Originally posted in The Financial Express on 11 March 2021
The United Nations initiated the classification of countries in November 1971 and at that time, the Least Developed Country (LDC) category had 25 countries. Currently, the number of countries stands at 46. These LDCs account for around 13 per cent of the world population. However, they contribute only 1.3 per cent to the global GDP and less than 1 per cent to the global trade and foreign direct investment (FDI). In terms of technology adoption, only 20 per cent of the population have access to internet.
The most recent triennial review by the Committee for Development Policy (CDP) has confirmed that Bangladesh is eligible to exit from the LDC category having crossed the threshold of three defining criteria namely per capita GNI, Economic and Environmental Vulnerability Index (EVI) and Human Assets Index (HAI). In the 2021 review, Bangladesh stands strongly in all three criteria with a per capita GNI of 1827 USD (requirement being USD 1222), EVI of 27 (requirement being 32 or below), and HAI of 75.4 (requirement being 66 or above).
According to an earlier timeline set by the CDP, Bangladesh was set to leave the LDC category in 2024. However, in view of the COVID-19 pandemic and taking note of a request by the Bangladesh government the graduation year was deferred by two years, i.e., in 2026. In the same review, Nepal and Laos were also recommended for graduation in 2026; but Myanmar and Timor-Leste failed to get a nod from the Committee.
WHAT ARE THE BENEFITS FROM LDC GRADUATION
Graduating from the LDC category is, in reality, a commendation from the international community for Bangladesh’s achievements in growth and development, which in turn would boost the confidence of global financiers. Countries that have graduated previously have experienced a higher flow of FDI. The improved perception of the country’s market risks is expected to upgrade the country’s international credit rating, which would lead to an increased generation of investible resources.
Although the graduation may not diminish the flow of foreign aid abruptly, the domestic tax collection is expected to increase significantly. However, for all these potentials to turn into reality, Bangladesh would need to undertake a significant amount of structural and policy reforms.
LOSS OF LDC-SPECIFIC PREFERENCES IN EXPORT MARKETS
Bangladesh has to overcome a series of hurdles to bear the fruits of potential benefits from graduation. Graduation would lead to waiving a number of preferences and privileges in the export markets, especially in the European and Canadian markets. Bangladesh may face an 8-10 per cent fall in its gross export revenue due to the loss of duty-free quota-free (DFQF) access to the European market, which may amount to about USD 2.5 billion annually. Although Bangladesh will exit the LDC category in 2026, the EU and the UK have agreed to allow Bangladesh to benefit from the preferential treatment for three years after graduation.
OTHER AREAS TO BE IMPACTED
The Bangladesh economy is experiencing a “dual-transition” as it entered the lower-middle-income country (LMIC) in 2015 and it is set to exit the LDC category soon. International financial institutions like the World Bank and the Asian Development Bank term Bangladesh as a “blended country” as it now (because of its LMIC status) has to take foreign loans based on a mixture of concessional and non-concessional interest rates. Access to official development assistance (ODA) is also diminishing sequentially.
The transition from a lower-income country (LIC) to an LMIC has caused constraints in accessing vertical funds like the Global Alliance for Vaccines and Immunsation (GAVI). Graduating from the LDC may also lead to the loss of access to the LDC Fund for Climate Change, which is a matter of grave concern for Bangladesh.
After LDC graduation, Bangladesh’s subsidy activities in agriculture would have to be more transparent and limited. The same would also apply to fiscally incentivising infant industries.
Over the years, the pharmaceutical industry in Bangladesh has flourished, benefitting from the waived intellectual property (IP) regulations for the LDCs under the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS). But, as a consequence of LDC graduation, the country will stop enjoying the flexibility seven years before the expiration of the globally stipulated preferential period, i.e. till 2033.
Bangladesh will have to also comply with, after graduation, the substantive provisions of the TRIPS. The country will also lose access to special technology transfer schemes and will have to comply with the full requirements for the use of special Compulsory Licensing to export medicines. Higher fees of global IP registration systems such as the Patent Cooperation Treaty have to be borne by the post-LDC Bangladesh.
REMAINING INTERNATIONAL SUPPORT MEASURES
Nonetheless, Bangladesh would continue to benefit from several preferences after graduation. While commitment regarding continued preferential treatment in the Japanese and Canadian markets is yet to come by, Bangladesh will continue to benefit from the DFQF access to the EU and the UK markets for extra three years after graduation. Further, India and China may also extend their LDC scheme to graduating LDCs for a certain period.
Incidentally, Bangladesh’s recent move towards signing bilateral and regional free trade agreements for counter-acting the loss of preferential market is a positive move. An alternative to preferential treatments is undoubtedly a positive impact from graduation. Bangladesh also needs to continue preferential market access negotiations under South-South cooperation provisions.
Bangladesh, however, will continue to have access to the LDC Technology Bank, and receive Aid for Trade (A4T) benefits through the Enhanced Integrated Framework (EIF) for five years after graduation.
RECOMMENDATION OF THE CDP
The CDP of the United Nations, while recommending graduation of Bangladesh, has noted that it expects that the extended preparatory period of five years will enable Bangladesh to not only tackle the ongoing global health and economic crises and the exposure to external shocks but also to engage with its development and trading partners in preparing a smooth transition strategy and to plan for a post-graduation international trade landscape. The UN CDP also underscored the importance to preserve necessary policy space while negotiating possible bilateral and regional agreements.
Further, the UN CDP mentioned that Bangladesh should consider a number of priority policy areas to support its development during the preparatory period for a smooth transition. These may include formulating national policies that mobilise domestic resources, placing job creation at the centre of the country’s Eighth Five Year Plan, increasing investment in the health sector—both at the primary healthcare level and for pandemic readiness—diversifying exports and export markets and accelerating efforts to scale back from coal-fired power plants and shift to clean and sustainable energy.
The UN CDP has also called upon Bangladesh’s development and trading partners to extend preferential market access and to exempt enforcement of the TRIPS for a reasonable period of time, which has to be negotiated at international levels and bilaterally with Bangladesh. It also called on the international development partners to provide financial and technical support to strengthen the health sector and tackle the impact of climate change in Bangladesh. The UN CDP also urged the development community to adopt a host of international support measures (ISMs) in favour of the graduating LDCs.
NATIONAL LDC TRANSITION STRATEGY
As the timeline for LDC graduation has now been finalised, Bangladesh needs to formulate a robust “LDC Transition Strategy” that will cover the upcoming five years and beyond. This strategy should deal with the possible fallouts of LDC graduation and should also lay the foundations for “graduation with momentum”. The availability of such a document will allow the international community to support Bangladesh more effectively. Bhutan, for example, has already moved forward in this direction to ensure its smooth and sustainable development prospect.
The national transition strategy has to address two specific challenges facing Bangladesh, namely the COVID-19 pandemic and the Rohingya refugee crisis. The post-COVID-19 recovery plans and programmes need to be embedded in the transition strategy. Rohingya maintenance and repatriation need to be addressed as well.
While preparing the national LDC transition strategy, Bangladesh also needs to focus on a number of concentric development plans including the Eighth Five Year Plan, the Second Perspective Plan, the Bangladesh Climate Change Strategy and Action Plan, and the Delta Plan. Bangladesh will also have to link up such a strategy with delivering the 2030 Agenda for Sustainable Development.
To ensure inclusive development—underpinned by the growth of investment, employment and income—improving “productive capacity” should be the core priority for Bangladesh. This warrants economic diversification, technology adoption, and improvement of labour productivity. The focus should be drawn towards the expansion and consolidation of the domestic market.
For a fruitful outcome, Bangladesh has to put in place a well-coordinated and resultative institutional mechanism at home. The role of the National Task Force (under the Prime Minister’s Office) that was set up in January 2016 to monitor the implementation of the “graduation roadmap” needs to be revisited. Preparation and actualisation of a coherent and cogent transition strategy for LDC graduation would need significant effort, coordination and engagement among the ministries—particularly among the External Relations Division (ERD) of the Ministry of Finance, Ministry of Foreign Affairs and Ministry of Commerce. Substantive inclusion of the private sector and non-government development organisations in this process is a must. Real-time data supply needs to be strengthened particularly for effectively participating in UN
CDP’s special mechanism to monitor the graduating LDCs.
Dr Debapriya Bhattacharya is, Member, United Nations Committee for Development Policy (CDP) and Distinguished Fellow, Centre for Policy Dialogue (CPD).