The UN Conference on Trade and Development (UNCTAD) has called on the global community to provide support for green industrial policies in commodity-dependent developing countries to transform and diversify their economies amid the global quest for a low-carbon energy transition.
These are sector-targeted policies that reshape a country’s economic production structure, attracting investments to increase countries’ domestic value-addition and integration in regional and global supply chains, with the aim of reducing commodity dependence, promoting economic and social goals, and generating environmental benefits.
UNCTAD’s Commodities and Development Report 2023, published on 9 October, spotlights the actions needed domestically and globally to tackle the intertwined triple development challenges of commodity dependence, inequality and climate change.
“The path to diversification that is inclusive and more sustainable is within our reach, but it demands strong political commitment from commodity-dependent developing countries and their development partners,” UNCTAD Secretary-General Rebeca Grynspan said.
“This report outlines a holistic approach that can drive sustainable development, safeguard vulnerable populations and contribute to global climate goals.”
Call for redoubled efforts
UNCTAD calls for the redoubling of efforts towards economic diversification in countries where 60% or more of merchandise export revenues come from primary commodities, including crude oil, copper and wheat.
With such reliance comes vulnerability, the report says, citing economic and political shocks to global commodity markets following the COVID-19 pandemic and the war in Ukraine.
It also warns that many countries that depend on fossil fuel exports will suffer from the rapid decarbonization of the global economy. Some estimates suggest that to limit global warming to 2°C above pre-industrial levels, a significant proportion of natural resources will need to remain unused. That would be one third of the world’s oil, half of natural gas and over 80% of coal reserves.
Widespread commodity dependence hampers development
Commodity dependence is more prevalent in the developing world, the report finds.
Over the period from 2019 to 2021, a staggering 76% of least developed countries, 81% of landlocked developing countries and 61% of small island developing states were commodity dependent, compared to 13% of developed economies.
Many commodity-dependent developing countries’ reliance on the export of a narrow range of commodities, or even a single commodity, reinforces their vulnerability.
From 2019 to 2021, copper, gold and crude oil accounted for 69%, 77% and 91% of the total merchandise export revenues of Zambia, Suriname and Iraq respectively.
Commodity dependence co-relates highly with lower levels of human and social development, slow productivity growth, income volatility, macroeconomic and political instability, as well as exchange rate volatility.
In 2021, commodity-dependent developing countries made up 29 out of 32 countries classified as having low human development, according to UNDP’s Human Development Index.
Need for greener, diversified economies more integrated into regional and global value chains
UNCTAD urges the global community to support economic diversification and value upgrading in commodity-dependent countries to help fortify them against shocks and volatility emanating from global markets beyond the control of one country.
Commodity-dependent developing countries should move up global value chains, especially those involving critical minerals for the energy transition like cobalt, lithium and copper. This would increase the resilience of supply chains while benefiting both producers and consumers of green products, ultimately contributing to climate change mitigation.
Green industrial policies, supported by international partners, will be central as countries reconfigure economic structures towards a more energy-efficient and low-carbon future.
The report outlines strategies for developing productive and technological capabilities, creating high-quality employment opportunities, promoting social cohesion, a just transition and gender equality — helping commodity-dependent developing countries to adopt a greener diversification path, earning more value from their commodities and being more integrated into regional and global supply chains.
It highlights additional enablers of economic diversification, including easing market access, making technology and capital goods more available, credit more affordable, and establishing special economic zones, as well as an efficient, inclusive and reliable energy sector.
Tapping into new energy markets and green products can help create new jobs, boost income and reduce the urban-rural divide.
Inclusive policies for a just transition
While diversification brings economic benefits by creating new sectors in the economy, the varying productivity levels of these sectors also risk deepening inequality within countries.
For diversification and energy transition to have positive effects on reducing income inequality, countries need to implement social measures that support vulnerable groups as part of an inclusive diversification strategy.
The report also underscores the need for comprehensive national plans to improve access to energy and opportunities for human capital development, such as education, health care and skill-building programmes.
Strong domestic and international leadership and political will crucial
UNCTAD says commodity-dependent developing countries require strong leadership and political will to propel a whole-of-government strategy covering a broad range of policy areas to achieve inclusive diversification and energy transition.
These include policies on trade, industrialization, export and investment promotion, infrastructure development, education, health, finance and energy.
UNCTAD calls on governments to build national consensus on economic diversification and ensure its implementation beyond the duration of political cycles.
Countries need to strengthen human capital through retraining and upskilling schemes for new employment opportunities, as well as create decent, quality jobs in a more diversified economic structure.
Global support is vital for successful inclusive and low-carbon diversification
The global community needs to play a more active role in providing the support needed for green industrial policies in commodity-dependent developing countries to succeed.
These countries need access to affordable and sufficient investment financial services and technologies to implement active productive policies and mitigate the climate-related risks associated with climate change towards making their economic structures more diversified, resilient and prepared for a low-carbon future.