Monday 23 Jul 2018 | 08:11 | SYDNEY
Monday 23 Jul 2018 | 08:11 | SYDNEY

Learning to love commodity exports


Mark Thirlwell

17 September 2010 10:13

One prominent feature of the China cycle is the boost it's delivered to commodity-exporting economies. For them, the China cycle involves a big upswing in the commodity cycle and an improvement in their terms of trade. This has been good news for countries from Australia to Africa and from Latin America to Central Asia and the Middle East. 

But since every silver lining has to have its cloud, and since no gift horse can be accepted without a thorough check of its dentistry, this good news story has been tempered by concerns about some possible downsides. 

One that's received a fair bit of attention is the possibility that the combination of the commodities boom plus China's own emergence as a hyper-competitive manufacturing exporter have together worked to power-up old fashioned comparative advantage and push resource-rich countries back towards a their natural specialisation as commodity exporters. 

Why should following comparative advantage be a bad thing' Well, it might not be, of course. But for those economies – particularly lower and middle income economies – that have been working hard to diversify their economic base away from resources, a return to being 'hewers of wood and drawers of water' is not an entirely welcome turn of events. 

Or to put it another way, to the extent that there's been an assumption that successful economic development means moving away from being a commodity exporter, then the worry is that the China cycle may make development harder, perhaps by making it more difficult to develop a manufacturing sector, or by increasing the risk of resource-curse type outcomes.

At the start of this week, the World Bank released a new report (large pdf) on natural resources in Latin America and the Caribbean. It argues against any simplistic version of the resource curse or commodity pessimism. While it's certainly true that there are examples of countries that have failed to manage their resources effectively, there are also some good examples of successful resource-based development (the Lowy Institute is based in one of them). 

The report stresses that, provided countries get their policies right, natural resources can have a positive impact on growth: after all, during the recent financial crisis, the countries that suffered the worst growth hit were those with a higher share of manufacturing exports. Their bottom line is a nicely reasonable one: there's no 'commodity curse', but there are 'commodity concerns', which can create significant risks if not managed properly.

Photo by Flickr user Pom2, used under a Creative Commons license.