UN General Assembly informal interactive dialogue on commodity markets
26 April 2024
Your Excellency,
Dennis Francis, President of the United Nations General Assembly,
Distinguished delegates,
Ladies and gentlemen, dear colleagues, dear friends:
It is my great honour to be here today, to talk about commodities and commodity dependence, an issue that has been at the heart of our work at UN Trade and Development.
We have two high level sessions today, featuring world class researchers and on-the-ground policymakers. To set the stage, I would like to share with you three thoughts.
- First, and the PGA already alluded to this, is the fact that the problem is getting worse. The list of commodity dependent countries has grown by 15 countries in the last 15 years. Decisive action is needed to tackle the persistence of this challenge.
- There are 95 commodity-dependent developing countries– almost half the entire UN membership. Most countries of South America, the Pacific, the Middle East, and Sub-Saharan Africa are commodity-dependent. This includes 66% of all Small Island Developing States, 83% of all LDCs, and 85% of landlocked developing countries. As the PGA said, 29 of the 32 countries with low HDI are commodity-dependent, and as are a staggering 95% of the 20 countries most vulnerable to climate change.
What this means, very simply, is that the status quo of the last 30 years has not worked for commodity dependent countries. Much of this has to do with many of the recommendations of the Washington Consensus, which called for rapid liberalization of currency markets and a quick winding down of trade policies with no policies implemented for the domestic industries and the so-called “losers” in this process. We still remember the phrase: the best industrial policy is NO industrial policy!!!!!. In combination, this made currencies even more volatile, and domestic industries even more uncompetitive.
I want to emphasize this point, because people often blame the victim when they talk about commodity dependence. This might be true in some cases, but when 90-plus countries – and counting— are dealing with the same issue, the problem is clearly also systemic. We need a new consensus that puts diversification and structural transformation at the center of the debate.
My second thought refers to our research that shows again and again that commodity dependence represents a trap of development, a cycle of vulnerability, and a source of inequality.
A trap of development, because commodity dependence hinders the growth of other economic sectors, what many times is called the ‘resource curse’, or the ‘Dutch disease’–. This happens thanks to the central paradox of commodities – the fact that they are too great a source of wealth, so that all domestic industries struggle to compete, etc., since commodities crowd out investments into other sectors, thanks to a number of channels: local currency appreciation which makes other exports less competitive, disincentives to invest elsewhere due to the relatively higher profitability of commodities, and lastly the false perception that all is well in the boom times, leading to the even falser notion that structural transformation is not necessary after all.
And yet, it is. In our research, with the exception of some oil- rich countries in the Gulf, Australia, New Zealand and Norway there is no case of a country ever escaping this trap without undergoing structural transformation and diversification.
Commodity dependence is also a cycle of vulnerability, given its exposure to the ups-and-downs of commodity prices, making countries prone to boom-and-bust cycles which are unruly, unbalanced, and politically unstable.
Here, the role of currencies is particularly important. When commodity prices boom, so does the inflow of foreign currency, rapidly driving up the value of the local currency. As mentioned, this makes other exports less competitive. But worse is what happens in the downturn. When the boom times end, with commodity prices in decline, capital flows revert quickly and the local currency collapses suddenly. This abrupt reversal fuel inflation and can also make foreign-currency-denominated debt hard to service, leading to debt crises. This is what is known in policy circles as the “sudden stops” problem of commodity dependence. Needless to say, this volatility also undermines confidence and deters long-term investments in other sectors.
The few countries that have become high-income while being commodity dependent – as I mentioned earlier— have done so in part by undertaking strong ‘contra-cyclical’ policies. This was underpinned by many things, including the creation of strong Sovereign Wealth Funds which saved during boom times, invested in future growth sectors, and then used its savings to cushion the impact of downturns; and transparency, taxation and good governance, which minimized corruption and ensured fiscal responsibility. It takes much wisdom and vision to defer consumption during boom times, but these sorts of policies do make a difference.
And lastly, commodity dependence is also a source of inequality, given that it naturally leads to the formation of so-called dual economies – economies marked, on the one hand, by a weak and informal domestic sector and, on the other hand, a formal commodity export industry, where well-paying jobs tend to cluster.
- This tends to fuel a small, well-connected elite, while the rest of the population struggles with low wages. This dynamic also exacerbates rural-urban divides, as opportunities may be concentrated around cities and extraction sites, drawing people away from agriculture and traditional livelihoods without offering sufficient alternative employment.
- This inequality undermines social cohesion and political stability. It generates a disconnect between vast resource wealth and people struggling to make ends meet. In short, the political economy of the cycle can be very pernicious: benefiting disproportionally the rich during the boom times, hurting disproportionally the poor during the bust.
My third and last point relates to geopolitics and the energy transition. The current trade regime is now increasingly being contested from within, thanks to growing protectionism and subsidy-based industrial policies to which only countries with ample fiscal space have access.
At the same time, the imperative for the energy transition is creating new commodity wealth, especially in regions already dealing with issues of dependence. Africa, for example, is home to 48% of the world’s reserves of cobalt and manganese, 80% of the world’s reserves of phosphate rock, and 92% of the world’s reserves of platinum. These minerals are critical for electric cars, solar panels, and batteries.
And yet, there is a risk that new commodity wealth may lead to new forms of commodity dependence. While Africa is rich in critical minerals, it only has 1 per cent of the global installed photovoltaic capacity. Most of the value-added of green value chains is still captured elsewhere.
Some countries, however, are fighting back. Indonesia banned the export of raw nickel ore in 2020, forcing importers to invest in factories in the country that ensured more intermediate and final products would be built there. Chile, Argentina and Bolivia are discussing how to better take advantage of their lithium industry. Though these moves have been controversial, it is clear that there is now an opportunity to leverage these new commodities to update our policies and trade regime, promote structural diversification, and turn the tide of commodity dependence once and for all.
But let me be very clear here: this is something that we need to do in a multilateral way. Developing countries, and especially commodity-dependent countries, need a universally agreed rules-based system. A trade regime based on the power game and geopolitics would be the worst of all worlds.
Here, the role of the UN and its General Assembly cannot be overstated. Today, the Secretary General will be launching the Panel of experts to advise him on what could be common principles for fair and sustainable production and trade of critical minerals. The UN Trade and Development is actively supporting the preparatory work of the Panel. This week we hosted in Geneva a Trade and Development Commission especially dedicated to critical minerals. We look forward to furthering this work in these great halls of the General Assembly.
Your excellencies,
I want to leave you with a message of hope. Commodity dependence is a trap from which countries can escape. There are actually many ways to do it.
Sometimes, countries can escape through manufacturing, as mentioned by the PGA in the case of Malaysia, which went from being a country dependent on rubber, to becoming one of the top global exporters of surgical gloves, an end product with much greater value added.
The PGA also mentioned my country, Costa Rica, which diversified through both services and manufacturing. When I was born, Costa Rica was a country of bananas and coffee. In my own lifetime, through a mix of strategic investments – in education, healthcare, and a stable political environment – we successfully diversified, and we are now top exporters of medical equipment, a regional hub for software development, and a global example of eco-tourism, a sector we pioneered. This transformation was not easy, and it did not happen overnight. But it shows that escaping commodity dependence is possible, even within a single generation.
Of course, countries like mine did not do this alone. While our efforts were key, favorable external conditions played a role. We must create these same conditions for other commodity-dependent nations. This means fairer trade rules, more support for technology transfer, and greater investment in sustainable, resilient infrastructure across the developing world.
Your excellencies, in closing
The UN system, and the General Assembly in particular, was created precisely for moments like this – when a shared global problem demands a shared global solution.
Time is of the essence. The window of opportunity to transform the energy transition into a force for inclusive development is closing. Let us seize this chance before it is too late. Let this Assembly be the place where point turns, where we move from debate to decisions, from principles to policies, from dependence to delivery. This is our historic responsibility.
I thank you.
