December 30, 2020

UNCTAD's Productive Capacity Index Measures the Economic Vulnerabilities of Landlocked Developing Countries

Working in landlock developing countries like Afghanistan, Uganda, and Uzbekistan, which represent three of the 40 landlock states in the world (landlock meaning not having territory connected to an ocean or whose coastlines lie on endorheic basins), I learned the unique challenges these countries encounter. For example, as explained in a report published by the United Nations Conference on Trade Development (UNCTAD), "In landlocked developing countries, manufacturing and industrialization processes, as well as structural transformation efforts, are undermined by challenges related to energy supplies, breakdowns and outages. Landlocked developing countries that are rich in energy resources such as hydroelectricity, fossil fuel or renewable energy sources, do not perform well in the energy category. Moreover, energy supply restrictions, such as electricity rationing and water shortages, hamper productive capacity development, industrialization and manufacturing in several landlocked developing countries. It is critical that these countries enhance their capacities to use energy in production and transformation processes."

Writing the Forward for the Productive Capacities Index ("PCI" or the "Index"), Mukhisa Kituyi, Secretary-General of UNCTAD, says: "Weak productive capacities penalize structurally weak and vulnerable economies, including many landlocked developing countries. This penalty is aggravated by the coronavirus disease pandemic, and the global economic crisis that has accompanied it, wreaking havoc on the production structures, trading relationships and domestic livelihoods of these countries. The deep economic shock is compounding mounting damage from climate change, steep drops in international commodity prices and declining trust in global solidarity, threatening to erase the development gains of the last decades. New pathways for building economic resilience and addressing the root cause of vulnerabilities in these countries are desperately needed."

Whether creating a multinational strategic plan for a venture where I hold an equity stake or recommending to a client on which markets they should commercialize their product or service, I appreciate that "UNCTAD, through the development of the Productive Capacities Index, is among a handful of institutions that have taken on the challenge of measuring productive capacities. The Index is the first of its kind in its comprehensiveness, scale and scope. The overall level of productive capacities has been assessed for 193 economies by using 46 indicators in the eight categories of structural change, human capital, natural capital, energy, ICTs, transport, institutions and the private sector. The result is the creation of a composite multidimensional global index that summarizes the state of productive capacities in economies worldwide."

In discussing the results, the PCI adds:
The results of the Index are in many ways, as expected. Developed countries are primarily positioned towards the top of the ranking, followed by the best-performing developing economies in East Asia, and developing countries are lower down. Similarly, with regard to geographical comparisons, many economies in Asia and Latin America have higher Index scores than economies in Africa and the levels of productive capacities among landlocked developing countries are among the lowest of the groups analyzed, other than the least developed countries. The average scores of both landlocked developing countries and the least developed countries are below the global averages in seven of the eight categories, except that for the natural capital category, and also below the scores of other developing countries, developing economies in East Asia and transit countries. The only area in which the least developed countries and landlocked developing countries score better than the other comparable groups is in the natural capital category. This means that if landlocked developing countries rich in natural resources capture the rents from such resources in development, they may be in a particularly favorable position to build productive capacities and initiate the process of structural transformation.
Moreover, "One important use of the Index and country-specific scores is in the understanding of the sources of systemic vulnerabilities and the identification of the enablers of economic growth, including progress towards sustainable development. For instance, most developing countries, in particular the least developed countries, landlocked developing countries and small island developing States, perform low in the categories of human capital and information and communications technologies (ICTs). These are key capabilities in responding rapidly to health-related crises, as the availability of medical professionals is vital and ICTs are indispensable tools in providing commercial and other critical services, such as online learning, telemedicine and teleworking, in particular in situations where physical distancing and restrictions on movement are required."

The Index's methodological approach and results may be downloaded through this link.

While great challenges exist in developing countries, these markets also provide a multitude of opportunities for businesses in a variety of sectors including ICTs, natural resources, and logistics, just to name a few. But advances in socioeconomic development requires a coordinated effort by members of the private sector, nongovernmental organizations, and government officials. As Dr. Kituyi explains, "Developing countries, including the most vulnerable among them, with the support of development partners, need to strive to grow their productive capacities, transforming their economic structures and reversing their continued marginalization in the global economy. The Productive Capacities Index offers indispensable guidance for new policy pathways that can realign incentive structures to revive socioeconomic progress and address persistent vulnerabilities to external shocks, whether economic, health-related or other shocks."

What are you recommendations for how to revive socioeconomic progress in developing countries?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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