Highs and Lows of Commodity Dependence

Typically for developing countries, the export of commodities – fossil fuels, metals, chemicals, food stuffs – is the primary source of income and provides the revenue for the import of everything not produced at home. The price of their commodities is critical to those governments’ ability to provide services and to improve the lives of their populations. Historically those prices are cyclical, so how countries use their import revenue and plan for leaner periods determines their stability.

Commodity prices tripled between 2000 and 2011, even after accounting for a two year slump during the recession. Several South American countries were beneficiaries of the period of strong commodity prices. A December 2016 report by KfW Research, a German economic research firm, described seven South American countries, Argentina, Bolivia, Brazil, Chile, Colombia, Peru and Venezuela, as rich in non-renewable resources. “This applies in particular to the deposits and the extraction of metals and oil, but also to agricultural raw materials such as soya beans.”

The high commodity prices of the first decade contributed to fast-growing incomes in the developing world. As an April 2016 World Bank report noted, “the commodity boom had a real and positive impact on the lives of poor consumers, ushering in an unprecedented social transformation that cut poverty in half and swelled the ranks of the middle class.” Investments in education, health care and social assistance resulted in a decline in inequality and a better standard of living.

The report goes on to say, “the windfall from the boom produced a ‘mirage effect,’ one that led many in Latin America to spend beyond their means and save at insufficient levels.” When world economic growth slowed and commodity prices eventually fell, governments could no longer afford generous spending on social programs, and financial turmoil followed for those countries that did not save for the downturn. (See World Bank Latin America Overview )

Populist leaders, who maintained power by spending freely, found their authority challenged when they were unable to prevent social decline and inflation. The downturn exposed not only mismanagement, but also corruption. Skimming of profits in the extractive industries and exposure of millions of dollars of bribes for construction contracts have brought people into the streets against both leftist and right-wing governments around the continent. Venezuela’s protests have been the most violent, resulting in over 30 deaths, as protesters call for President Nicolas Maduro’s removal even as he fights back every challenge to his authority. Crowds have firebombed Paraguay’s parliament and crippled Argentina’s transportation system. A Brazilian construction firm that won billions of dollars in construction contracts across Latin America admitted to illegal payouts to politicians at the highest levels.

As stated in the KfW Research report, long-term economic growth requires that resources “be transformed into other forms of capital such as a well-educated population, modern machinery and equipment, and infrastructure. Only then can the resource wealth benefit future generations as well.” Thus far South America’s resource wealth has not provided sustained economic development.

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