What is the Impact when an economy moves from LDC to developing status? Legal Economist MS Siddiqui explains foreign trade, finance & more

How are countries classified?

The United Nations (UN) divides countries into three categories: developed, developing and least developed (LDC) on the basis of economic and social indicators. The level of development is based on how socially, culturally and economically advanced the country is. The following criteria are used by the Committee for Development Policy (CDP) to determine LDC status: (a) Per capita income (gross national income per capita), (b) Human assets (indicators of nutrition, health, school enrolment and literacy), and (c) Economic vulnerability (indicators of natural and trade-related shocks, physical and economic exposure to shocks, and smallness and remoteness).

The LDCs are officially designated by the UN General Assembly on the basis of CDP recommendation. The LDCs are trying to come out of a group of the poorest countries. In order to graduate to the developing country status, the per capita gross national income (GNI) should be US$ 1,230 or above the income of US$ 2,460. The Human Asset Index (HAI) should be of 66 per cent or above and the Economic Vulnerability Index (EVI) 32 or below. The World Bank (WB) has classified the countries on the level of development in a different way. WB divided into: low income countries (LIC) – having GNI per capita of $1,045 or less, medium income countries (MIC) – with GNI per capita of more than $1,045 but less than $12,746,  and high income countries (HIC) -having GNI per capita above US$ 12,746.

The indicators of LDCs are measureable. Their share of export in the gross domestic product (GDP) is lower than the low-income countries. Productivity is low in the LDCs, particularly with respect to labour. This is due to low levels of physical and human capitals. Moreover, total factor productivity is low, presumably due to factors such as out-dated technologies and inefficient allocation of resources across sectors.

Benefits extended for LDCs’ development?

Developed and developing countries and donor agencies extend several benefits to the LDCs. The main international support pertains to official development assistance, measures related to trade and others. These benefits fall into four areas: (a) preferential market access, (b) special treatment regarding the World Trade Organisation (WTO)-related obligations, (c) Overseas development assistance and other forms of development financing, and (d) technical cooperation and other forms of assistance. These benefits are not granted by the UN or the WTO, but other countries on preferential treatment. These are generalised system of preferences (GSP). EU names the scheme as everything but arms (EBA). The GSP is subject to WTO law, in particular to the GATT and the “Enabling Clause,” which allows for an exception to the WTO’s most-favoured nation (MFN) principle.

Under the WTO agreements, countries cannot normally discriminate between their trading partners. This principle stipulates equal treatment for all WTO members. These laid the foundation for the launching of the GSP.

“The objective of the GSP is (a) to increase export earnings; (b) to promote industrialisation; and (c) to accelerate rates of economic growth.”

It is non-reciprocal and non-discriminatory system of preferences in favour of the LDCs. The preferential treatment is unilateral decisions of duty-free access for exporters from the LDCs to pay lower tariffs or to have duty-free and quota-free (DFQF) access to the developed and developing countries’ markets.

The GSP schemes are determined unilaterally by the preference-giving countries, which also unilaterally modify the preferences, product coverage and beneficiary countries. The preference-receiving countries play no part in the determination or modification of the schemes. The product coverage includes most of the agricultural and industrial exports – albeit a few and often notable exceptions. The beneficiaries of non-reciprocal preferential schemes have to meet certain and often non-economic conditions to be designated as such and to maintain the beneficiary status.

Individual GSP schemes are applied by the developed countries and some others belonging to Eastern Europe and made available to most of the developing countries. Regarding Bangladesh, USA is asking Bangladesh to improve working condition, trade union rights and other conditions at workplace for granting the GSP facilities again. EU is also asking for improvement of working condition in Bangladesh’s ready-made garment (RMG) industry and also for improvement of environmental protection from garment-related pollution to continue the EBA status.

Where is Bangladesh ranked?

Bangladesh was a low-income country that has just crossed the income level of US$ 1,045 per capita to become a lower middle income county, as defined by the WB. It is also in the process of graduating from an LDC to a developing country, as categorised by the UN.

“Bangladesh is expected to graduate concurrently from an LDC to a developing country as a UN member, while the WB has already upgraded Bangladesh to a lower-middle income economy.”

What is the impact of graduating from LDC to developing country status?

The most visible trade-related implication of LDC graduation is the loss of preferential market access, such as the EU’s EVA initiative and of the concessions granted to the LDCs under the global system of trade preferences (GSTP) among the developing countries. The impact on a graduating country’s exports due to losing preferential market access is determined by three main factors: (a) the coverage and structure of preferential schemes, (b) the product composition of exports, and their distribution across markets; (c) the benefit of tariff concession.

The LDCs are now enjoying the tariff concession and are also exempted for the trade-related aspects of intellectual property rights (TRIPS) agreement. If these countries lose these facilities, that’ll result in a rise of the cost of products and administrative burdens.

Potential benefits of the duty-free and quota-free access include: (1) higher prices of existing exports, (2) price gains from diverting sales from other export markets or domestic markets, (3) increased value added through expansion of production. The graduation from LDC will gradually close down these preferential trade opportunities.

“Bangladesh will face the challenge of withdrawal of GSP facilities from Europe, Canada, Japan, Australia and some other markets.”

The likely impact of Bangladesh’s loss of preferential facilities in major export destinations will be felt on the export, sustainable GDP growth and other socio-economic indicators e.g. poverty and employment generation as the cost of overseas funds will increase. The transition process has to be smooth in a gradual and predictable manner so that it does not disrupt the development progress of the graduating country. Otherwise, Bangladesh will lose exports between 5.5 per cent and 7.5 per cent as per an UNCTAD projection in 2016.

The developing countries and development agencies take into consideration the status of the recipient countries for loan, grant etc. The LDCs or other low-income countries (LICs) get loan at softer terms and conditions compared to the loan provided under the same conditions to a middle-income country (MIC). The development progress underlying graduation should, in principle, give rise to a progressive reduction in the need for ODA and other concessional financing during the course of the pre-graduation period.

“The option for concessional financing will no longer remain available after final confirmation of graduation from an LDC to a developing country.“

According to the Article 33 of TRIPS agreement, patent protection will be granted for innovating company that will last at least 20 years from the date of the patent application filed. So, TRIPS provide incentive for innovation. Under the Article 66 of TRIPS agreement, developed member countries shall provide incentives to enterprises and institutions in their territories for the purpose of promoting and encouraging technology transfer to the least-developed member countries in order to enable them to create a sound and viable technological base. The LDCs are exempted from Article 33 of TRIPS agreement and hence allowed for production and export of pharmaceuticals up to 2033.

“Bangladesh will lose these facilities by 2027 with finally graduating from LDC.”

Graduation from LDC has a more direct impact on financing for climate change adaptation as graduating countries lose access to LDC-specific funding sources, most notably the LDC Fund. In principle, 50 per cent financing from the Green Climate Fund is to be allocated to particularly the vulnerable countries, including the Small Island Developing States (SIDS) and African States as well as the LDCs. However, the graduating Asian LDCs would not benefit from this target while the graduating African countries and the SIDS would need to compete with the better-resourced ODCs within these categories. They will compete with other categories of countries for the green funds.

The UN has taken the matter of disruption of development and decided to make the process after graduation in a predictable manner, so as not to disrupt the development progress of the graduating country, pursuant to the general assembly resolutions 59/209, 66/213 and 67/221, among others.

What is the timeline for Bangladesh’s graduation?

The CDP Secretariat has confirmed that Bangladesh will meet the criteria for graduation, and they will consider it during the CDP’s triennial review of the LDCs in March 2018. Therefore, Bangladesh could be recommended for graduation at the following triennial review in 2021. The transition period is of three years. However, monitoring of development progress by the CDP is limited to a maximum of nine years. Transition period report procedures are three years after the general assembly takes note of the CDP recommendation of graduation. The graduated country will report annually to the CDP on the implementation of the smooth transition strategy for three years for two triennial reviews on implementation of the smooth transition strategy. The CDP is used to monitoring development progress in its annual reports to the UN Economic and Social Council (ECOSOC). On the basis of the procedure, Bangladesh will hopefully graduate with final confirmation of acceptance by the UN following the recommendation of ECOSOC in the UN General Assembly of 2027.

“Bangladesh should now be prepared for the probable impact of graduation and build capacity to retain the export market and enhance internal capacity to finance development programmes.”

The country should go for bilateral free trade agreement with the buying (importing) countries and also for sourcing of raw materials to maintain the competitive price for export and also try to retain duty-free market. It should also work on improving internal revenue collection, capacity building, etc.

– Written by MS Siddiqui; he is a Legal Economist based in Dhaka, Bangladesh

This article was originally written by him in Financial Express, Bangladesh as LDC graduation calls for accelerated development

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