Research Paper 28, May 2010

South Centre has released a Research Paper which examines the impact of the external shocks from the global economic crisis on industrial development of Least Developed Countries (LDCs).  These countries are heavily exposed to external shocks because of their extensive trade with the rest of the world.  Yet, they are marginalized in terms of their share in international trade and output.  They suffer from structural weaknesses and chronic balance-of-payments and fiscal deficits.  They are heavily dependent on commodity exports and external financing.The global economic crisis is a wake-up call for LDCs to reconsider their long-term industrial and development strategies.  

The commodity boom of 2003-08 allowed many of them to accelerate growth of their GDP and manufacturing value-added (MVA), but most of these benefits have been lost during the subsequent “bust” due to declines in export earnings, workers remittances and external sources of finance. They have seen significant declines in their GDP, MVA and investment in production capacity and sharp increases in unemployment due to closure of a number of factories.

These shocks came on top of the exposure of their manufacturing sector to severe external competitive pressures resulting, inter alia, from changes in the rules of the game in international competition.  They thus increased the need to restructure and nurture their industries. Yet, their policy space has diminished due to pre-mature trade liberalization and “market oriented” strategies imposed on them by donors and the international financial institutions (IFIs).  As a result, despite the acceleration of growth of their MVA during the boom years, most LDCs have experienced significant de-industrialization as compared with the situation prevailing in the early 1980s.

The global economic crisis is a wake-up call for LDCs to reconsider their long-term industrial and development strategies.  There is no “one-size-fit-all” strategy.  However, some common policy guidelines should apply to all and this paper makes proposals for industrial development along these lines. These countries still have some room to manoeuvre despite considerable loss of policy space. However, in order to avoid the risk of human tragedy, particularly in Sub-Saharan Africa, there is also a need for changes in WTO rules, a fundamental change of policies of IFIs towardsLDCs, and a basic reconsideration of the proposed Economic Partnership Agreements (EPAs).

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