A new approach to economic development in LDCs

For the first time a method of analyzing economic development pioneered by Professor Justin Lin, former Chief Economist at the World Bank, has been applied to a least developed country (LDC). The method, known as the Growth Identification and Facilitation Framework (GIFF), aims to determine the products and services in which a country should specialize, tapping into the advantages of industrial backwardness in an effort to achieve sustained, dynamic economic growth. One of the main messages is that Least Developed Countries (LDCs) should focus on what they have rather than what they lack.

Focusing on Uganda, the paper by Lin and Jiajun Xu determines that ‘what Uganda has’ is labour and natural resources but relatively low levels of capital. The authors then discuss ‘what Uganda can potentially do well’ by looking at sectors in which relevant benchmark countries have succeeded.

The paper, commissioned by the Committee for Development Policy Secretariat, makes some surprising discoveries. Uganda may be able to move up the value chain to make products such as garments, footwear, trunks and cases, video and radio equipment, cotton yarn, agro-processing, paper, dyeing/colouring materials, printing industries and glassware.

Despite progress in poverty reduction Uganda has not yet industrialized, meaning that manufacturing comprises 10 percent of GDP, well below the average of 20 percent seen in developing countries. A fifth of young people remain jobless. More than a third of the total population lives on less than $1.25 a day while income inequality is high. Uganda has mainly exported low-value raw materials and unprocessed agricultural products but imported high-value manufactured products, resulting in persistent trade deficits.

Composition of Uganda’s Exports at the 4-digit HS level, 2012

Source: Country profile, Observatory of Economic Complexity, MIT.

Composition of Uganda’s Imports at the 4-digit HS level, 2012

Source: Country profile, Observatory of Economic Complexity, MIT.

The method entails a number of steps. First, realistic comparator countries are identified. These countries must be fast-growing, have a per capita income of 100-300% of the country under study (or where income was the same 20 years ago) as well as similar factor endowments. The countries chosen as benchmarks for Uganda were China, India, Nigeria, Uzbekistan and Vietnam.

The next step is to identify tradable goods and services produced in these comparator countries, and in which Uganda would have potential comparative advantages. Domestic and international demand must also be strong.

It is important to scale up domestic industries in which domestic firms have achieved success, establishing sectors in which Uganda has been gaining global competitiveness. A useful indicator is Revealed Comparative Advantage (RCA), which refers to the national share of a particular export in overall export values, compared with total international exports of the good by all countries as a proportion of global export values. Uganda’s exports had RCA in 37 sectors by 2013, up from 22 sectors in 1996. These sectors include agro-processing business, iron and steel, paper production, dyeing/colouring materials, printing industries, and glass and glassware.

Once these promising sectors have been identified, what should governments do about it? The subsequent stage addresses how to identify and remove key constraints. Infrastructure is a well-known problem in Uganda, and the paper identifies electricity and transport as critical bottlenecks. Firms also find it particularly difficult to access finance. Lin and Xu argue that rather than try to address all these major constraints at once for all industries, which can take a long time, binding infrastructure constraints in a particular sector and geographic locale might be tackled first in order not to miss quick wins.

In Uganda among other things this means putting in place targeted government policies to attract more labour-intensive Foreign Direct Investment (FDI). In particular, there is significant potential for boosting China’s FDI in manufacturing sectors such as footwear and electronics. The increase in Chinese wages means the country is less competitive in these goods, and Chinese companies are increasingly looking for investment opportunities in lower-wage economies. Lin and Xu advocate the “power and magic” of industrial parks, of which there are 20 nationwide but which need to operate more effectively. Government needs to ensure first-class infrastructure including power, water and fiber optic cables, as well as drainage and solid water management facilities.

The government should also provide limited incentives to solve the first-mover problem; that is, to entice private companies to venture into the new industry. If firms succeed, other copycat firms would quickly share the gains. Yet failure by the first movers provides useful information to latecomers. Policymakers therefore might consider compensating pioneer firms in the identified industries with time-limited tax incentives, co-financing for investments or access to foreign exchange. LDC international support measures such as duty and quota-free market access may help some products gain a competitive edge in international markets.

The GIFF isn’t the end of the story. In the future, in-depth comparative value chain analysis needs to be conducted in order to make more specific policy recommendations – and often the devil is in the detail, while research findings can be difficult to put into practice. But as a consistent method for finding promising future products in which LDCs might specialize, the GIFF is a useful first stage.