Lessons Learned in Developing Productive Capacity: Fourteen Case Studies, CDP Background Paper no. 37

Developing productive capacities is key for least developed countries (LDCs), and developing countries in general, to overcome their development challenges. Productive capacity consists of the productive resources (natural, human, physical and financial), entrepreneurial and institutional capabilities, and production linkages. These elements jointly determine the capacity of a country to increase production and to diversify its economy into higher productivity sectors for faster growth and sustainable development. Whereas the recognition of lack of productive capacity as binding development constraint for LDCs is an important finding, it does not directly answer the questions what and how this constraint can be overcome. The Committee for Development Policy (CDP) investigated these questions between 2015 and 2017. The work is published as CDP Policy Note “Expanding Productive Capacity: Lessons Learned from Graduating Least Developed Countries”. The CDP found that building productive capacity requires an integrated approach covering a wide range of sustainable development issues and policies. At the domestic level, key elements are building development governance capability, creating positive synergies between social outcomes and productive capacity, establishing conducive macro-economic and financial frameworks as well as industrial and sectoral policies promoting technological upgrading and structural transformation. Among sectors, the agricultural sector requires priority attention in many LDCs. Moreover, and in particular for LDCs, expanding productive capacities depends not only on domestic but also on international support. For identifying concrete policies and strategies that helped LDC in building productive capacities, the CDP reviewed the experiences of fourteen countries in developing productive capacity and the implications for graduation and economic transformation. These include all five countries that have already graduated from the LDC category (Botswana, Cabo Verde, Equatorial Guinea, the Maldives and Samoa), the two countries that are already scheduled to graduate (Angola and Vanuatu), two countries that have already met the formal eligibility criteria for graduation (Bhutan and Solomon Islands), three countries that have made considerable progress towards graduation (Bangladesh, Ethiopia and Rwanda) and for comparative purposes two non-LDCs (Ghana and Vietnam). In this process, the CDP identified three alternative pathways to graduation from the LDC category. The first pathway is characterized by rapid economic growth based on natural resource exploitation, which ensures fast income growth but does not necessarily contribute to greater human assets and reduced vulnerabilities. The second pathway is characterized by economic specialization complemented by investments in human capital, which helps countries to increase income and human asset, although they may still face challenges in reducing vulnerabilities. The third pathway is characterized by a structural transformation that leads to more diversified economies and results in progress towards all three criteria used for identifying LDCs: increased per capita income, expanded human assets and reduced economic and environmental vulnerability. This background paper presents these fourteen case studies and should be read in conjunction with the Policy Note.