International trade in raw materials or commodities refers to the global trade in natural resources, such as agricultural products, metals, minerals, oil, natural gas, and other essential raw materials. This trade plays a central role in the global economy, as these resources are needed for industry, energy and daily consumption. With colonization and the internationalization of capitalism, developing countries became specialized in the export of commodities. They have become dependent and vulnerable. How does the trade in raw materials allow us to say that the world economy is organized around a dominant “center” and a dominated “periphery”? What about the deterioration of their terms of trade? What is the consistency of this economic dependence?
The economic dependence of developing countries on raw materials
According to the CNCED, raw materials represent 20 to 25% of world trade in recent years. When they account for 60% or more of a country’s merchandise export earnings, that country is considered “commodity dependent.” Although this type of addiction is a global problem, it is developing countries that suffer the most. Figure 1 below clearly shows that commodity dependence is predominant in Africa, South America and Oceania, followed by West Asia and Central Asia. Combined, these four regions account for 85 of UNCTAD’s 101 commodity-dependent member states (84 percent), with almost half of the countries located in Africa.
Figure 1: Commodity dependence by region, 2019-2021 in %
According to the UNCTAD report (2023) on the state of commodity dependence, only 13% of developed countries are on the list of countries considered dependent, including Australia and Norway, while the 85% of least developed countries are affected. Of the organization’s 195 member countries, 95 are classified as developing countries dependent on commodity exports. Furthermore, contrary to some beliefs, developing countries are not richer in natural resources than developed countries. In the case of oil, for example, in 2023 the main global producers are dominated by the United States, Russia and Saudi Arabia, which occupy the first three places respectively: United States with 13.3 million barrels per day, Russia with 10.3 million barrels and Saudi Arabia 8.95 million barrels. For wheat, Russia, the USA and Canada are the three leading producers in the world. For gold, China, Russia and Australia are the leading producers. Other examples could be cited.
The center, the periphery and the deterioration of the terms of trade
Center generally refers to developed, industrialized, and economically dominant nations, often located in Western Europe, North America, and East Asia. These countries have advanced technology, significant financial capital and diversified production capacity with high added value. The periphery refers, largely, to developing nations, often located in Africa, Asia and Latin America. These countries have economies oriented towards the export of raw materials and have embryonic industries that are not very diversified. Their export and budgetary revenues are heavily dependent on the production of raw materials; which are mainly intended for central markets. The terms of trade are defined as the export price index divided by the import price index of goods.
It is therefore an index with a base of 100 for the reference year. Its increase means that the purchasing power of exports is increasing and that there is an improvement in the terms of trade. Conversely, a drop in the terms of trade index reflects a reduction in the purchasing power of exports and therefore a deterioration in the terms of trade. In a deterioration scenario, individuals and businesses may purchase fewer and fewer imported goods, leading to a decline in the country’s standard of living. Graph 2 below illustrates the evolution of Senegal’s terms of trade. They deteriorated from 2002 to 2008 then began to improve since 2011. The evolution of Senegal’s terms of trade essentially depends on the evolution of world prices for phosphate, peanuts and gold. and especially oil. The latter product has a strong impact on improving the terms of trade when the world price of oil falls. Likewise, when the world price of oil increases, it contributes significantly to the deterioration of Senegal’s terms of trade.
Graph 2
The League of Nations (SDN) published a research work in 1945 called “Industrialization and Foreign Trade”. It estimated that between 1875 and 1938, the price index of primary products had fallen by 43% compared to that of manufactured goods. Thus, a country which mainly exported agricultural products would therefore have become poorer compared to countries producing manufactured goods, because it would have to sell more agricultural products than before to generate enough income to buy the same number of products invoiced as by the past. The United Nations, which took over from the League of Nations by continuing work on international trade, published a major research work in 1949, “Relative Prices of Exports and Imports of Underdeveloped Countries”. It demonstrated the persistence of the deterioration in the terms of trade between rich and poor countries. In the 1950s and 1960s, economists Raul Prebisch (1901–1986) and Hans Singer (1910-2006) worked on the deterioration of the terms of trade, independently, and arrived at the same conclusions: the deterioration of the terms of trade exchange is due to differences in specialization between countries.
According to them, this decline cannot be considered as a transitory phenomenon due to a combination of temporary circumstances, but rather as an intrinsic characteristic of the economic structures of the center and the periphery and the very nature of the development process. In a word, the trend towards deterioration of the terms of trade to the detriment of peripheral countries can be explained by at least two reasons. 1. The dynamic of growth, and therefore the rise in income, leads to a greater increase in imports at the periphery than at the center, which causes at the periphery an increase in import prices relative to export prices and , consequently, a fall in the terms of trade. 2. The impact of technical progress on central and peripheral countries is asymmetrical.
At the center, technical progress tends to reduce the demand for imported products from the periphery (most basic products can be replaced by synthetic products and processes become more economical in raw materials). On the contrary, at the periphery, technical progress tends to increase the demand for capital and intermediate goods produced by central countries. This also has the effect of increasing import prices and therefore worsening the terms of trade. We can add a third reason: the more rapid rise in productivity and wages in the center raises the relative price of products imported from the periphery. However, the deterioration of the terms of trade is not a phenomenon specific to developing countries, as illustrated in graph 3 below concerning the USA. Thus, between 2004 and 2015, we witnessed a deterioration in the terms of trade.
Graph 3
Today, the center-periphery model seems a little outdated except for most African countries south of the Sahara which are still too dependent on exports of raw materials. The center-periphery model can be seen as too simplistic to analyze the complexity of current economic relations, marked by the growing interdependence of economies and the existence of global value chains. What’s more, certain countries that were said to be peripheral, such as South Korea, China, India, Brazil, Indonesia or Malaysia, have been able to transform their position thanks to strategic industrial policies. To move away from this model, Africa would therefore benefit from learning lessons from Asian experiences of industrialization, starting with the partial or complete transformation of its raw materials on site. This is the only way to provide decent jobs to its millions of desperate young people.
About Amath NDiaye FASEG-UCAD
Prof. Amath Ndiaye is an eminent Senegalese economist, holding a State Doctorate in Economic Sciences from the Cheikh Anta Diop University of Dakar (2001) and a 3rd cycle Doctorate in Development Economics from the University of Grenoble, France (1987). Since 1987, he has taught at the Faculty of Economics and Management at Cheikh Anta Diop University in Dakar. A recognized expert, he has collaborated with prestigious institutions such as the African Development Bank, the World Bank, and the IMF, specializing in particular in the areas of exchange rates, economic growth, and institutional development. He was an expert member of the steering committee of the African Union Commission for the Creation of the African Central Bank. Prof. Ndiaye is the author of numerous influential publications, notably on exchange rate regimes and economic growth in West Africa. Trilingual, he is fluent in Wolof, French and English.
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