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LDC graduation: Progress brings its own challenges

Shamsul Alam | Published: May 29, 2019 20:59:37 | Updated: June 07, 2019 21:20:29


[The first of a two-part series titled 'Coping strategies for Bangladesh after graduation from LDC status']

 

The development progress of Bangladesh, measured in terms of income, poverty and human development, is truly impressive, especially after 2009.  Between FY1974 and FY 2018, per capita income increased from $90 to $1,752, the incidence of moderate poverty declined from 72 per cent to 22 per cent, average life expectancy climbed from 46 years to 72 years, infant mortality rate fell from 130 per thousand to 32, and adult literacy rate increased from 26 per cent to 73 per cent.  In 2015, Bangladesh crossed the threshold of the World Bank-defined lower middle-income country (LMIC). In 2018, it also crossed the threshold for graduation from the United Nations (UN)-defined list of least developed countries (LDC). The presumptive date for formal graduation out of LDC status is January 01, 2024, after going through the standard process of approval and announcement under the UN system.

This progress with development and its international recognition are welcome news. 

But progress brings its own challenges as the country aspires to move further forward. The successful move towards LDC graduation implies that the special benefits enjoyed by Bangladesh in its international trade and financial relations with the global community as an LDC will also come to an end after graduation. Some of the LDC benefits have been very helpful for Bangladesh, especially the duty-free access to exports in the European markets. The readymade garments sector (RMG) has prospered in the European Union (EU) country markets with the support of this duty-free access under the 'Everything But Arms (EBA)' facility. The Bangladesh Pharmaceutical sector has benefited and flourished into a vibrant industry thanks to the flexibility for LDCs in the application of the World Trade Organisation (WTO) Agreement on Trade Related Intellectual Property Rights (TRIPS). These are the most important benefits. But there are others. Perhaps Bangladesh is the LDC that was able to leverage the International Support Measures (ISM) the most.  

In recognition of the importance of the mentioned preferential export market access, the LDC graduation process allows a fair amount of time prior to formal graduation in 2024. The Bangladesh government is keen to utilise this transition period to develop a comprehensive strategy for LDC graduation with a view to ensuring that the graduation costs in terms of loss of benefits are well understood and appropriate strategies and policies are in place to allow a smooth transition from LDC status. As a first step, the government has asked the General Economics Division (GED) of the Planning Commission to conduct an in-depth analysis of the costs and consequences of LDC and suggest appropriate strategies and policies to offset these costs through compensatory domestic policies and reforms. This article aims to provide an analysis of the costs of LDC graduation, suggest strategies and policies to mitigate those costs and move forward along the path of development articulated in the Perspective Plan 2041 (PP2041). 

LOSS OF LDC BENEFITS: The International Support Measures Portal for Least Developed Countries of the United Nations Committee for Development Policy lists the ISMs in three categories. These are-(I) General Support related International Support Measures; (II) Development Assistance related International Support Measures; and (III) Trade related International Support Measures.

• General Support- related International Support Measures (ISMs):  One of the major components of General Support ISMs for LDCs is the financial support in the form of scholarships and travel grants for research related purposes, which are provided to citizens from this group of countries. The organisations offering such opportunities to citizens from LDCs range from specialised agencies like the United Nations Educational, Scientific and Cultural Organization (UNESCO) to international organisations like the Intergovernmental Panel on Climate Change (IPCC). In addition, academic institutions like the Berkeley Law School and the Leipzig Graduate School of Management also provide scholarships to deserving students.

The most important institutional support is the assistance provided  to prepare a strategy for a smooth transition after graduation from LDC status. This smooth transition is of vital importance since a country which is no longer an LDC will stop enjoying trade related support measures like preferential market access.

Another support measure is the cap on the contribution of an LDC  member country to the UN's total budget at 0.01 per cent regardless of the country GNI. For example, in 2015, the amount was capped at $271,356. In 2018, eight LDCs used this measure to determine their contribution to the UN budget, including  Bangladesh. At the same time, the countries have to make a minimum contribution of 0.001 per cent to the UN-in 2015, it  was $27,136. The LDCs are entitled to a discount of 90 per cent   on their contributions to peacekeeping operations.

• Development Assistance-related ISMs: Official Development Assistance, or the ODA is integral component of the special support measures to the LDC economies. Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) uses the term ODA to measure aid. Since LDCs face numerous structural challenges, their economies are vulnerable and exposed to natural as well as man-made shocks, ODAs provide some degree of secured assistance to these countries. There is a longstanding commitment by developed countries, reiterated in the 2030 Agenda for Sustainable Development, the Addis Ababa Action Agenda of the Third International Conference on Financing for Development and the Programme of Action for the Least Developed Countries for the Decade 2011-2020 (Istanbul Programme of Action), to provide the equivalent of 0.15 to 0.20 per cent of their gross national income (GNI) in the form of ODA to LDCs. This is in parallel to a commitment to provide the equivalent of 0.7 per cent of GNI in ODA to developing countries. Unfortunately, as of 2016, only six countries were able to fulfil their 0.7 per cent ODA/GNI ratio, and 0.15-0.20 per cent GNI/ODA ratio has not been achieved yet.

Another aspect of ODA is that, in 2001, the OECD countries  decided to untie aid for LDCs. Apart from South Korea and a few   Eastern European countries, 22 DAC members have been able to  untie their LDC specific ODA between 90 per cent-100 per cent. 

But there are questions regarding transparency of actual untied  support measures. Several OECD member countries provide  development assistance as grants or on concessional terms to  LDCs.

In addition to bilateral assistance by the member countries,  assistance is also provided to the LDCs through the UN's  specialised agencies like the United Nations Development               Programme (UNDP), United Nations International Children's  Emergency Fund (UNICEF) and the World Food Programme  (WFP). The UNDP and UNICEF target provide at least 60 per cent  of their regular assistance to the LDCs while the WFP allocates 50  per cent of their funds for the same. At the same time, the World  Bank provides loans on concessional terms like lower interest  rates and longer grace periods through its International  Development Association (IDA) to countries whose per-capita  incomes fall below a certain threshold (defined by World Bank as  low-income countries).

There are also a number of specialised funds and programmes that   seek to support specific aspects of LDC needs or vulnerabilities.  

These include: The Least Developed Countries Fund (LDCF) under the United Nations Framework for Climate Challenge (UNFCC) to  help fight climate change; the Global Climate Change Alliance  (GCCA) of the EU that also supports LDC effort to fight climate  change; and the United Nations Capital Development Fund  (UNCDF) that seeks to promote small enterprises in LDCs.

• Trade-related ISMs:  Most of the International Support Measures for the LDCs are trade related. The trade related ISMs for LDCs are mainly based on three categories: (i) preferential access to markets; (ii) special treatment regarding the World Trade Organisation (WTO) obligations; and (iii) building of trade-related capacities. So far, 16 countries and the European Union have granted LDCs preferential access to their markets: (i) Turkey; (ii) Switzerland; (iii) Japan; (iv) Iceland; (v) Morocco; (vi) China; (vii) Chile; (viii) the European Union; (ix) New Zealand; (x) Norway; (xi) Thailand; (xii) India; (xiii) the Eurasian Customs Union (consisting of Russia, Kazakhstan and Belarus); (xiv) Australia; (xv) Canada; (xvi) the United States; and (xvii) the Republic of Korea. This preferential access is given under two schemes: The Generalised System of Preferences (GSP) - under which the countries benefitting from it are not bound to reciprocate; and (ii) the Global System of Trade Preferences (GSTP) - under which the countries benefitting are supposed to reciprocate. In addition, regional trade agreements like the South Asian Free Trade Area (SAFTA) and the Asia Pacific Trade Agreement (APTA) also provide concessions on access to markets for the LDCs.

In the European Union (EU) countries, Bangladesh enjoys a comprehensive duty-free and quota-free (DFQF) market access for its merchandise exports. This preference is provided to any LDCs under the EU's "Everything But Arms" (EBA) scheme, which is the most generous among the three different GSP schemes provided by the EU for different groups of developing countries. Bangladesh is the largest beneficiary of the scheme. In 2017-18, it accounted for 64.1 per cent of all EU imports under EBA, and 9.5 per cent of the EU's total import under preferential treatment. Bangladesh enjoys on average a 9-12 per cent preference margin under the EBA for its exports of apparels to EU. The current EBA scheme is likely to continue for three years after LDC graduation, till 2027.

Apart from the EU, the list of countries providing preferential market access to Bangladesh exports includes Australia, Belarus, Canada (98.6 per cent; except: dairy, eggs and poultry), Liechtenstein, Japan (97.9 per cent; except: rice, sugar, fishery products, articles of leather), New Zealand, Norway, Russian Federation (38.1 per cent), Switzerland, and Turkey (79.7 per cent; except: meat, fish, food, steel etc.). In addition, there are some special and partial DFQF facilities provided by a handful of developing countries including China (61.5 per cent), Chile (99.5 per cent), Korea Republic (90.4 per cent) and Chinese Taipei (31 per cent). It is important to note that Bangladesh does not enjoy any type of GSP facilities in the largest developed economy market of the world, the USA. Bangladesh used to receive some limited US GSP facilities, which remains suspended since 2013, but never had any preferential access for its apparel exports to the U.S. market.

ESTIMATED LOSS FROM LDC GRADUATION:   While the access to scholarships and concessional subscription to UN membership has been useful, the financial impact of loss of access to General Support ISMs is not significant.  The loss of access to subsidised ODA and grants is important but not a huge source of concern in financial terms presently. At the early stages of development up to the 1990s, like other LDCs, Bangladesh benefitted a lot from concessional ODA. But as development proceeded over 2000-2019, the reliance on ODA as well as the concessional component fell significantly. Post-LDC graduation, this trend will continue especially the stock of concessional aid disbursement will shrink and eventually disappear. Bangladesh will have to increase its reliance on market-based commercial borrowing.  So, the average interest cost of foreign borrowing will increase. Simulation exercise done in the report shows this would cause an increase in debt-servicing payment, but debt sustainability will not be threatened if a prudent approach to foreign borrowing is preserved as envisaged under the PP2041 macroeconomic framework.

There will also be some losses of grants post-LDC graduation. These are estimated at around $700 million, of which $400 million goes to the government and an estimated $300 million to non-governmental organisations (NGOs). These grants are not growing much and the losses are very small relative to export earnings during the graduation period (FY24-27). 

Similarly, the loss of access to special climate funds for LDCs must not be a worrisome factor. The benefits are small in financial terms. Moreover, Bangladesh will continue to have access to the Green Climate Fund (GCF) which is presently grossly underutilised.

Not surprisingly, the biggest source of loss comes from the withdrawal of trade-related ISMs. The preferential access to markets at zero or very low tariffs has been a big boost for Bangladesh exports.  In FY 2017, about 75 per cent of Bangladesh's total export earnings came from countries that provided some degree of preferential access. Of these, the EU market accounted for 72 per cent.  Therefore, the loss of EBA facility will be an important loss. These losses in RMG exports could range from $1.0 billion (low price elasticity) to $4 billion (high price elasticity) in terms of the FY2018 export base. In percentage terms, they amount to a low of 2.8 per cent of total exports in FY2018 to a high of 11.1 per cent. The most likely loss will be about $1.8 billion (price elasticity of 1), which is 5 per cent of export earnings in FY2018. The absolute dollar values will be larger depending upon the timing of LDC graduation. For example, using the PP2041 macroeconomic framework and unitary price elasticity assumptions, the projected loss of RMG exports could be $7.0 billion in FY2027.  These are not overwhelming losses compared to the export base but neither are they very small. Also, the losses will be higher if import price elasticity of demand for RMG is higher. So, unless these losses are over-turned with coping policy measures, the cumulative losses over the years could be large. Additionally, there are other adverse implications of LDC graduation related to the end of special treatment under WTO provisions that are not easily quantifiable but can create important challenges.

[The second part of the article will be published on Saturday, June 01]

Dr. Shamsul Alam is Member (Senior Secretary), General Economics Division, Bangladesh Planning Commission. This is adapted from the study GED has undertaken titled 'Impact Assessment and Coping up Strategies of Graduation from LDC Status for Bangladesh'. The study is under the process of finalisation.

sambau23@gmail.com

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