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Financing rural structural transformation in the Least Developed Countries

Financing rural structural transformation in the Least Developed Countries
Photo credit: David White | Oxfam

12 Feb 2016

In its latest policy brief, UNCTAD discusses key policy measures and instruments that the least developed countries and their development partners can mobilize to widen the financing of rural economic activities.

For the least developed countries (LDCs) to reach the Sustainable Development Goals, their rural economies will have to undergo structural transformation, given that most of their population lives in rural areas and agriculture is a main contributor to their economy.

To this end, UNCTAD proposes that LDCs engage in the poverty-oriented structural transformation, or POST, of rural areas. It should encompass the upgrading of agriculture, the diversification of rural economic activities and the strengthening of synergies between both. A major obstacle is the dearth and inadequacy of financing for rural economic activities.

Introduction

More than ever, rural economic transformation will be central to the development of LDCs as they work towards the Sustainable Development Goals. These Goals signal both the need and the opportunity for a new approach to development policies, given the gap between the progress required by 2030 and that of recent decades. The focus on rural transformation is imperative for several reasons.

First, more than two thirds of their total population live in rural areas. This pattern is not expected to change substantially by 2030. Rural population growth will continue to be much faster, and the rural share of the population will remain much higher than in other developing countries throughout the achievement period of the Sustainable Development Goals (2015-2030).

Second, agriculture plays a crucial role in all LDC economies, accounting for 60 per cent of total employment and 25 per cent of value added. In many of them, it also represents a major source of export revenues.

Third, shortfalls in human development targeted by the Sustainable Development Goals are much greater in rural areas of LDCs. The proportion of people living below the national poverty line in these areas is generally about twice as great as in urban areas. Typically, rural people in LDCs are 50 per cent more likely than their urban counterparts not to have access to sanitation or to attend secondary school, twice as likely not to have access to electricity or to attend primary school, and more than four times as likely not to have access to clean water.

The performance of the agricultural sector in LDCs is unsatisfactory. Agricultural labour productivity in LDCs between 2011 and 2013 was 19 per cent of that in other developing countries and just 1.8 per cent of that in developed countries. Given the concentration of the labour force in agriculture in LDCs, this broader productivity gap is the major cause of poverty in these countries and of the income divergence between LDCs and these other country groups. The total food trade deficit of LDCs has widened dramatically, from $2 billion in 1995-1997 to $21.8 billion in 2011-2013.

Key points

  • Microfinance in rural areas of LDCs is hampered by high interest rates and short maturities, which can be countered by interest subsidies and in-kind microgrants.

  • Official development assistance and development banks can be used to finance the public investment required to fill infrastructure gaps, so that LDCs can reach the Sustainable Development Goals.

  • Information and communications technology provides opportunities to broaden the reach of financial services to rural areas.

  • Financial literacy and better management of collateral and risks will help finance rural structural transformation in LDCs.

Source UNCTAD
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Date 12 Feb 2016
 
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