Commodities and co-dependency

Written by  //  August 1, 2008  //  Americas, Globalization, Oil & gas  //  No comments

This thoughtful piece by Kenneth Rogoff was written in 2005. In light of the collapse of the Doha round, it bears reading and pondering, although we could not resist inserting a link to Dan Yergin that undermines the confidence the author had in him at the time of writing.

Who’s Dependent Now?
by Kenneth Rogoff
(Project Syndicate) If the late great Argentine economist Raul Prebisch were alive today, he no doubt would wonder whether the world had turned upside down. His hugely influential “dependency” theory argued that if poor countries relied too much on commodity exports, they would never achieve the industrial depth needed to sustain rapid growth. Instead, they would become mired in a cycle of declining global commodity prices and ever-dwindling income shares.
Prebisch’s preferred policy response, protectionism, proved disastrous for the many Latin American and African countries that heeded him. But the fact is that for many years, Prebisch seemed to have made the right call on long-term commodity price trends. …
Today, however, with Asia’s giants, India and China, joining the global economy, prices for oil, gold, wheat, and virtually every other commodity are exploding. While there will always be cycles – oil prices, for example, will probably fall before they start rising again – the long-run trend for many commodities will clearly remain upward for some time to come.
What many trade negotiators and other policymakers do not seem to have recognized yet, though Prebisch would have realized it instantly, is that this dramatic turn of events carries huge implications for the global balance of power. Indeed, perhaps no other aspect of economic globalization will pose greater challenges to world leaders over the coming decades.
The questions are many. Are today’s rich countries prepared for an era of co-dependency, in which they are just as desperate for commodities as developing countries are for industrial imports and technology? Are they prepared for the inevitable flow of power and influence to commodity producers as they become much wealthier? How will the world’s two superpowers, China and the United States, come to terms with the fact that important commodity-exporting regions from Africa to the Middle East to Central Asia are littered with ill-formed nation states?
Some self-anointed seers portray the problem as being one of finite natural resources, with the world running out of critical commodities at an alarming rate. Nowadays, there are many adherents of the “Hubbert’s peak” theory of oil production, which holds that we have reached the upper limits of output capacity, the wells are running dry, and it is all downhill from here.
However, as leading oil historian Dan Yergin points out, prophets of doom have declared that the world is running out of oil at least four times already. Each time, radical improvements in technology made the threat evaporate. In the late 1800’s, oil extraction involved dredging with a mule. Today, no one thinks anything of drilling 3,000 meters beneath the ocean floor. There have been similar improvements across the board in metals mining and agriculture.
No, the world is not about to run out of commodities. Instead, what is happening is that the integration of 2.5 billion people (China and India alone) into the global economy is producing a demand shift that is likely to put far more upward pressure on commodity prices than any technology gains are likely to offset. So, for at least the next 50 to 75 years, and perhaps until humans start mining on Mars sometime in the coming centuries, prices for many natural resources are headed up.
Will the rebalancing of global economic power that results from this destabilize world politics? … The Chinese are looking to regions like Africa, hoping to find stable trading partners. They do not share the political evangelism of the Americans, who don’t just want to trade with commodity exporters, but to convert them as well.
… Meanwhile, commodity prices will continue to rise, with oil exporters now constituting the largest contributors to America’s gaping trade deficit.

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