‘South’ faces economic challenges

Global financial crises hit least developed countries as well as economic powers.

 Experts say the crisis threatens the ‘bottom billion’ by jeopardising food security.  [GALLO/GETTY]

A lot has been written about the effect of the financial and economic crisis on developed countries and the need for greater regulation of the financial sector.

But the exact nature and implications of its impact on the world’s poorest economies are relatively unknown.

During the first week of December, ministers from the Least Developed Countries (LDCs) will meet in Vienna, Austria to discuss the impact and implications of the global recession.

Out of a total of 49 LDCs, 33 are in Africa, 15 in Asia-Pacific, and one country, Haiti, is in the Latin America and Caribbean region.

A few years ago, the march of globalisation powered free market policies and was seen as inevitable in the dominant schools of development thought.

Markets were said to be able to self-regulate, and governments were strongly encouraged to remain ‘hands off’ and to privatise some core social services.

In some cases, such policies were promoted as prerequisites for economic development with associated conditions. This often reduced the role of national governments in matters of economic development.

But the crisis has brought the state back on to centre stage.

Roots of the crisis

As industrial production and global trade accelerated in the latter decades of the 20th century, demand for primary commodities reached new highs.

This has led to a period of unsurpassed growth among primary commodity producing LDCs, particularly since the turn of the century.

In a dramatic turnaround as compared to the period 1970-1990, economic growth among LDCs as a group surpassed middle and high income country groupings for the period 2000-2007.

Developed countries have focused on the banking sector [GALLO/GETTY] 

By 2008, however, the world was experiencing exceptionally high primary commodity prices for both food and energy needs. This was confounded by a steep rise in the use of corn for ethanol production.

The situation resulted in high inflation and growing concern over food shortages in the world. The collapse of Northern financial institutions brought the episode to an abrupt end, with most primary goods’ prices falling back to their pre-2008 levels.

While the countries of the North were mostly concerned with high energy costs, in the first half of 2008 across the developing world the focus was on imported food prices and the vulnerability of the general population to price-induced food shortages.

This tendency sent alarm bells across the populations of many poorer nations exhibiting inadequate levels of affordable and local food production.

Different focus

The situation was also exacerbated by agricultural subsidies commonly practised in several developed countries, including for both food exports and bio-fuel production and not just for local consumption.

Nowadays, the focus in the North remains on re-evaluating the role and place of the banking sector. The search is on for the kind of regulation that promotes the financial sector as a useful service for the productive sectors. 

Although the lesson about the financial sector is relatively clear, the main concern of the policymakers in the South is likely to be elsewhere.

Here are three policy areas in which I strongly believe the LDCs must focus on:

First, the threat posed by the global recession to the food security of the “bottom billion” – those who live on just around a dollar a day – suggests that LDCs need to concentrate on local production and trade in food products. This is especially relevant to those countries with high food import volumes and costs.

Second, the likely rise in imported energy costs signals the need for a policy priority for alternative and renewable energy sources for energy-importing countries, particularly for those with limited export earnings.

Third, the policy area that demands urgent attention is the need to guard against over-reliance on imports and exports of essential goods to the detriment of local and regional markets and production.

Diversity key to success

The above considerations point to the overwhelming need for economic diversification, and creating new ‘comparative advantages’.

Diversification has many facets. Widening the range of local products – or ‘horizontal’ diversification is one aspect of it. This refers to the urgent need for moving away from being tied down to the production of a small number of primary commodities and even fewer manufactures. 

Another aspect of diversification would be moving up the ‘value chain’ by entering into the production of more technologically advanced manufactures, also known as ‘vertical’ diversification.

Also, there is need to diversify the range of trade and investment partners, an aspect of which is referred to as ‘South-South cooperation’.

And, just as importantly, there is a need to diversify the sources of energy that we use for domestic and productive uses. We also need greater efficiency in the use of energy, and more investment in alternative and renewable sources such as hydro power and solar energy on small, medium and large scales.

With such an approach comes greater reliance on local consumption and markets and the fact that these countries can concentrate more on catering to local and regional value chains and trade.

This is supported by prohibitive energy and environmental costs associated with globally dispersed production. This lesson, by the way, is as applicable to medium and high income countries as it is to LDCs.

Bio-fuel production contributed to a rise in food prices in the developing world [GALLO/GETTY]

It is clear that ‘globalised production’ alone is no panacea. There is clearly need for a more balanced view of local, regional and global factors.

Here I would emphasise economic security, environmental sustainability and a more rational and effective use of technology for cleaner, leaner and cheaper production.

I look forward to engaging with the LDC ministers on other related and important issues, including price, demand and supply trends together with the basic organisation of key manufacturing sectors, their value chains and supporting infrastructure.

Competitiveness, entrepreneurship development, and other industrial performance drivers should also be examined in the context of a changing global environment. The impact of the financial and economic crisis on export and import growth rates, remittances, balance of payments, the credit sector, and employment also needs to be considered.

LDCs cannot pull out of the crisis alone. The leading economies and international development agencies, through traditional and emerging donors, must be encouraged to come in to do their share once effective policies are in place and a strategy and an effective plan of action is agreed on.

We live in an interdependent world that has yet to fulfil its great potential in wealth generation and prosperity in an equitable and sustainable manner. We look forward to further engaging with our partners in the search for solutions and greater solidarity.

Kandeh K. Yumkella is director general of the United Nations Industrial Development Organisation (Unido).

Source : Al Jazeera

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