It used such measures as setting a suitable price for agricultural produce, establishing a price policy for principal inputs, directly taxing agriculture that incentivised farmers to produce, as well as pursuing fiscal and monetary policies to support private investment. These and other interventions led to rapid growth in agricultural productivity and food production, contributing to food security, wage competitiveness and an expansion of non-farm rural economic activities.

Second, think outside the box and co-ordinate

In many LDCs, macroeconomic, financial, social and industrial policies tend to be rather conventional, are conducted in isolation from each other, and aren’t subordinated to the goal of structural transformation.

Bangladesh, however, not only tailored various policies to its national context, but also successfully linked them together – often in unorthodox ways. The government initially enacted quite ‘hard’ sector-specific industrial policies such as tariffs, tax incentives and local content requirements. For health and economic reasons, the Drugs Control Ordinance of 1982, for example, allowed the authorities to fix prices and restrict the imports of any medicine if it or a substitute was produced in the country. But industrial policies also benefitted from macroeconomic and financial policies that stimulated investment in the targeted sector, the main one of which was garment manufacturing. These policies included strengthening banking to ease access to credit, investing in energy and transportation to remove infrastructure bottlenecks, and simplifying procedures to establish manufacturing enterprises.

This coordination of macro and industrial policies helped Bangladesh diversify away from raw material and agricultural production to become the world’s second-largest exporter of ready-made garments. And international market access was a key part of the success. The country’s human development successes – whether by design or not – also put in place a healthy and educated workforce to staff the garment industry. With improvements, this workforce looks likely to drive the country’s continuing economic transformation toward pharmaceuticals and IT services.

These are only two of the main lessons from the CDP’s research, which doesn’t cover every possible angle of promoting structural transformation in LDCs. For instance, considerably more work needs to be done to recognise environmental limits whilst simultaneously promoting industrial development for poverty reduction in LDCs. Another key lesson is using export processing zones (EPZs) to facilitate the task of getting things across borders, and often from a few target sectors, especially in national contexts where policy coordination is simply too time-consuming or difficult. Such quick wins help convince stakeholders that structural transformation and change are possible. EPZ policy can take place alongside more conventional country-wide policies.

What seems clear is that successfully graduating LDCs pursued different, often unconventional, policies aimed at structural transformation. Such policies were rarely enacted in isolation from one another and were almost always shaped to meet national needs. Hopefully, with more policy coordination, out-of-the box thinking and tailoring to national contexts, others will experience successes like the Nepalese women already stitching shapes at Leather Wings and moving their country closer to broad-based economic transformation.

[1] These views are those of the author only and do not necessarily represent the views or the official position of the Committee for Development Policy (CDP), its Secretariat or the United Nations.