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. Relentless efficiency gains in agriculture and resource extraction pushed down prices for commodities, especially during the 1980’s and 1990’s. With few exceptions, countries that focused on commodity exports performed dismally, whereas many resource-poor Asian countries raced ahead.
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? World War I, of course, was partly set off by Germany’s concern that the other colonial powers had locked up too large a share of world oil and commodity supplies. Similarly, in World War II, Japan feared for the stability of its foreign supplies of oil and other natural resources. Will similar tensions arise between resource-challenged China (where even water scarcity is a problem) and the West?
Fortunately, this does not seem likely for the moment, especially given the Chinese leadership’s sober and pragmatic approach to its resource problems. 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.
Then there are those American leaders who still speak of making the US self-sufficient in energy supplies. But this is basically a joke: self-indulgent, maybe, but self-sufficient, never. Much of the Arab world understandably views the invasion of Iraq as the cornerstone of the real US strategy for securing stable energy supplies. If they are right, one can only hope that America has a plan B.
Meanwhile, commodity prices will continue to rise, with oil exporters now constituting the largest contributors to America’s gaping trade deficit. Maybe the real US strategy is to try to owe the commodity-exporting countries so much money that they will feel dependent on making America happy! That is one twist that Prebisch would never have anticipated.
Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics at Harvard University.
Copyright: Project Syndicate, 2005.