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MONITORING AND TARGET SETTING
Productive capacity building in most vulnerable countries
by OHRLLS
I-Introduction
Pervasive poverty, high dependence on ODA but also often smallness, remoteness
and landlockness are some common denominators in most vulnerable countries. More
importantly, what sets these countries apart from other developing countries is their
very limited capacity to address these multifaceted challenges.
Most of these countries have witnessed a significant improvement in their growth
performance during much of the last decade, except during the economic and
financial crisis of late 2000s. Yet such an achievement has been either uneven or
unsustained and-in most cases—has not translated into commensurate structural
transformation, employment creation, and human and social development. Growth has
been driven mostly by natural resource extraction sectors – sometimes one sectorwith limited positive externalities on other sectors, and these sectors have been
subject to high volatility caused in large part by significant commodity price
fluctuations. By contrast, manufacturing has accounted for a negligible share of the
growth revival and total output in these countries. Very limited structural changes
have therefore occurred, except in cases of transitions from one primary activity into
another--namely from low-productivity and self-subsistence agriculture to capitalintensive mining and oil sectors1.
Scant structural transformation has also manifested itself through many aspects. Total
factor productivity and labour productivity have continued to be low, mirroring weak
human and physical capital stocks and the use of rudimentary technology to produce
goods and services. Private sector also remains at embryonic stage with a large
number of informal economic activities. Further, institutions and rules to promote
productive sectors are few. As a result these countries have displayed limited ability
to produce efficiently and to compete globally; in short, weak productive capacities.
Sustaining high-level growth and addressing the missing link between growth and
development could not be achieved without productive capacity development. Such a
task constitutes a multidimensional endeavour, requiring not only investments in
health, education and other MDG-related interventions but also expansion of
production and export supply capacities, including physical infrastructure
development, greater access to finance, improved trade facilitation and other private
sector development enablers.
II-Why is productive capacity building important in most vulnerable countries?
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One of the exceptions is Bangladesh and Cambodia which have diversified into the manufacturing,
particularly in the shipping, pharmaceutical and garment industries, thanks to a number of government
supportive measures. Even for them, overdependence on one or very few sectors has resulted to some
vulnerability.
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Success stories across developing countries suggest that the development of
productive capacities holds much promise for addressing shortcomings associated
with recent growth and development paths in vulnerable countries, as well as for
reducing their deeply entrenched weaknesses. Indeed, countries that have been
successful are those that have generated enough wealth and decent employment
through structural transformation rather than merely focusing on poverty reduction
and other human and social outcomes, which can not be sustained without the former.
Productive capacity development can help, among other things, to: i) diversity
production and export bases, thereby reducing vulnerability to external shocks, ii)
benefit more from greater integration into the global economy, iii) sustain progress in
human and social development, and iv) adapt and build resilience to climate change
and other exogenous shocks.
Vulnerable countries differ from one another in regard to productive capacity building
challenges and needs. There is, therefore, no single strategy to achieve such an
endeavour and countries have to identify their own priorities out of a “menu” of
options. This implies the development of country-specific targets, grounded in
broader/global/group-specific and aspirational goals on productive capacity
development. The overall goal could—for instance—be one of building a critical
mass of viable and competitive productivity in relevant sectors2 (See Annex on the
goals, targets and indicators for productive capacity building).
III-Principles and modalities of target setting for productive capacity building
Three guiding principles should inform the content of country-specific targets. First is
the conceptual definition of productive capacity. The targets should map both the
outcomes/outputs as well as inputs of productive capacity building. Outputs/outcomes
help assess results while inputs are important in gauging the process, in particular
efforts and resources that are being deployed towards achieving these results. Second,
any target-setting should reflect country experiences so as not to set countries up for
failure. Third, there must be ways to identify indicators--be they qualitative or
quantitative--that provide relevant and clear measures of the targets of interest. These
indicators should be anchored in international standards, recommendations and best
practices. Also, whenever possible, some of these indicators, in particularly the
quantitative ones, should be disaggregated by gender, income, geographical location,
socio-cultural or ethnic background, and age group. This desegregation is essential in
identifying and analysing intra- disparities concealed by national averages.
3.1 Outcomes/Outputs-related targets
Potential results, sought through productive capacity building efforts, may be broad
and sectoral in nature. Broad outcomes/outputs may include, but not exclusively,
strong and sustainable economic growth, economic diversification—in particular
through a growing range of higher value-added goods and services—and increased
2
This formulation is partly derived from the Istanbul Programme of Action
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labour productivity, which should lead to more decent jobs. In this respect, special
attention should be given to youth and female employment.
The growth experience of most vulnerable countries, expect that of the last decade,
has been a sober one. The majority of these countries has witnessed slow economic
expansion and remains highly susceptible to external shocks. The challenge has,
therefore, been to secure and sustain high –level growth. Besides the slow pace at
which their economies have advanced, these countries also witnessed severe growth
instability. Such instability has been persistent, despite recent rise in the rates of
economic growth across the most vulnerable countries. Growth instability has
contributed to a lingering doubt and a perceived risk regarding this group of countries,
and lowering their expected returns on investment. As a result, private investment,
productivity and job creation, and, more broadly, social development have turned
modest. The second challenge is to sustain strong economic growth over time. Strong
and sustainable growth should be an important dimension of productive capacity.
Very few vulnerable countries have branched out into manufacturing. By contrast,
many continue to rely heavily on natural resource extraction sectors for livelihood,
exports, and employment. Some of these sectors, agriculture in particular, have
displayed very marginal productivity growth and weak linkages with other sectors.
Others continue to depend on mining sector, which often has limited forward and
backward linkages with other sectors, therefore failing to generate spillover effects in
the form of value-addition, job-creation and deepening of technological know-how.
The composition of exports of vulnerable countries also reflects the structure of their
production bases. Exports are concentrated in a very limited number of primary
commodities with little value addition. This not only makes exports earnings volatile,
it also explains the fact they account for a very small share of the world trade. The
sum of the above is that economic diversification is key for accelerated and sustained
growth in the most vulnerable countries. Economic diversification represents another
important aspect of productive capacity building.
The pace and sustainability, as well as the nature of growth, determine how successful
these countries are in generating sufficient and decent employment opportunities for
all, including youth and women. Generating enough productive and decent jobs for a
growing labour force requires that agricultural sector undergoes significant
productivity growth and non-agricultural sectors absorb a growing share of labour
force. The other output/outcome-related dimensions of productive capacity building
are therefore labour productivity and decent jobs.
In addition, there is also sectoral dimension to productive capacity development. Such
a sectoral focus may be considered an effective route toward achieving broader
objectives, such as of those of structural changes and strong and sustainable growth.
Sectors that may receive greater attention in productive capacity development include
agriculture, food production in particular, manufacturing, and services, including
tourism. Country-specific growth targets could be set for some of these sectors.
3.2 Inputs-related targets
Essential inputs to productive capacity development are the set of factors or
conditions that are conducive to an enabling environment for private sector
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development. They encompass improvement and expansion of physical infrastructure
--transport, information and communication technology (ICT), energy and water-greater access to finance and technology, and human resource development
(education, training and skills development).
Inadequate physical infrastructure severely hampers growth and development in the
most vulnerable countries. Many of these countries lack transport services that
provide adequate and affordable connectivity within their borders and with their
neighbouring countries. Transport needs are particularly acute in landlocked
developing countries and small island developing countries, which face high
transaction costs in regard to transportation, because of their geographical location. In
addition, large infrastructure needs of vulnerable countries are in the energy, ICT and
water sectors. Closing the infrastructure gap in all these sectors will help reduce
production and trade costs, improve competitiveness and boost growth in these
countries.
Building new infrastructure as well as rehabilitating and maintaining the existing one
require considerable financial resources beyond those that are available in vulnerable
countries. ODA and innovative forms of financing for infrastructure development are
important in this regard. Issues of finance also encompass access of the private sector,
in particular, small and medium-sized firms- as well as households to financial
services.
Another important dimension of productive capacity building-viewed from the input
angle--relates to technological acquisition and innovation, which are transmitted not
only through trade and FDI but also through bold domestic and international measures
that encourage research and development as well transfer of technology. Technology
and innovation impact labour productivity positively and therefore growth and
development.
The quality of education, training and skill development also affect labour
productivity. Further, it also determines the extent to which countries reap the benefits
of FDI, including potential employment, technology and know-how spillovers.
Productive capacity development covers issues of governance, in particular aspects
that pertain to institutional, policy and regulatory frameworks, business regulations
and ways in which these rules are enforced. Small and medium enterprises are
important engines of growth, and they provide sustenance to many households in
vulnerable countries. It is important to leverage on their critical role in the society by
addressing the bottlenecks that prevent most of these relatively low-capital, familyowned and family-run businesses from attaining their full potential. The development
of fully-functioning and competitive markets-- locally, nationally and regionally-within which these firms operate can enhance their operations, foster efficiency,
create economies of scale, and thus leading to higher profits. Access to markets in
vulnerable and least developing countries is equally important to farmers, who are
mostly smallholder peasants.
The preservation of natural capital is the other important enabler for sustainable
productive capacity building. Natural capital comprises resources such as land, rivers,
forests, and the air, all constituting a lifeline for all countries but whose contribution is
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not accounted for. Inadequate investment, management and maintenance of this
capital cause unsuitable growth and development in the long-run.
Again the right mix of these above inputs will differ across countries, and the targets
should reflect this.
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Annex: Synopsis table of possible goal/targets/indicators for productive capacity
building
GOAL
TARGETS
CANDIDATE INDICATORS
Areas Covered by the
targets
•
•
Strong and sustainable
economic growth
Economic Diversification
and Structural
Transformation
•
•
•
Production Base
•
•
•
•
•
•
•
•
Trade
Inputs (Production Factors and Enabling Factors for Private
Sector Development)
Building a critical mass of viable and competitive productivity in relevant sectors
Nature
of the
targets
Increased labour
productivity
•
•
•
Increased decent
employment
Expansion of physical
infrastructure, including
improved quality and
reduced costs
•
•
•
•
•
Transport
•
•
•
ICT
•
Energy
•
•
•
Water
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Per capita GDP Growth
Coefficient of variation of Per
capita GDP Growth
Wealth Estimates
Change in Value added share of
non-extractive sector in total GDP
(%)
Change in share of manufacturing
(%GDP)
Change in share of agriculture (%
GDP)
Change in Herfindhal-Herschman
production index
Change in Herfindhal-Herschman
export index
Change in Trade to GDP ratio
Change in Exports to Imports ratio
Changes in terms of trade
Labour productivity per hour
Labour productivity per person
employed
Total Factor Productivity Growth
Unemployment rate
Youth unemployment rate
Roads, total network (km)
Rail lines (total route-km)
Roads, paved % (% of total roads)
Air transport, passengers carried
Container port traffic,(TEU:20
foot equivalent units)
Mobile cellular subscriptions per
100 population
Internet users per 100 population
Electricity production (Kwh) per
capita
Share of electricity generated
through renewable sources
Access to Electricity (% of
population)
Electric power transmission and
distribution losses (% of output)
Proportion of population using an
improved drinking water source
•
•
•
•
•
•
Greater access to
finance/capital
Greater access to technology
•
•
Credit to private sector as a
percentage of M2
Gross capital Formation (% GDP)
Real interest rate (%)
Savings to GDP ratio
ODA as a percentage of GDP
FDI as a percentage of GDP
Researchers per million
inhabitants
R&D expenditure
Human resource
development
•
Adult literacy rate (%of total
population)
•
Average number of years of
schooling of active population
Gross enrolment in secondary
education (%)
Secondary completion rate (or
some other indicator of quality of
education
Percentage enrolment in technical
and vocational programmes at
secondary level (%)
Time required to start a business
(days)
Ease of doing business Index
•
Education
•
•
Training and Skills
Development
•
Governance
•
Doing Business
•
•
Natural capital
•
•
7
Adjusted Net Savings
Depletion of minerals, timber and
fisheries
CO2 emissions
Number of threatened species