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The Fourth United Nations Conference on the Least Developed Countries 2011

Global Banking And Finance 1 News

Speech by Ngozi Okonjo-Iweala
Managing Director, The World Bank Group
Istanbul, Turkey

“Opportunity in Crisis”
Introduction His Excellency Mr. Abdullah Gül, President of Turkey, UN Secretary General Mr. Ban Ki-moon, Secretary General of the Fourth UN Conference on LDCs Mr. Cheik Sidi Diarra, Excellencies, Heads of States, Heads of Government, Ministers, delegates, colleagues, ladies and gentlemen it is a great pleasure to be with you today. First of all I would like to thank the Turkish PM, HE Mr. Recep Tayyip Erdoğan and his Government and the people of Turkey for their warm hospitality in hosting this important conference.

On behalf of the World Bank Group and of President Robert Zoellick, I want to thank the UN for organizing this event. We are here at a very important time in history.
The world economy is going through a very difficult transition. Three years after the worst financial crisis since the great depression, global growth is finally recovering – albeit very slowly. World GDP has increased from a 2.5 percent average in 2008-2009 to 5.5 percent in 2011. Developed country GDP has grown from 0 percent to 3.5 percent while emerging country GDP has grown from 5.7 percent average in 2008-2009 to 7.8 percent in 2011.

But the least developed countries (LDCs) have performed well. LDC’s (excluding four outlier countries) have grown from an average of 8.5 percent during 2000-2007 to 10.3 percent in 2008-09. That’s a significant increase in this difficult post financial crisis environment.

However this growth is fragile. Millions of people in the world’s poorest countries are today living on a knife’s edge – the victims of high and volatile food prices. People’s lives too are under threat by the impact of climate change and civil unrest. The devastation wrought by climate change,  volatile and high food prices and conflicts pose threats not only to the poor people within countries, but can also spill over borders and threaten global security.

Rising food prices have pushed about 44 million more people into poverty since June last year. The 2008 food crisis led to over 40 riots in many poor countries serving as a strong warning about the importance of food security for social stability and people’s own security. 1.5 billion people now live in countries affected by repeated cycles of political and criminal violence.

And the entire development agenda is threatened by climate change. We know recent natural disasters – and the crises in the Middle East – are further straining resources and creating added uncertainties.

The world’s least developed countries also face the challenge of dealing with a youth bulge – as more than 50 percent of the population in the Least Development Countries is below 25 years of age. And there are also challenges in dealing with the private sector; today nineteen of LDC countries are in the bottom 25 countries of the Doing Business survey.

In sum, despite the good growth rates experienced by the LDCs, the favorable economic conditions of pre-crisis period no longer exist.

So what does this mean for the 48 LDC countries represented here if the next decade is to be a decade of growth for LDCs? How can we together manage the transition back to accelerated growth? What should policy makers in LDCs focus on over the medium term and how can development partners assist? These are the issues I would like to focus my talk on.

I believe we need to focus on three critical issues: fiscal stability; building on the comparative advantage of countries and attracting foreign direct investment to support manufacturing and scaling up what we know works – designing safety net programs to protect the poor and vulnerable. These are areas where the international community can help – and also where the least development countries must now look within to create favorable growth conditions.

Let me begin by mentioning some interesting statistics about LDCs which are helpful to set the scene.

  • In the eight years prior to the crisis GDP growth for the LDCs averaged 8.5% (With the exception of Equatorial Guinea, Angola, Chad and Afghanistan);
  • GDP per capita increased from $US 271 million in 2000 to $US 686 million in 2008;
  • Average debt to GDP ratio of all the LDCs was 32 percent in 2008;
  • LDCs substantially increased FDI – seven fold- from $US 3,5bln in 2000 to $US 17.3 bln in 2008 and
  • LDC share in world trade increased rapidly from 0.61 percent in 2000 to 1.0 in 2008.•

In sum, the LDCs as a group have been doing their part to contribute to global growth. With the return to growth in most countries, ensuring a new decade of sustained and inclusive growth means seizing the opportunities, building on what works and meeting the challenges of today and preparing for the risks of tomorrow. Clearly the international community is helping and can continue to help. It’s also about the least developed countries innovating from within and seizing the momentum to create favorable conditions for another decade of growth and a decade in which at least half of the LDCs double their GDP per capita as they did in the last ten.

So how do we achieve this?

First protect existing growth. LDCs must continue to watch inflation. Many countries today are confronting the challenges posed by new inflationary pressures resulting from renewed increases in oil and food prices. Inflation in the LDCs now averages 5.4 percent in 2011 compared to 8.2 percent in 2007. LDCs have managed this well and cannot be complacent.

On the fiscal front, over the last three years many countries including LDCs put in place fiscal stimulus measures to cushion the impact of the crisis. Our analysis shows, for example, that countries like Tanzania, St Lucia, and Cambodia created labor intensive public works programs and Bolivia, and Senegal strengthened or introduced cash transfer programs. These countercyclical measures served countries well. But as we emerge from the crisis, many of LDCs will no longer have the fiscal space needed to restore growth to pre-crisis levels or accelerate growth if these policies are not scaled back or rationalized further.

The challenge, therefore, is for LDCs to focus on rebuilding fiscal space. This means strengthening domestic revenue. LDCs should increase the efficiency of the tax and customs administration offices to collect more from those registered to pay and also broaden the base by reviewing policy choices.

On the expenditure front, the crisis forced many countries to adopt legislation to improve the efficiency of public expenditure. In countries like Ethiopia improved subsidy programs have been designed to better target the poor and vulnerable at least cost.

Preparing for crises

Part of the new normal in many countries is the need to protect against the next crisis by building macroeconomic and fiscal buffers. A recent World Bank study shows that in the 1980s, the world had 150 crises every year. Now studies suggest the number of crisis has increased to 370 per year. This means increased uncertainty and volatility in the global environment. Countries need to be prepared for this. Increasing fiscal space and maintaining sustainable debt to GDP levels will be crucial for this.

In this regard there are lessons we could learn from our host country Turkey. Turkey rose from the crisis of 2001 — and seized the opportunity of that crisis – to build a better future and drive poverty rates dramatically down. A strong program of comprehensive reform produced growth of nearly 7 percent annually from 2003-2007. This progress helped to minimize the crushing impact of the global crisis of 2008.

Policies for Private Investment and Trade

The lesson from Turkey is that a strong reform program can deliver rapid and job creating growth as well as cushion countries from future crisis. As small open economies LDCs will rely on trade for growth and as such reforms should focus on opening up the economy and building skills that allow for increased competition and take advantage of FDI inflows to innovate.

But first LDCs must build and consolidate markets in the sectors where they have a comparative advantage.

Opportunity with agriculture

Agriculture production must grow by 70 percent worldwide by 2050 to feed an expected population of more than 9 billion people. In an era where unemployment is a big problem, an food prices continue to increase because of low stocks and other demand and supply pressures, the agriculture sector provides a big opportunity for many of the LDCs. The added bonus is that increasing agricultural production can help tackle the inflation problem in many countries

A recent study by the Bank showed that in many LDCs the agriculture sector was still characterized by low yields and high proportions of idle arable agriculture land. That idle land should be put to use as part of a bid for the least developed countries to take advantage of the growing demand for more and better agriculture products. This will create jobs while help feeding the planet.

How can this be done? The first thing is to move away from the concept of treating the agriculture sector as safety net and instead treat it as an engine for growth. The agriculture sector is also the very basis of the development of the private sector.

Essentially agriculture is a private sector activity. But in many countries, persistent state intervention in pricing policy, the imposition of export bans and the lack of adequate property rights, especially for land and for women, has impeded improvements in production and productivity. These constraints have also stifled the development of value adding agri-business. Vietnam has shown what good agriculture sector policies can do to grow the private sector. The growth in exports of mangoes in Mali – six-fold in the period 1993-2008 – is an outstanding case of export success for an LDC. Mali now has to begin exporting mango juice.

Beyond economic growth, agriculture development and increased food security can also be a tool for achieving political stability especially in the fragile and conflict affected states. The good news is that we have learnt some lessons from the 2008 crisis but we again must not be complacent. .

We must work to improve the agriculture value chain, improve agriculture markets, and increase transparency of the trading system. According to the World Development Report, for the poorest people, GDP growth originating in agriculture is about four times more effective in reducing poverty than GDP growth originating outside the sector.

Opportunity in Trade and Manufacturing

As countries improve agriculture productivity and production they would have to address the issue of non-farm employment. Moving people off the farms and into manufacturing or service sector jobs must be part of the long term strategy of all LDCs.

It is my firm belief that a “Decade of Growth” for LDCs must be anchored in more and better trade and trade openness. LDCs do not want aid they want trade. In fact recent rapid LDC growth has coincided with a period of increased trade.

Export growth in LDCs has turned from a negative -3.4 percent average in the 1990s to a spectacular rate of 18.5 percent in the 2000s. LDC exports to BRICs in 2005 was 19.0 percent and by 2009 increased to 24.2 percent.

A privilege LDCs enjoy which makes least developed countries the envy of many non-LDCs is the access to “Everything but Arms” and Africa Growth Opportunity Act (AGOA). These two agreements grant access to both European and North American markets other countries are struggling to enter. But for this access to be meaningful countries must exploit it. Lesotho for example in the first two years of AGOA access experienced a 36 percent increase in employment from 29,000 to 45,000 due to the establishment of new companies seeking to take advantage of the AGOA preferences. Other countries are also negotiating trade agreements and countries must be ready and prepared to compete with more countries over time. So how can LDCs seize the opportunity provided by this access?

As China moves up the value chain to produce more value added goods and phases out of labor intensive manufacturing LDCs should look to attract these investments.

In addition, rising labor costs in China as Chinese workers become more educated and demand better jobs will result in Chinese and foreign firms relocating their manufacturing plants to cheaper labor markets. A recent Credit Suisse report predicted labor costs in China for its over 150 million migrant workers could rise by over 20 to 30 percent in the next three to five years. Net FDI inflows into China increased from $30 billion in 2000 to a record $147.7 billion in 2008. With the increasing pressure on the Yuan, and rising labor costs companies will begin to look elsewhere to locate their businesses and their manufacturing. Net foreign direct investment inflows to China 7

increased from $30 billion in 2000 to a record $147.7 billion in 2008, it’s worth the least developed countries taking note as they stand to benefit from FDI relocation.
Recently for example, a large company, the world’s biggest contract electronics manufacturer– announced that it was looking to move some of its manufacturing operations – over $400,000 jobs- out of China. Imagine what attracting a company with 100,000 jobs could do for your economies. In many of these cases firms are looking to move their production to other Asian economies such as Bangladesh, Nepal and Cambodia where labor is abundant and cheap. But also some firms are relocating from Asia into Africa. The race is on to attract these firms.

If only 10 percent of Chinese FDI was available for investment in the LDCs, this would be the equivalent of over US$ 9-14 billion additional FDI into the LDCs. This means LDCs have to prepare their economies for this massive economic transition by building the infrastructure and creating the right environment for private sector to foster.

LDCs will have to compete with in-land China and other non-LDC countries for these new investments. China and India for example are all facing the pressure of rising labor costs in their manufacturing cities so they are investing heavily in infrastructure to link the inland states and provinces to markets at cheaper and faster rates.

LDCs need to export more and more to new markets. This means that the LDCs must find new ways of working and trading with emerging market economies. They need to take action to lower trade costs. Trade costs tend to be highest in those countries at the bottom of the development ladder. There are real gains to lower trade costs. For example, a recent Bank study shows that improving the business environment in Bangladesh halfway to the level of India could increase its trade by about 38 percent. Policy makers must put in place laws that encourage private sector investment. LDCs must make it easier to open businesses, settle disputes and hire skilled labor.

Building Skills

A key ingredient in the decision of firms to invest in LDCs in addition to the cost of inputs and infrastructure is the skills base of the economy.
Seizing the opportunity offered by youth is vital for the future, given that over half of all people in the least developed countries are under 25 years of age. Education is critical. While enrollments rates for primary school in many LDCs have increased over the last decade, they are still low compared to other emerging market economies. Girls’ enrolment continues to lag in many LDC countries.

It’s not just about numbers in the classroom but also what is being taught. In many countries the curricula has not changed to reflect the changing needs of the market place. But there is evidence of change. In sub-Saharan Africa for example despite the huge dependence of many countries on natural resource exploitation there are not that many specialized mining schools and colleges. Today the government of Mali is working with the private sector to build one such specialized school to supply the sub-continent with high quality mining engineers.

LDCs can also learn from the experience of countries such as South Korea and Malaysia. In 1997 faced with changing labor market demands, South Korea reformed its education sector including the curriculum to emphasis the need to prepare secondary school level students for the workforce. Protecting the Poor and Vulnerable; Natural disasters and Fragile and conflict Affected States:
“It is not where you start but how high you aim that matters for success.” Nelson Mandela In many countries close to half the population still lives below the $2 a day mark. Excluding four countries, the GDP per capita of the other 44 countries averaged US$560 in 2009, up from US$269 in 2000. The challenge of addressing poverty has been compounded for many countries with issues of recurring crisis.

Climate change for example will continue to pose significant dangers to economic growth, with more droughts, floods, storms, and heat waves. Over the period 1960-2007, actual reported losses in the worst disaster year reached 86% of GDP in Vanuatu and 100% in Samoa, with respectively 16% and 42% of population affected. We all witnessed the magnitude and size of the disaster in Haiti and the cost of rebuilding.

For the Pacific Island countries and for the Sahel countries for example, reducing the risk of disasters and adapting to the impact of climate change is a social and economic development imperative.

Today, four years to 2015, no low income fragile or conflict-affected country has yet achieved a single Millennium Development Goal (MDGs). Poverty rates are 20 percent higher in countries affected by repeated cycles of violence. Evidence from the 2011 World Development Report on Fragile and Conflict affected States shows that violence is the main constraint to meeting the MDGs. The 1.5 billion people who live in countries affected by organized violence are twice as likely to be undernourished, 1.5 times as likely to be impoverished, and their children are three times as likely to be out of school and jobless.

Fragility and conflict in most cases is the result of a weak social contract between people and their governments. Most often as in natural disasters and other crisis, the poor and the vulnerable are the most affected by these crises and most likely to fall deeper into poverty.

This is one area where we cannot stand-by as observers. On the disaster front and in the case of conflict and other crises the poor and vulnerable suffer the most.
To break these cycles, we must strengthen national institutions and governance processes to provide citizens with security, justice, and jobs. Countries with accountable institutions, where citizen participation in the decision making processes is facilitated and where there is room for social accountability mechanisms to be deployed usually do better in containing conflict and managing crisis including natural disasters.

In addition our experience shows that countries with real time risk monitoring systems to identify and understand the levels of vulnerability of their population are those most able to respond in times of crisis. During the 2008 food crisis, we also found out that countries with the basic administrative structures needed to develop needs- based safety nets were best able to respond to the crisis. These are some lessons LDCs must take from other developing countries and begin to implement in order to protect their medium term growth ambitions. Clearly the international community is and can play a role to support LDCs.

It’s about providing more access to resources, facilitating trade and investment especially south-south exchanges and finally through our knowledge and advocacy.
The good news is that despite the recent financial crisis, Official Development Assistance (ODA) has continued to rise and it is expected to reach $126 billion in 2010. The World Bank just concluded the 16th replenishment of the International Development Association (IDA16) and thanks to your help the World Bank raised a record $49.3 billion, an 18 percent increase from three years ago. With these resources, we’ll have the ability to help build 80,000 kilometers of roads; train and recruit over two million teachers; and give access to improved water sources to 80 million more people.

Going forward in agriculture, the World Bank’s Agriculture Action Plan projects an increase in World Bank Group lending from US$4.1 billion annually in FY06-08 to between US$6.2 billion and US$8.3 billion annually over FY10-12. Actual lending in FY10 was US$6.1 billion to over 51 countries over half of whom are LDCs.

The World Bank Group is also strengthening its agriculture partnerships such through support to the reformed Consultative Group on International Agricultural Research (CGIAR) and the establishment of the Global Agriculture and Food Security Program, which has already approved US$321 million in grants for eight countries — all to LDCs. The Bank is also working closely with United Nations High Level Task Force on the Global Food Security chaired by UN Secretary General Mr. Ban Ki-moon.

On helping countries improve their investment climate to attract and retain FDI, we work with countries to support reforms aimed at easing the business environment and improving infrastructure quality. We also work with WTO and UNCTAD to support the aid for trade agenda. We’re also strong supporters and help in south–south business knowledge sharing.

The Bank has also moved to help poor people hard hit by disasters. Following the 2009 tsunami, IDA was able to provide significant additional resources to both Samoa and Tonga. The Bank committed a total of $250 million to support Haiti’s recovery and development after its earthquake. The Bank hosts the Global Facility for Disaster Recovery and Reconstruction (GFDRR) and has established a Disaster Risk Financing and Insurance program to boost capacity building and knowledge sharing on disaster risk financing.

Since 2000, IDA has provided over US$5.9 billion in post-conflict reconstruction assistance to fragile and conflict-affected countries. Our latest World Development Report is also helping re-shape the way countries and development agencies approach the issue. The report shows that institutions matter, citizens’ matter and strong citizen participation and social accountability can improve development outcomes.

The World Bank Group, along with other development partners is keen to continue to support.

In conclusion, as we meet here in Istanbul to craft a new Action Plan for the LDCs, we must learn the lessons from the past celebrate our successes and use this to chart a course which can deliver a decade of growth while halving the number of poor in LDCs.

As Mandela said “It always seems impossible until it’s done.”

Global Banking & Finance Review


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