Extreme weather events such as floods, hurricanes can lead to ‘physical stranding’ of natural resources, rendering them impossible and unprofitable for use, finds a UNCTAD report
Developing countries dependent on commodities need to diversify their economies to mitigate the increasing climate change risks and achieve the United Nations-mandated Sustainable Development Goals (SDGs), according to a new report by the UN Conference on Trade and Development (UNCTAD).
Most of the developing countries, which include commodity-dependent developing countries (CDDCs), the least developed countries (LDCs) and small island developing states (SIDS), are commodity dependent.
It means that at least 60 per cent of their export earnings are from the commodity sector and the economic and commodity price cycle concur at the same time, according to Commodities and Development Report 2019.
In the case of a boom in the price of the commodities, countries' economies grow faster and slow down when the prices slump. However, the CDDCs experience a slower growth rate than other countries during the slow down period, which in most cases are for longer periods, according to the report.
Thus, the diversification could be horizontal, which requires venturing into new goods and sectors to reduce dependence on a narrow range of commodities, or vertical, which involves moving the value chain of a commodity to increase its worth, stated the UNCTAD report.
Climate change is an additional burden to CDDCs that are already struggling to manage the problems arising from their dependence on commodities, it noted.
They are more vulnerable to the risks due to their dependence on sectors that are highly exposed to extreme weather events.
While natural disasters like heatwaves, floods, hurricanes, rising sea levels and increase in sea surface temperature destroys agriculture, affect crop yield and fish production; extreme weather events lead to destruction of infrastructure, affecting the profitability and attractiveness of projects.
Impact on natural resource
These disasters can also lead to ‘physical stranding’ of natural resources, rendering them impossible and unprofitable for use, the report said.
These would adversely affect the CDDCs, especially those who are highly dependent on these resources for their economic well-being.
Further, in the race to limit greenhouse gas emissions, some natural resources in the energy sector also face the problem of ‘regulatory stranding’. The best example is the use of coal, which is increasingly being reduced and eliminated as the primary energy source.
With renewable energy, especially solar energy, becoming cheaper, there would be a shift towards them. Thus, even without regulatory stranding, the thermal power stations would become economically unattractive, the report said.
China, the world’s largest importer of commodities, has resolved to increase the share of non-fossil fuels in the country’s primary energy consumption, as part of its commitment to climate change mitigation. This would impact the exporters of fossil fuels to China, resulting in revenue loss in export market. They would also face problems in finding alternative and profitable markets.
Angola, for example, the largest African exporter of oil to China, would be the hardest hit. In 2017, 47 per cent of its total merchandise export revenue was oil exports to China.
The 10 most vulnerable countries to climate change in 2017 were all CDDCs, according to the University of Notre Dame’s Global Adaptation Initiative (ND-GAIN) Index.
Of the 40 most vulnerable countries, only three were not dependent on commodity exports, it added.
On the other hand, combating climate change also presents some opportunities to the CDDCs, according to the report.
The global push for renewable energy creates short- and medium-term opportunities in the mining sectors of CDDCs with large reserves of materials used in clean technologies, such as solar photovoltaic cells, wind turbines and electric vehicle batteries, it noted.
The Democratic Republic of the Congo was responsible for 58 per cent of global cobalt production in 2017, a major component for the development of electric vehicles and batteries.
Chile and Argentina jointly accounted for 71 per cent of the global reserves of lithium in 2018, a key product in the production of battery.
The report also emphasised the need for CDDCs to involve ‘non-state and sub-national actors’ like the private sector, civil society organisations and local governments to achieve the objectives of the Paris Agreement.
The countries, thus, need to relook their diversification potential and depart from their dependence on “one or a narrow range of commodities, which for decades has kept them exposed to the vagaries of international markets and climate change,” stated the report.
A combination of horizontal policies, such as strengthening human capital through investments in education and health, and targeted measures to promote individual sectors, are needed for a successful diversification, it added.
“Climate crisis poses an existential threat to commodity-dependent developing countries and will result in the collapse of some economies if decisive action is not taken now,” UNCTAD Secretary-General Mukhisa Kituyi said, in a press release.
“Now, more than ever before, these countries need to assess their diversification potential and reduce their commodity dependence, which for decades has kept them exposed to volatile markets and climate change,” Kituyi added.
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