Originally published on the World Economic Forum blog on 13 January 2022.
- Limited use of technology is inhibiting LDCs' path towards structural transformation.
- These countries can implement measures in several areas to build their technological capacity.
- Innovative approaches to resource mobilization should be explored to fund such transition.
Structural transformation is the process of moving resources from low productivity to higher productivity and skill-intensive sectors, thereby setting development and economic catch-up into motion. While many countries have achieved structural transformation in a matter of decades, the least developed countries (LDCs) have been notoriously slow in this respect.
One of the factors for this lack of structural transformation is LDCs’ overwhelming dependence on commodities for production and exports. According to the United Nations Conference on Trade and Development's Commodities and Development Report 2021, over 75% of African LDCs depend on commodity production for over half of their export earnings, though Asian LDCs have a relatively diversified export basket.
The report also suggests that it is extremely challenging to move away from the trap of commodity dependence and attain structural transformation. Fortunately, a combination of technology and global integration can help countries on this path.
When it comes to technological advancement and its effective use, the LDCs are at the lower end of the ladder. According to the World Intellectual Property Organization (WIPO)'s Global Innovation Index 2021, which monitors the state of technological advancement in 132 countries, 21 out of the 32 countries in the bottom quartile are LDCs. Of the 22 LDCs ranked altogether, only one (Tanzania) is in the second quartile.
This is also reflected in the pattern of LDC exports, with the share of high-tech manufacturing exports, which is a proxy for structural transformation, being below 1% for all but three LDCs (Lao PDR, Myanmar and Tanzania). In contrast, the best performers, such as Malaysia (38.6%), the Philippines (36.2%) and Vietnam (36.1%), have a share over 30 times that of most LDCs (see below).
This is not a good omen for the LDCs, as empirical evidence shows that a country's product and export composition determine its development trajectory. This is because not all types of production and exports have the same impact on growth and structural transformation.
Production and exports of technology-intensive, high-value and more sophisticated goods generate more income and have positive implications for productivity and structural transformation than production and exports of primary or semi-processed goods. What a country produces and exports, therefore, matter significantly. Based on this understanding and conceptual framework, the Harvard Growth Lab has developed an Economic Complexity Index (ECI) that confirms that the complexity of a country’s exports is associated with a high level of current and future income and technological capabilities.
The key questions, therefore, are: can the LDCs ramp up their investments in the critical areas necessary to ensure the level of technological sophistication required to achieve structural transformation? Given their domestic resource constraints, how can they mobilize additional investments?
Backbone hard and soft infrastructure, such as electricity, reliable and high-speed internet connectivity and digital skills are prerequisites for the application of technologies. However, as of 2019 52.8% of the LDC population did not have access to electricity, whereas the global average was 90.1%.
Access to electricity (% of population). Image: Authors, based on the World Development Indicators
Even within the LDCs, there is a considerable variation, with Asian LDCs such as Bhutan and Lao PDR having 100% coverage and others in the region closely following them, whereas African LDCs have very low electricity coverage. Some of the latter ones have failed to make significant progress over the past decade (see above).
Interestingly, three-quarters of LDCs’ population are covered by a mobile broadband network, but only one-quarter have internet access. If the LDCs are to harness the potential of the evolving technologies that are part of the Fourth Industrial Revolution (4IR), access to and affordability of digital broadband infrastructure would be critical. However, broadband penetration in the LDCs has remained unchanged at 1% since 2016, compared to a world average of 15%.
Research and development
Gross expenditure on R&D (GERD) as a percentage of GDP is a good indicator of a government's commitment to devote resources to R&D and innovation. Wide disparities exist between income groups.
Available data show that countries such as Israel and Korea spend over 4% of their GDP on R&D, while no LDC has reached even 1%, with Cambodia at 0.1%, Uganda at 0.2%, and Ethiopia, Mali and Nepal at 0.3%. The only two LDCs to reach 0.7% were Burkina Faso and Rwanda. Taking a cue from Rwanda, which aimed to increase its spending to over 1% by 2020, other LDCs should also recognize this imperative and act upon it.
The generation, adoption and scaling up of technology require technical skills, for which the LDCs face two critical challenges. First, the stock of human capital trained in science, technology, engineering and mathematics (STEM) is relatively low in the LDCs due to low investment in human capital. Second, those who are trained in these disciplines are unable to find gainful employment in the market due to skill mismatches and lack appropriate employment opportunities.
While the first problem can be resolved by enhancing STEM investment, the second problem can be resolved by having an institutionalized mechanism for dialogues between academic institutions and the private sector.
A typical feature of LDCs is that they are resource-strapped, which has been further exacerbated by the COVID-19 pandemic and the associated global economic crisis. This has significantly reduced LDCs’ fiscal space and their ability to mitigate the impact of the crisis and initiate recovery.
However, LDCs can utilize the revenue from commodity exports and external sources of funding, such as through South-South cooperation, Aid for Trade (AfT), foreign direct investment, blended finance and impact investment to upgrade technological capabilities. They should also leverage AfT to generate other sources of external financing.
Additionally, they can also crowd in sustainable finance, including climate finance, and leverage AfT resources for investments in climate-smart technologies to integrate into green value chains. Leveraging 4IR technologies such as blockchain can help them to access carbon markets as well.
The Fifth United Nations Conference on the LDCs, taking place in Doha later this year, will provide a new and timely opportunity to realign the international community's efforts to assist the LDCs on the path to transformational change. A clear strategy, backed by an investment plan for technological upgrading, is needed to enable the LDCs achieve structural transformation and higher levels of income.