We must help developing countries escape commodity dependence

(Alex Radelich, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Pamela Coke-Hamilton, Director, Division on International Trade and Commodities, United Nations Conference on Trade and Development (UNCTAD)

Commodities are the basic products that underpin both our material progress and our everyday lives. – from the cereals at your table, the cotton of your shirt or the copper and lithium in your smartphone, to the oil and gas that propels your vehicle.

These products also sustain and propel the economies of the many countries that produce them. When more than 60% of the merchandise a country exports, in value terms, are these basic products, we call the country commodity-dependent.

But commodity-dependent is much more than an adjective. It is a state. A state that often correlates with vulnerability and poverty. A state so persistent that it does not only describe a country’s present, but most likely will determine its future.

Commodity dependence may not make the headlines of newspapers, but its effects do. When a country’s economy is not diversified and relies heavily on basic products, it puts itself at the mercy of international market prices. When prices go down, employment, exports and government revenue suffer. In other words, putting too many eggs in one basket renders the country vulnerable.

This vulnerability is at the core of many economic, social and environmental challenges faced by developing countries. Addressing the challenges posed by commodity dependence is central to any meaningful efforts to achieve the UN’s Sustainable Development Goals, from reducing poverty and fostering equality to protecting the planet and preserving peace. To better understand the true impact of commodity dependence, monitoring goes a long way towards shedding light and breaking cycles of underdevelopment.

UNCTAD’s recent report on the State of Commodity Dependence 2019 assesses the current situation and analyses its evolution over the past 20 years. Two main facts stand out:

1) Commodity dependence is mostly a developing country phenomenon

2) It is persistent. Once a country is in this state, it is hard to break the chains of this dependence.

Commodity dependence is not rare. Around 54% of all countries, or 102 out of 189, are commodity-dependent. However, only 13% of developed countries – including Australia, new Zealand and Norway – are in this situation. In contrast, this share increases to 64% for developing countries, and is higher still – at 85% – for the world’s least-developed countries. In other words, export concentration of primary commodities is linked to underdevelopment; the higher the dependence, the lower the country’s development, measured by its GDP per capita.

In some cases, the dependence is extreme. There are 35 countries in the world for which more than 90% of their exports are commodities. For Angola, Iraq, Chad, Guinea-Bissau and Nigeria, this share surpasses 98%, and in some instances a single product constitutes more than three-quarters of all export revenue.

The problem is not dependence per se, but the vulnerability it entails. The recent commodity price downturn is a case in point. After reaching a peak between 2008 and 2010, commodity prices were substantially lower between 2013 and 2017. This reduction contributed to an economic slowdown in 64 commodity-dependent countries, with several of them going into recession.

And as their economies slowed down, fiscal positions worsened and public debt rose, often resulting in increased external debt. Between 2008 and 2017, the external debt of 17 commodity-dependent developing countries increased by more than 25% of GDP. In Mongolia, the most extreme case, the ratio of debt to GDP skyrocketed from 39% to 245%.

After these shocks, you can imagine what follows: less investment in infrastructure, social protection, and education spending, to name but a few examples. The very investment needed to diversify the economy is curtailed, and efforts to break away from commodity dependence are thwarted. This is the vicious cycle in which many countries are trapped.

The broader ramifications

The ramifications of commodity dependence go beyond economic statistics. They have important social and environmental implications.

As commodities are the main source of income for many poor countries, the only way to earn more is to produce more. This puts pressure on their natural resources, which compromises sustainability. This can place governments or producers in a dilemma: do they further exploit their resources to solve the problems of today, or do they adopt a more sustainable approach, forgoing income today but ensuring that these resources can still be used to address the problems of tomorrow? You can imagine the answer many have chosen.

In addition, a heavy concentration on a few commodities can have profound social consequences. Take the case of mining, a capital-intensive sector. As countries open up to trade, the benefits in large part accrue to the owners of capital, and not to the workers, who may work under very tough conditions.

Take the case of agricultural commodities, a more labour-intensive sector in poor countries. They are part of the low value-added segments of international food supply chains, and thus farmers get very low returns. This is why a coffee producer who works from sunrise to sunset gets less than 3 % of the price you pay for your morning coffee. Taken altogether, this perpetuates inequality and reinforces the perception that something is fundamentally wrong with the international trading system.

Commodity-dependence is stubborn, but it is not a sentence for underdevelopment. Whether natural resources are a blessing or a curse depends on how a country uses and manages them. There are success stories: Egypt, Oman and Trinidad and Tobago have driven exports in chemicals; Cameroon and Rwanda boosted exports by diversifying into agriculture; and Brazil and Colombia have steadily increased the value of their manufacturing exports.

However, these stories need to be replicated on a global scale. There is an urgent need to support developing countries to diversify their economies and increase the value of their exports. This is nothing new. Somehow despite all what we know, the situation has hardly changed in the past 20 years, and it will not change in the next 20 if we continue as we are. The vulnerability of these countries will become the vulnerability of our development ambitions – chief among them, the Sustainable Development Goals.