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Assessments Building Productive Capacities and Technological Capabilities in LDCs

Servaas Storm
The Least Developed Countries Report 2006: Developing Productive Capacities. Geneva: United Nations, 2006. xv + 352 pp. $50.00 paperback (developed countries) and $18.00 paperback (developing countries). The Least Developed Countries Report 2007: Knowledge, Technological Learning and Innovation for Development. Geneva: United Nations, 2007. 188 pp. $50.00 paperback (developed countries) and $18.00 paperback (developing countries). World Investment Report 2007: Transnational Corporations, Extractive Industries and Development. Geneva: United Nations, 2007. xxviii + 294 pp. $90.00 paperback (developed countries) and $42.00 paperback (developing countries).

The (Washington) consensus on development policy making has been that growth and development will result from free markets and free international trade. The role of the State should be restricted to enabling markets to function well and, hence, policies should focus on improving the investment climate by reducing regulatory burdens for rms, lowering (corporate) taxation, abolishing (formal) labour market regulation, weakening legal constraints, strengthening private (intellectual) property rights, and reducing bureaucratic red tape complemented by (hard-to-avoid) socialsector investments in education and primary health care. But as is carefully documented in UNCTADs Least Developed Countries Reports 2006 and 2007 (henceforth LDCR 2006 and LDCR 2007), these laissez-faire policies, widely implemented by the Least Developed Countries 1 (LDCs) within the context of structural adjustment programmes or poverty reduction strategies, have not only not generated higher growth, more productive employment and less poverty, but have actually worsened the plight of the fty poorest

1.

There are fty countries classied as Least Developed according to three criteria: (1) a per capita income less than $750 per year; (2) low levels of human development measured by malnutrition, child mortality, educational enrolment and illiteracy; and (3) economic vulnerability.

Development and Change 39(6): 12031221 (2008). C Institute of Social Studies 2008. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St., Malden, MA 02148, USA

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countries of the world pushing them even further behind. 2 Accordingly, both reports argue that without a paradigm shift in development policy making, the outlook for the 767 million people in the LDCs, of whom 50 per cent are forced to live in poverty, remains dismal. At the heart of the new paradigm, which in many ways represents a return to the ideas of earlier development economics approaches (including ECLACs (UN Economic Commission for Latin America and the Caribbean) structuralism and the big-push theories of Nurkse, Rosenstein-Rodan and others) the development of productive capacities should be placed: the productive resources, entrepreneurial capabilities and production linkages which together determine the capacity of a country to produce goods and services and enable it to grow and develop (LDCR 2006: ii). The report presents a detailed analysis of the internal and external requirements for the development of productive capacities and argues that government policies can no longer be hands-off but should actively promote capital accumulation, demand, technological progress and structural change. Building on LDCR 2006, LDCR 2007 argues that, to avoid deepening marginalization in the global economy, the LDCs should adopt policies to stimulate rapid technological catch-up with the rest of the world, based on state-guided technological transfer and imitation. The role played by foreign direct investment (FDI) in this NorthSouth technology transfer is analysed in UNCTADs World Investment Report 2007 (henceforth WIR 2007) with a focus on the extractive industries.

POVERTY TRAP

The LDCR 2006: Developing Productive Capacities paints a very bleak picture. From 198083 to 200003, the LDCs experienced economic stagnation, lack of export diversication and upgrading, technological regression, de-industrialization, growing informalization, and persistent poverty:

Real GDP per capita increased at only 0.7 per cent per year for the group of LDCs as a whole whilst it increased by more than 2 per cent per year in the other developing countries (ODCs). Out of fty LDCs, seventeen countries experienced negative per capita income growth over these twenty years and yet another eight countries had growth rates close to zero. Only nine LDCs experienced sustained growth, all other LDCs experienced (one or more) major growth collapses, from which recovery proved difcult, if not impossible.
Of course, there are those for whom the failure of development is the result not of too much liberalization, but not enough. But the reality is that in most LDCs World Bank reforms and WTO pressures did lead to drastic reductions of trade protection and capital account regulation and large-scale privatization.

2.

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LDC growth is largely due to employment growth and not so much to

labour productivity growth. Labour productivity in the LDCs increased by about 0.6 per cent per year compared to an increase of 2.2 per cent per year in the ODCs: the productivity gap between LDCs and ODCs has widened considerably. Productivity performance has been weak across the board. Due to low levels of investment and low levels of use of modern inputs, agricultural labour productivity growth in the LDCs was only 0.7 per cent (compared to 2 per cent in the ODCs) and in one-third of the LDCs agricultural labour productivity actually declined. Non-agricultural labour productivity declined due to pathological de-industrialisation: between 199093 and 200003, the share of manufacturing in value added fell in nineteen out of thirty-six LDCs (often by more than ten percentage points) and stagnated in two LDCs. To make things worse, deindustrialization has often meant large declines in the relative importance of medium- and high-technology manufactures. This change is closely linked to increased openness, which led to specialization in line with static comparative advantage (favouring agriculture and natural resources). The share of trade in GDP increased from 35.7 per cent to 52.3 per cent and the LDCs became more deeply integrated in the global economic system. But there is an overall lack of export diversication out of primary commodities towards higher value-added manufactures and upgrading within primary commodity exports, which is symptomatic of a lack of technological dynamism within these economies. High export growth is accompanied by even higher import growth, thus leading to persistent trade decits (in resource-poor LDCs). The external debt remains high (on average, the debtGDP ratio is 75 per cent), amounting to about $216 per head of population about double the burden of the ODCs, and LDC aid dependence remains high. A deepening of the underemployment crisis is looming large, as most LDCs are experiencing rapid labour force growth (of more than 2.5 per cent per year) in a situation in which (i) the scope for productive absorption of surplus labour in agriculture is declining, due to low levels of agricultural investment and low levels of use of modern inputs and due to major inequalities in access to land resources; and (ii) productive employment opportunities outside agriculture are growing only slowly. Negative (non-agricultural) labour productivity growth is one manifestation of growing underemployment; growing employment in small (survivalist) informal sector enterprises and persistently high poverty rates are other signs. On present trends, the number of people in poverty in the LDCs will increase from 334 million in 2000 to 471 million in 2010. Hence, the LDCs are stuck in a poverty trap in which an interlocking complex of domestic and international vicious circles led to economic stagnation and persistent poverty (LDCR 2006: 96). This lock-in is fundamentally

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conditioned by the way most of these countries are integrated into the periphery of the world economy (Mahutga, 2006), which has been further fortied by the laissez-faire policies implemented post-1983.

A WAY OUT?

The central claim of LDCR 2006 is that the LDCs have the potential to achieve high rates of growth and poverty reduction if the right policies are adopted to stimulate accumulation, technological progress and structural change. Actual performance of the LDCs has been dismal, so where does this optimism come from? It comes from two sources. First, while average LDC performance has been weak, there is some variation in performance between countries, as is brought out by the useful and interesting categorization of LDCs into fast-growing ones (with per capita income growth above 2.15 per cent per year) 3 , those with weak growth (growth of 02.15 per cent per year) and regressing economies with negative per capita income growth. It is found that the fastest-growing LDCs experienced a signicant (10 percentage points) decline in the share of agricultural value-added in GDP between 198083 and 200003 and a signicant increase in the shares of industrial and manufacturing value-added (by 9 percentage points and 7 percentage points, respectively), whilst the regressing economies experienced increases in the agricultural value-added share and declines in the industrial (manufacturing) value-added share. The weak-growth economies fall in between these two extremes. The fastest-growing economies experienced positive labour productivity growth in agriculture and non-agriculture, the regressing economies experienced large declines in labour productivity in both sectors. The share of trade in GDP increased in the fastest-growing countries and declined in the regressing ones. The rst group experienced a larger shift to manufacturing exports and more signicant upgrading of primary commodities into more processed and dynamic agricultural goods than the other two groups. The fastest-growing LDCs also did signicantly better than the other country groupings in terms of investment effort and domestic saving mobilization. What this comparison also shows is that in LDCs manufacturing does act as an engine of income and productivity growth. Secondly, the optimism about the growth potential of LDCs comes from estimates for twenty-three LDCs (for which data are available), based on a Kaldor-Verdoorn growth model (see Thirlwall, 2007 for a critique). To estimate potential growth, the model assumes full employment of labour and capital as well as that all sources of potential labour productivity growth are exploited. The model identies three sources of growth: (1) static and
3. These are: Bangladesh, Bhutan, Cape Verde, Equatorial Guinea, Lao Peoples Democratic Republic, Lesotho, Mozambique, Nepal and Uganda.

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Table 1. Determinants of Potential GDP Growth in the LDCs (200215)


Contributions of: Fast technological Slow technological Slow catching-up catching-up catching-up + higher Kaldorscenario scenario Verdoorn coefcient 3.42 (45.7%) 1.64 (21.9%) 2.96 (39.5%) 0.53 (7.1%) 7.5 (100%) 5.2 3.42 (62.3%) 1.64 (29.9%) 0.96 (17.5%) 0.53 (9.7%) 5.5 (100%) 3.1 4.66 (62.3%) 2.24 (29.9%) 1.31 (17.5%) 0.73 (9.7%) 7.5 (100%) 5.2

Labour force growth Human capital accumulation Technological catching-up Autonomous labour productivity growth Potential GDP growth Per capita GDP growth

Investment and Savings Requirements to Achieve Potential Growth Rates (% of GDP) Investment rate assuming capacity 34.8 27.5 utilization (u = 55%) Required step-up in domestic savings 11.6 4.3 rate (u = 55%) Investment rate assuming capacity 29.5 23.8 utilization (u = 70%) Required step-up in domestic savings 6.3 0.6 rate (u = 70%)

33.8 10.6 28.7 5.5

Notes: Based on authors calculations, assuming that (1) labour force growth is 2.5% per annum; (2) autonomous labour productivity growth is 0.4% per annum; (3) the Kaldor-Verdoorn elasticity is 0.27 in the rst two scenarios and 0.46 in the third; (4) the annual rate of human capital accumulation is 2.4%; and (5) the initial income gap between LDCs and ODCs is 46%. In calculating the investment and savings requirements to achieve potential growth, I assume that (a) foreign savings equal 9.6% of GDP; (b) the ICOR is 3.2; and (c) the domestic savings rate is 14.6%. u = the capacity utilization rate.

dynamic increasing returns to scale 4 in manufacturing, captured by the Kaldor-Verdoorn coefcient; (2) the accumulation of human capital (operationalized in terms of increases in average education levels); and (3) technological catching-up (exploiting Gerschenkronian advantages of relative backwardness). Using this model, the average annual potential growth rate over the period 200215 is estimated at 7.5 per cent for the fast technological catching-up scenario and at 5.5 per cent per year for the slow catch-up scenario. Table 1 identies the underlying sources of potential growth and highlights two crucial conclusions. First, the calculations bring out the importance of achieving fast technological catching-up the annual growth bonus amounts to as much as 2 percentage points. But equally important is the recognition of the relentless arithmetic of cumulative causation, in which the development of domestic productive capacities, especially in manufacturing, and the growth of demand mutually reinforce each other. A strengthening of this domestic process of cumulative growth, captured by
4. Static returns refer to the well-known technical (and other) economies of scale associated with mass production. Dynamic returns are multifarious, based on learning by doing, induced capital accumulation embodying technological progress, and economies that arise from the overall expansion of an interrelated cluster of industries. See Wells and Thirlwall (2003).

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an increase in the Kaldor-Verdoorn coefcient from 0.27 (as assumed in the report) to 0.46, would also yield two extra percentage points of income growth in the slow catch-up scenario. 5 It is obvious that the gap between potential growth in the two high-growth scenarios and the actual growth rate of 4.1 per cent per annum from 1990 to 2003 is formidable, but the main point brought out is that, beyond a certain threshold, growth becomes a self-reinforcing process and high growth rates are possible. However, critical constraints on the achievement of potential growth must be addressed. First of all, to achieve a growth rate of 7.5 per cent, the investmentGDP ratio must rise to 35 per cent, necessitating an additional domestic savings effort of 12 percentage points of GDP (given past inows of foreign savings). LDCR 2006 concludes that this will be difcult to achieve and puts its hope on increased (aid) inows from abroad. But the report may actually be overestimating the investment requirements of higher growth, because the calculations of capital requirements, based on a ratio of incremental capital to output (ICOR), are sensitive to the rate of capacity utilization, which is only 5060 per cent in most LDCs (LDCR 2006: 2267). An increase in capacity utilization by (say) 15 percentage points will reduce the ICOR, from the assumed value of 3.2 to a value of (about) 2.6, thereby reducing the required investmentGDP ratio from 35 per cent to 29.5 per cent. Correspondingly, the task of additional domestic resource mobilization becomes more manageable and/or foreign aid dependence can become less. In addition, if the LDCs can manage to integrate their underemployed workers, working in low-productive activities, as well as latent entrepreneurship in the processes of capital accumulation and technological progress, this will further reduce the problem of domestic resource mobilization. Beyond this, there is some potential to raise government revenues from taxation, which are low in LDCs (mostly because import taxes were lowered or abolished as part of structural adjustment programmes). Hence, part of the potential is there, but it requires strong States to implement the policies needed to realize this potential not the least, because the additional resource mobilization will lead to new and more intensied distributional conicts (Storm, 2005). LDCR 2006 identies other major constraints on investment, growth, and export diversication and on the adoption of available modern technologies, including: the close, non-strategic integration of (primary-commodity producing) LDCs within the world trading system, which locks them into low value-added, non-dynamic production activities (Chapter 3); a wagegoods constraint, resulting from low and very slowly growing agricultural productivity and large inequality in access to land (Chapter 4); an infrastructure constraint, due to the very inadequate and poor quality transport, energy
5. The estimate used by the report appears to be on the low side. Estimates by Wells and Thirlwall (2003) for 45 African economies (198096) point to a Kaldor-Verdoorn coefcient of 0.88.

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provision and telecommunications infrastructure of LDCs (Chapter 5); serious weaknesses in the performance of (often liberalized) nancial sectors, including poor delivery of credit to private rms, weak contract enforcement, and risk-averse bank attitudes (Chapter 6); and, nally, poorly functioning and fragmented domestic knowledge systems, in which the absorption of new technology is limited because of weak links with international knowledge systems and in which knowledge creation is not connected to the needs of productive enterprise (Chapter 6). These are all supply-side constraints, however. Resolving these will not generate growth of productive capacities and incomes if there is no demand growth to provide an inducement to capital accumulation, structural change and technological progress. This is the most important feature of LDCR 2006: the recognition that inadequate aggregate demand, and especially domestic demand, is the major constraint on launching LDCs on to a virtuous circle of economic growth. Demand in most (larger) LDCs, featuring large agricultural sectors, is initially determined by the growth and distribution of agricultural (rural) incomes. Bangladesh is used as a case-study to show how a prosperous agricultural sector has stimulated the demand for labour-intensive, non-tradable goods production in non-agriculture and led to employment creation and poverty reduction. Policies need to stimulate the backward linkage effects of agricultural growth on non-agricultural development, which can be done by increased public investment in rural infrastructure (for example, electrication) and by improving (rural) nancial systems in the LDCs. The importance of increased public investment could have been given more emphasis, as there is rm evidence that it crowds in private investment 6 by providing the necessary economic and social infrastructure, by augmenting aggregate demand and private protability, and by raising labour productivity growth (via the Kaldor-Verdoorn effect). But as the (relative) size of agriculture shrinks, export demand assumes importance as a source of demand and as a source of foreign exchange to nance the capital goods and technology imports required for industrialization. Policies should be geared to relax the foreign-exchange constraint on economic growth and here LDCR 2006 (pp. 2979) emphasizes supply-side reforms to diversify into more dynamic export products and efcient import substitution. The report argues for strategic integration with world markets, which means that protectionist policies, (targeted) capital controls and intermediate exchange rate regimes can be helpful so long as these do not unduly constrain a countrys pursuit of its dynamic comparative advantage. FDI can be benecial if domestic policy can ensure that it leads to technological spillovers and learning, and promoting the acquisition of imported technologies may help accelerate technological catch-up.

6. For a recent review of the evidence on this, see Belloc and Vertova (2006).

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FALLING BEHIND, STUMBLING ALONG, BUT NO CATCHING-UP

The growth bonus for LDCs of fast technological catching-up can be very large (Table 1). But unless their domestic rms and farmers acquire the technological knowledge and experience that enable them to catch up, the LDCs cannot escape from poverty and avoid deepening marginalization in the global economy this is the argument of LDCR 2007, subtitled Knowledge, Technological Learning and Innovation for Development. LDCs must innovate their way out of poverty, the report says, but this is precisely what is not happening: LDCs rms and farms have low technological capabilities, skills are underdeveloped, and the domestic institutions which could support technology acquisition and diffusion are lacking or ineffective. Hence, as documented by the report, rather than catching up, LDCs have actually been stumbling along or falling behind in a period in which they have increased exports and attracted more foreign direct investment than earlier:

LDC investment in imported machinery and equipment by far the most important source of technological innovation in LDCs is low (about half the level of ODCs). In real per capita terms, machinery imports into LDCs from 2000 to 2003 were at almost the same level as in 1980. While the ODCs have progressively used their foreign exchange earnings to buy foreign capital goods, thus building domestic technological capabilities, the LDCs have failed to do so. Participation in international value chains does little to infuse new technology into LDCs. An analysis of twenty-four value chains in which LDC exports play a role shows that export upgrading has occurred between 1995 and 1999 and 2000 and 2005 in only seven of them since the 1990s (involving 18 per cent of total merchandise exports from LDCs from 2000 to 2005), but downgrading occurred in twelve other value chains (involving 52 per cent of LDC exports). The general pattern is that LDC economies have become increasingly concentrated at the lower end of value chains due to increased entry barriers for LDC rms that aim at integrating into those chains, which have typically become more buyerdriven as a result of trade liberalization and reduced cost of international communication and transport. In many (African) cases, contract production involving transnational corporations (TNCs) has created islands of agrarian capitalism that contribute to and deepen existing inequalities and are in combination with demographic pressures intensifying struggles over land. Technological spillovers of FDI by TNCs to domestic rms and joint ventures are limited, even though FDI inows into LDCs as a share of both GDP and domestic xed capital formation doubled between 1990 and 2005. But FDI inows are highly concentrated: just four petroleumproducing countries (Angola, Sudan, Equatorial Guinea and Chad) received 56 per cent of the LDC total from 2000 to 2005 and the top ten

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FDI recipients accounted for 81 per cent of total inows. Most FDI in African LDCs is in capital-intensive, enclave-type (mineral) resource extraction by TNCs, which have been attracted by (temporary) tax exemptions and by scrapping restrictions on prot and dividend remittances, eliminating national content and employment provisions, and by granting other favours (for example, land allocation). 7 These activities have few and weak backward and forward linkages in host economies, have little impact on employment, have high import content and result in exports of unprocessed raw materials. Most TNCs mineral extraction activities in Africa are totally foreign owned and a large share of their foreign exchange earnings is retained abroad. In Asian LDCs, rapid growth of garment-related FDI (attracted by low wages and poor labour standards) did not strengthen the technological capabilities of local rms. Technology licensing in LDCs is extremely weak and has been stagnant since the 1990s; only 7 per cent of domestic rms in LDCs license foreign technology. On a per capita basis, spending on imports of disembodied technology is ninety times higher in the ODCs than in LDCs, which reects a weak presence in LDCs of knowledge-intensive TNCs (such as ICT or pharmaceutical multinationals). Although LDCs are exempt from implementing the general provisions of the TRIPS Agreement until 2013 (and until 2016, in the case of pharmaceutical products and processes), technology transfer by means of reverse engineering and imitation has already become more difcult under the TRIPS-based policy regime, which has stimulated monopoly positions in knowledge, thereby restricting opportunities for technology transfer. Out-migration of skilled workers increased sharply in the 1990s, especially in West and Central Africa, arguably due to economic conditions and conict, which entailed a contraction in the capacity of LDCs to absorb new technologies. There were 176 researchers and scientists working in R&D activities per million population in the LDCs in 2003 compared to 662 in the ODCs. R&D expenditure is low in LDCs (only 0.2 per cent of GDP). Public funding of agricultural R&D declined in real terms during the 1980s and 1990s, despite high returns on investments in agricultural research. Agricultural research systems are vastly under-funded, unco-ordinated, and fragmented, and generally fail to tap into local traditional knowledge. Unsurprisingly, LDCs are consistently ranked at the bottom of international
7. Mining codes were liberalized during the 1980s and 1990s as part of structural adjustment programmes and against the backdrop of low mineral prices and heavy indebtedness of LDCs. Liberalization often involved the easing of restrictions on foreign ownership of mining operations, generous tax incentives, lax environmental and labour standards and granting the permission of unrestricted repatriation of corporate prots and capital. See WIR 2007 (pp.1613).

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comparative indicators of technological achievement and innovation capability. While it is easy to become depressed by the failure of LDCs to catch up with the rest, LDCR 2007 adopts a refreshingly optimistic perspective, in which the large (and increasing) technological gap between LDCs and more frontier countries is seen as a great promise for the latter that is, a potential for high growth through imitating and adapting frontier technologies (Gerschenkron, 1962). Hence, LDC governments should adopt policies to promote technological catch-up, innovation (creative imitation and copying), reverse engineering and learning. LDCR 2007 rightly notes that precisely such policies were sidelined by the structural adjustment programmes of the 1980s and 1990s and current poverty reduction strategies have failed to re-introduce them. Its chapters outline, in detail, how to make catch-up by the LDCs possible by improving infrastructure, human capital, nancial systems and domestic knowledge systems and by increasing agricultural productivity in basic staples (by promoting a Green Revolution). International action is required, the report contends, in the following areas: the intellectual property rights system should be made more compatible with the needs of LDCs, most notably the transition period within which LDCs are allowed to undertake an imitative path of technological development, should not have a xed arbitrary deadline but should end once those countries have achieved a sound and viable technological base; the out-migration of skilled professionals from LDCs to industrialized countries should be reduced; and ofcial (knowledge) aid in support of science, technology and innovation to LDCs should be raised. But the optimism of LDCR 2007 comes with a cost: catching-up is treated as a technologically rooted explanation of backwardness that distracts attention from the (role of the) state and the politics surrounding it. We know that the greater the degree of (relative) backwardness, the more intervention is required in the market economy to channel capital and entrepreneurial leadership to nascent industries; and likewise, the more interventionist and comprehensive (big push) the measures must be to reduce domestic consumption and increase saving (Gerschenkron, 1962). The required catch-up cannot be expected to occur by market forces left to themselves but requires active policies, state guidance and institution building or, in other words, a developmental state. Ultimately, what is left unexplained is why most LDCs feature failed developmental states and weak bureaucratic capacities, which cannot bring about sufcient catching-up the great promise of relative backwardness notwithstanding.
PESSIMISTIC DIAGNOSIS, OPTIMISTIC PRESCRIPTIONS

The disjuncture between what Mkandawire (2001) calls the pessimism of the diagnosis and the optimism of the policy prescriptions is perhaps the

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most remarkable feature of The Least Developed Countries Reports. On the one hand, we have fty poor countries (more or less) locked into in a poverty trap and (further) falling behind the rest of the world, on the other hand, there is a long list of policy prescriptions on how to escape from this trap and how to enable technological catching up. What is lacking is a serious analysis of state developmental capacities to promote and implement the national project implied by both reports in general, and of domestic classes and interests seeking to control the interventionist state. LDCR 2006 addresses this issue in only one short paragraph on p. 300, arguing that although State capacities are weak, this does not mean that the State is irrevocably incapable. The government capacities required in order to formulate and implement a strategy to develop productive capacities [. . .] are no more exacting than those required for formulating and implementing a poverty reduction strategy. But given the limited success of poverty reduction strategies so far, this is clearly a non sequitur. LDCR 2007 devotes one short section (pp. 825) to the question of state capacity and mentions the examples of South Korea and Taiwan, where state capacities were weak until the end of the 1950s, to argue that very successful development experiences did not begin with ideal state capacities and that state capacities can be developed over time through an incremental process of learning from policy practice. Although this dynamic perspective is important and although it is true that the required state capacities can be built, UNCTADs approach remains technocratic and ignores key (political-economy) constraints on state capacities. In East Asia, the tension between the promise of economic development, as achieved elsewhere, and the continuity of stagnation and poverty did at some point take political form and did motivate institutional and policy innovations, often within authoritarian-nationalist regimes, which helped to overcome the difcult initial conditions and escape from the poverty trap. Why is a similar transformation from weak into more developmental states not happening in (most of) the LDCs? Even on the basis of their own analyses and ndings, the LDCRs could have said more on this. First, they could have argued more elaborately that, although many LDCs, especially many African ones, did have states that were developmental in both their aspirations and economic performance during the 1960s and 1970s, these states have become incapacitated and disembedded by the structural adjustment policies and donor initiatives of the 1980s and 1990s (Mkandawire, 2001). Unlike East Asian states, LDC states are subjected to external agents of restraint through aid and loan conditionalities and technical assistance, alienating the state from its citizens and thus undermining the political legitimacy of development policies. Second, the incapacitation of the state is augmented by the close integration of LDCs into global commodity markets, locked-in at the lower end of international value chains, and their exclusion from world capital markets, due to which the scope for autonomous scal and monetary policies is signicantly constrained. Expressed in terms of dependency and world-systems theory, it is because the LDCs have become more structurally

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entrenched in the periphery after 1965 that it has become more difcult to escape (Mahutga, 2006). And third, state capacities are constrained because the large inequalities in the distribution of income and wealth characteristic of most LDCs make it difcult to formulate and implement a national developmental project with the support of key domestic actors. Underemphasized in the LDCRs is the growth-reducing impact of inequality of incomes and assets which is surprising because even mainstream economics accepts that high (initial) inequality is not good for (subsequent) growth (for example, Deininger and Squire, 1998). Moreover, income redistributions and productivity-enhancing asset (land and/or credit) redistribution could act as catalysts of growth (Bowles and Gintis, 1995), initializing the much-desired process of cumulative causation which motivates much of UNCTADs optimism.

THE COMMODITY PRICE BOOM AND THE NEW IMPERIALISM

So far attempts to jump-start industrialization and technological catch-up of the LDCs have failed, and often quite miserably so, but a new window of opportunity has been opened for many of these economies by the recent commodity price boom. Between 2002 and 2006, UNCTADs aggregate commodity price index increased by as much as 88.8 per cent, as compared to a price increase of 25.3 per cent for the manufactured goods exported by developing countries. As a result, the commodity terms of trade improved by more than 50 per cent in only four years, which, as WIR 2007 (p. 88) points out, reversed a long-term downward trend that started in the early 1980s. Rapidly rising prices of oil and metals are the principal causes of this terms-of-trade shift: the crude petroleum price increased by 158 per cent and the average price of minerals, ores and metals by an even higher 220 per cent. As in earlier commodity booms, it was triggered by a demand shock, most notably the acceleration of economic growth in China and India, which is in this present stage very intensive in primary materials and energy 8 , coupled with slow supply responses, due to a long period of underinvestment and low surplus capacity (in OPEC). Speculative activity added to the demand for metals and oil, triggered by poor stock market performance during the period 200003 and the political insecurity in the Middle East (Iraq) and its potential impact on oil prices. Prices are likely to remain high, however, because of three factors: Chinese and Indian resource-intensive growth; the gradual depletion of natural resource stocks (leading to higher cost of new
8. China especially stands out. According to the US Energy Information Administration, China accounted for 40 per cent of total growth in global demand for oil in the last 4 years, more than double its share in global GDP (15.4 per cent in PPP terms). Chinas share in global demand growth between 2000 and 2005 was more than 50 per cent for aluminum, 84 per cent for steel and 95 per cent for copper.

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output); and the increased politicization of metal mining and oil extraction (a ` la Chavez and Putin) which limits foreign TNCs access to mineral deposits. Notwithstanding signicant cost increases of many inputs, the price boom has led to historically unprecedented prots of mineral (oil) producers. The net prots of ExxonMobil for 2007 (US$ 39.5 billion) were the highest ever reported by a US corporation. The combined net prots for 2007 of the top four private oil companies (ExxonMobil, Royal Dutch/Shell, Chevron and BP Amoco) equals US$ 103 billion, which is about twice the GDP of Africas largest oil producer Nigeria; thirty-two sub-Saharan African states currently have an annual GDP of less than $9 billion, which is what shareholders of ExxonMobil earn as net prot in just three months. Fed in part by these enormous windfall prots, the boom in mineral prices prompted a worldwide investment surge in extractive industries, which is the subject of WIR 2007, entitled Transnational Corporations, Extractive Industries and Development. Drawing on its unique dataset, the report examines TNC involvement in the extraction of mineral resources, maps the key countries and companies, and explores how the participation of TNCs may help or hinder long-term, broad-based development in developing countries. As the report shows, extractive industries account for the bulk of inward FDI in many low-income, mineral-rich countries, which due to their small domestic markets and weak productive capabilities have few other areas into which they can attract FDI. Foreign companies account for large shares of (metallic) mineral production in the LDC host countries in 2005, 100 per cent of mineral production in Guinea, Mali, Tanzania and Zambia was by TNCs. In oil and gas production, the share of TNCs is generally lower than in metal mining: 73 per cent in Angola, 92 per cent in Equatorial Guinea, and 64 per cent in Sudan, which still is high compared to 19 per cent in all developing economies (WIR 2007, p. 106). WIR 2007 highlights the growing importance of state-owned companies from developing and transition economies as key players in global energy and mineral extraction, gradually replacing the dominance of private TNCs:
these large, privately owned TNCs from developed countries no longer control the bulk of the worlds oil and gas reserves, and are no longer the leading oil and gas producers. In 2005, the top 10 oil-reserve-holding rms were all State-owned companies from developing countries, accounting for an estimated 77% of the total, whereas Russian petroleum rms controlled an additional 6%, leaving only about 10% for privately owned developed-country TNCs such as ExxonMobil, BP, Chevron and the Royal Dutch Shell Group. The remaining 7% was controlled by joint ventures between developed-country TNCs and developing-country State-owned oil companies (WIR 2007, pp. 11516).

Some of these state-owned oil and gas companies are rapidly expanding their overseas interests, reecting a common push for global status (WIR 2007, pp. 11622). In 2006, TNCs from developing Asia alone accounted for 50 per cent of total FDI ows to Africa Singapore, India, Malaysia, China (which adopted an aid-for-oil strategy) and South Korea are the main

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sources. For present purposes, we note that there was a huge ow of oil exploration investment to the West African Gulf, encompassing rich onand offshore oilelds stretching from Nigeria to Angola. These investments serve strategic interests of the OECD countries (notably the US 9 ) such as access to reliable, high-quality oil imports, 10 as well as keeping at bay the aggressive new actors in the African oil business, such as China in the Sudan and Angola, Malaysia in the Sudan, South Korea in Nigeria and Brazil in Angola (Frynas and Paulo, 2007). Hence, a new scramble for (mineral-rich) Africa which accounts for roughly 10 per cent of world oil production and 9.3 per cent of known reserves is in the making. However, the status quo is unlikely to change very much in the near future: the ve largest private-sector petro-TNCs from the OECD, which generate over 90 per cent of oil in Nigeria (Africas largest petro-state), will continue to dominate, because of their superior nancial means and above all technological capabilities. 11 The impact of the commodity price boom on the economies of the LDCs is varied, as is illustrated for selected African LDCs in Table 2. The losers of the oil and minerals price boom are the oil-importing exporters of (traditional) agricultural commodities: Ethiopia, Senegal, Tanzania and Uganda. Here, following a deterioration of their country-specic terms of trade between 1997 and 2002, and 2003 and 2007, trade decits increased, intensifying the balance-of-payments constraint on growth and making the mobilization of investable resources more difcult. In contrast, the terms of trade improved substantially for the oil and minerals exporting countries (Angola, Chad, Congo, Mozambique, Niger, and Zambia). As a consequence, these countries experienced substantial trade balance improvements often by more than 10 percentage points of GDP and turning a decit into a trade balance surplus. Concurrently, these LDCs have experienced large inows of (oil-related) FDI, which is now often nancing more than 50 per cent of gross xed capital formation. Increased export revenues and FDI inows provide the resource-rich LDCs with a bounty of investable resources, which, if adequately tapped and properly managed, is more than enough to nance the step-up in the investment rate (of about 10 percentage points) necessary to achieve their potential growth (Table 1). Due to the increased foreign exchange earnings, the leverage (on development policy making) of the external agents of restraint has been reduced and
African oil imports to the USA have been steadily rising and already account for 20 per cent of total US oil imports; this share will rise to more than 25 per cent. Indeed, the US already imports more oil from Africa than from the whole Persian Gulf (Frynas and Paulo, 2007). 10. Costs of exploration and oil production in Africa are relatively low, transportation costs are relatively low, the success rate in drilling operations is high, and African crude oil tends to be of high quality and with low sulphur content (which is a desirable feat). 11. Deep offshore oil elds in the Gulf of Guinea are considered the greatest and most protable prize in Africa; here the dominant players are the Western oil companies. 9.

Table 2. The Commodity Price Boom: Selected African Economies (20022007)


Terms of trade (2000 = 100) 1997 2002 70.4 104.2 104.8 115.0 168.8 165.0 2511 2521 434 51.3 46.9 26.2 2.0 2.6 5.0 41.7 0.4 9.0 4.5 40.9 12.9 0.5 1.4 3.0 13.8 7.3 3.0 36.4 16.4 5.7 2003 2007 (million US$) 20032006 (as % GFCF) 20032006 1997 2002 2003 2007 1997 2002 2003 2007 39.0 29.0 3.1 65.7 22.6 2.7 FDI inows 20032006 Per capita real GDP (% per year) Trade balance/ GDP (%) Real effective exchange rate (2000 = 100) 1997 2002 103.3 110.5 105.3 2003 2007 151.3 120.5 115.1

Major exports as % of total exports

Population (mill.)

20002004

in 2004

Angola Chad Congo, Democratic Republic 57.1 127.9 74.8 79.6 6611 1595 145.2 21.8

15.5 9.4 55.9

Eq. Guinea Ethiopia

0.5 75.6

107.8 97.0

144.3 91.6

Guinea

9.2

108.9

85.3

391

21.9

105.5

74.0

Mali

13.1

111.7

117.2

642

15.2

2.5

2.9

0.6

1.6 6.8 5.5 16.9 10.3

107.3

108.5

Assessment: Productive Capacities and Technological Capabilities

Mozambique

Oil (92.2%) Oil (92.0%) Diamonds (46%); non-ferrous ores (17%); oil (16%) Oil (93.0%) Agricultural commodities (38.1%) Bauxite, alumina, gold and diamonds (89.8%) Agricultural commodities (48.2%) Aluminium (42.3%) 91.3 143.6 844 20.3

19.4

96.1

83.5

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Table 2. Continued.
FDI inows 20032006 (million US$) 20032006 81 232 3.2 1.5 2.8 7.6 4.4 0.3 0.5 2.7 6.5 15.2 (as % GFCF) 20032006 1997 2002 2003 2007 1997 2002 2003 2007 1997 2002 105.1 104.8 Per capita real GDP (% per year) Trade balance/ GDP (%) Real effective exchange rate (2000 = 100) 2003 2007 110.3 105.8

Major exports as % of total exports 2003 2007 100.2 95.0

Population (mill.)

Terms of trade (2000 = 100)

20002004

in 2004

1997 2002

Niger

13.5

110.0

Senegal

11.4

102.2

Sudan Tanzania 55.7 2.4 4.3

35.5 37.6

86.5

8706 1683

47.9 16.6

7.9

10.2

97.5

67.8

Uganda Zambia 108.2 36889 23.7 5.7

27.8 11.5

110.3 104.1

67.2 144.1

988 1266

13.4 20.8

2.5 0.3

2.1 3.1 5.1

7.2 5.3 2.6

10.5 2.3 10.2

107.2 104.2 106.2

85.8 130.2 106.8

All LDCs

740.4

95.4

Nigeria

Uranium (43%), Gold (20%) Inorganic acids (35%); seafood & sh (25%) Oil (74.2%) Agricultural goods (38.3%); tourism (31.6%); gold (5%) Coffee, tea, tobacco Copper, cobalt (61.5%) Oil (37.7%), gas (2%), gold (1.8%), copper (1.5%), aluminium (1.1%) Oil and gas (98%) 139.3 13146 48.7 0.3 4.7 14.6

137.7

76.9

28.1

131.6

117.5

Servaas Storm

Note: An increase in the real effective exchange rate indicates a real appreciation. GFCF = gross xed capital formation. Sources: LDCR 2006; WIR 2007, Table III.5; and IMF (2007).

Assessment: Productive Capacities and Technological Capabilities

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domestic policy autonomy has been restored. As Table 2 shows, most resource-rich economies in Africa managed to signicantly increase per capita income growth but average growth is obscuring persistent inequalities and poverty. WIR 2007 (Chapter 5) sees little direct (employment and wage income) benets resulting from expanded minerals extraction, as it is highly capitalintensive and import-intensive, with little scope for local input procurement and very weak backward and forward production and employment linkages. For example, in Botswana, where the mining industry accounts for 40 per cent of GDP, 90 per cent of exports and 50 per cent of government revenues, it employed only 9,200 people or about 3 per cent of the total labour force. In addition, the proportion of expatriate workers involved in the extractive industries is generally very high. Angolas oil sector employs 19,000 Angolans (or less than 0.3 per cent of the labour force); and after half a century of oil production in Angola, only 50 per cent of engineers are Angolans, which is still a higher share than in new petro-states such as Equatorial Guinea (Frynas and Paulo, 2007). Hence, scal income and prots are the (only) signicant gains to host LDCs. A number of LDCs have changed their regulatory frameworks governing TNC participation so as to reap a greater share in the prots from minerals extraction, and they have placed more emphasis on technology transfer and skills promotion alongside introducing more strict environmental legislation and a weak attempt (under civil society pressure) to improve the transparency of TNC payments and revenues (WIR 2007, Chapter 6). The economic challenge is how to make the best use of these newly won (scal) revenues (WIR 2007, Chapter 3). LDCs, with initially limited absorptive capacities, run a big risk of contamination with Dutch disease: if the newly won (scal) resources are used to reduce external debt or accumulate foreign exchange reserves and are not productively invested within the domestic economic system it will lead to increased ination, real exchange rate appreciation (which is already occurring in some countries, see Table 2), loss of international competitiveness of traditional agricultural exports and more importantly of the nascent manufacturing sector. Premature de-industrialization and technological regression could be the outcome, pre-empting cumulative growth. In combination with a weak polity and poor governance, this will make for the infamous resource curse: a struggle for resource control resulting in miserable economic performance, widespread corruption and authoritarian rule, civil conicts, and adverse environmental impacts, in which, it must be noted, the extractive-industry TNCs play a crucial active and non-neutral role (WIR 2007, pp. 1523). To avoid the symptoms of Dutch disease, oil revenues must be set aside in stabilization funds and used to build up productive capacities and to diversify the non-oil economy (for future generations when oil riches run out), while accompanying scal and monetary policies should contain ination and prevent real exchange rate appreciation. So far

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the record is quite bleak 12 but there are examples of successful countries breaking the resource curse (for example, Botswana).

CONCLUSIONS

The UNCTAD reports put forward powerful sets of arguments as to why the current laissez-faire approach to economic development is not working hence the need for a paradigm shift towards policies focused on developing productive capacity, promoting structural change and speeding up technological catch-up. Maintaining the high standard of analysis of the previous reports, LDCR 2006 and LDCR 2007 do an excellent job in bringing out the principal constraints on cumulative growth, and their explicit recognition of the overriding need for structural change in patterns of production, employment and trade which is difcult, if not impossible, to achieve within a free-trade environment, is well-taken. What is needed is strategic integration with world markets, which allows the LDCs some policy autonomy and insulation from the world-systemic pressures which keep them in the periphery. The LDCRs are usefully supplemented by WIR 2007, which presents a balanced analysis of the challenges which the resource-rich LDCs now face due to the commodity price and FDI booms. Perhaps the most important conclusion of the reports, and the one which goes most strongly against the current of publications by the World Bank and the IMF, is that (lack of) demand constitutes the main constraint on LDC growth and that demand growth has to be increased by stimulating growth of agricultural output and incomes and by raising export growth. Once aggregate demand starts to grow, this induces additional labour productivity growth and technological progress, which will in turn further enhance income and demand growth. But the reports do underemphasize the growthobstructing impact of income and asset inequalities and ignore politicaleconomy complexities. Is UNCTADs call for a paradigm shift convincing? I think it is: the constraints which lock the LDCs into the periphery cannot be resolved by laissez-faire policies of the Washington Consensus type. The reports do provide a strong, albeit technocratic, case that the LDCs have a strong potential for growth. Tapping this potential requires powerful developmental states, founded on new social-political compromises involving key actors in their national economies. What should have been emphasized more is that the establishment of such compromises has not become easier for the late-latecomers in the context of the WTO-governed world trading system and of the new, imperialist, scramble for resources by governments and share-price maximizing TNCs. While acknowledging that a major part of the responsibility for state failure rests with domestic actors, we must
12. African petro-states failed to establish stabilization funds. Chad, after setting up a future generations fund aimed at long-term social development, scrapped it recently.

Assessment: Productive Capacities and Technological Capabilities

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at the same recognize the world-systemic constraints imposed upon the LDCs. Actual LDC growth is likely to remain (far) below its potential as long as the governments of the developed countries do not change their priorities which now only include reliable access to cheap natural resources even when this implies bolstering repressive regimes (in, for instance, Sudan, Chad and Nigeria), ignoring the often counterproductive effects that their policy advice has on economic outcomes and political behaviour in the LDCs, and refusing to rethink how the huge prots made in natural resource extraction by their TNCs (and their shareholders) are to be distributed more evenly internationally.

REFERENCES
Belloc, M. and P. Vertova (2006) Public Investment and Economic Performance in Highly Indebted Poor Countries: An Assessment, International Review of Applied Economics 20(2): 15171. Bowles, S. and H. Gintis (1995) Escaping the Efciency-Equity Trade-off: ProductivityEnhancing Asset Redistributions, in G.A. Epstein and H. Gintis (eds) Macroeconomic Policy after the Conservative Era, pp. 40840. Cambridge: Cambridge University Press. Deininger, K. and L. Squire (1998) New Ways of Looking at Old Issues: Inequality and Growth, Journal of Development Economics 57: 25987. Frynas, J.G. and M. Paulo (2007) A New Scramble for African Oil? Historical, Political and Business Perspectives, African Affairs 106(423): 22951. Gerschenkron, A. (1962) Economic Backwardness in Historical Perspective. Cambridge, MA: Harvard University Press. IMF (2007) Regional Economic Outlook: Sub-Saharan Africa. Washington, DC. Mahutga, M.C. (2006) The Persistence of Structural Inequality? A Network Analysis of International Trade, Social Forces 84(4): 186389. Mkandawire, T. (2001) Thinking about Developmental States in Africa, Cambridge Journal of Economics 25(3): 289314. Storm, S. (2005) Development, Trade or Aid? UN Views on Trade, Growth and Poverty, Development and Change 36(6): 123961. Thirlwall, A.P. (2007) The Least Developed Countries Report, 2006: Developing Productive Capacities, Journal of Development Studies 43(4): 76678. Wells, H. and A.P. Thirlwall (2003) Testing Kaldors Growth Laws across Countries of Africa, African Development Review 5(2/3): 89105.

Servaas Storm works on globalization, economic development and structuralist macroeconomics and is associated with the Department of Economics, Faculty TBM, Delft University of Technology, Jaffalaan 5, 2628 BX Delft, The Netherlands; e-mail: S.T.H.Storm@tudelft.nl