Building Productive Capacities in LDCs as a Means
Building Productive Capacities in LDCs as a Means to Reduce Poverty Productive capacities: what they are, why they are important and how they develop Michael Herrmann Expert Division for Africa, Least Developed Countries and Special Programmes
The LDCs
The Presentation Introduction Productive capacity development • Elements, development Processes • Capital accumulation, technological progress, structural change Constraints • Infrastructure, institutions, demand Policy implications
Introduction
Productive Capacities: Elements
Productive Capacities: Development Productive capacities are determined by 3 processes • Capital accumulation (physical, financial) • Technological progress (low- to medium-tech) • Structural change (agriculture to industry, low to high productivity jobs) Productive capacities are impeded by 3 constraints • Infrastructure (transport, utilities, etc. ) • Financial system (commercial and development banks, etc. ) • Knowledge system (schooling, training, R&D, extensions, etc. )
Processes: Overview
Process I: Capital Accumulation
Process I: Capital Accumulation Over the 1990 s investment rates declined in many LDCs. • Public fixed investment declined in 8 of 12 LDCs • Private fixed investment also declined in 8 out of 12 LDCs In 1999 --2003 investment rates were relatively low in LDCs. • Average investment rate was 22 % GDP, • Average savings rate was 14% GDP, • Average resource gap was about 8% of GDP. In 1999 --2003 almost 40% of investments was financed by external sources • Net FDI inflows to LDCs were about 2. 6% of GDP • Net ODA disbursements to LDCs were about 9% of GDP (in 2004).
Process I: Capital Accumulation Aid can be major source for capital formation. • In 2004 it accounted for more than 10% of GDP in 36 out of 43 LDCs. Aid targeted at capital formation has declined over past years. The share of ODA to LDCs associated with debt relief, emergency assistance and social sectors development increased from 34. 6% in 1992 -1994 to 62. 1% in 20022004. The share of ODA to LDCs associated with development of economic infrastructure and production sectors decreased from 47. 9% to 23. 5% over the same period.
Process I: Capital Accumulation Formation of human capital is weakened by low levels of education • In 2000 the average years of schooling of the adult population was only 3 years in the LDCs, less than in other developing countries in 1960. • In 2001 technical and vocational education constituted only 2. 6% in total secondary enrolment in the LDCs, as against 10. 4% in developing countries. • In recent years only 6% of the population aged 20 -24 in LDCs was enrolled in tertiary education, compared with 23% in other developing countries. … and high levels of brain drain • About one in five of the high-skill workers (persons with 13 years schooling and above) were working in OECD countries in 2000 • The intensity of the brain drain from African and Asian LDCs increased significantly in the 1990 s
Process II: Technological Progress Limited investment in technological development • In 2003 gross expenditures on R&D were only 0. 2% of GDP in the LDCs. Between 1980 s and 1990 s public expenditures for agricultural R&D declined in 8 out of 13 LDCs. Limited licensing of technology • In recent years only 7% of domestic firms in LDCs licensed foreign technology, compared with 27% of foreign firms, and only 21% of domestic firms in LDCs use a website for business, compared with 44% of foreign firms. Limited import of technology • Firm-Level Investment Climate Surveys (World Bank) show new machinery and equipment is the most important channel of technological acquisition in the LDCs. Yet, they have not increased over the last two decades in real per capita terms.
Process III: Structural Change: Production
Process III: Structural Change: Employment Transition Changing size and locus of labor force
Process III: Structural Change: Labor Productivity Fact 1: • Relatively large increase of labor force in non-agriculture (indicated by large growth of economically active population), Fact 2: • Relatively small expansion of economic activities in non-agriculture (indicate by small growth of value added) Implication: • Decline of non-agricultural labor productivity (indicated by the ratio of value added to labor force).
Process III: Structural Change: Labor Productivity
Process III: Structural Change: Employment Challenge Rapid increase of non-agricultural labor force Push factors Growth of agricultural labor force > agricultural land. • Land holdings per agriculturalist decline • Dependency on fragile land increases. • Productivity of agricultural workers increase slowly or decrease. • Yield of land increase slowly or decrease. • Few prospects to overcome rural poverty. • Decision to leave rural areas/ agricultural sector. Pull factors Growth of non-agricultural labor productivity > agricultural labor productivity. • Potential to earn higher wages. • Decision to migrate to urban areas/ non-agricultural sector.
Process III: Structural Change: Employment Challenge Weak absorption of non-agricultural labor force • In Tanzania the non-agricultural labor force grew 2. 26 million; wage employment outside agriculture grew by 172 thousand between 1990/91 and 2000/01. • In Uganda the non-agricultural labor force grew by 428 thousand, wage employment outside agriculture grey by 82 thousand between 1992 and 1999/2000. • In Burkina Faso only 5% of males and 3% of females found their first paid job in private formal sector in 2000. • In sub-Saharan Africa about 93% new employment opportunities are in informal sector, in recent years.
Process III: Structural Change: Employment Challenge
Constraints: Overview Weak Infrastructure • ICT and beyond Weak Institutions • • • Financial Business-support Knowledge-management Weak Demand • • External Domestic
Policy Implications Current approach • Human and social development (e. g. , health and education) Current approach PLUS • Economic development (i. e. , growth, production, employment) • Integration in world economy (liberalization will result in supply) • Framework conditions • (enterprise development, technology transfers, innovation, invention) • (e. g. , investment climate, governance, rules) • Domestic supply-side (lifting constraint on investors; compliance with rules and regulations, customs procedures, product standards) • • • Tradables FDI Welfare State Create conditions for production Ingredients (e. g. , institutions at meso level; enterprise capabilities at micro level) • Domestic demand-side (stimulation demand of investors through linkages and population through productive employment) • • • Non-tradables Domestic investment Development State
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