Making It #4 - On track to prosperity?

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Making It Industry for DevelopmentNumber 4, 2010

Ontracktoprosperity?

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A quarterly magazine.Stimulating, critical andconstructive. A forum for discussion and exchangeabout the intersection of industry and development.

Number 1 , December 2009l Rwanda means business: interview with President Paul Kagamel How I became an environmentalist: A small-town story with global

implications by Phaedra Ellis-Lamkins, Green For Alll We must let nature inspire us Gunter Pauli presents an alternative

business model that is environmentally-friendly and sustainablel Old computers new business. Microsoft on sustainable solutions

for tackling e-waster l

Green industry in Asia: Conference participants interviewedl Hot Topic: Is it possible to have prosperity without growth? Is greengrowth really possible?

l Policy Brief: Greening industrial policy; Disclosing carbon emissions

Number 2 , April2010l After Copenhagen Bianca Jagger calls for immediate steps to

avoid climate catastrophel The Interational Energy Agencys Nobuo Tanaka looks at energy

transitions for industryl Energy for all Kandeh Yumkella and Leena Srivastava on what

needs to be done to improve energy accessl Women entrepreneurs transforming Bangladeshl Everywhere under the sun Suntech CEO, Zhengrong Shi,

on the power of solar l Hot Topic: The pros and cons of biofuelsl Policy Brief: Financing renewable energy; Feed-in tariffs

Number 3 , July2010l Chinas stunning economic rise: interview with minister of

commerce, Chen Demingl Jayati Ghosh on politicizing economic policyl Towards a more productive debate Ha-Joon Chang calls for

an acceptance that industrial policy can workl The World Banks Robert Zoellick on modernizing

multilateralisml Greening the Mexican economy Juan Rafael Elvira Quesadal Hot Topic: Does microfinance work?l Policy Brief: The private sector and development;

The power of patient capital


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The theme of this the fourth issue of Making It: Ind for Development is the challenge facing the worlds 49 LeDeveloped Countries (LDCs), and in particular theimportance of strengthening productive capacity.

In the keynote article, the UNs High Representative fLDCs, Cheick Sidi Diarra, argues that by improvingproductive resources, entrepreneurial capabilities, andproduction linkages, these countries can strengthen theiresilience to external shocks and lessen their dependencon external assistance. But they will only succeed if theimplement new policies, devise new forms of developmgovernance, and receive more effective multilateral sup

Ahead of the Fourth UN conference on LDCs that wi

take place in May next year, Debapriya Bhattacharyapreviews the issues to be discussed, and highlights thedilemma of how to marry economic growth with povertreduction.

Our country feature looks at the Pacific Island nation Kiribati, an LDC and a Small Island Developing State thfaces a threat to its very existence in the form of rising slevels and temperatures. Kiribatis president, Anote Ton

talks about his countrys remarkable gesture to help sathe Pacific Oceans fish stocks and preserve globa

biodiversity.There are also articles on community bankalternatives to microfinance, renewable en

trends in the developing world, the relevof entrepreneurship for economicdevelopment, and much more.

Making It s website www.makingitmagazine.net containot only all the content of the print versions but other original articles anfeatures too. The website is also aninteractive platform for exchange of vand ideas, and we invite you our read

to join in the debate about globalindustrial development issues.

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Editor: Charles [email protected] committee: Ralf Bredel,Tillmann Gnther, Sarwar Hobohm,Kazuki Kitaoka, Ole Lundby,Wilfried Ltkenhorst (chair),Cormac OReillyWebsite and outreach:Lauren [email protected] illustration: Paresh NathDesign: Smith+Bell, UK www.smithplusbell.comThanks for assistance to

Donna ColemanPrinted by GutenbergPress Ltd, Malta www.gutenberg.com.mt

on PEFC certified paperTo view this publication online and toparticipate in discussions aboutindustry for development, please visitwww.makingitmagazine.netTo subscribe and receive futureissues of Making It , please send anemail with your name and address [email protected] It: Industry for Development is published by the United NationsIndustrial DevelopmentOrganization (UNIDO)Vienna International Centre,P.O. Box 300, 1400 Vienna, AustriaTelephone: (+43-1) 26026-0,Fax: (+43-1) 26926-69E-mail:[email protected] 2010 The UnitedNations Industrial DevelopmentOrganizationNo part of this publication can beused or reproduced without priorpermission from the editorISSN 2076-8508

Contents

GLOBAL FORUM6 Letters8 On the climate frontlines Pacific IslanderKrishneil Narayan calls for action to savethe region from looming disaster10 Hot topic Wim Naud and RanilDissanayake discuss the relevance of entrepreneurship for economicdevelopment14 Business matters News, trends, events

FEATURES18 Helping the worlds Least DevelopedCountries Debapriya Bhattacharya previewsthe Fourth U nited Nations Conference on LeastDeveloped Countries (LDCs) in May 2011

22The power of the community Milford Bateman on community bank alternativesto microfinance

24 KEYNOTE FEATUREStrengthening productive capacity The UNsCheick Sidi Diarra argues that the LDCs should and can produce more, and better quality, goodsand services

Making It Industry forDevelopment

The designations employed and thepresentation of the material in this magazinedo not imply the expression of any opinionwhatsoever on the part of the Secretariat of theUnited Nations Industrial DevelopmentOrganization (UNIDO) concerning the legalstatus of any country, territory, city or area orof its authorities, or concerning thedelimitation of its frontiers or boundaries, orits economic system or degree of development. Designations such asdeveloped, industrialized and developingare intended for statistical convenience and donot necessarily express a judgment about thestage reached by a particular country or area inthe development process. Mention of firmnames or commercial products does notconstitute an endorsement by UNIDO.The opinions, statistical data and estimatescontained in signed articles are theresponsibility of the author(s), including thosewho are UNIDO members of staff, and shouldnot be considered as reflecting the views or bearing the endorsement of UNIDO.This document has been produced withoutformal United Nations editing.

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30 Renewables: the new global landscapeTwo recent reports provide an insight intorenewable energy in developing countries

34 Country feature: Kiribati, small country, bsacrifice Interview with His ExcellencyAnote Tong, President of Kiribati38 Industrial policy in Africa: what needs to done Mallam Sanusi Lamido Sanusi,Governor, Central Bank of Nigeria40The challenge on our doorstep The WoBusiness Council for SustainableDevelopments Marcel Engel and FilippoVeglio give a business view of developmen

POLICY BRIEF42 Renewables investment in India43 Promoting industrys innovation capacitie45 Biodiversity: policy challenges in a changworld

46 Endpiece Patricia Francis, ExecutiveDirector of the International Trade Centre,climate change and trade

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LETTERS

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On microfinanceDoes microfinance work?(Making It , number 3) is to becommended for highlighting anumber of the most pressingissues concerning microfinancetoday, especially since it is

produced by a staff member of one of the internationaldevelopment agencies (UN-DESA) with a major interest inlocal economic development.With honourable exceptions,the main internationaldevelopment agencies seek tohugely underplay the verysignificant damage inflictedupon developing and transitioneconomies thanks tomicrofinance, preferringinstead to follow the lead set bythe World Bank, the IMF, andUSAID.

A wider and longer-termproblem with microfinancethat the article should reallyhave flagged up much morethan it did, especially since thisis a key concern of UNIDO andsome other UN agencies(UNCTAD in particular), is thatmicrofinance clearly helpsfacilitate the further de-industrialisation andinfantilization of the typicallocal economy in developingand transition countries. Thisoccurs precisely becausemicrofinance institutionsoverwhelmingly support onlythe very tiniest and verysimplest of microenterprises that is, street-vending, cross-

border shuttle trading, pettyservices, and some simpleproduction-based activitiesthat add value very quickly. So,to the extent that local savingsand remittance income areincreasingly channelled intosuch simple activities via therapid growth of microfinanceinstitutions, and so channelledaway from more sophisticatedand scaled-up activitiesassociated with small andmedium enterprises, the morethe economic structure of thatcountry, region or locality isinevitably going to beundermined and destroyed.

One other aspect of microfinance beloved of itssupporters and touched uponin this article is theempowerment of women angle.The author of this article goesalong with this understanding.But this angle is far more bluff than reality. Most independentresearchers report the reverse:women are actuallydisempowered as they getsucked more and more into the(under)world of microfinanceand microdebt peonage. In fact,what microfinance advocatesare aiming at is actually to getpoor women to accept that themarket is the sole avenue forimproving their position; just

forget the state, trade unions,collective organisations,pressure groups and so oncoming to your assistance likein the past. Today, as intended, awomen in poverty isincreasingly permitted onlyone avenue to escape poverty try to make a go of amicroenterprise. In otherwords, and this is hugelyimportant in helping explainmicrofinance, it is markets thatare being empowered here, notwomen.l Milford Bateman, author of Why Doesnt Microfinance Work? (See pages 22-23)

Should the poor have the samelevel access to credit as themiddle-class and affluent do?Of course! This access allowspeople to achieve more thanthey could with their ownresources: credit is a socialservice. And just as the middle-class and affluent should not be burdened by debts/mortgageforeclosures/credit card traps,the poor also should not be burdened by microdebt. Accessto financial services must bepaired with financialresponsibility and fair/ethicallending practices.l Dan Lundmark, received byemail

DecouplingI enjoyed reading the lastedition of Making It whichoffered a number of concisearticles on relevant topics of industrial development. Whilethe articles were short and easy

to read, they conveyed clearand differentiated messagesespecially liked the two artion the renaissance of industrial policy written byWilfried Ltkenhorst and H Joon Chang, respectively. Bemphasize the need for apragmatic industrial policywithout underestimating thesubstantial risks of

government failure.Also, I would like to

congratulate the editor forhighlighting the need for grindustrial policies, both in thcontributions by Ltkenhorsand by Mexicos environmeminister. Decoupling economgrowth from resourceconsumption is likely to become the most importanttask of industrial policy overnext decades. Governments have to set more effectiveincentives for theinternalization of environmental costs and the

The Global Forum section of Making It is a space for interaction anddiscussion, and we welcome reactions and responses from readers aboutany of the issues raised in the magazine. Letters for publication inMaking It should be marked For publication, and sent either by email to:[email protected] or by post to: The Editor, Making It ,Room D2138, UNIDO, PO Box 300, 1400 Wien, Austria. (Letters/emailsmay be edited for reasons of space).

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deployment of resource-efficient technologies. To do thisin a way that is compatible withpoverty reduction is one of themost pressing challenges ahead.l Dr. Tilman Altenburg, Headof the Competitiveness andSocial Developmentdepartment, GermanDevelopment Institute, Bonn,Germany

Wilfried Ltkenhorsts AChanging Climate for IndustrialPolicy (Making It , number 3)points out that markets are nohelp in stopping climate change.No surprise there: markets are ahuman invention, not naturallaw but businessmen,economists, and politiciansseem reluctant to acknowledgethis. Given their full agendas, a brief summary of some hometruths may be useful:l Manufacturing industrycreates material goods.Material goods require naturalinputs. We have one planet.Material resource scarcity istherefore built into industrialgrowth, global trade or not.l Industry is driven by privateenterprise. Private enterprisehas positive and negativepublic consequences; amongthe latter are pollution andunsustainable resource use.l In addition to upsettingnatural processes (e.g. throughmonocultures, large-scalelogging, and badly controlledmining), the careless use of scarce resources pushes uptheir price. Those who suffermost from higher prices arethose with the lowest incomes.

l A good analysis of theincreasing number of naturaldisasters will show that they areat least in part man-made, andthat industrial growth has oftenindirectly contributed to them.Those at the bottom of thesocial ladder suffer most.

Taking into account thesesimple points, industrialpolicies may become more

realistic. For, if development,sustainability, and humansecurity are not balanced, noneof the three will be achieved.l Paul Hesp, Vienna, Austria

EnlighteningFrom steam engines to humanconsciousness (Making It ,number 3) is indeed a veryenlightening piece of work.The human element has always been, by default, the culprit of the so-called economicprogress. Unless newapproaches to economicdevelopment are developed, thehuman being will always be theculprit, despite our goodintentions.l Anare Matakiviti, EnergyProgramme Coordinator,International Union forConservation of Nature, Fiji

Freetown callingThank you for sending the newissue of Making It . Establishedin 1989, Friends of the EarthSierra Leone (FOESL) has beenworking to createenvironmental awareness andprotection, as well as working toimprove the living conditions

of our society. Sierra Leone isnow at the crossroads of sustainable development.Which way are we to go as anation? As we venture along thepath to environmentalsustainability, we have come torealize the impoverishment of Sierra Leone. A majorproportion of the populationlives close to the land, and

subsistence farming is thelifeblood of the country. Barelytwenty years ago, Freetown wassurrounded by green hills.Today, they lie barren andexposed. The alarming rate of tree-felling for wood, shelter,charcoal, and timber, hasoutstripped the forests abilityto regenerate.

Important natural resourcesare at risk. Other areas of concern are land degradation,overfishing, and the pollutionof fresh water resources due tomining and municipal waste.The countrys environmentalwealth is threatened by poornatural resourcesmanagement. While generalawareness has increasedamong a number of environmental NGOs, there isstill need to support advocacy,policy development,community empowerment,and greater involvement innatural reserves managementand development action.FOESL is currently educatinglocals about the role of trees insoil conservation, and isupgrading its nurseries in theSierra Leone Peninsula andmountain communities. Theorganization is using the

popular medium of radio toraise awareness of its activities,as well as to create a forum fordiscussion of sustainableenvironment and developmentissues.

Presently there are severalNGOs at work in Sierra Leone but few directly addressing theoverriding concerns of thecountry which areenvironmental education andsustainable development.FOESL would like to establisha strong NorthSouth workingrelationship withenvironmental NGOs as a wayto help the North understandThird World environmentalproblems and solutions.l Olatunde Johnson, ExecutDirector, Friends of the EarthSierra Leone, Freetown, SierLeone

PraiseMaking It is getting better and better with each issue!!!Number 3 is particularlyinteresting and relevant,especially because of the leadstory, Chinas stunningeconomic rise a topic of great interest in India. I really believe that trade and industry,as well as policymakers and allother stakeholders here, will benefit a lot from the insightsand analyses that Making It offers. My compliments to youfor bringing out thiswonderful and highlyeducational magazine.l Shipra Biswas, NationalProgramme Officer, UNIDONew Delhi, India

For further discussion of theissues raised in Making It , pleasevisit the magazine website atwww.makingitmagazine.net andthe social networking Facebook site. Readers are encouraged tosurf on over to these sites to joinin the online discussion anddebate about industry for development.


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MakingIt 8

Human-induced climate change andrising sea levels are negatively affectingSmall Island Developing States (SIDS), andan uncertain future lies ahead for themillions of people who live in these islandcountries. In the Pacific Ocean, the sealevel will rise to inundate whole islands,forcing local populations to leave theirhomelands forever. Island nations likeTuvalu and Kiribati are amongst those thatface the most immediate threat.

Climate refugees are likely to be thelargest and fastest-growing category of environmentally displaced people. Tuvaluis the first country that has been forced toevacuate residents because of rising sealevels. Many Tuvaluans have also migratedinternally, from outer, low-lying islands tothe larger atoll of Funafuti.

An elderly man from the Solomon Islandstold me, They talk about us moving. But weare tied to this land. Will we take ourcemeteries with us? For, we are nothingwithout our land and our ancestors.

As a young Pacific Islander myself,spending my twenty-three years of life sofar growing up in Fiji, I know how muchthe land means to us. Our lands areconnected to our thousands-of-years-oldculture, our identity, our traditions, andour sense of belonging. Now, across thePacific region, many are helplessly seeingthe effects of climate change tear away partof their lives.

In different places, people areconsidering relocation from low-lyingislands after being affected by extremeweather events or climatic change that isdamaging the food and water supply.Perhaps the best-known case is that of theCarteret Islands in Bougainville, PapuaNew Guinea, where Ursula Rakova and thelocal NGO, Tulele Peisa, are assistingfamilies to resettle on church-donatedland on the main island of Buka.

The rapidly changing climate sciencehas highlighted the need for much morestringent greenhouse gas (GHG)reduction targets than set out in existingpolicies, if we are to avoid catastrophicconsequences for low-lying atoll nations.Rather than a two degree target, theAlliance of Small Island States (AOSIS),which most of the Pacific Island countriesare a part of, has called for well below 1.5degrees Celsius, and many developingnations are calling for greenhouse gases to be stabilized well below 350ppm. (Aconcentration of carbon dioxide in theatmosphere of 350 parts per million iscurrently regarded as the safe upper limitto avoid runaway climate change.)

As politicians continue to debate thetechnicalities of emissions tradingschemes, a global climate treaty, and homuch compensation to provide the coalindustry, its important we come back tothe human dimension. We must never losight of the fact that climate change in itessence is about people. Climate changea matter of human security, as itundermines peoples rights to life,security, food, water, health, shelter, andculture. By failing to tackle climate chanwith urgency, developed countries areeffectively violating the human rights omillions of the worlds poorest people,including people in the Pacific Islands.

While our leaders and governments afailing to act responsibly on this urgenthreat, a group of young leaders from tPacific Islands and Australia areresponding to the calls of these poorPacific Island people. Project SurvivalPacific (PSP) is a solely youth-ledinitiative which believes that the worldneeds to listen to the voices of those onthe climate frontlines. It is working tosupport these Pacific Islanders inadapting to climate change, providingleadership and life skills, as well ashelping to amplify the voice of the Pacregion on climate change and to increathe capacity of Pacific country delegatto have their say at internationalnegotiations, including the United

KRISHNEIL NARAYANis a Pacific youthleader against climate change, and is part of the Project Survival Pacific media team.

On the climate frontlines

Industry accounts for almost 40% of global CO2 emissions,and CO2 is one of the main contributors to the greenhouseeffect. Pacific Islander Krishneil Narayan calls for action tosave the region from looming disaster.


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Nations climate change conferences (theConference of the Parties COP).

Last year, PSP supported a delegation of Pacific Island youths to the UN COP15 inCopenhagen. This year again, PSP willassist some Pacific Islanders to go to theUN COP16 in Cancn, Mexico, so that the voices of Pacific people are not drownedout by the greed of the bigger andpowerful nations.

In June 2010, PSP, together with

concerned youth leaders of the Pacific,initiated the regions first ever PacificClimate Leadership Programme. Justabout everyone who participated hadstories to share of flooded villages, risingseas, disappearing coastlines, andimmediate and visible degradation of natural surroundings of all kinds, not tomention increasing erosion of the region'scultural richness. But, they still had hope;hope that they will survive at the end of this fight, and hope for a betterenvironment and life in the future.

They also have the following questionsto ask the people of the powerfulindustrialized nations.

As GHG emissions increase, changingthe global climate, triggering rises in sealevels, changes in rainfall patterns, bleaching corals, eroding shorelines, andreducing our fisheries, we, the PacificIslanders, would like to know what you inthe industrialized economies would do if the situation was reversed?

Would you want us to be concernedabout your future survival and that of yourchildren, or to merely consider you ascollateral damage in order to maintain acomfortable lifestyle?

Sustainable technological systems thatcan provide the worlds population withsignificantly more energy services than arecurrently provided by high GHG-emittingsources have been developed, but notdeployed, due to perceived higher costs.For example, the worlds oceans have many

times the energy needed by the globalpopulation, and it can be harvested withlimited GHG emissions.

How would you feel if you were a citizenof the Pacific Islands and you knew therewere low carbon energy alternativesavailable that can provide the globalpopulation with productive andenjoyable lifestyles many times over, andthus spare us from destruction, but itsconsidered too much of an economic

sacrifice to adopt them?For thousands of years, the people living

on small island states have generally beenresponsible stewards of their environment,and have acted as custodians of almost aquarter of the worlds oceans, aresponsibility that is taken very seriously.We have also played major roles in theevolution of the global maritime andtourism industries, with the tourism sectoraccounting for between 45% and 80% of gross domestic product in most smallisland states today.

We wish to continue welcoming visitorsto our islands, and we also want to enjoysome of the luxurious lifestyle enjoyed bymany in the developed countries alifestyle that can continue on the basis of alternative, sustainable energy sources thatcan help reduce the unprecedented rate of GHG emissions. n

They talk about us moving. Butwe are tied to this land. Will wetake our cemeteries with us?For, we are nothing without ourland and our ancestors.


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WIM NAUD is Senior Research Fellow atthe United Nations University WorldInstitute for Development EconomicsResearch (UNU-WIDER), and directed itsPromoting Entrepreneurial Capacityproject. He is editor of Entrepreneurship and Economic Development , and co-editorof Innovation, Entrepreneurship and Development.

Entrepreneurs, called heroes byThe Economist in March 2009, appear upon closerscrutiny to be rather irrelevant, and evenimpotent, in many developing countries.Three decades ago, Nathan Leff was of theopinion that entrepreneurship is no longera problem nor a relevant constraint on thepace of development in developingcountries. As development economists like topoint out, the vast majority of entrepreneursin developing countries are involved in microand small enterprises (MSE), often informal,contributing little to poverty alleviation andgrowth. The enthusiasm for promotingentrepreneurship is even more perplexing inthe light of weak and ambiguous statisticalevidence on whether entrepreneurshipcauses economic growth. Results do notseem to be very robust with regard to

definitions, time periods, quality of data, orestimation methods; reverse causality cropsup. Some economists even report a negativerelationship between entrepreneurial activityand economic growth.

Added to this is the danger that well-intentioned support policies forentrepreneurship may have unintendednegative consequences. These includepatronage, corruption, and rent-seeking,and the prolonging of the life of inefficientand low-productivity firms. Moreover, asProfessor William Lazonick has noted,policies that place too much stress onentrepreneurship as the key to economicdevelopment can undermine collective andcumulative processes of organizationallearning required for innovation. Also,general policies to facilitate the entry of entrepreneurs may disproportionately

encourage entrepreneurs with lowentrepreneurial ability, leading banks reduce their overall extension of credit.

Given that entrepreneurs may bepotentially irrelevant and/or impotent, anthat entrepreneurship policies can befraught with potential pitfalls,governments, donors, the UN-system, andevelopment agencies need to treadcarefully. A two-year WIDER researchproject has investigated how

entrepreneurship can be promoted fordevelopment, and why entrepreneurshipmatters for development. This articleshares some of the ideas emanating fromthe project.

Why entrepreneurship mattersDespite this rather pessimisticintroduction, the project confirmed thatentrepreneurship does matter. The reasothat the relationship betweenentrepreneurship and economicdevelopment is so precarious in empiricstudies is because these studies very ofteuse either inadequate measures of entrepreneurship and development, orrelatively small sample sizes. Most meaeconomic development in terms of economic growth, per capita income, orproductivity. While these are important,economic development, and, more broadhuman development, are about more tha just growth or monetary measures of performance. With data and measuremeproblems continuing to bedevil policyresearch in entrepreneurship, the small bsteady recent trend towards randomizedfield experiments and studyingentrepreneurship and human well-beingto be welcomed.

Although many economists aredismissive of entrepreneurship indeveloping countries, many others are nMany consider MSEs, including informand survivalist-type entrepreneurs, to important for poverty alleviation.

Entrepreneurshipand industrialization:tread carefully!

In what is a regular feature, distinguished contributors consider one of the controversial issues of the day. Is entrepreneurship important for developing countries, and, if so, what is the best way to support it?

Well-intentioned supportpolicies for entrepreneurshipmay have unintendednegative consequences

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Employment growth in the MSE sector indeveloping countries is often substantial.With the majority of MSEs in developingcountries owned by women, theircontribution to female empowerment andto the health and welfare of households ispotentially important.

The WIDER project studiedentrepreneurship across a spectrum of circumstances that entrepreneurs couldface: from high growth, innovative

situations, to those marred by armedconflict and economic stagnation. Thetenacity and dynamism of entrepreneurswas clear from driving innovation indeveloping countries, to providing survivaland resilience in conflict situations. High-growth entrepreneurship was found to beprevalent even in the least developedcountries. Firms that survive persistentconflict do so because of entrepreneurswho are able to adjust their businessmodels in the face of conflict, for instance, by reducing technological sophistication,relocating supply chains and productionlocations, or reducing long-terminvestment. These adjustments may reduceprofitability or even the size of firms, butultimately they contribute towards thefirms survival. And firm survival duringconflict situations is important becauseentrepreneurial activity may quicklyrebound once hostilities cease.

What role for policy?The fact that entrepreneurship may matterfor development does not automaticallyimply that government policies shouldsupport it. Designing policies fordevelopment through the promotion of entrepreneurship is complicated. To avoida number of potential pitfalls, it may behelpful to underpin policies by answeringat least two questions.

First, what is the rationale for wanting tosupport entrepreneurs? Many see therationale to be market failures. Markets


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Good institutionsImportant as it no doubt is, buildingappropriate institutions in developingcountries is notoriously difficult.Institutions are endogenous and relativelylittle is known about the co-evolution of institutions and entrepreneurial behaviour. Well-intended institutionalreform itself may create uncertainties thatcan have unwanted outcomes, such as theentrenchment of former elites and rent-

seeking behaviour.Moreover, not everybody agrees that

encouraging the building of goodinstitutions is all that should be done. Therange of entrepreneurship rates acrosscountries, even when controlled for variations in institutional quality, suggeststhat specific policies may have an influenceon the supply and quality of entrepreneurs.And just restricting governments role toimproving the environment for doing business may not work. Entrepreneurshiphas been vital in the rise of such emergingeconomies as Brazil, China, and India.What all three of these countries have incommon is a very low score and rank onthe World Banks Doing Businessindex.Brazil is ranked 122nd, China 83rd andIndia 120th, out of 178 countries in 2008.But their development success may beargued to be at least partly due to proactivegovernment support for entrepreneurs.

In India, venture capital funding standsout; in China, the transformation andprivatization of state-owned enterprises,learning from foreign firms through

encouraging the inflow of FDI, the expliencouragement of high-techentrepreneurship, and huge investmentsinfrastructure, particularly trade andtransport-related infrastructure, providedexamples. The cases of India and China illuminating, but by no means unique.Countries which are seen asentrepreneurial today particularly theUSA, had important proactive state suppfor private sector development.

Industrial policySuch industrial policy is, in thisperspective, a form of entrepreneurshipdevelopment. Selective industrial polici whether explicitly termed as such, orreferred to as competitiveness policieswill increasingly take centre stage after global economic and financial crisis, asgovernments grapple with the impacts orising commodity prices, growinginequality, sluggish growth, murkyprotectionism, and the imperative to adolow-carbon methods of industrializationThe dangers inherent in broader selectivindustrial policy are well-known, and inmany cases are similar to what has beendiscussed here. Hence, extreme cautionrequired. A strong case emerges for a nedebate on industrial policy, in particularsupported by new research and a morenuanced understanding of how to suppoentrepreneurship as a central plank of industrial development.

A measure of the success of entrepreneurship development policies ideveloping countries is that one would san initial reduction in the rate of entrepreneurship. This would reflect thefact that fewer people have to becomeentrepreneurs by necessity, and can instechoose to enter wage employment. Goodentrepreneurship policy gets people withlow entrepreneurial ability out of entrepreneurship and into jobs. It does th by creating the conditions where people

fail in many respects but particularlywhere there are externalities.Entrepreneurs innovation may have more benefits to society as a whole than to theindividual entrepreneur; entrepreneursmay furthermore create incentives forpeople to invest in their human capital because they demand skilled labour;entrepreneurs illustrate to followers theadoption of new technology, they provideinformation to external parties on whatkind of business may be profitable in aparticular location, and they may influencethe general business environment foreverybody by pressuring or lobbyinggovernment for regulatory changes.Understanding the main rationale isimportant in thinking about how thepositive externalities associated withentrepreneurship can be maximized andhow the negative externalities of supporting entrepreneurs (such as that thequality of the pool of entrepreneurshipmay be lowered by too easy access) can beminimized.

Second, can entrepreneurs in a particularcontext be practically supported, even if there is a rationale? One view is thatgovernments cannot raise the supply of entrepreneurs, but can merely influencethe allocation thereof. Accordingly, all thata government should do is get theinstitutions right, i.e. ensure theprotection of property rights and a well-functioning legal system, and maintainmacroeconomic and political stability andcompetitive tax rates. Others argue thatgovernments best course of action is toimprove the environment for doing business. The World Bank publishes a setof Doing Businessindicators, and countriesare encouraged to improve on these, inter alia for the sake of encouragingentrepreneurship.

HOT TOPIC

Good entrepreneurshippolicy gets people withlow entrepreneurial abilityout of entrepreneurshipand into jobs


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with a strong ability for entrepreneurshipwill see it in their interest to start up newfirms, to create jobs, to grow their firms insize, to raise the incentives for educationand migration to urban agglomerations bydemanding skilled labour, contributetowards diversifying an economy byuncovering its production possibilities,and demonstrate and facilitate theadoption of new technology.

Ultimately, such successful

entrepreneurship would result in aneconomy whose structure is dominated bythe service sector, populated by high-technology firms and highly educatedworkers. Entrepreneurial flourishing, andappropriate support for entrepreneurship,is at the heart of the process of structuraldevelopment and industrialization. Thefailure of structural development andindustrialization, and the failure of manycountries to compete, is thereforeultimately a failure of entrepreneurshipdevelopment policy. n

entrepreneurship contributes to economicdynamism have been largely ignored.

Specifically, three crucial aspects of the

debate have been underplayed:l that entrepreneurship has long existedin a vibrant form throughout Africa andAsia, and in some cases for centuries;l that those countries that transitionedinto major industrial economieselsewhere were distinguished by changingeconomic systems, structures and lawsrather than entrepreneurship; andl entrepreneurship does not have thesame benefits in all economic systems itis under true capitalism that it hasgenerated the returns we associate with itin the West.

To focus on entrepreneurs is to neglectthe difficult but potentially far moredynamic aspects of economicdevelopment that developing countrieslack. The question is not doesentrepreneurship support economicdevelopment, but under whatcircumstances does it do so?

The entrepreneurial impulseThat entrepreneurship is in no shortsupply in the developing world is self-evident. If entrepreneurship is taken to bethat characteristic that finds or createseconomic opportunity and seeks toexploit it, it is difficult to think of a singleplace in Africa where it is not abundant. Inrural Malawi today, if you expressadmiration for the pattern of a dress ordesign of a shirt, you will either be offereda roll of the same material or the item of clothing itself. This aim of transforming

RANIL DISSANAYAKEwas trained as aneconomist and historian. He nowspecializes in aid effectiveness, havingadvised the Government of Malawi in thisfield for almost four years, before taking asimilar post in Zanzibar. He can also befound blogging atAidThoughts.

Recent debate on the role of entrepreneurship in the economicdevelopment of the worlds poorestcountries has been largely misconceived.While many have focused on the need tosupport entrepreneurs or to expand theiropportunities, the historical and structuralaspects that form the context in which

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what some of these issues were. In The Birth of the Modern World , the historianChris Bayly looks at this very question:what was it about Europe and NorthAmerica that transformed theirentrepreneurship into massive trans-national economic entities, while othercountries languished? He comes up witha range of characteristics, some of whichare no longer relevant today. However, anumber still are.

First among these was the importanceof establishing transport links, bothinternally where an internal market exists,and externally where tradingopportunities are available. This remainsa massive drawback, particularly forAfrica: the World BanksDoing Businessreport suggests transport costs in Africaare significantly higher than elsewhere.Entrepreneurship requires access tosufficient markets to be fully realized.

Bayly also cites the move to modernforms of intensive, investment-heavyagriculture which produced the domesticsurplus required to power theurbanization and industrialization of European and North Americaneconomies, without requiring too great animport burden. Yet, food security in muchof Africa remains fragile, largely becauselandholding patterns rule out the move tomore intensive, commercial farming.

Additionally, the stability (geographicaland political) of dominant groups createdan incentive to invest the possibility of accumulation of the returns to

entrepreneurship provided a powerfulaccelerant to its realization.

The Mystery of CapitalThe other two central areas that Baylycites are the importance of theemergence of modern financialinstitutions to provide credit, and newlegal structures to stabilize the legalstatus of risk and returns to ownership.These factors form the central concern

Hernando De Soto, whose book, The Mystery of Capital , is probably the mostimportant contribution made in the lasttwenty years to the question of ThirdWorld entrepreneurship. De Sotosargument is essentially thatentrepreneurship is limited by theavailability of capital. What makes thisargument so powerful is that heconceives capital in a far more complexway than it is commonly thought of.

De Soto shows that the value of assetheld in the Third World is immense several trillion dollars. Yet little of thiscan count as capital since it is not bound by the central factor that createscapital: a functioning, efficient legalsystem that recognizes and regularizesthe popular notions of property. Onceassets are converted into legal propertythey obtain a number of characteristicsthat convert them into capital. Theireconomic potential is fixed in theprocess of legally defining what theycontain of value; they become part of asingle network of information, whichenables them to be traded, accumulateand acquired with ease; the owners aremade accountable and legally liable fothe asset, thus reducing risk associatedwith borrowing on them and so on.Combined with a strong borrowing andlending system, capital provides the fufrom which entrepreneurs can powertheir economic schemes.

For De Soto, therefore, our concern fo

desires into profit is the essence of entrepreneurship, and the inventivenesswith which it is achieved is staggering. Atthe port in Dar es Salaam, it is possible tocharge a mobile phone at small stationswhere a car battery is used to power arange of phone chargers for a fee.Aggregated over the numbers of travellersembarking on ferries daily, this providesthe basis of a sustainable company of sorts. The entrepreneurial impulse ispowerful in Africa. It is, however, oftenunable to find expression or is limited tosmall enterprises.

This should be no surprise for scholarsof the developing world. As far back as the18th and 19th centuries, Chinese, Arab,Asian, and African merchants were takingopportunities provided by new tradingrelationships and routes to move theirgoods across the world in return forincreased profits. While Europeansgenerated the lions share of the value-added in these relationships, they wereresponding to an acute entrepreneurialimpulse. A range of historians haveshown that vivid successes were beingmade even in the pre-colonial period inAfrica, Asia, and the Arab world.

Addressing the constraintsEntrepreneurship is therefore abundant,and has historically been so. Its absence isnot the constraint to industrialization ordynamism in the economic path of thedeveloping countries. The issue is thatentrepreneurship struggles to find anappropriate outlet through which it canachieve the massive accumulation andgrowth that has characterized theEuropean economies. It is addressing theconstraints to this outlet that we should be devoting our energies. Again, ahistorical analysis can help us untangle

Crucially for Westerndevelopment, the stability of elite groups allowed them toreap the benefits of investmentand entrepreneurship


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issues that Bayly identified as crucial forWestern development was that thestability of elite groups allowed them toreap the benefits of investment andentrepreneurship.

A similar argument is the root of KarlMarxs analysis of why capitalism as asystem allows entrepreneurs the freedomto power economic progress. Marxdemonstrated that capitalism was morethan markets or entrepreneurs. Thesehave existed since time immemorial: it isdifficult to think of any society inrecorded history where each did not exist.What distinguishes capitalism fromearlier systems are the specific relations between those who have the means toaccumulate, and those who must work fora wage. Essentially, under capitalism someentrepreneurs are able to accumulatecapital, and can maintain this capital with

some stability, in the sense that it is notarbitrarily seized from them; they thenapply labour from a pool of property-lessunemployed to their capital in order togenerate profits. Because the capitalistdoes not use his own labour and takes theexcess of revenue after wages are paid ashis profit, his incentive is always to applymore capital to his property and to hislabour force in order to increase therevenue generated from a constant labourforce.

Incentives and potentialA smallholder, or a small self-employedentrepreneur, does not have the sameincentives or potential. His horizons arelimited on two dimensions: if he himself is his primary source of labour, hisincentives as an entrepreneur, and as alabourer who values rest and recreation,are not in harmony; secondly, his limitedasset holdings restrict the amount of capital he can access the problem DeSoto identified. As Lindsay Clinton notedin a recent article for The Wall Street Journal, a focus on entrepreneurstherefore gives no guarantee that the vastnumbers of unemployed will see any benefits. We should instead be looking toallow a smaller pool of entrepreneurs to build the economic empires that canemploy thousands, and form the basis of acompetitive economy.

None of this is to suggest thatentrepreneurship is unimportant. It is anecessary but insufficient condition foreconomic development, one that isalready satisfied in almost all countries.Our focus should be on the supportingconditions that are necessary to giveentrepreneurs the platform and capacityto catalyze economic growth andemployment. n

entrepreneurs is misconceived. We should be far more exercised by the need toconvert their assets into capital, subjectcurrently to one major constraint. Thisconstraint is the legal system. In far toomany countries, there is currently eitherno recognition of what is socially acceptedto be private capital or there areintolerable barriers of bureaucracy. Toown legal property in Haiti, for example,takes up to 19 years.

The importance of stabilityYet, even if we resolve the outstandingissues concerning transport links, theneed for commercialized agriculture, andthe currently inadequate legal andfinancial systems, there may still be afundamental constraint thatentrepreneurs must overcome: theexistence of stable capitalism. One of the

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n The United Arab Emiratesand Malaysia are the twohighest-ranking developingcountries in the Global Innovation Index 2009/10 . The

index looks at 132 countries andcompares the enablers thatstimulate innovation and theoutputs that are the results of innovation activities. The fiveenablers are institutions;human capacity; general andICT infrastructure; marketsophistication; and businesssophistication. The two outputsare scientific outputs, and

producing countries, particulaon infrastructure developmenprojects, will fuel regionalgrowth of an annual average rof 4.6% in 2012-15.

Countries in North Africa,which are highly dependent othe European Union (EU) as aexport market for both goodsand services, and as a source o

workers remittances, will recmore modest growth, given thsubdued economic outlook fothe EU and some appreciationtheir currencies. Growth isunlikely to be sufficient to redcurrently high levels of unemployment among thesecountries typically youngpopulations. (EconomistIntelligence Unit)

The recently published 2010 Global ManufacturingCompetitiveness Index , acollaboration between Deloitteand the US Council onCompetitiveness, is based on theviews of more than 400 seniormanufacturing executivesworldwide. By drawing directlyon the experience of manufacturers, the index deliversa unique perspective on theglobal competitive landscape.

According to the seniormanufacturing leaders whoparticipated in the study, themost important drivers of globalmanufacturing competitivenessare the classic factors of production labour, materials,and energy.

The next four drivers arecontributory governmentforces: economic, trade, financialand tax systems; the quality of physical infrastructure;government investments inmanufacturing and innovation;and the legal and regulatorysystem.

The final three drivers aremore localized: the suppliernetwork; the dynamics of thelocal business environment,including the size of the marketopportunity and the intensity of local competition; and the qualityand availability of healthcare.

The executives were asked torate the overall manufacturingcompetitiveness of 26 countries,currently, and in five years time.The results reveal that a newworld order for manufacturingcompetitiveness has emerged.

The rise of three countries inparticular China, India, and theRepublic of Korea appears toparallel the rapidly growing andimportant Asian market. Thedominant manufacturingsuperpowers of the late 20thcentury the United States, Japan, and Germany are nowlagging in comparison to thesethree Asian juggernauts.

A review of the remainingcountries on the index indicatesthat several newcomereconomies are soaring inimportance as manufacturinghubs. In particular, executivesexpect Brazil, Mexico, Poland,and Thailand, to improve theirmanufacturing competitivenessin the next five years, either dueto their natural resources or theattributes of their workforce. Alsoexperiencing significant progresson the index are the economiesof Eastern Europe and Russia,which are showing strongcompetitive potential.

trends

Manufacturingcompetitiveness

1 China2 India3 Republic of Korea4 Brazil5 United States of America6 Mexico7 Japan8 Germany9 Poland10 Thailand 2010 Global Manufacturing Competitiveness Index

BUSINESS MATTERS

creative outputs and well-being.The index, produced by theINSEAD business school, incollaboration with theConfederation of Indian

Industry, uses a mixture of harddata collected by internationalorganizations, and survey datafrom the executive opinionsurvey conducted annually bythe World Economic Forum.

At the top of the list of the 132countries included in the indexare Iceland and Sweden. The toptwo in Africa are South Africaand Tunisia; in Asia: China,

Hong Kong SAR and Singapore;and in Latin America: Costa Ricaand Chile. Of the 15 LeastDeveloped Countries covered,Mauritania and Lesotho head

the list. (INSEAD)

n The Economist IntelligenceUnit reports that economicgrowth in the Middle East andNorth Africa has picked up in2010, supported by higher oilprices and a stronger globaleconomy. In 2011, higher oiloutput and persistently highgovernment spending in oil-

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n The 2010 Ibrahim Index of African Governance showsrecent gains in manycountries in human andeconomic development, butdeclines in political rights,personal safety, and the rule of law. In the SustainableEconomic Opportunitycategory, 41 of Africas 53

states improved. Ten of thesewere cited as having seennotable improvements overthe past five years: Angola,Burundi, Cape Verde, Egypt,Liberia, Malawi, Mauritius,Namibia, Sierra Leone, andSwaziland. (The Mo IbrahimFoundation)

A company producing low-cost,high-quality, durable solarlanterns has won the prestigiousAshden Award for SustainableEnergy for 2010. Thed.lightdesign company makes solar-rechargeable LED lanterns thatare lighting up the lives of people in developing countrieswho previously relied onkerosene lanterns and candles.

The solar lanterns aredeveloped and tested at thecompanys headquarters inChina, Hong Kong SAR, aremanufactured and assembled inShenzhen, China, and are thensold in over 32 countries acrossthe world, with the main marketsin India and East Africa.Founded in 2007, d.light recentlyannounced that sales of itslanterns had brought bright,clean, and affordable lightingalternatives to a total of over oneand a half million people.

Until now, people indeveloping countries who livewithout access to electricity havehad to rely on kerosene andother fuel-based sources for

lighting. These produce hedamaging fumes and smokprovide poor light, and arehazard. Kerosene is alsoexpensive, eating up as muhalf of some householdsmonthly income. The d.liglanterns cost between US$US$45, depending on the m

For d.light, innovation indistribution channels is asimportant as innovation inproduct design and technoThe lanterns are marketedthrough the usual networkdistributors and dealers, bu by rural entrepreneurs (Rpeople with some standingtheir community who buy solar lanterns at a time fromdealers and sell them at a pin their own village. Someallow potential customers lantern for a few days befocommitting to buying it.

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n International Green EnergyConferenceNovember 22-23,Kuala Lumpur, Malaysiawww.greenenergyconference.org

n UN Climate Change Conference COP16November 29 December 10,Cancn, Mexico

www.cc2010.mx/en

n World Climate SummitDecember 4-5, Cancn, Mexicowww.wclimate.com/World_Climate_Summit

n The Water and BusinessConferenceDecember 8-9, London, UK www.ethicalcorp.com/water2010

n CCS World MENA 2010December 13-15,Doha, Qatarwww.terrapinn.com/2010/ccsmena

n World Future Energy Summit January 17-20, 2011,Abu Dhabi, UAEwww.worldfutureenergysummit.

com

n Global Biofuels Summit January 26-27, 2011,Barcelona, Spainwww.flemingeurope.com/energy-conferences/europe/global-biofuels-summit-2011

n Third annual event on thWomens EmpowermentPrinciplesMarch 9-10, 2011,New York, USAwww.unglobalcompact.oIssues/human_rights/equ

means_business.html

The Economists second aIdeas Economy: Innovatioevent: Entrepreneurship indisruptive worldMarch 23-24, 2011,Haas School of BusinessUniversity of California,Berkeley, California, USAhttp://ideas.economist.co

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How is it decided which country is an LDCand which isnt?Within the United Nations system, and ingeneral within the community which is deal-ing with the definition and the concept of theLDC group, there is a lot of debate about cri-teria which can really definitively distinguishthese countries from the rest of the countriesin the world. And these criteria have under-gone various metamorphoses that have

evolved over time. The current three majorcriteria which are used to identify LDCs arethe following:l A low-income criterion, based on a three-year average estimate of the gross nationalincome (GNI) per capita (under US$905 for in-clusion, above US$1,086 for graduation);l A human capital status criterion, based onindicators of nutrition the percentage of population undernourished; health themortality rate for children aged five years orunder; education the gross secondary schoolenrolment ratio; and the adult literacy rate;l An economic vulnerability criterion, basedon indicators of population size; remoteness;merchandise export concentration; share of

Are there enough benefits to being an LDthat if I was president of a country I wouwant that, or is there so much stigma attachethat I wouldnt want it?There is a stigma attached to it because are somehow perceived as one of the oamongst the poor. When this category wastroduced, two countries really didn't wan be there. One of them was Ghana. The otwas Zimbabwe. They were allowed to op

because, if you don't want to be there, nobcan force you to be there. But on the othand, you also exclude yourself from the befits or the preferences which are associawith being included.

Although there is a bit of a stigma, the iis that you are going to utilize this windowopportunity provided by the support meures and get off that list as soon as possiSo, the issue is rather that by being recognias structurally handicapped, you use wha being made available to you in the way of port measures, and you make good use of t

Unfortunately and that is the whole isnow notwithstanding the use of suppmeasures over a period of 30 to 40 years,

Helping the worldsLeast Developed Countries

DEBAPRIYA BHATTACHARYA iadvisor to the Secretary-General of thUnited Nations Conference on Trade Development, and is tasked withpreparing the strategy documents whwill feed into the preparatory processthe 2011 UN LDC conference.

Debapriya Bhattacharya previews the issues to be

discussed at the Fourth United Nations Conference onLeast Developed Countries (LDCs) which will be heldin Istanbul, Turkey, in May 2011. A central dilemma, heexplains, is that economic growth in the LDCs hasfailed to lift enough poor people out of poverty.

agriculture, forestry and fisheries in gross do-mestic product; homelessness owing to natu-ral disasters; instability of agriculturalproduction; and instability of exports of goods and services.

So, income, human assets, and vulnerabil-ity these are the three sets of criteria whichessentially identify the list of LDCs. The UNhas a mechanism where every three years thislist is reviewed and new countries are in-

cluded, and if we are lucky, some countriesgraduate from the list.You said that the UN has its processes, its stan-dards and its numbers, and assesses who is inand who is out. Why does it matter who hasLDC status?Among the developing countries, these leastdeveloped countries have been singled out toreceive more focused public support and in-ternational support measures, and to givethem more attention so that they can over-come their structural problems, their struc-tural handicaps, or their impediments to

development. So, it is basically for targetingthose countries that need the most interna-tional support.


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two countries have graduated from thisgroup. Cape Verde recently, and before that, itwas Botswana.

And now there are three countries in thepipeline which might graduate next year. Oneof them is the Maldives, again a small islandcountry which is threatened by climate changeand other things. Samoa is the second one, andthe third is Equatorial Guinea. The latter has alot of oil, and its current per capita income is

in the worlds highest income category.How is this group of countries different or thesame from Paul Colliers bottom billion de-scription of the worlds poorest people?The issue is that this bottom billion cutsacross many countries. It is a set of popula-tions who are the poorest of the poor. But weare not talking about poor people here. We aretalking about poor countries. The most im-portant thing here is that these countries arehandicapped in certain ways which are noteasy to overcome by relying solely on their do-mestic efforts. Some handicaps can never be

overcome. For example, you have dozens of landlocked countries, like Bhutan, Nepal, andsome in Africa low income, but at the sametime landlocked. This is a major problem forthem. Similarly, you have island countries,with very small populations, which can getwashed away by every tidal wave.

These are major handicaps which have tobe taken into account. Haiti is a classic exam-ple of how vulnerable these economies are. Acountry can be hit, not only by man-made dis-asters, but also by natural shocks. The samething happened with the tsunamis in the Pa-cific a couple of years back. So, even if you aredeveloped, but you are very vulnerable, yourachievements are very fragile and any one ex-ternal shock can wipe them out, just like that.So, it is more than just a matter of nationalincome.So this class of countries, with these particularproblems, will be the focus of the conferencethat you are responsible for preparing for inMay 2011. How is this - the Fourth UN LDCconference - going to be different, and what are the things that you would hope that might be achieved there that would help these coun-tries in ways they havent been helped before?In order to design new methods, new inter-ventions, new support measures, or the newgeneration of public policies to accelerate thegrowth process of development in these coun-tries, we need to understand how they havebeen performing during the last decade.

If we take a very close look at these coun-tries, we see that during the last decade before2006/07, before the food crisis, the fuel crisis,

and the financial and the economic crises setin, they were doing pretty fine in terms of growth. They were expanding exports, and re-ceiving relatively high levels of foreign directinvestment (FDI). Official development assis-tance flows had also increased at a certainlevel. But what was very curious was thatnotwithstanding all the apparently improvedperformances of these countries, and the im-proved macroeconomic indicators as well, we

saw that the role of the manufacturing sector,the processing industries which can providegood quality jobs and even incremental jobs,was not growing. So there was growth, butthere was no modern sector growth.

Then, in terms of exports, there was noproduct diversification. It was one commod-ity which was dominating, either the manu-facturing of textiles or extractive industries fuel or other minerals, in the case of most of African countries. There was no diversifica-tion. In the case of FDI, most of the invest-ment went into mining and the extractiveindustries.

So, the question we must address is hownew support measures can change these cir-cumstances in order to achieve inclusive, even broad-based, productive growth. Productivegrowth means manufacturing growth andagriculture sector growth because agriculturewas very neglected during the last decade before the latest food crisis. And it also meansservices which can support the investment environment and all these other areas by creat-ing jobs for people.Is the enabling environment for the growth of these sectors largely in the control of the richcountries or the larger developed countries, oris this mostly about domestic policy decisionsthat would be made by the leadership withinthe LDCs themselves?What we are talking about here is a compact,a development understanding between thedeveloped countries and the LDCs. And nowwe have a third party, the emergingeconomies. So, you have the developed coun-tries, the advanced developing countries, andthe least developed countries. So, these threewill come together with what we call shared but differentiated responsibility. The objec-tives are shared, but in terms of how to deliverthem, there is a differentiated responsibility,depending on the sector.

Domestic policy, good governance, anti-corruption measures, a good legal system, allthese things are very important, and are in thecontrol of the LDCs themselves. But in orderto modernize them, they might need re-sources, and these resources and expertise are

not always available internally. And givencompeting nature of their investment dmands or their public expenditures for heaand education, in order to meet that gap thwould need some kind of support. One wobviously is of course to get more foreign The second way is to get into new markwhere they can sell their products. And third is to bring in investment into the arewhich creates good jobs sustainable de

opment by way of investment in areas otthan the extractive sectors.

All these issues will be coming togethe

TheAmeric

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Least DevelopeCountries

* Also Small Island Developing States (SIDS) # Also Landlocked Developing Countries (LL

Small Island Developing States are marginalizefrom the global economy by the combinedadverse consequences of their small size,remoteness from large markets, and higheconomic vulnerability to economic and naturashocks beyond domestic control.

Landlocked Developing Countries face seriousconstraints on their overall socio-economicdevelopment in the form of lack of territorialaccess to the sea, remoteness and isolation fromworld markets, and high transit costs.

1. Haiti *


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terms of how to precipitate a structuralchange in these countries so that they can become better integrated into the globalizedworld, so that the benefits of developmenttrickle down to the poorest of the poor, and tomeet some of the Millennium DevelopmentGoals, too.When we think of aid, trade, and investment,we usually focus on the policies of the highincome countries, but of course, as you point

out, we now have these big emerging market economies that are increasingly powerful, withmarkets that are sometimes larger than those

of the rich countries. How do they factor intothis discussion with the LDCs?One of the major areas that has changed, thenew context for the development challengesfacing the LDCs that has changed since 2001when the last conference took place, is theemergence of the global south, the new emerg-ing economies. LDCs now sell more than 50%of their exports to the developing economies.But the problem is that most of these exports

are minerals and fuels. The less than 50% of their exports that go to the developed countriesare all manufactured goods, including textiles.

There is a question of quality versustity here. The issue now is how the LDget access to these new emerging mwith better products, and whether thhelp with diversification and also in tertechnology transfer. This is the new coand this is where the shared responsissue comes back again.l The above is an edited and abridged verinterviewconducted by Lawrence MacD

the Centre for Global Development, ancast as part of the Centres Global PWonkcast series.

Africa33

Asia andthe Pacific

15

1. Afghanistan #2. Bangladesh3. Bhutan #4. Cambodia5. Kiribati *6. Lao PeoplesDemocratic Republic #7. Maldives *8. Myanmar 9. Nepal #10. Samoa *11. Solomon Islands *12. Timor-Leste *13. Tuvalu *14. Vanuatu *15. Yemen

1. Angola2. Benin3. Burkina Faso #4. Burundi #5. Central AfricanRepublic #6. Chad #7. Comoros *8. Democratic Republicof the Congo9. Djibouti10. Equatorial Guinea11. Eritrea

12. Ethiopia #13. Gambia14. Guinea15. Guinea-Bissau *16. Lesotho #17. Liberia18. Madagascar 19. Malawi #20. Mali #21. Mauritania22. Mozambique23. Niger #24. Rwanda #

25. So Tom andPrncipe *26. Senegal27. Sierra Leone28. Somalia29. Sudan30. Togo31. Uganda #32. United Republic of Tanzania33. Zambia #


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Local communities in LDCs across the globehave been hit hard by the global financialcrisis, with the already meagre economic andsocial gains made in recent years beingabruptly put into reverse. Increasingly urgentcalls are now being made for the internationalcommunity to do something to assist withjob creation and income-generating initia-tives to attempt to repair the situation, espe-cially in the very poorest of communities. As

in previous years, one of the most commonly-heard solutions being put forward is microfi-nance which, so the argument runs, is per-fectly situated to help kick-start a bottom-uprecovery and a development trajectory ani-mated by the poor themselves through self-employment and microenterprises.

In spite of much heady rhetoric and up-lifting PR surrounding the microfinancemodel this past thirty years, even long-timemicrofinance supporters now accept that itstrack record is actually very weak indeed. Forothers, the evidence reveals that microfinance

is more likely a part of the development prob-lem, and not part of the solution: LDCswanted sustainable development, but arelargely ending up with microdebt peonage.

With the dominant, commercialized mi-crofinance model increasingly seen as prob-lematic, many international developmentagencies, and LDC governments too, are start-ing to examine what might be better forms of local financial institutions to assist the poor.And what they are finding is that there aremany local financial models and community-based financial institutions that actually havea very impressive record of promoting sus-tainable development and poverty reduction.

The CLP examplePerhaps the most important requirement of alocal financial system in the LDCs is that itshould not simply ameliorate poverty andunder-development, but should move to per-manently eradicate these problems over time.Well-designed and managed community de-velopment banks can do this. The Caja Labo-ral Popular (CLP) in the Basque region of northern Spain is one such locally-owned andcontrolled institution that has succeeded insupporting enterprise development in a his-torically backward and conflict-affectedregion. The CLP is a development bank that

supported cooperative enterprises as thelynchpin around which the community could begin to develop and rapidly reduce poverty ina socially optimal manner. For example, co-operatives were founded near to where themembers lived so they could easily travel toand from work, a decision that gave membersmore free time to enjoy their family lives.Thanks to its deep roots in the community,and because of various democratic checks and balances, the CLP has managed to successfullysteer clear of both corruption and misman-agement. All told, in a little over 30 years, aonce poor region was turned into one of Europes richest, most socially inclusive, andculturally vibrant regions.

Is the CLP experience a one-off? Not at all.Broadly similar results were achieved innorthern Italy after 1945, when a network of cooperative banks and special credit institu-tions (SCIs) were decisive in reconstructingthe physical and social infrastructure de-stroyed during the Second World War. Byquickly mobilizing savings and then recyclingthese savings into long-term investmentfunds geared up to support potentially sus-

tainable and/or fast-growth businesses, escially cooperative enterprises, these commnity-based financial institutions helpedconflict-ravaged region become perhEuropes most economically and socially vanced. Importantly, they were able to devemethodologies to identify the best businprospects and then to carefully support thedown the years. In some cases, governmennancial support was needed (as in the casthe SCIs), but this expenditure could notseen as anything other than a fantastic invement, given the economic development apoverty reduction outcome achieved.

Governance issuesSpurred on by such uplifting examplegrowing number of LDCs have begun(re)explore the idea of local cooperative band other community-based financial instutions. Many accept that the cooperat banking concept is a sound one, but the pamount issue is how to get the governanissues right. Privately owned, profit-drivennancial institutions in many LDCs very ofundermine trust in the community and crea

Milford Bateman arguesthat it is community-drivenfinancial institutions ratherthan microfinance that canhelp poor people in LeastDeveloped Countries moveout of poverty

MILFORD BATEMAN is a researchfellow at the Overseas DevelopmentInstitute in London, United Kingdom,specializing in access to finance andenterprise development issues.

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economic chaos, as seen most recently inNigeria, where the licenses of 224 small privately owned microfinance banks were termi-nally revoked by the Central Bank because of excessive risk-taking and bad corporate gov-ernance. Of course, the cooperative model hasnot escaped similar forms of abuse and cor-ruption, as seen, for example, with the col-lapse of many financial cooperatives in Haitiin 2002. But experience shows that commu-nity-ownership and control can help to in-crease the chances of there being properaccountability to both its savers and to thewider community, as well as enhance effi-ciency as a financial institution.

Some LDCs have been inspired by suc-cesses with the development bank concept atthe national level in emerging economies, asin the case of Brazil. But, at the communitylevel too, there are many creative examples of what can be done. For example, AkwandzeAgricultural Finance (AAF), in South AfricasMpumalanga province, is a 50-50 joint venture between a farmer-owned cooperative(Liguguletfu Co-operative Ltd) and a sugarprocessor (Tsb Sugar). AAF has been able to

help its poor farmer-members permanentlyescape poverty by turning subsistence farm-ing operations into family farms, operatingwell above the minimum efficient scale. In- volving more than 900 of the local sugarfarmers who are members of Liguguletfu, in just a few years AAF has been able to help itsfarmer-members with access to affordableloans (16% interest rates), not just to under-pin their normal operations, but also cru-cially, in view of the need to scale-up in orderto be successful into the longer term to sup-port their expansion plans. The farmers knowthat they need to grow beyond the minimumefficient scale if they are to really becomesecure and enjoy a decent return on theirlabour. Importantly, any profit in AAF is notchannelled away to external shareholders, butrecycled back into AAF to develop more serv-ices, as per the farmer-members wishes.

But it is not just development-driven, localfinancial institutions that can help LDCs todevelop. Many analysts argue that promotingsavings within poor communities is often anequally beneficial way of dealing with poverty.For example, helping the poor to save up for

important purchases, rather than pay hiterest rates on simple consumer loantained from microfinance providers, woa major help to them. And here, dedcommunity-based, saver-owned andtrolled institutions have very often pro be just the ticket. The idea is an old ocourse, stretching back to the buildingety movement founded in the United dom (UK) in the late 18th century. Fo

than 150 years, the UKs building sworked extremely well for the local conity, providing affordable loans for houschases and small business developmenonly floundered when they were demized and commercialized in the early The positive experience of such comm based savings institutions can be replicamany LDCs given technical suppoperhaps, some initial capitalization too

Real empowermentIndeed, there are now many experimen

derway using credit union-type commowned organizations. For example, Americas Saving for Change prograMali involves upwards of 300,000 managing over US$4m in their group The women are helped to avoid contacthe local loan sharks and commercial mfinance institutions, and instead begin swith their own institution. They save foular big-ticket items of expenditure anfor unforeseen emergencies, but they caquickly access sufficient, affordable fstart or expand a real business, as oppo just a simple trading operation. This empowerment, achieved via a commowned financial institution, not gradutrapment in microdebt.

The conclusion to be drawn from the riences of developed countries, and elsewis that local financial institutions are owhelmingly best configured as commuowned and controlled bodies, especiamaximize the chances that they remaicused on local development. Financial coatives, community development bankscredit unions, have been very successfufinancial-sector innovations in many doped countries, and their experience igently needed as the LDCs design theirfinancial institutions in the wake of the gcrash. Above all, the lesson seems to be tneed to take local financial systems out ohands of would-be Wall Street-types angressive, commercialized microfinance tutions, and return them to their righowners: local communities and local peo

The Ikidia Saving for Changegroup holds a weeklymeeting in Domba, Mali.

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STRENGTHENING

PRODUCTIVCHEICK SIDI DIARRA was appointed the United NationsUnder-Secretary-General and High Representative for theLeast Developed Countries, Landlocked Developing Countries,and Small Island Developing States, in 2007. At the time of thisappointment, Mr Diarra was serving as the Permanent Representativeof Mali to the United Nations in New York. During his longdiplomatic career, Mr. Diarra has been actively involved in furtheringAfrican integration efforts and the African development agenda at theinternational level. He has served as one of the lead negotiators onthese issues at the African Union summits since 1982.

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CAPACITY

As the worlds Least Developed Countr(LDCs) increasingly feel the effects of tglobal economic crisis, the UNs CHEICKSIDI DIARRA argues that, in order to buup their resilience, these countries shouland can increase their productive capaBy strengthening three core elements,

productive resources, entrepreneurialcapabilities, and production linkages, thLDCs can produce more and betterquality goods and services. But, for thprocess to succeed, they also need toimplement new policies, devise new forof development governance, and receivmore effective multilateral support.


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resilience

Before the global economic crisis in 2008/2009,the group of least developed countries (LDCs)registered impressive economic advances withreal GDP growth averaging 6% per annum overthe preceding five years. The recent financial cri-sis had its immediate reverberations in develop-ing countries, which were closely linked to theglobal financial markets, as capital took refuge insafe havens and there was a rapid flight of capi-tal from emerging markets to the advancedeconomies, and particularly the United States.The initial impact on the LDCs, however, wassomewhat muted given that many, if not all, werenot as integrated into the global financial mar-ket. However, with the deepening of the financialcrisis, freezing of credit, and the sharp fall in themarket value of private wealth, the LDCs weredrawn into a global crisis of the real economy.

According to the United Nations Conferenceon Trade and Development (UNCTAD), the valueof exports from the LDCs to major importingcountries declined by over 43% in 2009, com-pared to the first half of 2008, whereas the global

value of exports declined by only around 32%during the same period. This sharp decline inexport earnings is largely due to a decline incommodity prices and is associated with declin-ing government revenues and investment.According to the World Bank, remittances todeveloping countries were down by 6% in 2009,although a slight recovery is possible in 2010. Of particular concern is the long-term impact thecrisis is likely to have on the LDCs, given theirinherent economic vulnerability and suscepti- bility to external shocks.

Productive capacity mattersIn this context, it is generally agreed that a keystrategy towards building the internal resilienceof LDCs is the strengthening of productivecapacity. Productive capacities, as defined byUNCTAD, are the productive resources, entre-preneurial capabilities, and productive linkages,which together determine the capacity of a coun-try to produce goods and services, and enable itto grow and develop. In May 2001, the ThirdUnited Nations Conference of the Least Devel-oped Countries adopted the Brussels Pro-gramme of Action for the decade 2001-2010, acomprehensive results-oriented poverty reduc-tion strategy, tailored to the special needs of theLDCs. The Brussels Programme of Action iden-tified the building of productive capacities, inorder to ensure that LDCs benefit from global-ization, as one of seven key commitments between LDCs and their development partners.

By developing their productive capacities,LDCs can rely increasingly on domestic resourcemobilization to finance their economic growth,

lessen their dependence on aid, and attract private capital inflows of a type that can supporttheir development process. Enhanced produc-tive capacities will also allow LDCs to compete ininternational markets for goods and serviceswhich go beyond primary commodities andwhich are not dependent on special marketaccess preferences.

Productive capacity is also of great impor-tance in the struggle to reduce poverty in theLDCs. There is a growing amount of evidenceindicating that aid transfers to the LDCs are

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increasingly being used to alleviate human suf-fering, but substantial and sustained povertyreduction cannot be achieved with such expres-sions of international solidarity alone. This out-come will require wealth creation in the LDCs,and the development of domestic productivecapacities in a way in which productive employ-ment opportunities expand.

How LDCs can strengthen productive capacityGiven the magnitude of the challenges faced byLDCs in terms of capacity building, there is anurgent need for development partners to furthertheir engagement in the form of private sectordevelopment, industrial upgrading, and theenhancing of an enabling environment, such asquality infrastructure and services. At the sametime, LDCs must tackle the challenge of improv-ing their physical infrastructure, especiallyenergy, transport, and communications. Energysupply is critical, as, together with transport andcommunications, it facilitates the internal andinternational connectivity of economic agents.

Another major component in capacity build-ing is social infrastructure, especially for healthand education, which directly relates to the suf-ficiency of human resources supply, skills, andmanagerial capabilities. Moreover, establishingfunctional financial systems, and securing suffi-cient investment in research and development,technological learning, and innovation systems,are crucial to enable LDCs to confront the crisisand accelerate modernization.

For LDCs to expand production, they need tostrengthen three core elements: productive

resources, entrepreneurial capabilities, and pro-duction linkages.l Firstly, LDCs need to effectively utilize andexpand productive resources that includehuman, physical, financial, and natural capital.Investment in human development is a criticalpart of developing productive capacities.l Secondly, a better utilization of the entrepre-neurial capabilities and of enterprises core com-petencies in skills, knowledge, and information,can facilitate the mobilization of productiveresources in order to transform inputs into out-puts, and to invest in, innovate, and upgradeproducts and improve their quality, and even tocreate markets.l Thirdly, the successful mobilization of pro-ductive resources and better utilization of entre-preneurial capabilities should be married todiversified production linkages. These includelinkages between enterprises of different andsimilar sizes, and can take the form of outsourc-ing and sub-contracting relations.

In the actual process of developing produc-

tivity capacity, the foremost stage is to accumu-late capital. The accumulation of capital essen-tially relies on an elevated scale of foreigninvestment and private savings, both domesticand foreign. Therefore, LDCs need a set of incen-tives for savings and investment, as well as aneffective financial system that can attract andmobilize financial resources and developdomestic enterprises.

Further measures are also required to pro-mote technology transfers and increase theproductivity of the labour resource. Enhanced


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supporttechnological capabilities enable products

from LDCs to compete in international mar-kets, and they can also generate more produc-tive employment and build linkages with theglobal economy.

The role of agriculture and industryIn addition, the strategies for developing pro-ductive capacities devised by the LDCs, especiallythose in Africa, which comprise 33 of the 49LDCs, should encompass agriculture. Agricul-ture will have to receive new domestic and inter-national policy attention for it requires increasedinvestment and technological upgrading. Thenew generation of agricultural policies shouldnot focus solely on agricultural production, butwill have to be developed in the context of agribusiness and value chain development. A balance will have to be struck between staplesand cash crops, in order to allow a strengtheningof food security, while also permitting thegrowth of exports;

With a set of pre-conditions and enhanced

adaptive capabilities to use modern technologyand commercialize new knowledge, LDCs canleapfrog several stages of development and moveinto higher degree of industrialization. The chal-lenge is to reach the threshold of competitive-ness in the global market, and in this contextmuch depends on the path that the LDCs take to benefit from regional integration.

How can aid be more effective?During their industrial development process,the capacity of LDCs to incur financial obliga-

tions and mobilize adequate domestic publicand private resources remains seriously handi-capped by various structural constraints. Theseinclude the low diversification of the economic base and the ensuing high economic vulnerabil-ity, persistent poverty levels, the inadequacy of basic infrastructure, geographic disadvantages,and most importantly, the ominously highresource gap. Hence the international commu-nity has been providing aid and loans that have been playing a vital role in financing nationalinvestment in order to attain the MillenniumDevelopment Goals (MDGs) in those countries.

To attain a higher level of effective aid man-agement and utilization of aid resources, allstakeholders should address the aid effective-ness issues. To make aid work for the MDGs,donors should indicate their long-term com-mitment to assist LDCs, and recognize thatfinancial support is the most deliverable long-term strategy to assist these countries. To sup-port the development of productive capacity,aid and other assistance should increase in vol-

ume, be more effectively delivered, and bemore demand-driven, including taking intoaccount the concerns of the private sector andcivil society.

As each country has its own conditions, inde-pendent monitoring and evaluation of aid per-formance at the level of the recipient country isnecessary. In addition, LDC-specific measuresand a country-oriented approach are needed topromote country ownership, channel aid to sec-tors where its impact is greatest, and enhance theefficiency of utilization of such aid.


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Furthermore, LDCs need to strengthen theirproductive capacities for planning and projectimplementation, improve monitoring andevaluation, and ensure better institutionalcoordination among various government agen-c

Making It #4 - On track to prosperity?

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