Hamish McRae: Here is a chance to reboot the world's development machine

Economic Life

China seems to be managing to sustain growth at around 8 per cent a year while India looks like achieving somewhere between 6 per cent and 7 per cent. So has the developing world managed to come through the global downturn in good shape after all? The answer must be that, viewed as a whole, the developing world is emerging remarkably unscathed. But of course it is not a single entity at all – which is why the new UNCTAD report, The Least Developed Countries Report 2009, published yesterday evening, is especially welcome.

The first point to make is that the downturn has struck different countries is very different ways. The energy and raw material producers, by and large, have been able to sustain growth. The very poorest nations, however, which in many cases need to import food, have been devastated. Food prices soared last year, along with raw materials. It gets worse. The poorest people in those countries spend the highest proportion of their income on food, typically 60 per cent or more, so they are hit hardest of all.

You can catch a feeling for that from the surge in oil and minerals but also the surge in food and agricultural raw materials. For the first half of the past decade prices were pretty stable, then we had a gradual climb, then the astounding gyrations of the past year. But note, despite the recent declines we are not back to the pre-2005 period of calm. So it is not back to "business as usual".

Nor will it be. The main thrust of the UNCTAD report is that the effects of the current crisis are so severe that the world will have to re-think the whole approach to economic development. A number of things will have to happen. The least developed countries need to reduce their exposure to swings in commodity markets. They need to reduce their debt exposure. We have to figure out ways of increasing the flow of external finance, including non-governmental flows such as foreign direct investment and emigrants' remittances, both of which have been affected by the downturn. And we should be aware that while some progress has been made in aggregate by many least developed countries, often the benefits of such growth have failed to flow down to the poorest people within them.

So what's to be done? UNCTAD argues that this is an opportunity and that must surely be right. It suggests there are three main thrusts for policy. One is to increase the productive capacity of these countries so that they can produce a wider range of products and services. Second, it calls for a new development state, with better co-operation between state and private sectors. And third, there has to be continuing multilateral support for these countries.

I don't think anyone would quarrel with the first and the third of those. The most interesting one, the second, is the one expanded on in the report. I must confess that when I see an expression such as "a new development state" I am immediately suspicious. It is the sort of officialese that these people pump out and I am never quite sure what it actually means. Fortunately the thought is developed. It is partly a question of good governance, and the paper helpfully sets out some principles of this that are universal rather than culturally specific, including such basics as fairness and decency. No one is going to quarrel with that. It adds that governing well is not an aim in itself but rather a way of achieving successful outcomes. Again, that must be right. Here, however, you run into what I feel is the most interesting issue of all. This is the apparent truth that many countries with questionable governance achieve a good economic performance, sometimes an outstanding one, while others with what looks like better governance fail to perform very well in economic terms.

UNCTAD does not cite examples but put it this way: neither China nor India is noted for its lack of corruption.

There is a way through, which is to say that countries have to have not just good governance but good development governance. And what might that be? Well, there are examples of success and they are based on a mixed model where the private and public sectors co-operate effectively. No one is suggesting going back to 1960s state planning.

The paper makes some other suggestions. For example it notes the importance of knowledge systems – I would prefer it if people simply said education, as I am not quite sure what a knowledge system is.

It notes that countries have to diversify, but not just into industry. That again must be right, though that path seems to have worked for China. It stresses that there must be a role for private inward investment, and that again must be right. One of the key things about such investment is that it brings in skills and access to markets as well as money. And it points out that there should be a role for regional development, again a sound point.

There is much more, for this is a big document. I suppose I would want to draw attention to a couple of further issues. One is negative. It is the extent to which some least developed country governments have become dependent on foreign grants to support their spending. Have a look at the bar chart, which shows the proportion of government spending coming from grants for a set of selected countries. At the top you have countries where more than half their spending comes in this form; at the bottom other countries not so different in terms of their income levels where such grants are minimal.

Now I accept of course that Afghanistan is a special case, but I find myself pondering why Gambia is so different from Sierra Leone. If the government bureaucracy of a country is funded so heavily by grants, it is bound to tailor its policies to please the bureaucracy of the grant issuers. The whole relationship is artificial. In special circumstances this may well be both inevitable and acceptable, but I do wonder whether it is healthy.

One of the thrilling things about the past decade is that many parts of the world which had hitherto been impoverished have made great progress. One of the most troubling things is that there are some parts that have not. There must surely be a case for working from the bottom up: observing success where it has occurred, and then seeking to transfer that success more widely, particularly perhaps to neighbouring regions or countries.

We'll see. The big point here that UNCTAD makes is that this is an opportunity to rethink the process of development for the poorest nations. The more widely that point is accepted, the more likely it is that the development machine for these nations can be rebooted.

Global growth is resuming now, though we cannot know how strongly that growth will be over the next couple of years. But we do know, if ever we doubted it, that growth is better than stagnation – and that goes for the least developed countries as well as for the rest of us.