The current slowdown in the Chinese economy has contributed to major falls in a number of commodity prices in the last year. Its development path in recent years has been based on a huge and unsustainable share of investment in GDP, up to around 50% at one point. The Chinese authorities also promoted massive infrastructure spending as part of their stimulus programme in the wake of the weakening of demand for its exports brought on by the 2008 recession. This created a huge demand for commodities, supporting the prices of the latter and boosting the economies of commodity exporters, from Latin America and Africa to Australia. Now the tide has turned, and commodity prices have fallen dramatically.
Brazil, as the largest economy in Latin America and a major commodities exporter, is now in recession and is an example of missed opportunities for the promotion of development while the going was good. It has made progress in reducing inequality, as have a number of Latin American economies, and this is to be welcomed, as they were some of the most unequal emerging markets in the world in the 1990s. Government spending on education and social programmes has helped in this respect.
But economies that become dependant on commodities exports for economic growth, and which fail to use the opportunity to diversify towards the domestic production and export of industry and services sectors, find the going tough once commodity prices fall as they eventually tend to. There are cycles in commodity prices which can over time redistribute income and spending power between economies which are largely consumers and those which are producers of commodities.
Economies like Brazil that are now suffering from the commodity price falls have arguably missed such an opportunity to diversify. Buoyant tax revenues during a boom in commodities could have been used to improve infrastructure that supports industry and services. Some have argued that deregulation would play a role here, while others have suggested that funds could have been used to support strategic industries that can create large positive spillover effects and possess linkages with other production sectors.
If such support is conditional on improved productivity and the adoption of already existing technologies, firms can be driven to become internationally competitive, able to export abroad and help to support economic growth. Developmental states in East and South East Asia during various periods from the 1960s to the 1990s offer good examples of successful industrial policies which have accelerated economic growth for a significant period, allowing them to catch up to some degree with more advanced countries at the technological frontier.
The success of such policies requires their compatibility with what the economist Mushtaq Khan has called the ‘political settlement’ or balance of power in society. If the rents created by the state to support industrial development become captured by particular interest groups and there is a high cost politically to withdrawing them, then the relevant firms and sectors may never become competitive, remaining simply a drain on the public purse. But if the state has the ability to withdraw support when sectors fail to develop, this need not happen and the potential exists for the successful promotion of infant industries.
Brazil and other commodities exporters have to some degree failed to take the opportunity to diversify their economies and are now paying the price. This is a pattern that can be seen across a number of emerging markets. When China boomed and invested heavily, many emerging markets benefited from its insatiable demand for commodities. Now that the economic times have taken a turn for the worse and tax revenues become less plentiful, diversifying economies and accelerating productivity growth and technological advancement will be more difficult.