Poor countries need aid and well-planned trade liberalization, UN says

Policies using international trade to improve the economies of the 50 poorest and least developed countries (LDCs) have not generated long-term reductions in poverty, the United Nations Conference on Trade and Development (UNCTAD) says in a new report.

"Their (LDCs') development partners should not imagine that preferential market access or multilateral trade liberalization will substitute for international aid as a central mechanism for supporting poverty reduction," UNCTAD says in The Least Developed Countries Report 2004: Linking International Trade with Poverty Reduction.

The policies could be complementary, but the LDCs require more and better aid to build their productive capacities, it says.

"The LDCs themselves can maximize the poverty-reducing effects of international trade by pursuing a development-led approach to trade rather than a trade-led approach to development," UNCTAD says.

In the 1990s the average income per person in the LDCs was 72 cents a day, of which the earner spent 57 cents, leaving just 15 cents a day for private capital formation and public investment in such national infrastructure as health care, education, law and order and administration, UNCTAD says.

If current trends persist, the number of people living in extreme poverty will increase to 471 million by 2015 from 334 million people in 2000, it predicts.

Mass poverty reinforces the tendency towards economic stagnation and vice versa, it says. "Low income leads to low savings; low savings lead to low investment; low investment leads to low productivity and low incomes."

Countries which liberalized trade moderately in the 1990s achieved the best trade-to-poverty relationships and the growth rates of gross domestic product, exports and investment have been higher after liberalization than before, it says.

On the other hand, "rapid and deep trade liberalization has been associated with de-industrialization, as import substitution industries have collapsed when they are exposed to international competition without adequate preparation," UNCTAD says.

In any case, "imports have grown faster than exports after liberalization," and "there has been a repeated tendency for aid inflows to peak during trade liberalization and then fall," UNCTAD says.

Experience shows that a country must have a minimum production base, as well as supply capabilities, to take advantage of export market access preferences, it says.

LDCs equipped to take advantage of preferences provided by certain textile export arrangements achieved high and steady export growth, but the benefits of access are being reduced by limits on product insurance, restrictive rules of origin, problems with predictability and the adverse effects of such non-tariff barriers as bans, quotas and tough labelling requirements, UNCTAD says.

Health issues were also a problem for LDCs, UNCTAD says, quoting estimates by the Joint UN Programme in HIV/AIDS (UNAIDS) showing that in 2001, LDCs experienced 37 per cent of worldwide AIDS deaths, although they had only 11 per cent of the global population.