What happens after LDC graduation?

Past graduates saw mixed outcomes shaped by exports, trade preferences, diversification

Bangladesh is seeking to defer its LDC graduation even as it prepares for the transition, amid concerns over export competitiveness and preferential market access. How have the eight countries that graduated before it fared, and what lessons do their experiences hold for Bangladesh?

A study by the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP) found that post-graduation outcomes varied across the eight countries, depending largely on their economic structures, reliance on trade preferences and sources of development finance.

The loss of LDC status did not necessarily trigger a major economic shock. The impact was limited in countries whose exports relied little on LDC-specific preferences, particularly those exporting minerals, hydrocarbons and cocoa, or products already entering major markets at zero or low most favoured nation (MFN) tariffs.

Botswana and Equatorial Guinea, for instance, faced limited exposure to preference erosion because their exports were dominated by natural resources. Botswana had built domestic fiscal capacity through diamond revenues, while Equatorial Guinea’s high hydrocarbon income had reduced its reliance on concessional finance and grant-based official development assistance (ODA).

However, both countries remained dependent on natural resources, highlighting the limits of graduation without economic diversification.

São Tomé and Príncipe, in Central Africa, was also expected to face little direct trade shock because cocoa already entered many markets duty-free. However, it remained reliant on cocoa, external finance and an emerging tourism sector.

By contrast, Cabo Verde and the Maldives faced greater risks from preference erosion because fish and processed fish products faced positive MFN tariffs in the European Union (EU) market.

Even in these countries, the overall impact was mitigated by the small share of merchandise exports in total external earnings and the dominance of services, particularly tourism. Transition periods, alternative preference schemes, flexible rules of origin, certification and market positioning also helped cushion the effects.

Nevertheless, both remained exposed to tourism-related risks. Cabo Verde was also vulnerable to disruptions in fisheries, remittances and climate shocks, while the Maldives remained heavily dependent on tourism.

Samoa and Vanuatu retained access to Australia and New Zealand through regional trade arrangements that were not conditional on LDC status. However, both remained exposed to changes in development finance, tourism, fisheries, remittances and climate shocks.

The study noted that the serious external disruptions Samoa and Vanuatu experienced after graduation stemmed mainly from natural disasters, the Covid-19 pandemic and the collapse of tourism, rather than the loss of trade preferences.

Bhutan’s trade and development finance profile was anchored largely in its relationship with India, limiting its direct dependence on LDC-specific support. However, it continued to rely on hydropower and trade centred on India.

Changes in development finance did not generally lead to a sudden withdrawal of support, the study found. Cabo Verde, Samoa, Vanuatu and São Tomé and Príncipe remained more exposed to such changes, but graduation typically involved a longer transition in which some support measures were phased out, replaced or extended.

Overall, graduation mattered more where countries actively used LDC-specific support in sectors exposed to tariff preference erosion or in areas such as climate finance and Aid for Trade. Its effects were less pronounced where exports already entered markets duty-free, regional agreements preserved market access, or aid allocations depended mainly on income, vulnerability, bilateral ties or small island developing state considerations.

The study identified limited productive transformation before graduation as a more persistent challenge than the loss of LDC benefits alone.

It also cautioned against drawing direct parallels between past graduates and countries preparing to graduate now. Asian LDCs with manufacturing-led economies and deep integration into global production networks, such as Bangladesh and Cambodia, generally have much higher trade preference utilisation rates than small island economies dependent on services or countries driven by natural resources.

For countries heavily reliant on the Generalised System of Preferences (GSP) or duty-free market access, losing preferential access could create a significant competitiveness shock, particularly where labour-intensive textiles and garments underpin the economy.

The eventual outcomes will depend on the mitigation measures adopted before graduation, the quality of domestic reforms and the broader external environment, the study said.

Mohammad Abdur Razzaque, chairman of Dhaka-based think tank Research and Policy Integration for Development (RAPID), was one of the researchers involved in the study.

Speaking to The Daily Star, Razzaque said two of the eight countries were rich in natural resources but could not export those resources.

Bangladesh’s situation is different, as it will need to sustain export growth after graduation, he said.

Razzaque said Bangladesh should follow the government’s Smooth Transition Strategy (STS) for LDC graduation, which emphasises retaining preferential market access through trade agreements with major trading partners.