The impact of the global economic crisis on industrial development of least developed countries

Research Paper
May 2010

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THE IMPACT OF THE GLOBAL ECONOMIC CRISIS ON INDUSTRIAL DEVELOPMENT OF LEAST DEVELOPED COUNTRIES
Report of the South Centre

RESEARCH PAPERS

28

THE IMPACT OF THE GLOBAL ECONOMIC CRISIS ON INDUSTRIAL DEVELOPMENT OF LEAST DEVELOPED COUNTRIES

REPORT PREPARED BY THE SOUTH CENTRE

MAY 2010

THE SOUTH CENTRE

In August 1995 the South Centre wasestablished as a permanent inter-governmental organization of developing countries. In pursuing its objectives of promoting South solidarity, South-South cooperation, and coordinated participation by developing countries in international forums, the South Centre has full intellectual independence. It prepares, publishes and distributes information, strategic analyses and recommendations oninternational economic, social and political matters of concern to the South. The South Centre enjoys support and cooperation from the governments of the countries of the South and is in regular working contact with the Non-Aligned Movement and the Group of 77. The Centre’s studies and position papers are prepared by drawing on the technical and intellectual capacities existing within South governments andinstitutions and among individuals of the South. Through working group sessions and wide consultations, which involve experts from different parts of the South, and sometimes from the North, common problems of the South are studied and experience and knowledge are shared.

ABOUT THIS REPORT

This paper is a report that the South Centre originally produced at the request of the United NationsIndustrial Development Organisation (UNIDO). An earlier draft was distributed at a UNIDO Conference in December 2009. This Report is drawn heavily from a background paper on the same topic written by Dr. Mehdi Shafaeddin for the South Centre. Contributions for various sections were also made by Martin Khor and Aileen Kwa. Yılmaz Akyüz made valuable comments. Xuan Zhang provided research assistanceincluding on some data used in the report.

ABSTRACT

This paper 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 tradeand 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 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 exportearnings, 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 ininternational 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 haveexperienced 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....