Commodity Dependence

7 Key excerpts on "Commodity Dependence"

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  eBook - ePub

  The Political Economy of Natural Resources and Development

  From neoliberalism to resource nationalism

  • Paul A. Haslam, Pablo Heidrich(Authors)
  • 2016(Publication Date)
  • Taylor & Francis

    (Publisher)

  PART I The political economy of resource nationalism Passage contains an image 2  Trends in minerals, ores and metals prices

  Samuel K. Gayi and Janvier D. Nkurunziza1

  Introduction

  Commodity Dependence, defined as the ratio of commodities exports to total merchandise exports, appears to have increased over time. Whereas 64 per cent of countries had a ratio of commodity exports to total merchandise exports of at least 50 per cent in 2009–2010, the proportion of countries with this ratio had increased to 70 per cent by 2012–2013. Out of 133 developing countries2 analysed, 93 countries derived 50 per cent of their merchandise export earnings from commodities in 2009–2010 (UNCTAD 2014a). By 2012–2013, the number of developing countries deriving at least 50 per cent of their merchandise export earnings from commodities had increased to 100. If this cut-off point is increased to at least 80 per cent of merchandise exports derived from commodities, 45 per cent of developing countries under review could be classified as commodity dependent in 2009–2010, increasing to 47 per cent by 2012–2013. The situation in Latin America and the Caribbean region reflects this pattern.

  The economics literature has generally associated Commodity Dependence, a feature characterizing most developing economies, with negative development outcomes. The literature argues that commodities affect development through three main channels: negative terms of trade, the Dutch Disease phenomenon, and political instability often resulting from struggles over the control of rents associated with commodity windfalls (Humphreys et al. 2007; UNCTAD 2013a).

  In spite of the negative association between the reliance on commodities and economic development, commodity sectors are of strategic interest not only to resource-rich developing countries but also to other stakeholders including multinational companies and their host countries, which regard them as high-return destinations for their financial capital. On the one hand, commodity exports are the major source of foreign exchange in a number of developing countries in Latin America and Africa. On the other hand, developed countries such as Switzerland, where about 570 companies are involved in commodity trading alone, derive substantial benefits from commodities trade. It has been estimated that commodity trading in Switzerland, for example, has a workforce exceeding 10,000 employees, and represents 3.6 per cent of the country’s GDP. In 2010, commodity trading contributed to about 50 per cent of the country’s economic growth (SwissBanking 2013). Therefore, the way that rents, generated in the commodity sectors, are shared by the different stakeholders along the value chain is an important determinant of the sector’s growth and development, including its stability.

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  Commodities, Governance and Economic Development under Globalization

  • Machiko Nissanke, George Mavrotas(Authors)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Such unbalanced export structures have many detrimental consequences; they are obviously very vulnerable to price volatility. Dependence con- tributes to the vulnerability of countries as it reduces their capacity to sustain shocks (a well-known example being the Dutch disease effects): depen- dence increases vulnerability and diminishes resilience (UNCTAD 2008b). In commodity-dependent developing countries, price volatility generates fiscal crises, budget deficits and revenues that are very difficult to manage, which in fine has a negative effect on growth. For example, it was the boom in the price of agricultural commodities such as coffee and cocoa in 1976–1979, immediately followed by a sharp 154 Uncertain Prospects of Developing Countries Table 7.2 Commodity Dependence by geographical region, 1995–1998 and 2003–2006 (number of countries for which exports of commodities account for more than 50 per cent of total exports) Total primary Three or less commodities a commodities One commodity 1995– 2003– 1995– 2003– 1995– 2003– 1998 2006 1998 2006 1998 2006 Developing and 118 113 82 84 47 50 transition economies Developing economies 108 103 78 78 45 46 Africa 46 45 37 34 21 23 Latin America 30 27 15 17 6 7 East and South Asia 7 8 4 6 1 2 West Asia 9 9 9 9 8 6 Oceania 16 14 13 12 9 8 Transition economies 10 10 4 6 2 4 Memo items Least developed 38 38 31 31 19 20 countries Heavily indebted 38 36 30 28 15 15 poor countries Note: a = primary commodities: SITC Rev. 2: 1 to 4 plus 68, 667 and 971. Sources: UNCTAD (2008a), table 2.4; UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics database. decline, that was the cause of major fiscal crises in low-income countries in the 1980s, their need for financial help from the IMF and the World Bank, and the launch of the first stabilization and adjustment programmes (Ghanem 1999). In their analysis of terms of trade shocks over the period 1970–2006, Funke et al.

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  eBook - ePub

  Global Commodity Markets and Development Economics

  • Stephan Pfaffenzeller(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Introduction

  Commodity-export dependence and economic development

  Stephan Pfaffenzeller

  Developing countries and primary commodities are two categories that seem to correlate naturally, so much so that the phenomenon of Commodity Dependence is commonly associated with the macroeconomic perspective on development economics. The connection to international commodity markets should also be apparent in so far as economic development constitutes a process in which an economy’s productive activities transition from a primary sector focussed on subsistence agriculture towards export oriented agri-outputs and extractive industries.

  The traditional progression from subsistence agriculture to basic manufacturing via surplus agricultural production seems so natural that an early stage of commodity-export dependence appears almost inevitable. Problems have traditionally arisen in mobilising an inter-temporally stable flow of export earnings to accelerate the process of domestic industrial transformation. The low value added problem of early stage agricultural and manufacturing processes produced a difficult to surmount growth constraint on the potentially developing economy in so far as the value added in these export sectors has been inherently limited.

  At some point, the expansion of extractive mineral producing industries could have appeared as an attractive alternative to reliance on early stage production activities, which, moreover, were easily accessible to competitors. Extractive industries required the coincident presence of suitable resources, but had the advantage of limited international competition once favourable natural endowments were present. The entry barrier developing countries have faced in attempting to access mineral resources has largely been defined by the start-up capital required to initiate extractive activity on an industrial scale and to integrate into advanced industrial markets for these outputs.

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  Global Commodity Markets and Development Economics

  • Stephan Pfaffenzeller(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Introduction Commodity-export dependence and economic development Stephan Pfaffenzeller Developing countries and primary commodities are two categories that seem to correlate naturally, so much so that the phenomenon of Commodity Dependence is commonly associated with the macroeconomic perspective on development economics. The connection to international commodity markets should also be apparent in so far as economic development constitutes a process in which an economy’s productive activities transition from a primary sector focussed on sub-sistence agriculture towards export oriented agri-outputs and extractive industries. The traditional progression from subsistence agriculture to basic manufactur-ing via surplus agricultural production seems so natural that an early stage of commodity-export dependence appears almost inevitable. Problems have tradi-tionally arisen in mobilising an inter-temporally stable flow of export earnings to accelerate the process of domestic industrial transformation. The low value added problem of early stage agricultural and manufacturing processes produced a dif-ficult to surmount growth constraint on the potentially developing economy in so far as the value added in these export sectors has been inherently limited. At some point, the expansion of extractive mineral producing industries could have appeared as an attractive alternative to reliance on early stage production activities, which, moreover, were easily accessible to competitors. Extractive industries required the coincident presence of suitable resources, but had the advantage of limited international competition once favourable natural endow-ments were present. The entry barrier developing countries have faced in attempt-ing to access mineral resources has largely been defined by the start-up capital required to initiate extractive activity on an industrial scale and to integrate into advanced industrial markets for these outputs.

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  International Commodity Markets and the Role of Cartels

  • Mark S. LeClair(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  2 The Dependence of Developing Nations on Commodity Exports

  As discussed in chapter 1 , production of most key commodities is centered in the developing world. In many cases, the exported goods constitute a significant proportion of the country’s foreign earnings, and therefore price variability in commodity markets can result in severe economic stress. As commodity prices slide, the funds needed to procure the imports critical for development decrease. The result is falling growth rates, the inability to repay international financial obligations, and potential political instability.

  This chapter will consider the relative dependency of developing nations on single-versus multiple-export trading. The numbers show that the impact of price instability is most severe for single-commodity exporters. Thus Ghana, which relies almost entirely on cocoa to secure foreign exchange, is far more vulnerable to price swings than a diversified exporter like Brazil. Although prices of primary commodities have tended to move in tandem, rising in the 1970s and falling together in the 1980s, this price correlation is not absolute. It is unlikely, for example, that the international markets for cocoa, coffee, sugar, and tin—all significant exports of Brazil—will simultaneously see a decline in prices. It appears that a broadly diversified export mix spreads out the risk of falling prices. By estimating the impact that declining commodity prices have exerted on export earnings during the last two decades, it becomes clear that even modest changes in a nation’s product mix can result in significant economic benefits.

  The chapter concludes with an examination of UNCTAD, the first global commission to aggressively support the formation of “cooperative” cartels (i.e., those that incorporate both producing and consuming nations). The discussion of UNCTAD’s efforts to empower developing nations by fostering the concept of cartelization will serve as a springboard to the overview of individual cartels presented in chapter 3

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  Primary Commodities and Economic Development

  • Stephan Pfaffenzeller(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  The lower intermediate export dependence category of 25 per cent or more for minerals and metals exports also shows a strong decline from the early 1960s to the 1990s. The number of countries reporting an incidence of the sub-sector in this category dropped from 18.07 per cent in 1965 to 6.80 per cent in 1990 before recovering to 14.65 per cent by 2011. Low and middle income countries account for a consistently high percentage of countries in this category, with 73.33 per cent in 1965, 71.43 per cent in 1990, and 78.26 per cent in 2011. The corresponding percentages for the 50 per cent category are 83.33 per cent in 1965, 33.33 per cent (for one out of three country cases) in 1990, and 81.82 per cent in 2011. At the higher Commodity Dependence clusters in this commodity category, the number of country cases is consistently too low for such percentages to be meaningful. What is generally apparent, though, is the stylized fact of persistent export dependence in the metals and minerals sub-sector at intermediate levels and the extreme rarity of countries, including low income countries, finding themselves in almost exclusive dependence on export earnings in this category.

  The pattern of export dependence across commodity sub-categories and the evolution of these patterns over time identify some crude yet crucial stylized facts about developing country Commodity Dependence. The relative importance of exports from agricultural and agriculture-related commodity sectors has generally been in decline, even though the prices of some agricultural commodities showed temporary recoveries, and in some cases even tended to trend upwards over time (see Chapter 3 ). The relative importance of export revenue from the mineral fuel and minerals and metals sectors differs systematically from this general characteristic. Even though the value of mineral fuel exports is partially driven by cartel action – in a way that minerals and metals exports are generally not – both have the common property of being functionally tied to industrial activity. The incidence of export revenue in both commodity sub-sectors has also failed to systematically diminish.

  A linkage between demand for primary commodities and industrial activity in centre economies is of course at the heart of the original Prebisch–Singer hypothesis, and dependency theory more generally. The recent experience differs in so far as the booms in industrial demand sustaining the relative importance of the commodity trade are now conventionally linked to successful emerging economies. In other words, recent experience points to the continued presence of limited numbers of countries successfully following export-oriented growth strategies and boosting international demand for primary commodities in industry-related sub-sectors as they build their secondary sector industrial infrastructure. To the extent that the establishment of an industrial infrastructure is particularly resource intensive, one should expect this foundational stage in an emerging market’s development to give rise to particularly intensive commodity demand. During the recent emerging market development experience, this foundational infrastructure development has of course been particularly pronounced in China. Given the size of this particular emerging economy, the external effect of a protracted international commodity price boom is hardly surprising.

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  Natural Resources in Latin America and the Caribbean

  Beyond Booms and Busts?

  • Emily Sinnott, John Nash, Augusto de la Torre(Authors)
  • 2011(Publication Date)
  • World Bank

    (Publisher)

  In this chapter, we consider how commodity produc- tion is—and is not—special for its potential and more direct connections to long-term growth. (Indirect effects through institutional channels are considered in chapter IV.) We also consider the legitimate con- cerns that those special features may elicit. We begin with an overview of the empirical evidence on the relationship between Commodity Dependence and growth, and then explore a series of specific potential causal channels. The chapter puts some emphasis on Dutch disease—the appreciation of the real exchange rate that commodity exports may generate, especially in booms. But it also explores other channels through which Commodity Dependence has been alleged to influence growth and economic development, includ- ing the dearth of spillovers that commodities are said to generate for other economic activities and the pur- ported secular decline in commodity prices relative to those of manufactures. A simple correlation between natural capital and GDP, both expressed in per capita terms, seems to confirm the intuition that natural resources contribute to income generation (figure 3.1). Indeed, among the richest countries in the world are the top three in 13 CHAPTER 3 Natural Resources and Long-Term Growth: Exploring the Linkages Key messages: As one might intuitively expect, greater natural resource wealth is associated with higher GDP per capita in a cross-country sample. Despite this simple fact, anecdotal evidence and some economic research have called into question whether resources are good or bad for development: that is, whether there is a “natural resource curse.” Although the weight of the evidence seems to indicate that, on balance, there is no curse, it is useful to look at some of the individual channels for Commodity Dependence to allegedly exercise a negative influence.

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