Much to our excitement, Bangladesh has fulfilled all three criteria of eligibility for LDC graduation (e.g., Per capita GNI, Human Assets Index and Economic Vulnerability Index) for the second time in 2021. Earlier, Bangladesh had been recommended for LDC graduation back in 2018 by the Committee for Development Planning.
The country will most likely graduate from the LDC category in 2026, following a five year transition period. Pundits, however, argued over the eventual benefits of LDC graduation and some went far enough to claim that it may be detrimental to the economic growth of Bangladesh. Both statements are difficult to evaluate in a vacuum. One way to reconcile that is by focusing on the performance of earlier LDC graduates and how they fared over the years following graduation.
The six countries that have graduated from the LDC category to date are Botswana (1994), Cabo Verde (2007), Maldives (2011), Samoa (2014), Equatorial Guinea (2017) and Vanuatu (2020). Equatorial Guinea and Vanuatu have graduated only over the past four years and therefore, it may be too early to investigate the impact of LDC graduation on these two countries. Hence, this article focuses on the other four.
According to the Least Developed Countries Report 2016, all of these four countries have maintained the development momentum after graduation. None of the countries has suffered an economic regression sufficient enough to call for re-inclusion in the LDC category. All of them have continued to increase their per capita GNI as well as their human assets.
However, all of the countries except for Samoa remained extremely vulnerable to economic shock and environmental disasters, as showcased by their high value on the Economic Vulnerability Index. For starters, any country needs to earn a score lower than the threshold EVI value of 32 to be considered for LDC graduation. The lower the value of the EVI, the more robust the performance of the economy. Botswana, Cabo Verde and the Maldives had a value over 32, implying their susceptibility to economic shocks. Interestingly, Botswana, the earliest graduate of the LDC class, is faring much worse than the recent graduates (e.g., Samoa and Equatorial Guinea).
In summary, most LDC graduates achieved increased per capita GNI accompanied by high HAI, except for Equatorial Guinea as of 2020. In terms of economic vulnerability, however, most of the graduate countries fared worse than the pre-graduation period.
Such trends may be attributable to performance in a few key variables, namely, external debt, foreign direct investments and economic diversification.
First, let's talk about external debt. Foreign debt for Cabo Verde has doubled over the years following its graduation. In 2014, the debt to GNI ratio was calculated at 86 per cent. Similar trends were noticed in Maldives and Samoa as well, where the ratio was 39 per cent and 58 per cent, respectively. Such an astronomical proportion of foreign debts was accumulated most probably during the 2008-09 global meltdown and subsequent reconstruction efforts that constituted increased welfare programs.
Such persistent debt is indicative of the inadequacy of the domestic market to generate sufficient funds for the economy. While financing development projects with external debt may sound sustainable in the short-term, particularly in the absence of development assistance, they may be concerning for the prospects of the graduating countries.
Speaking of Official development assistance (ODA), one major promise of LDC graduation is increased foreign direct investment (FDI) that would supposedly exceed the need for ODA. As expected, graduation from the LDC category resulted in a systematic reduction in the share of ODA received by the graduate countries. For instance, Net ODA to GNI ratio for Botswana decreased from 2.9 per cent to 1.3 per cent in 2016. For Maldives, it decreased from 3.4 per cent to 1.7 per cent, and for Cabo Verde the shift was from 18.2 per cent to 14 per cent.
This decrease in Net ODA was then complemented by an increase in FDI for all the graduates, except for Botswana. The FDI to GNI ratio for Cabo Verde increased from 5.5 per cent to 8 per cent, whereas, the ratio increased from 5.8 per cent to 12.9 per cent for Maldives.
It is worth mentioning that this increase in FDI may not be solely attributable to LDC graduation, but a culmination of multiple external factors. Furthermore, simultaneous decrease in ODA and increase in FDI -the expected outcome of LDC graduation- only creates more confusion while explaining the increased economic vulnerability.
What may help us reconcile this perplexity is evaluating the performance of the graduate economies in terms of economic diversification. Economic diversification refers to the diversification of the basket of goods and services, an economy relies on to increase its GDP. For example, Maldives excessively relies on its tourism industry for economic development. It is the largest industry in Maldives, accounting for almost 28 per cent of the GDP as well as more than 60 per cent of its foreign exchange reserves and 90% of tax revenues. The second largest industry in Maldives is its fishing industry. The same could be said about Cabo Verde as well. On the other hand, the largest industry in Botswana is its diamond mining industry.
Whether it is the tourism industry, the fishing industry or the diamond mining industry, all of them are extremely vulnerable to economic shocks as well as environmental disasters and such unfortunate events may cripple the economy of these countries. Therefore, failure to diversify the economy may explain their performance in terms of economic vulnerability.
Does this mean Bangladesh will fall victim to similar circumstances?
Samoa has been a shining beacon of hope for its LDC counterparts. In fact, Samoa is the only country that remains under the threshold value for EVI accompanied by an extremely high value in HAI (96.63). Although Samoa remains vulnerable to natural calamities, they have gradually shifted from a tourism and agriculture dependent economy to one that prioritises its manufacturing industry. Manufacturing currently constitutes 23.6 per cent of the GDP and is steadily increasing, putting its human capital to good use.
These are encouraging signs for an economy like Bangladesh that is pumping up for LDC graduation. The lesson to learn from earlier graduates is to diversify its economy by investing in as many industries as possible. That is, Bangladesh should not only rely on the RMG sector for economic development, but should also invest more in nascent industries like the ceramic industry, ship-wrecking industry, cement industry, pharmaceutical industry etc.