UNITED NATIONS

ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

Expert Group Meeting on Progress made by LLDCs in Implementing the Almaty Programme of Action 25 January 2011 Bangkok

DRAFT DISCUSSION PAPER

Constraints and Development Gaps Facing Asia Pacific Landlocked

Developing Countries: An Overview

____________________

This draft discussion paper has been prepared by ESCAP consultant to facilitate discussions.

The views expressed in this draft paper do not necessarily reflect those of the United Nations or any

other landlocked developing country mentioned therein.

This draft discussion paper has been issued without formal editing.

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Draft

For comments only

Constraints and Development Gaps Facing Asia Pacific Landlocked

Developing Countries: An Overview

I. Introduction

As a group, the landlocked developing countries (LLDCs) are among the poorest developing countries in many respects. Moreover, these countries have limited dependence on a small number of commodities for their export earnings. The growth rate of the LLDCs has also been low over the last decades. One major factor behind the relative deprivation of the LLDCs in the globalized world is their lack of territorial access to the sea and remoteness and isolation from the world markets which substantially inflate their transportation costs and lower effective participation in the world market. The trade reducing effect is significant for these countries as most of the LLDCs are commodity exporters for which high transportation costs constrain export development limiting potential exports and reducing competitiveness and profitability. The price of imports also tends to be high due to inflated transit transport costs. One of the major UN mandates to assist the LLDCs is the Almaty Programme of Action (formulated in 2003) specifically designed to address the special needs of the LLDCs through (i) establishing a new global framework for developing efficient transit transport systems in landlocked and transit developing countries taking into account the interests of both landlocked and transit developing countries; and (ii) promoting trade for development (see, APoA 2003).1 The identified priorities under the Almaty Programme of Action (APoA) covered several areas including the need to address fundamental transit policy issues, infrastructure development and maintenance, international trade and trade facilitation, enhancing international support measures, and focused attention on implementation and review.

1 The United Nations Millennium Declaration (2000) also recognized the special needs and problems of the LLDCs. Several other major UN conferences addressed the development issues and concerns of the LLDCs including the Third UN Conference on the Least Developed Countries (Brussels 2001), International Conference on Financing for Development (Monterrey 2002), and the World Summit on Sustainable Development (Johannesburg 2002). The International Ministerial Conference of Landlocked and Transit Developing Countries and Donor Countries and International Financial and Development Institutions on Transit Transport Cooperation was convened in 2003 to review existing transit transport systems and implement the Global Framework for Transit Transport Cooperation of 1995 and formulate policy measures and action programmes aimed at developing efficient transport systems. The Programme was endorsed by the General Assembly in its resolution 58/201 of 23 December 2003 and 59/245 of 3 March 2005 as well as in the 2005 World Summit Outcome (see General Assembly resolution 60/1).

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The midterm review of the APoA, undertaken in 2008, underscored the need to adopt strengthened initiatives for implementing the Programme especially in view of the high structural vulnerability of the LLDCs in the context of recent global developments. The world economy including the regional development scenario has undergone drastic changes since the review in 2008. The modest economic growth achieved by the LLDCs during the last decade has recently come under increasing threat due to successive global crises in the areas of food, fuel, and finance. As a result, most LLDCs are falling short in achieving various social targets including the Millennium Development Goals (MDGs) while many are severely affected by the climate change. Moreover, the absence of a voice in the evolving global economic governance has led to the marginalization of the LLDC concerns. At present, the world economy is experiencing critical shifts in structure and governance requiring new approaches and modalities for forging development partnership among the LLDCs and the development partners. In view of the importance of the issue, ESCAP in cooperation with the Government of Mongolia, plans to organize the High-level Asia-Pacific Policy Dialogue in April 2011 on the implementation of the APoA and closing the development gaps by the LLDCs. The dialogue would involve all key stakeholders including member governments, the UN system, relevant regional organizations, development partners, and the broad spectrum of the civil society from the Asia Pacific region. This overview paper on the constraints and development gaps faced by the 12 Asia Pacific LLDCs has been prepared to serve as input to the above High-level Policy Dialogue in Ulanbatar, Mongolia in April 2011.2 The paper assesses the progress made in implementing the APoA keeping two broad objectives in view: (i) promoting connectivity and creating fundamental transit transport infrastructure in achieving overall development of the LLDCs; and (ii) enhancing the share of the LLDCs in global trade, aid, and financial flows and promoting further productive capacities of these countries. The paper also discusses the key development gaps faced by the LLDCs beyond the trade-transit issues, particularly in terms of the MDGs. The discussion encompasses the challenges faced by the LLDCs in coping with the recent global financial crisis and its impact on implementing the APoA and achieving the MDGs. The study also addresses other multiple risks and development gaps faced by the LLDCs (such as those arising from climate change) in the context of fast changing regional and global environment. Finally, the paper suggests several forward looking medium to long term recommendations that would be useful for enhancing regional action for accelerating further implementation of the APoA as well as positioning the LLDCs to confront their development challenges and filling the development gaps, especially the ‘MDG gaps’.

II. The Almaty Programme of Action: Progress of Implementation

The main objectives of the Almaty Programme of Action (APoA) are to establish a new global economic framework for developing efficient transit transport systems in landlocked and transit developing countries taking into account the interests of both groups of countries and promote trade for development. In particular, the APoA aims to: (i) secure access to and

2 The 12 LLDCs are: Afghanistan, Armenia, Azerbaijan, Bhutan, Kazakhstan, Kyrgyzstan, Lao PDR, Mongolia, Nepal, Tajikistan, Turkmenistan, and Uzbekistan.

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from the sea by all means of transport according to applicable rules of international law; (ii) reduce costs and improve services so as to increase the competitiveness of their exports; (iii) reduce the delivered costs of imports; (iv) address problems of delays and uncertainties in trade routes; (v) develop adequate national networks; (vi) reduce loss, damage and deterioration en route; (vii) open the way for export expansion; and (viii) improve the safety of road transport and the security of people along the corridors. It was stipulated that, along with streamlined policies and procedures, international conventions on transport and transit as well as regional and bilateral agreements ratified by landlocked and transit developing countries would be the main vehicles by which harmonization, simplification, and standardization of rules and documents can be achieved. It was expected that, at the international level, development partners especially the multilateral aid agencies would give high priority to sustainable transportation financing. Regional and subregional cooperation and integration can play an important role in successfully addressing the specific problems of transit transport from, in, and through developing countries. The APoA called for more effective regional cooperation and integration initiatives to facilitate the participation of landlocked and transit developing countries in the global economy, better sharing its benefits, and containing its negative effects. Recognizing the importance of trade for the LLDCs and the adverse impact of high trade transaction costs, the Programme emphasized the need for enhanced and predictable access to all markets for the exports of the landlocked and transit developing countries along with assistance in the area of trade facilitation.

Almaty Programme of Action: Implementation Status and Major Issues The implementation status of the APoA was assessed in the Midterm Review Meeting at the regional level jointly organized by ESCAP and the Economic Commission for Europe (ECE) in collaboration with the Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries, and Small Island Developing States during 22-23 April 2008 in Bangkok. The meeting assessed the progress and identified the obstacles along the five priorities of the APoA. While acknowledging the work undertaken at the national, subregional, and regional levels for the implementation of the Programme, the meeting recognized the continuing challenges faced by the LLDCs in integrating with the global economy and the need to expedite and strengthen the process of implementation of the APoA. In particular, the Review identified several priority actions for effective implementation of the Programme. Priority 1: Create enabling environment by the landlocked and transit developing countries in order to establish efficient transit transport systems through genuine partnerships. Several fundamental transit policy issues have been identified that need urgent action: (i) harmonization of legal regimes relating to transport and transit; (ii) adoption of an integrated approach to trade and transport facilitation; (iii) elimination of physical and non-physical barriers to transit transport; and (iv) promotion of integrated training programmes encompassing all levels in both public and private sectors. International conventions on transport and transit, including regional and bilateral agreements, are the main vehicles for achieving harmonization, simplification, and

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standardization of rules and documentation. While the need is to provide quick accession by the concerned countries to conventions that provide at least the minimum level of international harmonization (e.g. seven conventions identified by ESCAP in its resolution 48/11 and another six additional international conventions administered by ECE and recommended by the Special Programme for the Economies of Central Asia Project Working Group on Transport and Border Crossing), priority should be given to capacity building assistance to countries for raising awareness and understanding of the process and implications of accession to international conventions on transport facilitation. For ESCAP, priority areas for technical and financial support include: (i) negotiation of an agreement among the Shanghai Cooperation Organization member States to facilitate international road transport; (ii) implementation of annexes and protocols to the Greater Mekong Subregion Cross Border Transport Agreement supported by the Asian Development Bank (ADB); and (iii) implementation of the Economic Cooperation Organization (ECO) Transit Transport Framework Agreement. For adopting an integrated approach to trade and transport facilitation, ESCAP needs to expand its support to member countries in establishing and strengthening national coordination mechanisms for trade and transport facilitation, organizing subregional and regional forums for sharing knowledge and best practices, and working towards harmonization of trade and transport rules and documents. The countries may also need assistance in developing benchmark performance indicators for border crossing along their main international road and rail corridors. The ESCAP also needs to assist the countries in identifying and addressing physical and non-physical bottlenecks through analyzing different transport routes e.g. Euro-Asian transport links and the transport network of the Special Programme for the Economies of Central Asia. Based on route data and analysis using ESCAP time/cost distance methodology, ESCAP should work with the landlocked and transit developing countries and other development partners to promote the intermodal transport corridor concept and assist the countries in formalizing cooperation along these corridors. Priority 2: Develop transport infrastructure networks especially to complete the missing links, improve the infrastructure, promote intermodal transport, and develop integrated transport corridors and logistic services. Several areas of priority action may be identified for ESCAP to expedite progress in infrastructure development and maintenance: (i) develop, upgrade, and maintain the Asian Highway and Trans-Asian Railway networks by working jointly with traditional and non-traditional funding sources including public-private partnerships; (ii) implement capacity building programmes to enhance the capacity of Governments to promote, operate, and manage infrastructure development and provision of basic services; (iii) operationalize the Asian Highway and Trans-Asian Railway networks through organizing truck caravans along the highway routes and demonstration runs of container block trains along railway routes; (iv) assist landlocked and transit developing countries in promoting the Euro-Asian Transport Linkages by enhancing capacities to deal effectively with their transit transport requirements; and (v) continue with support to the Special Programme for the Economies of Central Asia Project Working Group on Transport and Border Crossing in developing and operationalizing the road and rail networks.

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For developing intermodal transport and logistics, ESCAP needs to: (a) promote the intermodal transport corridor concept and assist countries in formalizing cooperation for efficient operation of such corridors; (b) provide assistance for developing intermodal interfaces such as dry ports and inland container depots, and for clustering economic activities around the intermodal interfaces to bring development inland; and (c) assist landlocked and transit developing countries in establishing sustainable training programmes in multimodal transport and logistics. Priority 3: Enhance market access and trade opportunities. Despite some progress in enhanced integration of landlocked and transit developing countries into the global trading system, several LLDCs are still not members of the World Trade Organization (WTO). Similarly, the signing of a number of preferential trade agreements has not led to adequate materialization of the opportunities for enhanced market access and new South-South trade for the LLDCs. Along with domestic institutional reform, efforts are needed at the multilateral level for facilitating development friendly conditions for the accession of landlocked and transit developing countries to the WTO especially to cope with unavoidable adjustment costs. For enhancing market access, the ESCAP needs to: (i) administer training programmes for the LLDCs on trade policy reform and economic policy coherence; (ii) conduct tracking and analysis of changes in market access for these countries; (iii) develop on line databases, analytical tools, and trade information sources (e.g. Asia Pacific Trade and Investment Agreements Database) as well as platforms for sharing best practices in trade policy reforms and trade facilitation (e.g. Macao Regional Knowledge Hub on Trade Policy and Asia Pacific Forum on Efficient Trade); (iv) promote measures for accessions to the Asia Pacific Trade Agreement for enhanced integration of the LLDCs into the regional economy and encourage land linkages for the LLDCs; (v) develop local and regional capacity for trade and trade policy analysis (e.g. using the experience of ESCAP with Asia Pacific Research and Training Network on Trade); and (vi) build capacity of LLDCs to implement the ECE commercial agricultural quality standards, manage regulatory harmonization and prepare for accession to WTO. Although the majority of the LLDCs have implemented trade facilitation reforms aimed at simplifying trade regulations, procedures, and documents, four areas need increased focus for the LLDCs. These are: (i) harmonizing regulatory requirements, procedures, and documentation for imports, exports, and transit with international conventions and standards; (ii) creating or reinforcing an effective institutional framework for the implementation of trade facilitation measures; (iii) modernizing customs information systems and shifting to risk assessment and advance cargo information; and (iv) enhancing cooperation between neighbouring countries through harmonized trade regulations and joint border crossing posts, where feasible, or harmonizing the working hours of adjacent border crossing posts as articulated in the ECE International Convention on harmonization of frontier controls of goods. For capacity building in the above areas, several activities by ESCAP may be considered including: (a) assistance in negotiating on trade facilitation in the context of the WTO; (b) creating public-private cooperation mechanisms for effective implementation of

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trade facilitation measures;3 (c) assisting for accession to and implementation of international conventions and use of standards and best practices in trade and transport facilitation including use of standards and recommendations on establishing single window systems for export and import clearance and trade data harmonization; and (d) establishing an Asia Pacific Forum on Efficient Trade covering expert networks to, among others, introduce and use electronic trade documentation aligned with United Nations standards. Priority 4: International support measures. Although the primary responsibility of implementation of the APoA rests with the LLDCs, the Programme acknowledges the magnitude of the task of establishing and maintaining an efficient transit system and the role of development partners in providing assistance. The mandate of the international community is to work together in specific areas relating to fundamental transit, transport infrastructure and facilitation, and international trade and trade facilitation. For achieving the objectives, more emphasis is needed on mobilizing additional official development assistance (ODA) as well as financial and technical resources in undertaking the actions identified under different priorities. This is essential in order to move forward in implementing the APoA. Priority 5: Implementation and review. It would be important to organize periodic review meetings at the subregional level in order to provide the required thrust to implement the Programme and monitor the implementation progress. For the LLDCs, the urgent priority is to establish efficient transit transport systems for which genuine partnerships are required between the public and private sectors and between landlocked and transit developing countries and their development partners at the national, bilateral, subregional, regional, and global levels. For successful collaboration, the partnerships need to be based on mutual benefits emanating from specific actions agreed under the APoA aiming to establish efficient transit transport systems. The key to success would be the provision of financial and technical support by the international community including the financial and development institutions to help these countries to deal effectively with their transit transport problems and requirements. It also needs to be recognized that the efficiency of the transit transport systems critically depends on the promotion of an enabling legal, administrative, and macroeconomic environment in both landlocked and transit developing countries for making effective policies, mobilizing required resources for implementation, and devising equitable cooperative frameworks between landlocked developing countries and their transit neighbours for ensuring transit transport safety and enabling to derive significant economies of scale especially by the LLDCs. For the LLDCs, regional and subregional cooperation or integration can play an important role in successfully addressing their specific transit transport problems, facilitating more effective participation of these countries in the global economy to derive a more equitable share of benefits from global integration. For accelerating the speed of implementation of the APoA, it is important to ensure a more effective mobilization of concerted efforts by the landlocked and transit developing countries, their development partners, relevant

3 See, for example, ESCAP 2007.

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organizations and bodies of the United Nations system, international financial and development organizations, and other relevant regional and subregional organizations.

III. Asia Pacific LLDCs: Multiple Imbalances and Development Gaps

The Asia Pacific LLDCs have achieved relatively rapid economic growth in the last decade and rebounded fast after the recent global economic recession of 2008-09. However, the rebound remains fragile and uneven characterized by a number of downside risks. The challenge for the LLDCs is to turn the rebound into sustained recovery leading to high economic growth along with creating capacity to address the multiple structural imbalances and large socioeconomic and development gaps that persist in these countries. The LLDCs also have considerable infrastructure gaps and these countries reflect varying patterns of progress towards the MDGs. In addition, these countries suffer from serious ecological imbalances reflected in the degradation of key natural resources, such as forests and fresh water, which are aggravated by the climate change impacts. The above point out that inclusive and sustainable growth is not only desirable for the LLDCs but also necessary for regaining dynamism and promoting social development goals. Recent Economic Performance The Asia Pacific region as a whole started to recover from the recession by the second half of 2009 and, for the developing economies of the region, GDP is expected to grow by 7.0 percent in 2010 following a growth of 4.0 percent in 2009 (ESCAP 2010a). The growth performance of the 12 Asia Pacific LLDCs is shown in Table 1. In Afghanistan, real GDP growth is estimated at 15.1 percent in 2009/10 (compared with 3.4 percent in 2008/09), driven largely by the performance of the agriculture sector and increased spending by the government and the donors. Weather factors play the largest role in determining the level of agricultural production and hence the growth of GDP in the country. Nearly a third of the country’s GDP originates in agriculture followed by 28 percent from industry. The rest comes from services. Afghanistan ran a trade deficit of around US$ 6.3 billion in 2009/10. The potential for an increase in Afghanistan’s traditional exports, such as carpets and dried fruits, is limited but greater transit trade from Central Asian countries and trade with Iran could provide a boost. Despite signing a bilateral transit agreement with Pakistan in July 2010, trade problems still remain affecting the country’s exports and imports (see, EIU 2010). Although the Armenian economy contracted by 14.4 percent in 2009, it grew by 2.8 percent year on year in January-September 2010. The slowdown was primarily driven by the agriculture sector, which contracted by almost 18 percent year on year in January-September 2010. The real GDP growth in 2010 is estimated at 1.5 percent. The forecast for real GDP growth in 2011 is 3.3 percent primarily due to weakening of external conditions mainly slow growth in the countries that host migrant workers, or are important export markets and sources of investment for Armenia. The export earnings contracted by 35.7 percent in 2009. Although growth picked up in 2010 due to higher global prices and increased demand for the country’s main exports of metals and mineral products, a slow growth is predicted for 2011 mainly due to weaker outlook for the global economy. It is estimated that the current account deficit will narrow as a percentage of GDP to 13.3 percent in 2010 after expanding to 15.5 percent of GDP in 2009 (see, EIU 2010).

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Table 1: Recent Economic Growth and Inflation in Asia Pacific LLDCs

Country/Region Real GDP growth (percent) 2008 2009 2010

Inflation (percent) 2008 2009 2010

Afghanistan Armenia Azerbaijan Bhutan Kazakhstan Kyrgyzstan Lao PDR Mongolia Nepal Tajikistan Turkmenistan Uzbekistan

3.4 15.1 7.6 6.8 -14.4 1.5 10.8 9.3 7.0 5.0 5.7 6.6 3.3 1.0 2.0 7.6 2.3 3.0 7.9 5.4 6.0 8.9 0.5 6.5 5.3 4.7 3.5 7.9 3.4 3.5 9.8 -6.1 7.0 9.0 8.1 8.0

26.8 -10.0 8.4 9.0 3.4 4.0 20.8 1.5 6.0 6.3 7.2 8.4 17.2 7.3 7.0 24.5 6.8 8.6 7.6 0.2 5.0 28.0 7.0 7.9 7.7 13.2 7.5 20.4 6.4 8.0 13.0 10.0 12.0 12.7 8.0 8.5

East and North East Asia North and Central Asia South and South West Asia South East Asia Developing Economies ‘---‘ excluding China and India

2.1 -1.1 4.0 5.8 -5.8 3.7 4.7 2.9 6.1 4.0 0.6 5.1 5.7 4.0 7.0 2.7 -0.6 4.7

3.5 -0.3 1.0 14.4 10.7 7.9 11.5 11.2 8.4 8.6 2.1 4.1 7.3 3.1 4.1 8.0 3.8 4.5

Note: Real GDP growth rates are at 2000 prices and inflation is measured by changes in consumer price index. The figures for 2009 are estimates and those for 2010 are projections. Source: ESCAP 2010a.

Azerbaijan experienced the repercussions of the global downturn through weaker oil prices and heightened risk aversion towards emerging markets. Real GDP expanded by 9.3 percent in 2009, the slowest growth recorded by Azerbaijan since 1999. Due to weaker outlook for the oil sector, it is estimated that economic growth will slow to 7.0 percent in 2010 and 3.1 percent in 2011. The forecast for current account surplus shows an average of 23.8 percent of GDP in 2011-2015 driven by substantial trade surplus as export revenue, overwhelmingly derived from the oil sector, will continue to dwarf import spending (see, EIU 2010). Bhutan’s economy is highly dependent on exports of hydroelectricity primarily to neighbouring India. Real GDP growth slowed from 19.7 percent in 2007/08 to 5.0 percent in 2008/09 which is projected to rise to an average of 6.8 percent a year in 2010/11 and 2011/12 following an estimated growth of 5.7 percent in 2009/10. Growth will be underpinned by further hydroelectric schemes and by industrial development as well as a revival in tourism following a sharp fall in tourist arrivals in 2009. The current account deficit is likely to narrow as export growth accelerates on the back of stronger economic growth in Bhutan’s export markets especially in India. It may be mentioned that India is Bhutan’s largest trading partner and accounted for nearly 94 percent of the country’s exports and 81 percent of its imports in 2008/09 (see, EIU 2010). Real GDP grew by 1.0 percent in 2009 in Kazakhstan, the slowest pace of growth since 1998. Economic growth has picked up in 2010 as external demand has risen and domestic conditions have started to improve. As a result, economic growth is estimated at 2.0 percent in 2010. The forecast for real GDP growth is 4.9 percent in 2011, partly because of weaker external demand and lower oil prices which is likely to offset to some degree by an increase in domestic demand

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as the impact of the global economic recession fades and prospects for employment improve. The average annual growth rate is forecasted at 6.1 percent in 2012-2015. The current account is projected to remain in surplus at 5 percent of GDP in 2011-2015 as higher oil prices and an increase in global demand for commodities support a rise in export revenue (see, EIU 2010). In Kyrgyzstan, real GDP, which grew by an estimated 3 percent over 2010, is expected to bounce back to a growth rate of 4 percent in 2011. A faster recovery would be constrained by a slowdown in Russia and Kazakhstan, which are important markets for Kyrgyz exports. Furthermore, these countries are a large source of remittances on which many Kyrgyz households rely. Growth is likely to pick up to 5 percent in 2012 as the Russian and Kazakh economies expand more strongly. The risks, however, are on the downside since cross border trade, which supports much of the retail sector, could suffer if border controls with Uzbekistan and Kazakhstan are tightened. Following a current account deficit of 6.6 percent of GDP in 2009, the current account is estimated to be in broad balance in 2010. The forecast is that the current account will revert to deficit in 2011 and 2012, equivalent to 2.9 percent and 4.6 percent of GDP respectively (see, EIU 2010). With very limited exposure of the economy to global trade and investment flows, Lao PDR recorded robust economic growth of 5.4 percent in 2009 which is expected to rise to 6.0 percent in 2010 and to 7.7 percent in 2011. Merchandize exports will recover in 2010 as economic growth accelerates in Laos’s main export markets especially in Thailand and as the country benefits from higher global prices for energy and minerals. The trade deficit, however, is likely to widen as the demand for imported capital goods strengthens in line with increased investment and growth in imports of consumer goods accelerates partly fueled by lower tariff barriers in line with AFTA commitments and poor competitiveness of local products. The current account deficit narrowed to the equivalent of 0.4 percent of GDP in 2009 from an estimated 1.4 percent of GDP in 2008. The deficit is likely to widen to 1.1 percent of GDP in 2010 owing to increases in merchandise trade and income deficits (see, EIU 2010). Hit by the global economic downturn, a domestic banking crisis, and a slowdown in construction, the Mongolian economy grew by 0.5 percent in 2009. Moreover, the impact of a zud (a natural disaster encompassing a summer drought followed by an unusually harsh winter) in 2009 and early 2010 had a major adverse effect on the agriculture sector. Despite these adverse impacts, the prospect of a boom in mining related investment is likely to lead to a strong recovery with an expected annual real GDP growth of 9.0 percent in 2010-2011. Mongolia’s exports have recovered from their slump in late 2008 and early 2009 owing to a surge in export prices and strong demand from the country’s main trading partner, China. Exports are expected to remain strong in 2010-2011, in line with improving external demand and high global prices for metals (see, EIU 2010). Given the large share of agriculture in GDP--an estimated 33 percent in 2009/10—and the fact that agriculture employs the majority of the population, crop growing conditions remain the major determinant of Nepal’s overall economic growth. The real GDP growth is likely to remain below 4 percent in 2010/11, following an estimated expansion of 3.5 percent in 2009/10. The merchandize trade account is likely to remain in deficit as import growth would outpace export growth by a considerable margin. A sustained rise in inflows of remittances from Nepali workers

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overseas is likely to provide limited support to the current account, but the balance of payments is expected to remain in deficit in 2011-2012 (see, EIU 2010). In Tajikistan, real GDP growth was reported at 3.4 percent in 2009 with a forecast of 3.5 percent growth in 2010. The growth is likely to be 5.0 percent in 2011 with the slowdown in Russia and broadly stagnant prices of aluminium and cotton adversely affecting the Tajik economy. Tajikistan remains dependent on sales of aluminium, cotton, and electricity for most of its export revenue. Although export revenue is expected to rebound from 2010 onwards, higher global prices for food and fuel will push up import costs as well. The trade deficit is expected to remain relatively narrow in 2010, following a sharp contraction in 2009. The overall current account deficit is projected at 6 percent of GDP in 2010, which is likely to expand further to 7 percent of GDP in 2011 as import costs remain high but cotton prices fall limiting growth in export revenue (see, EIU 2010). The Turkmen economy contracted by 6.1 percent in 2009 owing mainly to the disruption to the gas exports, as well as the poor performance of the global economy especially of the Russian economy. However, the resumption of gas exports to Russia from the beginning of 2010 and start of gas exports to China and increased gas exports to Iran combined with increased investment in developing the energy sector have seen the economy recover in 2010. The forecast is that the economy will grow by 7.0 percent in 2010 and, with a continuing ramp-up in investment and further increases in gas exports to China and Iran, a growth of 6.0 percent in 2011 is predicted. The current account surplus shrank sharply to around 14 percent of GDP in 2009 owing to the shutdown of most gas exports in the pricing dispute with Russia. However, the surplus will grow substantially in 2010-2011 as gas exports increase. Transit trade will provide only limited services credits and Turkmenistan is expected to rely on imported services in sectors such as construction and hydrocarbons (see, EIU 2010). For Uzbekistan, the expected real GDP growth rate is 8 percent in 2010 following a reported growth of 8.1 percent in 2009. The chief external factors affecting economic performance are trends in commodity prices especially of gold, cotton, and gas which significantly affect the Uzbek economy and its export earnings. In view of the expected downturn in the global environment in 2011, real GDP growth is likely to dip to 7.9 percent in 2011, following an expected growth of 8 percent in 2010. The current account surplus was 11 percent of GDP in 2009 slightly smaller than the surplus of 14.2 percent of GDP in 2008 owing to a downturn in remittances and a sluggish performance of exports. The current account surplus is estimated at 17.3 percent of GDP in 2010 largely resulting from higher prices of Uzbekistan’s commodity exports and recovery of remittances. The current account surplus is expected to hover around 13-16 percent of GDP during 2011-2012 (see, EIU 2010). Impact of Global Economic Crisis The pattern and extent of impact of the global economic crisis in each economy of the Asia Pacific LLDCs hinged on a number of factors, including its initial conditions, the breadth and depth of its integration with the global economy, and the speed and intensity of the government’s countercyclical measures.

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The only LLDC located in East and North East Asia is Mongolia. Although the economy of Mongolia is relatively less integrated with the rest of the economies in the region, it experienced a sharp drop in economic growth, from a robust 8.9 percent to 0.5 percent between 2008 and 2009. Lower commodity prices for some of its principal exports contributed to the sharp deceleration in growth. Mongolia also exhibited a relatively high inflation rate, estimated at 7 percent in 2009 in comparison with 28 percent in 2008. In the case of exports, Mongolia was affected both by a decline in volume and sharp fall in prices. By the end of 2008, the Mongolian tugrik lost over 25 percent of its value against the US dollar and the Bank of Mongolia responded with a rise in interest rates. Benefiting from the Oyu Tolgoi investment, Mongolia is expected to grow by 6.5 percent in 2010. Among the LLDCs in North and Central Asia, Armenia had the worst affected economy suffering a 14.4 percent decline in growth in 2009. A sharp fall in remittances from Armenians working abroad caused much hardship, since remittances accounted for nearly 9 percent of the country’s GDP. Consequently, the remittance fuelled construction boom halted sharply, with the sector contracting by more than 50 percent during the first three quarters of 2009. Among other LLDCs in the region, Kazakhstan is a net exporter of fuel with an economy highly dependent on oil revenues. It was impacted heavily by the crisis as well as reduced oil and other commodity prices. GDP is estimated to grow by 1 percent in 2009. From mid 2009, Kazakhstan experienced a rise in the pace of industrial production providing signs of a positive response from the government’s stimulus package for industry and infrastructure sectors including small and medium scale enterprises. On the other hand, Azerbaijan, Turkmenistan, and Uzbekistan grew relatively fast; being less open and thus being more reliant on domestic demand for economic growth. They also had the fiscal space to implement countercyclical measures. Uzbekistan was one of the fastest growing economies buoyed by increases in the price of gold and a good grain harvest. Industrial output grew by 9 percent in 2009, with gross fixed investment particularly in the construction sector growing by about 30 percent. In Azerbaijan, expansion in the industrial sector also made a major contribution to economic growth. After experiencing high inflation rates in 2008, inflation decelerated in 2009 across these countries due to weakened domestic demand and reduced commodity prices especially for energy and food. Inflation, however, is expected to remain high at close to double digit level in Turkmenistan. In Kyrgyzstan, CPI inflation decelerated from 24.5 percent in 2008 to 6.8 percent in 2009. Turkmenistan attempted to control inflation by reducing the amount of cash in circulation through a currency reform process given its underdeveloped capital and money markets and the lack of alternative monetary policy tools at its disposal. Inflation in Armenia and Azerbaijan remained at modest levels. Economic crisis resulted in sharp declines in current account and foreign trade surpluses across most of these countries. The impacts were low in relatively closed economies that were less affected. Remittances made a major contribution accounting for one third and one quarter of GDP in Tajikistan and Kyrgyzstan respectively in 2008. Up to one third of Tajikistan migrants are estimated to have returned home in 2009 and remittance inflows could have fallen by 60 percent. A 30 percent fall in remittance inflows is expected in Kyrgyzstan in 2009. The governments reacted quickly to the crisis by implementing expansionary monetary and fiscal policies. Most countries substantially expanded government spending directed at countering the

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adverse impact of the crisis on economic security and social well being of the peoples. Public investments in large infrastructure projects accelerated. However, substantial declines in remittance inflows created serious difficulties for the poor households who, over the years, had come to depend on remittances as a way of coping with poverty. Much of the rapid economic growth in these countries prior to the global crisis came through increased external integration, mainly through trade and investment, particularly in natural resources as well as remittances. During the crisis, despite rising protectionist pressures and temptation to reverse externally oriented growth policies, these countries generally maintained their commitment to keeping trade, investment, finance, and labour markets open. Moreover, reforms to improve the business climate and encourage FDI inflows continued. As a result, a return to positive growth in all these countries is expected in 2010. The fastest growing economies are likely to be those of Turkmenistan and Azerbaijan at 7 percent and Uzbekistan at 8 percent in 2010. Kyrgyzstan and Tajikistan need to develop their energy resources and infrastructure and to increase energy self-sufficiency to sustain economic growth and solve problems of poverty, infrastructure repair, and capacity building. Although the LLDCs in South and South West Asia (Afghanistan, Bhutan, and Nepal) maintained positive economic growth, exports declined substantially and capital inflows were reduced. These countries rely mostly on agriculture for employment which has held up well overall and thus dampened the worst of the crisis fallout. In Afghanistan, economic activity is dominated by agriculture and large fluctuations in GDP growth reflect the inherent vulnerability of the economy to weather conditions. In Bhutan, GDP growth peaked at 21.4 percent in 2007 with the completion of the Tala hydropower project in 2007 but returned to a more normal level of 5.0 percent in 2008 and 5.7 percent in 2009. In Nepal, GDP growth was 5.3 percent in 2008 and fell slightly to 4.7 percent in 2009 due mostly to adverse weather affecting agricultural output and severe electricity shortages constraining non-agricultural production. High inflation emerged as a serious problem in most of these LLDCs. Inflation in Afghanistan rose to 26.8 percent in 2008 which is expected to come down to 8.4 percent in 2010. Inflation in Bhutan and Nepal is linked to inflation in India due to the fixed rates of exchange of their currencies with the Indian currency. Inflation in Nepal reached 13.2 percent in 2009 and would be around 7.5 percent in 2010. In Bhutan, inflation was 7.2 percent in 2009 which is expected to rise to 8.4 percent in 2010. During the global economic crisis, both exports and imports slowed down and helped contain trade and current account deficits in the region’s LLDCs. In Nepal, due to the continued growth of remittances, the current account and the balance of payments remained in surplus despite large merchandise trade deficits. Lao PDR, the only LLDC in South East Asia, grew at 7.9 percent in 2008 which was one of the fastest rates of growth in the region. The growth of GDP is estimated at 5.4 percent in 2009 and is likely to be 6.0 percent in 2010. The relatively brisk growth was partly the result of higher metal prices, especially gold. The economy also received a boost due to pay increases for public servants and increased public investment on infrastructure. The above shows that about two years after the global economic crisis hit the Asia Pacific region, the LLDCs face challenges that underlie the need for domestic policy reforms and changes in global environment geared to more inclusive and sustained growth of their

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economies. The LLDCs were significantly affected because of their relatively high vulnerability to global developments, primarily through trade and financial channels. The degree of vulnerability of individual LLDC varied with the extent of dependence on trade, nature of demand structure, depth of fiscal space, extent of foreign exchange reserves, and strength of other macroeconomic fundamentals. Moreover, the ability of individual countries to adopt counter-cyclical macroeconomic policies depended on the fiscal capacity to meet the necessary costs and the institutional capacity to implement such policies, especially if they were to contribute to protecting the poor and the vulnerable groups in society. While most LLDCs adopted policies to stimulate their economies out of the downturn, the response varied among the countries depending on the fiscal and policy space they had in accommodating expenditure increase and implementing relevant programmes. It is necessary to recognize that while fluctuations in economic activities are normal in market economies, the frequency and severity of such fluctuations are usually more severe in developing economies such as the LLDCs. Hence it is important for the LLDCs to keep them prepared to face such crises. The above becomes still more necessary as crises originating in the financial sector spread to the real world and affect people’s lives and livelihoods through a variety of transmission channels. As such policy responses to a crisis in the LLDCs need to address not only the economic impact but also the social dimensions such as poverty and employment. It may also be prudent for the LLDCs to consider the idea of creating a ‘basic social floor’ for the poor (such as, a desirable package of employment and labour market policies) in their countries in order to protect them from the fallout of such crises in future. While national policy reforms are important, the LLDCs require regional coordination in economic and financial policymaking to provide the supportive environment for inclusive growth. Coping with Vulnerability As a result of the global economic crisis, economic growth in the LLDCs was severely affected by vulnerability to trade and, to some extent, to financial exposure. In particular, export dependent LLDCs suffered large reductions in GDP growth. In effect, the global crisis has sparked a debate on the role of trade in development and the importance of market diversification especially for the LLDCs. The extent of vulnerability depended on a number of factors, such as the degree of openness of the economies, market orientation of exports, and the product mix of trade. The export dependence of LLDCs varies significantly across countries with countries like Azerbaijan, Kazakhstan, and Turkmenistan having relatively high shares (more than 50 percent) whereas countries such as Armenia, Nepal, and Afghanistan have low shares (less than 20 percent) of exports in GDP. It may be mentioned that the export sector of the Asian and Pacific developing economies comprises close to 38 percent of GDP which is two and a half times larger than the corresponding share of the developed economies in the region. The destination market of exports is also an indicator of vulnerability since it reflects the exposure of an economy to the source of market disturbance. The trade intensity index shows whether a country exports more (as a percentage) to a given destination than the world does on average.4 Although data on the index for all Asia Pacific LLDCs are not available, the trade

4 More specifically, the trade intensity index measures the ratio of the trade share of a particular country to a partner country and the world trade share to the same country. An index value of greater than one indicates that the

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intensity index is reported at 15.60 with China for Mongolia in 2007 indicating greater trade in materials which presumably are used for Chinese exports to the developed world. The trade patterns of other LLDCs are also more likely to reveal similar dependencies on specific countries indicating increased vulnerability. Impacts on Employment and Income The economic crisis, especially the collapse in aggregate demand from developed countries through the trade channel, led to job and income losses especially in key export industries in the LLDCs. The unemployment rate rose sharply in many LLDCs creating deep socio-political repercussions in the absence of sufficient social protection programmes. Most of the LLDCs have low public expenditure on social protection creating the danger for millions to fall back into poverty. It is estimated that the present global crisis could trap an additional 21 million people below the poverty line of $ 1.25 per day and 25 million based on the $ 2-per-day poverty line between 2009 and 2010 in the Asia Pacific region (ESCAP/ADB/UNDP 2009). Although separate figures are not available for the LLDCs, it is more likely that these countries will have to bear a more than proportionate burden of the people who would slip back into poverty due to the crisis. For most of the workers in these countries, shifting to vulnerable and informal employment is often the only means of survival since they belong to low-skilled workers at the bottom of the income scale. Joblessness among youth is also a major challenge in the LLDCs which, besides reducing overall family income, can exacerbate social tensions. From the onset of the global economic crisis, many LLDCs have responded to the worsening employment situation with a wide range of measures. It needs, however, to be recognized that recovery in the labour market can trail behind economic recovery and real wages and labour productivity take time to recover. The appropriate mix of macroeconomic policies is therefore an essential prerequisite along with labour market reforms and adequate resources for building effective social protection systems. Migration and Remittances Over the years, remittances have become an increasingly important source of external development finance, supporting the balance of payments and contributing to income growth of the LLDCs. For poor households in these countries, remittances provide a vital lifeline; remittances augment family incomes, help in developing human capital by contributing to education and healthcare needs, and foster entrepreneurial development through income earning investment activities. Although remittances fell or slowed down in several LLDCs as a result of the global crisis, it remained as the most resilient source of foreign exchange earnings in comparison with other capital flows to these countries resulting mainly from the relatively stable migrant populations in most destination countries. However, recognizing the great importance of remittances in national development, the LLDCs need to design appropriate measures to counteract negative impacts on migrant workers. These countries can adopt aggressive labour export strategy to identify areas with a high demand for labour and negotiate bilateral labour migration agreements with those countries. The governments can also create expatriate livelihood support funds to help returning migrants find new jobs.

country’s export volume to the destination is greater than the world average. The country would then have a more intense export trade relation with that partner than does the rest of the world.

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Disaster and Climate Change Impacts According to the International Disaster Database (EM-DAT), the number of disaster events reported globally more than doubled from 1,690 during 1980-1989 to 3,886 during 1999-2009. Over the 1980-2009 period, 45 percent of these events were in the Asia Pacific region and the region suffered the largest number of disasters over these years. Moreover, the Asia Pacific region experienced a sharp increase in the number of disasters in the last decade. In terms of losses, the region is proportionally harder hit as well, suffering 42 percent of the economic losses due to disasters while generating 25 percent of the world’s GDP. All subregions are affected by disasters with South and South West Asia having the highest number followed by South East Asia. Since only four out of 12 LLDCs are located in these two regions, the share of disaster events of the LLDCs was low at 9 percent during 1980-2009 with a share of 6 percent of total damage in value terms (ESCAP 2010b). The above, however, should not be taken as a source of complacency since the risks for most hazards have been increasing in the region. The development policy of the LLDCs needs to take into consideration rising disaster risks, especially the impact of climate change. The climate change findings of the Asia Pacific region especially relate to surface warming, sea level rise, extreme events (e.g. more frequent hot extremes and heat waves), precipitation events (more precipitation at higher altitudes and less in most subtropical land areas), cyclones, and similar other events. An analysis with EM-DAT database for the period of 2000-2004 to 2005-2009 suggests that the risk of hydrological disasters has increased in the LLDCs while the least developed countries (LDCs) have experienced an increase in risk of loss caused by multi-hazard, geophysical, and meteorological events. Overall, the risk is increasing in the poorer countries of the Asia Pacific region. Disasters in the LLDCs, like in other developing countries, constitute unresolved problems of development and require a risk reduction and mitigation perspective rather than a response based approach. Reducing disaster risks in the LLDCs requires widespread and sustained commitment across a wide range of areas in line with the priorities for action and tasks highlighted in the Hyogo Framework for Action (HFA) 2005-2015 for reducing disaster risks. The adoption of such an overall framework by the LLDCs would ensure effective integration of disaster risk considerations into sustainable development policies, planning, and programming at all levels with a special emphasis on disaster prevention, mitigation, preparedness, and vulnerability reduction. Since many of the hazards are likely to intensify due to climate change, it is vital for the LLDCs to address the issues on a broad front integrating disasters and climate change policies and socioeconomic policies aimed at reducing poverty and inequalities. As in other developing countries, the issues of increasing effects of disasters, environment degradation, and climate change are emerging as important barriers to achieving the MDG targets. Climate change is projected to have serious economic and social impacts which will impede progress towards the MDGs (see, UN 2005, 2007). ESCAP’s monitoring and updates on progress towards achieving the MDG goals in the Asia Pacific region show that only 10 developing countries are on track in integrating sustainable development principles into country policies and programmes. For the LLDCs, the MDGs are unlikely to be achieved unless

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development investments are disaster proof, and disaster risk and vulnerability are factored into development plans and strategies. As climate change adaptation action is mostly local, the need for the LLDCs is to link organized and local adaptation strategies and approaches. This will provide a better understanding of ways of improving coping and adaptation strategies by communities impacted by climate change along with providing support to creating an environment that would make such practices sustainable and more effective by fostering participation, empowering the participants, and incorporating indigenous knowledge. The urgent need for the LLDCs is to prepare comprehensive disaster risk management action plans along the lines of the HFA. In view of the cross-national nature of the impact of climate change, the response by the LLDCs needs to be regional and subregional which may cover various dimensions, such as through sharing knowledge, information, and good practices; developing common frameworks and understandings; reaching agreements on common laws, institutions, and protocols; and by pooling common resources. Progress in Achieving the MDGs A recent review records the impressive gains made by the Asia Pacific region in many MDG indicators, especially in reducing poverty (ESCAP/ADB/UNDP 2010).5 For several other indicators, the Asia Pacific region as a whole has achieved the targets, e.g. reducing gender disparities in primary, secondary, and tertiary education enrolment, preventing a rise in HIV prevalence, stopping the spread of tuberculosis (TB), reducing the consumption of ozone depleting substances, and halving the proportion of people without access to safe drinking water. On the other hand, the region lags behind in some major areas, such as in reducing the extent of hunger, ensuring that girls and boys reach the last grade of primary education, reducing child mortality, improving maternal health provision, and providing basic sanitation. The overall progress in the Asia Pacific region, however, masks considerable variations between country groupings and subregions. If we look at the sub-regional picture, the greatest progress can be seen in South East Asia followed by the North and Central Asian countries (ESCAP 2010c). The region’s 14 least developed countries (LDCs) have made slow or no progress on most indicators—performing well only on gender equality in primary and secondary education, and stopping the spread of HIV and TB. The performance of the 12 Asia Pacific LLDCs is summarized in Table 2. It shows wide divergence in performance across the countries and with respect to overall status of the Asia Pacific LLDCs showing that the progress in reaching the MDGs has been uneven for the LLDCs. Moreover, even in countries where good progress has been made towards the MDGs, there are often glaring disparities between rural and urban areas, between the rich and the poor, between women and men, and between girls and boys. In terms of 21 indicators of the MDGs for which status of the LLDCs is reported in Table 2 using internationally comparable data until 2008, the countries are seen to be lagging in some major areas, such as reducing the extent of hunger, ensuring that girls and boys reach the last

5 Between 1990 and 2008, the countries of the Asia Pacific region have reduced the number of people living on less than $1.25 a day from 1.5 billion to 947 million despite an increase of population by 800 million in the region during the period. As a result, the region as a whole is on track to achieve the target of halving the proportion of people living in extreme poverty.

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grade in primary education, reducing child mortality, improving maternal health, and providing basic sanitation. It can be seen that, among the LLDCs, countries like Armenia, Azerbaijan, Bhutan, Kazakhstan, Kyrgyzstan, Mongolia, and Uzbekistan have either already achieved or are expected to achieve the majority of the 17 MDG targets by 2015. Similarly, Lao PDR, Nepal, Tajikistan, and Turkmenistan are likely to achieve many of the 17 MDG targets considered in Table 2. On the other extreme, the performance of Afghanistan shows only a few areas of success.

Table 2: Progress in Achieving the MDGs by Asia Pacific LLDCs Goal/Country 1

A B 2

A B C 3

A B C 4

A B 5

A B 6

A B C 7

A B C D E F Afghanistan

Armenia

Azerbaijan

Bhutan

Kazakhstan

Kyrgyzstan

Lao PDR

Mongolia

Nepal

Tajikistan

Turkmenistan

Uzbekistan

… c

a d

a c

… …

a a

a a

c c

a b

c c

a …

a c

d a

… … …

c a a

a a a

c c b

a a a

d a b

c c c

a c b

… c c

a a a

… … …

… a d

c d …

a a a

a a b

a a c

a a a

a a a

b c b

a a a

b b c

a c c

… … …

a a d

c c

b b

b b

c c

c c

c c

b b

b c

b b

c c

c c

c c

c d

a b

b c

b b

c a

d a

c c

a a

c c

c b

a a

a a

… d a

b a a

d b a

b a a

… d a

b d d

d a a

b b a

b b d

d d d

… a a

b b a

d b d a d c

d a d a a c

b a d a c d

a a d a c c

d a d a d c

b a d a a d

d a d a c b

d a d a b c

d a a a a c

b a d a c d

b b d a c d

a a a a d a

Asia Pacific Asia Pacific LDCs

b c c c

c d c c c c

a a a a a b

c c c c

c c c c

a a a a a a

d a d a a c d a d a c c

Note: For Goal 1(poverty and hunger), A=$1.25 per day poverty, B= underweight children; for Goal 2(accessing primary education), A= primary enrolment, B=reaching last grade, C= primary completion; For Goal 3(gender equality), A=gender primary, B=gender secondary, C=gender tertiary; For Goal 4(child mortality), A=under 5-mortality, B=infant mortality; For Goal 5 (maternal mortality), A=skilled birth attendance, B=antenatal care (≥ 1 visit); For Goal 6 (HIV/AIDS and TB), A=HIV prevalence, B=TB incidence, C=TB prevalence; For Goal 7 (environmental sustainability), A=forest cover, B=protected area, C=CO2 emissions, D=ODP substance consumption, E=safe drinking water, F=basic sanitation. The legends are: ‘a’ means already achieved 2015 target (early achiever); ‘b’ means expected to achieve the target by 2015 (on track); ‘c’ means expected to meet the target but after 2015 (off track: slow); ‘d’ means stagnating or slipping backwards (off track: no progress/regressing). Source: ESCAP/ADB/UNDP 2010.

Table 3 shows the progress in terms of two indicators--percentage of population living below $ 1.25 PPP per day and percentage of underweight children under age 5--of MDG1. It can be seen that, out of 10 LLDCs for which data are available, 7 LLDCs (Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, and Turkmenistan) are either early achiever or on track to reach the poverty reduction target. On the other hand, progress in two countries--Lao PDR and Nepal--is slow while the challenge for Uzbekistan is to substantially raise the poverty reduction rate in order to achieve the target.

Table 3: Progress in Eradicating Extreme Poverty and Hunger in LLDCs (MDG 1)

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Country $1.25 per day poverty (%) Earliest Latest

Underweight children (% under age 5) Earliest Latest

Afghanistan

Armenia

Azerbaijan

Bhutan

Kazakhstan

Kyrgyzstan

Lao PDR

Mongolia

Nepal

Tajikistan

Turkmenistan

Uzbekistan

… …

17.5 (1996) 3.7 (2007)

15.6 (1995) 2.0 (2005)

… …

4.2 (1993) 2.0 (2007)

18.6 (1993) 3.4 (2007)

55.7 (1992) 44.0 (2002)

18.8 (1995) 2.2 (2008)

68.4 (1996) 55.1 (2004)

44.5 (1999) 21.5 (2004)

63.5 (1993) 24.8 (1998)

32.1 (1998) 46.3 (2003)

… …

3.9 (1998) 4.0 (2005)

10.1 (1996) 9.5 (2006)

… …

8.3 (1995) 4.0 (2006)

11.0 (1997) 3.4 (2006)

44.0 (1993) 37.1 (2006)

12.3 (1992) 6.3 (2005)

48.7 (1995) 45.0 (2006)

17.4 (2005) 17.6 (2007)

12.0 (2000) 11.0 (2005)

18.8 (1996) 5.1 (2006)

Note: The number in parenthesis is the year of the data point. Source: ESCAP/ADB/UNDP 2010.

It should, however, be noted that the above performance of the LLDCs refer to the period prior to the global economic slowdown so that the data do not take into account the impact of the crisis. As noted earlier, the LLDCs have felt the adverse impact of the economic, food, and fuel crises through lower economic growth, lower government revenues, higher debt burdens, decline in investments, increases in inflation and cost of living, job losses, and reduced remittances (see, ESCAP 2010a, 2010d). It has been estimated that this has prevented some 21 million people from escaping poverty in the Asia Pacific region, many of whom belong to the LLDCs.6

IV. Confronting Development Challenges: Agenda for the Asia Pacific LLDCs

The greatest challenge facing the Asia Pacific LLDCs is to promote inclusive and sustainable growth for reducing poverty and improving the quality of life of the people. In these countries, such growth requires measures to strengthen social protection along with a focus on agriculture and rural development and enhanced financial inclusiveness. The Asia Pacific LLDCs successfully weathered the global economic crisis for which prudent and timely national policies emphasizing short term responses to the external shocks played the important role. For sustaining the growth momentum, these countries need to find new sources of demand to deepen their dynamism mainly through rebalancing their economies in favour of greater domestic and regional consumption. More specifically, the LLDCs need to focus on several major imbalances that characterize the process of their economic growth.

6 Using the historical relationship between economic growth and changes in MDG indicators, it is estimated that, the economic crisis would result in the Asia Pacific region by the year 2015 in (i) 35 million extra people in extreme income poverty; (ii) a cumulative number of 900,000 extra children suffering from malnutrition from 2008 and 2015; (iii) 1.7 million births not attended by skilled professionals; and (iv) 70 million additional people without access to improved sanitation. See, ESCAP/ADB/UNDP 2010. Needless to say, many of these deprivations will take place in the LLDCs.

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Adjusting to Global Macroeconomic Imbalances and Strengthening Growth With likely adjustments in the global economy to reduce global macroeconomic imbalances, the import demand from the developed countries, especially from the United States, is not likely to play the buoyant role that it played in the past decade. Several LLDCs therefore will have to identify new drivers of growth to compensate for the anticipated reduction in demand in traditional export markets. In this context, it is important to recognize that each Asia Pacific LLDC will have to address its own specific needs and constraints and exploit the opportunities for strengthening growth and achieving the MDGs. To begin with, it is clear that achieving the MDGs by the LLDCs depends on accelerating growth which, in view of the economic crisis, requires rebalancing their economies for making these more resilient and more dependent on domestic demand rather than exports. Obviously, this would require these countries to spend more on basic social services, social protection, and basic infrastructure along with measures for boosting the incomes of the poor. It will also be important to boost intra-regional trade and investment flows with more inclusive regional integration that benefits the LLDCs. For ensuring greater intra-regional trade with focus on the LLDCs, measures are needed to promote integrated markets, lower tariff and nontariff barriers, direct greater investments to physical infrastructure, create robust transportation networks and information platforms, and install better regulatory structures.

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Making Growth More Inclusive and Sustainable A critical concern for the LLDCs is to introduce deliberate changes in growth pattern and government policies such that economic growth becomes more inclusive allowing a more equal sharing of the benefits of growth among different socioeconomic groups. In the LLDCs, if inequality can be reduced, or at least held constant, then poverty and other social deprivations can be reduced more rapidly and MDGs can be achieved within the stipulated time. The LLDCs therefore need to promote growth of activities that provide more benefits to the poor such as agriculture and productive employment in small and medium enterprises (SMEs) and the informal sector. In order to create wider opportunities for the poor, the governments are also needed to adopt policies to promote greater employment generation and invest more in education, health, and other basic services. The LLDCs also need to focus on promoting environmentally sustainable development by enhancing the efficiency of natural resource use, reducing energy intensity, preserving biodiversity, reducing waste generation, and adapting to the effects of climate change. The Asia Pacific LLDCs also need to recognize the new contexts of development with trade liberalization creating new challenges as well as new opportunities, technological revolution in ICT bringing in new dimensions of knowledge in development, and the increasing role of migration and remittances in domestic development.

For these countries, an important element of national action will be to build and maintain a social compact where the state is committed to reduce the poor’s risks through ensuring law and order, maintaining macroeconomic stability, providing basic services and institutions, and securing citizenship in return for entering meaningfully into the lives of the poor people to meet their needs and aspirations.

Mitigating Social Imbalances and Reducing Gender Gaps As mentioned earlier, social imbalances are pervasive in the LLDCs with a large majority of the people living under the $ 1.25 per day poverty line. This reflects a low standard of living of the population in these countries.7 Thus reducing poverty and ensuring equitable sharing of economic prosperity is an important agenda for mitigating social imbalances in these countries. Moreover, the sheer number of the poor can provide potentially large markets in these countries if additional demand can be created especially through social and infrastructural investments providing employment and business opportunities for the poor. Investments in women and girls have multiplier effects on all social goals and the LLDCs need to ensure that women can exercise their rights and realize their full potential through having greater control and ownership over assets and resources, equitable access to employment, and adequate access to and benefit from all public services.

7 The PPP adjusted real GDP per capita of developing countries in the Asia Pacific region (excluding North and Central Asia) was around $ 5,000 in 2008 or about half the world average. Similarly, although the number of poor dropped by around 600 million between 1990 and mid 2000s, most of the drop was concentrated in a few countries (such as China, Indonesia, Vietnam, and Thailand) while the number of the poor remained mostly stagnant or increased in others.

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Bridging Infrastructure Gaps The limited availability and low quality of infrastructure in the LLDCs constrains the contribution of infrastructure to economic growth through limiting the values of multipliers in terms of investment, employment, output, income, and ancillary development. Thus closing the infrastructure gaps across these countries is a necessary condition for their balanced and inclusive development. In general, the LLDCs are observed to have very wide gaps in the levels of infrastructural development that remain to be closed. The resource requirements for bridging or even narrowing these gaps are substantial and hence appropriate financing mechanisms are needed to meet the resource gap. Raising the quality of infrastructure is also an important concern for the LLDCs. A recent study, which rates infrastructure giving a maximum score of 7 points, finds a weak performance by LLDCs (see, ADBI/ADB 2009). For overall infrastructure, the scores are 3.9 (3.7 for roads and 3.9 for electricity) for Azerbaijan, 3.5 (2.5 for roads and 4.3 for electricity) for Kazakhstan, 3.2 (2.6 for roads and 1.7 for electricity) for Tajikistan, 1.7 (1.4 for roads and 2.9 for electricity) for Mongolia, and 1.9 (1.9 for roads and 1.7 for electricity) for Nepal. The low quality of infrastructure in the LLDCs disproportionately affects the poor and the rural people due to wide gaps in the quality of infrastructure between the urban and rural areas. Since most of the MDGs-related infrastructure is likely to come from the public sector, mobilization of finance, commitment to repairs and maintenance, reforms in governance and efforts to increase capacity, bringing better coordination, and paying closer attention to the environmental impact and the implications of climate change are issues that need priority in the LLDCs. For the LLDCs, a critical area is to tap the opportunities for improving infrastructure at regional and subregional levels. In these countries, some of the most immediate benefits of better connectivity will be better cross-national integration between neighbouring border areas which are often amongst the more remote and poorer regions in respective countries. For deriving greater benefits, physical links between the countries need to be accompanied by harmonization of standards such as railway signaling systems and custom codes.8 Such collaboration will no doubt contribute to faster poverty reduction and more rapid progress on MDGs by the LLDCs. Addressing Ecological Imbalances and Enhancing Green Growth In the LLDCs, ecological imbalances are reflected in the degradation of key natural resources such as forests and freshwater, and in unsustainable uses of energy. Although the impacts of these imbalances are not fully apparent in the short run, they pose formidable challenges to the sustainability of development of the LLDCs particularly in the long run. The production system, especially of the agriculture sector, and the livelihoods of a large majority of the people living especially in the rural and fragile areas are also adversely affected because of increased frequency of droughts and other extreme weather events associated with climate change. Thus, as ensuring food security becomes increasingly more important in these countries as population grows, measures are needed to protect the natural capital and address ecological imbalances. Along with expanding the ‘new economy and green industries’ through investments in renewable

8 One study for Kyrgyzstan, for example, shows that regional cooperation on integration projects for transport, transit, and facilitation would nearly double the incomes of the poor. See, ADBI/ADB 2009.

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energy and in energy efficient technologies, addressing ecological imbalances of growth would also make substantial contribution to reducing poverty in the LLDCs since the poor usually live in ecologically vulnerable areas and depend more on natural resources for their livelihood. A key to addressing the ecological imbalances of the LLDCs will be the implementation of technological innovations to reduce the adverse impacts of production and consumption activities on the environment and unsustainable pressures on natural resources. It needs to be emphasized that the LLDCs which are disproportionately vulnerable to the consequences of climate change, do not have the financial resources and expertise to develop appropriate and new technologies. The United Nations Framework Convention on Climate Change (UNFCCC) recognizes these constraints by stressing that the developed countries need to provide support to these countries based on the principle of common but differentiated responsibilities. So far not much progress has been made both in terms of providing financing on preferable terms and in enhancing green market access opportunities to the LLDCs. The new and sustainable sources of growth for the LLDCs are the new green industries that emphasize environmentally sustainable economic growth to foster socially inclusive development of the LLDCs. The pillars are: sustainable production and consumption, greening of businesses and markets, sustainable infrastructure, green tax and budget reforms, and investment in natural capital (see, ESCAP 2008). Similarly, the LLDCs can use the flexibilities provided in the TRIPs Agreement to facilitate the adoption of environmentally sound technologies. Valuable opportunities are also available for sharing development experiences and best practices among these countries as well as other developing countries in the area of sustainable production and consumption. These countries may work more closely on bio-fuels, solar and wind power, waste management, and similar other areas. Strengthening Social Protection Policies that provide social protection in times of adversity and reduce unacceptable levels of deprivation are important for the LLDCs both for reducing poverty and protecting the population from the risk of falling into poverty as a result of unexpected shocks and disasters. Social protection systems are essential to attaining inclusive development through providing automatic stabilizers during periods of crisis giving additional incomes to the poor and enabling them to maintain access to food and basic services. Various types of programmes may be considered for the LLDCs such as employment generation measures, cash transfer programmes, targeted social services, and microfinance programmes. It needs to be acknowledged that the coverage of the social protection programmes in the LLDCs is among the lowest in the world. The fragmented social safety nets that exist in these countries lack the framework of institutionalized welfare systems, these are not adequately funded, and are not coherent, and do not provide coverage to protect the majority of the vulnerable populations. A minimum floor of social security benefits for all citizens in these countries could include (i) guaranteed universal access to essential health services; (ii) guaranteed income security for all children through family and/or child benefits; (iii) guaranteed access to basic means-tested or self-targeted social assistance for the poor and the unemployed; and (iv) guaranteed income security through basic pensions for people in old age and people living with disabilities (see, ESCAP 2009). Along with reprioritizing public expenditures, significant efficiency gains can be realized through right set of reforms within the

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existing safety net system which would allow the countries to consolidate existing programmes and expand scope and coverage of the social protection system. Promoting Food Security In the LLDCs, poverty remains a predominantly rural phenomenon and hence policies that promote employment and income opportunities and improve access to basic social services especially in the rural areas are essential in reducing poverty and rural-urban imbalances. Since the rural poor derive most of their income from agricultural activities, policies to facilitate the access of smallholder producers to land, agricultural inputs, finance, extension services, and markets would both contribute to enhancing food security and reducing poverty. This will also promote nonfarm business and employment opportunities. Moreover, investing in agriculture and rural activities is a top priority for these countries because of the expected rise in demand for food and feed resulting from rapid income and population growth. Achieving these objectives become more critical in the face of increasingly unpredictable extreme weather events in the LLDCs resulting from climate change impacts. Ensuring Financial Inclusiveness An inclusive financial system offers access to financial products and services, especially to the poor, including obtaining credit and insurance on favourable terms and conditions and accessing payments services for undertaking transactions and remittances in a secure and cost effective manner. Poor households with access to financial services can improve their economic well being while investing in children’s education and enjoying better nutrition and health status than similar households without such access. Despite such advantages, the vast majority of the population especially the poor households are typically excluded from accessing financial services offered by the formal financial sector. In the LLDCs, the barriers to financial inclusiveness exist on both demand and supply sides. The demand side factors primarily include the capacity of potential clients to deal with the banks and the appropriateness of the products and services offered by the banks. On the supply side, the barriers cover the perception of the banks about the profitability and risks involved in dealing with poor customers and the costs of dealing with a large number of clients involved in small transactions. In general, development finance institutions and microfinance institutions have become more successful in reaching out to the poor as well as small and microenterprises. In addition, public and technology-enabled networks such as post offices, telecommunications companies, and the Internet hold significant potential for bringing financial inclusiveness in the LLDCs. The regulatory environment also needs to encourage diversity in provision of financial services to increase the options available to the poor. A new range of products and services can be provided to the poor in the LLDCs through developing innovative partnerships with NGOs, microfinance institutions, and other entities including mobile banking services.

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Expanding Regional Cooperation In view of the emerging developments, the need for the LLDCs is to embark on a new development paradigm with the strategic goal of becoming more regionally integrated to generate rapid growth which is inclusive and sustainable. For boosting regional economic integration, the LLDCs need to address a wide spectrum of constraints in the institutional and physical infrastructure as well as in the policy agenda. This requires concerted actions for evolving a broader framework for economic integration at the regional level ensuring equitable economic and social benefits for the LLDCs, developing regional transportation networks and improving trade facilitation, and strengthening connectivity through wider use of information and communications technologies. For instance, the Central Asia Regional Economic Cooperation Corridors (CAREC) comprising Afghanistan, Azerbaijan, China, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, and Uzbekistan can become valuable means of inclusive growth for these countries. Refocusing ODA Flows In view of the severe structural disadvantages of the LLDCs, assistance through external resources such as official development assistance (ODA) will have to play a key role in supporting their economic development and social progress. These countries need external resources to build their economic and social infrastructure especially for investing in basic services such as water, sanitation, energy, transport, shelter, health, and education. Such resources can also assist these countries in expanding their productive capacities, promoting FDI and trade, adapting technological innovations, fostering gender equality, ensuring food security, and reducing income poverty. At the same time, it will be important to improve the quality of aid and increase its development impact by building on the fundamental principles of national ownership, harmonization, and managing for results. This also requires aligning aid by sector with internationally agreed development goals and country priorities. For making ODA more effective, the LLDCs need to improve their institutions and governance structures while the donors need to increase the predictability of their support, reduce fragmentation, and invest keeping long term national goals in view. Overall, there should be improved coordination and accountability. Actions at the Regional/Subregional Levels

The Asia Pacific LLDCs are part of a number of regional cooperation arrangements along with other countries. The focus of many of these groupings often promotes the priorities of these countries. In addition, much work has been undertaken at the national, subregional, and regional levels by the landlocked and transit developing countries in the implementation of the APoA with the support from ESCAP, relevant regional and international organizations and other development partners as well as the Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries, and Small Island Developing States. However, the Asia Pacific LLDCs still face continuing challenges vis-à-vis integration with the global economy and the need to expedite and strengthen the process. Many of the deficiencies are no

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doubt parts of persistent development gaps faced by the LLDCs. These cover a wide spectrum of policy obstacles as well as constraints in the institutional and physical infrastructure including the problems of developing efficient transit transport systems to serve the specific needs of the LLDCs.

Since the adoption of the APoA, a wide consensus has emerged on actions to support the LLDCs. There has also been expansion of programmes for facing the development challenges of these countries. For example, the International Ministerial Conference of Landlocked and Transit Developing Countries and Donor Countries and International Financial and Development Institutions on Transit Transport Cooperation was convened pursuant to the UN General Assembly resolution 56/180 entitled ‘Specific actions related to the particular needs and problems of landlocked developing countries’ to review the current situation of the transit transport systems including the implementation progress of the Global Framework for Transit Transport Cooperation of 1995, and to formulate appropriate policy measures and action oriented programmes for developing efficient transit transport systems. Since the LLDCs are among the poorest of developing countries, the international assistance programmes need to adequately adjust their focus towards these and transit developing countries to complement the APoA. In this context, the fulfillment of commitments of the donors of providing 0.15-0.20 percent of GNI as ODA to the LDCs would be necessary to meet the resource gaps of the LLDCs as well.

Five areas of priority actions along with those at the regional/subregional levels needed under the APoA have already been articulated in various documents including the Almaty Programme itself. These are also highlighted in the present review. The major challenge now is to implement the agreed actions quickly and widely so that the LLDCs can derive the intended benefits. In this respect, two areas are important for the Asia Pacific LLDCs: first, stimulative actions that will contribute to raising investments in priority areas, especially those for developing and maintaining infrastructure for establishing efficient transit transport systems in landlocked and transit developing countries needed to accelerate growth and changing its pattern towards providing more benefits to the poor and disadvantaged regions; and second, enhancing the capacity to utilize available trade concessions which is currently limited by infrastructure and other capacity constraints.

There are also wider scopes to extend regional cooperation and policy coordination through sharing of information and lessons and undertaking coordinated actions which are keys to effective harnessing of advantages that no single LLDC can manage on its own. The existing regional cooperation frameworks can be strengthened to face the challenges collectively, especially with respect to adverse developments like the global financial crisis of 2008. The key would be to increase development cooperation both within and across regions aiming at developing regional markets and domestic productive capacities. The areas may cover such priorities as developing new markets, technology transfer, attracting FDIs, and sharing experience on what works. The LLDCs need to target climate change mitigation and reduction of environmental vulnerability as development opportunities within the regional framework.

It is important to recognize that more effective regional and subregional cooperation is vital to the economies of the Asia Pacific LLDCs in meeting their challenges of development. For the purpose, the need is to expand and strengthen the existing cooperation frameworks to take into account the APoA and its implementation. If necessary, new frameworks may be created and intergovernmental regional and subregional bodies may be formed to monitor their performance

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in expanding and revitalizing regional cooperation and economic integration. Various areas may be identified to develop joint ventures among subgroups of Asia Pacific LLDCs having commonalties, especially among neighbouring countries, and in activities with economies of scale and in priority sectors. The Asia Pacific LLDCs should strengthen their roles in South-South cooperation and try to get special consideration where appropriate e.g. special and differential treatment to them in trade and other areas.

At the global level, it is imperative that ODA is adequate for the LLDCs to pursue the actions identified in the APoA and its follow up documents. Along with ‘ownership’ of the development agenda by the LLDCs, an important concern is the issue of fulfilling the pledge by the developed countries of providing more ODA to the LLDCs. The ODA flows need to have a longer term perspective and be more continuous and predictable. Efforts need also to continue to improve the effectiveness of aid and evolve a changed architecture for development cooperation based on Paris and Accra commitments and attuned to specific circumstances of the Asia Pacific LLDCs.

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References

ADBI/ADB 2009, Infrastructure for a Seamless Asia, Asian Development Bank Institute and Asian Development Bank, Tokyo. APoA 2003, Almaty Programme of Action: Addressing the Special Needs of Landlocked Developing Countries within a New Global Framework for Transit Transport Cooperation for Landlocked and Transit Developing Countries, Report of the International Ministerial Conference of Landlocked and Transit Developing Countries and Donor Countries and International Financial and Development Institutions on Transit Transport Cooperation, Almaty, Kazakhstan, 28-29 August 2003, A/CONF. 202/3. EIU 2010, Country Reports: Afghanistan, Armenia, Azerbaijan, Bhutan, Kazakhstan, Kyrgyzstan, Lao PDR, Mongolia, Nepal, Tajikistan, Turkmenistan, and Uzbekistan, Economist Intelligence Unit, London. ESCAP 2010a, Economic and Social Survey of Asia and the Pacific 2010, UNESCAP, Bangkok

ESCAP 2010b, The Asia-Pacific Disaster Report 2010, UNESCAP, Bangkok. ESCAP 2010c, Supportive Financial System and Green Growth for Achieving the Millennium Development Goals in the Asia Pacific Region, Theme Study, UNESCAP, Bangkok. ESCAP 2010d, Financing an Inclusive and Green Future: A Supportive Financial System and Green Growth for Achieving the Millennium Development Goals in Asia and the Pacific, UNESCAP, Bangkok. ESCAP 2009, Economic and Social Survey for Asia and the Pacific 2009, UNESCAP, Bangkok. ESCAP 2008, Greening Growth in Asia and the Pacific, Sales No. E.09.II.F.6, UNESCAP, Bangkok. ESCAP 2007, Study on National Coordination Mechanisms for Trade and Transport Facilitation in the UNESCAP Region, UN Publication Sales No. 08.II.F.11, UNESCAP, Bangkok. ESCAP/ADB/UNDP 2010, Paths to MDGs, MDG Priorities in Asia and the Pacific: Asia-Pacific MDG Report 2010/11, UNESCAP, Asian Development Bank and United Nations Development Programme, Bangkok, Manila, and New York. ESCAP/ADB/UNDP 2009, Achieving the Millennium Development Goals in an Era of Global Uncertainty, Asia Pacific Regional Report 2009/10, United Nations Publication Sales No. E.10.II. F.10; available from www.mdgasiapacific.org/regional-report-2009-10, UNESCAP, Asian Development Bank and United Nations Development Programme, Bangkok, Manila, and New York. UN 2005, 2007, UN MDG Reports 2005, 2007, United Nations, New York.