Challenges of the Least Developed Countries: Governance and Trade (Least Developed Countries Series)

ESCAP is the regional development arm of the United Nations and serves as the main economic and social development centre for the United Nations in Asia and the Pacific. Its mandate is to foster cooperation between its 53 members and 9 associate members. ESCAP provides the strategic link between global and country-level programmes and issues. It supports Governments of countries in the region in consolidating regional positions and advocates regional approaches to meeting the region’s unique socio-economic challenges in a globalizing world. The ESCAP office is located in Bangkok, Thailand. Please visit our website at www.unescap.org for further information.

The shaded areas of the map indicate ESCAP members and associate members.

Challenges of the Least Developed Countries: Governance and Trade

United Nations ESCAP New York, 2007

ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

Challenges of the Least Developed Countries: Governance and Trade

United Nations publication Sales No. E.07.II.F.11



All rights reserved Manufactured in Thailand ISBN: 978-92-1-120504-6 ST/ESCAP/2443

The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries. The views expressed in this volume are those of the authors and do not necessarily reflect the views of the United Nations Secretariat.

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PREFACE The experiences of the least developed countries in the Asian and Pacific region vary widely as these countries differ greatly in terms of size, geography, history and socio-economic conditions. However, the persistently high incidence of poverty, poor institutional capacity, inadequate human resources, low levels of economic and export diversification and inadequate infrastructure, melded with significant external debt burdens and decreased inflows of official development assistance, have coerced the least developed countries into a position in which they generally have become the weakest segment of the international community. All these predicaments, combined with the challenges of globalization and the rapidly widening digital divide, have further marginalized and retarded the process of integrating these less fortunate countries into the global economic system. The ESCAP secretariat gives special focus to helping the least developed countries deal with such issues. It organized an expert group meeting in 2003 in order to address the socio-economic challenges faced by these countries of Asia and the Pacific. The present publication is a collection of papers presented at the meeting on governance and trade-related issues in least developed countries of the region. Part One of the study discusses the issues related to governance, noting that good governance is crucial for the implementation of sound economic and social policies. In the absence of effective governance, other policies, such as financing for development and trade-related concessions to assist the least developed countries, will have limited impact. Part One also notes that many of the least developed countries of Asia and the Pacific have undertaken wide-ranging reform policies and measures to improve their governance situation. However, further effort and domestic political commitment are needed to ensure that the positive benefits of good governance will favourably affect the institutional capability of Governments to plan and implement coherent long-term policies. Part Two examines the key trade constraints facing the least developed countries, especially those related to barriers to market access as well as supply-side “behindthe-border” constraints. It also analyses the new challenges encountered by these countries in the face of the recent trade liberalization initiatives of the World Trade Organization (WTO). Lessons are also drawn from the experience of the least developed countries in seeking accession to WTO, and recommendations are made to ensure that WTO membership fits the particular economic needs of these countries. It is hoped that the analysis and the suggestions presented in this publication may generate interesting discussions among the policymakers, practitioners, researchers and development partners on the importance of good governance and the need for market access to the least developed countries in the region. The ESCAP secretariat would like to thank the two authors, Patrick Keuleers (United Nations Development Programme) and Kazi Matin (World Bank), and the expert group meeting discussants, Professor Hall Hill (Australia), Mustafizur Rahman (Bangladesh), Panjore (Bhutan), Arjun Sengupta (India), Shinichiro Ichimura (Japan), Yuba Raj Khatiwada (Nepal), Suchitra Punyaratabandhu (Thailand), S. Langi Kavaliko (Tonga), Tekreth Samrach (Association of South East Asian Nations), Evan Due (International Development Research Centre) and Pierre Encontre (United Nations Conference on Trade and Development) for their valuable contributions in the preparation of this publication.

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CONTENTS Page PREFACE ................................................................................................................................

iii

ABBREVIATIONS ................................................................................................................

ix

I.

CHALLENGES OF THE LEAST DEVELOPED COUNTRIES IN ASIA AND THE PACIFIC .................................................................................

1

A.

Least developed countries in Asia and the Pacific ......................................

2

B.

Governance ...........................................................................................................

3

C.

Trade .....................................................................................................................

4

D.

Global partnership for development ...............................................................

4

PART ONE: GOVERNANCE II.

GOVERNANCE, ECONOMIC GROWTH AND DEVELOPMENT ..............

9

III. MEASURING THE QUALITY OF GOVERNANCE: GOVERNANCE INDICATORS .............................................................................

11

A.

Governance indicators for Asian and Pacific least developed countries ..................................................................................

11

B.

Analysis of ratings and conclusion .................................................................

13

IV. ANALYSIS OF SOME KEY GOVERNANCE DIMENSIONS .........................

17

A.

Parliamentary development and electoral reforms ......................................

17

B.

Improving public sector performance ............................................................

18

C.

Controlling corruption – accountability, transparency and ethics in governance ...................................................................................

20

D.

Access to information ........................................................................................

22

E.

Decentralization and local governance ...........................................................

23

F.

Human rights and access to justice ................................................................

25

G.

Least developed countries in conflict and post-conflict situations ...........

27

GOOD GOVERNANCE AT THE INTERNATIONAL LEVEL: COMMITMENTS TO SUPPORT LEAST DEVELOPED COUNTRIES ........

33

VI. CONCLUSION .............................................................................................................

37

V.

v

CONTENTS (continued) Page PART TWO: TRADE INTRODUCTION ................................................................................................................

43

VII. TRADE PERFORMANCE BY ASIAN LEAST DEVELOPED COUNTRIES .................................................................................................................

47

A. B. C.

Trade preference in Asian least developed countries ................................. Trade performance in landlocked least developed countries .................... Foreign direct investment ..................................................................................

47 48 48

VIII. IMPROVING MARKET ACCESS ...........................................................................

51

A. B. C. D. IX.

X.

Barriers to markets in developed countries .................................................. Barriers to markets in developing countries ................................................. Moving regionalism forward ............................................................................ Geographical constraints to market access ....................................................

51 55 56 57

SOLVING DOMESTIC SUPPLY-SIDE CONSTRAINTS TO TRADE EXPANSION ........................................................................................

61

A. B. C.

Domestic trade policies hindering trade expansion ..................................... Non-trade “behind-the-border” policies hindering trade ........................... Domestic policy changes for export promotion and diversification ........

61 65 72

FACILITATING THE ACCESSION OF LEAST DEVELOPED COUNTRIES TO THE WORLD TRADE ORGANIZATION ..........................

75

A.

Benefits of WTO membership for least developed countries: An opportunity for wide-ranging policy reforms ..................... Accelerated accession and automatic grant of preferential treatment: economically wise? .......................................................................... National ownership of the accession process ............................................... Review of the experience of least developed countries in accession negotiations ................................................................................... Streamlining the accession procedure for least developed countries ........................................................................................... Capacity-building for accession negotiations ................................................ Technical assistance in implementing reforms .............................................

81 82 83

NATIONAL AND INTERNATIONAL POLICY CHANGES TO REMOVE CONTRAINTS ..................................................................................

87

A. B. C.

Improving access to external markets ............................................................ Enhancing trade facilitation at the national level ........................................ Facilitating least developed countries’ accession to WTO ..........................

87 88 89

REFERENCES .........................................................................................................................

91

B. C. D. E. F. G. XI.

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75 76 77 79

TABLES Page I.1

Criteria used in determining eligibility for least developed country status ...........................................................................................................

3

II.1

Impediments faced by least developed countries .............................................

10

III.1

Measuring governance in least developed countries .......................................

12

IX.1

Trade policy regimes in Asian and Pacific least developed countries .........

62

IX.2

Simple average tariff rates .....................................................................................

63

IX.3

LDC illiteracy rates and school enrolment ratios .............................................

66

IX.4

Measures of effectiveness of public credit information services ...................

67

IX.5

Cost of doing business in selected Asian least developed countries and other countries .................................................................................................

70

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BOXES Page Box 1. Cambodia’s Garment Industry ..............................................................................

55

Box 2. Integrating transit transport issues within existing regional economic cooperation frameworks – The Case of the Dhaka-Chittagong Economic Corridor ................................................................

58

Box 3. Institutional constraints to trade ...........................................................................

65

Box 4. The Deferral of Vanuatu’s Entry in WTO: Why Does Policy Autonomy Matter? ..................................................................

78

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ABBREVIATIONS ADB

Asian Development Bank

CDI

Commitment to Development Index

DAC

Development Assistance Committee of the Organisation for Economic Co-operation and Development

ESCAP

Economic and Social Commission for Asia and the Pacific

FDI

foreign direct investment

GATT

General Agreement on Tariffs and Trade

GDP

gross domestic product

GNI

gross national income

GNP

gross national product

HIPC

heavily indebted poor countries

ICT

information and communication technology

IMF

International Monetary Fund

ITC

International Trade Centre

LDC

least developed country

MDGs

Millennium Development Goals

NGO

non-governmental organization

OECD

Organisation for Economic Co-operation and Development

ODA

official development assistance

PRSP

Poverty Reduction Strategy Paper

RTA

regional trade agreement

SURF

Subregional Resource Facility (UNDP)

TRIPS

trade-related aspects of intellectual property rights

UNCTAD

United Nations Conference on Trade and Development

UNDP

United Nations Development Programme

WTO

World Trade Organization

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I

Challenges of the Least Developed Countries in Asia and the Pacific

The Declaration of the Third United Nations Conference on the Least Developed Countries,1 or Brussels Declaration, committed the international community to the eradication of poverty and the improvement of the quality of lives of people who live in least developed countries. Guided by the principles set out earlier in the United Nations Millennium Declaration,2 the Programme of Action for the Least Developed Countries for the Decade 2001-2010, adopted at that Conference, articulated the measures that need to be implemented by the least developed countries and their development partners in order to attain internationally agreed development goals.3 1

Report of the Third United Nations Conference on the Least Developed Countries, Brussels, 14-20 May 2001 (A/CONF.191/13), chapter I.

2

General Assembly resolution 55/2 of 8 September 2000.

3

The Programme of Action for the Least Developed Countries for the Decade 2001-2010 articulates seven commitments by the least developed countries and their development partners towards achieving the Millennium Development Goals and the actions to be taken by each partner. These commitments are (a) fostering a people-centred policy framework; (b) good governance at national and international levels; (c) building human and institutional capacities; (d) building productive capacities to make globalization work; (e) enhancing the role of trade in development; (f) reducing vulnerability and protecting the environment; and (g) mobilizing financial resources.

To address the special needs of the least developed countries, the Brussels Declaration called upon developed countries (a) to adopt a policy of duty- and quota-free access for essentially all exports from the least developed countries; (b) to implement the enhanced programme of debt relief for the heavily indebted poor countries without further delay and to agree to cancel all official bilateral debts of those countries in return for their making demonstrable commitments to poverty reduction; and (c) to grant more generous development assistance, especially to countries that are genuinely making an effort to apply their resources to poverty reduction. Since then, development partners of least developed countries have extended a number of aid, trade and debt relief measures to enable them to attain their development goals. Actual socio-economic progress in the least developed countries, however, depends also upon the overall challenges in governance and trade faced by these countries. These challenges affect the overall effectiveness of the measures of aid, trade and debt relief measures taken by the least developed countries and their development partners. This publication considers governance and trade-related challenges faced by the least developed

1

Challenges of the Least Developed Countries: Governance and Trade

countries in Asia and the Pacific and propose policies and sequences to be considered for implementation at national, regional and international levels.

A. Least developed countries in Asia and the Pacific While the implementation of the Brussels Programme of Action for the Least Developed Countries is critical in order to foster sustainable development in these countries, the international community also needs to recognize that each country is different. Since the establishment of the list of least developed countries in 1971, Bangladesh, Cambodia, Kiribati, Myanmar, Solomon Islands, Timor-Leste, Tuvalu and Vanuatu have joined the original six countries in Asia and the Pacific. Clustered in South Asia, South-East Asia and the Pacific subregions, the 14 least developed countries in the Asian and Pacific region vary widely. Afghanistan, Bhutan, the Lao People’s Democratic Republic and Nepal are landlocked, while Kiribati, Maldives, Samoa, Solomon Islands, TimorLeste, Tuvalu and Vanuatu are small island developing States. Cambodia and the Lao People’s Democratic Republic are countries with economies in transition. Bangladesh is relatively large and densely populated while the least developed countries in the Pacific are small and remote. Afghanistan, Cambodia, Nepal, Solomon Islands and Timor-Leste have faced conflict in the past and some are still in the difficult process of nation-building. Since there is no typical least developed country, there is no uniform prescription to address their challenges. In the triennial review conducted in 2006 to determine which countries should be added to or graduated from the list of least developed countries, the Committee for Development Policy based its identifi-

2

cation of these countries on the three dimensions of a country’s state of development, namely (a) its income level; (b) its stock of human assets; and (c) its economic vulnerability. Gross national income (GNI) per capita was used as an indicator of income, the Human Assets Index as an indicator of the stock of human assets and the Economic Vulnerability Index as an indicator of economic susceptibility.4 In addition, no country with a population exceeding 75 million was considered for addition to the list. The results based on LDC eligibility indicators for 14 least developed countries in Asia and the Pacific are summarized in table I.1. In 2006, the Committee for Development Policy recommended that: (a) Papua New Guinea be included in the list of least developed countries (subject to the acceptance of its Government) and (b) Samoa be graduated from the list. The Committee also found Kiribati, Tuvalu and Vanuatu eligible for graduation for the first time. In accordance with a recent United Nations General Assembly resolution, Maldives will be graduated from the list in January 2011.

4

The Human Assets Index reflects (a) nutrition, as measured by the percentage of the population undernourished; (b) health, as measured by the under-five child mortality rate; and (c) education, measured by (1) the gross secondary school enrolment rate; and (2) the adult literacy rate. The Economic Vulnerability Index (EVI) reflects the risk to a country’s development by exogenous shocks, the impact of which depends on the magnitude of the shocks and on structural characteristics that determine the extent to which the country would be affected by such shocks. EVI is a combination of seven indicators: (a) population size; (b) remoteness; (c) merchandise export concentration; (d) share of agriculture, forestry and fisheries in gross domestic product; (e) homelessness owing to natural disasters; (f) instability of agricultural production; and (g) instability of export of goods and services.

Chapter I

Table I.1. Criteria used in determining eligibility for least developed country status Population 2004 (in millions)

Country

Afghanistan Bangladesh Bhutan Cambodia Kiribati Lao People’s Democratic Republic Maldives Myanmar Nepal Samoa Solomon Islands Timor-Leste Tuvalu Vanuatu

Per capita gross national income (United States dollars)

Human Assets Index

Economic Vulnerability Index

29.9 141.8 2.2 14.1 0.1 5.9

122 403 690 303 917 350

11.5 50.1 44.4 46.0 90.5 54.0

60.3 25.8 46.6 52.3 84.3 57.9

0.3 50.5 27.1 0.2 0.5 0.9 0.01 0.2

2 320 167 243 1 597 557 467 1 267 1 187

81.9 68.4 56.0 90.4 70.6 55.3 89.7 66.0

50.5 42.2 37.4 64.7 56.9 65.2 91.9 64.3

Source:

United Nations, Committee for Development Policy, Report on the eighth session, 20-24 March 2003. Official Records of the Economic and Social Council, 2006, Supplement No. 13 (E/2006/33).

Note:

The thresholds for inclusion in the list of least developed countries are a population of fewer than 75 million; a three-year average (2002-2004) per capita GNI less than US$ 745; Human Assets Index less than 58; and Economic Vulnerability Index greater than 42. A country must meet all the criteria. Thresholds for graduation from the list of least developed countries are a three-year average (2002-2004) per capita GNI greater than US$ 900; Human Assets Index greater than 64; and Economic Vulnerability Index of less than 38. A country must meet at least two of the criteria for graduation. Figures in boldface type indicate a graduation criterion that has been met by a least developed country.

B. Governance Since each country is responsible for its own socio-economic development, each country needs to ensure good governance, which is essential for the implementation of sound economic and social policies. Good governance requires domestic political commitment. Without effective governance, financing for development and trade-related concessions to assist these countries will have limited impact.

In many least developed countries, political instability affects the institutional capability of Governments to plan and implement coherent long-term policies. Despite their economic growth, the incidence of poverty often remains high, owing to the unequal distribution of wealth, resources and opportunities. Given the wide disparity in the ownership of productive resources, good governance is necessary to ensure that the poor in these countries benefit from financing

3

Challenges of the Least Developed Countries: Governance and Trade

for development and trade measures conceded by the international community. Since governance has several distinct aspects, it is essential to focus on those that are essential for development. Democratic governance advocated by a number of international organizations considers (a) parliamentary development; (b) electoral systems and processes; (c) access to justice and human rights; (d) access to information; (e) local governance and decentralization; and (f) public administration and civil service reform. Furthermore, particular combinations and sequencing of these aspects of governance may be more relevant to each least developed country. Finally, governance also needs to ensure that the country is able to use all of its available resources, especially the human resources of women.

C. Trade Although trade is a primary instrument in assisting the least developed countries, measures implemented by the international community may not necessarily lead to a significant improvement in countries which are unable to fully integrate themselves in the global trading system. Landlocked and island developing countries generally face higher direct and indirect trade and transport costs owing to their geography. Establishment of effective transit transport and trade systems in collaboration with the transit authorities in developing countries may be a prerequisite for their regional and global integration. In addition to infrastructure development, implementation of transit trade and transport facilitation measures and coordination among various private and public sector participants may also be needed.

4

At the global level, the interest of the least developed countries, with their limited supply capacities and small domestic markets, may also not be congruent with the interests of other developing countries. As reflected in the Economic Vulnerability Index, least developed countries are generally highly dependent on a limited number of products for their exports. The cost of producing these commodities may also be high. Their specific concerns, especially regarding market access, may therefore differ from those of other developing countries. To address these issues, the Subcommittee on Least Developed Countries of the World Trade Organization (WTO) was established to report on ways of integrating these countries into the multilateral trading system, to provide them with technical cooperation and to periodically examine how the special provisions favouring the least developed countries in WTO agreements are being implemented. All partners of the least developed countries need to ensure that these countries are able to take advantage of these measures so that they lead to their socio-economic development.

D. Global partnership for development As the Brussels Declaration recognizes, the primary responsibility for development in least developed countries rests with the countries concerned. If concrete and substantial international support from Governments and international organizations in a spirit of shared responsibility is to be expected, the least developed countries must address their domestic challenges themselves and lead the international community towards a resolution of their regional and inter-

Chapter I

national concerns. Without effective ways to address these challenges, the best intentions and efforts by their development partners may not confer significant improvements on the least developed countries themselves. Finally, while much focus on the partnership has been placed on support from developed countries, effective implementation of the Brussels Programme of Action for the Least Developed Countries in the Asian and Pacific region requires implementation of special measures by developing countries surrounding these least developed countries. Possibilities for a regional partnership in Asia and the Pacific need to be explored. The first part of this publication provides an assessment of the state of governance in the least developed countries in Asia and the Pacific. This discussion on governance-related constraints to development is organized in four sections. First, the importance of governance as a key element of the development paradigm and as a prerequisite for economic growth is highlighted. Second, the quality of governance is measured with a set of governance indicators. Third, an analysis of several key dimensions of governance examines parliamentary development

and electoral reforms, corruption, access to information, decentralization and local governance, and access to justice in these countries. The last section examines the international commitments to support the least developed countries in tackling their challenges. The second part examines traderelated constraints faced by these countries. First, the future potential of the least developed countries in Asia is assessed in light of their trade performance in the previous decade. Second, the extent of access by the least developed countries to markets in developed and developing countries is considered. The potential of regional trade arrangements to remove trade-related constraints is discussed, with particular attention paid to geographical constraints to market access. Third, domestic supply-side constraints to trade expansion are considered and domestic policy changes for export promotion and diversification are proposed. Fourth, the process of WTO accession by the least developed countries is considered. The particular needs of the least developed countries and the technical assistance required in order to implement the necessary reforms are highlighted. The final section summarizes the various policy recommendations presented in the chapter.

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PART ONE Governance

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II

Governance, Economic Growth and Development*

Good governance is perhaps the single most important factor in eradicating poverty and promoting development. Singling out governance as a key priority, four out of the seven Commitments identified in the Brussels Programme of Action for the Least Developed Countries are related to governance: fostering people-centred action; promoting good governance at national and international levels; building human and institutional capacities; and mobilizing financial resources, including official development assistance (ODA). Good governance is generally positively correlated with economic performance (Linder and Santiso, 2002). Governance, however, has many dimensions. For example, institutional quality is often highly correlated with aid effectiveness and investment levels. As such, the dimensions having the most impact on development and poverty needs to be identified so that resources could be allocated to specific areas that could lead to rapid and equitable socio-economic development.

*

Part One of the publication has been prepared by Patrick Keuleers of United Nations Development Programme. It was also updated and edited by the secretariat.

Given the difficulty in measuring the impact of measures to improve governance on poverty, issues related to prioritization and sequencing of governance reforms are still debated. Economic growth, which is necessary for poverty reduction, is usually associated with their development of industrial and service sectors. Least developed countries however face a number of factors that impede implementation of such growth strategy. Some constraints arise from the specific geographical location or physical conditions of these countries. Other constraints such as quality of governance and economic institutions are determined in part by the political or economic decision-making process and thus are much more amenable to change. Key risk factors that influence economic growth in least developed countries range from weak governance to geographical isolation. The risk factors are summarized in table II.1. The least developed countries in the Pacific and South Asia face many of these risk factors, but those in South-East Asia face fewer of these impediments owing to their coastal orientation, larger populations and less adverse environmental conditions.

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Challenges of the Least Developed Countries: Governance and Trade

Table II.1. Impediments faced by least developed countries Internal impediments

External impediments

Weak governance including lack of transparency, respect for human rights and participation, as well as inefficient and ineffective public administration.

Low population density leading to limited internal markets.

Deficits in human capacity both in the public and the private sector.

Protectionism and reduced trade opportunities.

Gender discrimination.

Geographical isolation.

Internal and external conflicts.

Biophysical barriers, such as soil infertility and tropical disease.

Deficiencies in communication and infrastructure.

External debt crisis.

Environmental degradation.

Weak governance is understandably a constraint to both economic development and poverty reduction. Yet, despite their best efforts, not all economies are equally well-placed to achieve economic growth since they also face many other challenges that are beyond their immediate control. For these countries, good governance is necessary but not sufficient. A multidimensional approach that allows each country and their development partners to address the particularities of each country is required.

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Around the world, discussions on development are thus placing more and more emphasis on accountable institutions and governance. The UNDP Human Development Report 2002: Deepening Democracy in a Fragmented World stated that “advancing human development requires governance that is democratic both in form and substance”. However, the Report also highlighted the difficulties in conceptualizing unambiguous, uncontroversial indicators for measuring the quality of democratic governance in a given context.

III

Measuring the Quality of Governance: Governance Indicators

A. Governance indicators for Asian and Pacific least developed countries The Asian and Pacific region has many diverse forms of governance. The region historically had strong Governments that have steered development from the top down (China, Indonesia, Malaysia, the Republic of Korea and Singapore). These centralized bureaucracies delivered many of the economic rights and achieved a notable reduction in poverty, mainly due to the quality of service delivery, the building up of human resources and professionalism of the public service. In the 1990s a number of least developed countries were exposed to a crisis in governance, manifested by the persistence of corruption, poorly conceived and weakly implemented policies, erosion of social norms and accumulation of political and social conflict. While macroeconomic and fiscal performance was strengthened after the 1997 Asian financial crisis, governance and institutional performance remain issues of concern in most of the Asian and Pacific least developed countries. The search for adequate indicators of governance performance has attracted

considerable interest from a variety of sources. There now exist a wide variety of country risk ratings and indicators for governance performance, debunking the myth that governance is too hard to define or measure. While most of these indicators do not allow assessing longer-term trends, they all reflect an important shift from the “nature of governing systems” to the “quality of governance systems” (Linder and Santiso, 2002). The quality of governance in a given country reflects a complex array of factors. Consequently, trying to aggregate a variety of more narrowly focused governance factors into one single indicator for assessing the quality of governance in a country would not be appropriate. The unbundling of governance into more specific dimensions would help better to highlight the causes, consequences and costs of various forms of governance failures. It also shows that there can be a wide variation in institutional quality within a particular country as well as differences in scores between governance indicators within one country. It can also help donors in identifying key entry points that can operate as true champions for reforms. Nonetheless, the use of objective and subjective indicators that aim to show the extent of democracy or political

11

Challenges of the Least Developed Countries: Governance and Trade

and civil rights in countries remains controversial. Objective indicators (e.g., existence of competitive elections) fail to capture all aspects of democracy. Subjective indicators (e.g., those produced by NGOs such as Transparency International, and Freedom House, or by the World Bank) capture more of what is meant by the concept of democracy, but because they are subjec-

tive, they are open to disagreements and perception biases (UNDP, 2002). Despite the limitations of such indicators, in order to summarize trends and provide inputs to the debate on the quality of governance, this chapter looks at the 14 Asian and Pacific least developed countries on the basis of six governance indicators developed by the World Bank as recorded in table III.1.

Table III.1. Measuring governance in least developed countries

Country

Samoa Maldives Solomon Islands Vanuatu Cambodia Myanmar Lao People’s Democratic Republic Bhutan Bangladesh Nepal Kiribati Tuvalu Afghanistan Timor-Leste

Human DevelopGovernVoice/ ment Political ment accountReport stability effecability 2004 tiveness ranking

Rule of law

Regulatory quality

Control of corruption

75 84 124 129 130 132 135

69.7 25.3 60.1 73.2 30.3 1.5 3.5

74.1 93.5 – – 35.1 11.9 40

64.4 75.8 6.7 29.4 33.5 7.7 22.7

79.9 66 30.4 47.9 20.1 2.1 12.9

52.6 74.2 9.3 20.1 39.2 2.1 10.3

56.2 59.8 22.2 40.2 20.1 2.1 3.6

134 138 140 – – – –

13.6 29.3 33.3 82.3 85.9 11.1 55.6

71.9 26.5 8.1 – – 1.1 19.5

81.4 35.1 36.6 60.8 – 5.2 24.2

58.2 26.3 37.6 47.9 – 2.6 12.4

30.9 13.9 35.6 12.9 – 2.6 8.8

80.9 7.7 46.9 40.2 – 2.6 37.1

Source:

D. Kaufmann, A. Kraay and M. Mastruzzi, Governance Matters III: Governance Indicators for 1996-2002, World Bank website, 2003.

Note:

Figures are for 2002.

12

Chapter III

B. Analysis of ratings and conclusion The least developed countries that score high on governance indicators are generally the ones that rank high on the Human Development Index. Countries that score well in one aspect of governance also tend to score well in others. Samoa scored well in all six governance indicators while Vanuatu scored well in five. Bhutan, Kiribati and Maldives scored well in four governance indicators but six countries scored poorly in all six governance indicators. Such correlation suggests that improvement in certain aspects of governance could lead to improvements in other aspects of governance. Looking into individual governance indicators, all six of the small island least developed countries in the Pacific, namely Kiribati, Samoa, Solomon Islands, TimorLeste, Tuvalu and Vanuatu scored well for voice and accountability. Bhutan, Samoa and Vanuatu scored well for political stability, rule of law and control of corruption. Bhutan, Maldives, Samoa and Tuvalu scored well for government effectiveness, while Maldives, Samoa and Vanuatu scored well for regulatory quality. Countries that have experienced armed conflict in recent years, such as Afghanistan, Cambodia, Nepal and Timor-Leste, scored very poorly on political stability. Political and administrative reforms currently being implemented in a number of least developed countries, however, could lead to improvements in these scores in the future. The table enables one to draw preliminary conclusions. First, low scores in some of the governance indicators are closely correlated with the high incidence of poverty. Corruption, for example,

negatively impacts development, whether it occurs in a post-conflict country or in a politically stable country. Measures to control corruption at different levels could contribute to each country’s development and reduction of poverty. However, the link is less clear for other indicators. Regulatory quality, rule of law and effective Government are important for development. It may however be difficult to prescribe an effective form of Government that would lead to poverty reduction. Depending on local circumstances, an effective Government may be highly centralized or decentralized; it may be lean or heavily bureaucratic; it may be very participative or rather autocratic. Trying to ascertain a correlation between decentralized governance and poverty reduction may therefore be difficult. Second, although voice and accountability comprise a key dimension of governance, they may not be the key determinant for poverty reduction. If cultivated in a climate of political stability, voice and accountability could have an impact on the overall level of human development. “Political stability” is also important for reaching certain development goals. This suggests the need for an incremental process when deciding on the implementation of democratic reforms. In general, there is a consensus in the international community that democracy is a universal value shared by all peoples and that good governance is essential to poverty reduction and sustainable development in any country. However, a number of studies and international conferences have confirmed that democratic governance is not sustainable, unless (a) there is empowerment of people leading to the sharing of democratic values among a broad segment of the population; (b) there are economic and social under-

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Challenges of the Least Developed Countries: Governance and Trade

pinnings to sustain and spread the benefits of democratic values; (c) there is a solid partnership and solidarity among different actors of society both at the local and national levels to promote democratic values and institutions; and (d) policies, programmes and projects in support of democratic governance at the central and local levels are not imposed by the donor community. Without these conditions in place, the benefits of democratic governance may not reach the poor and voiceless. Consequently, there is a need for pragmatism, flexibility and caution when measuring the quality of governance in a diverse group of least developed countries. Democratic governance relies on strong foundations – economic, social and political – which require time to anchor in society. Building, strengthening and consolidating the economic foundations for democratization includes promoting sustainable growth, employment expansion, skill development, poverty reduction and income distribution. Building, strengthening and consolidating the social foundations for democratization includes educating children and adults about democratic values, tolerance for different opinions, a culture of trust and solidarity within the community and adherence to cultural and spiritual values. Building, strengthening and consolidating the political foundations for democratization include the protection of child and human rights, freedom of beliefs and creed, freedom of association and press, parliamentary representation and fair elections. In the light of the above, care should be taken not to rush when prioritizing political reforms. Due regard must be paid to a country’s political, social and

14

economic foundations for democratization. The relative weight to be given to various governance components should vary according to a country’s economic, political, institutional, financial, social and physical conditions, in a particular period of time. Hence, it may be much more important for a specific least developed country to focus on health and education, even through a top-down bureaucratic approach that promotes efficient allocation of resources and accountable resource management. In other countries, the key reforms to focus on may involve access to justice and human rights, or, alternatively, civil service and financial reforms. Depending on the different stages of economic, social and political development of the countries concerned, there exists a diversity of approaches and routes to democratization, and time is required to build and consolidate all three foundations. The challenge is to maintain political stability while ensuring an incremental path towards further reforms tailored to the local context. UNDP definitions of governance and democracy allow enough space to accommodate such a variety of models. While acknowledging the importance of good governance for economic development, the preliminary conclusion is that democratic governance is a complex and multifaceted process, the sequencing of which needs to be adapted to local circumstances. Most importantly, while there are core principles inherent in a good governance programme (transparency, accountability, predictability, equity, rule of law, participation etc.), their application in a given economic, social and political context requires careful analysis of the environment, as well as adaptation.

Chapter III

Although a possible correlation between good governance indicators and poverty alleviation remains hard to prove, it appears from the table above that all six governance indicators carry an important weight in furthering human development and in the fight against poverty in least developed countries. Nonetheless, their respective value in a given context will depend on other variables. The three countries that scored well, Bhutan, Maldives and Samoa, are geographically distant from each other. These countries have different social structures and types of government. Such an observation debunks the myth that development successes and failures are driven by culture or religion. It also points to the need for a good understanding of the cultural and social values that inform policy choices for development.

The following section will analyse some governance indicators in more detail, through the lens of two of UNDP core practices, namely “democratic governance” and “conflict prevention and recovery”. This analysis will deepen our reflection on the kind of governance reforms that are critical to further development in the least developed countries of the Asian and Pacific region. Taking a human rightsbased approach to development, UNDP focuses in particular on issues of gender equality, equal access, representation, participation and transparency. Gender is thus no longer a stand-alone indicator but a cross-cutting issue that needs to be mainstreamed through all the different service lines of governance and conflict prevention practices.

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IV

Analysis of Some Key Governance Dimensions

A. Parliamentary development and electoral reforms Today, the number of people living in “democratic” countries has grown to 2.7 billion people or almost 44 per cent of the global population. However, while 121 countries are now considered electoral democracies, only 89 out of these have an environment in which there is broad respect for human rights and a stable rule of law. In other words, 32 electoral democracies fail to provide systematic protection for basic civil liberties (Karatnycky, 2003). The state of democracy in the 14 least developed countries of the Asian and Pacific region also remains fragile, as evident from: (a) corruption (Bangladesh, Cambodia and Nepal); (b) religious and ethnic tensions, civil war and insurgencies (Nepal); (c) post-conflict reconstruction (Timor-Leste); (d) powerful interest groups and wide discrepancies in income (Bangladesh, Cambodia and the Lao People’s Democratic Republic); and (e) distance between politicians and their constituencies (Solomon Islands). The importance of regular and transparent elections and of a wellfunctioning parliament lies in its role in controlling the effectiveness of government

and in combating corruption. However, in many least developed countries, the legislature is either powerless, or disconnected from and unaccountable to the poor. UNDP assistance includes programmes to build the capacities of parliaments and legislators to ensure effective oversight of the Government. More recently, interventions have focused on a more “issue-based” engagement of parliamentarians in areas that have a direct impact on achieving the Millennium Development Goals: trade, ICT for development, human rights, gender, environmental management and anticorruption (e.g., Bangladesh, Cambodia, the Lao People’s Democratic Republic and Viet Nam). Governments are now increasingly requesting UNDP to go beyond its traditional pre-election coordinating and support role, to engage in post-election support at the local level (e.g., Bangladesh, Bhutan and Cambodia). In a post-election context, people’s participation should materialize through the formation of a vibrant civil society able to monitor the Government’s actions. Indeed, in many least developed countries in the region, participative governance remains very weak.

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Challenges of the Least Developed Countries: Governance and Trade

So far, the focus of the governancepoverty debate has largely been on the supply side, with less attention paid to the “demand” for good governance. “Demand” for good governance is hampered by weak social mobilization and a lack of civil society involvement in civic life. This is due to inadequate education and a lack of information among the population. The fact that the poor are usually represented by others (political parties and interest groups), each with different agendas and priorities, also accounts for this lack of civil society involvement in least developed countries. The deepening of democracy therefore requires a progressive shift from individual-centred democracies to partycentred democracies, and finally to peoplecentred democracies that allow for direct participation of citizens in decisionmaking.

accountability can expect a fourfold increase in income per capita in the long term and major improvements in literacy and child mortality indicators. However, the hypothesis whereby economic growth accelerates in an environment of political freedom is conditioned by the prevalence of relative political stability and of certain economic, social and political foundations that enable some form of democracy to consolidate. Lecturing on democratic governance will not lead to its rapid adoption. For democracy to take roots in a society, a societal transformation is required. A new political culture needs to be fostered, a process which, depending on local context and history, often takes a few generations to consolidate.

Past and recent lessons learned (e.g., Afghanistan, Burundi and Iraq) indicate the need for a careful analysis of the economic, social and political foundations for democratization, before rushing into political reforms. There is also the example of Timor-Leste, where political reforms were launched early in the process. In contrast to Afghanistan, Burundi, and Iraq, the relative (albeit still fragile) success of the democratization process in Timor-Leste is probably due to the strong social cohesion and the legacy of broad popular support for the revolutionary movement that now controls the political scene. Nonetheless, such social cohesion may wane rapidly if the new Government cannot deliver on its promises for more employment opportunities, especially for the younger generation.

Efficient, accountable, effective and transparent public administration, at both the national and international levels, has a key role to play in the implementation of internationally agreed goals, including those contained in the United Nations Millennium Declaration.5

To conclude, evidence suggests that countries that improve their rule of law, control corruption and promote voice and

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B. Improving public sector performance

The relatively underdeveloped private sector in many of the least developed countries requires Governments to play a major role in the delivery of services and the provision of much needed economic infrastructure. Yet, apart from Bhutan, Kiribati, Maldives and Samoa, all other least developed countries in the region score low on “government effectiveness”. On “regulatory quality” also all least developed countries, except Maldives and Samoa, score below the regional average. Besides corruption 5

General Assembly resolution 57/277 of 20 December 2002.

Chapter IV

problems, a lack of fiscal discipline and sound expenditure management as well as deficient service delivery appear to be some of the other main problems. Public sector reforms have been undertaken in nearly all 14 least developed countries in the Asian and Pacific region. Despite a substantive amount of resources allocated to this sector, results over the years remain mixed, with a slow pace of implementation. Lack of political commitment and insufficient acknowledgment, on behalf of the donors, of the highly political nature of civil service reforms are among the main reasons for the slow progress. There is also an acute lack of research on ways to achieve high performance in government organizations, and on the connections between civil service efficiency and success in poverty reduction. So far, donors have espoused the universal model of civil service reform, namely the implementation of a depoliticized, merit-based system that discounts political appointments and promotions. Increasingly though, donors acknowledge the fact that most elected Governments tend to secure the services of a cadre of trusted senior personnel. Therefore, meritbased human resource management also needs mechanisms to ensure that political appointments are linked to performance and counterbalanced by an effective system of checks and balances. However, in many least developed countries, traditional patronage systems remain, checks and balances are weak and politicians maintain important discretionary powers over the recruitment and promotion of staff. Three types of public sector reforms are taking place in least developed countries of the ESCAP region. The first type of reform is tailored to countries in transition from a centrally planned

economy to a market economy (e.g., the Lao People’s Democratic Republic and Cambodia). In these countries, public sector improvement is tackled through incremental reforms characterized by flexibility and pragmatism. The second type of reform applies to countries emerging from a crisis or a war and facing the enormous task of nation-building, often on the ruins of a devastated public administration (e.g., Afghanistan and TimorLeste). Rehabilitating basic social services and restoring law and order are some of the priorities faced by these post-conflict Governments. In the third category of least developed countries, the public sector has deteriorated so badly that crisis-management requires an almost exclusive focus on restoring fiscal and monetary discipline, and on measures to restore civil service performance and cost-effectiveness. This daunting situation prevailed in several of the Pacific islands. Most of the reforms focused on redressing macroeconomic stability through the introduction of output-based budgeting, as well as through public sector downsizing, performance accountability, improved revenue collection, privatization of Stateowned enterprises, regulatory reforms and the strengthening of parliamentary oversight. However, despite massive support government effectiveness and regulatory quality in most of these Pacific islands remain weak. The main reason for the failure of reforms is probably the lack of national ownership over the reforms. Indeed, the restructuring package essentially mirrored the New Zealand model, featuring extensive privatization, outputbased budgeting and private sector management approaches. Overall, there has been a bias towards the macroeconomic aspects of reforms and towards reducing public expenditures, sometimes

19

Challenges of the Least Developed Countries: Governance and Trade

even at the expense of public sector effectiveness (ADB, 1999). Questions related to equitable service delivery, mechanisms for client feedback and clear and transparent regulations seem to have been relegated to second priorities. Cultural aspects also seem to have been overlooked. Privatization in least developed countries must be conducted cautiously, given their small internal markets, distant external markets and high vulnerability to economic and natural risks. The problem in many least developed countries is that whatever the delivery mechanism in place, funds for service delivery and poverty reduction often fail to reach the poor. Therefore, while tax reforms and expenditure management reforms are important, it is equally important to implement internal and external systems for control and monitoring, including, where feasible, mechanisms for public participation in monitoring the quality of service delivery and “public expenditure tracking systems”. The type of service delivery mechanism needs to be tailored to the characteristics of the service and circumstances of the country. Also, changes in management approaches and attitudes require time for people to acquire new skills and to integrate new values and motivations. Without these accompanying measures, reforms cannot be sustainable. To conclude, where there is a need to increase efficiency in resource management, the quality of service delivery should not be overlooked. In other least developed countries where the bureaucracy is characterized by red tape and inertia, the focus must be on changing attitudes and on aiming to create a transparent, accountable and more clientoriented public service. Strengthening

20

control mechanisms is imperative before one can move on to fiscal decentralization. More ambitious reforms aimed at developing a democratic culture will require more time to develop. However, democracy has many faces and even a one-party State can find innovative ways to boost participative governance, besides traditional mass organizations. Finally, while reforms have been slow, donors need to understand that public administration reform is a long-term political process. Increasing the speed of the reform risks jeopardizing national ownership and long-term sustainability.

C. Controlling corruption – accountability, transparency and ethics in governance Corruption remains a serious problem worldwide and in the Asian and Pacific region. Least developed countries seem to be particularly affected. The Transparency International Corruption Perceptions Index 2003 highlights the fact that 9 out of 10 developing countries urgently need support to fight corruption. Bangladesh now has the sad privilege to be listed at the bottom end of the 133-country list. Several studies have investigated the impact of corruption on growth inequality and poverty. High levels of corruption significantly aggravate poverty. Corruption reduces expenditures for social services, feeds inequality and injustice, discourages foreign investment and aid, fosters declining moral values and reduces respect for democratic institutions. The Brussels Programme of Action for the Least Developed Countries therefore calls for the strengthening of efforts to fight corruption by strengthening anti-corruption laws and their effective application.

Chapter IV

Corruption is a politicized problem that is essentially grounded in vested interests. Democracy does not automatically curb corruption. Therefore, strong political will and a strong anti-corruption and ethical culture are crucial. An ethical infrastructure includes, among others, regulations aimed at the establishment of a professional and client-oriented civil service, mechanisms for financial, administrative and political accountability, systems to promote sound financial management, increased capacity for systematic auditing, accountable aid management, higher standards for transparency and predictability in procedures, particularly for procurement, licensing and contracting services. Combating corruption is one of the key governance indicators having a direct impact on poverty. Anti-corruption measures, including aspects of accountability, transparency ethics and integrity cut across all other dimensions of any governance and economic reform programme and affect all other measures and institutions of good governance. Free independent media comprise another pillar of accountability. Unfortunately, the transparency record of the least developed countries in the Asian and Pacific region is not encouraging (see next section). Most of the least developed countries in the region also face serious constraints related to the quality of social indicators and economic and financial data. While they suffer from an obvious lack of capacity in statistical computation, deliberate information-hoarding by Governments is also frequent. For this reason, the Brussels Programme of Action for the Least Developed Countries stressed the need to support least developed countries in creating and promoting a comprehensive and integrated information base.

There is no single model to fight corruption; the traditional approach of establishing anti-corruption agencies and voting for anti-corruption laws may not yield the desired outcome in countries where institutional charisma is weak. The following are some further suggestions for supporting least developed countries in anti-corruption campaigns:

•

A four-pronged approach to fighting corruption is usually suggested, including prevention, enforcement, public awareness and coalitionbuilding;

•

Identification of key champions within government, civil society and the private sector, and the creation of a coalition of stakeholders who would lead anti-corruption efforts (also at the local level);

•

An in-depth assessment of the governance institutions, systems and processes is needed to determine areas and target groups most vulnerable to corruption. “Irrespective of what the data collection may reveal, the very fact and process of embarking on these diagnostics is in itself an important pro-governance and pro-transparency move” (Kaufmann and Kraay, 2002);

•

Continue to seek coalitions with the leadership – elected officials as well as traditional chiefs;

•

Building checks and balances within the reform process that span government as well as non-government actors by means such as monitoring by independent think-tanks and advocacy groups (e.g., report cards), social audits performed by civil society organizations and public expenditure tracking systems;

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Challenges of the Least Developed Countries: Governance and Trade

•

Focus attention on the political aspects of the reform (transparency and access to information, diminishing of discretion, clarity regarding lines of accountability and space for citizens to hold officials and service providers accountable) and strengthen prevention measures within institutions.

The United Nations Convention against Corruption6 was signed in December 2003 by 95 countries. Efforts to secure ratifications are under way, and the Convention will enter into force when 30 ratifications have been obtained. The Convention provides a comprehensive framework for dealing with international and domestic corruption in the public and private sectors. It recognizes the need for capacity-building and technical assistance and provides opportunities for collaboration between different United Nations agencies. The most challenging phase will be to transform treaty provisions into action programmes.

D. Access to information In many developing countries, restrictions remain on basic civil liberties – the rights to free speech, assembly and information. Access to information (one of the new service lines of UNDP) and freedom of expression are basic human rights, which are considered prerequisites for ensuring voice and participation and thus a key weapon in the fight against poverty and corruption. A healthy democratic culture, whatever its form, depends on an open society. Laws on access to information are critical tools, but these also require certain foundations (appeals mechanisms, an in-

6

General Assembly resolution 58/4, annex.

22

formation-sharing culture, “whistleblower” protection etc.) to be meaningful and applicable; many such prerequisites are still lacking in least developed countries. Although the constitutions of many least developed countries guarantee the right to information, the denial of such a right remains widespread. Recent health concerns [such as human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) and severe acute respiratory syndrome (SARS)] as well as environmental degradation have fueled somewhat the demand for access to information, but in traditionally secretive bureaucracies, information itself remains a source of power, which those in control do not want to share. Freedom of information laws may be premature for certain countries, but a more vigorous culture of openness, a strong civil society and government-supported public information campaigns can produce real advances even without a law being in place. Also important is the training of media personnel and increasing the number of female media professionals. The Internet offers many new opportunities to facilitate a Government’s interaction with its citizens and the private sector. Internet users are rapidly increasing in many least developed countries, especially in urban centres. The majority of the 14 Governments of least developed countries have seized the opportunities and now have websites with official information. Nonetheless, most of these technologies are inaccessible to the poor; therefore, in several countries, UNDP supports national efforts to make media outlets freely available to the poor. Budget hearings, public expenditure tracking system as well as “one-stop shops” also offer valid mechanisms for facilitating access to information on government services and benefits.

Chapter IV

E. Decentralization and local governance In line with the democratization wave of the past 15 years, an increasing number of countries, including least developed countries are narrowing the gap between urban and rural areas and between central government and local communities through the implementation of various decentralization policies. This explains the steep rise in problems related to local governance in many least developed countries. Because decentralization and good local governance increase the opportunity for people’s participation in the development process, it is generally assumed that there is a positive correlation between decentralization and poverty reduction. However, despite considerable decentralization in the Asian region over the past decade, the benefits of development have yet to be distributed equitably for the benefit of the poor. Therefore, while links between decentralization and poverty reduction have been noted, the debate is still open as to whether the two are necessarily mutually supportive. The success of decentralization policies depends mainly upon the existence of an appropriate set of conditions (political, social, cultural, economic and physical) and the capacity of institutions both at the central and the local levels. In many least developed countries, such favourable conditions are not in place. To limit the risks, the Brussels Programme of Action for the Least Developed Countries proposes “promoting broad-based popular participation in development, inter alia through decentralization, where appropriate”.7

7

General Assembly resolution 55/279 of 12 July 2001, para 29(i)(f).

For example, devolution seems to increase the risks of local misuse of funds or corruption as more funds and more power are devolved to a new untrained local leadership and local administration (Fjeldstad, 2003). Capacity demands and constraints, especially for financial management, are also much more stringent. Based on cross-country data for 78 countries, Melo and Barenstein (2001) concluded that the higher the share of grants from central (or provincial) Government, the stronger is the correlation between decentralization and good governance. Crook and Sverrisson (2003) add that locally raised revenues in least developed countries are almost by definition inadequate. However, most interestingly, another study reveals that “governments of countries that are administratively decentralized tend to spend a higher proportion of their revenues on pro-poor social spending”, while politically decentralized States spend little on social sectors. The research concludes that “there is no consistent, significant statistical association between the degree of fiscal decentralization and pro-poor public spending”. Another problem is the over-reliance on donor funding to support decentralization and local governance programmes. It is also important to carefully study the political context as well as social implications of poverty, such as migration to the urban areas to escape rural poverty, creating additional urban poverty problems (social exclusion, unemployment and the lack of social networks, child labour, environmental and sanitary degradation, violence and juvenal crime, prostitution and HIV/AIDS exposure). It is also common for local self-governing institutions to be captured by the local elites, so that little or no redistribution in favour of the poor takes place. The extent

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Challenges of the Least Developed Countries: Governance and Trade

of capture depends on the level of social inequality, regularity and fairness of elections, transparency in decision-making and media attention – many of which apply to least developed countries in the region. Where the potential for capture is serious, decentralization programmes need to focus first on strengthening local accountability (Fjeldstad, 2003). However, there is growing evidence that improved local governance practices, such as the adoption of local-level participatory planning and budgeting practices, do result in gains of efficiency and effectiveness in the delivery of local infrastructure and services (Romeo, 2002). In addition to the “formal” institutions involved in local governance, special attention also needs to be paid to the effective participation of the local communities, through social mobilization, taking into account local culture and social fabric. Even the poorest communities are capable of organizing themselves to improve their well-being. Opponents will argue that many least developed countries do not have the resources required to support such empowerment policies. However, case studies described in Rhagav’s (2001) study “Decentralization and Poverty Alleviation in Asia”, all suggest that resources are actually less important than attitudes and accountability of those who are to deliver the services, whether they are teachers, nurses or tax collectors. In an earlier study, Manor (1999) had this to say: “Over time, the greater transparency offered by increased participation of poorer groups, and their developing skills at influencing decision-making at the local levels may well assist them in curbing the power of rural elites to appropriate benefits”. With the necessary foundations in place, properly designed decentralization

24

reforms (involving varying degrees of administrative, fiscal and political decentralization) may indeed result in improved local governance: (a) more legitimate, transparent and accountable local authorities and an active and inclusive local political process; (b) institutional mechanisms for civic information, consultation and participation in all stages of the local public resources management cycle; (c) efficiency gains in local services delivery; and (d) greater security for citizens (Romeo, 2002). While decentralization can contribute significantly to effective governance, political stability and voice and accountability, the links between policy changes for decentralization and their impact have yet to be fully captured.

•

Decentralization needs to be implemented in the social and political context of each country. Since decentralization is a political process that deals with the distribution of power and resources, there is no single solution for all countries;

•

Decentralization is a process of transformation that requires long-term strategies and a coordinated approach;

•

The pace of decentralization should be incremental and care should be given not to rush into fiscal devolution without having all conditions in place;

•

Concepts of fiscal, administrative and political decentralization are distinct in practice; it is thus appropriate to design decentralization policies that combine different degrees of centralization/decentralization;

•

Capacity development at the central and local levels, as well as strengthening of civil society are important.

Chapter IV

F. Human rights and access to justice 1. Human rights and access to justice in the Asian and Pacific region Poverty includes deprivation in access to basic services and knowledge. Poverty is thus the most crucial denial of human rights as it implies discrimination and injustice and destroys human dignity. An increased emphasis on human rights (especially for women and excluded groups) is, therefore, key in the strategy to achieve the Millennium Development Goals (UNDP, 2003). Human rights provide a framework for equality and non-discrimination. Until recently, UNDP support to justice programmes focused mainly on building institutional capacities. Insufficient attention was paid to facilitating access to justice and promoting human rights as a means to protect the freedom of choices, combat poverty and prevent conflicts. The new rights-based approach to development is radically changing the way UNDP is designing its legal reform programmes. With the exception of Bhutan, Kiribati, Maldives, Samoa and Vanuatu, least developed countries scored poorly for rule of law. According to the United Nations High Commissioner for Human Rights, weak judiciaries, widespread corruption, limited access to proper legal support, trafficking of women and children as well as child prostitution, limited access to land, gender discrimination and sexual abuse of women and girls contributed to human rights abuses in some least developed countries.

2. The rights-based approach to development and to access to justice Upholding human rights is crucial for securing a humane and non-discriminatory society and for eradicating poverty. The rights-based approach to development integrates human rights principles and human rights obligations in development policies and programmes in order to strengthen (a) the capacities of rights holders to claim and exercise their rights; and (b) the capacities of duty bearers to fulfil human rights obligations. Access to justice refers to the ability of individuals to seek and obtain remedies for their grievances. The rights-based approach puts the poor and marginalized groups at the core of policy and development strategies. A rights-based approach to enable access to justice thus concentrates on the rights of disadvantaged groups (women, minorities and persons with HIV/AIDS etc.), ensuring that their rights are safeguarded and respected. Therefore, it also focuses on the capacities and accountability of duty bearers (police and judges etc.) to fulfil human rights obligations. Access to justice and justice sector reform priorities will obviously vary according to different national contexts. In countries where there is already a functioning, judicial system (e.g., Samoa), access to justice provides an entry point to further justice sector reform. In countries undergoing reconstruction after conflicts and crises, access to justice is essential to eliminate impunity and ensure accountability. Here, the promotion of democracy first requires the putting into place of laws, policies and institutions that guarantee respect for all human rights and

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Challenges of the Least Developed Countries: Governance and Trade

fundamental freedoms. However, in many of the other least developed countries where the justice sector still lacks integrity, focusing on access for the poor to a corrupt or poorly trusted justice system may not be the appropriate starting point. Problems related to access to justice in least developed countries of the region include the following: (a)

Lack of understanding of the rule of law

The “rule of law” refers to the foundation of a legal system where (a) no person can be above the law; (b) all persons are equally protected under the law; and (c) justice is secured for all through access to effective remedies. Rule of law is not synonymous with “rule by law”. It is also more than the sum of laws, courts and other formal institutions. It is a normative system that resides in the members of a society (Carothers, 2003). However, despite common use of the term worldwide, its content remains abstract and little concrete knowledge is available on how the rule of law actually develops in a society (Carothers, 2003). Links between the predictability of the legal system and levels of investment, or quality of democracy, appear less evident than commonly thought; too often, a one-sizefits-all solution to improve the rule of law in a country seems to be applied. (b)

Corruption and abuse of power

The United Nations High Commissioner for Human Rights points to serious problems of corruption in the judiciary in a number of least developed countries in Asia directly affecting the very institutions responsible for providing legal protection for all other human rights, in particular the right to a fair trial and to protection from discrimination.

26

(c)

Access

In a number of least developed countries, access to the court system and the formal institutions charged with the protection of human rights is difficult, simply because they are located miles away from local communities (e.g., Afghanistan, the Lao People’s Democratic Republic, Maldives, Nepal and South Pacific). Similar problems apply to legal enforcement agencies, thus adding to the climate of impunity. (d)

Lack of capacities

Newly created institutions often find themselves with insufficient resources to operate. Special Human Rights Institutions or Ombudspersons are not yet available in some least developed countries (e.g., the Lao People’s Democratic Republic and Myanmar). Because of the paucity of locally trained manpower, a number of judges sitting in the High/ Supreme Court or Court of Appeal of South Pacific island States are expatriate judges. (e)

Lack of legal aid facilities

In a number of least developed countries, legal aid services are rare and where they exist they are often weak. Civil society organizations, working on access to justice, promote awareness of rights and remedies. They may be equipped to provide legal aid as well; otherwise, they facilitate access to institutions of the justice system. Yet, in a number of least developed countries, such NGOs are either not available or there is no legal framework that allows them to operate (e.g., the Lao People’s Democratic Republic). The barefoot lawyers from South Africa are lawyers who have not com-

Chapter IV

pleted their degrees. They run advice offices in areas that are inaccessible. They educate poor people about their rights, help them access State services, act as a conduit for access to free legal services and provide mediation services and lobbying for people’s rights. The Government takes them seriously. There are now some 400 active members, but after 15 years, they are still dependent on donors (Carothers, 2003). (f)

Conflict between the formal legal system and the customary legal system

Focusing technical assistance mainly on institutional capacity-building and providing support to legislative drafting has been questioned (Hughes, Paterson and Mohammed, 2003). The problem seems to be particularly stringent in the South Pacific, where formal laws are misunderstood or ignored by the local population. As a result, formal legal systems operate side by side with customary tribunals; formal legislation and international treaties exist alongside customary traditions; and universal human rights compete with local values and customs. Under a rights-based approach, improving access to justice requires that both formal and informal (customary) systems be made to work justly, equitably and effectively. There are certainly merits and constraints in marrying the two systems. However, to allow them to operate in a complementary manner, a legal framework for the coordination of the various kinds of legal authority, including customary authority, is required, especially for land disputes (Hughes, Paterson and Mohammed, 2003). Care should be taken to ensure that traditional systems observe fundamental human rights standards. Alternative dispute resolution mechanisms are also options to be considered.

To conclude, the rule of law and access to justice appear to be among the cornerstones of a governance strategy to support poverty eradication in least developed countries. The approach to promote the rule of law should be comprehensive and inclusive, and should aim at incorporating socio-cultural norms and traditional systems. Under the new rights-based approach, donor support to increase human rights education for duty holders and duty bearers will be an important trend in the near future. Since violence and crime have a negative impact on poverty, special attention needs to be paid to strengthening security while applying a rights-based approach to capacity-development programmes for security forces. While substantive progress was made over the past several years, the security dilemmas faced by countries around the globe since 11 September 2001, the growth of international terrorist networks and the risk of nuclear proliferation have now triggered debates on the danger of compromising the rule of law and human rights for national security reasons. Measures taken in response to these security threats risk violating human rights, such as the presumption of innocence, prohibition of torture, the right to a fair trial and rights to freedom of expression and association (UNDP, 2002).

G. Least developed countries in conflict and post-conflict situations 1. Crisis in the Asian and Pacific region In the 1990s, a number of least developed countries experienced a crisis in governance, as a result of enduring corruption, poorly conceived and weakly

27

Challenges of the Least Developed Countries: Governance and Trade

implemented policies, erosion of social norms and accumulation of political and social conflict. Today, out of the 14 least developed countries, at least 4 are in a conflict or post-conflict situation (Afghanistan, Nepal, Solomon Islands and Timor-Leste) and no fewer than 9 of them have been defined by the World Bank as being low-income countries under stress. Armed conflict and terrorism often have deep developmental roots in human poverty issues. Given that the Asian and Pacific region contains the largest number of people living in income poverty and that 36 per cent of the world’s poor reside in South Asia, it is not surprising that both intranation and internation conflict is growing in this subregion. Equally disrupting is the growing incidence of HIV/AIDS, making South Asia the subregion with the second highest level of infection after South Africa. The burden of achieving human security in all corners of the Asian and Pacific region thus represents a daunting challenge for the coming 10 years. To address this matter, the Brussels Programme of Action for the Least Developed Countries contains the goal of “pursuing national policies and strategies to promote confidence building and conflict prevention, and in countries affected by conflict, to promote peaceful settlement of disputes, reconciliation and post-conflict peace building”. With its focus on democratic governance for poverty reduction, UNDP is clearly at the centre of United Nations conflict prevention and plays a central role in United Nations peace-building efforts in the region.

2. Challenges in post-conflict countries Experience in conflict and postconflict countries in the region and beyond

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indicate the following key areas for intervention (the relative importance of different factors varies considerably between countries, so targeted responses will need to be tailored to the specific needs and context of the country):

•

Rule of law and access to justice: including security sector reforms, collection of small arms, establishment of courts and key human rights institutions;

•

Strengthening mechanisms at the local level that empower local communities;

•

Effective delivery of services in an inclusive manner;

•

Creation of new economic opportunities for manufacturing, leading to economic diversification beyond the traditional agricultural production base;

•

Creation of employment opportunities (and special attention to youth);

•

Strengthening of key public sector institutions at the local and national levels (for human rights management/payroll and sound financial management systems).

Decentralization policies may seem easier to implement in post-conflict countries than in established centralized bureaucracies, because of the pressure for change and possible “overload” at the centre, which is thus induced to involve local communities in the nation-building process. In some cases, decentralization is seen as a possible solution to conflict situations. In the case of Afghanistan, extending authority and accountability beyond the centre remains a major barrier to overcome in order to achieve sustainable peace (UNDP Democratic Governance Network Discussion, June 2003). Challenges are daunting because of security

Chapter IV

threats, a weak resource base and lack of capacity. Programmes in post-conflict countries always include a risk that too much effort is directed at institutions and reconstruction processes without sufficient attention being paid to reconciliation and political consensus-building. To avoid this, the following actions need to be taken:

•

Consultations with broadest possible community of stakeholders;

•

A careful study of power-sharing (looking also at cultural and traditional patterns of decision-making and land issues);

•

Options should be provided rather than predefined/imported solutions;

•

Create a transitional government that appreciates ethnic and regional balance;

•

Justice-building needs to be addressed early in the process;

•

The process of establishing a constitution is a powerful opportunity for nation-building, linking local communities with political leaders. It can provide a critical process for empowerment of the people in the political process.

Aid flows are too small and arrive in a rush in the first few years of peace, tapering out just as they should be accelerating. The following are some lessons learned from activities in conflict and post-conflict countries:

•

National ownership: The issue of ownership needs to be addressed in any capacity-building activity. It should be sought as early as possible and include information dissemination to the larger public. Building consensus around diverse concepts and ideas is one of the most important challenges when developing the governance system in a post-conflict country;

•

Simplicity: “First-world” solutions cannot be imposed on third-world conditions;

•

Flexibility and adaptation: Because of frequent changes in the political, economic and social environments, flexibility in programme management is required;

•

Stability and security is a constant concern. The early years of building a democratic State tend to be most perilous (UNDP, 2000). Rapid transition from one political State to another tends to increase the level of stress and thus increase the likelihood of political tension. Therefore, the priority is to set up institutions of government that will contribute to national stability. Traditional structures can play a key role in conflict management and resolution. Adequate attention needs to be paid to local political realities;

•

A strong field presence with sufficient decentralized decision-making powers is required;

3. Lessons learned from interventions in post-conflict countries During the decade following a conflict, the absorptive capacity of postconflict countries may be as much as double that of normal low-income countries, with a peak in capacity absorption occurring in the middle of the decade. However, actual aid disbursements to post-conflict countries do not seem to match these trends in absorptive capacity.

29

Challenges of the Least Developed Countries: Governance and Trade

•

Tangible results: Comprehensive reforms are usually not well understood by the population. While there are no quick fixes, early visible successes, well communicated to all stakeholders, can sustain popular support for the long and difficult change process;

initiative. According to the World Bank (2004), the following least developed countries from the region are identified as low-income countries under stress: Afghanistan, Bangladesh, Bhutan, Cambodia, the Lao People’s Democratic Republic, Myanmar, Nepal, Solomon Islands and Timor-Leste.

•

Timeliness: Delivering timely assistance is one of the most critical elements of success. The initial years following a conflict offer opportunities that need to be acted upon rapidly;

•

Increased representation of women at all decision-making levels in institutions and in mechanisms for preventing, managing and resolving conflicts.

A twofold strategy has been adopted towards these countries. It seeks: (a) Sustained improvement in policies, institutions and governance (seeking reforms that are likely to result in a rapid and substantial payoff); (b) Improvement in the provision of basic social services.

4. Low-income countries under stress and difficult partnerships Owing to the lack of progress made over the years and the perpetuating decline of governance in a number of countries, donors have raised questions concerning whether they should disengage totally from these countries or, if not, how they could better ensure the effectiveness of their assistance. Low-income countries under stress and the difficult partnership policy are donor responses to these questions. The group of low-income countries under stress has been defined as countries that feature an unfriendly environment for private sector activity; that have exclusive rather than inclusive policies; and that are characterized by high levels of corruption and arbitrariness in public sector decision-making (World Bank, 2002). Some of these countries already benefit from the Bank’s support in the context of the heavily indebted poor countries

30

The focus is on service delivery, but given the high risk of corruption and opportunism, the low-income countries under stress taskforce had proposed the use of “independent service authorities”. These transitional bodies would be largely autonomous from the Government, provided with special incentives and accountable for performance to a board with strong donor presence (World Bank, 2004). Another key feature in the programme for low-income countries under stress is the need for stronger partnerships and donor coordination. An agreement has already been reached with UNDP for joint piloting this approach in a few countries (World Bank, 2002). The Development Assistance Committee of the Organisation for Economic Co-operation and Development (DAC/ OECD) categorizes this group as the “difficult partnerships”. The DAC approach towards these fragile countries points to the importance of governance, political development and institution building. Its strategies to address the problem of difficult partnerships are comparable to the initiative for low-income countries under stress.

Chapter IV

From the above, it appears that much more attention needs to be paid to the political aspects of anti-corruption strategies. This could be achieved by introducing methods for people’s participation and related training, training parliamentarians on topics that have a direct impact on achieving the Millennium Development Goals, improving professionalism in the civil service and increasing the responsiveness of social services, improving access to justice, training the media, introducing “e-government” where possible and promoting the rights-based approach to

development. The implementation of these measures requires efforts and resources that are beyond least developed countries’ capacities. Consequently, the Third United Nations Conference on Least Developed Countries highlighted good governance at the international level and mobilization of financial resources (including ODA) as key components of the Brussels Programme of Action. Section V will address issues of international governance and look at the status of international support for least developed countries.

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V

Good Governance at the International Level: Commitments to Support Least Developed Countries

A study by the World Bank (2001) indicates that the 49 poorest countries could boost their exports by about 11 per cent if the United States of America, Canada and Japan followed the European Union in granting them exemption from customs duties. That would mean extra earnings for the least developed countries on the order of US$ 3 billion per year. The post-cold-war world is a globalized and interdependent one, yet one of the key dimensions of globalization has been overlooked, namely that of shared responsibility. That shared responsibility was consolidated in the Millennium Declaration and reiterated at the International Conference on Financing for Development 8 where, in exchange for developing countries’ commitments to governance improvements, developed nations committed themselves to reverse the declining trends of ODA. Unfortunately, commitments made at international conferences stand in sharp contrast to actual contributions, as 8

Monterrey Consensus of the International Conference on Financing for Development (Report of the International Conference on Financing for Development, Monterrey, Mexico, 18-22 March 2002 (United Nations publication, Sales No. E.02.II.A.7).

evident from the figures provided by Vandemoortele and Tostensen (2003). According to their paper, aid as a percentage of GDP had fallen by one third in the 1990s, from an average of 0.33 per cent of GDP in 1990 to 0.23 per cent in the period 2002-2003. This is far below the targeted 0.7 per cent suggested in Monterrey. In recent years only a few countries have surpassed the 0.7 per cent target, and military expenditures and agricultural subsidies continue to outweigh development aid. The lack of democratic decisionmaking in some key international institutions also remains subject to controversy. Although developing countries are deeply affected by the decisions of the international financial institutes and WTO, they have little power in their decision-making. Therefore, recommendations have been made to publish decisions made by the executive boards of those institutes and to make WTO decisions more inclusive and transparent. However, despite remaining concerns, multilateral and bilateral donors today are focusing their programmes increasingly on the least developed countries. In June 2002, UNICEF and UNDP decided to mainstream the Brussels

33

Challenges of the Least Developed Countries: Governance and Trade

Programme of Action for the Least Developed Countries within their respective work programmes. This section summarizes some of the main initiatives taken by the bilateral and multilateral donors in favour of the least developed countries. The Heavily Indebted Poor Countries Initiative The Heavily Indebted Poor Countries (HIPC) Initiative covers the 42 poorest countries, which are already entitled to concessional assistance from the World Bank and the International Monetary Fund, and the debt burdens of which are deemed to be unsustainable. The total cost of the Initiative is now estimated at US$ 34 billion. To qualify for relief, HIPC candidates must adopt adjustment programmes supported by IMF and the World Bank, including Poverty Reduction Strategy Papers (PRSPs), to demonstrate their intention to use the freed resources for poverty-reduction purposes. Only two least developed countries in Asia and the Pacific, namely the Lao People’s Democratic Republic and Myanmar, are currently benefiting from concessional assistance under the HIPC Initiative. It was estimated that social expenditures in the HIPC would increase by US$ 2 billion in the period 2001-2002, but the results of the HIPC Initiative remain contested (Vandemoortele and Tostensen, 2003). Many countries are unable to meet the conditions required for undertaking reforms or to handle the social conflicts related to the reform programmes. Nonetheless, the quality of programmes is improving. Indisputably, the PRSP process is a step in the right direction, to the extent that it seeks greater involvement from recipient countries (Radelet, 2004). However, rapid progress in the HIPC Initiative must be

34

assessed with a word of caution. As new loans are granted throughout the developing world, even in areas that previously were not eligible for loans, some recipient Governments need to carefully assess whether or not they need to borrow as much as they currently do. The European Union “Everything but Arms” Initiative In February 2001, the European Union launched the “Everything but Arms” Initiative, granting least developed countries full access to the European Union market by abolishing restrictive duties and quotas for all imports, except arms, from least developed countries. This Initiative is laudable; however, powerful farm lobbyists have been successful in removing from the list such commodities as beef and rice. Since 99 per cent of European Union imports from least developed countries are products that were already liberalized, the impact of the Initiative for least developed countries is in fact negligible; hence, this ironic appellation by its critics, who call it the “Everything but Farms” Initiative (Brenton, 2003). In a more positive development, the European Union recently announced its commitment to increase its assistance to an average of 0.39 per cent of national income by 2006, which is expected to increase ODA by about US$ 7 billion (Vandemoortele and Tostensen, 2003). The Integrated Approach to Trade-related Technical Assistance The “Integrated Approach to Traderelated Technical Assistance” is a cooperative initiative between six multilateral organizations (WTO, World Bank, IMF, ITC, UNDP and UNCTAD). The approach calls for coordinated efforts

Chapter V

to help the poorest countries to benefit from the trading system, to improve their capacity to trade and to respond better to the demand shifts of global markets. A pilot phase was launched in three countries, including Bangladesh and Cambodia in the Asian and Pacific region. The United States Millennium Challenge Account The Millennium Challenge Account aims to raise the United States aid levels from US$ 5 billion to US$ 15 billion per year by 2006. The allocation rule for funds is designed to ensure selection of low-income countries with relatively sound policies and institutions that support economic growth and reduce poverty. Countries will be rated along three performance dimensions: (a) governing justly (“Rooting out corruption, upholding human rights, and adherence to the rule of law are essential conditions for successful development”); (b) investing in people (“Investment in education, health care, and immunization provide for healthy and educated citizens who become agents of development”); and (c) promoting economic freedom (“More open markets, sustainable budget policies, and strong support for individual entrepreneurship unleash the enterprise and creativity for lasting growth and prosperity”). (see Fact Sheet: Millennium Challenge Account Update <www.usaid.gov/press/releases/2002/ fs_mca.html>, accessed on 6 March 2007). The selection criteria include five of the six World Bank indicators for good governance and two indicators of Freedom House, namely political rights and civil liberties. The United Nations Millennium Project The Millennium Project was commissioned by the United Nations Secretary-

General in 2002 and is supported by the United Nations Development Group (United Nations agencies and Bretton Woods institutions). Its mandate was to recommend operational frameworks that will enable countries to accelerate their poverty reduction strategies by aligning them with needs assessments to achieve the Millennium Development Goals. Pilot countries, one of which is Cambodia, identify the detailed input targets – both domestic and external resources – needed for the country to achieve the Goals by 2015. The OECD-DAC “Tied versus Untied Aid” Agreement Bilateral aid to least developed countries stands at around US$ 8 billion or 17 per cent of total bilateral aid, and about half of the total amount is tied. In April 2001, DAC adopted a recommendation to untie aid to least developed countries, except for food and technical assistance. Sound procurement in least developed countries and a competitive private sector are important criteria. The latest report from the Secretary-General on the Implementation of the Brussels Programme of Action on the Least Developed Countries confirms that the majority of DAC members have untied all categories of ODA to least developed countries. Savings by least developed countries are calculated to be as high as 20-25 per cent. Commitment to Development Index The Commitment to Development Index is a recent initiative that ranks the 21 richest countries according to how much their policies help or hinder the economic and social development of poor countries. The Index looks beyond foreign aid flows to encompass also trade, envi-

35

Challenges of the Least Developed Countries: Governance and Trade

ronment, investment, migration policies and contributions to peacekeeping. The Index covers most countries of Western Europe, Australia, Canada, Japan, New Zealand and the United States. The Netherlands holds the top position, due to its strong performance in aid, trade, migration, investment and environmental policies. Japan and the United States rank very low in the Index, which confirms the inadequate state of affairs with regard to Goal 8. Despite some shortcomings, the Index also rectifies the prevalent yet inaccurate assumption attributing shortfalls in achieving the Millennium Development Goals solely to ineffective aid, poor governance and weak policies in developing countries.

levels of ODA to the amount needed to achieve the Millennium Development Goals. Fulfilling previous promises made by the economic giants alone would raise ODA by 31 per cent (OECD, undated). But the ongoing war on terror and the reconstruction of Iraq are likely to deprive least developed countries once again of the long-promised aid packages. These trends and recent events highlight once again that governance at the national level is also deeply affected by international factors. While there certainly is a renewal of interest in providing assistance to least developed countries, an international monitoring mechanism to clarify aid policies and attract public attention on global development issues remains very much needed.

Global Governance Initiative – First Annual Report 2004

Indubitably, the patterns are shifting. Many of the faster-growing developing countries are receiving substantial quantities of FDI and so are less in need of ODA. More aid could thus be directed towards the least developed countries. Middle-income countries in the region need to build up their capacities to help least developed countries increase their gains from trade. Other donors should also be encouraged to support middleincome countries in expanding their role as knowledge providers in the field of development policies. As these middleincome countries become more and more engaged in providing ODA, the Commitment to Development Index should gradually be adapted to include also non-OECD countries and to become a global instrument for monitoring aid commitments and ODA. At the same time, the idea of a “development dividend” (Kaufmann, 2003) needs to be further examined: the least developed countries that have shown serious efforts to improve their system of governance should be granted special incentives.

The report is an initiative of the World Economic Forum (WEF, 2004) and its Global Institute for Partnership and Governance. This Initiative brought together some of the world’s leading experts on the most pertinent issues of global governance – security, human rights, environment, poverty, hunger, health and education – to assess the quality and quantity of efforts that humanity is putting into achieving the Millennium Development Goals. The assessments take the form of a numerical score on a scale of 0 to 10. The scores are relatively low: peace and security (3), human rights (3), environment (3), poverty (4), hunger (3), health (4) and education (3). The warning is thus clear: the global community is devoting less than half the necessary effort to meet any of the goals. To conclude, strong advocacy and lobbying directed at donor countries will be required to increase the current

36

VI

Conclusion

Alarming signs from various corners suggest that, unless there is a dramatic change in attitudes and approaches, the Millennium Development Goals will not be met. Many least developed countries have undertaken wide-ranging reform policies and measures to improve their economic situation. However, without increased external support, least developed countries will only become further marginalized as the process of globalization gains further momentum. There is a broad consensus in the international community that good governance is essential to achieving sustainable development and poverty reduction and that better policies and institutions can double the effectiveness of aid. However, societal transformation to improve governance in conditions of widespread poverty is a major challenge. While there are indicators to measure the status of education and health in a given country or region, there are no “objective” standards to decide, in a given political and socio-economic context, exactly what types of governance efforts will bring about the kind of progress needed towards the achievement of the Millennium Development Goals. It is equally difficult to decide on the kind of

reform approaches and instruments that are most effective in instilling and propagating democratic values under different economic, social and political conditions and environments. In addition, while the concept of “good” governance has now been accepted as a model for adjusting State-society relations, a number of countries still do not acknowledge the concept of “democratic” governance. Analysing the impact of governance policies on poverty alleviation thus remains a very difficult task, which this paper does not claim to have completed. Nonetheless, a number of conclusions can be drawn from this general assessment of the status of governance in the least developed countries of the Asian and Pacific region. First, while democratic governance can play a critical role in the achievement of the Millennium Development Goals, the links between the two are neither automatic nor unidirectional. The examples of China and Viet Nam provide evidence that massive reductions in poverty can be achieved under a singleparty people’s democracy. In the past, countries such as Malaysia, the Republic of Korea and Singapore have shown diverse approaches and routes to democratiza-

37

Challenges of the Least Developed Countries: Governance and Trade

tion, depending upon different stages of economic, social and political development. Second, all governance indicators reviewed in this paper carry an important weight in furthering human development and poverty reduction in least developed countries, yet context and other “local” variables will influence the sequencing of opportunities for reforms in each of the governance dimensions. The Goals are outcomes to aim for, they are not a prescription for how a country should get there. There is thus no clear-cut and universal answer to the question of what kind of efforts should least developed countries focus on to make progress in their governance practices. The concept of governance is simply too broad; thus, it requires greater precision. Different countries have different needs and therefore use different entry points to promote and support good governance. Nonetheless, in line with Abraham H. Maslow’s theory of human motivation, people’s aspirations tend to increase as basic needs are satisfied. Demand for democratic governance will thus gradually intensify in most of the least developed countries as basic social services improve, employment rates go up, security improves and overall poverty and hunger are addressed. Third, reforms to instill democratic governance in least developed countries are not sustainable, unless (a) these reforms are thoroughly owned by the people themselves and not imposed upon them by the donor community; (b) there are political, legislative and administrative institutions and processes ensuring that democratic governance is based on a solid partnership and solidarity among different actors of society both at the local and national levels; (c) democratic values (transparency, accountability, participation and respect for human rights) are

38

ensured and shared among a broad segment of the population; and (d) there are economic and social underpinnings to sustain and spread the benefits of democratic values to reach the poor. Fourth, rushing straight to prioritizing political reforms without due regard to the social, economic and political foundations for democratization may be risky as such an action could spawn a chain of events that could compromise the achievement of poverty reduction goals. Enjoying political freedom is a fundamental human right, but so is the right to a secure environment, emphasized as a crucial condition for achieving the Millennium Development Goals (WEF, 2004). A democratic culture guarantees political and civil freedoms, but throughout history, people have paid a high price to gain that freedom. Democracy is not a panacea and elections alone will not ensure automatic success in development. Just as privatization requires certain prerequisites, so does democracy. Fifth, a new trend is emerging whereby aid is allocated to countries selected on the basis of governance indicators. Hence, there is a gradual shift of aid resources into countries showing greater improvements in governance. These efforts to use governance indicators as a sound basis for determining eligibility for aid assistance ought to be welcomed. Nonetheless, such indicators must be used with caution since many of them still rely on subjective data with significant margins of error, and sovereign countries continue to reject measurement of their performance in securing political freedoms and civil rights. This explains why progress towards the development of unambiguous, uncontroversial and widely accepted governance indicators

Chapter VI

for measuring the quality of democratic governance has been slow. Several international institutions and civil society actors are now in the process of developing new governance indicators, which reflect the particularities of developing countries. Given the considerable interest from developing countries in cooperating for the publication of governance indicators reflecting their particularities, some governance indicators might ultimately be included in the Millennium Development Goals. However, until such indicators are available, specific country-focused surveys are required to provide more insights on the governance context in each country

and to measure possible trends that may give rise to additional incentives for further reforms. These insights will also help donors to gain a better understanding of the various positions on governance and prevent them from penalizing least developed countries for impediments that lie outside their control. With 1.8 billion people living in Asia and the Pacific, what happens in the region will matter greatly for global eradication of poverty and global prosperity. The implementation of the Brussels Programme of Action for the Least Developed Countries in their favour is one of the many steps on that long and difficult journey.

39

PART TWO Trade

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Introduction*

Part two of the study examines the key trade constraints facing the least developed countries over the next decade – barriers to market access as well as supply-side “behind-the-border” constraints – with the objective of outlining national, regional and international policies that could help to remove those constraints. The new challenges encountered by least developed countries in the face of recent WTO trade liberalization initiatives are also considered. Finally, lessons are drawn from the experience of least developed countries in seeking accession to WTO, and recommendations are made to ensure that WTO membership fits the particular economic needs of least developed countries. As emphasized in the Brussels Programme of Action for the Least Developed Countries, FDI can play a catalytic role in building domestic supply capacity. Notably, trade policies promoting FDI in the export sectors have brought new ideas, new skills and new technology, thus increasing efficiency and competitiveness

*

Part Two of the publication has been prepared by Kazi Matin of World Bank. It was also updated and edited by the secretariat.

in global markets. Yet, the share of least developed countries in the global investment inflows continues to decline substantially compared with other recipients. Over the span of the last decade, their combined share in global trade has fallen from 0.8 per cent to 0.4 per cent, despite the fact that they have embraced a development policy shift towards more open economies. Even when least developed countries themselves adopt more favourable trade and foreign investment policies at the national level, for example by reducing tariffs on imports or reducing taxes on exports, it is often the case that they continue to experience difficulties in expanding exports and trade. A host of non-trade or “behind-the-border” constraints must therefore also be addressed, such as weak human resources, lack of finance, hostile private investment climate, poor transport and logistics, high transaction costs of doing business and weak law enforcement institutions. To reverse marginalization and ensure the meaningful and beneficial integration of least developed countries in the global economy and the global trade system, concrete action by their development partners and least developed

43

Challenges of the Least Developed Countries: Governance and Trade

countries themselves is required. While least developed countries are striving to gain membership in WTO, it is important to ensure that least developed countries retain flexibility in the use of appropriate policy instruments to strengthen the competitiveness of sectors of strategic importance for the development of their trade. This chapter emphasizes the need for least developed countries to fully realize the potential economic benefits to be derived from their accession to WTO. In this connection, serious concern is expressed regarding the declining level of resources in the UNCTAD Trust Fund for Least Developed Countries. ODA, which accounts for most of the external financial flows accruing to least developed countries, has declined drastically in spite the immense need of least developed countries for external assistance. Industrial countries need to renew and strengthen their efforts to meet as expeditiously as possible their commitments with regard to ODA targets for assistance to least developed countries, namely 0.2 per cent of GNP, as contained in the Brussels Programme of Action for the Least Developed Countries. Untied aid must be provided on a more predictable basis with long-term commitments, and be supportive of national objectives. In this connection, it is recommended that aid be channelled through national budget processes. Finally, there is a critical need for greater policy coherence on the part of development partners in their responses to the market access and supply capacity constraints of least developed countries, as well between international processes and national policies and strategies.

44

Policy coherence between international processes and national strategies The OECD Ministerial Statement “Action for a Shared Development Agenda” (2002) called for greater policy coherence for development, that is, between aid and non-aid policies. There is little point, for example, in providing development aid to improve a country’s ability to engage in trade if the donor countries maintain trade barriers that keep the developing country’s goods out. Disturbingly, OECD support to agriculture in 2002 amounted to 1.21 per cent of GDP, while DAC aid to developing countries in the same year amounted to 0.23 per cent of GDP. Equally troubling is the fact that at least 20 per cent of aid remains tied to donor exports, reducing its value by as much as 30 per cent. Coherence must be embedded in the objectives and work of policy communities outside development agencies. Analysis should consider trade-offs and potential synergies across such areas as trade, investment, agriculture, health, education, the environment and development cooperation. For instance, reduction in developed countries’ tariff escalation for value added products, a policy likely to be overseen by the ministry of trade or the ministry of foreign affairs, is a necessary complement to development assistance policies that promote diversification by developing countries into processed products, a policy likely to be managed by international development agencies. The experience of DAC suggests that there can be value in establishing a specialized unit dedicated to analysing the impact of non-aid policies on developing

Part Two

countries and bringing these insights to the attention of appropriate forums across government. In most DAC members, the shift from a development cooperation approach to a government-wide development policy approach remains to be achieved. Only a few DAC members have a focal unit responsible for policy coherence within their systems. Additional factors that can help to achieve greater policy coherence include the ability to build strategic alliances with non-governmental actors and other States within multilateral systems. Academics and NGOs can play a significant role in research and analysis. DAC peer reviews could consider asking the following questions in individual peer reviews: 1.

What incoherencies are found between agricultural policy and development policy in the country reviewed? These may take the form

of distorting subsidies, tariff and non-tariff barriers, or limited movement of knowledge, such as agricultural research, to least developed countries. 2.

Has there been any analysis of these incoherencies by the Government or by research institutes?

3.

What is done to increase awareness of the problems in the ministry of agriculture and among the general public?

4.

Is there a policy framework in place that shows the Government’s political commitment to tackle specific incoherencies in agricultural policy? What institutional arrangements bring together the ministry of agriculture with the agencies dealing with ODA to discuss these issues?

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VII

Trade Performance by Asian Least Developed Countries

A. Trade preference in Asian least developed countries Although the economies of least developed countries in Asia continue to expand, their per capita gross national income is generally still far below the threshold required for graduation from the list. Although these least developed countries have experienced a net reduction in poverty since 1965, such economic growth has yet to make significant inroads into poverty. The ratio of total trade to GDP in the least developed countries of Asia increased from 27 to 72 per cent of GDP during the 1990s. Exports from these least developed countries more than tripled between 1990 and 1998. Imports to these countries also rose substantially during this period, thereby reducing prices for consumers and increasing competition among producers. Despite this rise in both exports and imports, the share held by Asian least developed countries in global trade, at 0.19 per cent, remains negligible and market concentration is high, with two thirds of their exports destined for Canada, Japan, the United States and the European Union.

As a result of changes in traderelated policies, the composition of exports from least developed countries in Asia and the Pacific shifted in the 1980s from the agricultural sector to the industrial and service sectors. Growth in exports during the 1990s has been highest in countries such as Bangladesh, Cambodia, the Lao People’s Democratic Republic and Nepal, which export manufactures, especially textiles and clothing products. In Bangladesh and Nepal, manufactures constituted 49 per cent of merchandise exports in 1980, 74 per cent in 1989 and 83 per cent in 2001. According to WTO, exports of clothing by Bangladesh grew, on average, by 21 per cent annually between 1990 and 2001. Limited diversification in the industrial sector, however, causes substantial volatility in the sectoral growth rate. The backward and forward linkages of the industrial sector furthermore remain weak. The expiry of the Multifibre Arrangement and China’s accession to WTO are likely to adversely affect garment and textiles exports by some of these countries. The abolishment of garment export quotas eliminated the formal quantitative restraints on exports from low-cost coun-

47

Challenges of the Least Developed Countries: Governance and Trade

tries such as China and India to the United States and the European Union, leading to a redistribution of production and export capacity, namely (a) contraction in production in developed countries as protection was reduced; (b) strong growth in exports from a number of large Asian producers where quota restrictions were most binding; and (c) either modest increases or reductions in exports and production in smaller developing countries where quotas had been lower or not binding.

B. Trade performance in landlocked least developed countries The lack of direct access to the sea is a major factor impeding international trade in landlocked developing countries. Landlocked least developed countries spend nearly two times as much on transport and related services as a proportion of export earnings as other developing countries and nearly three times as much as developed countries. This disadvantage is greatest for exports of high-bulk, lowvalue products, which in fact constitute a significant share of developing countries’ commodity exports. While trade growth in landlocked developing countries is less impressive than trade growth in least developed countries in general, Asian landlocked least developed countries have fared better than average. For all landlocked least developed countries, exports as a share of GDP grew from 25 per cent in 1990 to 30 per cent in 2001 (WDI, 2003). In contrast, the Lao People’s Democratic Republic’s exports as a share of GDP increased more than threefold over the same period. Nepal also recorded a doubling in its export share of GDP. This outstanding export growth in Asian

48

landlocked least developed countries demonstrates that, in the right circumstances, landlocked countries can also experience rapid growth. Asian landlocked least developed countries such as Nepal and the Lao People’s Democratic Republic have had the advantage of close proximity to rapidly growing neighbours. Three favourable conditions brought about by this thriving neighbourhood have greatly benefited these landlocked least developed countries. First, neighbours that are growing economically provide a lucrative export market, with significant growth potential, and can be reached by road transport. In the case of the Lao People’s Democratic Republic, nearly two thirds of its exports go to neighbouring Thailand, Viet Nam and Cambodia. In the case of Nepal, about 45 per cent of its exports go to India. In these situations, links to the ocean are less important as long as there are good transport links to neighbouring markets. A second advantage of having economically better-off neighbours lies in the higher quality of infrastructure found in these landlocked least developed countries as compared with those whose neighbours are poor. Finally, flourishing neighbours bring in a large amount of FDI to landlocked countries. For example, India provides around one third of Nepal’s total FDI inflows, and Thailand and Viet Nam provide close to two fifths of the FDI inflows to the Lao People’s Democratic Republic.

C. Foreign direct investment FDI in the least developed countries remains minimal. FDI in developing countries rose from US$ 200 billion in 1990 to US$ 1.3 trillion by the end of the decade. Yet, only 0.5 per cent of this amount is invested in the least developed

Chapter VII

countries. Although small, FDI is still very significant for these countries relative to the total financing available to them. FDI remains highly concentrated: the top 10 recipient countries – Angola, Bangladesh, Cambodia, Lesotho, Mozambique, Myanmar, Sudan, Uganda, the United Republic of Tanzania and Zambia – accounted for over 86 per cent of total FDI inflows to all least developed countries in the period 1998-2000 (UNCTAD, 2002). A significant share of FDI to Asian least developed countries, however, has been invested in domestically oriented sectors. FDI in Bangladesh is heavily concentrated in the energy sector, with FDI in export-processing zones accounting, on average, for less than 20 per cent of total FDI during the period 1994-1999. FDI in Nepal is also heavily concentrated in domestic sectors, such as in hotels and restaurants and in transport and storage. In Cambodia, FDI flows have mainly targeted the garments and tourism industries, although total flows have declined in recent years. The Lao People’s Democratic Republic has been more successful in directing foreign investment into export-oriented sectors. Initially, FDI was mainly directed to the hydropower industry, but more recently, the garments,

wood-processing and mining sectors have received significant FDI inflows. Business services have also attracted close to 20 per cent of FDI in 2001, compared with only 8 per cent flowing into the mining sector, in that same year (UNCTAD, 2003). The trade performance of Asian least developed countries demonstrates that in the right circumstances, least developed countries can successfully participate in global trade. A review of their experience over the past decade suggests that the following factors are key to propel growth in trade:

•

Exploiting areas of comparative advantage;

•

Reforming economies to remove constraints to private firms taking advantage of global opportunities in line with a country’s comparative advantage;

•

Providing an environment that supports/welcomes foreign direct investors who provide capital and technological expertise;

•

Providing export platforms from which exporters can access inputs at close to global prices;

•

Negotiating access to markets in distant and neighbouring countries.

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VIII

Improving Market Access

Acquiring a miniscule share of foreign markets translates into rapid export growth for least developed countries, given their small size; therefore, further easing of least developed countries’ access to foreign markets must remain a priority on the international and regional agenda. Both developed and developing countries still impose high tariffs on products of interest to least developed countries, namely agricultural products and textiles. Between one sixth and one third of the tariff peaks extant in Quad economies (Japan, Canada, the United States and the European Union) exceed 30 per cent and can reach more than 100 per cent, with some exceeding 200 per cent. Moreover, the preferential treatments they grant to least developed countries cover only a minor share of least developed countries’ current exports, and stringent rules of origin and documentation requirements remain firmly in place. While regional preferential agreements, such as the one on the ASEAN Free Trade Area, are instrumental in lowering tariffs and increasing market access, the take-up of imports at those preferential tariffs remains limited.

A. Barriers to markets in developed countries Four main types of international constraints adversely affect exports from least developed countries to developed markets: (a) import restrictions in developed countries; (b) rules of origin and environment-related trade barriers, including sanitary and phytosanitary standards; (c) measures to support agriculture in developed countries; and (d) the phasing out of the WTO Agreement on Textiles and Clothing.

1. Tariff escalation and tariff peaks Market access preferences offered to least developed countries by developed countries enable exporters from the least developed countries to pay lower tariffs or even to enter markets quota- and dutyfree. Recent examples of preferential schemes include the 2001 “Everything but Arms” Initiative of the European Union, under which all products from least developed countries enter the European Union duty- and quota-free, with the exception of

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Challenges of the Least Developed Countries: Governance and Trade

arms, and the phased liberalization of rice and sugar (2009) and bananas (2006). Interestingly, the share of least developed countries’ exports to the European Union has not increased much in recent years. Research has shown that the largest benefits to the least developed countries from the Initiative will be related to products that are currently excluded, such as sugar (Cernat, Laird and Turrini, 2002). Strikingly, it has been estimated that only 0.03 per cent of total least developed countries’ exports to the European Union entered under that Initiative in 2001 (Brenton, 2003). A particular problem affecting all preferential market access schemes is that utilization of preferences is low. In 2001, only 68.5 per cent of total imports from least developed countries eligible to enter Quad markets at a preferential duty rate actually did so, with the rest paying most-favoured-nation duties (UNCTAD, 2003). The low utilization ratios are mainly the result of the insignificant magnitude of the potential commercial benefits. The lack of technical knowledge, human resources and institutional capacity to take full advantage of the preferential arrangements are also major constraints faced by least developed countries. Furthermore, the preferential schemes cover a large number of products that are not currently produced by least developed countries. In fact, only 15 least developed countries have more than 30 per cent of their current exports eligible for European Union preferences (Brenton, 2003). The benefits of preferences provided by Quad economies are also strongly limited by their unpredictability. Investors

52

in preference-receiving countries are often hesitant to increase their investments in Quad economies if preference-granting countries do not make clear commitments with regard to the period during which the market access scheme remains effective, and with regard to the products and the countries covered by the scheme. The list of products is generally reviewed in the light of their economic sensitivity and the list of countries is often determined on the basis of non-trade concerns. Problems of tariff escalation and tariff peaks on products of major interest to least developed countries persist. For instance, raw hides enter a Quad economy at a duty-free rate while finished products (handbags, shoes and luggage) enter at double-digit tariff rates. As tariffs escalate with value addition, they bias least developed countries’ exports towards unprocessed resource-based commodities. One very harmful effect of tariff escalation is to lock exporting countries out of opportunities to move up the value chain in accordance with their comparative advantage, thus seriously undermining least developed countries’ efforts to diversify their export base. Residual problems with very high tariff peaks on products of interest to least developed countries also persist. Textiles and clothing are subject to significant “specific duties” in Japan and the United States, which fall disproportionately on least developed countries in view of the relatively low value of these exports. The case for removing such tariff distortions becomes all the more compelling in view of the marginal share (0.5 per cent) of least developed country imports in

Chapter VIII

world trade. An increase in imports from least developed countries resulting from improved market access would nonetheless be extremely beneficial at the country level, since each product group accounts for a very large share of least developed countries’ trade.

2. Rules of origin and sanitary and phytosanitary standards The stringent rules of origin attached to preferential market access schemes, defining specific processing requirements, comprise a second major constraint impeding exports from least developed countries. The costs incurred in providing the necessary documentation to prove conformity with these rules are an important impediment to least developed countries wishing to benefit from such preferences (Brenton and Manchin, 2003). In the case of the European Union, the costs of documentation related to the rules of origin are compounded by a requirement that goods for which preferences are requested are shipped directly to the European Union. If goods are in transit through another country, which is the case for most goods originating from least developed countries, documentary evidence must be supplied by the country of transit, attesting that the goods did not enter the domestic market and did not undergo operations other than unloading and reloading. In practice, it is very difficult to obtain the necessary documentation. Implementation difficulties among preference-receiving countries are also related to the obligation to devise and operate an accounting system that is conceptually and operationally different from the national legal requirements,

making it very difficult for enterprises to comply with the new system. Often times, the costs of complying with administrative procedures to obtain certificates of origin often exceed the value of the preference margin offered by the scheme. As a result, an exporter might prefer to have the most-favoured-nation rate applied rather than going through the high costs and administrative burden incurred by the preferential rate qualification process. Meeting international standards has been identified by least developed countries as a key challenge for increasing their exports. As tariff barriers decline, the relative importance of sanitary and phytosanitory standards and other regulations increases. Environmental trade barriers, which affected 42 per cent of the least developed countries’ exports in the period 1999-2000, are now the most important constraints for the least developed countries as a group (UNCTAD, 2004). There are concerns that these provide implicit protectionism for domestic industries. For instance, eco-labelling programmes favouring a particular process or production technology, may negatively affect market access for least developed countries: the required technology may be unavailable, unsuitable or prohibitively expensive. Referring to the WTO Agreement on Technical Barriers to Trade and the WTO Agreement on the Application of Sanitary and Phytosanitary Measures, least developed countries have been calling on their development partners to align the standards with the level of a country’s development and to enhance technical assistance and resources to least developed countries as they strive to meet these standards.

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Challenges of the Least Developed Countries: Governance and Trade

3. Agricultural support measures in developed countries Despite a commitment in Doha to “substantial reductions in trade-distorting domestic support”, agriculture continues to be the area on which OECD countries are creating the most trade distortions. Strikingly, the European Union, Japan and the United States, the three wealthiest OECD members/groupings, are also those which provide the largest assistance to their farmers by subsidizing production and exports and by imposing tariff and non-tariff barriers on trade. Tariffs on agricultural products average 60 per cent across the OECD countries and several have peak tariffs of at least 200 per cent for certain commodities. As a result, imports from developing and least developed countries are absent over a wide range of added value items in the food industry sector. An analysis of the impacts of OECD agricultural policies on least developed countries and developing countries, measured against OECD objectives for development assistance reveals much incoherence in donor countries’ policies. The agricultural sector of the OECD membership absorbs more than US$ 300 billion a year in support, or around 1.2 per cent of those countries’ GDP, which is also more than five times what these countries spend on development assistance. These subsidies promote increased production and distort markets by lowering global market prices, in some cases by 10 per cent or more. For developing countries and least developed countries, this means increased competition, which leads to a lower market share

54

– even in their own market, reduced income from agricultural exports and thus fewer incentives for investment and lower economic growth than would be the case without these subsidies.

4. Phasing out of the Agreement on Textiles and Clothing Import quotas and preferential margins enjoyed by textile-producing least developed countries were eliminated on 1 January 2005 in line with the phasing out of the Agreement on Textiles and Clothing. Since the textile exports of the 14 least developed countries in Asia and the Pacific accounted for 94.2 per cent of the total textile exports from the least developed countries, they were particularly affected by the elimination of quotas. Textile exports of the 14 Asian least developed countries accounted for 61 per cent of their total merchandise exports, with the share of garment exports in total merchandise exports of Bangladesh, Cambodia and Nepal reaching 85 per cent, 76 per cent and 40 per cent, respectively. As a result of the expiration of the Agreement, major buyers were expected to reduce the number of countries from which they source by half during the period 2005-2006, and by another third by 2010. The removal of quotas on Chinese clothing exports was also expected to present a challenge for the least developed countries as the increased competition and subsequent fall in prices could reduce employment for unskilled or semi-skilled workers. The quality of clothing could be raised only if suppliers have access to higher quality fabrics and other inputs, designs and stitching technologies.

Chapter VIII

Box 1. Cambodia’s Garment Industry Clothes accounted for 98 per cent of Cambodia’s export earnings in 2003. The United States is currently the destination for about two thirds of Cambodia’s clothing exports. Yet, a decades-old system of United States textile duty-free import quotas was due to expire at the end of 2004, a system that capped China’s share of the market and effectively assured manufacturers in smaller countries such as Cambodia that they would receive some orders from the United States. Manufacturers acknowledge that they cannot beat China on price. Production costs in Cambodia are 25 per cent higher than in China, for a host of reasons: electricity costs are three times those in neighbouring Thailand or Viet Nam; it takes 18 days for a freight container to reach Phnom Penh from the port of Sihanoukville, 115 miles away; and monitors sent by Nike, Inc., Gap Inc. and the International Labour Organization (ILO) keep insisting that workers receive overtime pay, bathroom breaks and union representation. Meanwhile, Cambodian factories have built a reputation for fair employment practices they hope will keep Gap and Nike coming. “We are trying to create a niche that builds on Cambodia as a safe producer – that this garment is made in a country that respects labour rights”, said Ray Chew, Secretary General of the Garment Manufacturers’ Association in Cambodia. Since 1999, manufacturers shipping goods to the United States must participate in a working-conditions improvement programme devised by ILO. Under this inspection programme, Cambodian garment workers have the right to strike and to negotiate with employers, unlike in Viet Nam and China where there are no free trade unions. Mindful of the anti-sweatshop campaign that appeals to the consciences of Western shoppers, Cambodia is trying to turn its fair labour practices into its comparative advantage. Ultimately, Cambodia is working on obtaining a seal of approval for its labour practices, perhaps on the model of the privately run certification programmes for “Fair Trade Coffee”, something such as “Cambodia: Free of Sweatshops”. In all likelihood, protecting workers’ rights will pay off financially in the long run.

B. Barriers to markets in developing countries Access to other developing countries’ markets is as important for least developed countries as access to developed markets. A new geography of trade is taking shape, with only 42 per cent of least developed countries’ exports entering industrial country markets and nearly 50 per cent being directed to other developing countries. Enhanced South-South cooperation therefore has the potential of playing a significant role in promoting sustained growth for least developed countries. In fact, such partnership is

mutually beneficial, as the enhanced development of least developed countries will soon turn into a market opportunity for more advanced developing countries. Yet, evidence shows that developing countries’ trade policies are moving in the opposite direction. According to a study conducted by World Bank economists Hertel, Hoekman and Martin (2000), more than 70 per cent of all duties paid by developing country exporters of industrial goods were levied by other developing countries, which impose still higher duties on imports from least developed countries than on imports from developed countries.

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Challenges of the Least Developed Countries: Governance and Trade

A WTO study concurred, pointing out that most-favoured-nation rates on products of export interest to least developed countries were substantially higher in developing and transition economies than in developed countries. For instance, the average tariff on agricultural and fish exports of 1 and 3 per cent, respectively, in developed markets are well below the corresponding average levels of 10 and 17 per cent, respectively, in developing markets. Measures to reverse the marginalization of least developed countries in South-South trade include further use of the Global System of Trade Preferences among Developing Countries, which is, an agreement on tariff reduction and trade liberalization among such countries. It is essential that least developed countries take an active role in these negotiations in order to avoid being marginalized. Other measures include the promotion of regional FDI in the least developed countries by more advanced developing countries, the establishment of triangular relationships with developed countries and the formulation of special provisions within regional agreements.

C. Moving regionalism forward Regional trade agreements in Asia and the Pacific are for the most part distinguished by their outward orientation and open regionalism. Consequently, it would appear that they have served as useful stepping-stones towards a broader liberalization strategy, and have contributed to the more effective integration of least developed countries and developing countries in the global trading system. Most least developed countries in the ESCAP region, with the exception of

56

Afghanistan, Kiribati, Solomon Islands, Timor-Leste, Tuvalu and Vanuatu, are members of regional trading arrangements. Cambodia, the Lao People’s Democratic Republic and Myanmar are members of AFTA. Bangladesh, Bhutan, Maldives and Nepal are members of the SAARC Preferential Trading Arrangement (SAPTA). Bangladesh, Nepal and Bhutan are members of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMST-EC). The Pacific Island Countries Trade Agreement (PICTA) entered into force in April 2003. Through these arrangements, least developed countries receive reciprocal or preferential market access. India, for example, provides preferential access for least developed country members of SAARC. However, as noted prevenly, there is a clear tendency for least developed countries’ exports to face higher tariffs in developing country markets than in developed country markets. Bilateral free trade agreements (FTAs) have proven to be even more popular than regional trade agreements, in recent times, in part due to the slow progress achieved in regionalism. FTAs depart from the traditional tariff liberalization approach in that they encompass economic and technical cooperation ranging from human resources development to technical assistance. While these features may seem to be a positive development, especially for least developed countries, which are in dire need of such technical assistance, the sheer number of bilateral and regional trade agreements under negotiation is a cause of concern. Resources are scarce, especially in least developed countries. The more resources are devoted to negotiations of multiple agreements, the less is available for the multilateral trade process. Under the current proliferation of regional trade

Chapter VIII

agreements, there is a risk that multiple memberships could undermine the political willingness and administrative capital that least developed countries would otherwise be willing to dedicate to the WTO process. The ESCAP region is also plagued with complex problems of multiple memberships in the intricate web of regional integration agreements that span the region. Often, countries sign multiple agreements that create contradictory obligations, thus creating uncertainty and confusion among investors, traders and customs officials. In practice, which tariff level applies? Which rules of origin apply? These complexities not only delay private sector decision-making, but also increase the opaqueness of policies and in turn, the cost of doing business. Furthermore, it should be noted that bilateralism based on reciprocity rather than on the most-favoured-nation principle is discriminatory, since it is based on power relations rather than on multilaterally negotiated rules. For instance, AFTA provides for a maximum tariff of 5 per cent on intra-AFTA regional trade by 2006. However, a number of countries have nominated key agricultural products to figure on “sensitive lists”. These are to be excluded from the maximum tariff of 5 per cent until 2010. Given the importance of agricultural production in Asian least developed countries and other low-income Asian countries, the “sensitive lists” represent a significant barrier to exports for least developed countries. Preferential trade agreements often go hand in hand with foreign policy objectives. As such, the long-term strategic interests of least developed countries may also be negatively affected by the unpredictable long-term effects

of such arrangements between trade and foreign policy. In contrast, the rule-based multilateral trading system is much less likely to be affected by such linkages, thus offering greater stability.

D. Geographical constraints to market access Without addressing trade and transport constraints resulting from geography, increased market access may still not lead to significant growth in exports from landlocked countries and island developing countries. The Almaty Programme of Action: Addressing the Special Needs of Landlocked Developing Countries within a New Global Framework for Transit Transport Cooperation for Landlocked and Transit Developing Countries,9 is a comprehensive framework for establishing closer partnerships to enhance the efficiency of transit transport. Together with the Asian action plan on transit transport cooperation, which was adopted by the Commission at the first phase of its fifty-ninth session on 25 April 2003, it provides a set of concrete actions to be taken by all stakeholders to tackle transport constraints faced by landlocked and island developing countries. With the Almaty Programme of Action, the international community clearly recognized that the main reason for the marginalization of landlocked developing countries and landlocked least developed countries from the international trading system was the high transaction costs incurred by these countries owing to their

9

Report of the International Ministerial Conference of Landlocked and Transit Developing Countries and Donor Countries and International Financial and Development Institutions on Transit Transport Cooperation, Almaty, Kazakhstan, 28 and 29 August 2003 (A/CONF.202/3), annex I.

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Challenges of the Least Developed Countries: Governance and Trade

Box 2. Integrating transit transport issues within existing regional economic cooperation frameworks – The Case of the Dhaka-Chittagong Economic Corridor The Special Body on Least Developed and Landlocked Developing Countries stresses the importance of integrating transit transport issues within existing regional economic cooperation frameworks. For instance, the ADB has projected fourfold growth in traffic by 2020, in referring to the Dhaka-Chittagong Economic Corridor, and called for massive infrastructure development in the Chittagong Port of Bangladesh to facilitate trade in the corridor. While Bangladesh is not a landlocked country itself, it is a transit country for many of its neighbours. Chittagong Port is thus a key infrastructural facility to be revitalized for subregional integration to thrive. “As a principal transport corridor in Bangladesh, the DCEC provides potential subregional linkages to northern states of India and via Jamuna bridge, to West Bengal, as well as to Bhutan and Nepal”, explains the study. According to ADB, Bangladesh has high potential, particularly with the development of DCEC, to become a transport/trans-shipment centre for the countries comprising the South Asia Subregional Economic Cooperation (SASEC), Programme of ADB, namely Bangladesh, Bhutan, India and Nepal. Bangladesh could turn Chittagong Port into a revenue-generating port if it was properly overhauled, in view of its proximity to landlocked Nepal, Bhutan and the eastern states of India. The proposed 133 km highway linking Bangladesh and Myanmar will also put Chittagong Port and the corridor at centre stage, with connections to 40 countries. Among other measures, ADB called for removing restrictions on intercountry vehicle movement and for signing transit agreements between countries. The Bank recommended that the key infrastructure be owned by the Government but operated by the private sector.

being landlocked and remote from major global markets. According to recent UNCTAD statistics, transportation costs in the export sector of landlocked least developed countries is three times higher than in developed countries and twice as high as in developing countries. If high tariffs are also imposed, the resulting high prices are beyond the reach of both importers and consumers. In view of the increasing marginalization of landlocked least developed countries because of globalization, WTO agreements have provided these countries with special provisions, in recent years. WTO membership can help alleviate the problems of landlocked countries by promoting transit rights under the

58

“freedom of transit” article (Article V of GATT 1947). This right is enforceable under the WTO dispute settlement mechanism. For instance, the landlocked Lao People’s Democratic Republic envisions its forthcoming WTO membership as an opportunity to be transformed into a land-linked country in the Greater Mekong Subregion. In the process of accession, the Lao People’s Democratic Republic has approached other landlocked countries in order to jointly raise the issue and collectively negotiate for transit rights. In spite of the existence of such special provisions, they have yet to translate into significant assistance from the trading partners of landlocked least

Chapter VIII

developed countries. This insufficient support was highlighted by the Special Body on Least Developed and Landlocked Developing Countries at its sixth session (1-4 September 2003). The Special Body noted that there was a need for genuine partnerships between landlocked and transit developing countries and their development partners at the national, bilateral, subregional, regional and global levels, as well as a need for effective partnerships between the public and private sectors. Basic infrastructure requires huge investments from the public sector, which in the absence of external assistance is difficult to obtain. In this regard, the current trend of multilateral agencies giving priority to financing social and governance projects risks depriving the

infrastructure development sector. A more balanced mix of donor support for social and economic infrastructure is needed. More specifically, the international community should encourage private sector participation in infrastructure through co-financing. Besides financial resources, least developed countries also have an acute need for technology as well as for technical assistance in developing human resources. Finally, it must be recognized that, in spite of its best efforts, the private sector’s participation in infrastructure development in least developed countries, especially in remote, sparsely populated and mountainous areas, is difficult to achieve. A “special fund for infrastructure development” would therefore be very helpful to stimulate trade and development in geographically disadvantaged countries.

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IX

Solving Domestic Supply-side Constraints to Trade Expansion

Problems of market access and supplyside constraints are interlinked. In fact, they are two sides of the same coin: supply-side constraints determine the capacity of a least developed country to export and therefore its ability to make effective use of market access opportunities. Clearly, a mere increase in market access opportunities for least developed countries is far from sufficient. Of equal importance is the need to devise long-term strategies to strengthen least developed countries’ export supply capabilities, in order to more effectively utilize improved market access opportunities. As more and more developing countries open up and seek markets for the same types of products, international competitiveness will increasingly be determined on the basis of quality, uniformity and timely delivery of products. Overcoming supplyside constraints must therefore be a top priority in least developed countries’ export development strategies.

A. Domestic trade policies hindering trade expansion

the most immediate domestic constraints to expanding trade and exports. Quantitative import restrictions and import tariffs not only reduce the amount of imports but also become “taxes” on exports by raising the cost of imported inputs for exports, as well as the cost of foreign exchange. Controls and taxes on exports inhibit exports even more directly. During the 1990s, several least developed countries in the region initiated reforms to liberalize their trade system, by reducing and rationalizing tariff rates and by eliminating quantitative restrictions and non-tariff barriers. Export taxes have also been significantly reduced. While the liberalization of domestic trade policy is an important necessary prerequisite for the enhancement of exports, it certainly is not a sufficient condition. A large unfinished policy agenda requiring national and international action remains in need of attention. Table IX.1 assesses trade policy regimes in Asian and Pacific least developed countries.

Trade policies formulated by Governments of least developed countries are

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Challenges of the Least Developed Countries: Governance and Trade

Table IX.1. Trade policy regimes in Asian and Pacific least developed countries

Country

Tariff reduction and rationalization

Abolition of quantitative restrictions and non-tariff barriers

Expansion of supply base and supply capacity

Deregulation and legal reform

Growth in production and competitiveness

Abolition of export promotion subsidy

Private sector expansion

Bangladesh

Y

S

L

P

I

I

S

Bhutan

Y

Y

S

P

I

U

L

Cambodia

Y

P

P

I

I

S

L

ND

ND

N

N

N

Y

N

Lao People’s Democratic Republic

Y

Y

P

I

L

S

L

Maldives

Y

Y

I

P

S

P

L

Myanmar

Y

P

P

N

N

I

L

Nepal

Y

Y

L

P

I

S

S

Samoa

Y

Y

N

N

N

L

L

Kiribati

Solomon Islands

N/ND

N/ND

N

N

N

I

N

Tuvalu

ND

ND

N

L

N

L

L

Vanuatu

ND

ND

N

N

N

L

N

Source:

ESCAP, “Review of implementation of the Programme of Action for the Least Developed Countries for the 1990s: A synthesis study” (draft).

Abbreviations:

Y = Yes; N = No; S = Some; I = Inadequate; U = Unattained; L = Limited; P = Partly; ND = Not Desirable.

Tariffs With the exception of the Lao People’s Democratic Republic, tariffs of least developed countries on imports are higher than the average tariffs in lowincome countries and developing countries (see table IX.2). However, gradual imple-

62

mentation of the Common Effective Preferential Tariff (CEPT) for imports from ASEAN countries under AFTA is lowering tariff protection, as seen in the case of Cambodia. Meanwhile, there is considerable scope for reducing the mostfavoured-nation tariffs in Bangladesh, Cambodia and Nepal.

Chapter IX

Table IX.2. Simple average tariff rates Country

Number of bands

Bangladesh Cambodia Lao People’s Democratic Republic Nepal Developing country average (2001) Low-income country average (2001) Middle-income country average (2001) OECD average

Source:

4 4 6 5

Simple average tariff (percentage) 17 16 10 14 12.7 14.8 11.4 3.7

See .

Despite the relatively small number of tariff bands, the rates cascade: the highest tariff rates apply to processed goods and the lowest rates apply to raw materials. Effective rates of protection therefore remain much higher than nominal tariffs suggest, thus generating problems of inefficient resource allocation (Tarr, 2002). In addition, widespread concessions and exemptions undermine the predictability of tariffs. For example, in the Lao People’s Democratic Republic, only 21 per cent of import duties payable according to the regular tariff schedule are actually paid, due to widespread exemptions (UNIDO, 2003). In contrast, Bangladesh continues to levy supplementary duties for revenue and protection purposes. This serious lack of transparency in the tariff regime of these two countries acts as a major deterrent to both domestic and foreign investment in export industries. Quantitative restrictions Quantitative restrictions on re-exports have hindered the development of

entrepot trade in Bangladesh, Myanmar and Nepal. Under the Export Policy Order of 1997-2000, re-exports from Bangladesh were permitted only if exports exceeded a 10 per cent mark up on the value of imports. Quantitative import restrictions also adversely affect the export capability of these countries. After Myanmar issued in March 1998 Order No. 4/98 under the Control of Imports and Exports Act of 1947, companies were allowed to import goods in a ratio of at least 80 per cent essential goods to 20 per cent non-essential goods, with specifications given as to which non-essential items were allowed. As a result of this policy, power production and overall economic activity have been seriously affected by the limited availability of capital equipment and spare parts. Quantitative import barriers are also significant in the Lao People’s Democratic Republic; they include import-licensing, enterprise-specific restrictions, differentiated turnover tax rates that discriminate against imports and onerous pre-shipment inspection charges.

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Challenges of the Least Developed Countries: Governance and Trade

Export taxes and export restrictions Some least developed countries impose export taxes and other export restrictions in an attempt to encourage greater domestic processing. These restrictions constrain the export growth of both raw and processed goods, especially when domestic processing is not competitive. Cambodia and Nepal impose export taxes and restrictions on exports. Cambodia places export taxes on live animals, fish and raw hides and skins. Nepal imposes an export floor price for carpets, which has been maintained at US$ 50 and US$ 60 per square metre of unwashed and washed carpets, respectively; it limits the export of raw hides and wool used in carpet production. Nepal also imposes export taxes on essential agricultural commodities and selected manufacturing items, as well as on commodities likely to be re-exported to India, such as processed edible oil, vegetable ghee (clarified butter), plastic products and copper wire. Export platforms to exempt tariffs on imported inputs Least developed countries in Asia have established a number of export platforms aimed at exempting exporters from paying tariffs on imported inputs and to provide them with better infrastructure. Such export platforms include export-processing zones, industrial zones, bonded warehouses and duty-drawback schemes. Although these platforms are aimed at providing exporters with access to

64

imported inputs at international prices, the platforms have not altogether eliminated costs to exporters. Nepal has a bonded warehouse system for imported inputs and raw materials, as well as a duty-drawback system, yet the impact of these measures on export costs has been limited. The procedures to obtain duty rebates are cumbersome since they require a substantial amount of documents and involve several departments and ministries. Exporters in Bangladesh and Cambodia similarly complain about lengthy delays in receiving import duty rebates and about processing in these zones. The experience of other developing countries, such as Malaysia and the Republic of Korea, suggests that such platforms can be organized to minimize costs. One option is to pre-announce the imported-input coefficients for a range of existing as well as potential export subsectors. Customs administration The institutional framework for border control and customs administration also needs to be strengthened and made more efficient. Overlapping responsibilities by different agencies should be removed and pay for officials should rise to reduce any incentive to accept payments from smugglers. Delays in customs and payments to enable the transfer of goods undermine liberal trade policies by raising both holding and administration costs for importers and exporters. Such delays could potentially destroy the marketability of perishable products.

Chapter IX

Box 3. Institutional constraints to trade In Cambodia and Nepal, the institutions involved in trade facilitation need to be streamlined. In Nepal, procedural delays result from complicated documentation procedures, averaging 80 export-related documents; inaccurate classification of goods, leading to incorrect decisions, delays and rent-seeking behaviour; inaccurate valuation owing to the use of reference, rather than invoice, value; and a lack of law enforcement, as well as smuggling. Rationalization of institutions responsible for investment approval, concessions and trade, and investment promotion has therefore been recommended. Despite the appointment of a pre-shipment inspection service provider and agency coordination at border checkpoints, Cambodia has also experienced significant delays in customs processing. In 2002, it took 17 days, on average, to clear customs in Cambodia, compared with 9 days in India, 7 days in China and 5 days in Poland. The average clearance time for garments, one of Cambodia’s major exports, was even longer. A diagnostic studya supporting an integrated framework for Cambodia identified a number of problems that need to be addressed, including payment of unofficial fees to “facilitate” customs clearance; the uneasy relationship between the pre-shipment inspection and customs; the lack of computer support to accelerate processing time and to improve risk assessment; and an outdated customs law that no longer meets the needs of a modern customs administration. a

See Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries <www.integratedframework.org/countries/cambodia.htm>, accessed on 27 March 2007.

B. Non-trade “behind-theborder” policies hindering trade Significant obstacles in Asian least developed countries’ internal environment often prevent them from taking advantage of opportunities created by their increasingly liberal trade policies as well as by their greater market access in other countries. An inadequate human resource base is a common constraint to developing efficient production and export businesses in many least developed countries. Also, poor mechanisms for mobilizing and allocating resources, as in the case of a poorly functioning financial sector, inhibit the needed investments. High transaction costs and poor quality of infrastructure and logistics services also increase the costs of business in the region and deter private investment.

Weak human resource base A weak human resource base constrains a country’s capacity for entrepreneurship and the provision of adequately productive labour for competitive enterprises, economic growth and development (ESCAP, 2001). In a more liberal trade policy environment, such a lack of human capacity makes it difficult to face competition as well as to expand the supply of exports. Improvement in the delivery of social services to strengthen the human resource base is thus a key requirement for sustained growth in trade in least developed countries. Examining some indicators of education as set out in table IX.3 reveals that Asian least developed countries and least developed countries as a group have made some progress in lowering adult illiteracy rates between 1990 and 2004. With the exception of Bangladesh, the selected

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Challenges of the Least Developed Countries: Governance and Trade

Table IX.3. LDC illiteracy rates and school enrolment ratios

Country Bangladesh Cambodia Lao People’s Democratic Republic Nepal Average selected Asian LDCs All LDCs All developing countries Source:

Adult illiteracy rate (%)

Secondary school enrolment (%)

1990

2004

1997

1997

66 38 43

59 26.4 31.3

72 113 112

19 24 28

70 54

51.4 45

113 103

42 28

57 N/A

46 24

72 102

19 52

World Development Indicators (WDI) (2003), Online Database, World Bank (producer and vendor), annual updating. United Nations Conference on Trade and Development (UNCTAD) (2004), Linking International Trade with Poverty Reduction, Least Developed Countries Report 2004, United Nations, New York and Geneva, May.

Asian least developed countries have performed well in terms of primary school enrolment rates. However, Asian least developed countries and least developed countries more generally require significant gains to improve enrolment rates in secondary schools. Lack of skilled labour has been identified as a key constraint to growth in the private sector of the Lao People’s Democratic Republic. Improving literacy rates, providing technical and vocational education, and giving entrepreneurial and management training are a priority to ensure an adequate supply of skilled labour. Other more sophisticated skills are also needed. Some labour-related weaknesses identified by UNIDO in the manufacturing sector of the Lao People’s Democratic Republic include marketing capabilities, especially for export marketing, product design and development, and production management capabilities (UNIDO, 2003). Although Bangladesh has a relatively stronger capacity than the Lao People’s Democratic Republic in this

66

Primary school enrolment (%)

regard, it also suffers from shortages in skilled labour due to a high adult illiteracy rate and low enrolment ratios in primary and secondary school. Cambodia and Nepal have similar problems. Some key priorities for labour-market reforms in Asian least developed countries include the following: removing labourmarket restrictions, particularly in Bangladesh and Nepal, to facilitate the expansion of the formal labour market and increase the demand for labour from this formal market; reforming labour laws and introducing performance-based wages; providing incentives to firms to train employees, through tax incentives or by offering vouchers or grants to employees (UNIDO, 2003); funding (fully public) of primary and secondary school education to provide a solid base for subsequent vocational and technical training; and securing funding and teaching expertise for appropriate vocational, technical and management education, particularly in the Lao People’s Democratic Republic.

Chapter IX

Lack of finance Lack of access to capital is commonly cited by firms as a constraint to the development of the private sector and to expansion of exports. In the Lao People’s Democratic Republic, the lack of finance and consequent inability to purchase new technologies have been cited as significant weaknesses in the manufacturing sector (UNIDO, 2003). The banking sector of the Lao People’s Democratic Republic remains underdeveloped and thus is in a poor position to service the needs of businesses, especially with regard to the provision of credit. This is particularly the case for small enterprises, as is evident from a survey showing that only one enterprise in five had ever received a loan (ILO, 2002). Legal reforms have also been called for by UNIDO (2003), which recommended that the Lao People’s Democratic Republic reform its banking sector and related legislation, such as its bankruptcy and secured transaction laws. The institutional infrastructure does not help to alleviate the asymmetry of information that lenders face with respect to potential borrowers. Since lenders have difficulty assessing the creditworthiness of borrowers, the amount of

loans extended to customers remains at inappropriate levels. Despite recent expansion in the financial sectors of Cambodia and Nepal, access to financial services in these countries also remains limited. Table IX.4 presents some measures of the effectiveness of public credit information services across country groups. Only Bangladesh and the Lao People’s Democratic Republic have public credit information services; however, data are only available for Bangladesh where the service has been operating since 1992. As can be seen from the table, there is limited coverage by public credit information services among Asian least developed countries. Although exports accounted for nearly a third of Bangladesh’s industrial output in the mid-1990s, the export sector received only 9 per cent of total industrial financing owing to a weak commercial banking system and the scarcity of foreign exchange. Nonetheless, the public services index, a measure of the extent of collection, distribution, access and quality of the service, rates Bangladesh well. The absence of similar public and private services in other Asian least developed countries represents a potential hurdle to the development of markets for credit.

Table IX.4. Measures of effectiveness of public credit information services

Bangladesh

African least developed countries

Other Asian countries

Low-income countries (non-Asia)

Middleincome countries (non-Asia)

OECD and other high-income countries

1.0

2.1

23.5

14.8

49.0

120.1

50.0

38.4

58.7

47.3

48.4

56.3

Public credit registry coverage (borrowers per 1,000) Extensiveness of public credit registry (Index) Source:

World Bank, Doing Business in 2004 Database .

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Challenges of the Least Developed Countries: Governance and Trade

UNCTAD has stressed the need to improve access to credit for medium-sized enterprises and small agricultural landowners unable to obtain finance from banks. Developing and implementing best practice guidelines for rural microcredit schemes could also facilitate access to capital for export industries. In the immediate future, concentrating efforts on the provision of trade-focused instruments, including the use of back-to-back letters of credit, may alleviate the most pressing impediments to trade. “Unfriendly” private investment climate Asian least developed countries offer a range of investment incentives to encourage foreign investment. These include fiscal incentives, such as tax holidays and lower taxes for foreign investors, financial incentives including grants and preferential loans to transnational corporations, and other measures such as market preferences, infrastructure and, sometimes, even monopoly rights. However, the administration of investment incentives often lacks consistency or is subject to change, thus creating a disincentive to investment. More importantly, incentives do not necessarily target export-oriented sectors. Despite the liberalization of FDI policy regimes, FDI flows into most of the least developed countries remain minuscule. Domestic supply-side obstacles, such as institutional weaknesses, inadequate legal infrastructure, extensive government involvement and complicated or time-consuming business procedures, impede and inhibit private investment and export growth, even if trade policies are sufficiently favourable to exports. Therefore, the least developed countries need to simplify administrative procedures and improve the efficiency of institutions that

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impinge on the establishment and operation of enterprises by foreign investors. Most importantly, least developed countries need to engage in focused promotion to attract FDI in areas where they possess comparative advantage. In this connection, the international community should facilitate the flow of information on the opportunities for profitable investments in least developed countries. In many instances, potential investors did not possess adequate information on such opportunities. Further, a number of countries and multilateral institutions have provided insurance coverage for foreign investors. The scope of such insurance coverage could be expanded with special provisions for investment in least developed countries. In the Lao People’s Democratic Republic, the excessive involvement of the government in economic affairs, a weak legal framework, inconsistent application of existing regulations, unclear foreign investment approval procedures and weak property rights have hindered private sector development (World Bank, 2003a). Over the 1990s, this state of affairs has improved and foreign investment has risen, but there is scope for further improvements. Cambodia offers a much more open and liberal climate for private investment. Cambodia’s Law on Investment contains a range of taxation concessions for approved investment activities, including tax holidays, special corporate taxation rates, tax-free reinvestment of profits and tax-free repatriation of earnings. However, licensing restrictions, inspections of all consignments and illegal police checkpoints along the road have increased informal charges for exporters and investors. These charges have become an informal tax on private activity amounting to as much as 9-10 per cent of the sale price (World Bank, 2003b). The

Chapter IX

discretionary aspects of many investment restrictions create uncertainty for investors by raising hidden bureaucratic costs and facilitation fees (IMF, 2003). The existence of different rules for foreign and domestic firms can also create serious problems for trade.

services (telephone, power and gas etc.) or credit facilities. However, despite the liberal nature of this investment regime, FDI in Bangladesh tends to concentrate in the energy and telecom sectors; little foreign investment is found in exportoriented sectors.

Investment promotion policies are particularly important to Nepal, a country facing obvious disadvantages as a small, landlocked economy. However, the poor implementation of investment policies creates an unattractive business environment. The regulatory environment in Nepal is hampered by poor coordination within and among government departments, resulting in ineffective policy implementation and high unpredictability for investors. Responsibility for administering incentives is spread across several organizations, and policy implementation is plagued by a lack of clarity and predictability. Deficient bankruptcy arrangements and inadequate consultations between the public and private sectors also contribute to an unfriendly business climate.

In terms of trade facilitation, Cambodia’s experience in supporting private investment has been particularly successful. Cambodia is considered to have one of the most favourable policy approaches towards the private sector. It has instituted a government-private sector forum where systematic consultations between private and public institutions take place. While the Government of Cambodia lacks experience in managing competitive markets, theses partnerships help public institutions to understand the interconnections between good governance and economic growth. Importantly, the private sector believes that its participation in the forum does result in concrete outcomes. The assistance provided by Cambodia to exporters is equally noteworthy. Trade support institutions in Cambodia are young but steadily growing. One such successful example is the National Codex Committee, which was created to help enterprises meet the technical standards and packaging requirements of export markets.

Similar problems are encountered in Bangladesh. A survey of firms shows that they require several licenses, authorities and clearances just to start business. The cost of public service inefficiencies for the private sector has been estimated at 2-3 per cent of GDP growth annually foregone (Rahman, Gisunko and Kapoor, 2000). Nonetheless, the investment regime in Bangladesh is one of the most liberal, with an absence of any prior approval requirement or limits on foreign equity participation. Bangladesh does not impose restrictions on the repatriation of profits and income (UNCTAD, 2003). The Bangladesh Board of Investment sees its role as a facilitator of investment, with foreign investors required to register with the Board only if they need its assistance in fast-track delivery of infrastructure

High transaction cost of doing business In a recent World Bank report, Asian least developed countries are found to have significantly higher transaction costs relative to other countries, a major disincentive for private investment (see ). Table IX.5 compares transaction costs in Asian least developed countries with respect to a number of indicators. With regard to starting a business, Asian least developed countries compare favourably with all

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Challenges of the Least Developed Countries: Governance and Trade

Table IX.5. Cost of doing business in selected Asian least developed countries and other countries

Asian least developed countries Starting a business Number of procedures Duration (days) Cost (per cent of per capita gross national income – GNI) Minimum capital (per cent of GNI per capita) Closing a business (bankruptcy) Actual time (in years) Actual cost (per cent of estate) Goals of Insolvency Index Contract enforcement Number of procedures Duration (days) Cost (per cent of GNI per capita) Procedural Complexity Index Source:

African least developed countries

Low-income countries (non-Asia)

Middleincome countries (non-Asia)

OECD and other high-income countries

8.8

11.8

9.1

10.9

11.2

7.0

86.8 210.0

71.8 314.4

53.7 20.1

64.5 102.4

58.5 37.3

30.8 9.9

494.1

364.2

401.3

317.3

314.5

94.1

5.0

4.0

3.5

2.7

3.5

2.1

8.0

17.2

16.6

10.1

15.7

10.0

24.8

31.5

51.7

51.2

48.2

74.8

19.5

23.9

19.2

25.9

26.3

18.1

310.0 157.3

299.8 85.9

231.6 52.7

248.4 40.6

367.8 27.5

250.2 8.4

57.0

58.5

52.8

53.8

63.1

49.7

World Bank, Doing Business in 2004 Database, .

country groupings, except for OECD and high-income countries, in terms of the number of procedures an investor must go through. Asian least developed countries fare less well with regard to other start-up measures. The number of days required to complete procedures is high, although the Lao People’s Democratic Republic inflates the average value: it takes an average 198 days to complete the required steps for establishing a business in the Lao People’s Democratic Republic. Excluding the Lao People’s Democratic Republic would brings the average duration in line

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Other Asian countries

with other lower-income countries. In Bangladesh and Nepal, it takes 30 and 25 days respectively to complete start-up procedures – a lower average than that of the OECD and high-income country average. The cost of completing procedures and the minimum capital requirements in Asian least developed countries are much higher than in most other countries. Bangladesh and Nepal fare better than the South-East Asian least developed countries, as they maintain no minimum capital requirements.

Chapter IX

When businesses collapse, they leave secured and unsecured creditors with debts that need to be recouped from any residual assets. The cost of winding down the business and recovering these debts also account for the transaction cost of doing business in a country. The lower the costs associated with insolvency, the lower are the risks for investors. While costs associated with winding down a business are relatively favourable in Asian least developed countries, the time taken to complete the procedure is longer than in other countries. The Goals of Insolvency Index provides an overall score for the bankruptcy/insolvency procedures in a country, reflecting (a) the cost and time taken to work through procedures; (b) whether the absolute priority is retained (measuring the priority with which secured creditors are paid); and (c) whether the insolvency process results in foreclosure or liquidation with a going concern for sale or successful rehabilitation with new management – the “economically efficient outcome”. This measure shows that Asian least developed countries perform poorly relative to other country groups. The final set of measures aims to assess the quality of the legal institutions required for enforcing contracts. Data are available only for Bangladesh and Nepal, with these countries not rating too badly in terms of the number and duration of procedures when compared with other countries. Nonetheless, enforcement costs in Bangladesh (270 per cent of per capita GNI) are considerably higher than in other country groups. Complex and changing commercial regulations also hinder commercial activities in Myanmar. Since Myanmar is neither a member of the International Centre for the Settlement of Investment Disputes nor a party to the Convention on the Recognition and

Enforcement of Foreign Arbitral Awards, or the “New York Convention” of 10 June 1958, businesses involved in disputes in Myanmar tend to seek settlement informally rather than relying on the legal system, thus substantially increasing transaction costs. While data for Cambodia and the Lao People’s Democratic Republic are not available, the costs of contract enforcement are likely to be equally high, given the underdeveloped legal system of these two least developed countries. Inadequate transport and logistics Gross deficiency in infrastructural facilities can be identified as a crucial factor restraining the competitiveness of the least developed countries. In Cambodia, paved roads as a percentage of total roads in the late 1990s accounted for 0.3 per cent – the lowest in the group of non-island Asian and Pacific least developed countries – and in Bhutan, they accounted for 60 per cent – the highest in the group. Nepal also suffers from a deficient road infrastructure: several communities are not linked to the country’s main roads network, leaving them without access to national markets. Nepal relies on one major Indian port for the transit of its goods, and it takes on average 45 days for products to leave Kathmandu and to be shipped off from Kolkotta Port in eastern India. The impact of poor logistics on trade is also evident in Bangladesh where port congestion and frequent power outages have hindered garment exports (ADB, 2001). For instance, container ship turnaround time in Chittagong Port is 5-6 days against only 1-2 days in Bangkok and Singapore. Furthermore, the cost of handling containers in the port is double the amount charged in neighbouring ports.

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Challenges of the Least Developed Countries: Governance and Trade

In Cambodia, a poor road infrastructure and a lack of adequate storage and cooling facilities have caused much of the countries’ fish exports to be spoiled prior to reaching their destination, thus adding to export costs and tarnishing the country’s export reputation. In addition, freight costs for garment exports are considerably higher in Cambodia than freight costs from Ho Chi Minh City in Viet Nam and Bangkok. Being landlocked, the Lao People’s Democratic Republic is particularly reliant on road links to Thailand’s ports. However, despite a bilateral transit agreement between the Lao People’s Democratic Republic and Thailand, the monopoly held by a trucking firm has reduced the efficiency of this link. Inland freight costs in the Lao People’s Democratic Republic are also high. The planned road link to Viet Nam’s port is expected to generate competition and thus reduce transit costs. Fast-growing neighbours provide access to important export markets by land, yet the rudimentary road system that links the Lao People’s Democratic Republic to these markets has been estimated to add 25 per cent to paddy prices. The Lao People’s Democratic Republic still lacks a railway system and the telecommunications system remains crudely underdeveloped (ESCAP, 2003). It is recognized that the Governments of least developed countries lack sufficient resources to undertake the necessary investments for improving transport and communication facilities. The mobilization of private sector investment for developing infrastructure is therefore encouraged by many least developed countries in order to complement government efforts. Yet, in determining the role of the private sector in the provision of infrastructure, it is critically important to ensure that the

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decision-making process is transparent and that public interest is duly protected. Governments must also provide a policy framework conducive to private investment, addressing issues such as debtequity ratios and access to capital from financial institutions on reasonable terms. In those least developed countries where facilities already exist, inadequate attention to operation and maintenance has contributed negatively to the efficiency and life of such facilities. In that connection, national Governments might consider creating “maintenance funds”, for example by earmarking a certain portion of the user fees they charge. The involvement of local government institutions in maintaining the infrastructure also deserves encouragement. In this connection, it is important that skilled manpower be available for establishing, maintaining and restructuring the institutions responsible for the planning and regulation of infrastructure. In that regard, the Governments of least developed countries must ensure that the educational system is geared towards the provision of adequate skills, particularly in computer-based information technology.

C. Domestic policy changes for export promotion and diversification The composition of least developed countries’ exports has shown little diversification in the past two and a half decades. With the exception of Bangladesh, the Lao People’s Democratic Republic and Myanmar, the export base of least developed countries in the ESCAP region continues to be limited to two or three products. This section looks at export policies that pursue two goals: first, strengthen the competitiveness of exports in both existing and non-traditional

Chapter IX

markets, and second, promote diversification of exported products. In studying such policies, it is crucial to be aware of the multitude of exogenous and endogenous factors having an impact on export competitiveness. Therefore, a wide range of policies, including those which may not seem directly related to exports, must be considered. For example, a reduction in import duties can be considered as a policy promoting both imports and exports if applied to capital equipment required in export-oriented industries. Export-promotion policies can be implemented by institutions that are not necessarily involved directly in export promotion. Duty exemptions, for example, may be handled by a country’s customs department, an institution that is usually not directly involved in devising foreign trade policy. It is therefore important to realize that schemes to diversify and promote exports need to be complemented by an appropriate combination of fiscal, monetary and exchange-rate policies in order to be effective. However, these policies are likely to have objectives other than export promotion, when they are implemented. It is therefore essential that coherence in the overall export strategy be achieved in order to reach the objective of greater export capability. Needless to say that close institutional coordination between the different branches of government is crucial in implementing these policies. A recent study (ESCAP, 2004) entitled Export Diversification and Economic Growth: The Experience of Selected Least Developed Countries outlines a number of policies aimed at promoting export growth and diversification. While the study discusses policies on an individual country basis, policy outcomes are likely to be equally beneficial if replicated in other least developed countries.

In terms of tax treatment, it was found that exporters from Bangladesh, since 1998, have benefited from an income tax exemption of 50 per cent on the sale of non-traditional exports – a policy highly conducive to export diversification. The availability of bonded warehouses for export-oriented industries in both Bangladesh and Nepal was also noted as a favourable policy. Bonded warehouses enable exporters to import and store inputs duty-free with minimal customs formalities. The use of export-processing zones, where foreign and local enterprises import inputs and capital goods free of duty, is also highly beneficial, as witnessed in the case of the Bangladesh Export Processing Zone authority. Interestingly, in 1998 Bangladesh allowed 100 per cent of export-oriented industries located outside export-processing zones to import capital machinery free of duty. Nepal offers the same arrangements for any industry exporting 90 per cent or more of its products. Cambodia has adopted a “valuechain approach” to identify a number of potential industries and product groups strategic to the growth of the Cambodian economy. The findings of the value-chain analysis were then incorporated into the private sector development strategy report. The channel-mapping technique measures the cost of administrative interventions and production costs along the entire value chain of a product. This technique helps to capture the cost of administrative distortion and the impact on competitiveness as well as to benchmark the cost of production against local and regional competitors producing similar products. Cash incentive schemes may also be effective in promoting backward linkages (or so-called “vertical diversification”), as seen in the case of Bangladesh. The Bangladesh Bank provides garment

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Challenges of the Least Developed Countries: Governance and Trade

exporters with subsidies through a scheme if their products are locally manufactured using 100 per cent local raw materials. Finally, tariff reductions, regional trade

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arrangements and transit treaties for landlocked least developed countries were also found to be instrumental in promoting export growth and diversification.

X

Facilitating the Accession of Least Developed Countries to the World Trade Organization

A decade after the establishment of the WTO in 1994, least developed countries and landlocked least developed countries continue to experience great difficulties in implementing their Uruguay round commitments and capitalizing fully on the benefits they were expected to derive from their participation in WTO. On 23 April 2004, Nepal was the first least developed country to accede to WTO since its establishment, even though some had applied for membership more than a decade previously. Currently, five least developed countries (Bhutan, Cambodia, the Lao People’s Democratic Republic, Samoa and Vanuatu) are in the process of accession to WTO, and four least developed countries have no WTO status (Afghanistan, Kiribati, Timor-Leste and Tuvalu). Only five of the region’s 14 least developed countries are WTO members, with four of them having acceded earlier under GATT (Bangladesh, Maldives, Myanmar and Solomon Islands). Clearly, this lack of progress in least developed countries’ accession to WTO calls for a rethinking of the existing accession process. A rethinking of WTO membership not only in commercial terms, but most importantly, in terms of the wide-

ranging economic reforms entailed by the accession process, is also long overdue.

A. Benefits of WTO membership for least developed countries: An opportunity for wideranging policy reforms Least developed countries can potentially derive two types of benefits, commercial and economic, from becoming a WTO member. The main commercial benefits from WTO accession are twofold. First, members are guaranteed nondiscriminatory market access abroad, or most-favoured-nation status. For small countries such as least developed countries, such status guarantees protection from unilateral pressures arising from larger countries. Second, any WTO member, irrespective of size or development, can use the dispute settlement mechanism to resolve trade differences and protect its interests. This mechanism may be particularly useful for landlocked countries trying to resolve problems of transit rights. Meanwhile, the main economic benefit to be gained by a least developed country from WTO membership is help

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Challenges of the Least Developed Countries: Governance and Trade

in facilitating policy reforms for trade liberalization. By “locking in” such reforms internationally, WTO accession provides Governments with a defense mechanism against future policy backsliding or “de-liberalization” in response to domestic protectionist pressures. While the commercial benefits of WTO accession are usually seen as “the main gain”, they should not be exaggerated. In practice, most major trading nations not only grant most-favourednation tariffs to developing non-members but also discriminate in their favour under various unilateral and regional trading arrangements. As for the benefit to least developed countries of having access to the dispute settlement mechanism, it is likely to be minor, since least developed countries lack both the financial resources and expertise required for effectively mounting a case against major trading partners. The economic benefits of WTO membership should therefore be seen as more important, in the case of least developed countries. After all, it is a Government’s own trade and economic policies that determine a country’s efficiency – not simply non-discriminatory access to markets. Hence, the removal of constraints on exports must start at home, by addressing supply-side constraints. It is in this context that least developed countries’ accession to WTO will be discussed here. It will be argued that the least developed countries’ complaint that the “entry fee” for WTO accession in terms of required commitments is too high and narrowly focused on the commercial aspects of accession. On the contrary, least developed countries need to look at the real source of expected benefits – substantial policy reforms that are bound internationally.

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B. Accelerated accession and automatic grant of preferential treatment: economically wise? If domestic policy reforms are the real gains for least developed countries acceding to WTO, their proposed solution to automatically extend all “special and differential” (S and D) treatments to their group must be assessed with caution. While potentially an expedient means of accelerating their accession, the extension of S and D provisions should first be assessed on the grounds of whether or not they make economic sense for least developed countries. Indeed, a longer accession period, if used effectively by the acceding country to introduce the necessary policy and institutional reforms, may be of more benefit to an acceding least developed country, especially in view of the fact that many developing countries become inactive in WTO after gaining membership. In other words, accelerating the accession of least developed countries without ensuring that they also have the necessary institutional and policy capacities may achieve little integration of least developed countries into global trade. If S and D treatments requiring acceding least developed countries to only make commitments “commensurate with their level of development” are automatically granted to least developed countries, there is a real risk that such open-ended treatment virtually ensures status quo policies. Such a practice would effectively negate the usefulness of WTO disciplines for least developed countries. While S and D provisions are indeed very much needed, they should nonetheless be well targeted and time-bound. Providing least developed countries with strictly

Chapter X

defined transitional or implementation periods where necessary, coupled with technical and financial assistance for capacity-building, would seem to be a good compromise as to the best type of S and D treatment. This realization that economic benefits outweigh commercial benefits, in the case of least developed countries’ accession to WTO, was central to the Integrated Framework Pilot Study on Cambodia (see Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries <www.integratedframework. org/countries/cambodia.htm>, accessed on 27 March 2007). The study found that understanding what was “WTO-allowable” was less important than identifying what was good economic policy for Cambodia. The pilot study also warned against the automatic extension of S and D provisions to developing and least developed countries, since they often become escape clauses for “bad” policies rather than guidelines for “good” policies.

C. National ownership of the accession process To ensure that the expected benefits can be realized, an acceding country should be able to maintain ownership of its membership. In other words, it should be able to conduct any activity required by the accession procedure mainly by itself, even if it means the process will take longer than anticipated. While the very limited resources of least developed countries do make external assistance absolutely necessary, least developed countries should not depend totally on international experts. For instance, it would be a good practice for an acceding least developed country to write a memorandum on its foreign trade regime and

to try to answer questions raised by the country’s own officials as to whether or not the regime is in compliance with WTO principles. Such exercises should also help Governments understand the implications of their own policies and identify any bad aspects, a pre-requisite for any domestic reform programme. Besides retention of national ownership for capacity-building purposes, the critical need for sustained political commitment amply justifies that the national Government retain control over the accession process. The magnitude of the policy, legislative and regulatory changes that WTO membership induces will be difficult to implement if there is a lack of political commitment to the accession process at the highest level. Recent experience shows that donor- or consultant-driven processes that neglect national ownership will most likely fail. Governments should maintain ownership of the accession process at each and every stage, so as to avoid Governments finding themselves unprepared for the adjustment costs that liberalization brings and thereafter abandoning reforms. Put differently, WTO accession should not be seen in isolation. Rather, it should be made an integral part of a national development policy. National ownership implies broad political consensus among a wide range of stakeholders: planners, trade officials, business interests, development practitioners and civil society groups. Mechanisms for this national policy dialogue and consultation among stakeholders on accession problems need to be put in place. Establishing networking with educational institutions such as universities and economic institutes is another mechanism that could help to create national ownership of WTO reforms. By including WTO principles and agreements in the

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Challenges of the Least Developed Countries: Governance and Trade

curriculum of universities, students and professors would be able to discuss, undertake research and produce publications on WTO issues, at the same time as disseminating information and creating

national ownership of WTO reforms throughout the country. Those studies carried out by academic partners would also help sharpen the negotiating skills of officials handling WTO-related work.

Box 4. The Deferral of Vanuatu’s Entry in WTO: Why Does Policy Autonomy Matter? WTO officials were particularly keen to complete Vanuatu’s accession at Doha, in October 2001. The country would have been the first least developed country to join WTO proper. However, Vanuatu politicians suspended WTO accession at the final hour. They felt they did not have much of a say in defining the terms of accession. Policy autonomy is particularly important for small, exposed economies that need adaptability in times of hardship. Vanuatu has a population of only 200,000 and its remote location in the south-west Pacific means it is geographically distant from its trading partners. The archipelago is also exposed to a high recurrence of earthquakes and tropical cyclones. Hence, removing important policy advantages, such as the ability to raise subsidies in response to a temporary decline in commodity prices, could have a stultifying effect on the economy. Negotiations over Vanuatu’s accession involved demands that would have denied its access to such policy tools. The Vanuatu delegation in Doha consisted of the Director of Customs, the Director of Trade and two part-time external consultants who were barred from some meetings because they were not Vanuatu citizens. Without specialist technical and legal back up, the negotiators themselves found it hard to understand complex jargon. On some issues, policy had to be made “on the hoof” rather than after a formal negotiating position had been agreed beforehand. If least developed countries are to negotiate favourably, they need much better support. This could be achieved if a team of personnel was made available specifically to assist smaller countries such as Vanuatu, which cannot afford a full-time team of negotiators based in Geneva. (In this regard, the existing Advisory Centre on WTO Law is a small step in the right direction.) The United States demanded that Vanuatu reduce its tariffs to around 15-25 per cent; Vanuatu had offered a reduction of 49 per cent on average. The fall in tariff revenue would first have forced high taxes on an already weak private sector. An immediate reduction in tariffs to 15-25 per cent would also have thrown Vanuatu’s tiny private sector into competition with globally competitive neighbouring economies and most likely would have bankrupted businesses. Moreover, while reducing tariffs is aimed at increasing competition and efficiency, in small economies such as Vanuatu’s, trade liberalization can actually reduce competition because there is little incentive for new companies to enter the market. Since entry costs are high and potential revenue is low, the most likely outcome is a monopoly or oligopoly. The answer, therefore, is to sequence reforms correctly, by first instituting measures to encourage domestic competition, such as cutting start-up costs, introducing antitrust legislation and diversifying the economy. Only after such domestic reforms have been undertaken should external trade liberalization take place. In other words, the proposed long-term strategy for Vanuatu is counterintuitive: increased protection and a delay in trade liberalization can actually increase competition.

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Chapter X

Box 4. (Continued) The case of Vanuatu should remind more developed WTO members that most of the least developed countries face analogous constraints and thus would require a similarly progressive approach to liberalization. A cookie-cutter approach to trade liberalization is ill advised for underdeveloped economies such as Vanuatu’s. Quite the opposite, policies spurred by WTO accession must accommodate Vanuatu’s special circumstances. Increasing the volume of market access to developed WTO members such as the European Union and the United States is not a prime attraction for Vanuatu, which is too small to compete on the global market in high-end manufacturing or large agribusiness operations. It is crucial that Vanuatu have the autonomy under the accession process to decide policies that focus on establishing Vanuatu’s true comparative advantage over the long term. For instance, in 2002, the Department of Trade, Industry and Investment launched its export development strategy. If Vanuatu accedes to WTO, any accession package must accommodate this existing strategy. This will involve a period of targeted protection and assistance for selected infant industries; therefore, the bound tariff rates agreed under the previous accession package would need to be renegotiated under a new package.

D. Review of the experience of least developed countries in accession negotiations Except for the recent accession of Nepal, current least developed country WTO members (Bangladesh, Maldives, Myanmar and Solomon Islands) acceded to GATT under Article XXVI through simple declaration. In contrast, currently acceding least developed countries are obliged to go through an extremely complicated and lengthy process of negotiation, nothing close to a rules-based process. In addition to the enormous time investment incurred by the accession process, the financial investment in no less significant, especially for resourcestarved least developed countries. A World Bank study noted that it costs a typical developing country some US$ 159 million to implement the requirements under WTO requirements on quotas valuation, sanitary and phytosanitary requirements and intellectual property rights – an amount equivalent to the annual development budget of many least

developed countries. Acceding least developed countries also face the need to meet expenses such as fees related to their observer status, the costs involved in establishing a permanent mission in Geneva (only 16 out of 48 least developed countries are capable of affording permanent missions in Geneva), travel and participation in various meetings, training and carrying out various studies. In resource-strapped economies, this raises disturbing questions about opportunity costs: would such investment not have yielded higher benefits if allocated more directly to the needs of the poor? What are the returns on such a heavy investment in acquiring WTO membership? When ODA is used to meet these costs, is it a zero-sum calculation? In other words, does ODA allocated for accession come at the expense of other sectors? Experience emerging from the ESCAP region highlights the importance for each acceding country to conduct a thorough analysis of the costs and benefits of WTO memberships before the actual accession process starts.

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Challenges of the Least Developed Countries: Governance and Trade

A comparative description of the terms of accession of the first three least developed countries to have completed accession negotiations – Cambodia, Nepal and Vanuatu – highlights three important facts. First, commitments made by the least developed countries in question are characterized by significant differences. In terms of transition periods, Cambodia and Nepal were able to obtain better conditions than Vanuatu. With regards to tariff peaks, Cambodia and Nepal made substantially greater commitments than Vanuatu. While Cambodia’s bound rates are as high as 60 per cent for sensitive agricultural products, and Nepal’s bound rates are as high as 200 per cent for selected agricultural goods, least developed WTO members have bound rates on agricultural goods as high as 550 per cent (Myanmar), other developing WTO member countries have bound tariff rates on agricultural goods as high as 3,000 per cent (Egypt), and even Quad economies such as Canada (238.4 per cent) and the United States (350 per cent) have significantly higher peaks in tariff bindings. Second, it appears that each newly acceding country is expected to make liberalization commitments that go beyond its predecessor, often referred to as “WTO plus” obligations. This is particularly striking in the area of market access, as evident from the comparatively high levels of tariff bindings to which they have committed. While Cambodia, Nepal and Vanuatu have agreed to bind 100 per cent of their tariff lines, other countries that are already members of WTO have often bound a much smaller share of their tariff lines. For example, a least developed WTO member, the United Republic of Tanzania, has a binding coverage of only 13.3 per cent, and even Australia, a developed WTO member, holds a lower

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binding coverage than that of the three least developed countries, at 97 per cent. Cambodia and Vanuatu made a commitment to bind export subsidies in agriculture at zero. In committing not to apply such subsidies in the future, Cambodia and Vanuatu have effectively foregone their right to use export subsidies for agricultural goods, a right granted to other least developed countries by the WTO Agreement on Agriculture. Cambodia also made explicit commitments to certain obligations of the trade-related aspects of intellectual property rights (TRIPS) Agreement, although the Doha Declaration on the TRIPS Agreement exempted least developed country members from these provisions until 1 January 2016. Third, the experience of Cambodia, Nepal and Vanuatu shows that current accession practice requires least developed countries to negotiate all provisions on a case-by-case basis. Acceding countries are not automatically granted the right to S and D treatment, or the right to transitional periods. Yet, as argued previously, there is a risk that open-ended S and D treatment result in status quo policies in least developed countries, hence sacrificing the most beneficial aspect of WTO accession for least developed countries – the implementation of comprehensive domestic reforms. As such, there is scope for this current practice of not automatically granting S and D provisions to least developed countries in order to be beneficial to these countries. By negotiating on a case-by-case basis, the working party and the acceding party can possibly devise well-targeted individual country provisions with strictly defined transitional or implementation periods, appropriate to the specific situation of the acceding least developed country.

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Regrettably, both the working and acceding parties have failed to tailor S and D provisions to the specific development needs of each least developed country. Instead, acceding least developed countries are required to constantly re-negotiate their “least developed country status” under each agreement. Meanwhile, the working parties follow routinely the procedures and questions established by the WTO Secretariat without differentiating across countries.

E. Streamlining the accession procedure for least developed countries While acceding least developed countries tend to assess their commitments against what other countries have negotiated, the Special Body on Least Developed Countries and Landlocked Developing Countries explains that there is in fact little value in doing so. A more fundamental question must be raised: To what extent do the terms, conditions and speed of accession induce policy reforms at the national level that can most benefit acceding countries economically? In other words, the Special Body warns against a strict focus on the level of commitments to be expected of least developed countries as new members compared with existing members. The level of commitments should instead be defined according to the applicants’ development priorities and administrative capacity. WTO members must focus on those sectors of developmental interest to least developed countries and forego insistence on compliance that has little meaning for the situation of least developed countries. For instance, the implementation of the TRIPS Agreement requires extensive legislative development as well as financial resources before compliance is achieved.

Is this in the best interest of least developed countries given their numerous other pressing economic and social needs? It is of great concern that the implementation of such far-reaching commitments is likely to divert scarce resources from other key sectors such as education and health, where returns in the long term may be higher. Members could define a small subset of core areas on which least developed country accessions could focus. This could help overcome a major problem with the accession process: the placing of simultaneous demands on countries, without any recognition that some policy reforms are more crucial than others. Least developed countries need to be able to set reform priorities and WTO members should permit such flexibility. For instance, requirements for a measured opening up of some of the backbone infrastructural services, i.e., financial, telecommunication and transport sectors, could significantly improve the supply capacity, productivity and export competitiveness of least developed countries. In terms of the procedures of the Working Party tasked with preparing the terms of accession of each prospective WTO member, a good starting point in facilitating the process could be a simplified format for preparing the Memorandum on the Foreign Trade Regime, which typically takes least developed countries a long time to prepare. In Cambodia’s case, well over four years elapsed between the formation of its Working Party and the presentation of its Memorandum. Trading partners should show greater flexibility, and a useful first step could be to rationalize the volume of information required by the Working Parties. In this regard, Nepal has called for membership for least developed countries to be automatically granted after the submission of the

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Memorandum on Foreign Trade Regime and the first meeting of the Working Party. It has also been suggested that the Working Party, instead of concentrating on clarifying and reaffirming the adherence of the acceding country’s national laws to commitments contained in WTO agreements, should focus on a “negative list” approach, i.e., on the applicant’s departures from the rules or negotiated exceptions to commitments.

F. Capacity-building for accession negotiations The WTO LDC Consultative Group, based in Geneva and comprising least developed country officials/heads of delegations, is now coordinating the negotiating positions of least developed countries much more closely than in the past. A meeting of least developed country trade ministers in Dhaka, on the eve of the Cancun negotiations, enabled coordinated action by least developed countries in Cancun. Another meeting of least developed country trade ministers in Dakar in May 2004 further strengthened the coordinated action plan of least developed countries on post-Cancun trade negotiations. Such coordination is essential for least developed countries to effectively promote their interests in multilateral negotiations. Information asymmetries between developed and developing countries about trade flows, regulations and barriers are a major problem. This situation is further compounded by an absence of research studies on domestic industry competitiveness, which makes it difficult for least developed countries to decide on what to seek and what to offer. With these handicaps, participation of least developed countries in accession negotiations is far from meaningful.

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ESCAP has a pivotal role to play in fostering regional learning and regional policy dialogue. Since 1999, ESCAP has built up a training programme on WTO agreements and the evolving Doha negotiating round, which it implements jointly with WTO. Priority areas in which further training could be considered are negotiating techniques, new issues (such as services and intellectual property rights), and associate agreements under GATT 1994 related to the agricultural sector. An informal network of acceding countries was also recently set up by ESCAP with the aim of enabling Governments to examine the experience of other Governments that are applicants, have recently acceded, or are more experienced developing countries. It has been recommended that the network expand to include experiences and views on accession of developed WTO members as well. In thinking about negotiation strategies for ESCAP least developed countries, an important point to bear in mind is the growing diversity of interests that cut across developed, developing and least developed countries in the region. As such, thinking in terms of a North-South divide is unduly restricting and often misleading. The significant achievements of the so-called Cairns Group of countries during the Uruguay round illustrate that groupings of countries, even those including small countries from various regions, can influence the WTO decisionmaking process. The Cairns countries consisted of both developed and developing countries sharing a common interest: they were all efficient exporters of agricultural products unable to compete with heavily subsidized agricultural production from developed countries. The Group was able to offer a counter-balance to the two large players, the European Union and the United States, and was very

Chapter X

effective in negotiating liberalized access for agricultural products. An important lesson from the Cairns initiative is that negotiation strategies should look for areas of common interest and consider all countries as potential members. Such areas of common interest that cut across developed and developing countries, where least developed countries’ interests would be best defended by joining a bloc of the “like-minded”, include the growing demands for international labour and environmental standards, tourism, maritime services, financial services and telecommunications. Notwithstanding the high potential of those interest-driven yet geographically heterogeneous groupings, the scope for exploiting regional cooperation to effectively integrate the multilateral trading system could be expanded. Until now, the growing political weights of regional trade agreements in WTO remain underutilized. Through regional initiatives, least developed countries could draw on joint expert groups and significantly increase their bargaining power in WTO negotiations. The experience gained from accession to a regional trade agreement is also of tremendous value to least developed countries applying for WTO membership. For instance, the Lao People’s Democratic Republic gained valuable experience from its AFTA accession, which greatly facilitates the thorough review of policies in many departments and extensive internal coordination required for WTO accession. In addition, when forming its negotiating team, the Lao People’s Democratic Republic benefited from the experience of those who had previously dealt with AFTA accession negotiations, and those involved in the National AFTA Unit currently handling AFTA issues.

G. Technical assistance in implementing reforms This section looks at international assistance for trade capacity development in the context of least developed countries’ upcoming WTO accession. Donor agencies typically grant acceding countries technical and financial assistance to strengthen trade policymaking and negotiating capacities, and to build the competitiveness of the export base as well as the efficiency of importers. While external assistance is vital to least developed countries, the type of assistance granted is equally critical. Pledges must cater to the demands of individual countries rather than simply follow a generic pattern. The monitoring of the scale, composition and effectiveness of aid at the recipient country level remains as pertinent as ever. The OECD Creditor Reporting System database (CRS) recorded that aid for trade-related infrastructure, in real per capita terms, declined by 43 per cent from 1990 to 2001. This pattern is indeed part of a general tendency to decrease the proportion of aid to least developed countries going to productive development as more goes to social sectors, debt relief and emergencies. It is therefore vital that the upturn in international assistance following the Monterrey Consensus leads to a shift in its composition towards building production capabilities and not simply meeting basic needs. Based on a review of Vanuatu’s difficult accession experience, OECD identified several criteria for technical assistance to be effective. First, assistance must be requested rather than foisted upon the country by an international agency. Further, it must be practical, not simply a written report by a short-term

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consultant. It should also involve training so that the activities can continue after the programme ends. Finally, consultants must be based in the country concerned for the duration of the assistance and they should, if possible, be nationals of that country. Paragraph 43 of the WTO Doha Declaration endorsed the Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries as a viable model for addressing supplyside constraints in least developed countries’ trade development. Since early 2000, the Integrated Framework has gradually become the principal mechanism for integrating trade priorities into national development plans and poverty reduction strategy papers, commonly called “PRSPs”. The Integrated Framework has also emerged as a key mechanism to assist the coordination of delivery of trade-related technical assistance. In this regard, the Dhaka Declaration (June 2003) stresses the need for developed countries to increase the funding they provide to the global Trust Fund to finance the activities of the Integrated Framework. In addition to the global Trust Fund, an “LDC fund” should be created from the regular budget of WTO to facilitate the accession process and develop the capacity of least developed countries in particular. While the Integrated Framework is an important initiative, concerns among least developed countries remain to the effect that the Integrated Framework “has placed a great deal of emphasis on diagnostic activities [the Diagnostic Trade Integration Study (DTIS) is the central building block of the Integrated Framework process], rather than on outcomes”, as put forth by the Coordinator of the LDC Group in WTO at the ninth meeting of the Integrated Framework Steering

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Committee on 16 May 2003. More effort needs to be put in to the area of regulatory capacity, which is of critical importance to the successful implementation of reform and liberalization programmes, whether undertaken on a unilateral or multilateral basis. There is also a need to conduct studies assessing the institutional mechanisms established by acceding countries to ensure effective policy coordination. Bhutan’s efforts at export diversification are a perfect example of a case where the Integrated Framework could deliver very concrete technical assistance. As the scope for large-scale farming is limited due to the country’s rough terrain and poor soil quality (arable land amounts to approximately 7 per cent of the country’s total land area), Bhutan has to explore special niche markets for its agricultural produce. For example, an entrepreneur has started exporting local “red rice” to health food stores in the United States while others export fresh mushrooms to Japan and Singapore. However, Bhutanese farmers are not able to benefit fully from such niche markets owing to supply-side constraints such as a lack of marketing skills and technology, and high transportation costs. The ability of Bhutan to benefit from market access as a result of WTO membership will be contingent on overcoming these bottlenecks, with the help of external technical assistance. Least developed countries also need to receive technical assistance on how to evaluate the economic merits of tradeopening policies and other economic reforms. Supporting such strategies by providing technical assistance that goes beyond narrow WTO accession issues to include fundamental economic management offers the best hope of not only

Chapter X

accelerating least developed country accession, but also ensuring that it provides economic benefits. In other words, an important aspect of providing effective technical capacity is to equip least developed countries with the economic skills and knowledge to reject advice that is not in their economic interest. In this regard, the Foreign Trade Department of the Lao People’s Democratic Republic has stated that if the country is to reap the maximum benefits from trade and investment expansion, a more extensive understanding of international trade issues and domestic policies that support expansion of trade investment is needed. Therefore, the capacity of government officials and those concerned in the private sector to fulfil these objectives needs to be enhanced through short-term and long-term training. Likewise, Cambodia has said that it was concerned about capacity-building challenges in dealing with the “spaghetti bowl of rules of origin” effect of different rules and regulations associated with different bilateral and regional agreements. Over the past few years, a considerable part of Cambodia’s exports, although eligible for trade preferences, did not obtain preferential tariff rates, as recorded by UNCTAD. Lacking capacity as to how to effectively manage trade-opening policies and lacking knowledge about the preferences to which it is entitled, Cambodia made unnecessary payments of most-favoured-nation custom duties. Cambodia also suffered from unjustified rejection of imports by other countries,

unnecessary testing of its products and foregone opportunities in general. At the regional level, ESCAP, in collaboration with the WTO and UNCTAD secretariats, could draw up best-practice experiences, particularly with regard to implementation of the 2002 WTO guidelines on facilitating the accession of least developed countries. These experiences could be shared among acceding countries at the regional level to enable others to learn good lessons and attempt to avoid difficulties that other acceding countries have experienced. The enhancement of networking could be in the form of regional workshops, or by conducting study tours to partner countries with similar political and trade regimes. In this regard, the Lao People’s Democratic Republic has already conducted two very useful study tours, one to Viet Nam and the other to China. A study tour of WTO headquarters, with financial assistance from international organizations, has also proved to be a very effective way of gaining practical experience for acceding least developed countries that were unable to establish their own permanent mission in Geneva. When the Lao People’s Democratic Republic undertook such a study tour with the assistance of UNCTAD, not only was it exposed to the proceedings of the first Working Party, but it also had an opportunity to meet and establish networking with WTO members for exchanging views and observing their position with regard to the accession of the Lao People’s Democratic Republic.

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XI

National and International Policy Changes to Remove Constraints

Improving the trade performance of Asian least developed countries is important to poverty reduction and development. Maximizing the trade potential of Asian least developed countries will require a combined response from the international community and from the national Governments of least developed countries to address the myriad of institutional and regulatory factors that create barriers to trade and investment. Important in this regard are trade liberalization measures in Asian least developed countries and the trade policies of other countries that determine least developed countries’ access to those markets. Of even greater importance are complementary domestic reforms and investment to overcome the “behind-the-border” constraints. Ultimately, policy actions at the national, regional and international level should aim at furthering the integration of Asian least developed countries in regional and multilateral trade arrangements, which are critical vehicles for export growth.

A. Improving access to external markets Developed and developing countries must remove formal trade barriers im-

posed on least developed countries by progressively granting duty-free and quota-free access to all the products exported by least developed countries. Several studies emphasize that reducing trade barriers to agricultural products is particularly important to Asian least developed countries, and should be a key trade policy objective (Krumm and Kharas, 2002). It is equally important to improve the effectiveness of trade preferences for Asian least developed countries, which are currently underutilized and limited in scope. Regional cooperation, including the establishment of growth zones, could also help increase FDI flows in least developed countries. Policy actions by the international/ donor community include the following:

•

Reducing above-average tariff rates and the extent of tariff escalation;

•

Improving the transparency of tariff schedules by converting non-ad valorem rates to ad valorem rates;

•

Re-examining health and safety regulations and the procedures for administering them;

•

Increasing the stability, predictability and coverage of trade preferences through a set of multilaterally agreed

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criteria to be adhered to by all preference-giving countries in the operation of their preferential schemes;

•

Developing a harmonized and simplified set of rules of origin to be applied in the context of the initiative for duty-free and quota-free market access in favour of least developed countries, taking into account the industrial reality of least developed countries;

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Providing technical assistance in the field of information technology and training courses to local producers and exporters to strengthen human resources and institutional capacities to comply with administrative and customs procedures under different trade arrangements;

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Facilitating the flow of information on the opportunities for profitable investment in least developed countries and providing insurance coverage and/or co-financing for foreign investors;

•

Providing a higher level of financial resources to least developed countries to meet their infrastructural needs and setting up a special fund for infrastructure development in remote, sparsely populated and mountainous areas where private sector participation in infrastructure development is difficult to obtain;

•

Facilitating regional cooperation with a view to linking the transport and telecommunication networks of least developed countries, especially landlocked and island developing countries, with those of neighbouring countries.

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B. Enhancing trade facilitation at the national level While the international community surely has a role to play in decreasing the barriers to trade currently faced by exporters from least developed countries, reforms at home aimed at enhancing export competitiveness must also be addressed if the exporters from those Asian countries are to be able to take advantage of the opportunities that are opening up to them. Many Asian least developed countries have complex tariff and customs duties and associated arrangements including exemptions and concessions. Simplifying trade requirements, harmonizing procedures and documentation, standardizing commercial practices and introducing agreed codes for the representation of information will reduce transaction costs (Chowdury, 2003). Where simplification acts to reduce revenue from tariffs and duties, complementary reforms of the tax system may also be required in order to broaden the tax base. Another important institutional change for Asian least developed countries is to improve the link between trade policy analysis and recommendations, and policy implementation, as emphasized in reviews undertaken by the World Bank’s Integrated Framework Analysis (see Integrated Framework for TradeRelated Technical Assistance to Least Developed Countries <www.integrated framework.org>, accessed on 27 March 2007). Establishing a formal trade policy unit reporting to a ministry, which would in turn report to parliament, is one possible approach to improving coordination between policymaking and policy implementation.

Chapter XI

Actions at the national level include the following:

•

Simplifying tariffs and associated arrangements to provide certainty to local investors and to reduce transaction costs for exporters;

•

Engaging in focused promotion to attract FDI in areas where the country possesses a comparative advantage;

•

Simplifying administrative procedures and improving the efficiency of institutions which impinge on the establishment and operation of enterprises by foreign investors;

•

•

•

•

Encouraging private sector participation in infrastructure development while ensuring a transparent decisionmaking process and protection of the public interest; Securing unfettered access to the sea and reducing delays enroute, loss and deterioration by devoting greater resources to the maintenance of public infrastructures; Devising human resources development programmes in line with export diversification schemes as well as with the country’s infrastructure needs; Upgrading the technological base for increasing the efficiency of the infrastructure and for facilitating export diversification.

process and ensure that resources are devoted to the development of institutional requirements that are consistent with their own domestic priorities. Failure to do so could result in least developed countries devoting significant resources to develop institutional frameworks that have limited payoffs for their development. In terms of commercial benefits, committing to binding tariffs can also provide much needed certainty for investors in Asian least developed countries. At the international level, the following actions would greatly help least developed countries in negotiating a meaningful and hastened accession to WTO:

•

Intensifying support for the building up of capacity in least developed countries so that they could undertake multilateral trade negotiations, and for ensuring adequate representation in WTO trade negotiations;

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Abstaining from asking least developed countries to assume obligations or commitments that go beyond what is applicable to least developed country members of WTO;

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Allowing for a longer period of transition in the implementation of WTO Agreements while ensuring that the duration of the extension is strictly bound and is not used to evade policy reforms;

•

Allowing for special and differential measures in favour of least developed countries in a well-targeted manner, while simultaneously defining a small subset of core areas on which to focus efforts for reform;

•

Accelerating the effective implementation of the Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries.

C. Facilitating least developed countries’ accession to WTO Pursuing WTO accession for Asian least developed countries could be considered as a means of supporting institutional capacity-building for trade facilitation. In this regard, least developed countries should carefully manage the accession

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Chapter XI

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Economic and Social Commission for Asia and the Pacific (ESCAP) (2004). Export Diversification and Economic Growth: The Experience of Selected Least Developed Countries. Development Paper No. 24, (ST/ESCAP/2314). Poverty Development Division. Economic and Social Commission for Asia and the Pacific (ESCAP) (2001). Review of Implementation of the Programme of Action for the Least Developed Countries for the 1990s: Subregional Studies, LDC Series No. 5, <www.unescap.org/drpad/publication/toc/ldc5_2084.htm>, accessed on 23 September 2003. Economic and Social Commission for Asia and the Pacific (ESCAP) (2003). “Transit issues for landlocked countries: The case of Lao People’s Democratic Republic“, paper presented at the ESCAP sixth session of the Special Body on Least Developed and Landlocked Developing Countries, Bangkok, 22-23 April 2003, <www.unescap.org/LDC& Poverty/ Regional Preparations.htm>, accessed on 23 September 2003. Fjeldstad, O. (2003). Decentralization and Corruption: A Review of the Literature, July 2003, Bergen, Norway. Hertel, T.W., B.M. Hoekman and W. Martin (2000). “Developing countries and a new round of WTO negotiations”, paper presented at the 12th Annual Bank Conference on Development Economics, World Bank, Washington D.C.

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Hughes, B., D. Paterson and A. Mohammed (2003). Interface between Formal and Informal Systems for the Protection of Human Rights in Small Island States of the South Pacific, School of Law, University of South Pacific, Vanuatu. International Labour Organization (ILO) (2002). Study on Generating Employment through Micro and Small Enterprise and Cooperative Development in the Lao People’s Democratic Republic, <www.ilo.org/public/english/ region/asro/bangkok/ability/msme_ lao_foreword.htm#content>, accessed on 23 September 2003. International Monetary Fund (IMF) (2003). Cambodia: Selected Issues and Statistical Appendix, IMF Country Report No. 03/59, March. Karatnycky, A. (2003). Freedom in the World 2003: Liberty’s Expansion in a Turbulent World: Thirty Years of the Survey of Freedom <www. freedomhouse.org>. Kaufmann, D. and A. Kraay (2002). Governance Indicators, Aid Allocation, and the Millennium Challenge Account, December. Kaufmann, D. (2003). Rethinking Governance, Empirical Lessons Challenge Orthodoxy, Discussion Draft, 11 March.

Manor, J. (1999). The Political Economy of Democratic Decentralization, World Bank, Washington D.C. Melo, L. and M. Barenstein (2001). Fiscal Decentralization and Governance: A Cross-Country Approach, International Monetary Fund (IMF), Working Paper 01/71. Organization for Economic Development (OECD). About the OECD’s work on governance. (www.sourceoecd.org). Radelet, S. (2004). Aid Effectiveness and the MDGs, Centre for Global Development, February. Raghav, G. (2001). Decentralization and Poverty Alleviation in Asia, Asian Development Bank, October. Rahman, A., G. Gisunko and K. Kapoor (2000). Estimating the Costs of Corruption: Implications for Bangladesh, World Bank South Asia Group, Poverty Reduction and Economic Management Group, Policy Research Working Paper 2479, Washington D.C., November. Romeo, L. (2002). The road from decentralization to poverty reduction and the role of external assistance, United Nations Capital Development Fund (UNCDF), October.

Krumm, K. and H. Kharas, eds. (2002). East Asia Integrates: A Trade Policy Agenda for Shared Growth, World Bank, Washington D.C.

Tarr, D.G. (2002). “Arguments for and against uniform tariffs”, in M. Hoekman, P. English and A. Mattoo, eds., Development, Trade and the WTO: A Handbook, World Bank, June.

Linder, A. and C. Santiso (2002). Assessing the predictive power of country risk ratings and governance indicators, School of Advanced International Studies (SAIS), Working Paper, Washington D.C.

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United Nations Conference on Trade and Development (UNCTAD) (2003). FDI in Landlocked Developing Countries at a Glance, United Nations, New York and Geneva, August. United Nations Conference on Trade and Development (UNCTAD) (2004). Linking International Trade with Poverty Reduction, Least Developed Countries Report 2004, United Nations, New York and Geneva, May. United Nations Development Programme (UNDP), Bangladesh (2000). National Human Development Report, 2000. United Nations Development Programme (UNDP) (2002). Human Development Report 2002, New York. United Nations Development Programme (UNDP) (2003). Human Development Report 2003, New York. United Nations Development Programme (UNDP) (2003). UNDP Democratic Governance Network Discussion, June. United Nations Industrial Development Organization (UNIDO) (2003). Lao PDR: Medium-term Strategy and Action Plan for Industrial Development, Final Report, UNIDO Integrated Framework for Lao PDR, Vientiane, May. Vandemoortele, J. and A. Tostensen (2003). “Progress on Doha, Monterrey and HIPC: A review”, paper presented at

the High-level Seminar on Achieving the MDGs: Strengthening mutual accountability, May 2003, Bergen, Norway. World Bank (2001). Success for Least Developed Countries, Development and Cooperation, No. 5, September/ October. World Bank (2002). Report of the Word Bank Group Task Force on Low-Income Countries under Stress, Washington D.C., June. World Bank (2003a). Country Brief: Lao People’s Democratic Republic, . World Bank (2003b). World Development Indicators 2003, <www.worldbank. org/data/wdi2003>, accessed on 1 September 2003. World Bank (2004). World Development Report 2004: Making services work for poor people. World Development Indicators (WDI) (2003). Online Database, World Bank (producer and vendor), annual updating. World Economic Forum (WEF) (2004). Global Governance Initiative, Washington D.C.

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