Agriculture, energy and mining products underpin global trade, but too much dependence on them can leave an economy vulnerable and people poor, especially in developing countries.
Commodities, from the cereals in our meals to the cotton in our clothes and the copper in our electronics, are the bedrock of global trade.
When these raw materials account for 60% or more of a country’s merchandise export revenue, it’s deemed to be “commodity dependent.” While such dependence is a global concern, it affects developing countries the most.
Only 13% of advanced economies make the list, including Australia and Norway, compared with a staggering 85% of the world’s least developed countries, according to UNCTAD’s most recent State of Commodity Dependence report.
Of the organization’s 195 member nations, 95 are classified as commodity-dependent developing countries.
For over half a century, UNCTAD has put commodity dependence at the heart of its work, publishing yearly reports and organizing an annual conference with policymakers and experts from commodity sectors.
Here are five things you need to know about commodity dependence and its implications for development.
1. It’s linked to lower human well-being
Commodity dependence typically goes hand-in-hand with underdevelopment, as shown by the UN Development Programme’s Human Development Index (HDI).
In 2021, 29 out of the 32 countries with low HDI scores were commodity dependent. On average, commodities accounted for 82% of these low-HDI countries’ exports.
Likewise, commodity dependence is normally seen in countries where access to critical public services is limited. For example, in 2020, all 20 countries with the smallest portion of the population with access to electricity were commodity dependent. Commodities made up an average of 90% of their exports.
2. It affects economic performance and exposes countries to shocks
Commodity-dependent countries often grapple with issues like slow productivity, income volatility, overvalued exchange rates, and increased economic and political instability.
Discoveries of large natural resource deposits can trigger an influx of foreign currency, strengthening the domestic currency to a level that hampers traditional sectors’ competitiveness. This, in turn, pushes the economy more towards commodities.
Dependence can leave an economy highly exposed to shocks, such as the COVID-19 pandemic and price swings in international markets.
Countries dependent on a few commodities or even one – such as Zambia’s reliance on copper or Iraq’s on oil – are even more vulnerable. A dip in commodity prices can slash export revenues, spurring challenges like reduced public investments, currency devaluation, increased public debt and a higher risk of default.
Declining commodity prices hit households, especially those dependent on agricultural products such as coffee, cotton, tea and cocoa for jobs and income. And the negative macroeconomic conditions hamper firms’ profitability and, consequently, their contribution to a country’s overall economic performance.
Additionally, the competition over controlling the profits from these natural resources has ignited civil wars in many commodity-dependent developing countries.
3. It makes countries more vulnerable to climate change
More than 60% of the world’s small island developing states – on the front lines of the climate crisis – are commodity dependent.
Commodity-dependent developing countries make up a staggering 82.5% of the 40 countries most vulnerable to climate change, which amplifies their economic and social challenges.
Rising temperatures threaten economic growth by cutting agricultural yields, decreasing capital accumulation, reducing worker productivity and harming people’s health.
If climate change continues unchecked, by 2100 the typical low-income country could face economic losses equivalent to 100% of their current gross domestic product (GDP).
Furthermore, global efforts to shift towards renewable energy could create challenges for developing countries reliant on fossil fuel exports. To limit global heating to 2°C, vast reserves – up to a third of the world’s oil, half its natural gas and 80% of its coal – must remain untapped.
As a result, some of these countries could witness declining revenues as their natural resources become stranded assets in a greener global economy.
4. It’s hard but not impossible to overcome
Commodity dependence tends to be a persistent state that looms over a country’s future.
Estimates show that, under current conditions, the average commodity-dependent country would need 190 years just to cut in half their dependence compared with…