Commodity dependence: 5 things you need to know

09 October 2023

Agriculture, energy and mining products underpin global trade, but too much dependence on them can leave an economy vulnerable and people poor, especially in developing countries.

A miner in Potosi, Bolivia
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© Shutterstock/ | A miner in Potosi, Bolivia.

Commodities, from the cereals in our meals to the cotton in our clothes and the copper in our electronics, are the bedrock of global trade.

When these raw materials account for 60% or more of a country’s merchandise export revenue, it’s deemed to be “commodity dependent.” While such dependence is a global concern, it affects developing countries the most.

Only 13% of advanced economies make the list, including Australia and Norway, compared with a staggering 85% of the world’s least developed countries, according to UNCTAD’s most recent State of Commodity Dependence report.

Of the organization’s 195 member nations, 95 are classified as commodity-dependent developing countries.

For over half a century, UNCTAD has put commodity dependence at the heart of its work, publishing yearly reports and organizing an annual conference with policymakers and experts from commodity sectors.

Here are five things you need to know about commodity dependence and its implications for development.

1. It’s linked to lower human well-being

Commodity dependence typically goes hand-in-hand with underdevelopment, as shown by the UN Development Programme’s Human Development Index (HDI).

In 2021, 29 out of the 32 countries with low HDI scores were commodity dependent. On average, commodities accounted for 82% of these low-HDI countries’ exports.

Likewise, commodity dependence is normally seen in countries where access to critical public services is limited. For example, in 2020, all 20 countries with the smallest portion of the population with access to electricity were commodity dependent. Commodities made up an average of 90% of their exports.

2. It affects economic performance and exposes countries to shocks

Commodity-dependent countries often grapple with issues like slow productivity, income volatility, overvalued exchange rates, and increased economic and political instability.

Discoveries of large natural resource deposits can trigger an influx of foreign currency, strengthening the domestic currency to a level that hampers traditional sectors’ competitiveness. This, in turn, pushes the economy more towards commodities.

Dependence can leave an economy highly exposed to shocks, such as the COVID-19 pandemic, and price swings in international markets.

Countries dependent on a few commodities or even one – such as Zambia’s reliance on copper or Iraq’s on oil – are even more vulnerable. A dip in commodity prices can slash export revenues, spurring challenges like reduced public investments, currency devaluation, increased public debt and a higher risk of default.

Declining commodity prices hit households, especially those dependent on agricultural products such as coffee, cotton, tea and cocoa for jobs and income. And the negative macroeconomic conditions hamper firms’ profitability and, consequently, their contribution to a country’s overall economic performance.

Additionally, the competition over controlling the profits from these natural resources has ignited civil wars in many commodity-dependent developing countries.

3. It makes countries more vulnerable to climate change

More than 60% of the world’s small island developing states – on the front lines of the climate crisis – are commodity dependent.

Commodity-dependent developing countries make up a staggering 95% of the 20 countries most vulnerable to climate change, which amplifies their economic and social challenges.

Rising temperatures threaten economic growth by cutting agricultural yields, decreasing capital accumulation, reducing worker productivity and harming people’s health.

If climate change continues unchecked, by 2100 the typical low-income country could face economic losses equivalent to 100% of their current gross domestic product (GDP).

Furthermore, global efforts to shift towards renewable energy could create challenges for developing countries reliant on fossil fuel exports. To limit global heating to 2°C, vast reserves – up to a third of the world’s oil, half its natural gas and 80% of its coal – must remain untapped.

As a result, some of these countries could witness declining revenues as their natural resources become stranded assets in a greener global economy.

4. It’s hard but not impossible to overcome

Commodity dependence tends to be a persistent state that looms over a country's future.

Estimates show that, under current conditions, the average commodity-dependent country would need 190 years just to cut in half their dependence compared with other nations.

But success stories show that breaking free is possible and provide strategies to follow. For example, Costa Rica has moved from trading mainly bananas and coffee to exporting services and medical instruments. And Malaysia has pivoted from producing mostly rubber and tin to making electronics.

Both countries show that the manufacturing sector can be a relevant way to tackle commodity dependence in developing countries. Whether the sector uses commodities as inputs or not, it contributes to diversifying exports and the whole economy.

The success stories also show that breaking from commodity dependence requires strong political will, a long-term, realistic development vision, and an ambitious but reasonable implementation strategy.

5. It calls for policies to harness opportunities and mitigate risks in the energy transition

UNCTAD’s Commodities and Development Report 2023 outlines how commodity-dependent countries can achieve sustainable and inclusive growth by making their economies more diversified, resilient and ready for a low-carbon future.

Many of these nations have untapped renewable energy potential, including solar, wind and hydropower. There are also opportunities to build, operate and maintain new low-carbon equipment and participate in climate change adaptation projects.

Besides diversifying exports and creating jobs, tapping renewables can help reduce energy disparities. Technologies like solar mini-grids could bring electricity to remote areas, helping to modernize schools and provide households with cleaner cooking technologies.

But the race for minerals like cobalt, lithium and copper that are critical for clean energy could reinforce commodity dependence. To avoid this, countries need to add value to the minerals domestically and move up commodity supply chains.

The transition also implies big challenges for fuel-exporting developing countries that will need to reconfigure their economies.

The report advocates for green industrial policies tailored to each commodity-dependent developing country’s resources, productive capacities and inequalities. It calls for stronger support from international partners to help them adopt a more sustainable diversification path, earning more value from their resources, better integrating regional and global supply chains and addressing the energy disparities hindering their development.

UNCTAD underscores the need to ensure the transition is “just” through policies that extend opportunities across society and protect vulnerable groups like communities dependent on fossil fuels for jobs and income.