The Miami Herald
Mon, Sep. 13, 2010

Commodities accelerate economies

BY MIMI WHITEFIELD
mwhitefield@MiamiHerald.com

From the early days of the conquistadores seeking gold and silver, the world has been clamoring for the commodity wealth of Latin America and the Caribbean. But despite all their agricultural and natural riches, the region's economies have lagged in development or been mired in poverty and endured boom and bust cycles.

A new World Bank study explores whether such riches as oil, natural gas, copper, coffee and grain have been "more of a curse than a blessing for the region.''

It concludes that if properly managed, commodities can be a key source of economic growth for Latin America and the Caribbean. In fact, the 2001-2008 commodities boom -- the longest since records have been kept -- helped the region bounce back more quickly from the global economic crisis.

The study, which is to be released Monday ahead of the Americas Conference at the Biltmore Hotel, was compiled after researchers sifted through dozens of background papers submitted by political scientists and economists from around the world.

"The speed of the recovery in Latin America and its resilience... can certainly be attributed partly to the growth of the region's commodity exports to emerging Asian economies,'' said Augusto de la Torre, one of the study's authors and chief economist for Latin America and the Caribbean at the World Bank.

"Assuming that Asian demand for soy exports from Argentina, iron ore from Brazil, copper from Chile, fish and minerals from Peru and other Latin American commodities keeps up, the region is on a strong position to profit from its natural resources,'' he said.

In fact, the study titled Natural Resources in Latin America and the Caribbean: Beyond Boom and Bust, said during the boom the trade of countries in the region shifted away from exporting commodities to rich nations toward trading with emerging economies. In 1990, for example, 44 percent of the region's commodity wealth was shipped to the United States. By 2008, that had fallen to 37 percent.

During that same period, China's share of such exports rose from 0.8 percent to 10 percent. And China became Brazil's largest market for commodities, gobbling up a third of the commodity exports of Latin America's largest nation in 2008.

Some 93 percent of the region's population lives in countries that benefit from high commodity prices.

But commodities have gotten a bad rap through the years, the study said, because of concerns that dependence on them:

Undercuts growth and productive activities. When commodity prices are high, for example, it may attract resources away from other activities and discourage a diversified economy.

Opens an economy to volatile boom and bust cycles that aren't conducive to long-term growth

May poison a country's institutions. The mix of easy money, combined with government ownership, may lead to poor governance and undermine development of good institutions as well as long-term growth.

Negatively affects affects the environment and some social groups. Among the dangers are over-exploitation of resources and harmful wastes from extraction processes.

In the Amazon Basin, for example, there are an estimated 400,000 artisanal gold miners who use inadequate technology during gold recovery, resulting in an estimated 200 tons of mercury being released into the environment.

Mining and oil production also have the potential to stir social tensions not only because of environmental effects on local communities but because workers sometimes feel their jobs are being undermined.

In the Arequipa region of Peru, informal miners who the government says pollute rivers and destroy the environment clashed with police this spring over rules the government wanted to impose. Six people were killed and 29 injured.

"We went through all the arguments and we found a dark side and a bright side to commodities trade,'' said de la Torre, who authored the report with Emily Sinnott and John Nash. "With commodities there is a risk of trapping you into bad things but they also should be viewed as opportunity.''

One of the keys to cashing in on those opportunities is by saving money during a boom for a rainy day. Some countries have tried commodity stabilization funds or long-term savings funds to manage windfall revenue.

But they have met with mixed results because governments sometimes cave in to public pressure to spend the proceeds as Ecuador did during the recent boom. Venezuela also stopped contributing to its stabilization fund soon after it was created in 2003.

Chile and Trinidad and Tobago, however, kept contributing to their funds and by the end of 2008 had accumulated savings equivalent to 12 percent of gross domestic product, the study found.

"The long-term challenge is to manage well this commodity bonanza and to dedicate those earnings to improving human capital, build better infrastructure and spur innovation, which is fundamental for sustained growth,'' said de la Torre.