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Addressing the diverse needs and challenges faced by countries in special situations

The Addis Agenda commits the international community to support countries in special situations. It emphasizes the need to address the needs and challenges faced by countries in special situations, in particular least developed countries, landlocked developing countries, Small Island developing States, and African countries, as well as the specific challenges facing middle-income countries. To that end, the AAAA called for prioritizing full and productive employment and decent work for all, sustainable patterns of production and consumption, structural transformation and sustainable industrialization, productive diversification and agriculture. The Addis Agenda also promised to reverse the trend of declining ODA to the LDCs and reaffirmed existing commitments of developed countries, including to provide 0.7 percent of their gross national income (GNI) as ODA, and 0.15 - 0.20 percent of their GNI to LDCs.

These commitments are monitored across the action areas of the Addis Agenda. Progress in and for countries in special situations is highlighted whenever merited (see for example Country allocation of international public finance). This section highlights several issues of particular relevance to the respective country groups.

Structural transformation

An overarching challenge for vulnerable countries has been limited structural transformation. Narrow resource bases, limited diversification of production and exports and incomplete integration into regional and global value chains put these countries at a disadvantage. A major hindrance to building productive capacity has been low investment rates combined with institutional bottlenecks, limited human resource development and lack of infrastructure. As a result, they are highly dependent on the demand for as well as prices of a few commodities.

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Among the vulnerable countries, changes in the sectoral composition of GDP, technological content and innovation in productivity have been slowest in LDCs, indicating obstacles to structural transformation. The share of manufacturing in LDCs and Sub-Saharan Africa remained stable, around 11per cent, in recent years. SIDS and MICs had higher shares of manufacturing, at around 18 and 16 per cent respectively of total value added in 2015. For LLDCs, this share declined slightly from 9.9 in 2011 to 9.4 in 2015. The share of manufactured goods in total exports from LLDCs decreased from 21 per cent in 2000 to 13 per cent in 2014, while around 70 per cent of imports to these countries were manufactured products. LLDCs are still relying heavily on a limited number of mineral resources and low-value agricultural products for their exports.

Foreign direct investment

The AAAA called to incentivize foreign direct investment to developing countries, particularly least developed countries, landlocked developing countries, Small Island developing States and countries in conflict and post conflict situations. Foreign direct investment is an important source of finance and technology in developing countries.

However, FDI to countries in special situations is either marginal or concentrated in a few (often extractive) sectors. FDI flows to LDCs have increased in absolute terms to nearly $35 billion in 2015, but as a share of world FDI, they still constitute only 2 per cent (although this is twice as high as the average share for 2001-2010).

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Compared to other developing countries, which have been experiencing an increase in FDI since 2013 (and average about 33 per cent of world FDI in recent years), FDI inflows to LLDCs have been on a decline. LLDCs’ share of global FDI has averaged 0.1 per cent since 1990. FDI flows to LLDCs dropped dramatically by about 18 per cent, from $29.7 billion to $24.5 billion between 2014 and 2015. FDI was also concentrated in a small number of countries, as only three LLDCs accounted for more than 50 per cent of the total FDI to LLDCs in 2015.

SIDS’ share of global FDI has increased from a low of 0.8 per cent in 2008 to 2.4 per cent in 2014. There was a decline of nearly $2 billion in 2015, revealing a high degree of volatility associated with FDI flows.

In Africa, FDI flows declined from $58 billion in 2014 to $54 billion in 2015: a decline of about 7 per cent. As a result, Africa’s share in global FDI fell sharply from 4.6 per cent in 2014 to 3.1 per cent in 2015.

LDCs have made efforts to attract more FDI through improvements in the investment climate. Many LDCs have also established Investment Promotion Agencies. Many developed and some developing countries also have policies, programmes and measures in place to encourage outward FDI flows, including information services on the business environment and opportunities in host countries and financial support for pre-investment activities, fiscal measures and political risk insurance. In general, these measures aim to advance strategic interests of the home country and enhance the international competitiveness of its firms, but they also encourage FDI flows to developing countries to foster their development.

Several developed countries have specialised agencies to provide long-term financing for private sector development by providing loan and equity financing for FDI projects. For example, MIGA allocate relative small shares of their support to LDCs. MIGA in addition to guarantees, uses donor contributions and guarantees to provide an initial loss layer to insure investment projects in fragile and conflict contexts. However, the facility allocates a relative small share of its support to LDCs. A number of UN system organisations are providing support for FDI in LDCs mainly through the provision of information and data, advisory services and capacity building. Most of these programmes are not specifically designed for LDCs but cover several LDCs.

Energy

The AAAA called for public and private investment in energy infrastructure and clean energy technologies including carbon capture and storage technologies in order to “substantially increase the share of renewable energy and double the global rate of energy efficiency and conservation, with the aim of ensuring universal access to affordable, reliable modern and sustainable energy services for all by 2030”, while recognizing the special vulnerabilities and needs of small island developing States, least developed countries and landlocked developing countries.

Compared to other developing countries, LDCs, LLDCs and African countries have limited rates of access to modern energy, e.g. to electricity. This acute energy gap increases the obstacles faced by firms, households and governments in these vulnerable countries on the path to sustainable development, as energy is an enabling factor in productive capacity, education, technological upgrading, and many other areas.

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While the percentage of the population having access to electricity in LDCs has increased slowly from 31.5 per cent in 2010 to 34.5 per cent in 2012, they still face significant access challenges. At this rate, it would take almost 40 years to provide access to energy for all in LDCs. Furthermore, progress was faster in urban than in rural areas, with energy access rates of 70 per cent versus 21 per cent in 2012. LLDCs have access rates below 50 per cent. SIDS have higher rates, which increased from 67.6 per cent in 1990 to 74.2 per cent in 2012. Access rates for Sub-Saharan African countries increased from 23 per cent in 2000 to 32 per cent in 2012. In North Africa, the rate of access is more than 99 per cent.

 

ODA commitments to the energy sector in LDCs and LLDCs have increased as a share of total ODA from around 5 per cent in 2002 to nearly 10 per cent in 2014. ODA disbursements to the energy sector in SIDS increased steadily from 2011 to 2013, and almost doubled by 2014.

There has been good progress with efforts to create stronger public-private partnerships, such as the Sustainable Energy for All initiative (SE4All) of the Secretary-General, which promotes partnerships among Governments, business and civil society. However, financing sustainable energy in LDCs, LLDCs and SIDS remains a challenge. Development finance institutions will have to play a larger role in investing in these projects, mitigating risks and ensuring guarantees. Accordingly, additional sources of financing and tailored programmes and initiatives appropriate for vulnerable countries are needed to accelerate energy transition.

Two years after launching Power Africa, the initiative has mobilized commitments by public and private Power Africa partners to invest nearly US$ 32 billion for power generation across sub-Saharan Africa. ECA, the African Union Commission (AUC) and the NEPAD Planning and Coordinating Agency have been implementing the Biofuels Programme for Household and Transport Energy Use, which strengthens the capacity of African countries to promote the use of renewable energy to achieve sustainable development and poverty reduction.

Transport and infrastructure

The Addis Agenda encourages multilateral development banks and regional banks to “address gaps in trade, transport and transit-related regional infrastructure, including completing missing links connecting landlocked developing countries, least developed countries and Small Island developing States within regional networks”. See also the section on Closing the infrastructure gap.

Incomplete and outdated transport and infrastructure systems in vulnerable countries hinder their development, increase their costs of trade as well as commuting, and hold their economies back from fully exploiting their potential for structural transformation and sustainable development. As a share of total ODA to countries in special situations, aid to transport and storage increased in LDCs and LLDCs from around 8 per cent over 2000-2010 to 8.7 per cent since 2011. In SIDS, these flows increased from 8.3 per cent to 10.2 per cent over these two periods, but have displayed far more volatility, reaching a trough of 4.7 per cent in 2010 and a peak of 14 per cent in 2011.

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Several initiatives have been put in place to support infrastructure development. The Inter-American Development Bank (IADB) and the CAF Development Bank of Latin America have invested in improving connectivity in the region. The new Silk Road Fund was established by China in December 2014, and the Asian Infrastructure Investment Bank was formalized in 2015. The Asian Development Bank (ADB) established a new fund to support private infrastructure investments across Asia, capitalized by $1.5 billion in equity.

Since its launch in July 2015 with around $700 million in initial capital subscriptions from 20 African states and the African Development Bank, the Africa50 Infrastructure Fund has been mobilizing funds from African states, international financial institutions, institutional investors such as pension and sovereign wealth funds, insurance companies and other private sector entities. 90% of the financial pledges were earmarked for project financing and the remainder for project development. At the first Annual General Meeting in July 2016 two more African governments and two central banks joined Africa50. Capital should reach US$ 1 billion in early 2017 and the medium-term target has been raised to US$ 3 billion.

The Global Infrastructure Forum was launched in April 2016 with an aim to align coordination among the full suite of infrastructure actors, including the private sector. This forum will allow for a greater range of voices to bridge infrastructure and capacity gaps, particularly in challenging environments.

The Continental Business Network (CBN) was launched in June 2015, on the margins of the World Economic Forum in Cape Town, South Africa, as an African Union Heads of State and Government response to facilitate private sector advice and leadership in essential continent-wide infrastructure projects. The CBN serves as the continental platform between private and public sectors to promote implementation of the Programme for Infrastructure Development in Africa (PIDA). It aims to engage and advance private sector priorities and requirements to invest in regional and cross-border projects.

The small size, remoteness and insularity of SIDS pose daunting challenges in transport and trade logistics. While their unique vulnerabilities with regard to transport had been recognized decades ago, they, nevertheless, remain ever more present today and are further exacerbated by concurrent trends such as globalization, environmental degradation, climate change and limited financial resources for infrastructure development and maintenance. In relation to maritime transport, relevant challenges are affecting, among others, shipping services, transport costs, port infrastructure and equipment, as well as markets and operations. The age of some port infrastructure and superstructure, often combined with poor maintenance, is compromised in many SIDS.

Climate finance

The Addis Agenda reaffirmed the importance of fully meeting existing commitments on climate change, and called for increasing funding from all sources - public and private, bilateral and multilateral, as well as alternative sources of finance - for investments in many areas including for low-carbon and climate resilient development. It recognized the commitment by developed countries to jointly mobilize $100 billion annually by the year 2020. The AAAA also welcomed the largest dedicated climate fund – the Green Climate Fund (GCF) – as well as the decision of its board to aim for a 50:50 balance between mitigation and adaptation over time on a grant equivalent basis and to aim for a floor of 50 per cent of the adaptation allocation for particularly vulnerable countries, including least developed countries, small island developing states and African countries (see also section on Climate finance).

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Vulnerable countries often suffer the greatest burden of climate change, although they have contributed the least to the phenomenon. While there has been an increase in funding pledged for financing climate adaptation and mitigation for these countries, many of them are unable to cope with the complexity required to access such funds.

The Green Climate Fund (GCF) portfolio consists (as of October 2016) of 27 projects of which 26 per cent focus on mitigation, 22 per cent cross-cutting and 52 per cent on adaptation. Out of the 27 projects 12 are implemented in Africa, with a total project investment of USD 2.1 billion (including co-financing).

Due to capacity constraints, LDCs may face significant difficulties in preparing the required complex and technical proposals to access the GCF. They may not have the baseline data and statistics for decent project designs which require thorough social and environmental safeguards, valid consultation processes, accountability mechanisms and transparency, feasibility studies and financial and economic analysis, along with evidence on potential impact on sustainable development. The pilot phase for new additional modalities to Enhance Direct Access will provide an initial allocation of US$200 million for around 10 pilots, including at least four to be implemented in Small Island developing States, LDCs and African States.

The GCF also has a special $16 million “readiness program” to support developing countries’ institutions through the accreditation process. As of 31 July 2016, 128 countries had expressed an interest in support from this programme and 50 have had their requests approved (70 per cent of these are SIDS, LDCs and African States). This funding, which comes from donations by developed countries, will has begun being disbursed to 12 countries in 2016. The funding limit for an individual country has been set at $1,000,000. Though this will presumably help countries to be “program ready”, simplifying the accreditation process would perhaps be a bigger help for LDCs.

Trade

The AAAA envisioned a significant increase in exports from developing countries, especially LDCs, and to support the involvement of Small Island developing States in trade and economic agreements. It also called on developed members of the WTO to implement duty-free and quota-free market access in a timely manner on all products from LDCs, and to develop simple and transparent rules of origin applicable to imports LDCs, and focus Aid for Trade on LDCs through the Enhanced Integrated Framework (see also the chapter on International trade for sustainable development).

While exports of many developing countries increased significantly since Monterrey, the share of vulnerable countries in world trade in goods and services remains low and world trade seems challenged to return to the buoyant growth rates seen before the global financial crisis.

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SIDS’s share of global trade has been the lowest, averaging 0.17 per cent between 1990 and 2015, and showing a stagnant trend. This attests to their narrow resource bases, dependence on a few external and remote markets, high costs for transportation, communication and servicing; long distances from export markets and import resources; and low and irregular international traffic volumes.

The percentage of LDC exports in total world exports is very low, accounting for about 1 per cent of world’s exports in 2015, which is well below the targets of the IPoA and SDGs of 2 per cent. The downward trend since 2013 is mainly due to the decline in commodity prices. LDC exports also remained highly concentrated with almost 70 per cent of merchandise exports depending on three main products in 2014. The share of clothing products in LDCs exports increased from 7 per cent in 1995 to 11 per cent in 2014. Thus exports of products with higher value added and use of more advanced technology remain very limited. Merchandise exports from LLDCs were estimated at $158 billion in 2015, registering a fall of 30 per cent over 2014. The huge decline was caused by the collapse in commodity prices and sluggish demand. This was the second year that LLDC exports fell, following a 2 per cent fall in 2014. Merchandise imports to these countries also fell in 2014 and 2015, reaching an estimated $186 billion in 2015. African countries have higher shares of world trade and LDCs, LLDCs and SIDS but still account for only 2.4% (down from a peak of 3.5% in 2008). Middle-income countries, and upper middle income countries in particular, account for a much larger share of global exports – their share increased from 16 per cent in 2000 to 27 per cent in 2015.

 

The product diversification index - computed by measuring the absolute deviation of the trade structure of a country from world structure, with a value closer to 1 indicating greater divergence from the world pattern - for LLDCs has remained about 0.6 per cent since 2010 thus reflecting very little value addition to the traditional exports and very little progress in export diversification. As a whole, LDCs have the highest product concentration compared to the world average among these groups. Merchandise exports from LLDCs are also highly concentrated in just a handful of products, in particular raw commodities. Likewise, the exports of SIDS and African countries were less diversified than those of the rest of the world.

Duty-free quota-free (DFQF) market access for LDCs in developed economies increased only slightly, reaching 84 per cent in 2014. However, access varies significantly by products – with agricultural and manufactured exports (except textile and clothing) having almost completely free market access (98 per cent and 97 per cent respectively). As of end of 2015, Australia, New Zealand, Norway and Switzerland provided 100 per cent DFQF coverage for LDCs, while the European Union provided 99 per cent coverage, excluding arms. However, the erosion of preferences has continued due to ongoing tariff liberalization, although it slowed down in recent years. The African Growth and Opportunity Act (AGOA) scheme, which grants preferential market access by the US to many African countries including 26 out of 34 African LDCs, was renewed until 2025.

Aid for Trade (AfT) to LDCs has also seen some improvement, with disbursements for LDCs increasing from US$9 billion in 2009- 11 to US$11 billion in 2013, mainly for economic infrastructure. Aid for trade to LLDCs doubled since 2002. Disbursements to these countries stood at $6.49 billion in 2014, down from $6.7 billion in 2013. Most support is going to economic infrastructure (56 per cent) and building productive capacities (41 per cent). According to UNECA, in 2013, Aid for Trade accounted for roughly 35 percent of sector ODA disbursements, or 26 percent of total ODA disbursements excluding debt relief. A worrying trend is the continuing sharp decline of ODA committed to trade regulation and policies, including capacity building which could enhance the capacity of SIDS to improve its trade. From 2010 to 2014, ODA has steeped considerably. Much of this ODA is from multilateral agencies, while that from the DAC countries, though quite low, increased steadily between 2011 and 2014. Aid for Trade disbursements to Africa continued to display a strong resilience, reaching a record-level of USD 15.8 billion. Total aid-for-trade commitments reached US$ 54.4 billion in 2014. Commitments in aid-for-trade to Africa totalled US$ 18.2 billion, which constituted roughly one-third of global aid-for-trade commitments.

Science and technology

Addis committed to ‘enhance international cooperation, including ODA, in these areas, in particular to least developed countries, landlocked developing countries, Small Island developing States, and countries in Africa. We also encourage other forms of international cooperation, including South-South cooperation, to complement these efforts.’ (See also chapter on Science, technology, innovation and capacity building).

ODA commitments for Technological R&D to the countries in special situations have been quite volatile since 2000. ODA to this sector in Africa increased from $8.6 million in 2000 to over $61 million before the financial crisis, but has since declined dramatically. In LDCs, ODA to Technological R&D likewise fluctuated widely, peaking at $27.3 million in 2007 and nearly disappearing by 2014. LLDCs experienced two peaks in ODA to the technology research sector, with $32.7 in 2007 and $44.1 in 2013, dropping to 0.3 million in 2014. By contrast, aid to science and technology in SIDS has been marginal throughout the period 2000-2014, never exceeding $1.9 million.

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The Technology Bank

On 23 December 2016, the United Nations General Assembly officially established a Technology Bank for Least Developed Countries as a new UN institution. The Technology Bank, a long-standing LDCs priority provided for in the Istanbul Programme of Action and in SDG 17, is intended to help least developed countries strengthen their science, technology and innovation capacities, foster the development of national and regional innovation ecosystems that can attract outside technology, generate homegrown research and innovation and take them to market. It also aims to assist the world’s poorest countries in building their national and regional capacities in the areas of intellectual property rights and technology related policies, as well as facilitating the transfer of technologies on voluntary and mutually agreed terms and conditions, and in the process, accelerate the least developed countries integration into the knowledge-based economy.