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Commodity price rises are no substitute for long-term investment in infrastructure and capacity as a means of securing sustained development

Commodity prices have risen dramatically over the past few years, driven by escalating demands from rapidly industrialising economies such as Brazil and India. At first glance this is a blessing for those developing countries with plentiful natural resources.

Between 2005 and 2007 the world's least developed countries (LDCs) achieved their highest rate of economic growth for 30 years, averaging at around 7 per cent. From a strictly financial viewpoint, that has been one of the most encouraging features of the global economy.

But appearances can be deceptive. A report published last month by the Geneva-based UN Conference on Trade and Development (UNCTAD) warns that a development model based on commodity prices alone is unstable, and leaves LDCs highly vulnerable to price fluctuations.[1]

Equally important, it distorts the economy by discouraging adequate investment in either the agricultural or productive sector. This week's national strike in South Africa, triggered by soaring prices and depressed wages, highlights the dangers.

There, a crucial factor has been the crippling effect of electricity shortages (driven partly by underinvestment in supplies) on the mining industry. Much of the country's wealth still depends on this industry, but the industry is having to reduce production, leading to lower wages and civil unrest.

Left to starve

Both the UNCTAD report and the events in South Africa are reminders that economic growth alone will not guarantee social prosperity, or even social stability. As many African countries continue to demonstrate, the fruits of commodity-based growth can too easily be divided unevenly.

Those who control the commodities can get rich quickly. Others are often left to starve. The result is corruption, and civil wars across the continent driven more by the desire to control valuable resources than any concern to exercise democratic power.

Significantly, a country relying on high commodity prices for its wealth has little incentive to build up the social and economic infrastructure that would help it actively participate in the global economy. It will remain a fringe actor, subservient to the demands of industrialised and rapidly emerging nations, and extremely vulnerable to any rapid downturn in prices, as could happen with a global recession.

Wishful thinking

During the 1980s and 1990s, anyone raising these concerns was told not to worry, since the private sector in these countries would soon realise that it was in the interests of company shareholders to invest in such infrastructure. This proved wishful thinking as, too often, shareholders opted for quick profits rather than long-term returns.

For example, the private sector has not filled the hole left by cuts in government funding for agricultural research in developing countries. Similarly, industrial companies have not invested in research and development at anywhere near the level required to establish viable national systems of innovation.

But the UNCTAD report also points the finger at those who provide development aid. Too often, it argues, donor agencies have focused excessively on direct means of addressing poverty alleviation, such as health and sanitation programmes, rather than improving countries' ability to raise economic productivity so that they can afford to tackle problems for themselves.

It points out that even the way that the Millennium Development Goals are written appears to endorse this perspective, by focusing on surface level achievements, such as increasing the number of children in primary education. Indeed, it warns starkly that, partly as a result, LDCs are not on track to achieve the goal of halving poverty by 2015.

Investment in infrastructure

Next month, ministers from more than one hundred countries, heads of bilateral and multilateral development agencies, and representatives of donor and civil society organisations from around the world, will gather in Accra, Ghana, for the Third High-Level Forum on Aid Effectiveness. Their goal is to help developing countries fight poverty by making aid more transparent, accountable and results-oriented.

This meeting must tackle the message of the UNCTAD report — that even those developing countries benefiting from the commodity boom will remain condemned to the margins of the global economy without adequate investment in both physical and intellectual infrastructure (which includes training for scientists and technologists, and support for their work). And therefore, effectiveness of aid to them will inevitably suffer.

The current food crisis shows the type of problems that the situation can create. More investment in agricultural productivity (including agricultural research) will not, in itself, solve the problem of high food prices. But it could put countries in a far better position to contain prices, and thus avoid consumers' wrath.

Achieving this realignment in development policy is a significant political challenge. For understandable reasons (given that it is a UN body and has, in the past, incurred the wrath of some of its major donors, including the United States), UNCTAD tends to play down the struggle required to overcome the vested interests that keep the current system in place.

But if the global economy is to avoid regular cycles of boom and bust — a pattern from which the poor, as ever, suffer even more than the rich — next month’s meeting must forge a consensus that substantial increases in public investment in productive capacity are needed. At the core of this investment must be a commitment to capacity building in science and technology. Anything else is 'fool's gold', with all the insecurity the current strategy brings in its wake.

David Dickson, Director, SciDev.Net


[1] Growth, Poverty and the Terms of Development Partnership, UNCTAD, 2008