New index suggests production capacity should be top priority in PMA5
A report by the United Nations Conference on Trade and Development (UNCTAD) on the findings of its Productive Capacity Index (CPI) concluded that insufficient productive capacity in many least developed countries (LDCs) limits their economic production makes them more vulnerable to external shocks and makes them more dependent on a handful of exports. Providing clear guidance on how to foster economy-wide productive capacity in LDCs should therefore be an urgent priority at the Fifth United Nations Conference on the Least Developed Countries (LDCs5) in January 2022. , he argues.
Launched earlier this year, the index measures and compares countries’ productive capacities, drawing on 46 indicators divided into eight categories: energy, human capital, ICT, institutions, natural capital, private sector, structural change and transport. UNCTAD describes it as a diagnostic tool designed to monitor socioeconomic progress and guide evidence-based policy choices.
The main findings of the report include:
Investing in productive capacities supports the diversification of exports
An inverse correlation between the ICP and the UNCTAD merchandise export concentration index – with countries like Angola and Iraq, for example, notable for both very low productive capacities and heavy reliance on with respect to the export of a few commodities – illustrates how building productive capacities can support efforts to diversify exports, the report suggests.
High levels of natural capital generally lower PCI scores for LDCs and Landlocked Developing Countries (LDCs) and intensify dependence on commodities rather than supporting economic diversification or structural transformation, he concludes.
Weak ICTs, structural changes and energy scores hold back LDCs and LLDCs
The index reveals that LDCs lag behind the rest of the world in seven of the eight categories of productive capacity, with natural capital being the outlier. Investments are most needed in the areas of ICT, energy, human capital, structural change and institutions.
Massive variation between countries’ ICT scores indicates a growing digital divide, with LDCs and LLDCs scoring the lowest, according to the report. Their weak performance in the structural change category also reflects a dependence on commodity exports and insufficient integration into regional and global commodity value chains. The poor performance of LDCs and PDSLs in the energy category reflects the fact that energy use is concentrated in urban areas and energy use for productive purposes remains low. This undermines the ability of companies to produce competitively and to export, he concludes.
Strong PCI score associated with high GDP and achievement of the SDGs
A strong positive correlation between PCI scores and gross domestic product (GDP) per capita demonstrates the link between investing in productive capacity and generating wealth, the report concludes. This is largely due to the productive capacities which determine the ability of an economy to produce goods and services. The index is therefore a valuable tool for policymakers when planning economic growth, its constituent categories providing information on areas in which countries are progressing or falling behind, the authors say.
The study also highlights a correlation between productive capacity and progress towards achieving the Sustainable Development Goals. For example, in countries with high levels of productive capacity, more adults have bank accounts and fewer are employed informally, he notes. These two elements are essential to drive a structural transformation that can support progress towards achieving the indicators related to food security, education and urbanization of the SDGs, proposes the report.
Low productive capacity increases vulnerability to external shocks
While PCI trends from 2000 to 2018 indicate increased production capacity in all geographic regions during this period, those in Africa remained low, despite moderate improvement, according to the report. He concludes that low productive capacities are both causes and consequences of the continent’s socio-economic vulnerability to negative external shocks, although there are wide variations from country to country.
Asia is a continent of contrasts, with a huge gap between the best performing countries in East Asia that are China, South Korea and Singapore and the worst countries in West Asia that are the Afghanistan, Iraq and Yemen, which have experienced conflict and instability, according to the report. The weak productive capacities of these countries also increase their fragility and their vulnerability to external shocks, he argues.
In a separate report on the link between productive capacities and exit from LDC status, UNCTAD also concludes that the development of productive capacities not only propels countries towards exit, but provides a basis that is fundamental for their success through exit. following. LDCs in transition should therefore evolve their transition strategy from a short-term plan focusing on the use of international support mechanisms (ISMs) to a long-term, broad-based strategy in which increasing the capacity of production helps them move âwith momentum,â he argues.