Centrality of International Support Measures for Graduating LDCs

International Support Measures (ISMs), for the least developed countries (LDCs), are provided in the areas of trade; financial and technical assistance and support for participation in international forums. The Enhanced Integrated Framework (EIF) – a trilateral partnership between the LDCs, donors, and international agencies – is one such mechanism that provides ISMs in the form of Aid for Trade (AfT) to the LDCs for undertaking analytical studies, strengthening institutional structure, and building productive capacity.

The recently concluded programme evaluation of the EIF shows some impactful results, of which the most notable one is a finding that states that the doubling of EIF AfT was linked to an approx. 20% increase in total exports from countries with stronger economies having average and above average export volumes, most of which are graduating LDCs.

Country-specific impacts of the EIF intervention in graduating LDCs include Cambodia, having increased its rice exports by 150%, Zambia having increased regional and international honey exports by over sixfold, and Lao PDR having recorded a 50% productivity increase for rice. In Bhutan, through machine grading and online auctioning of potatoes, farmers were able to earn USD 420 in additional income per truckload.

Although some providers of ISMs continue to extend support to graduating countries even after their graduation, there is a wide variation in the type, magnitude, duration, and more importantly, predictability of support. The Doha Programme of Action for the LDCs accordingly makes a call for the “extension of ISMs to graduating and graduated least developed countries to make graduation sustainable and irreversible”. The EIF has been a trailblazer in this respect, as it has been providing, right from its inception, support to the LDCs five years after their graduation.

The EIF has contributed to incentivizing graduation due to the predictability in the continuity of its support, which is free from political manoeuvring and devoid of any social, economic, or governance-related conditionalities. More importantly, the EIF has modulated its support to the LDCs taking into account graduation considerations to ensure a smooth transition. Examples of graduation-focused ISMs from the EIF can be divided into global/regional and country-specific.

Global/Regional

Since the LDCs view trade preferences as the single major ISM, the EIF and the World Trade Organization joined hands to conduct an evidencedbased analytical work entitled “Trade Impacts of LDC Graduation”, which could be utilized by the LDCs to design and sequence their policy reforms to remain competitive when they graduate.

Realizing the need for graduated countries to mobilize private investment in general, and foreign direct investment (FDI) in particular, the EIF teamed up with the World Association of Investment Promotion Agencies to provide capacity-building training to governments and the private sector in eight graduating countries. Later, 12 other LDCs joined the initiative.

Thirdly, to help graduating countries reduce trade costs, the EIF partnered with the United Nations Economic and Social Commission for Asia and the Pacific to support cross-border paperless trade initiatives in four Asian graduating countries.

Finally, given the significance of digital transformation and the priority attached by the graduating countries to speedy digitalization, two-thirds of the support provided for conducting eTrade Readiness Assessments went to graduating LDCs, including Bhutan, Cambodia, Nepal, Myanmar, Senegal, Solomon Islands, and Vanuatu.

Country-Specific

The EIF’s flagship analytical work – the Diagnostic Trade Integration Study (DTIS), which provides the foundation that guides the EIF’s intervention on the ground, now covers the graduation dimension. Most of the recent studies or their updates either include graduation as a cross-cutting issue or as a chapter. Examples of recently concluded DITSs that included the graduation aspect are Cambodia, Bhutan, and Lao PDR. The ongoing DTIS in Bangladesh covers graduation even more explicitly.

Additionally, two specific supports were extended to Vanuatu in the recent past. First, trade mainstreaming support provided to Vanuatu was utilized to develop a sustainable graduation strategy in the country’s run-up to graduation. Second, a pilot project was launched in Vanuatu to integrate the customs clearance system with that of the postal system to speed up trade in parcels, thereby helping to reduce the trade costs of e-commerce transactions.

The Path Towards Sustainable Graduation

In November 2020, the LDCs submitted a Draft Ministerial Decision to continue providing them special and differential treatment, including trade preferences for 12 years after their graduation. However, what is equally important is to ensure that the LDCs can reduce their trade costs in the long run, as preferences would eventually be phased out. Such support should ideally be in the form of AfT to build productive capacity by investing in infrastructure (both physical and digital), human capital, and technology, among other things. Similarly, trade costs can be reduced through improved trade facilitation and by upgrading facilities to comply with sanitary, phytosanitary, and technical standards.

In the areas of trade facilitation, the example of Vanuatu is particularly instructive; where the Vanuatu Electronic Single Window project was implemented by the United Nations Conference on Trade and Development, with the financial contribution of the EIF, the Government of Australia, and the Government of Vanuatu, resulted in a reduction in processing time from four to six days to less than 10 minutes. This could potentially translate into a non-trivial saving in trade cost if we take David Hummel’s work, which posits that each day saved in shipping time is equivalent to saving 0.8% of the ad valorem tariff, as a basis.

Similarly, the implementation of cross-border paperless trade can help these countries reduce their trade costs substantially and achieve trade gains, as shown in the table below for the Asian graduating LDCs.

Source: UNESCAP, 2014

Finally, capacity building in at least three key areas would be critical for the graduating countries to make their progress irreversible. First, even when zero tariff preferences are phased out, helping them access relatively generous European Union (EU) preferences under GSP+ can contribute to continued access to the EU market.

Second, facilitating preferential trade negotiations with major exporting markets and helping them take advantage of regional markets could contribute to expanding their exports, both at intensive and extensive margins.

Thirdly, helping graduating countries mobilize alternate sources of finance to make up for the loss of traditional official development assistance would be extremely helpful. These could include shoring up domestic revenues, South-South concessional finance, FDI, and innovative sources of finance, such as blended finance and impact investment.

Originally published in Nefport 50 (2022).