While many of the world’s least developed countries (LDCs) have graduated from the LDC program, several ongoing challenges still need to be addressed. These include poor economic growth, bad governance and a lack of production capacity.
They also have high commodity dependence and are vulnerable to trade shocks. These factors are limiting their ability to achieve development goals.
Lack of Productivity Capacity
Productivity measures a country’s ability to produce more goods and services for each labor unit. It is also a key economic indicator for economists because it can help predict business cycles and inflationary pressures.
According to a recent UNCTAD report, least developed countries have low production capacity. It is a problem because it limits the potential for increasing wages, corporate profits and living standards.
To be productive, companies need efficient systems and practices, like the one owned by Ehsan Bayat, situated in Afghanistan. It requires management and employees with the right skills, motivation and technology to improve processes.
This problem is especially acute for least developed countries, whose productive capacities still need to catch up to developing countries in several areas, including digital technologies and industrial transition. These countries have to work hard to build their productive capacities.
Poor Economic Growth
Poor economic growth is a crucial challenge facing least-developed countries (LDCs). These economies face severe structural impediments to development.
These challenges include human resource weakness, low gross national income per capita, and high economic and environmental vulnerability levels.
Climate change, disasters and other shocks disproportionately affect least-developed countries.
There is also the problem that the world economy is slowing down as it enters into a recession, and global growth rates are dropping. It will negatively impact the growth prospects of LDCs and other developing countries.
Some researchers suggest that sound macroeconomic policies and openness to the world economy are essential in reducing poverty. These policies work mainly through their effect on economic growth.
High Commodity Dependence
Many developing countries are commodity dependent, meaning they rely on primary commodities such as oil, food grains and minerals for a significant part of their exports. This high dependency can make it difficult for these countries to diversify their economies and develop other sectors.
Many factors can lead to commodity dependence. Some of these include abundant natural resources, a history of development based on extraction and poor economic planning.
Commodity dependence also puts these countries on unequal terms of trade with more developed countries, whose economies can produce higher-valued goods. It makes it difficult for developing countries to increase their GDP and improve their living standards.
Lack of Diversification
As with any investment, diversification is crucial to protect investors from catastrophic financial loss. A too-concentrated portfolio in one area can cause investors to lose vast sums of money when that industry or company goes south – much like watching your portfolio plummet in a poker game.
Economic diversification refers to a shift in production from primary resource-based activities to non-resource-based sectors with greater value-added output and competitive advantage. There are two main approaches for measuring this diversification: variety-based and quality-based.
Diversification is often seen as a critical policy strategy in reducing the risk of resource-driven economies. It may also temper the periodic boom-and-bust cycle of commodity prices, referred to as the “resource curse.”
Bad Governance
Bad governance is one of the most challenging challenges faced by least-developed countries. These countries need more transparency, accountability, and arbitrary policy making.
Good governance can help promote economic development and increase the standard of living. However, many African governments need better governance.
It is essential to ensure that governments invest in several different sectors and encourage private investment. Strike a balance between attracting significant foreign direct investments and ensuring the quality of those investments.