Commodity Dependence

Have you heard of the resource curse? It's when countries are blessed by a huge supply of natural resources, inviting economic development exclusively based on resource extraction. This blessing can become a "curse" for the country because it may lead to sluggish economic, political, and social development. Another term for this is commodity dependence. We'll explore commodity dependence and its implications for local and global economies.

Commodity Dependence Definition

A commodity is a raw material product. This can be anything that is grown or extracted from the Earth, including agricultural products, fuel, minerals, and metals. Commodities are essential in trade because they are needed to create other products via manufacturing or processing later on. The most traded commodities in the world are crude oil, gold, and other base metals.

Every product we use comes from a raw material extracted from somewhere in the world.

Commodity dependence occurs when over 60% of a country's exports are commodities. A lack of economic diversity is due to the fact that most tax revenue comes from on the extraction and trade of raw materials.

There are numerous issues linked with commodity dependence. It increases a country's vulnerability to economic shocks. This is because commodity prices adhere to market demand, which at global scales can fluctuate daily.

Fig. 1 - Fluctuations in commodity prices from 1959 to 2022

For example, when there's a sudden drop in coffee prices, countries with commodity dependence on coffee experience major negative economic effects. While coffee sells for less on the global market, extraction and labor costs remain the same. Companies may then take drastic measures to save money and turn a profit which disrupts labor markets and livelihoods. Governments may then see a drop in tax revenue and are unable to pay debts.

Dependency Theory

There have been several theories to describe the global issue of commodity dependence that affects many previous colonies and satellite states. This is because it's not just a present-day phenomenon, but also part of the global history of capitalism and colonialism. Commodity dependence is not just economic over-reliance on commodities but also over-reliance on trade with wealthier nations that have a high demand for raw materials.

Theotonio Dos Santo describes this dependence as an integral part of the world economy.¹ As a pioneer of Dependency Theory, he presents the case of underdevelopment and dependence of developing countries as a necessary step for growth in wealthier nations.

Commodity Dependence Countries

According to the United Nations Conference on Trade Development report, 101 countries are considered commodity dependent. Around 38 countries primarily export agricultural commodities while the remaining are evenly split between fuel and mineral/metal commodities.²

Fig. 2 - Commodity exports as a percentage share of total merchandise exports (2018-2019). Countries in deep red are 80% and above

For developed countries or those with higher incomes, commodity exports account for roughly 23% of total exports on average. For transitioning economies, around half (50%) of countries are commodity-dependent.

For developing countries or those with lower incomes, around 87% of countries are commodity-dependent, with reported increases since 2008. In Africa alone, over 75% of countries are commodity-dependent. Second is Oceania followed by the Americas and Asia. Europe contains the lowest amount of countries that are commodity-dependent.

Commodity Types

Not all commodities are the same. Some are grown for food and other materials using agricultural practices. They can also be extracted through drilling to obtain fossil fuels. Finally, they can be mined to obtain minerals and metals.

Agriculture

Agricultural commodities include food and other materials that are grown as well as livestock. Agricultural commodities vary based on country and region, with some countries specializing in certain products.

The top three agricultural commodities in the world are corn (maize), livestock, and soybeans.

Ethanol can be made from corn, a heavily desired commodity, particularly when fossil fuel energy prices are high. Meanwhile, meat consumption is a major reason for raising and trading livestock. Countries with developed or growing economies, such as China, have an increasing demand for meat and are primary importers. Soybeans are used to produce many products such as cooking oils but also building materials.

Fuel

Fuel is an extremely important commodity for every country, usually dictating the prices for other commodities, products, and services in the world. Fuel commodities include gasoline, oil, and natural gas and are exported by a handful of countries. Some of these countries are part of the Organization of the Petroleum Exporting Countries (OPEC), which controls production and trade and in turn, heavily influences prices. High and middle-income countries are primary importers of fuel.

Minerals and Metals

Minerals and metals are another major commodity category essential for products such as buildings, electronics, and vehicles. The most traded metal commodities are steel and copper. Both these commodities combined are integral for building the structures we live in and the devices we use every day.

Fig. 3 - Chino Copper Mine outside of Silver City, New Mexico, USA

Commodity Dependence Consequences

Commodity dependence goes both ways. While some countries are dependent on extracting and exporting raw materials, others also rely heavily on importing raw materials to make products. This fuels other major issues including economic vulnerability in commodity-dependent countries, environmental degradation, and labor exploitation.

Economic Vulnerability and Debt

Due to fluctuations in commodity prices, commodity-dependent countries are more likely to see economic uncertainty. Additionally, the US and Europe encouraged high borrowing after the Financial Crisis of 2008.³ These monetary policies were dependent on decreasing commodity prices at the time. Along with public debt, there are also high rates of private debt from investors, banks, and other financial institutions. High amounts of public and private debt contribute to economic vulnerability.

This economic vulnerability comes at a cost to other parts of the economy and society. Governments may spend less on critical infrastructure, education, and social services. Spending cuts in these critical sectors can prevent countries from moving away from commodity dependence, trapping them in a difficult cycle of commodity dependence.

Environmental Degradation

Industrial agriculture and large-scale mining come at a cost to the environment. Industrial agriculture reduces soil quality, can contribute to air and water pollution, and introduces toxins from pesticide use. Likewise, mining requires major land-use changes that lead to the deterioration of the land. After decades of mining, there are typically higher rates of erosion and air and water contamination from acid and heavy metals.

Labor Exploitation

The extraction of raw materials is a labor-intensive process, requiring large amounts of people and machines. Unfortunately for many commodity-dependent countries, forced labor, poor working conditions, and human trafficking are prevalent issues to contend with. In many post-colonial states, forced labor exists in many industries.⁴ There is a struggle to eradicate these forms of modern-day slavery.

Fig. 4 - Children working in Serra Choa, Mozambique. Child labor is common in sub-Saharan Africa

Solutions to Commodity Dependence

Commodity dependence often hinders environmental protection and hampers development. Despite increases in the number of commodity-dependent countries, there is some hope for change.

Commodity-dependent countries provide the raw materials that are then sent to processing facilities that begin making products. Usually, this step happens in industrialized countries, namely higher and middle-income countries. However, commodity-dependent countries can invest and strengthen their own industrial economies to ensure they can benefit from this step as well. This would diversify exports, and possibly promote inter-regional trade rather than the current value chain process which favors higher-income countries.⁵

Commodity Dependence Example

A striking example of commodity dependence and its effects is in Venezuela.

Petrostate: Venezuela

Venezuela is an example of a commodity-dependent country turned petrostate. A petrostate is a country reliant on fuel exports with a strong ruling elite and weak public institutions. Venezuela discovered oil back in the 1920s and, over time, ruling elites took control of extraction and production from private companies.

US foreign investment poured into the Venezuelan oil and gas industry. This coincided with several difficult moments in Venezuela's political history. Dictator Marcos Pérez Jiménez seized power in 1948, inviting in investment and natural resource exploitation from which US oil companies primarily profited. International and elite control of the oil industry deepened while socialist movements against imperialism, colonialism, and exploitation surged throughout South America.

Oil production was nationalized in 1976 in order to limit international influence. By the 1980s, oil production rose while oil prices decreased. Because of Venezuela's heavy reliance on oil at every level of government and economy, Venezuela's foreign debt also rapidly increased. Prolonged economic, political, and social crises ensued, giving rise to the populist socialism of Hugo Chavez and successor Nicolas Maduro.

Fig. 5 - Oil prices per barrel for OPEC countries to balance their budgets

Chavez and Maduro attempted to re-channel oil revenue from elite control to social programs for the poor, creating direct lines of spending from Petróleos de Venezuela S.A.'s (PDVSA) revenue. Due to internal industry issues, the US's deep opposition to "Bolivarian socialism," overspending, and inflation, Venezuela has had difficulty moving away from commodity dependence.