885. Challenges for Economies Dependent on Exported Commodities

Agricultural commodities, such as grain and cotton, and minerals, such as copper, which are critical to the electronics industry, play a central role in global trade. However, an over-reliance on these commodities exposes the global economy, particularly impoverished nations, to significant market volatility. This over-dependence, especially when these commodities account for more than 60% of a country's export earnings, creates a precarious situation for developing countries.

A recent report by the United Nations Conference on Trade and Development (UNCTAD) shows that 85% of commodity-dependent countries are classified as developing, while only 13% are developed, including countries such as Australia and Norway. In fact, of UNCTAD's 195 member countries, 95 are considered resource-dependent developing countries.

UNCTAD has identified five major development challenges associated with this dependence on export commodities, as detailed on its website:

1. Commodity dependence correlates with reduced human well-being　

In 2021, a staggering 29 out of 32 countries with a low Human Development Index (HDI) were dependent on commodity exports, which accounted for an average of 82% of their total exports. High commodity dependence is typically associated with limited access to basic public services. In 2020, 20 countries with particularly low access to electricity were dependent on export commodities, which accounted for about 90% of their exports.

2.Commodity dependence affects economic performance and vulnerability to shocks

Countries that are heavily dependent on export commodities tend to face challenges such as low productivity, low income levels, overvalued exchange rates, and economic and social instability. The discovery of valuable but scarce resources can lead to an influx of foreign capital and currency appreciation, ultimately undermining the competitiveness of traditional economic sectors and exacerbating commodity dependence. This dependence exposes economies to shocks such as the COVID-19 pandemic and price volatility in international markets. Countries that rely on a limited range of commodity exports, such as Zambia for copper or Iraq for oil, are particularly vulnerable. When commodity prices fall, these countries face declining revenues, reduced public investment, currency devaluation, mounting public debt, and the threat of default. Falling commodity prices also adversely affect households that depend on agricultural products such as coffee, cotton, tea, and cocoa for their livelihoods. In addition, competition for control of natural resource profits has fueled civil conflict and war in many commodity-dependent developing countries.

3. Dependence on export commodities increases vulnerability to climate change

Over 60% of island developing states, which are on the front lines of the climate crisis, are dependent on export commodities. Moreover, a staggering 95% of the world's 20 most vulnerable countries to climate change fall into the category of commodity-dependent developing countries. These countries are particularly at risk as climate change exacerbates their existing economic and social challenges. Rising temperatures are expected to reduce agricultural productivity, hamper capital formation, undermine labor productivity, and harm human health. In addition, as the global economy shifts away from fossil fuels, countries that are overly dependent on such exports face the imminent loss of revenue streams in the transition to a green global economy.

4. Commodity dependence is challenging but not insurmountable　

It is undeniable that a nation's future is heavily influenced by its dependence on export commodities. Under current circumstances, it is estimated that it could take about 190 years to halve export dependence. Nevertheless, there are valuable lessons to be learned from the successful examples of countries that have managed to move away from commodity dependence. For example, Costa Rica transformed its economic structure, moving away from banana and coffee exports to services and medical equipment. Similarly, Malaysia moved from rubber and tin production to electronics. The success of both countries in diversifying their economies, including venturing into manufacturing, depended on factors such as political determination, a realistic long-term development vision, and ambitious but achievable strategies.

5. Commodity dependence requires policies to seize opportunities and mitigate risks in the energy transition 

Many countries dependent on export commodities have the potential to harness renewable energy sources such as solar, wind and hydropower. Capitalizing on these opportunities not only diversifies their exports and creates jobs, but also helps bridge the energy access gap by bringing electricity and utilities to remote areas through small-scale power grids. On the other hand, as the global shift to clean energy gains momentum, competition for mineral resources such as cobalt, lithium, and copper could increase dependence on export commodities. To avoid this, it is imperative to process and add value to mineral resources domestically and contribute to the global supply chain. Developing countries that depend on fossil fuel exports and are mandated to restructure their economies need the cooperation of international partners to add value to their resources for more sustainable economic diversification and to address energy gaps that hinder their integration and development into regional and international supply chains.

Contributor: IIYAMA Miyuki (Information Program)