The UN Conference on Trade and Development (Unctad) has just published its “Least Developed Countries Report 2009”, which looks at the world’s 49 poorest countries.

The report says the Least Developed Countries (LDCs) need to focus macroeconomic policy on building up both the productive capacity of their economies and infrastructure. Also, they need to ensure that their fledgling banking sectors lend towards productive activities rather than government portfolios and real estate.

Given the current crisis, LDCs will find it difficult to take corrective action of this nature and will still be dependent on Official development assistance (ODA). Although the report notes that this has often been wrongly directed in the past and has been used as a substitute for fiscal revenues. The report urges that ODA be maintained or even raised during the current crisis, with even more emphasis on debt relief, but that the aid should increasingly be used to bolster economic infrastructure whilst making it possible to raise more revenue through the domestic economy.

Unctad takes a swipe at the World Bank and IMF, who it maintains have, for the last three decades, encouraged LDCs to concentrate on using monetary policy to contain inflation, whilst ensuring fiscal policy keeps budget deficits at a moderate level. At the same time little emphasis has been placed on public investment as a vehicle to promote economic development.

How can states raise public investment to the necessary levels? They need to improve tax revenues which in 2000-2006 only rose marginally in LDCs to 12% of GDP, despite strong economic growth, which compares to tax takes of 30-60% in richer countries. The report calls for a halt on further trade liberalisation, an increase in tax on luxury goods, an improvement in the effectiveness of taxes on high incomes and corporations and a strengthening of property taxes.

Too much attention has been placed by LDCs on using monetary policy to reduce inflation. The report concedes that inflation has fallen, but that restrictive monetary policy has delivered high real interest rates on average, which has made much investment unviable.

In conclusion, the report suggests that LDCs manage their capital accounts to deal effectively with the two major problems of capital flight and short-term capital volatility. It also calls for managed exchange rate systems – such as a managed float or loose adjustable peg system – which would allow LDCs to maintain the competitiveness of their exports.