TWN Info Service on UN Sustainable Development (Oct23/09)
13 October 2023
Third World Network

UN: Widespread commodity dependence hampering development – UNCTAD
Published in SUNS #9874 dated 13 October 2023

Penang, 12 Oct (Kanaga Raja) — Commodity-dependent developing countries (CDDCs) have long over-relied on the extraction and export of natural resources to support their economies, with diversification eluding the majority of these countries for decades, the UN Conference on Trade and Development (UNCTAD) has said.

In its Commodities & Development Report 2023, UNCTAD said most CDDCs seem to be trapped in a state of commodity dependence.

It said that over the period from 2019 to 2021, a staggering 76% of least developed countries, 81% of landlocked developing countries and 61% of small island developing states were commodity dependent, compared to 13% of developed economies.

While this concentration on the commodity sector has brought revenues to these countries, it has also created numerous challenges and vulnerabilities, said the report.

It said these include macroeconomic instability, delayed industrialization or de-industrialization, the long-term declining trend of prices of exported primary commodities relative to the prices of imported manufactured goods, and volatility of export revenue caused by commodity price fluctuations.

Many CDDCs are among the most vulnerable to the impacts of climate change, such as extreme weather events, rising sea levels, and droughts, it added.

“The COVID-19 pandemic and the war in Ukraine have further exposed CDDCs’ vulnerabilities and highlighted the urgent need for these countries to diversify their economies.”

In this context, UNCTAD called on the global community to provide support for “green” industrial policies in commodity-dependent developing countries to transform and diversify their economies amid the global quest for a low-carbon energy transition.

UNCTAD said that these are sector-targeted policies that reshape a country’s economic production structure, attracting investments to increase countries’ domestic value-addition and integration in regional and global supply chains, with the aim of reducing commodity dependence, promoting economic and social goals, and generating environmental benefits.

“The path to diversification that is inclusive and more sustainable is within our reach, but it demands strong political commitment from commodity-dependent developing countries and their development partners,” said UNCTAD Secretary-General Ms Rebeca Grynspan.

“This report outlines a holistic approach that can drive sustainable development, safeguard vulnerable populations and contribute to global climate goals,” she added.

According to the UNCTAD report, CDDCs now have to diversify in ways never done before: through low carbon paths in the context of climate change mitigation and the energy transition.

“This is challenging because diversification has been associated with the increasing use of fossil fuels and rising greenhouse gas (GHG) emissions.”

Hence, efforts to reduce global GHG emissions will undoubtedly impact CDDCs’ policy space to diversify their economies and achieve the Sustainable Development Goals (SDGs), said the report.

“And diversifying in the context of the energy transition should be done in a way that is just and equitable rather than worsening income inequality.”

Economic and export diversification is the key to reducing commodity dependence and increasing the economic resilience of this group of countries, UNCTAD emphasized.

Diversification not only minimizes the risks associated with economic concentration but also generates faster economic growth by expanding productive capacities and shifting resources from low to high-productivity sectors, and promoting economic structural transformation, it said.

It said that successful cases of diversification often combine various pathways, for example, by adding value to primary commodities such as producing and exporting chocolate instead of cocoa or producing a larger number of products within or outside the commodity sector.

“A country may also diversify by investing its financial resources into a broad set of assets to minimize risk, as is the case with Norway.”

To successfully diversify, the report said that CDDCs will have to deal with old and new issues that have been hampering their socioeconomic development.

It said these include the structural barriers that have prevented them from fully realizing their potential, such as political instability, limited institutional capacity and governance, poor infrastructure, and insufficient investment in education and skills training.

CDDCs will also need to embrace new technologies and business models to create more resilient and sustainable economies, it added.

“While the challenges seem daunting, this might be the time, more than before, when CDDCs should focus on overcoming commodity dependence.”

While decarbonization and the energy transition might represent challenges, they also come with opportunities for countries that are able to harness them, said the report.

It said in the current paradigm, which calls for decarbonization of production and consumption, the demand for traditional high-carbon commodity exports from CDDCs, such as fossil fuels, is expected to drop drastically.

Due to declining demand for fossil fuels in the future, such natural resources and their associated assets might become stranded, it added.

“This will have a devastating effect on CDDCs dependent on fossil fuels if the global energy transition is not accompanied by inclusive diversification in these countries.”

At the same time, the global shift towards renewable energy presents opportunities for countries with abundant solar, wind, and geothermal resources, said UNCTAD.

“Embracing a transition towards green energy sources will give distinct advantages to early adopters from the CDDC group. Green energy will be an important commodity which, if produced in large quantities, could be exported to regional and global markets.”

While all CDDCs share challenges and opportunities, their diversification pathways will need to be tailored to country circumstances, the report underlined.

CDDCs will need to define relevant green industrial policies (GIPs) that focus on enabling these countries to benefit from opportunities created by the global energy transition, said UNCTAD.

One important element of such a policy would be its inclusivity through, for example, its capacity to create jobs that cater to the needs of different segments of the workforce, it added.

COMMODITY TRAP

Most economic value chains originate in commodities such as crude oil, copper, cotton or wheat, said the report.

“As prices fluctuate in international markets, developing countries that depend on exporting these commodities often have volatile incomes and slow productivity growth and can be politically unstable.”

As the world moves to more advanced products that command higher prices in international markets, CDDCs risk falling further behind, it cautioned.

UNCTAD considers a country to be commodity-dependent if it derives 60 per cent or more of its merchandise export revenues from primary commodities.

On this basis, in 2019-2021, 95 of the 195 UNCTAD member States were CDDCs, and an additional 15 were also very exposed, with shares in the 50 to 60 per cent range.

Generally, CDDCs are countries at earlier stages of development: for landlocked developing countries (LLDCs), the proportion of merchandise export revenues from primary commodities was 81 per cent; for small island developing States (SIDS), it was 61 per cent; and for the least developed countries (LDCs), it was 76 per cent, it said.

“In 38 CDDCs in 2019-2021, the dominant commodity export was agricultural goods; in 31, it was mining products; and in 30, it was energy.”

Moreover, many CDDCs depend on a narrow range of exports or even a single commodity. For Zambia, for example, 69 per cent of merchandise exports were of copper; for Suriname, 77 per cent were of gold; and for Iraq, 91 per cent were of crude oil.

Of the developed countries, however, only 13 per cent were commodity dependent, said the report.

It said that countries dependent on commodities often experience slow productivity growth, volatile incomes, macroeconomic and political instability, and overvalued exchange rates.

“Typically such dependence goes hand-in-hand with under-development – as reflected in UNDP’s human development index (HDI).”

For instance, in 2021, 29 of the 32 countries classified as having low human development in UNDP’s human development index (HDI) were CDDCs. Low-human development countries have average commodity export shares of 82 per cent.

The report said that over-concentration of exports also affects public revenue and the potential for investing in sustainable development.

For example, it said in 2020, Angola generated 51 per cent of its central government revenue from oil, a figure projected to increase in 2022 to 59 per cent.

Without proper fiscal policy frameworks, this can result in volatile and unsustainable spending and fluctuations in output, said the report.

One way to address this is by saving a portion of commodity revenues for future use through sovereign wealth funds (SWFs), it added.

Examples of such funds include the Norwegian Oil Fund – the largest commodity-linked SWF with over $1.1 trillion worth of assets, and the copper-based Economic and Social Stabilization Fund in Chile.

Such funds can also make countries more resilient by transforming wealth based on natural resources into other types of assets, said UNCTAD.

It also said that CDDCs are very exposed to fluctuations in exchange rates.

A drop in commodity prices reduces export revenues in United States dollars, which tends to lower the demand for the local currency and puts downward pressure on the exchange rate.

In Zambia, for instance, between July 2014 and January 2016, the price of copper per metric ton dropped from $7,113 to $4,472.

Over the same period, the exchange rate of the Zambian kwacha fell from K6.14 to K11.13 per United States dollar – increasing the local currency value of external debt denominated in United States dollars.

UNCTAD said that further recent shocks transmitted via global commodity markets have been the COVID-19 pandemic and the war in Ukraine, which have come on top of the climate crisis and the global energy transition, all of which are affecting patterns of production and consumption.

“These disruptions have hit hardest at vulnerable developing countries – but particularly at CDDCs, many of which rely on the export of one commodity group, such as fuels, while also being net importers of other basic commodities, including food.”

In addition, many CDDCs that depend on fossil fuel exports will suffer from a rapid decarbonization of the global economy, it added.

This could leave them with “stranded assets” – resources that have lost their value or become liabilities, such as abandoned oil fields or equipment, it said.

CDDCs that depend on the export of crude oil, natural gas and coal fossil fuels will need to prepare for shrinking markets, the report cautioned.

One estimate suggests that, to limit global warming to 2 degrees C above pre-industrial levels, a significant proportion of fossil fuel reserves will need to remain unused – one-third of oil reserves, half of the natural gas reserves and over 80 per cent of coal reserves, it said.

In Africa, for example, this comprises 28 billion barrels of oil, 4.4 trillion cubic metres of natural gas and 30 gigatons of coal.

In Central and South America, it comprises 63 billion barrels of oil, 5 trillion cubic metres of natural gas and 11 gigatons of coal.

Even more assets would need to be stranded to achieve the 1.5 degrees C target: to have a 50 per cent probability of reaching the 1.5 degrees C target by 2050 would leave un-extracted 58 per cent of oil reserves, 56 per cent of gas reserves, and 89 per cent of coal reserves.

These proportions would be even higher if the 1.5 degrees C target is to be reached with a probability higher than 50 per cent, said the report.

UNCTAD suggested that the 1.5 degrees C target might already be out of reach, but the global energy landscape is nevertheless undergoing a profound transformation.

The latest forecasts of the International Energy Agency for the first time show that global fossil-fuel demand is peaking.

“Under current policies, coal use would drop within the next few years, natural gas demand would plateau by the end of the 2020s, and oil demand would peak in the mid-2030s.”

If countries follow through on their climate pledges, fossil fuel demand would drop even faster. This is already reflected in lower investment in fossil fuels: between 2019 and 2022, investment in upstream oil and gas fell by 17 per cent to around half its 2014 level, said the report.

While there are risks for countries that depend on commodities for exports, there are also risks for commodity importers, it underlined.

Many developed and developing countries depend on imports of basic commodities such as food, fuels and fertilizers, UNCTAD noted.

In 2019-2021, among the 195 UNCTAD member States, 131 were net importers of basic food, 143 of fuels, and 154 of fertilizers.

And of the 95 CDDCs, 73 were net importers of basic food, 60 of fuels and 79 of fertilizers. And 42 were net importers of all three basic commodity groups.

International trade helps to balance the global supply and demand of commodities and provides more diverse food, said the report.

But, as demonstrated after the onset of the war in Ukraine, import dependence is also a risk, it added.

For example, it said that in 2021, Egypt sourced 75 per cent of its wheat imports from the Russian Federation and Ukraine; Mexico sourced 98 per cent of its maize imports from the United States of America; and Nepal sourced 99 per cent of its rice imports from India.

In mid-2020, as national economies started to rebound from the shock of the COVID-19 pandemic, supply chains could not keep pace, and commodity prices started to rise, it added.

“Commodity production also depends on supplies of energy, so prices were also driven up by high energy prices. At the same time, there were increases in the cost of transport, notably for container freight.”

The broad-based upward trend in commodity prices was given a boost by the start of the war in Ukraine, which affected basic food items such as wheat and sunflower oil, as well as fertilizers and fossil fuels.

In 2021, the Russian Federation and Ukraine jointly accounted for 27 per cent of global wheat exports, said UNCTAD.

Supplies were also affected when commercial vessels were prevented from leaving Black Sea ports after the war started.

UNCTAD said that net importers of food faced not just rising prices but also increasing uncertainty in supplies, especially in countries that depended on imports coming through Black Sea ports, including many LDCs.

It said some countries responded by restricting exports of wheat and other grains, which further exacerbated the situation.

Between 2021 and March-April 2022, after the start of the war, the price of wheat rose by 56 per cent and that of sunflower oil by 65 per cent, said the report.

Over the same period in Europe, prices of natural gas, for which the Russian Federation was the main supplier, increased by 131 per cent.

Prices of food started to fall after the Black Sea Grain Initiative was signed by the Russian Federation, Turkiye, Ukraine and the United Nations, which facilitated exports of food items and fertilizers from Ukraine and the Russian Federation.

Between 3 August 2022 and 5 March 2023, 23 million tons of grain and other food products were exported, it added.

Nevertheless, as of January 2023, many commodity prices remained higher than before the COVID-19 pandemic.

Between 2019 and 2023, the price of wheat increased by 89 per cent and that of sunflower oil by 64 per cent.

Also worrying for food production and supplies is the high price of fertilizers: over the same period, the average monthly price of urea increased by 81 per cent and that of potassium chloride by 120 per cent, said UNCTAD.

The price hikes since mid-2020 created a significant problem for net-commodity-importing developing countries – which were faced with higher import bills, inflationary pressures and rising levels of debt.

This hit particularly hard at the poor, who tend to spend a higher share of their incomes on food – so that in 2022 the number of acutely food-insecure people hit a record of 349 million.

In 2022 and 2023, for the 48 most-affected countries, higher food and fertilizer prices raised import bills by $9 billion, and governments had to spend $5-7 billion to protect vulnerable households.

UNCTAD said there is also an important gender dimension: in 2019, women were 13 per cent more likely than men to experience either moderate or severe food insecurity – a gap that widened in 2020 and 2021 during the COVID-19 pandemic.

In combination with rising energy prices, the world faces a cost-of-living crisis. In Rwanda, in January 2023, for example, year-on-year nominal food inflation was 41 per cent, and in Ghana, it was 61 per cent.

It said many net commodity-importing developing countries were also affected in 2022 by a depreciation of their currencies against the United States dollar – the main invoicing currency in international trade.

In highly integrated global commodity markets, supply disruptions in one region have knock-on effects around the world, said the report.

For liquified natural gas (LNG), for example, as the technology and infrastructure have been extended to more countries, the market has become more integrated.

In 2022, reduced pipeline flows from the Russian Federation to Europe pushed up LNG prices globally – with dire consequences for some Asian countries.

Pakistan, for instance, was forced to shut down gas-fuelled power plants, causing widespread blackouts, said the report.

“Bangladesh had to stop purchasing LNG on the spot markets in 2022 and faced an energy crisis and power outages.”

Higher LNG prices have also encouraged countries to turn to coal and oil – undermining global efforts to reduce GHG emissions, said UNCTAD.

For example, Germany reactivated and prolonged the operation of coal-fired power plants to boost supply in 2022.

If CDDCs are to achieve the Sustainable Development Goals in an increasingly uncertain global economic and political environment, they will need to become more resilient – by moving along value chains and diversifying production to offer a greater variety of exports, said the report.

“Diversification not only insures against future market shocks, but also generates economic growth and drives structural transformation,” it stressed. +