We need commodities

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We need commodities

The world needs more and more raw materials - especially in the last decade. But there are not many benefits to the countries that produce them. Wayne Ellwood tells the history of the use of resources.

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Demonstrators in Rangoon, Burma. They are protesting against the expansion of the Latpadaung copper mine (supported with Chinese money) in northwest Burma. The company has taken very large areas of farmland and forced hundreds of villagers to leave their homes. (© EPA/Alamy)

The late Venezuelan President Hugo Chávez was very confident. He talked to the world's media about Latin America’s problems after colonisation. And, smiling, Chávez walked across at Summit of the Americas conference in April 2009 to give US President Barack Obama a book. A special book. It was The Open Veins of Latin America: Five Centuries of the Pillage of a Continent (1973), in Spanish, by Uruguayan writer Eduardo Galeano.

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Hugo Chavez gives Barack Obama a book (Kevin Lamarque/Reuters)

He was saying that history is important. Galeano’s book says what other economists like Raúl Prebisch and Andre Gunder Frank had said for years. They called it ‘dependency theory’. Galeano made people think about the theory again.

Not many people understand dependency theory. But the main ideas are clear: the economies of the South were affected badly by 500 years of colonialism and imperialism, decided by their colonial masters. The colony’s early role, in Latin America, Asia and Africa, was to take raw materials to the imperial ‘centre’ – and then to export products from these raw materials back.

Sometimes the natural resources were minerals like silver, copper or diamonds; sometimes they were agricultural products like bananas, cotton or sugar. The result was the same: colonies became dependent on the export of a few cash crops and raw materials produced by cheap labour. Over hundreds of years, this system developed and became stronger. It decided all the social, political and cultural structures – even after colonisation ended and the countries became independent. Everything was created for the exports: the transport, energy and communications systems, and the education systems and bureaucracies.

Cheap raw materials was good business for the controlling countries. It was also good for the companies that got huge profits. The UN Conference on Trade and Development (UNCTAD) has said that the prices of resource exports (compared to manufactured goods) have been falling for more than a century.

So the centre of global economic structures was primary exports. This did not help prosperity or social welfare in the South. Poor countries were not undeveloped, they were intentionally underdeveloped. The North getting rich was directly related to the South getting poor. The result was that the poor majority did not benefit at all from the “extractive model”. The corrupt politicians, local élites, profit-driven corporations and the global trading system all helped the rich countries.

Has that system finished now? South Korea, India, Brazil and China now have successful economies. This proves that some poor countries can fight to the top. They just need to use their natural wealth and reinvest it to help their citizens. We had the ‘Asian tiger’ economies, so could we also have ‘resource tiger’ success stories?

There is enough demand. The world needed so many raw materials and new energy sources that the prices increased dramatically from 2002 to 2012 – this was called the ‘commodity supercycle’. Since 2000, average prices have doubled. And more countries than ever before are now dependent on selling commodities. UNCTAD says that 94 of 156 developing countries now earn at least 60per cent of their export earnings from resources. Most of the increased demand has come from China (and also from India and Brazil), where economic growth and exploration for resources have increased greatly.

Maybe you think higher prices for resource exports are good. But the opposite seems to be true. There is more and more evidence that if countries depend on a few commodities, this can cause a lot of problems – some people call this the ‘resource curse’. Most countries with a lot of resources do not have good economies. Studies show that resource dependency is directly related to declining GDP. They get stuck with the exports. They do not produce other things. It is very difficult to develop businesses that process raw materials, or to make the machines that dig the mineral or harvest the crop. In Africa, for example, ‘commodities are being exported with almost no value added’ (said former US Assistant Secretary of State for African Affairs, Hank Cohen).

Mining needs a lot of money and does not provide many jobs. The benefits all go to the rich countries where the big international companies are. Also, it is easy to make money from extracting resources, and so all the investment money goes into this. There is little reason to invest in developing a more diverse economy. In the past, some countries developed domestic industries to replace foreign imports and reduce their need to export resources. But this is less likely in today’s globalized economy. China’s industry is so powerful that it’s almost impossible for small countries like Ghana or Bolivia to compete. And new, neoliberal markets with less regulation means that newly industrializing countries can no longer defend themselves with protective tariffs. In sub-Saharan Africa, for example, average manufacturing decreased 45 per cent from 1990 to 2010. But at the same time, the US and European Union cut restrictions on imports of Chinese clothes imports. These two things together killed the African clothing industry that was just beginning.

Also, the prices of raw materials rise and fall with the world market. This affects national governments for how much they pay for debts and for planning budgets, as they don’t know how much money they will make each year. And now there is even more insecurity because of banks and hedge funds investing in commodities, creating a ‘casino economy’. People have not learnt from the 2008 economic crash. The world economy is unsettled. In 2000, banks and hedge funds controlled $10 billion of commodities; in 2012, it had gone up to $439 billion. Investors are now changing commodity markets so that prices are not connected to supply and demand. This means the prices rise and fall more. Bankers get good profits, but but farmers, miners and countries that depend on these markets get financial insecurity.

If countries depend on commodities, they can get the ‘Dutch Disease’. This is the effect on Holland of the sudden increase in North Sea natural gas in the 1960s. Foreign investors put a lot of money into the gas industry. This made the Dutch currency (the guilder) rise so no-one could afford to buy from Dutch manufactures. Countries with a lot of resources usually have strong currencies. We can see from the Dutch case that this can be bad, even in ‘developed’ countries. In Australia and Canada today, domestic manufacturers are suffering from the high value of their respective currencies. The value of the Canada dollar is too high because of tar sands oil. So it is difficult for its manufactured exports to compete; and Australian coal exports to China raise the value of the Australian dollar. This brings more problems– an overvalued currency encourages people to get into debt because of lower interest payments. This is not a problem when exports are successful. But easy credit can also support corrupt governments and there can be a lot of debt to pay if the income from resources suddenly goes down. When the value of a currency falls, they have to pay more money for debts.

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A cyclist with wooden crosses to honour workers killed in the unregulated coal mines of northern Mexico. (Daniel Becerril/Reuters)

Countries where the economy is based on resource extraction usually have more conflict, corruption and authoritarian governments. Paul Collier (Oxford University economist) found that if a third or more of a country’s GDP comes from the export of commodities, the probability of conflict is 22 per cent. For similar countries without commodity exports, it is one per cent. There are many examples. But perhaps the most shocking case is the Democratic Republic of Congo (DRC). A lot of mineral wealth – gold, diamonds, copper, coltan – has brought in money for decades of terrible fighting, mass rapes, mutilations and forcing thousands of child soldiers to fight. There is a lot of corruption, mainly related to these ‘conflict minerals’. Congolese military officers earn less than $100 a month but they drive very expensive cars live in luxury. ‘War in this country is business,’ a UN official told reporter Geoffrey York. ‘It’s like the Mafia. Every time we have a military operation, people say that the commander must be buying a new house.’

Oil may be the most dangerous resource –not just because of the carbon emissions which change our climate. Many of the countries with the worst governments in the world rely on petroleum. Azerbaijan, Saudi Arabia, Iraq, Chad, Libya, Equatorial Guinea – the list is long. Political scientist Terry Karl says that oil-dependent countries ‘eventually become among the most economically troubled, the most authoritarian, and have the most conflict in the world’. Money from oil is very bad for democracy. It makes corruption and inequality worse, and it stops the country developing.

In the late 1970s, some people tried to organize groups of oil producers, to help control supply and stabilize the market. OPEC is one of these groups, and it still exists, but most of the others don’t. These groups were part of the creation of a New International Economic Order. They wanted this to include ‘international commodity agreements’ and a way to make the prices more stable called the ‘common fund’. But then people said all this was not efficient, because of neoliberal economics in the 1980s, and total trust in markets. After the debt crisis of the 1980s, they made ‘structural adjustment’ agreements. These killed national commodity marketing boards and ended the international commodity agreements.

Markets had no regulations; prices went up and down wildly. Also, because of neoliberal ‘reforms’, mining companies owned by the state were privatized. Governments were no longer involved in the production of commodities. So there was more and more private investment in resource industries around the world. And this still happens today. There are no restrictions on investment, and there is huge demand. The extractive industries are going around the world looking for new opportunities, often far from major cities.

Maybe this increase could make resources help the countries instead of being bad for them. Paul Collier, from Oxford, believes the world’s demand for raw materials will continue and that countries that have natural resources need to get smart. The challenge, he says, is how to use this wealth to help future development. Collier and others are working on a Charter of Natural Resources to manage the relationship between citizens, producer states and private companies. They want this to become a legal international agreement. There is also the World Bank-backed Extractive Industries Transparency Initiative (EITI). This is run by a group of governments, NGOs, companies and investors, and it started more than a decade ago. The EITI should make information public about how natural resources are managed, and how much money governments make. But it has not helped much yet.

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Resource-dominated economies: Ratio of Commodity Exports to Total Merchandise Exports, by region, 2009-10 average (UNCTAD, Special Unit on Commodities)

Countries as different as Norway and Botswana have shown there are alternatives. Norway has saved more than $905 billion in its sovereign wealth fund – by the government collecting taxes from oil and making investments. Seventy per cent of Botswana’s income is from diamonds but the country is very different to its African neighbours, as it puts all the money from mining into education and healthcare. This only happened because Botswana fought hard with the large diamond company De Beers. Countries with a lot of resources need balance, and full value for their resources. The resources in the ground will not disappear soon.

But maybe this is the main point. All areas of the extractive industry (eg. expanding oil palm plantations in Sierra Leone or new coal mines in Mozambique) has a lot of opposition from local communities. Citizens are refusing to suffer for ‘development’. “Development” has a big cost: divided communities, broken human rights, destroyed forests, poisoned land, polluted water and loss of self-determination. The London Mining Network and Mining Watch Canada are two organizations that have shown the death and destruction to the planet by the resource industry over the past decade.

Liz Hosken (Director of the Gaia Foundation) says that ‘mining is destroying indigenous territories, protected areas, World Heritage Sites and fragile ecosystems around the world too quickly. Nothing is safe from this attack.’

So local communities are fighting this violence, fighting against a model that destroys the environment and their right to live how they choose. A new word has been invented for this fight ‘Yasunization’. This is from Ecuador’s failed plan to ‘keep the oil in the soil’ in Yasuní National Park (an Amazon rainforest region with great biodiversity). EJOLT (several environmental justice groups) says that Yasunization is an idea that ‘questions economic growth, fossil-fuel dependency and climate change’ and, at the same time works to ‘conserve nature, community ways of life’ and ‘protect human rights and the rights of nature’.

Maybe this sounds too optimistic. But it is already happening. From the Peruvian Amazon to the forests of northern Canada, people are beginning to say ‘no’ to the model of progress that loses money and destroys.

What is ‘Yasunization?’ Add it to your dictionary.

As this article has been simplified, the words, text structure and quotes may have been changed. For the original, please see: http://newint.org/features/2014/03/01/keynote-commodities/