The current economic crisis is the result of weaknesses in the neoliberal thinking that has shaped global economic policies in the last three decades; weaknesses that have been magnified by policy failures and lax regulation in the advanced countries. The cost in terms of the bailouts and recapitalization of banks has already reached unprecedented levels. However, the adverse impact on the real economy and the cost in terms of lost output and employment are now the great concerns. Most advanced economies are in recession and emerging markets have slowed. But the major victims of this contagion are likely to be the least developed countries (LDCs), many of which are still suffering the adverse impact of recent energy and food crises and have the least capacity to cope with yet another major external shock.

The current financial crisis has given added urgency to a reconsideration of the potential for new roles and functions for the State in the current global context. This chapter examines what this might mean in general terms for the least developed countries (LDCs). Its central argument is that the LDCs should pursue good development governance and that with this in view they should seek to build developmental State capabilities.
Development governance, or governance for development, is about creating a better future for members of a society by using the authority of the State to promote economic development, and in particular to catalyze structural transformation, create productive employment opportunities and raise living standards for present and future generations. In general terms, governance is about the processes of interaction between the Government — the formal institutions of the State including the executive, legislature, bureaucracy, judiciary and police — and society. Development governance is governance that is oriented to solve common national development problems, create new national development opportunities and achieve common national development goals. This is not simply a matter of designing appropriate institutions but also a question of policies and the processes through which they are formulated and implemented. Which institutions matter is inseparable from what policies are adopted. Development governance is thus about the processes, policies and institutions that are associated with purposefully promoting national development and ensuring a socially legitimate and inclusive distribution of its costs and benefits.

How should the macroeconomic policies of LDCs be modified in light of the global deterioration in real and financial conditions? What should be the role, for example, of counter-cyclical fiscal and monetary policies? And can LDCs continue some of the growth momentum that they achieved prior to late 2008, based on maintaining the financing of public investment and the stimulus of private investment?
It will be important for LDC Governments to continue to devote a significant share of their budgets to public investment, which will enable them to maintain some degree of momentum in their previously achieved growth trajectories, which were brought about by the global boom in the export of primary commodities. It would be a mistake for LDCs to reduce taxes in order to provide a fiscal stimulus to their economies. Their taxes are already low. Reducing them further would undermine their long-term basis for domestic resource mobilization. Also, such reductions would be unlikely to provide much short-term stimulus, because part of the tax relief would be saved instead of spent. This is why public expenditures tend to have a larger multiplier impact on an economy than tax reductions.

While agriculture is a major component of overall economic growth in most LDCs, the key policy challenge that most LDCs face is how to promote agricultural growth in a way that will enable a structural transformation, in which the relative importance of the agricultural sector declines as other sectors (particularly manufacturing) move onto a dynamic growth path. In order to enable this transition, policy issues in agriculture need to be addressed in terms of multiple intersectoral linkages, which often involve complex choices. Thus, the development of agriculture as the basis for a structural transformation of the national economy, leading to broad-based economic growth, food security and poverty reduction, requires extending the analytical and programmatic perspective beyond the narrow confines of farming. It requires a macroeconomic perspective that emphasizes the importance of generating an increasing agricultural surplus,3 which requires agricultural labour productivity growth to exceed the growth of labour’s own consumption requirements by an increasingly larger margin. Lack of agricultural surplus may constrain non-agricultural growth from the demand side (demand deficiency), but also from the supply side. In the latter case, missing agricultural surplus makes the system prone to food-price inflation, which: (a) erodes the real wages of non-agricultural workers and reduces their consumption; (b) erodes industrial profits, and hence investment; and (c) may lead to lower exports, due to loss of cost competitiveness. This chapter takes a view of the LDC food and agriculture system that encompasses an integrated approach to improving productivity and efficiency at every stage of the commodity chains, from research and development to input markets, and from farm-level production and distribution to the final consumer. The development of linkages among these stages and to other sectors is key to achieving an optimal contribution from the agricultural and food system to broad-based economic growth and transformation through increased value-added and employment linkages.