Developing Productive Capacities

Rolf TraegerUNCTAD, Division for Africa Least Developed Countries and Special Programmes

UNCTAD Virtual Institute Study Tour (University of Dar-es-Salaam), 22 February 2010

This presentation

1.What are productive capacities? 2.How do productive capacities develop?3.Why focus on productive capacities?4.What prevents productive capacities

from developing?5.Need of paradigm shift in development

policy

What are productive capacities? (1)

Productive capacities are « the productive resources, entrepreneurial capabilities and production linkages which together determine the capacity of a country to produce goods and services an enable it to grow and develop ».

(The Least Developed Countries Report 2006, p.61)

What are productive capacities? (2)

The 3 elements are complementary to each other.

What are productive capacities? (3)

• What are perceived as supply-side constraints cannot be divorced from the demand side.

• The existence of productive capacities simply represents a potential for production and growth; whether or not this potential will be realized depends on the utilization of existing capacities, that is on aggregate demand.

How do productive capacities develop? (1)

In LDCs these processes are taking place only to a limited extent

• Capital accumulation increased, but still relies largely (40% of gross K formation) on external finance

• Structural change is rather slow (especially in African LDCs) and many economies experienced de-industrialization

• Technological progress is too often limited to enclaves, with the bulk of SMEs operating at a very small scale or even in the informal sector 

How do productive capacities develop? (2)

Why focus on productive capacities? (1)

An alternative view of development

1. Focus on supply-side and demand-side factors2. Productive capacities:

generic activity-specificenterprise-specific

3. Growth not steady-state with full utilization of productive resources and full employment

4. Path dependency5. Form of global integration matters

Why focus on productive capacities? (2)

The virtuous circle of development

What prevents productive capacities from developing? (1)

Obstacles to the development of productive capacities in LDCs

1. The infrastructure divide2. Institutional weaknesses3. The demand constraint

What prevents productive capacities from developing? (2)

1. The infrastructure divide

LDCs have the worst infrastructure in the world

What prevents productive capacities from developing? (3)

2. Institutional weaknesses a. The financial system is often not conducive to private

investment

What prevents productive capacities from developing? (4)

b. Knowledge systems are frequently disarticulated (dualism modern vs. traditional knowledge)

c. Enterprise sector

- The missing middle- Weak development of formal sector SMEs:

informal sector formal sector small firms large firms

Investment climate reforms are not enough in a context of radical firm heterogeneity

2. Institutional weaknesses

What prevents productive capacities from developing? (5)

3. The demand constraint • Low labour productivity + widespread

underemployment persistent mass poverty in most LDCs national markets offer limited opportunities for efficient mass production

• weak capabilities, infrastructure and institutionsdifficult to succeed in export marketsexports poverty reduction

• productive resources and capabilities are currently underutilized in the LDCs owing to lack of effective demand

LDCs historical record has shown the need to move beyond the Washington Consensus, to face more effectively the challenges of:

• generalized poverty

• urban transition

• globalization

• external fragility

Need of paradigm shift in development policy (1)

Need of paradigm shift in development policy (2)

FROM

Integration / exchange

Macroeconomic stabilization

Static allocation / Allocative efficiency

Liberalization

FDI

Tradables

Supply-side

Good governance

TO

Production

Growth and productive capacities development

Dynamic processes / Expand prod.cap. and employment

Strategic integration

Domestic investment + FDI

Tradables and non-tradables

Demand + Supply

Developmental governance

Thank you !