Letter IEDI n. 1101—Overcoming Commodity Dependence: Unctad's View
Today's Letter IEDI addresses the study “Escaping from the Commodity Dependence Trap through Technology and Innovation” recently published by the United Nations Conference on Trade and Development (Unctad).
Following the definition adopted by Unctad, a country is considered dependent on basic products (minerals, oil/gas and agricultural products) when at least 60% of its export revenues come from sales of commodity sectors' goods. In 2018–2019, about two-thirds (64%) of developing countries were dependent on commodity exports, compared to just 13% of developed nations. Therefore, commodity dependence is, above all, a developing country phenomenon.
Also according to Unctad, the international experience indicates that, in general, developing countries dependent on commodities remain stuck for long periods in a situation that is characterized by: low GDP growth and weak socioeconomic development, macroeconomic instability, high exposure to shocks and to the volatility of international commodity prices, among other problems.
These primary-dependent countries also register low productive diversification when compared to developing nations with a similar level of GDP but not dependent on raw material exports.
All of these are reasons for concern for countries that, like Brazil, have been experiencing an increasing weight of primary sectors in their production structures and a simplification of their economies.
According to the same source, commodity-dependent developing countries usually present a lower level of technological development in comparison to other developing countries and to developed economies.
The study highlights that, in the last 25 years, several countries have obtained significant gains in technological development. But for the vast majority of commodity-dependent developing economies the gains were minimal. The main exceptions were Brazil, the United Arab Emirates, Saudi Arabia, Iran and Peru.
The persistence of dependence on commodities has contributed to the recent rebirth of discussions about industrial policy, or at least to a debate about its rationale in academic and political circles.
The study seeks to show that, although it is a time-consuming process, escaping the trap of commodity dependence and achieving economic and product diversification is not only desirable but may also be possible. The path would involve the implementation of active government policies to encourage the strengthening of industrial skills, the acquisition of technological capabilities, innovation and the diffusion of technologies.
This requires, however, “strong political will and a long-term development vision, together with an ambitious but reasonable implementation strategy.”
Technological change is the main driver of the transformation of the productive structure towards higher levels of productivity and competitiveness, being an essential component of a successful economic development strategy built around the improvement and expansion of productive capacities.
In general, technological change occurs through innovation, whether product or process innovation, which modifies existing methods, increasing productivity and reducing costs. In commodity-dependent developing countries, product innovation is critical for economic diversification, according to Unctad, as well as for the creation of new sectors with new job opportunities and greater productivity gains.
For the authors of the study, the definition of a strategy aimed at promoting structural change and, eventually, the diversification of production and exports in commodity-dependent developing countries must take into account the specific characteristics and contingencies of the country, as well as the external conditions.
The set of policy interventions needed to support technological transformation will then be defined by the combination of short-term and long-term objectives regarding the increase of productive capacity and, ultimately, the diversification path chosen by countries.
The recommended path is a shift towards manufacturing, generally characterized by higher productivity. This change can occur through the promotion of sectors and products unrelated to the set of commodities produced or through the exploration of direct links within a vertical integration process. Diversification can also be achieved by promoting the production of other commodities or by raising the quality of the set of commodities currently produced.
According to the study, the main horizontal facilitators of structural transformation are: access to technology, entrepreneurial capacity to adopt technology, training of workers, appropriability of innovation, access to financial resources, commercial integration.
Fiscal capacity and investments (domestic and foreign) would be the main vertical facilitators for developing countries dependent on the export of mineral and energy commodities, while for countries dependent on sales of agricultural commodities the vertical facilitators would be access to productive capital and to information about innovations and technologies.
In Unctad's assessment, the advancement of digitization and the adoption of a wide range of cutting-edge technologies, such as the Internet of Things (IoT), robotics, blockchain, etc., will profoundly impact the commodity sectors. These technologies are expected to considerably increase demand for some of them and reduce the costs associated with extracting, producing and marketing others, in addition to enabling the emergence of new commodities.
Commodity-dependent developing countries must then take advantage of the opportunities that are opening up and reduce the technological gap with developed countries, reaching higher socioeconomic levels.
To promote structural transformation through economic diversification and technological modernization, Unctad suggests that developing economies dependent on commodities consider adopting an industrial and innovation strategy.
Making the most of the opportunities offered by technology and innovation will depend on several factors, the main one being the level of commitment of leaders and governments. Another important factor will be the role of the international community in supporting commodity-dependent developing countries in this effort.
In this regard, it will be essential, according to Unctad, that commodity-dependent developing countries' public and private international partners facilitate the transfer of technology and participate by financing their efforts to build the physical, human and institutional capacities necessary for the adoption and adaptation of relevant technologies.