TO GRADUATE, OR NOT TO GRADUATE?

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2018 was a glorious year for Bangladesh. The country had some of the highest growth rates in South Asia, a stable export market and products and it had just met all three eligibility criteria for leaving the LDC category over the next six years; national income per capita, human asset index (HAI), economic vulnerability index (EVI). Bangladesh willingly embraced its graduation journey and added landmarks to its development milestones. Then China sneezed, the world caught the cold and the CoronaVirus brought the global economy to a standstill. With the second of two triennial reviews to take place in late February 2021, the nation asks if it is ready to graduate from the LDC category?

 

LDC Category

Least Developed Countries (LDCs) are characterized by low levels of income and severe structural impediments to sustainable development. The category was established by the UN General Assembly (UNGA) in 1971 to acknowledge that special support measures are needed to assist the least developed among the developing countries. Currently 47 countries are part of the LDC category.

Decisions on inclusion into, and graduation from, the list of LDCs are made by the UNGA based on recommendations by the U.N. Committee for Development Policy (CDP) that are endorsed by the U.N. Economic and Social Council (ECOSOC). The CDP, a subsidiary advisory body of ECOSOC and composed of 24 members, analyzes the list of LDCs every three years during triennial reviews to identify countries that may qualify for inclusion into or graduation from the LDC category.

There are two ways to become eligible for graduation: LDCs can either meet two out of three graduation criteria or have a GNI per capita that is at least twice the income threshold for graduation (income-only criterion) in two consecutive triennial reviews.

Since 1971, five LDCs have graduated from the LDC category, namely: Botswana, Cabo Verde, Equatorial Guinea, the Maldives, and Samoa. Five additional LDCs should graduate by 2024. Those are: Vanuatu (graduation in 2020); Angola (graduation in 2021); Bhutan (graduation in 2023), São Tomé and Príncipe (graduation in 2024); and Solomon Islands (graduation in 2024).

LDC Graduation

In March 2018, the CDP found that Bangladesh met the criteria for graduation for the first time. If Bangladesh meets the graduation criteria for a second time, at the next triennial review in 2021, the CDP will recommend it for graduation from the LDC category in 2024.

If Bangladesh graduates, it will be one of the first South Asian LDCs to do so, and it is the first country to meet all three graduation thresholds of the LDC criteria. Debapriya Bhattacharya, a leading Bangladeshi Economist, who began serving as a CDP member starting in January 2019 noted that Bangladesh is characterized by a “double transition” since, in addition to its expected graduation from the LDC category in 2024, it transitioned from a low-income country to a lower-middle-income country in 2015.

There is no denying the fact that graduation will invite a number of new challenges. Important questions that merit attention, are related to the possible impacts of graduation on the export-oriented readymade garments industry. The impact on the RMG sector in terms of its competitiveness and performance; the implications for the enterprises; what initiatives will need to be undertaken towards technological upgrading, social compliance, labor standards and rights compliance, to address the post-graduation challenges.

Scopes and Repercussions

According to the World Trade Organization (WTO), LDC graduation will have the greatest impact on the exports of Bangladesh, which is estimated to see a decline by 14%. The report goes on to mention that Graduation from LDC status will eventually result in the loss of preferences received by the LDCs on trade deals negotiated with developed country members. Access to LDC-specific preferences in regional trade agreements may also cease to exist. This impact will vary depending on the extent that graduating LDCs have used these preferences. For some, the impact will be limited, while for others the likely impact may necessitate that the graduating governments identify effective options to continue their integration into the global economy.

The C Word

Things were going pretty well for Bangladesh till COVID-19 intervened in the first quarter of the year. Due to the pandemic situation, growth has fallen to 5.24%, export earnings dropped 16.93% and import plunged by 8.56% in FY20. Furthermore, Foreign Direct Investment inflow plummeted, in FY 2019-20 to $2.5 billion which was $3.97 billion in the corresponding period of the previous FY. In the meantime, inflation has risen to 6.02% in June 2020 where the average inflation of the FY was 5.65%. Unlike the other sector, private investment is also projected to sharply decline to 12.72%.

The World Bank predicts GDP growth in FY20 is to be in the range of 1 to 1.6%, and 1.0 to -3.0% in FY21. In the downside scenario, a second wave of COVID-19 infections and a prolonged global recession would result in the realization of some contingent liabilities, especially from the financial sector. The recovery from the pandemic is expected to be very gradual, with some increase in export demand and higher public spending amid potential economic disruptions and increasing fragilities in the banking system.

Bhattacharya, in his article for Daily Star writes, “Notwithstanding the immediate and visible adverse impacts of the COVID-19 contagion, all the three core LDC graduation criteria of Bangladesh will most probably be above (or below) the required thresholds. This projection is guided by the fact that the pre-pandemic scores had been high enough to withstand a certain level of erosion. Moreover, even if the country does not fulfil one of the criteria, it will still be eligible for graduation based on the two other criterions.”

Therefore, it seems likely that, during the review in February 2021, the impact of COVID-19 will not be reflected in the available data for the assessment of graduation criteria of the LDCs. However, the U.N.-CDP has recently adopted a broader assessment framework as well as country-specific risk analysis, to make an informed decision. The candidate countries are entitled to put up their views in written form, and CDP may also seek their advice regarding the graduation process. It will be a country by country decision, including the one on Bangladesh.

But What About Us?

LDC graduation will result in Bangladesh losing the preferential market access facilities enjoyed by the LDCs thanks to the various unilateral, and bilateral, regional and global initiatives. While the E.U. has offered to extend the preferential market access for an additional three years following graduation (i.e. till 2027 in case of Bangladesh), there is no denying that future market access scenario for Bangladesh will undergo profound changes in the coming years.

Bangladesh will face an increased tariff structure in destination markets after graduation compared to the LDC duty rate. Thereupon, Bangladesh will also lose the preferential market access for goods, preferential treatment for services and service supplies, special treatment regarding obligations and flexibilities under WTO rules, IPR facility for pharmaceuticals, official development assistance, scholarships and other forms of financial support for education and research, caps and discounts on the contribution of LDCs to the United Nations system budgets, capacity-building for participation in negotiations, flexibility in reporting requirements etc. In a nutshell, phasing-out of preferences may substantially impact our economy along with the post COVID-19 new economic order.

Yeah No, Yeah.

In case CDP review comes back with flying colors, Bangladesh will need to pursue negotiations in various fora, making allies with other graduating LDCs, to secure their common interests in view of the emerging challenges. The country’s policymakers will have to take a proactive stance in the WTO and lead the effort to design a package of supports sustainable graduation of the LDCs. Already the idea of a package of support for graduating LDCs has been mooted in various global fora. The proposed package would have provided the graduating LDCs and their apparels sectors a much-needed breathing space as they embark upon their post-graduation journey.

Negotiating trade deals of their own is another idea. South-South Cooperation is another possible option for Bangladesh. The country take the lead in exploring the possibility of extending preferential treatment under unilateral LDC schemes, such as those run by India and China, for some years following graduation. Indeed, China extended LDC preferential treatment to Samoa following its graduation in 2014.

Bhattacharya has talked about the three pronged approach, which includes; Bangladesh campaigning for a comprehensive agenda of transitional ISMs for the graduating LDCs; the country has to develop and implement a strategy which has to be in alignment with the Sustainable Development Goals (SDGs) of 2030 Agenda and embedded in the upcoming Eight Five Year Plan (2021-25); and lastly engage the institutional arrangement of the Bangladesh government dealing with the LDC graduation.

Graduation from the LDC category is an important milestone for Bangladesh’s pursuit of development. The Graduation process is happening at a time when the world is witnessing fundamental changes, including in terms of rising nationalism, and that protectionist measures could create strong disincentives for graduating countries. With so much of our livelihood at stake, the government needs to be on their own in case Bangladesh does emerge as a middle income nation.

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