Volatile Prices of Primary Goods Preventing Economic Development in LDCs
Background
The primary goods refer to the products that are obtained directly from agricultural activities and are not subjected to the process of manufacturing. The most important primary products in an economy include those that are obtained from the sector, such as the fishing, agricultural, forestry, and mining industries. In terms of the least developed nations, which are mainly located in Africa, Asia, and the Latin America, the trade characteristics of their economies include the dependence on the developed, industrialized nations, and, significantly, the reliance on primary products. Accordingly, in international trade, the least developed nations’ exports are primary goods, often traded as fuels, raw materials, and agricultural produce. Additionally, some of the least developed nations also trade exports in drugs and low technologically advanced military material to obtain the foreign currency. A major instance is India, which exports low tech goods and services as well as medical material to obtain the dollar from the international market. Against this background, the paper will explore the extent to which the volatile prices of primary commodities prevent economic development in least developed nations.
Volatile Prices of Primary Goods and Economic Development of Developing Economies
An example of the dependence of the developing economies on the primary goods for international trade is shown in the table below, which highlights the major export products of the countries. A unique feature that is common among most commodities is the low elasticity of demand in the short-term, which implies that in the demand and supply of the commodities, prices are determined by these variables. This is a partial indication of the reasons why commodity prices tend to fluctuate. In terms of the increase in the price volatility of commodities in the recent past, various variables have been cited as probable reasons. As for the supply and demand aspects, the main factors indicated highlight the related issues. In supply factors, there are aspects of reduced investment in agriculture throughout the decades, which is also identified in the mineral and oil sectors that happened in the mid-1990s. Second, there are aspects of harvests and extraction, which fluctuate depending on technology, climate, and labor force among other factors. Here, the supply of primary commodities is affected by the prevailing conditions in the respective least developed nation. Third, decreasing levels of the production also affect the supply aspect of price volatility. This is often attributed to the management of timeliness of delivery, which affects the ability of the producers to develop effective stimuli to the demand uncertainties. Fourth, another supply factor that causes price volatility of the primary goods us cost and complexity associated with finding and maintaining supplies of the natural resources, which causes scarcity and affects prices. Lastly, the issue of heightened competition with new producers in the world market lowers the price of the commodities.
The factors that affect the price volatility of the primary commodities and are associated with demand are, first, the increasing desire for commodities from the fast developing LDCs, especially in the emerging nations in Asia and Latin America. Additionally, the increasing demand for biofuels in substitution for the oil and natural gas products has caused major shifts in the use of land, which has, in turn, led to the scarcity of agricultural products and, thus, commodity price volatility. Lastly, there is an increase in the speculation of the commodities, which the investors based on an index, especially, further increasing demand on the futures.
The additional variables that are also attributed to the volatility of the commodity prices are geopolitical dynamics, freight issues, exchange rate dynamics (this is linked to the fluctuation of the dollar rate). Furthermore, the association among the commodities has been indicated as a major factor in the price volatility rates, with crude oil prices affecting the prices of other commodities in the international market.
Figure 1: Price of primary commodities and demand shocks
Figure 2: Inelasticity of demand and supply
The most common variables of measuring economic development are Gross National Product (GNP), population growth rate, the occupational framework of the workforce, urban development, per capita consumption, infrastructural development, and the social aspects, such as literacy and life expectancy rates. Therefore, to assess the economic development of the least developed countries, these factors are used to analyze how the export income obtained from the primary commodities contributes toward the development of these economic growth and development variables of the nations.
Are Least Developed Economies Dependent on Primary Products?
A main characteristic of agricultural goods exports in most least developed economies is that comparatively few products are part of the share of the earnings obtained from the exports. In most cases, the least developed nations depend on single primary commodities to obtain export revenue. Accordingly, the lethargic demand for the primary commodities and the recurrent conditions of slump and boom in exports have posed challenges to the least developed nations that base their economies on commodities. As discussed before, the fluctuating commodity prices and the earnings from exports are identified to complicate the process of economic development and create serious short-term impacts on investment, employment rates, and income. Moreover, with the reducing demand, the nations that specialize in the production of the primary goods are anticipated to have a reducing portion of the global trade except when they have major quality or cost advantages over their competitors.
Figure 3: The global share of primary products exports between 1995 and 2009, Developed Nations vs Least Developed Economies. United Nations Conference on Trade Development 2009 Statistics
Additional Factors Preventing Economic Development
Apart from the price volatility issues that prevent economic development of least developed nations that depend on primary commodities, the other issues that affect economic growth are governance and rebellion, which affect most LDCs. First, there is a correlation between dependence on primary goods and bad governance, where government funds have the tendency to be dissociated from mainstream taxation. The primary products often create location-linked tariffs that LDC governments can levy high taxation without affecting the economic activity. In the least developed nations in southeast Asia, the Latin America, and Africa, the governments have emphasized, rather disproportionately, on obtaining revenue from the taxation of the primary goods, which is done either, indirectly, through levying taxes on the imports financed by the primary goods exported or, directly, through taxing the exports.
Therefore, in the case that the LDCs dependence on primary goods have the tendency of creating poor governance, the issue is critical since the nations with major primary products exports require good governance. Importantly, the social benefit obtained from the taxation of the primary commodities depends on the ability and willingness of the government to utilize the obtained resources efficiently. The finances obtained from the exports are taxed to ensure equitable distribution of the financial resources across the nation. However, this has not been achieved because of the governance issues, which cause problems in terms of developing the nations. Second, because of bad governance and reliance on primary commodities, the least developed nations are susceptible to civil wars because of inequitable distribution of the financial resources obtained from the export funds. In Africa and Latin America, rebellion occurred in the 1990s and early 2000s because of the unwillingness of the governments to ensure effective management of the primary commodities that are traded on the international market in exchange for foreign currencies and other goods that are scarce in the respective regions.
Opinion on Improvement of the Situation
During the recession of 2008, global demand for products reduced, which affected investment and consumption patterns in the developed nations and, in turn, influenced world trade. A major important factor that facilitates growth in the LDCs is trade, although it also, often, creates situations for imbalances vis-à-vis international trading of commodities and obtaining foreign currency. Thus, it appears that the elasticity of international trade to income continues to experience a steady growth and intensifies the effects of recession in the developed nations in the flow of trade. In international trade, such economic effects pose problems for the least developed nations that rely on exporting their primary goods. Often, when the trade flourishes, it does not automatically indicate sustenance of income, because some of the economic downturns cause long-term economic effects in the least developed economies.
Importantly, “postponable” goods, including the investment goods and consumer durables, which experience the risk of aversion in the developed nations, comprise a major segment of international trade, whereas they account for a minor segment of the global Gross Domestic Product (GDP). The situation has been complicated by the harmonization of trade shrinkages that occur because of the vertical integration of the international production chain. Initially, a minimization of trade finance was indicated as a major contributor to the decline of world trade, despite the various disputes against this claim by some scholars. The reduction in the volumes of trade has been indicated as a major cause of the problem for exporters, manufacturers, and consumers, while the negative effects on the prices have occurred in the nations that rely on the exports of primary goods, which are often the least developed nations. In these economies, particularly the nations that depend – almost entirely – on minerals and oil exports, have experienced major economic setbacks. After an increase in trade that intensified at the beginning of the new millennium, the prices of minerals, oil, and other export commodities begun experiencing a downturn during the global financial crisis of 2008 and dropped further later that year. Accordingly, the rapid plummeting of the prices of the primary goods benefitted other nations, which had experienced shortages in the supply of such primary products, especially oil.
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