28 September 2021

New index suggests productive capacities should be priority at LDC5

by Helen Castell / in News

A United Nations Conference on Trade and Development (UNCTAD) report on findings from its Productive Capacities Index (PCI) has concluded that inadequate productive capacity in many least developed countries (LDCs) limits their economic output, leaves them more vulnerable to external shocks and makes them more reliant on a handful of exports. Providing clear guidance on how to foster economy wide productive capacity in LDCs should therefore be an urgent priority at the fifth United Nations Conference on the Least Developed Countries (LDC5) in January 2022, it argues.

Launched earlier this year, the index measures and benchmarks countries’ productive capacities, drawing on 46 indicators under eight categories: energy, human capital, ICTs, institutions, natural capital, the private sector, structural change and transport. UNCTAD describes it as a diagnostic tool designed to track socioeconomic progress and guide evidence-based policy choices.

Key findings from the report include:

Investing in productive capacities supports export diversification

An inverse correlation between the PCI and UNCTAD’s Merchandise Export Concentration Index – with countries like Angola and Iraq, for example, notable for both very weak productive capacities and heavy dependence on the export of a few commodities – illustrates how building productive capacities can support efforts to diversify exports, the report proposes.

High levels of natural capital typically drag down PCI scores for LDCs and landlocked developing countries (LLDCs) and intensify dependence on commodities rather than supporting economic diversification or structural transformation, it concludes.

Weak ICTs, structural change and energy scores hold back LDCs and LLDCs

The index reveals that LDCs lag the rest of the world in seven out of the eight productive capacity categories, with natural capital the outlier. Investment is most needed in the areas of ICTs, energy, human capital, structural change and institutions.

A massive variation between countries’ ICTs score points to a growing digital divide, with LDCs and LLDCs registering the lowest scores, the report finds. Their weak performance in the structural change category also reflects a dependence on commodities exports and insufficient integration into regional and global commodity value chains. LDCs’ and LLDCs’ low performance in the energy category reflects the fact that energy use is concentrated in urban areas and use of energy for productive purposes remains low. This undermines companies’ capacity to produce competitively and export, it concludes.

Strong PCI score associated with high GDP and SDG attainment

A strong positive correlation between PCI scores and gross domestic product (GDP) per capita demonstrates the link between investing in productive capacity and generating wealth, the report concludes. This is largely due to productive capacities determining an economy’s ability to produce goods and services. The index is therefore a valuable tool for policymakers as they plan for economic growth, with its constituent categories providing insights into areas where countries are progressing or lagging, authors argue.

The study also points to a correlation between productive capacity and progress towards achieving the Sustainable Development Goals. For example, in countries with high levels of productive capacities, more adults have a bank account and fewer are informally employed, it notes. These are both key to driving structural transformation that can support progress towards achieving the SDGs’ food security, education and urbanization-related indicators, the report proposes.

Low productive capacity increases vulnerability to external shocks

While PCI trends from 2000 to 2018 point to a strengthening of productive capacities across all geographical regions over that period, Africa’s remained weak, despite moderate improvement, the report shows. It concludes that low productive capacities are both causes and consequences of the continent’s socioeconomic vulnerability to negative external shocks, although there are big variations from country to country.

Asia is a continent of contrast, with a huge gap between East Asia’s top performers of China, South Korea and Singapore and West Asia’s worst performers of Afghanistan, Iraq and Yemen, which have experienced conflict and instability, the report finds. These countries’ weak productive capacities also increase their fragility and vulnerability to external shocks, it argues.

In a separate report on the link between productive capacities and graduation from LDC status, UNCTAD also concludes that developing productive capacities not only propels countries towards graduation but provides a foundation that is fundamental to their success afterwards. Graduating LDCs should therefore evolve their transition strategy from being a short-term plan focused on the use of international support mechanisms (ISMs) into a broad-based, long-term strategy in which expanding productive capacity helps them graduate ‘with momentum’, it argues.

Any views and opinions expressed on Trade for Development News are those of the author(s), and do not necessarily reflect those of EIF.