Primary product dependency Flashcards
Introduction
Primary product dependency is when a country (usually an LEDC) relies on one, or a very small number, of products (usually raw materials) for its export earnings. e.g. Zambia, copper makes up 98% of its exports; Uganda, 95% coffee beans.
Three points
Dependency on one product (especially commodities/raw materials) creates volatility in the economy
Price instability can create fluctuations in revenues for firms
Price instability of commodities can generate fluctuations in foreign currency earnings
Other points include:
- Reduces attractiveness of country for FDI (more commonly associated with manufacturing sector?)
Volatility point
Dependency on one product (especially commodities/raw materials) creates volatility in the economy:
Primary products are prone to price fluctuations.
Typically raw materials have fairly price inelastic supply and demand. Therefore any shift in supply or demand can create significant changes in price.
In the case of soft commodities (agricultural products) supply shocks are common caused by extreme weather events, and therefore resulting price volatility. - Diagrams could be used to extend the point (e.g. cobwebs).
Volatility evaluation
Despite the problems associated with price fluctuations, it might be beneficial to specialise in the production of primary goods because it allows a country to maintain security over supply over essential products that can alleviate absolute poverty.
Revenue fluctuation point
Price instability can create fluctuations in revenues for firms: This instability in revenues creates difficulty for long term business planning. This can lead to reluctance by firms to take the risk to expand business. It constrains the level of investment – both in capital (equipment, machinery, facilities) and in human capital (skills and training of staff). This constrains the development of the supply-side of the economy, limiting the productive potential of the economy.
Revenue fluctuation evaluation
Evaluation: Whilst there might be volatility in the price of commodities, incomes may remain stable in the production of some hard commodities - especially in the short term e.g. for gold (Ghana); diamonds (Botswana); oil (Nigeria).
Foreign currency fluctuation point
Price instability of commodities can generate fluctuations in foreign currency earnings: Even without specific shocks to the primary product markets, the Singer-Prebisch hypothesis suggests that there is a gradual deterioration of the terms of trade of these products over time. This therefore suggests that over time there will be less foreign currency revenue. This could constrain development by limiting the country’s ability to importing capital goods from overseas.
Foreign currency fluctuation evaluation
Evaluation: Despite the downward pressure on primary product prices, LEDCs may still maintain a comparative advantage in these products. Some products also exhibit higher YED (such as blueberries produced in Chile) which suggest that revenues will rise as global incomes rise. Therefore specialisation in these products may still make economic sense and allow these countries to maximise foreign currency income.
