In October 1973, the Arab members of the Organization of Petroleum Exporting Countries (OPEC) launched an embargo against the United Kingdom, the United States, and several other developed countries for their support of Israel during the October War. The scale of the geopolitical shifts that followed are difficult to overstate. Political scientist Steve Yetiv describes the 1973 oil embargo as ‘history’s biggest peaceful transfer of wealth from industrialized states to developing ones.’ Four months after the embargo was imposed, one American statesman exclaimed, ‘We are now living in a never-never land…in which tiny, poor and weak nations can hold up for ransom some of the industrialized world.’ Fluctuations in commodity prices, financial flows, and international trade even empowered some members of the Global South to declare the establishment of a ‘New International Economic Order’ at the United Nations in 1974.
In the decades since, natural resources lost much of their geopolitical potency. The 2008 financial crisis put a cap on commodity prices, global population growth decelerated, technology lowered the cost of resource extraction, and China’s decades-long building boom slowed down. There were hopes that, in a “flat world,” digitization would mitigate resource scarcity and globalization would accelerate the world’s transition from carbon-intensive manufacturing to services-led growth.
However, two new supply shocks, the Covid-19 pandemic and the war in Ukraine, threaten to upend this incumbent order built upon years of depressed commodity prices. In turn, the trappings of a new commodity supercycle—a sustained period of commodity inflation—presage a world economy increasingly impacted by the relative scarcity of raw materials. Out of this restructuring could emerge a newly empowered Global South whose natural resources attain greater value in global supply chains and usher in a transformation of the global economic system.
The Price of Cheap Commodities
Between the global financial crisis in 2008 and the outbreak of the Covid-19 pandemic in 2020, global commodity prices faced a seemingly interminable decline. The level of the Bloomberg Commodity Index, which weighs the prices of 23 commodities according to economic significance, declined by nearly 74% between 2008 and 2020. In large measure, the costs of this decline were borne by countries in the developing world.
Although not all countries in the Global South depend on commodities for economic development, a majority do. The UN Conference on Trade and Development’s (UNCTAD) State of Commodity Dependence 2021 report assesses that 87 out of 136 developing countries are considered commodity dependent and that developing countries account for 86.1% of the world’s commodity-dependent countries. Due to the prior decade’s slump in raw materials’ costs, many of these countries have struggled to both maintain high rates of economic growth and invest in social services.
Growth in sub-Saharan Africa, for instance, fell from an average of 5.2% between 2000 and 2010 to less than 2.7% in the period between 2011 and 2020. Low rates of growth have not only impacted households, but prevented governments from making much-needed investments in infrastructure and human capital to reduce their dependence on commodity production. Beyond its direct impact on the Global
South, the slump in commodity prices has exacerbated the global climate crisis. For instance, low prices of coal and concrete have, in effect, subsidized a decade’s worth of environmentally pernicious coal-power generation and concrete-based construction.
Divergence in the Developing World
Yet, the days of cheap commodities may now be behind us. The Covid-19 pandemic and the war in Ukraine have obstructed global supply chains and reduced the availability of products like energy, grain, and fertilizer. In 2021, Ukraine was the world’s fifth-largest wheat exporter and a major exporter of barley, corn, rapeseed, and sunflower oil, all of which have been disrupted as a result of the war.
Much of the journalistic coverage of the commodity crunch has focused on its negative impact on the developing world. High-priced essentials have triggered political and economic devastation in Sri Lanka. Protests have erupted in the southern Iraqi city of Nasiriya over rising food costs. In response to the high price of commodities in Africa, the African Export-Import Bank has introduced a new Africa Trade Exchange tasked with procuring basic commodities in bulk to redistribute to countries in need.
At the same time, rising commodity prices have been a boon for many others in the Global South. A recent UNCTAD report suggests that, for dozens of countries in Latin America and the Caribbean, ‘price increases have led to significant increases in commodity export revenues.’ Palm oil and petroleum price rises, for example, have improved Malaysia’s terms of trade and South Africa has gained from surging platinum and iron ore costs.
Much of the political distress mentioned above has been caused not by the rise in commodity prices alone, but by the fact that the wealth generated from commodity production tends to be distributed unevenly between and within developing countries.
Even if the Iraqi government benefits from rising oil prices, in other words, such windfalls will only lead to broader welfare gains if accompanied by higher transfers to the household sector. In the long run, larger government revenues could allow many commodity-dependent countries to up their social spending and invest in economic diversification. Whether this occurs, however, will be the result of political will as much as of higher state revenues.
Brave New World
Economists forecast that the rise in commodity prices may not abate with the end of the Covid-19 pandemic and the war in Ukraine. Rather, a coming commodity supercycle could impose lasting structural change on the global economy. Zoltan Pozsar of Credit Suisse writes that ‘We are witnessing the birth of Bretton Woods III – a new world (monetary) order centred around commodity-based currencies in the East.’
In this new world, commodity prices will remain higher for longer, the US dollar and the euro will decline in value, and inflation will run hot in the developed world. The longer term effect will be that the ‘ecologically unequal exchange’ between high-income commodity-importers and low-income commodity-exporters that we have seen over the past decade could come to an end.
The coming commodity supercycle presents an opportunity for the Global South to lock in the benefits of resource windfalls in the service of long-term development and sustainability. Governments can use this occasion to invest in human capital and infrastructure to diversify their economies away from resource dependence.
Higher commodity prices will allow producers to lower production while retaining higher levels of income, thereby lessening the burden on the natural world. In the coming years, finally, there will be an opportunity to refashion a system of global governance catering to the interests of all countries, rich and poor.
Nathaniel Sher is a research analyst at Carnegie China.
This piece previously appeared in our 7th print issue, “Looking South.” You can read the full issue here: https://issuu.com/oxfordpoliticalreview/docs/opr_issue_7_final.