The road to LDC graduation in Timor-Leste

June 2021.  By Daniel Gay.

The Covid-19 crisis hit Timor-Leste harder than many countries. The economy shrank 6.5% in 2020 according to the United Nations. An already fragile situation was compounded by a collapse in tourism as well as oil and gas exports, alongside lower domestic economic activity.

Although Timor-Leste met the criteria to leave the least developed country (LDC) category in 2015, 2018 and 2021, the UN Committee for Development Policy (CDP) deferred its decision on graduation to 2024 because of these concerns. Like some other LDCs the country needs time to rebuild and get ready.

One of the main benefits of delaying graduation is that the country can join the World Trade Organisation (WTO) as an LDC, and therefore benefit from potentially easier conditions of entry. The government has already begun the process, although the pandemic has clearly affected progress.

The WTO guidelines date to 2002, when the WTO General Council adopted suggestions on helping LDCs join. The guidelines were updated in 2012. During negotiations, WTO members are encouraged to hold back when seeking concessions in market access and on trade in goods and services. There are benchmarks on goods and services commitments and on transparency in accession negotiations; as well as special and differential treatment and transition periods; and technical assistance.

WTO accession is also at the heart of Timor-Leste’s efforts to join the Association of Southeast Asian Nations (ASEAN), a key part of its development strategy. The government should continue its efforts to join the WTO as an LDC while it can, ideally before the next CDP triennial review in 2024.

Another critical part of preparations involves financing. Although a big fall in external development assistance isn’t expected as a result of LDC graduation, the uncertainty surrounding global aid flows still implies that the government should already start raising more funding at home, including improvements to tax collection. The government should also talk to donors so as to ensure ODA levels in critical areas are maintained, smoothing the transition.

The Development Finance Assessment and Integrated National Financing Framework studies carried out by the UN will help map out funding, but there may be scope for additional support on transition finance. Even if the aggregate impact of graduation on development assistance is limited, one of the biggest risks will be any possible impact on education and health expenditure. Such issues will need to be followed closely.

While the country remains an LDC the government should also use existing LDC-specific funds and facilities as fully as possible. These include the LDC Climate Fund, the Enhanced Integrated Framework for Trade, and the UN Technology Bank for LDCs. The WTO also provides technical assistance for acceding LDCs. The current technical assistance plan provides training, support for negotiations and an internship programme for acceding countries.

It may even be possible to start thinking now about the post-LDC future. In particular, what will happen when the country loses access to trade preferences such as the European Union Everything But Arms (EBA) scheme? A recent report by the WTO shows that Timor-Leste doesn’t currently make much use of EBA, but exporters may do so if the coffee industry expands and other sources of diversification emerge.

Who knows what the economic structure will look like in around a decade, when graduation might take place? Can the usual three-year post-graduation transition period for EBA even be extended longer? It would pay to start thinking about such possibilities now, together with other potential LDC graduates.

Particular South-South collaboration may come from Community of Portuguese Language Countries like Angola (another country historically dependent on oil and gas), as well as members of the G7+ group of countries affected by conflict, fragility and on the transition towards resilience, whose secretariat Timor-Leste hosts.

Other, new support measures may even be possible in response to Covid-19. Lobbying for and supporting any such changes should be conducted in the run-up to the start of the next Programme of Action for LDCs at LDC-V in Doha.

A survey conducted by the UN Department of Economic and Social Affairs (DESA) in Timor-Leste found that new support measures should prioritise capacity-building and technical assistance, particularly for WTO accession. Support for building public finances was another concern, followed by a mechanism to help transfer of technology and know-how, and other issues.

As much as the government should start preparing early for graduation, the international community can do more, given the global responsibility for ending the Covid crisis and the ability of developed countries to much more readily absorb the impact of the transition through development assistance, trade rules and improvements to the international system.

In many ways the response of the international community to the challenges facing a small island LDC like Timor-Leste are a measure of the global commitment to multilateralism, and a test of slogans like ‘leaving no-one behind’. If ‘building back better’ is to mean anything, it should include new and revitalised support for all LDCs, including graduating countries.

The views in this paper are those of the author and do not necessarily represent the views of the Committee for Development Policy (CDP), its Secretariat, or the United Nations. This document should not be considered as the official position of the CDP, its Secretariat or the United Nations. Any remaining faults are those of the author.

This article has been made possible with financial support from the UN Peace and Development Fund.