Commodities and Development Report 2023

UNCTAD's Commodities and Development Report 2023 outlines how commodity-dependent developing countries could pursue inclusive economic diversification in the context of the global energy transition.

Decades of overreliance on exporting a few raw materials, such as oil, copper, cacao and wheat, has hindered these nations' growth and undermined their people's well-being.

Many of these countries have untapped potential for renewables like solar and wind that could broaden their economic horizons and improve livelihoods.

But the diversification process needs careful navigation to avoid worsening inequalities.

The shift to renewables could leave these countries with vast fossil fuel reserves stranded – including abandoned oil fields, plants and equipment – and this will affect the communities and people that depend on industries like gas and oil.

Another risk is that the surge in demand for critical minerals like lithium and cobalt that are needed for green technologies could undermine diversification efforts in mineral-rich countries.

The report outlines actions to avoid past commodity traps. It offers a blueprint for tailored green industrial policies to ensure a fair low-carbon transition that benefits everyone, striking the right balance between the right to development and the need to protect the environment.

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

When 60% or more of a country's merchandise export revenue comes from these raw materials, it's deemed "commodity-dependent".

This dependence exposes countries to volatile commodity markets and makes them more vulnerable to global shocks, such as the COVID-19 pandemic and the war in Ukraine. When prices drop, governments and business earn less – and people lose jobs.

The risks escalate for countries heavily reliant on a single commodity, like Zambia with copper or Iraq with crude oil.

Although commodity dependence is a global concern, it affects developing countries the most.

Between 2019 and 2021, only 12% of advanced economies, including Australia and Norway, were on the list, compared to a staggering 74% of the world's least developed countries.

A total of 29 out of the 32 nations classified as having low human development in 2021 were commodity dependent, according to the UN's Human Development Index.

The road to resilience and inclusive prosperity lies in economic diversification. Countries can do this by climbing value chains in existing sectors – processing cacao into chocolate, for example – or by moving into new industries, like the renewable sectors that will drive the global energy transition.

The report highlights several countries that have shown the way, like Malaysia that shifted from rubber and tin to electronics, and Mauritius, which moved beyond sugar into textiles, tourism and financial services.

Historically, economic growth and diversification have relied on energy provided by fossil fuels. But the global energy transition opens new, sustainable avenues.

While the shift to renewables poses challenges for developing countries dependent on fossil fuels, it offers vast opportunities.

The report highlights that many of these countries have abundant, yet untapped, renewable energy potential – from solar to wind to hydropower.

Besides diversifying exports and creating better jobs, renewables can also help these nations address energy disparities that hinder development, particularly the urban-rural electricity divide. Innovative solutions like solar mini grids promise to electrify even the remotest corners.

But for these benefits to materialize, these countries must move beyond merely supplying raw materials for the energy transition.

The global push for cleaner energy is boosting demand for metals such as cobalt, lithium and copper – an electric car, for example, requires six times more minerals than a conventional vehicle.

From 2025 to 2030, global mining investments will reach $1.7 trillion, presenting opportunities for countries like the Democratic Republic of the Congo, which produced 68% of global cobalt and held 48% of its reserves in 2022.

However, this "gold rush" for critical minerals risks reinforcing commodity dependence in countries with vast reserves of such metals.

A potential strategy to tackle this is regional collaboration. By using regional trade blocks, such as the African Continental Free Trade Area, commodity-dependent developing countries can leverage their productive capacities and local demand to add value within the region, move up value chains and increase the resilience of the critical minerals industry for all participants.

Countries reliant on fossil fuel exports face hurdles in the energy transition. 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 go unused.

For many communities, a shift away from fossil fuels could spell economic hardship. They'll need new job opportunities and skills training and strong support during the transition.

This is part of what the Paris Agreement calls a "just transition" – ensuring the benefits are shared and those who stand to lose are protected.

A mishandled transition could amplify socioeconomic inequalities. Government intervention is crucial to prevent this from happening. Policies should create opportunities across sectors – for everyone from miners to farmers to tech workers.

Equitable energy access is a glaring concern. Many people in energy-rich developing countries still lack basic access to electricity or clean fuel for cooking.

Every country has the right to develop. Since energy access is crucial for well-being, commodity-dependent developing countries may need to continue using fossil fuels while they remain the most immediate and cost-effective sources available.

The report says, however, that this fix should be temporary, calling for a clear commitment to increasing the energy mix in favour of more renewables. It advocates for a balanced energy transition and calls for stronger global support to equip these nations with the resources, technology and skills they need.

The report calls for green industrial policies that adapt to individual country contexts, highlight sectors with high potential for diversification and promote sustained collaboration between public and private partnerships.

These are sector-targeted policies that reshape a country's economic production structure with the aim of generating environmental benefits. They should be tailored to each country's unique needs, emission levels, productive capacities and commodity dependencies.

Economies dependent on fossil fuels could transfer income during boom periods into a diverse asset portfolio through commodity-based sovereign wealth funds (SWFs). The management of these assets should follow strict governance rules that ensure the investments and disbursements benefit all of society.

Those reliant on agricultural commodities should prioritize local crop processing. For example, while African nations produce most of the world's cashews, they export them to Asia for processing. It's also important to adopt low-emission farming, shorten distribution networks and ensure access to affordable capital for newcomers.

Countries rich in metals critical for clean technologies should diversify by adding value domestically before export. They should also bolster links between big mining companies and local industries to build domestic productive capacities while improving environmental and social governance.

Effective green industrial policies should have long-term political and public support and pinpoint sectors optimal for diversification, considering a country's strengths and market prospects. Their scope should extend beyond manufacturing to embrace all sectors, including services.

These policies must also tackle pressing social challenges, including health, education, energy poverty and job creation.

The report provides action points for diversification depending on a country's context.