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  • Breaking the chains of commodity dependence
    04 May 2016, by Mukhisa Kituyi, Secretary-General of UNCTAD

    A supply glut has oil prices in freefall. There are concerns about a debt crisis in developing countries. Sounds like today's headlines? Maybe, but it was also the case in 1986, the year of the last major crash in oil prices. To many young people alive today, this may seem like faraway history - back then the U.S.S.R. was the world's leading oil producer, for example.

    Thirty years on, a crash on a comparable scale is underway on the markets for oil and other commodities. While the factors contributing to the current crash differ from the last, the fallout for developing countries remains frustratingly familiar. Too many of them remain dependent on unprocessed commodity exports - including mineral ores, crude oil or raw agricultural products - which chains their futures to the commodities rollercoaster.

    It is true that a few resource-rich countries, such as Chile and Indonesia, have successfully transformed their economies. But, apart from these exceptions, little has changed for the majority of resource-rich developing countries over recent decades. Indeed, UNCTAD calculates that, in 2014, 88 of 134 developing countries relied on one or two unprocessed commodities for 60 per cent or more of their total merchandise export earnings. For 66 of these countries, the rate of dependency was above 80 per cent. Indeed, the number of countries in this situation remains unchanged from the situation 30 years ago, and despite a decade-long commodities price "super-cycle."

    The economic consequences of this dependence are severe. The boom-bust cycle of commodity prices plays havoc with countries' macroeconomic management. The recent collapse in commodity prices has exposed widening fiscal deficits, eroding currencies, and looming sovereign debt risk in many exporting countries. A few countries have even exhausted their available reserves and been forced to ask for international assistance. Sadly, there may be a queue forming behind them. Consider that this comes only a little more than two years after oil prices were above $110 per barrel, underwriting sound macroeconomic positions and ambitious investment projects in these same countries. Today, UNCTAD estimates that foreign direct investment into Africa fell 31% in 2015, as end of the commodity "super-cycle" sees resource-seeking investment ambitions slow down. Mozambique, Nigeria and South Africa saw declines in FDI inflows of 21%, 27% and 74% respectively.

    Developing countries must abandon short-term thinking in the exploitation of their natural resources. Commodity wealth must be managed for the future well-being of a nation as a whole, not to fuel conspicuous consumption of a few, or worse - to line the pockets of kleptomaniacs in power. It is tempting to consume the windfall from these resources as soon as they come out of the ground, but this has proven to be a developmental dead-end.

    Fortunately, there are already a number of promising examples of governments adopting a longer-term vision. In Africa, Uganda has proceeded carefully in developing its oil reserves. The government has scrutinized agreements with producers to ensure the best long-term deal for the country and has passed legislation that requires oil revenues to be invested in infrastructure or agriculture, rather than programme spending.

    Similarly, Mozambique and Tanzania have ambitious visions for their offshore natural gas reserves, but have resisted the temptation to hurry their projects. Instead, they have devoted years to composing "master plans" that foresee practical details, necessary legislation and marketing agreements, all to realize the sustainable development opportunity contained within these gas fields.

    Simply put, these countries realize you need the right infrastructure, policy and regulatory framework in place before exploiting resources in order that the revenues benefit everybody. And they undertake this careful sequencing mindful of the bigger economic changes underway - for example, the shift to greener technologies implies that countries endowed with some extractive resources may have a limited window to invest this mineral wealth into their futures.

    The international community must do its part to create an enabling environment that gives commodity-dependent countries real opportunities to manage their reliance on commodities effectively and at the same time support economic diversification. At the multilateral level, there have been encouraging signs, such as the WTO agreement on trade facilitation, which may augment export diversification efforts by some countries. But these are incremental steps, so we must maintain the momentum across a wide range of domains. Better managing commodity wealth for development, for example, also requires concerted international action against tax havens to seal up the murky shadows where many illicit gains from the commodities trade end up squirrelled away. This could also mean expanding worthy initiatives like the Extractive Industries Transparency Initiative to cover enterprises and other private stakeholders.

    Realizing the 2030 Agenda for Sustainable Development demands that we shed many of the outdated ideas that underpin commodity dependence. Coherent national and international approaches to implementing this new universal and holistic agenda must take into account the major role that commodities continue to play in the economic fundamentals of developing countries.

    This will require novel policies grounded in the changed landscape of the global economy over the past three decades, but it will also require taking a fresh look at the challenges that resource-based economies face, many of which remain all too familiar.

    A major opportunity to agree on a way forward will be the Global Commodities Forum, which will be part of the Fourteenth Session of the UN Conference on Trade and Development (UNCTAD 14) in July in Nairobi. We chose a bold theme for the Forum - "Breaking the chains of commodity dependence" - that conveys our commitment to overcoming this key obstacle to sustainable development.

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