Is Commodity-Dependence Pessimism Justified? Critical Factors and Government Policies that Characterize Dynamic Commodity

Commodity dependence does not necessarily lead to low income and export growth. Government policies that encourage dynamic and viable commodity sectors include: ° Eliminating price controls and state monopolies. ° Promoting research and extension. ° Developing transport and communications infrastructure. ° Enticing foreign capital and technology transfers. ° Establishing a legal system that encourages the use of innovative financial instruments. Economists often associate a country's dependence on primary commodities for exports, income, and employment with underdevelopment and low income. Yabuki and Akiyama explore this commodity pessimism theoretically and empirically and suggest that it may be ill-founded. If it is, it could have adverse ramifications for many commodity-dependent developing countries. They examine successful commodity-exporting countries and show that commodity dependence does not necessarily lead to low income and export growth. Successful commodity-exporting countries achieve dynamic and viable commodity sectors by implementing appropriate policies that encourage private sector initiative and investment. Drawing on successful cases --- including Uganda's coffee sector, Ghana's gold mines, and Colombia's cut-flower industry --- Yabuki and Akiyama identify government policies that encourage viable commodity sectors. These include: ° Eliminating price controls and state monopolies. ° Promoting research and extension. ° Developing sound infrastructure in transport and communications. ° Enticing foreign capital and technology transfers. ° Establishing a legal system that encourages the use of innovative financial instruments, especially risk management instruments and a sound warehouse receipt system. This paper --- a product of the Commodity Policy and Analysis Unit, International Economics Department --- is part of a larger effort in the department to analyze commodity policies in developing countries.