Deep reliance on commodities persists in developing nations; adding value to their products could help reverse the trend
In a recent report, the United Nations Conference on Trade and Development (UNCTAD) has emphasized the importance of economic diversification for Least Developed Countries (LDCs), Landlocked Developing Countries (LLDCs), and Small Island Developing States (SIDS). The report, titled "The State of Commodity Dependence," was released on 21 July.
The report highlights that the world's dependence on commodities, including energy, mining, and agriculture, continues to be a significant concern. Many of these countries, highly reliant on primary commodity exports, face vulnerabilities from price volatility and limited sustainable growth opportunities.
To address these challenges, the report proposes several key strategies. One of these is promoting value addition and industrial diversification. By developing domestic industries that process raw materials locally, instead of exporting them as crude goods, these countries can increase export value, create jobs, and stabilize income streams. The report underscores the need for strategic investments that strengthen value addition and expand manufacturing beyond traditional agriculture and mineral sectors.
Another strategy is the implementation of sound trade policies and regional cooperation. LLDCs particularly benefit from reforms that reduce reliance on traditional transit arrangements and foster regional integration and South-South cooperation. This includes adapting to new global trade realities and mitigating the impact of rising tariffs by broadening economic activities and enhancing resilience.
Encouraging innovation and entrepreneurship is another way to diversify economies beyond commodities, supporting more sustainable growth pathways and reducing exposure to commodity price shocks. Infrastructure investments, both physical and digital, are also important to support diversified economic activities, regional cooperation, and market access.
Policy reforms aimed at economic diversification are also crucial. Active government policies are required to foster industrialization, technology adoption, and move away from dependence on raw commodities, which is often below 60% export share in successful cases such as Indonesia and Guatemala.
Mobilizing finance is critical to address the decline in international project finance, as insufficient investment hinders infrastructure development and economic diversification needed to reduce commodity dependence.
The report warns that countries risk missing out on opportunities for sustainable and resilient growth without efforts to diversify their economies and add value. For instance, Africa's total earnings from commodity exports fell by over US$25 billion from a decade before, despite growth in the agricultural and mining sectors. The decrease in Africa's commodity exports was primarily due to a decrease in energy products from Nigeria, Angola, and Algeria.
Despite these challenges, there are positive signs. The shift in energy demand, including the transition to renewable sources, has reshaped global trade flows. Energy products made up 44.5% of the total value of global commodity trade during 2021-2023, down from 52.1% a decade before. Western Asian countries, specifically the United Arab Emirates and Saudi Arabia, contributed a significant share to the sub-regional total.
Asia and Oceania maintained the largest share of global commodity exports, accounting for 37.1% during the same period. Agricultural commodity exports grew by 34% to reach US$2.3 trillion during 2021-2023. Mining products export value increased by 33.4% during the same period, averaging US$1.65 trillion annually.
The report serves as a call to action for countries to take steps towards economic diversification and resilience. By implementing these strategies, countries can mitigate the risks from commodity price volatility and enable sustainable development.
The report suggests that promoting value addition and industrial diversification, which includes developing domestic industries in energy, can increase export value, create jobs, and stabilize income streams for countries reliant on commodity exports.
Effective policy reforms and mobilization of finance are critical to address the decline in international project finance, as they are essential for infrastructure development and economic diversification in the finance and energy sectors.
