Addressing the trade challenges facing landlocked LDCs : the experience of Lesotho

Given their small domestic markets, expanding international trade is crucial to driving and sustaining growth in Least Developed Countries (LDCs). In turn, attracting foreign direct investment (FDI) often plays a key role in providing the necessary capital for developing export-oriented industries and bringing new technology and techniques. Landlocked LDCs (LLDCs) face a unique set of constraints on their capacity to attract FDI and pursue export-led growth. This note examines these challenges facing LLDCs and discusses policy options for dealing with them. In particular, the note uses the example of Lesotho to show how some of the constraints can be overcome. For example, Lesotho has been successful in building a labor-intensive manufacturing sector based around textiles and clothing production for export by attracting FDI in these activities. However, an investigation of Lesotho also demonstrates the broader challenges, typical to many LLDCs, which remain for export-led growth to be sustained through diversification into a broader range of higher-valued added activities and for the benefits of FDI to spill over beyond a narrow enclave into the broader economy.