b. natural resources: definitions, trade patterns and globalization

world Trade reporT 2010

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This section provides a broad overview of the role that trade in natural resources plays in the global economy. It begins with a discussion of definitions and terminology, focusing on key features that distinguish natural resources from other types of traded goods. These features include the exhaustibility of natural resources, the uneven geographical distribution of resource endowments, the presence of externalities in the spillover effects of extraction and use of natural resources, the dominance of the natural resources sector in many national economies, and the high degree of price volatility in this class of goods. A variety of statistical data related to natural resources are presented in order to illustrate the magnitude and direction of global trade flows.

B. Natural resources: definitions, trade patterns and globalization

II – tRADe In nAtuRAL ResouRces

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Contents 1. Definitionsandkeyfeaturesofnaturalresources 46

2. Naturalresourcetradeflowsandrelatedindicators 54

3. Modesofnaturalresourcestrade 59

4. Naturalresources:Globalizationandtheintellectualdebate 63

5. Conclusions 70


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Since most natural resources trade is conductedthroughorganizedcommodityexchanges,weexaminetherolethatfinancialmarketsplayindeterminingpricesandquantities.This isfollowedbyahistoricalaccountof trade in natural resources since the industrialrevolution, touching on the recurring themes oftechnologicalchange, trade liberalizationandscarcity.Thisaccountalsoelaborates theevolutionof thinkingabout how perceptions of natural resources haveevolved over time, including their role in determiningeconomic and political outcomes. Together, theseanalysesprovideessentialbackground information forthe theoretical and policy-related discussions insubsequentchapters.

1. Definitionsandkeyfeaturesofnaturalresources

Natural resources are difficult to define precisely,particularly in the context of international trade. Mostpeoplehaveanintuitiveideaofwhatnaturalresourcesare, but “common sense” definitions cannot be reliedupon since they eventually run into problems whendealingwithambiguouscases.Forexample, crudeoiland wood are clearly natural resources, but it is lessobvious how intermediate and final goods made fromtheseproductsshouldbeclassified.

All goods either embody natural resources (e.g.automobiles contain ironore)or require resources fortheirproduction(e.g.foodcropsrequirelandandwatertogrow),soallgoodscouldconceivablybeclassifiedasnaturalresources.Suchanapproachwouldbelogicallyconsistent but otherwise unenlightening. At anotherextreme,onecouldchoosetofocusstrictlyonresourcesintheirnaturalstate.However,evenclear-cutexamplesof natural resources would be difficult to classify assuchunderthisapproach,sincemostresourcesrequireatleastsomeprocessingbeforetheycanbetradedorconsumed. Regardless of the choice of definition, theline of demarcation between natural resources andothergoodswillalwaysbesomewhatarbitrary.

For the purposes of this report we define naturalresources as “stocks of materials that exist in thenatural environment that are both scarce andeconomically useful in production or consumption,either in their raw state or after a minimal amount ofprocessing”.1Notethequalifier“economicallyuseful”inthis definition. For example, sea water is a naturalsubstancethatcoversmuchoftheearth’ssurface,butitisoflimitedintrinsicordirectvalueforconsumptionorproduction.Goodsmustalsobescarceintheeconomicsensetoqualifyasnaturalresources;otherwisepeoplecouldconsumeasmuchas theywantedatnocost tothemselvesortoothers.

Airwouldnotbeconsideredanatural resourceunderthisdefinitionbecausepeoplecanobtainitfreelysimplybybreathing.Thisisnottosuggestthatair(especiallycleanair)orforthatmatterseawater(e.g.asacarbonsink)arewithoutvalue,but itdoesmeanthattheyarenotcommoditiesthatcanbetradedinmarkets. Inthis

report, the term “resources” is used interchangeablywith“naturalresources”.

Ausefuldefinitionshouldnotonlyidentifythenatureofnaturalresourcesbutalsodistinguishwhatisandwhatisnotanaturalresource.Undertheabovecriteria,itisclear that manufactured goods such as automobilesand computers would not be considered resources,sincebotharesubjecttomorethanaminimalamountofprocessing.However,thisshouldnotbetakentoimplythat all primary products are covered as naturalresources in the report. For example, while mostagriculturalgoodsincludingfoodareprimaryproducts,we do not classify them as natural resources for anumber of reasons. To begin with, their productionrequiresothernatural resourcesas inputs,particularlylandandwaterbutalsovarioustypesoffertilizer.Moreimportantly, agricultural products are cultivated ratherthanextractedfromthenaturalenvironment.

Twoimportantexceptionsinthisreportrelatetofishandforestry products, which are normally classified underagricultureinWTOtradestatistics,butwhicharetreatedhereasnaturalresources.Bothfishandforestryproductscanbecultivated, forexample inaquaculture forfishorthrough forest management for wood. However,traditionally they have simply been taken from existingnaturalstocks,andstillareforthemostpart.Unfortunately,itisimpossibletodistinguishbetweencultivatedandnon-cultivated varieties of these products in standarddatabases on international trade, but some effort hasbeenmadetoidentifytheseinthecaseoffish.

Natural resourcescanbe thoughtofasnaturalcapitalassets,distinctfromphysicalandhumancapitalinthattheyarenotcreatedbyhumanactivity.Naturalcapitalmay be a potentially important input in a country’s“productionfunction”–thatis,Y = f (K, L, N),where “Y”isoutput, “K” iscapital, “L” is labourand “N” isnaturalresources.Itisimportanttodistinguishbetweennaturalresourcesasfactorsofproductionandnaturalresourcesasgoodsthatcanbetradedinternationally.Forinstance,minerals, oil, and various other materials can beextractedandenterintotrade.However,otherresourcesmayformtheeconomicbasisforvarioussectorsofthedomestic economy, and therefore are only involved intrade in an indirect way (Josling, 2009). For example,climateandscenerycanbeexported through tourism.Similarly,agriculturalland,whichisthearchetypal“fixed,immobile” natural resource, can be exported throughagriculturalcommoditiesgrownonthatland.Hence,atafundamentallevel,naturalresourcesareoftenareasonfortraderatherthantradablegoodsintheirownright.

A more precise statistical definition that identifiesexactly which products are to be counted as naturalresources in trade data is provided in a StatisticalAppendix,butthemainproductgroupscoveredinthisreportarefish,forestryproducts,fuels,oresandotherminerals, and non-ferrous metals. Taken together, theproductgroupsoresandothermineralsandnon-ferrousmetals are referred to as mining products. Broaderconceptionsofnaturalresourceswillalsobeemployedfrom time to time, particularly as they relate to non-


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tradable resources such as scenery, bio-diversity ornon-tradedgoodssuchaswaterorland.

As noted earlier, natural resources falling under ourdefinition typically share a number of key features,including exhaustibility, uneven distribution acrosscountries,negativeexternalitiesconsequencesinotherareas,dominancewithinnationaleconomiesandpricevolatility.Wenowexamineeachof thesefeaturesandillustratethemwithsomeconcreteexamples.

(a) Exhaustibility

In resource economics, a distinction is usually madebetween renewable and non-renewable resources. Arenewableresourceisaresourcethateitherincreasesinquantityorotherwiserenews itselfoverashort (i.e.economicallyrelevant)periodoftime.Hence,iftherateof extraction takes account of limitations in thereproductivecapacityoftheresource,renewablescanprovideyieldsoveran infinite timehorizon.Ofcourse,the timeframe must be economically relevant, sincesomeresourcesmayberenewableinprinciplebutnotinpractice.Forexample,ittakeshundredsofmillionsofyearsfordeadtreestobetransformedintocoalandoil(BlundellandArmstrong,2007),andhundredsofyearsforcertainkindsof trees togrowtomaturity (Conrad,1999),sooldgrowthforestswouldnotbeconsideredrenewable resources despite the fact that they dorenew themselves over time. Classic examples ofrenewableresourcesarefisheriesandforests.

Non-renewableresourcesaredefinedasallresourcesthat do not grow or otherwise renew themselves overtime.Anotherwayofputtingthisisthatnon-renewableresources exist in finite quantities, so every unitconsumed today reduces the amount available forfuture consumption. The most common examples ofnon-renewable resources are fossil fuels and mineraldeposits.Thetermexhaustibleissometimesusedasasynonymfornon-renewable,but it isworthnotingthatrenewableresourcesmayalsobeexhaustibleiftheyareover-exploited.

Ingeneral,thesustainablemanagementofanyresourcerestsonacapacity tomonitor theevolutionofstocksand take corrective action in cases of significantdegradation or decline. In the case of man-madephysical assets, the cost of maintaining, renewing,expandingandimprovingthecapitalstockisanexplicitpart of production costs (capital depreciation isaccounted for as an expense). For natural resources,however,thisisnotalwaysthecase.Thevalueofnaturalcapital is often not accounted for at the level of theindividualfirmorinnationalaccounts.Thisimpliesthatneithertheircontributiontogrowthnortheextentandimpact of their degradation are fully measured andrecognizedbypolicymakers.

Anothertypeofcostthatisrelatedtoexhaustibilitybutnotexplicitlyaccountedfor innaturalresourcesuseisthe effect of rent-seeking behaviour. The scarcity ofnatural resources generates economic rents (i.e. the

premium that the resource owner receives aboveopportunitycost,orthecostofthenextbestalternativeuse of the relevant assets). Policies, including trademeasures,thatalterthesupplyanddemandandhencethe price of resources alter the distribution of rentsacross time and countries, sometimes lead tointernationaltension.

Technological change can effectively increase thesupplyofresourcesbycontributingtonewdiscoveriesand allowing extraction of stocks that could not bereached before. According to the BP World EnergyReview (2009), proven world oil reserves2 rose from998 billion barrels in 1988 to 1,069 billion barrels in1998and1,258billionbarrelsin2008,thankslargelyto new discoveries and advances in extractiontechnology.Changes in technologycanalso influencetherateofdepletionofaresourcebyeitherincreasingitsrateofuse(e.g.electricalenergyforincreaseduseof electronics, computers, etc.) or decreasing it (e.g.improvements in the efficiency of automobiles).Technological developments like these would changetherateatwhicharesourcewasusedup,butitwouldnotalterthefactofitsexhaustibility.

Manypetroleumexpertsbelievethatworldoilproductionhas or soon will reach its maximum point, known as“peakoil”(Hackett,2006).Onceoilproductionpeaks,itisbelievedthatfuturesupplieswillbecomemoreandmoredifficulttoobtain,causingtheflowofoiltodeclineinexorablyaccordingtoalogisticdistributionknownasthe Hubbert curve. This bell-shaped curve is namedafterM.KingHubbert,whoaccuratelypredictedinthe1950s that United States oil production would peakaround 1970 and decline thereafter (see Figure 1).More pessimistic peak oil theorists predict enormouseconomicdisruptions in thenear futureasa result ofrapidly dwindling supplies, while more optimisticobservers put the date of world peak oil productionmanyyears,ifnotdecades,inthefuture.Peakoiltheoryhas been less successful at predicting maximum oilproductionincountriesotherthantheUnitedStatesorattheworldlevel,butfewwoulddisputethenotionthatoilproductionwillbegintodeclineatsomepointinthefutureifcurrentratesofconsumptioncontinue.

Anotherexampleofarenewableresourcethatmaybeindecline is fish. According to statistics from the UnitedNations Food and Agriculture Organization (FAO), totalworldfisheriesproductionrosefrom98milliontonnesin1990to140milliontonnesin2007,anincreaseof42percent.Duringthesameperiod,totalworldexportsoffishjumped60percentfrom33milliontonnesto53milliontonnes.Theshareof trade inworldfishproductionalsoadvanced from 34 per cent in 1990 to 38 per cent in2007.Despiterisingproductionandtrade,annualcatchesfromoceansandfreshwaterfisherieshavebeenmostlyflatduringthisperiod,ataround90million tonnes,withnearly all growth in recent years accounted for byaquaculture, otherwise known as “fish farming” (seeFigure2).Thiscouldindicatethattheworld’soceansandfreshwaterfisherieshavereachedpeakproductionandareindangerofover-exploitationinthefaceofgrowingdemand.


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(b) Unevendistributionacrosscountries

Many natural resources are concentrated in a smallnumberofcountries,whileothershavelimiteddomesticsupplies. For example, Appendix Table 1 shows thatnearly 90 per cent of the world’s proved oil reservesare located in just 15 countries (out of slightly morethan 200 in the world today), and 99 per cent of oilreservesarefoundin40countries.3Internationaltradecanhelptoalleviatethesekindsofdisparitiesinnaturalendowmentsbyallowingresourcestomovefromareasof excess supply to areas of excess demand, whichmay also serve to promote the most efficient use oftheseproducts.However, sincenatural resourcesareindispensable inputs for production and are alsonecessaryformaintainingahighqualityofhumanlife,theunequaldistributionofresourcescancausefrictionamongnations.

The nature of the friction associated with naturalresources may be different from that observed in thecase of other types of goods. In most trade disputesinvolvingagriculturalormanufacturedgoods,acountryseeks to restrict imports.Many reasonsmaybegivenforthis,includingfiscalneeds,supportforaninfantora“strategic” industry, public considerations (health,environment, safety etc.), or as a response to tradepractices that the importing country perceives to beunfair.Conversely,most importingcountriesareeagertoobtainnaturalresourcesfromforeignsuppliers.Butexporting countries may be reluctant to allow theirresources to flow freely to other nations, also for avariety of reasons. These include fiscal needs, thedesire for economic diversification through additionalprocessing of raw materials, ensuring adequatedomesticsupplies,andprotectingtheenvironment.

Theunevengeographicaldistributionoftradednaturalresources is further illustrated by Maps 1 to 5 in the

Figure1:monthly united states oil production, Jan. 1920-Jan. 2010 (Millionbarrels)

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Figure2:World fisheries production, 1990-2007 (Milliontonnes)

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Appendix,whichshownetexportersandnetimportersbyproduct,basedonmerchandisetradedatafromtheUN Comtrade database. The distribution of fuels andnon-ferrousmetals isparticularlynoteworthy,sinceallof the world’s largest industrial economies are netimporters of these goods. With few exceptions,European countries are net importers of all types ofnatural resources, as are Japan and the Republic ofKorea.TheUnitedStates isanetexporterof forestryproducts and mineral ores, but a net importer of allother tradableresources. IndiaandChinaareonlynetexporters of fish, while they are net importers of theotherresourceproductsdealtwithinthisreport.Russiaisanetexporter,exceptoffish.Amongmajordevelopedeconomies,onlyCanadaisanetexporterofalltypesofnaturalresourcesdiscussedhere.

Waterismostlynon-tradedbutit isalsoveryunevenlydistributed across countries. According to the UnitedNations,humanity isfacingadrasticproblemofwaterscarcity (United Nations, 2009). The vast majority oftheearth’swaterresourcesaresaltwater,withonly2.5percentbeingfreshwater.Approximately70percentof thefreshwateravailable is frozen in the icecapsofAntarcticaandGreenland, leaving just0.7percentoftotalworldwaterresourcesforconsumption,andofthis0.7 per cent, roughly 87 per cent is allocated toagricultural purposes. The world’s limited reserves ofclean,freshwaterforhumanconsumptionareshrinkingfast, posing a serious threat to public health, politicalstabilityandtheenvironment.

Amongthemainfactorsaggravatingwaterscarcityarepopulation growth, increasing urbanization, and highlevelsofpercapitaconsumption.Climatechangeisalsoexpected tocontribute togreaterwaterscarcity in thefuture, as rising temperatures lead to droughts,desertification and increasing demand for water. Theproblem of water scarcity is more acute in somecountriesthaninothers,whichisillustratedbyMap6intheAppendix.ItshowsthatpercapitawatersuppliesaremanytimesgreaterincountrieslikeCanada,RussiaandBrazilthantheyareintheMiddleEastandlargepartsofAfrica.Forexample,Canada’ssupplyof87,000m3perpersonperyear is roughlynine timesgreater than the9,800m3availabletocitizensoftheUnitedStateseveryyear.However,theUSsupplyisnearly14timesgreaterthan that of Egypt, at 700 m3 per person per year.Moreover, Egypt’s water supply is roughly seven timesgreaterthanthatofSaudiArabia,withresourcesofjust95 m3 per person per year (UN Food and AgricultureOrganization,AQUASTATdatabase).

International trade could conceivably help to alleviatelocalproblemsofwaterscarcitybymovingresourcestowhere they are most needed. However, countries areunableorunwilling todoso,as large-scaleshipmentsare essentially non-existent. Reasons for this lack oftradeare largely technical,sincewater isbulkyand istherefore difficult to transport. Water scarcity orabundancealso tends tobesharedbymostcountrieswithin a given region, so water would have to betransportedlongdistancestomakeadifferencetotheproblemofscarcity.

Althoughwateritselfmaynotbetradable,internationaltrade can have an indirect and beneficial effect ondomesticsuppliesofwater.Exportsofwater-intensiveproducts(e.g.agriculturalgoods)fromregionsofwaterabundance to regions where water is scarce cangenerate savings in importing countriesby freeingupresources for other uses. For example, from 1997 to2001,Japan’s importsofwater-intensivegoodssavedthecountry94billionm3ofwaterthatwouldhavebeenrequiredifJapanhadproducedthegoodsdomestically(Hoekstra,2008b).

(c) Externalities

Anexternalityoccurswhentheactionsofoneeconomicagentaffectotheragentsindirectly,ineitherapositiveor negative way (Nicholson, 2001). Another way ofexpressingthisisthattheoutcomesofcertainactivitiesmay impose external costs on, or provide externalbenefits to, consumers or firms not involved in therelevant production or consumption decision. These“externalities”canbenegativeorpositive.Anexampleof a negative externality would be when a productionprocess results in pollution that adversely affects thehealthofpeoplewho livenearby,or thatdamagesthenatural environment in a way that reduces the well-being of individuals indirectly. A positive externalitymightoccurwhenhomeownersmakeimprovementstotheir properties that raise the market value ofneighbouringhousesaswell.

From a perspective of social well-being, externalitiescause goods to be over-produced or under-produced,depending on whether the externality is positive ornegative.Thisisbecausethemarketpriceofthegoodinquestiondoesnot reflect its truecostorbenefit tosociety. A good whose production and use imposesexternalcostsonotheragentswouldtendtobeover-produced because these additional costs are notincludedinthebuyer’scalculations.Ontheotherhand,goodsthatprovideexternalbenefitstendtobeunder-produced because their market price is too low. Thesolutiontotheproblemofexternalities,whetherpositiveornegative, isto internalizeallcostsandbenefits intothepriceof thegood,but this isdifficult toachieve inpractice without the intervention of an external agentsuchasagovernment.

Natural resource economics is mostly concerned withnegative externalities arising from the extraction andconsumption of resources, but positive externalities inthisareaarenotinconceivable.Forexample,over-fishingof one species of fish may benefit another competingspecies and improve the welfare of other fishingenterprises.Anotherexamplewouldbewhenaminingcompanybuildsa road thatenablesnearby farmers toshiptheirgoodstomarket.Sincethiskindofunintendedconsequenceisrare,theremainingdiscussionwillfocusexclusivelyonnegativeexternalities.ExternalitieswillbediscussedingreaterdetailinSectionC,butthefollowingexamplesillustratetheprobleminthecontextofnaturalresources.


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The burning of fossil fuels produces a variety ofpollutants that directly harm human health, while alsoemitting largequantitiesofgreenhousegases (mainlyCO2) that contribute to global warming. Since globalwarming affects everyone on the planet, includingpeople who consume little fuel, the consumption offuelsresultsinlargeexternalities.

According to statistics from the International EnergyAgency, annual world CO2 emissions from fuelcombustion more than doubled between 1971 and2007, rising from 14.1 billion tonnes to 28.9 billiontonnes (International Energy Agency (IEA), 2009a).Duringthisperiodtheshareofdevelopingcountriesinworldemissionsincreasedfrom34percentto55percent(seeFigure3).This increasecanbeattributedtopopulation growth, rising GDP, and increasing percapita CO2 emissions in a number of developingcountries. Global CO2 emissions per person grew byaround 17 per cent between 1971 and 2007, withsharper increases towards the end of the period on

accountof rapidgrowth insomeemergingeconomies(see Figure 4). Per capita CO2 emissions of mostdevelopedeconomiesrosethroughthe1970s,buthavesinceeitherstabilizedordeclinedslightly.

The above figures are not adjusted for levels ofeconomic activity. The influence of this factor isobservable in terms of the carbon intensity of worldoutput,ortheCO2/GDPratio(seeFigure4).Theratiodeclined33percentatthegloballevelbetween1971and 2007. To the extent that globalization raisesconsumptionoffossilfuelsthroughhigherincomesandindustrialization, it can be seen as having a negativeimpactontheenvironment,buttheincreasedefficiencyofproductionandthespreadoftechnologyassociatedwith globalization may create some countervailingbenefits.

Another example of a negative externality is Hardin’swellknown“tragedyofthecommons”(Hardin,1968)inwhich lack of ownership rights over a common pool

Figure3:total world co2 emissions by level of development, 1971-2007 (MilliontonnesofCO2)

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Figure4:World co2 / GDP and co2 per capita, 1971-2007 (kgofCO2per2000USdollarsandtonnesofCO2percapita)

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resource leads to depletion of that resource. Thetragedy of the commons was first used to explainovergrazingonpublicland,buttheconceptcanalsobeapplied to other common pool resources such asforests. Table 1 shows the countries with the largestdeclinesinforestlandbetween1990and2005,basedon data from the World Bank’s World DevelopmentIndicators database. Countries in South America andAfrica experienced the biggest declines during thisperiod,whileotherregionsrecordedsmallerdrops,orinsomecasessmallincreases.Europesawitsforestarearisemorethananyotherregion,butthereisconsiderableuncertainty surrounding increases in other areas,particularly in Russia. It should be noted that forestsdiffersignificantly inthenumberofplantspeciestheycontainandthenumberofanimalspeciesthat inhabitthem,sothatagivendeclineinforestedlandmayhaveagreaterimpactonbiodiversityinsomeregionsthaninothers.Asof2005,11percentof theworld’s forestsweredesignatedfortheprotectionofbiodiversity(FAOGlobalForestResourcesAssessment,2005).

(d) Dominanceofnaturalresources

Another important feature of natural resources is thedominant position of this sector in many nationaleconomies.Manyof thesecountries tend to relyonanarrowrangeofexportproducts.Table2showsexportconcentration indices from the 2008 UNCTADStatistical Handbook, along with shares of naturalresources in total merchandise exports for selectedeconomies. Concentration indices are based on thenumberofproductsintheStandardInternationalTradeClassification(SITC)atthe3-digitlevelthatexceed0.3per centofagivencountriesexports, expressedasavaluebetween0and1,withvaluescloserto1indicatinggreater concentration. It is clear that with very fewexceptions, countries with the highest exportconcentrationscoresalsohavehighsharesofnaturalresourcesintotalexports.

AppendixTables8and10showleadingtradersoffuelsand mining products in 2008 and also illustrate theimportance of these products for exporting andimporting countries alike. For example, the share offuels inSaudiArabia’s totalmerchandiseexportswassome90percent in2008,whiletheequivalentshareforIranwas82percent.ExportsharesforKuwait,theBolivarianRepublicofVenezuela,Algeria,NigeriaandAngolawereallinexcessof90percent.Althoughnotas high as the shares for exports, fuels made up asignificant part of imports for the leading developedeconomiesin2008,includingtheUnitedStates(23percent)andJapan(35percent).

Shares of mining products in total exports are muchsmallerthantheequivalentsharesforfuels,butminingproducts still dominate exports in many countries,including Zambia (80 per cent), Chile (60 per cent),Niger(58percent),Jamaica(56percent)andPeru(43percent).

Thedominanceofnaturalresourcesinexportsconformswith predictions from trade theory that countries willspecializeintheproductionofgoodswheretheyhaveacomparative advantage, and export them in exchangeforothergoods.However,thefactthatmanycountriesarebothexportersandimportersofnaturalresourcesishardertoexplain.TheGrubel-Lloyd(GL)indexprovidesausefulmeasureof thiskindof “intra-industry” trade.Foragivencountry,theshareofintra-industrytradeinsectoriisdefinedasfollows:

GLi=1-(|exporti–importi|/(exporti+importi))

Ifacountryonlyexportsorimportsgoodi,thentheGLindexforthatsectorwouldbeequalto0,whereasifacountryimportsjustasmuchasitexportsitwouldhaveaGLscoreof1forthatsector.

Table1:countries with the largest declines in forested land, 1990-2005(1000sq.kmandpercentageoflandarea)

1000sq.km %oflandarea

Brazil -423 Honduras -24

Indonesia -281 SolomonIslands -21

Sudan -88 Korea,Repof -17

Myanmar -70 Indonesia -15

Congo,Dem.Rep. -69 Cambodia -14

Zambia -67 Zimbabwe -12

Tanzania -62 Nicaragua -12

Nigeria -61 Philippines -11

Mexico -48 Timor-Leste -11

Zimbabwe -47 Myanmar -11

BolivarianRep.ofVenezuela -43 Ecuador -11

Australia -42 Liberia -9

Bolivia -41 Zambia -9

Philippines -34 Benin -9

Cameroon -33 Ghana -8

Source: World Bank World Development Indicators.


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Table3showsGLindicesfornaturalresourcesinmajoreconomiesat the3-digitSITC level.Figurescloser to1indicatemoretradeinsimilarproducts,whereassmallerfiguresindicatelessintra-industrytrade.Someproductshave relatively high scores, including fuels and non-ferrousmetals.Thiscouldbeexplainedby the fact thatthese products may be differentiated at lower levels ofaggregation, but it is also possible that large diverseeconomies contain some regions that export naturalresourcesandothersthatimportthem.Canadaprovidedanexampleofthiswhen,in2006,theprovinceofOntarioimported electricity from the United States while theprovince of Quebec exported the same product. ThisconjectureissupportedbyTable4,whichshowsaverageGLindicesfornaturalresourcesandmanufacturedgoodsforalargergroupofcountries.TheaverageGLscoresformanufactured goods are consistently higher than thescores for resources,butsmallercountriesalso tend tohave lower average GL values in both manufacturedgoodsandnaturalresources.

(e) Volatility

Thefinalcharacteristicofnatural resourcesexaminedhere istheiroccasionalextremepricevolatility.This isespeciallytrueforfuels,whichhaveexperiencedsharpprice rises from time to timesince the1970s,only tocollapseatalaterdate.Pricesformineralsandmetalshave also fluctuated dramatically in recent years,although their importance for the world economy isperhapslessenedbytheirsmallershareinworldtrade.Price volatility for forestry products and fish is much

lessthanforothertypesofnaturalresources.Accordingto the International Monetary Fund’s InternationalFinancial Statistics, fuel prices jumped 234 per centduring 2003-08, while mining products rose 178 percent.Duringthesameperiod,pricesoffishandforestryproductsadvancedattherelativelymodestratesof38percentand26percent,respectively.

Figure5showstheevolutionofpricesforWestTexasIntermediate (WTI) crude oil from 1970 to 2009. Thefirstbigpriceincreaseoccurredin1973,whenmembersof the Organization of Petroleum Exporting Countries(OPEC) proclaimed an embargo against the UnitedStatesandothercountriesthatsupportedIsraelintheArab-Israeliwar.Pricesagainrosesharplyin1979-80followingtheIranianrevolutionandtheoutbreakoftheIran-Iraqwar.Thiswasfollowedbyasteepslidebetween1982and1986,duringwhichoilpricesfellroughly75percentinrealterms.Aprolongedperiodofweaknessended in 2003, when prices began their climb to therecord levels of mid-2008. This was followed by yetanothercollapsebroughtonbytheglobalrecession.

The most noteworthy features of this chart are thesustained deviations of oil prices from their long-runaverage. Between 1979 and 1986 prices wereconsistentlyabovetheiraveragelevelduringtheperiod1970-2009. Then, with the exception of a brief spikethatcoincidedwith Iraq’s invasionofKuwait,oilpricesstayed below average from 1986 until 2005. Since2005priceshaveremainedaboveaverageexceptforabriefperiodinFebruary2009.

Table2:export concentration and share of natural resources in merchandise exports, 2006(Indicesandpercentage)

UNCTADConcentrationIndex(0-1)

Shareofnaturalresourcesintotalexports(percent)

World 0.08 24

Angola 0.96 100

Iraq 0.95 100

BolivarianRep.ofVenezuela 0.91 96

Sudan 0.87 95

Congo 0.87 ..

SãoToméandPríncipe 0.87 47

Nigeria 0.86 92

Yemen 0.85 91

LibyanArabJamahiriya 0.84 97

Gabon 0.84 95

Bahrain 0.79 90

Iran 0.78 86

Tajikistan 0.77 67

SolomonIslands 0.77 81

Maldives 0.77 99

SaudiArabia 0.76 88

Guinea-Bissau 0.75 1

Oman 0.75 79

Mali 0.75 75

Mauritania 0.74 87

Source: UNCTADHandbookofStatistics2008andWTOSecretariatestimates.


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A number of possible explanations for these largeswings in oil prices have been put forward, includinggeopolitical uncertainty, shocks to the flow of oil,changes in demand and speculation. There is noconsensus in the relevant literatureonwhichof these

forcesismostimportant,butrecentresearchsuggeststhatchangesinsupplyarerelativelyunimportant,whilechanges in demand associated with global businesscycleshavesignificanteffects(Kilian,2009).

Table3:Grubel-Lloyd (GL) indices for selected economies, 2008 (Index,0-1)

united states european union (27)

Stone,sandandgravel 0.93 Briquettes,lignite,peat 0.96

Othercrudematerials 0.92 Petroleumproducts 0.93

Ironore,concentrates 0.91 Wood,simplyworked 0.89

Naturalabrasives 0.83 Non-ferrouswaste,scrap 0.86

Fuelwood,woodcharcoal 0.78 Silver,Platinum,etc. 0.86

Petroleumproducts 0.73 Electriccurrent 0.84

Pulpandwastepaper 0.69 Nickel 0.84

Residualpetroleumproducts 0.68 Naturalabrasives 0.82

Nickelore,concentrates,etc. 0.67 Stone,sandandgravel 0.78

Fish(fresh,chilled,frozen) 0.67 Residualpetroleumproducts 0.77

Ores,concentratesofbasemetals 0.65 Copper 0.73

Aluminium 0.64 Ferrouswaste,scrap 0.72

Nickel 0.64 Pulpandwastepaper 0.68

Petroleumgases 0.62 Coalgas,watergas,etc. 0.65

Silver,platinum,etc. 0.60 Lead 0.63

Japan china

Lead 0.95 Petroleumgasses 0.91

Aluminiumore,concentrates,etc. 0.85 Crustaceans,molluscs,etc. 0.85

Petroleumproducts 0.84 Fish(fresh,chilled,frozen) 0.85

Residualpetroleumproducts 0.84 Coal,notagglomerated 0.81

Pulpandwastepaper 0.71 Residualpetroleumproducts 0.80

Non-ferrouswaste,scrap 0.68 Fuelwood,woodcharcoal 0.78

Preciousmetalores,concentrates 0.66 Silver,platinum,etc. 0.74

Nickel 0.62 Wood,simplyworked 0.73

Zinc 0.61 Othercrudeminerals 0.68

Petroleumgases 0.54 Naturalgas 0.66

Naturalabrasives 0.53 Petroleumproducts 0.63

Coke,semi-coke 0.51 Lead 0.62

Aluminium 0.42 Aluminium 0.61

Copper 0.42 Naturalabrasives 0.46

Silver,platinum,etc. 0.40 Liquifiedpropane,butane 0.42

Source:UNComtradedatabase.

Table4:Average GL indices for manufactured goods and natural resources, 2008 (Index0-1)

Naturalresources Manufacturedgoods

Australia 0.28 0.33

Bahamas 0.06 0.13

Brazil 0.29 0.52

Canada 0.49 0.59

China 0.34 0.47

EuropeanUnion(27)extra-trade 0.47 0.68

Iceland 0.09 0.14

India 0.27 0.53

Japan 0.29 0.49

RussianFederation 0.25 0.32

SouthAfrica 0.33 0.46

SriLanka 0.16 0.20

UnitedStates 0.49 0.68

Source: WTOSecretariatestimates.


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2. Naturalresourcetradeflowsandrelatedindicators

Having defined natural resources in general terms asthe sum of forestry products, fish, fuels and miningproducts, we now present a variety of descriptivestatistics on international trade in these products.Merchandise trade data are first shown at the worldlevel,butarethenprogressivelybrokendownbyproductand region to give a more detailed picture of globaltrade flows. Tables on trade of individual countries byproduct are provided in a statistical appendix, whichalso contains illustrative maps showing a variety ofresource-relatedindicators.

Two definitions of natural resources are used in themerchandise tradestatistics,withoneslightlybroaderthan the other. Tables showing country and productsharesinworldnaturalresourcestradeusethenarrowerdefinition that only includes forestry products, whiletables on trade by geographic region use the slightlybroader definition that includes all agricultural rawmaterials.Thisissolelyforreasonsofdataavailability,and the difference is minimal at the world or regionallevel.

Somegreyareasinproductcoverageshouldbenoted.Inadditiontorawfossilfuelssuchascoal,crudeoilandnaturalgas,thefuelsproductgroupalsoencompassesrefinedpetroleumproductsandelectricity.Itmayseemoddatfirsttocountelectricity(seeBox1)andrefinedfuels as resources, since their production requiressubstantial capital inputs, and the final output isproducedbyhumanactivityratherthansimplyextractedfromthenaturalenvironment.However,fossilfuelsarerarely consumed in their raw form, so we may stillconsiderrefiningandelectricitygenerationtorepresenttheminimumamountofprocessingnecessarytoallowthesegoodstobetraded.

NominaltradeflowsareexpressedincurrentUSdollarsand are strongly influenced by changes in exchangerates and commodity prices. This is especially true offuels,whichrepresentthelargestcomponentofnaturalresourcestradeindollarterms,makingupsome77percentofworldnaturalresourcestradeand18percentoftotalmerchandisetradein2008.

(a) Worldtradeinnaturalresources

The dollar value of world exports of natural resourcesincreasedmore thansixfoldbetween1998and2008,risingfromUS$613billiontoUS$3.7trillion,thanksinlarge part to steadily rising prices for primarycommodities(seeFigure6).Higheroilpricesinparticularhelpedpushtheshareoffuelsinworldnaturalresourceexportsto77percentin2008(US$2.9trillion),upfrom57percentin1998(US$429billion).Althoughpricesformetalshavealsorisensharply inrecentyears, theyhavenotkeptpacewithfuels,andasaresultthe2008shares of ores and other minerals and non-ferrousmetals in natural resources trade fell to 8.2 per cent(US$ 308 billion) and 9.6 per cent (US$ 360 billion),respectively.Sharesfortheseproductswerealsobelowtheir respective long-runaveragesof8.3percentand13.3percent.

The value of global fish exports rose from US$ 53billionin1998toUS$98billionin2008,whileexportsof forestry products increased fromUS$52billion toUS$106billion.Despitethegrowingdollarvalueoffishandforestryexports,sharesoftheseproductsinworldnaturalresourcestradefellfrom8.6percentto2.6percentandfrom8.5percentto2.9percent,respectively,due to the even faster growth of fuels and miningproducts.

Higher commodity prices also boosted the share ofnaturalresourcesinworldmerchandisetradefrom11.5percentin1998to23.8percentin2008(seeFigure7).Meanwhile, the share of fuels in world trade jumped

Figure5:nominal and real crude oil prices, Jan. 1970-oct. 2009 (Currentdollarsperbarreland2008dollarsperbarrel)

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Box1: Is electricity a natural resource?

Electricity isgenerated fromnatural resourcessuchascoal,gas,water,anduranium,butshould italsobeconsideredanaturalresource?Sinceitsproductionrequiresothernaturalresourcesasinputs, it isperhapsmorenaturaltoviewelectricityasamanufacturedgood.However,electricityarguablyshouldbecountedasanatural resource since some processing must be applied to most resources before they can be traded orconsumed.Inthisrespect,electricitycansimplybeseenastransformedcoal,naturalgas,etc.Electricityalsoallows energy resources that are normally untradable (e.g. flowing water in rivers used for hydroelectricgeneration)tobetradedacrossnationalborders.

Electricityhasanumberofunusualpropertiesthatdistinguishitfromothergoods.First,itisintangibleandcanonly be stored in very small quantities. (An exception is pumped-storage of hydro energy, where water ispumpeduphill intoareservoirduringlowdemandperiodsandreleasedlaterduringhighdemandperiodsinorder to generate additional electricity to balance supply and demand more efficiently.) Also, it must beproducedatthesametimethatitisconsumed,makingitmorelikeaservicethanagood.Electricityisclassifiedas a fuel in international trade statistics, but it is not recorded systematically by all countries. As a result,merchandisetradestatisticsonelectricitymaybeincompleteorinaccurate.

Generationfacilitiescanbeclassifiedasbase-loadcapacityorpeak-loadcapacitydependingonthetypeoffuelused.Base-loadcapacityhaslowmarginalcostbutusuallyhasverylargefixedcosts.Examplesincludehydroelectricandnuclearpowerplants.Peakcapacityhashighmarginalcostbutisusuallymuchmoreflexiblein termsofschedulingoutput.Naturalgas isoftenused forpeak-loadgeneration.Patternsof internationaltradeinelectricitydependtosomeextentonthetypeofgeneratingcapacitythatacountrypossesses.Somecountriesexportlargequantitiesofnuclearenergy(e.g.France)orhydroelectricpower(Canada),resultinginlargevolumesoftradebutlowercostperunit.Othercountriesmayengageininternationaltradeonlyduringtimesofpeakdemand(e.g. tomeetair-conditioningdemandsonhotsummerdays) inordertomaintainthestabilityof theirelectricitygrids. Insuchcases, thevolumeofelectricity tradecouldbequitesmallbut thedollarvaluemightbelarge.

International trade in electricity is limited by physical constraints, including geographic proximity andinfrastructurerequirements.Onlyneighbouringcountriestradeelectricity.Furthermore,powersystemsacrosscountries must be interconnected. Importantly, international trade in electricity can result in better use ofcomplementary resources (e.g.usingflexiblehydrogeneration toexportpeakpowerand importing thermalpowerduringoff-peakhours),thebalancingofannualdemandvariationsandofcurrentversusfutureneeds,andthepoolingofreservecapacity.

Figure6:World natural resources exports by product, 1990-2008 (Billiondollars)

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from6.5percent to18.2percent.Totalmerchandiseexports increased from US$ 5.3 trillion to US$ 15.7trillion during the same period, implying an averageannualgrowthrateof12percent,whilenaturalresourceexportsgrew20percentperyearonaverageoverthisperiod.ExportsofmanufacturedgoodsincreasedfromUS$4.1trillionin1998toUS$10.5trillionin2008,anaveragegrowth rateof10percentperyear,orabouthalf the rateof increaseofnatural resources.Despitethe rapid growth of natural resources trade,manufactured goods still made up the bulk of worldmerchandiseexportsin2008,at66.5percent.

The growing share of oil in world trade is mostly theresultofhigherpricesratherthanincreasedquantities.This is illustrated by Figure 8, which shows worldproductionoffossilfuelsincludingcrudeoilsince1970.Output of oil has been remarkably steady in recentyears,butthishascoincidedwithrisingdemandonthepartofmajordevelopingcountriessuchasChinaandIndia, which has put upward pressure on prices.Constant oil production also fails to keep up withdemandduetonormalpopulationgrowth. Itshouldbenotedthattherelationshipbetweenworldoiltradeandproduction is not one-to-one, but given the unevendistribution of these resources across countries, it isreasonable to link the two. The share of world oilproductionthatisexportedhasinfactbeenremarkablysteady over time, rising from 50 per cent in 1970 to55percent in2000,and remainingunchangedsincethen.Coalandnaturalgasproductionhascontinuedtoexpandinrecentyears,mostlytomeetgrowingdemandforelectricitygeneration(InternationalEnergyAgency(IEA),2009b).

For a longer-term perspective on natural resourcestrade,wemustresorttoestimation,sincebreakdownsof merchandise trade statistics by product are notreadily available for the years before World War II.UsinghistoricaldatafromtheUnitedNationsandtheGeneralAgreementonTariffsandTrade (GATT), it ispossibletoconstructadataseriesgoingbackto1900

Figure7:World merchandise exports by product, 1990-2008 (Billiondollars)

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that shows the split between manufactured goods,natural resources and other primary products, with amoredetailedbreakdownofnaturalresourcesavailablebeginningin1955(seeFigure9).Thesedatashowthatmanufacturedgoodsonlymadeupabout40percentofworldmerchandiseexportsat thebeginningof thelast century, with the remaining 60 per cent beingprimary products, including natural resources andagricultural products. However, between 1955 and2000theshareofmanufacturedgoodsinworldtradeincreased steadily from 45 per cent to 75 per cent,largely at the expense of agricultural products. Theshare of natural resources also tended to fall after1955, but the decline was less pronounced than foragricultural goods and was punctuated by increasescoincidingwithoilpricerises.

Between1955and2004theshareofnaturalresourcesinworldtradefellfrom22percentto14percent,butroseto30percentin1980andto24percentin2008duetohigherpricesforoilandothercommodities.Therising share of natural resources between 1900 and1955isprobablyexplainedbytradeinfuels,whichwasnegligible at the beginning of the century but whichexpanded as use of the automobile became morewidespread.

Thepre-warsharesfornaturalresourcesinFigure9areveryroughestimatesandthereforeshouldbeinterpretedwithcaution.Thedefinitionofmanufacturedgoodsalsodiffersslightlyintheearlierperiodsinceitincludesnon-ferrous metals, which means that the rise ofmanufacturedgoodsdepictedinFigure9maybeslightlyunderstated.Whethertheshareofmanufacturedgoodswill continue to rise is difficult to say, but this chartsuggests a large part of international trade in naturalresourcesmaybeintheformofmanufacturedgoods.

(b) Naturalresourcestradebyregion

Due to the uneven distribution of natural resourcedepositsacrosscountries,thepatternofexportsisquitedifferent from one region to another. For some regions(e.g. the Middle East, Africa, the Commonwealth ofIndependent States), resources represent a significantproportion of merchandise exports, while others (Asia,Europe and North America) have more diverse exportprofiles (seeTable5).SouthandCentralAmerica isanintermediatecase,withresourcesmakingupasignificant,butnotdominantshareofmerchandiseexports.In2008,the Middle East had the largest share of resources inmerchandiseexports,at74percent,withtotalshipmentsofresourcesvaluedatUS$759billion.

Figure9:shares of product groups in world merchandise trade since 1900 (Percentage)

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Table5:natural resources exports by region, 2008a (Billiondollarsandpercentage)

ValueShareintotal

merchandiseexports

World 3855.4 25

MiddleEast 758.7 74

Africa 406.0 73

CommonwealthofIndependentStates(CIS) 489.7 70

SouthandCentralAmerica 281.3 47

NorthAmerica 397.8 20

Asia 630.4 14

Europe 891.5 14

aThistableusesthebroaddefinitionofnaturalresourcestoincludeallagriculturalrawmaterialsratherthanjustforestryproducts.Asaresult,theworldtotalisslightlylargerthantheUS$3734.2showninAppendixTable1.Source: WTOSecretariatestimates.


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ThetotalvalueofAfrica’sexportsofnaturalresourceswasjustunderUS$406billion,representing73percentof thecontinent’sexports.Resourceexports fromCIScountries were worth US$ 490 billion, equal to70percentof totalmerchandiseexports.Europehadthe smallest share of resources in total exports at14percent,althoughthevalueofthistradewasgreaterthananyotherregionatnearlyUS$892billion.Asia’sshareofresourcesinexportswasrelativelylow,atjustover14percent,butthetotalvalueofresourceexportswasthesecondlargestofanyregionatnearlyUS$630billion. South and Central America exported naturalresourcesworthUS$281billion,ornearlyhalfof theregion’s total exports. In general, more industrializedregions have smaller shares of resources in exportsthanlessindustrializedregions.

Regions that predominantly export natural resourcestend to ship these goods to other regions, whereas

regions that produce more manufactured goods havemuchhigher intra-regionalsharesinnaturalresourcestrade (see Figure 10). For example, 82 per cent ofEurope’sexportsofnaturalresourceswereshippedtoother European countries. Similarly, 78 per cent ofAsia’sexportswereintra-regional,aswere62percentof North America’s exports. On the other hand, theintra-regionalsharesfortheMiddleEast,AfricaandtheCISwere2.3percent,5.3percentand11.8percent,respectively.Theintra-regionalshareofSouthAmericawas higher than those of other resource exportingregions at 22 per cent, but this is still well below thelevelsrecordedbyindustrializedregions.

Fuelswere the largestcomponentofnatural resourceexportsforallregionsin2008(seeFigure11).Resourceexports from the Middle East were almost entirelycomposedoffuels,witha98percentshareinresourceexports. South and Central America had the smallest

Figure10:natural resources exports of regions by destination, 2008 (Percentage)

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shareoffuelsinnaturalresourceexports(58percent)due to significant exports of ores and other minerals(20 per cent) and non-ferrous metals (12 per cent).Shares of fuels in natural resources trade for Asia,EuropeandNorthAmericawereallbetween61percentand64percent.NorthAmericahadthelargestshareofrawmaterialsinitsexports,at10.8percent,followedbyEuropeat9.9percentandAsiaat8.7percent.

(c) Leadingexportersandimportersofnaturalresources

Appendix Tables 2 and 3 show the top 15 exportersandimportersofnaturalresources,bothincludingandexcluding the member states of the European Union.The largest exporter of natural resources in 2008(including EU members) was Russia, with exports ofUS$ 341.2 billion or 9.1 per cent of world naturalresources trade. The share of natural resources inRussia’smerchandiseexportsroseto72.9percentin2008asthevalueofresourceexportsjumped34percentyear-on-year.RussiawasfollowedbySaudiArabia(exports of US$ 282 billion, or 7.6 per cent of worldtrade),Canada(US$177.7billionor4.8percent),theUnited States (US$ 142.5 billion or 3.8 per cent),Norway (US$ 130.6 billion or 3.5 per cent) andAustralia(US$114.3billionor3.1percent).

The leading importer of natural resources in 2008(also including EU members) was the United States.Thecountry’sresourceimportswereworthUS$583.4billion, or 15.2 per cent of world natural resourcestrade.USimportsofnaturalresourcesincreased27.9percentin2008whiletheshareofnaturalresourcesin total imports rose to 27 per cent, mostly due tohigher oil prices. Other leading importing countriesincludeJapan(importsofUS$350.2billionor9.1percent of world trade), China (US$ 330.3 billion or 8.6percent),Germany(US$231.5billionor6.0percent),Republic of Korea (US$ 182 billion or 4.7 per cent),France (US$ 148.5 billion or 3.9 per cent) and India(US$135.4billionor3.5percent).

IfweconsidertheEuropeanUnionasasingletrader,itranksfourthinworldexportsofnaturalresourcesafterRussia,SaudiArabiaandCanada.TheEuropeanUnionexportedUS$176.6billionworthofnaturalresourcestotherestoftheworldin2008andimportedUS$766.6billion, making it the largest single market for naturalresources, with a share in world imports (excludingtrade within the EU) of nearly 23 per cent. Tables onleading exporters and importers by product are alsoprovidedintheAppendix.

Appendix Table 12 shows imports of resources byregion and supplier for some of the world’s largesteconomies (the European Union, the United States,JapanandChina.) It shouldbenoted that thefiguresfortheEuropeanUnionincludetradewithintheEU:in2008,nearly37percentofEUimportsoriginatedfromwithin the trading bloc. EU imports overall totalledUS$ 1.1 trillion for the year. The top five suppliers ofresourcestotheEUwereRussia(16percent),Norway

(8percent),Libya(4percent)andtheUnitedStates(2 per cent). Most of the European Union’s importsof natural resources come from Europe, theCommonwealth of Independent States and Africa,whichtogethermadeupalmost80percentofresourceimportsin2008.

Total US imports of natural resources in 2008 werevalued at US$ 583 billion. The country’s top fivesuppliers of resources were Canada (24 per cent),SaudiArabia (10per cent), theBolivarianRepublic ofVenezuela (9 per cent), Mexico (8 per cent) and theEuropean Union (7 per cent). Japan’s imports for theyearcametoUS$350billion,anditsleadingsupplierswere Saudi Arabia (14 per cent), the United ArabEmirates (13 per cent) Australia (12 per cent), Qatar(8percent)andIndonesia(7percent).ChinaimportedUS$331billionworthofnaturalresourcesfromothercountries in 2008. Top suppliers include Australia(10 per cent), Saudi Arabia (8 per cent), Angola(7percent),Russia(6percent)andBrazil(6percent).

3. Modesofnaturalresourcestrade

Many natural resources are fairly homogeneous andmay be classified as “commodities”. Unlike the manyvarietiesofmanufacturedproducts–automobiles, forexample–theyaresuitedtocentralizedtradingandtheformationofaunifiedprice.Inaddition,characteristics,suchastheunevengeographicaldistributionofnaturalresources around the world, and the consequentaccumulation of market power, has triggered theevolution of alternative modes of trade that reducemarketrisks,suchasdisruptionsinthesupplyofcriticalnaturalresourceinputs.It isimportanttokeepinmindtheseparticularmodesofnaturalresourcestradewhenconsidering the consequences that some of the keyfeatures of natural resources, such as volatility, mayhavefortradeandtradepolicy.

Thissub-sectionfirstdescribestheroleofcentralizedspotandfuturesmarketsincommoditiestrade,notablyinthecontextoforganizedexchanges.Italsoprovidesan account of the evolution of these exchanges,describestheirgeographicaldistribution,andhighlightstheirprincipalfunctions.Theseincludepricediscovery,liquidity, management of risk, financial intermediationand clearing house guarantees. Second, we analyzealternativearrangementsfortradeincommoditiesthatmay be important for strategic reasons or qualitycontrol. These include bilateral long-term contracts,which are relevant for certain energy and metalcommodities.Wealsoexploretheprevalenceofverticalintegrationinsomenaturalresourcesectors.

(a) Commodityexchanges

(i) Key definitions

A commodity is typically defined as a homogeneousproductwhichcanbeexchangedamongconsumersandproducers. The term “commodities” is often used in therelevantliteraturetorefertoagriculturalgoods,butitalso


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includesanumberofotherproductsthatareclassifiedasnatural resources in this report. Examples are fuels,forestryproducts,mineralsandmetals.Giventheirmostlyhomogeneous nature and the fact that their quality canusuallybeeasilyverified,tradeincommoditiesisfacilitatedby organized market places where trade is centralized(UNCTAD,2006).Aconcentrationofbuyersandsellersinoneplace reduces the transactionscosts thatwouldbeincurred in the search for a suitable counterparty(ThompsonandKunda,2000).

Trades inorganizedcommodityexchangesarecarriedout either electronically or verbally in a trading pitbetween buyers and sellers who are anonymous toeachother(Stroupe,2006).Tradesarecarriedoutboth“on the spot” and via “futures” contracts, usually on adaily basis. In “spot” markets, physical delivery to theimportingnation,viatankersorpipelines,isimmediatelyarranged (Neuhoff and von Hirschhausen, 2005).Commodity producers, marketers, trading companies,local distribution companies and consumers are themajorparticipantsinthesemarkets.

In“futures”markets,contractsrepresentacommitmenttobuyorsellagivenquantityofanunderlyingproducton a given date in the future at a price agreed uponnow(Valdez,2007).4Thisenablesmarketparticipantsto“hedge”oreliminatepriceuncertainty.Forexample,agasdistributormaypurchaseafuturescontracttosetapricecapon thegas it buys in some futureperiod.Futures contracts dating anything between a fewmonthsandseveralyearsaretraded.Mostoften,thesecontracts are settled in cash and do not result inphysical delivery of the underlying commodity as theexistingpositionofatraderisnegatedwiththepolar-opposite contract and his or her account is closed(Smith,2009). Infuturestrading,othersinthemarketbesides those involved in the commodity businessinclude hedge funds, banks and commodity indexfunds.These“non-traditional”investorsusecommoditymarkets to diversify their total investment portfolio.Their possible contribution to increased commodityprice volatility has given rise to controversy (seeSectionC.5).

(ii) Evolution

The evolution of modern commodity markets may betraced back to the beginning of agriculturalmechanizationandtheindustrialrevolutioninpresent-dayadvancedcountries.Atthetime,tradeinagriculturalcrops was a hit-or-miss proposition. In the UnitedStates, for example, farmers went to Chicago to selltheir goods because of its central location. However,havinglittleideaofcropdemand,farmerstookwhateverpricetheycouldgetandunsoldcropswenttowasteinthe streets. In the mid-19th century, a central graincommoditiesmarket,whichallowedfarmerstoselltheircrops directly and on the spot for cash, was created.Thismarket,namedtheChicagoBoardofTrade,istheoldest organized commodity exchange in the world(Nathan, 2008). It reduced transactions costs andenabled buyers and sellers to find a ready market.

Subsequently,forwarddeliveryalsobecameanoption.Over time, these forward contracts evolved as morefarmers began committing their grains to futureexchanges for cash. For example, if a producer nolongerneededthecommodity,heorshewouldsellittoanotherproducerwhodid.Thisdynamic,coupledwiththeuncertaintyofpricechangeovertime,ledtotheriseoffuturescontracts(UNCTAD,2001).

(iii) Geographical distribution

The old exchanges are located mainly in the UnitedStates (Chicago Board of Trade, Chicago MercantileExchange,NewYorkMercantileExchange (NYMEX)),the United Kingdom (London Metal Exchange,International Petroleum Exchange) and Japan (TokyoCommodity Exchange). The 1980s and 1990s saw aproliferation of commodity exchanges in emergingeconomies such as the Dalian Commodity Exchange,theZhengzhouCommodityExchange,andtheShanghaiFuturesExchange inChina,andvariousexchanges inEast Asia (for example, in Kuala Lumpur, now part ofBursa Malaysia Derivatives), in Latin America (forexample,BolsadeMercadorias&FutorosinBrazilandBolsadeCerealesinArgentina)andinEasternEurope(UNCTAD,2006).

The21stcenturyisseeingtheonsetofathirdwaveintheevolutionofcommodityexchanges,drivenprimarilyby developments in information technology. Examplesinclude the National Multi-Commodity Exchange ofIndia, established in 2002, the Dubai Gold andCommodityExchange(2004)andtheDubaiMercantileExchange(2005).Africahasseentheleastsuccessindeveloping its commodity exchanges, with the SouthAfrican Futures Exchange (SAFEX), established in1987, being the only major commodity exchange(UNCTAD,2006).

Despite the development of organized commodityexchangesindifferentpartsoftheworld,thereisstillahigh degree of market concentration with the bulk ofcommodity trading occurring in just four countries,namely the United States, the United Kingdom, JapanandChina.Infact,thetop11commodityexchanges,intermsofmarketturnover,arelocatedinoneorotherofthese four countries (Lewis, 2005). Moreover, theseexchangesaredominatedbycertaincommoditygroups.Forinstance,intheUnitedStates,energyandagriculturalfutures constitute the lion’s share of turnover. In theUnited Kingdom, commodity trading is highly skewedtowards the metals sector. In Japan the focus is onenergycommoditiesandpreciousmetals,andinChinatradingisdominatedbyagriculturalcommodities(Lewis,2005).

(iv) Key functions

Price discovery

Organizedcommodityexchangesformnaturalreferencepoints for determining market prices – the pricediscoveryprocess–becausetheyenablemarketsupply


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and demand forces to determine spot and futuresprices. Exchange trading may bring about greatervolatility in commodity prices. At the same time, byenablingeffectivecompetition(ThompsonandKunda,2000), it may also result in lower prices, relative tothosenegotiatedbypartiesinabilateralcontract.

Liquidity

Organizedexchangeshavefacilitatedthecreationofacommonglobalpoolintowhichnearlyallexportersselltheircommoditiesandoutofwhichnearlyallimporterspurchasecommodities,onadailybasis(Stroupe,2006).Hence, they provide more liquidity, as disruptions insupply from one producer country may be offset byalternative supplies from elsewhere. This function oforganized exchanges may have implications for pricevolatility,akeyfeatureofresourcecommodities,whichisanalyzedinSectionC.5.

Insurance against risk

An important function of futures markets is to allowsuppliers and customers to hedge their futurerequirements for buying and selling commodities at afuturecontractprice.By locking in thepricefor futuredelivery, market participants can hedge againstunfavourable price movements that may occur beforethedeliverydate(Valdez,2007).Forinstance,ifafuturepricerisecancausealosstotheprospectivebuyerofacommodity,thepurchaseofafuturescontractensuresthatthebuyercanlockinthepriceatthecurrentlevel.Inthiscase,themarketisusedasaninsurancemechanism.Futures contracts may also be bought and sold forspeculativereasons,orinotherwordsforprofit(orloss)bybettingagainstfuturepricemovements.

Clearing house feature

Every organized trading exchange operates with aclearinghouse,whichtakesinitialmarginsordepositsfrom both parties of a contract. Subsequently, if thecontractmoves into loss,extramargin isdebitedonadailybasisfromtherelevantpartyinordertorestoretheamount of the initial margin available (Valdez, 2007).Hence,clearinghousesprovidefinancialintermediationservicestomajorplayersincommoditymarketsand,ifsufficiently well-capitalized, minimize risk ofcontemporarydefault.Theyalsomanageriskassociatedwith exchange transactions by being a centralcounterpartytoallexchangeneeds–thatis,thebuyerto every seller and the seller to every buyer (Valdez,2007). Furthermore, clearing houses protect theintegrityofthemarketplacebyensuringthattradesareexecuted in accordance with the rules (Neuhoff andvon Hirschhausen, 2005)5 and guaranteeing thatcontractsarehonoured(Valdez,2007).

(b) Othertradingarrangements

Besidesorganizedexchanges,commoditiesaretradedviaspotandfuturescontractsinover-the-counter(OTC)markets. For certain commodities, bilateral trades are

important,notablytakingtheformof long-termsupplycontractsbetweencountries.Finally,commoditiesmayalso be traded in the context of vertically integratedsupplychains.

(i) Over-the-counter (OTC) markets

OTCtradeisnotconductedthroughacommontradingfacility, but directly between two parties, which in thecase of commodity markets include both traditional(producers and consumers) and non-traditional (indexfundsandhedgefunds)participants.Unlikeorganizedexchanges,OTCmarketsarecharacterizedbyalackofliquidity,theabsenceofcompetitionandnoprotectionagainstdefault.Inaddition,theyarelargelyunregulated(Valdez, 2007). Although OTC markets arefundamentally bilateral trading arrangements, thenegotiation process is often highly automated withdealers being interconnected among themselves aswell as with major customers. This enables traders tosurveythemarketalmostinstantaneously(Dodd,2002).

(ii) Long-term contracts

Until theearly1970s,tradeinenergycommoditiessuchas oil and natural gas, and in metals, such as copper,aluminiumand ironorewasconductedprimarily throughlong-term contracts between producer and consumercountries, mostly via state or multinational companies(Stroupe, 2006). These long-term take-or-pay contracts(ToP)joinsellersandbuyersinabilateralcontract,typicallyfor about 15 to 20 years, during which time both havestrictly definedobligations. In particular, thesecontractsrequirebuyerstopayforapre-specifiedminimumquantityofthecommoditywhetherornotitisactuallytaken.Atthesametime,inmostcases,someformofpriceindexationisusedtoprotectthebuyeragainstpricechangesonalong-term basis (Masten, 1988). Hence, the buyer bears thevolumeriskandthesellerbearsthepricerisk.Furthermore,underthissystem,ifoneexportingstatefailstohonouritsdelivery commitments to another, then the affectedconsumer state has to acquire replacement supplies(Stroupe, 2006). These arrangements are generallyassociated with limited market liquidity and significantdifficultiescanresultfromsupplydisruptions.Long-termcontractswithpriceindexationcanalsohaveimplicationsforpricevolatility.

Anumberof factorsmayexplain theuseof long-termcontracts. First, several of the sectors involved arecharacterized by non-competitive producer structures(Golombek et al., 1987). Second, because of theirstrategicnature,thevalueofthesecommoditiesinlong-termcontractsmayfarexceedthesalepriceinamorecompetitive market (Parsons, 1989). Third, long-termcontractsincommoditiestrademayfunctionasadevicetoavoidtherisksofopportunisticbehaviourwhentherearehighsunkinvestments(Kleinetal.,1978;Williamson,1983). Fourth, from the perspective of an importingcountry, long-term contracts are likely to increase thesecurity of supply. Fifth, from the point of view of theexportingcountry, long-termcontractsmay serveasabarrier to entry for new market participants. Finally, a


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preference for long-term contracts over exchangetrading may relate to the nature of transportinfrastructure.Forexample,theexistenceofapipeline6betweentwocountriesmayfavourlong-termcontracts,whiletheavailabilityoftankersthatcanreachanywhereintheworldmayencouragetradingthroughexchanges.

Overtime,bilaterallong-termsupplycontractsnegotiatedbetween exporting and importing states have beencomplemented and sometimes replaced by trading onorganizedexchanges.ThiswastruefortheUnitedStates,theUnitedKingdomandWesternEurope ingeneral.7 Ithas been argued that more exchange trading at theexpenseoflong-termcontractsmayleadtoapaucityoflong-terminformationaboutfutureproductioncapabilities,andprovideanincentiveforsupplierstooverstatefutureproductioncapacityinordertoensurehighdemandandless investment by competitors (Neuhoff and vonHirschhausen,2005).Box2providesanaccountofthistransitioninthemarketforcrudeoil.

However, bilateral long-term supply contracts forcertain natural resource products (energy products,metals and minerals) still exist, involving for instance,Russia or countries in Asia and Africa (Alden, 2009;Stroupe2006;EnergyReport,2009).Thesignatoriesto these contracts are governments of resource-abundantcountriesandprivateinvestorsorfirmsfromabroad. Host country governments grant licences tothesefirmsforexplorationandextraction,andspecifythe accompanying fiscal regime. Contracts typicallytaketheformofaninitialpaymentforthelicenceand,subsequently, a royalty or tax on corporate profits(Collier and Venables, 2009).8 Of late, some of thesebilateral long-term supply contracts have beencharacterizedbypre-specifiedexchangesakintobarterarrangements. For example, the China InternationalFund is financing infrastructure investments worthUS$ 7 billion in Guinea in exchange for access to itsnaturalresourcessuchasbauxite(Alden,2009).

Evenmorerecently,therehasbeenanincreaseinlarge-scale acquisitions of farmland (a natural resource) inAfrica,LatinAmerica,andCentralandSouth-EastAsia

via contracts between host country governments andprivatefirms, sovereignwealth fundsand state-ownedenterprises from abroad. This is driven by the lack ofarablelandandcompetingusesforagricultural landinthecountriesmakingthepurchases(Cotulaetal.,2009).

(iii) Vertical integration

Supplychainsmayinvolveseveralproductionstagesincertain natural resource sectors. For instance, in thecase of energy commodities (oil and natural gas),mineralsandmetals,theyincludeexploration,extraction,processing or refining, distribution and marketing.Hence,producerssellandconveytheiroutputtorefinersor processing units. Subsequently, refiners sell theirproductstowholesaleandretailmarketers,whointurnselltheseproductstofinalconsumers(Smith,2009).

Each stage in the supply chain may be located in adifferentregionoftheworld,onthebasisofcomparativeadvantage(WTO,2008)(seeSectionC.1).Hence,firmscan lower costs of production by locating differentstages of the production process in a country wherethere isa relativeabundanceof inputsused relativelymoreintensivelyinthatstageofproduction(JonesandKierkowski,2001).Firmscancarryoutthisprocess inoneof twoways:vertical integrationofvariousstagesoftheproductionprocesswithinasinglefirmorarm’s-lengthcontractsbetweenseparate,independentfirms.The rationale for choosing between the two is alsobased on comparative advantage (Coase, 1954). Forvertical integration to make economic sense, internalsuppliers must be more cost-efficient than externalsuppliers.

In addition to the more general efficiency argument,trade in natural resource commodities may take placewithinfirmsforseveralreasons.First,verticalintegrationreduces risk as profits in the different stages of thesupply chain tend to fluctuate in different ways. Forexample, in thecaseofoil,whencrudepricesare low,refining and marketing margins are likely to be higher(Al-Moneef, 1998). This is especially relevant forresource commodities that are characterized by high

Box2:the evolution of the market for crude oil trade from long-term contracts to exchange trading

Priortotheearly1970s,crudeoilmarketswerecharacterizedbybilaterallong-termsupplycontracts(withadurationof10or20years,ormore)betweenexportingandimportingcountries,usuallythroughmultinationaloilcompanies.Eightbigoilcompanieswerethe“commonsuppliers”anddominatedcrudeoiltrade.Theysoldlarge quantities of oil not needed for their own operations to other integrated oil companies, independentrefinersandtraderstobalanceoutworldmarkets(Mohnfeld,1980).However,thestrengtheningofOPECandtheArab-Israeliwarof1973ledtoawaveofnationalizationinagroupofoilexportingnations.This,inturn,facilitatedatargetedembargooftheUnitedStatesandadramaticincreaseincrudeoilprices.

Following a brief period of strict price controls, the United States administration initiated a process ofderegulation.Oilspotandfuturesmarketswerecreated,andtheNewYorkMercantileExchange(NYMEX)becamethefirstcentraloiltradingexchange.Overtheyears,aproliferationofmanysuchorganizedexchangeshavefacilitatedthecreationofaglobalpoolofoil,denominatedinUSdollars.Atthesametime,Russiaanditsproducingandconsumingpartnerscontinuetotradeoilthroughbilaterallong-termsupplycontracts.Inaddition,thereisatrendtowardstheestablishmentofnewoilexchangesintheMiddleEastandAsiaasrivalstotheNew York and London exchanges. These more recently established exchanges may denominate trade incurrenciesotherthanUSdollars(Stroupe,2006).


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price volatility. Second, as opposed to arm’s-lengthtrade, vertical integrationensuresaccess to resourcesorsecurityofsupply(Al-Moneef,1998).

Third, to sell an intermediate good to a particulardownstream firm, an upstream supplier may make alocation or site-specific costly investment upfront, inorder to minimize inventory and transportation costs.Extractionorprocessingplantsforminingproductsaregoodexamplesinthiscontext(Joskow,2005).Fourth,ashiftfromspotmarketexchangetoverticalintegrationmayalsobeattributabletothefactthatproducerswishto control their supply chains more tightly to satisfyconsumerdemand forqualityandsafety (MénardandKlein, 2004). In the oil and gas sector, for instance,manydrillingcompaniesarebroadeningtheirfunctionsto include reservoir development and resourcemanagementfunctions.9Box3providesabriefaccountofChevron,whichisavertically integratedoilandgascompany with different segments located in differentpartsoftheworld.

Tosummarize,theabovediscussionhasshownthattheway in which natural resources are traded may differfrom manufactured goods transactions on account ofcertain specific features. These include thehomogeneity, storability, the uneven distribution ofsuppliesandthestrategic importanceofmanynaturalresources. Inlightofdecliningtransportcostsandthemovetowardsmoreliberalizedmarkets,alargepartofnatural resources trade is now conducted at a globallevel,oftenviaorganizedcommodityexchanges.Atthesametime,certaincommoditymarketscontinue tobecharacterized by widespread government interventionand market power. The reasons for this may be botheconomic and non-economic, ranging from industrialdevelopmentconsiderationstogeopoliticalfactors.

4. Naturalresources:Globalizationandtheintellectualdebate

(a) Globalizationofnaturalresources

Overthepasttwocenturies–andespeciallyoverrecentdecades–therehasbeenadramaticexpansionofthevolume and range of natural resources tradedinternationally. At one time only the most valuableresourceswereshippedtodistantmarkets.Todayvastquantitiesofalmosteveryrawmaterial imaginableare

tradedaroundtheplanet–fuellingtherapidspreadofindustrialization and development that is defining themodern economic era. Although a number of factorshave contributed to the “globalization” of naturalresources – including population growth, colonization,industrialization,andtheriseofdevelopingcountries–the following section looks at two key developmentsthat have underpinned this process: first, the far-reaching improvements in transport technology sincethemid-19th centurywhichhavedramatically reducedthecostsofcommoditiestrade;andsecond,thetrendtowards more liberal natural resource markets,especiallysince the1980s,whichhaveopenedupanincreasinglyglobalmarketplacefornaturalresources.

(i) Shrinking distances

The rise of a world market for natural resources is arelatively recent phenomenon. For most of humanhistory,bulkrawmaterialsweretoocostlytotransportover great distances, which effectively tied economicproduction to the location of key natural resources,suchaswood,coalorironore.Amajorfactorinbreakingdown these constraints is what Nils-Gustav Lundgrendescribesasthree“revolutions”intransporttechnology(Lundgren, 1996) The first such revolution occurredroughly between the 16th and 18th centuries with aseries of incremental improvements to sailing shipdesignandefficiency.Althoughhighcostsstillmadeittoo expensive to ship all but the most expensivecommodities, such as coffee, cocoa, spices andprecious metals, across the oceans, sail transportgradually linked thecoastalareasofNorthandSouthAmerica,AfricaandAsiawithEurope,creatingforthefirsttimethebroadoutlinesofa“worldeconomy”.

Asecondtransportrevolutionoccurredinthemid-19thcenturywhenthe introductionofsteampower to landand sea transportation transformed the economics ofmovinglow-valuegoodscheaplyacrossgreatdistances.Asrailwaysreplacedoverlandtransportbyhorses,andasmetalsteamships took theplaceofwoodensailingvessels, a wide range of primary commodities,particularly agricultural products, in North America,South America, Africa and Asia were suddenlyeconomically accessible to the world’s industrialcentres.This,inturn,greatlyexpandedtheincentivetoengage in overseas trade, exploration and investmentand significantly widened the scope for industrialexpansion. Transatlantic transport costs fell roughly

Box3:chevron – A case of vertical integration

Chevron has extensive oil and gas exploration and production operations throughout the world.10 It is thelargestprivateproducerofoil inKazakhstan,thetopoilandgasproducer inThailand,the largestholderofundevelopednaturalgasresourcesinAustralia,amongthelargestholdersofdeepwateracreageinNigeria,anditholdsleasesinthedeepwateroftheGulfofMexico.Furthermore,Chevronworksinallsegmentsofthedownstreamindustry—manufacturing,marketingandtransportation.Thecompany’srefiningresourcesareconcentrated inNorthAmerica,WesternEurope,SouthAfricaand theAsia-Pacific rim, servingcustomersaroundtheworld.Chevronmarketsrefinedproductsprimarilyunderthreebrands:Chevron,TexacoandCaltex.Under transportation, Chevron Pipe Line Co. transports crude oil, natural gas, natural gas liquid, CO2,petrochemicalsandrefinedproductsintheUnitedStatesthroughanextensivesystemofpipelinesandstoragefacilities.Inaddition,ChevronShippingCo.managesaworldwidefleetofvesselsthattransportretailproducts.


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60percentinthedecadesbetweenthe1870sandthebeginningofthe20thcentury,transformingagriculturaltradeasNorthAmericanandEasternEuropeangrainsuddenly become competitive in European markets,andacceleratingtheprocessofindustrialspecialization(Lundgren,1996).

Athirdrevolutionintransporttechnologyoccurredafterthe 1950s with the dramatic increase in the averagesizeofmerchantships.TheclosureoftheSuezCanalin1956-57 (and again in 1965) played a major part inlaunching this process. Suddenly faced with theexpenseoftransportingoil,coal,ironoreandotherbulkcommoditiesovermuchgreaterdistances,theshippingindustry decided to invest in huge, specialized bulkcarriers, aswell as in theharbour facilitiesneeded tohandlethesenewvessels.Whereasoiltankersaveraged16,000 deadweight tonnes (dwt) in the early 1950s(theirdesignpartlyconstrainedbytheneedtonavigatetheSuezCanal), theyaveragedover100,000dwtsbythe 1990s – with modern “super-takers” exceeding500,000 dwts and capable of carrying over 3 millionbarrels of oil. The same technological advances havetransformedbulkfreighters,withshipsgrowingfromanaverage of less than 20,000 dwts in 1960 to about45,000dwtsintheearly1990s.

Just as the advent of steam transport dramaticallyreducedthecostofagriculturaltradeafterthemid-1800s,new transport design technology has dramaticallyreducedthecostsofshippingavastrangeof low-valuebulk commodities in the post-war period. Freight ratesdecreased by 65 per cent in the period between the1950sand1990s,whilebulkcommoditytradegrewfromabout500milliontonnesto3,977milliontonnes–a657per cent increase.11 Overall the cost of transportingnaturalresourceshasfallenanastonishing90percentbetween 1870 and 1990. This, in turn, has massivelyexpanded the volume of raw materials traded, thedistancescovered,andthecommoditiesinvolved.Almostevery conceivable bulk commodity – from iron ore andphosphatefertilizers,tocrudeoilandnaturalgas–isnowroutinelyshippedvastdistancesacrosslandandoceans.Even resource waste – such as metal scrap, miningtailings, or rejects from forestry and agriculture – isincreasinglytradedglobally.

(ii) More open markets

Asecondmajorfactorinfluencingglobaltradeinnaturalresources has been the ebb and flow of governmentintervention in national and international commoditymarkets.Whileitisdifficulttogeneralize,theextentandtype of government intervention in resource marketshasappearedtodependnotsimplyonideologicalviewsandtrends,butontherelativeabundanceorscarcityofnaturalresourcesonworldmarkets.

Certaininterventions,suchasinternationalcommodityagreements,havebeendevised todealwithproblemsofglobalsurplusesandpricevolatility.Others,suchasexport restrictions, have been shaped by resourcescarcity,thestrategiccompetitionamongcountriesfor

critical raw materials and the quest for economicdiversification. Ifthegeneraltrendtowardsmoreopenmarkets in recentdecadeshasbeendriven inpartbythe relative abundance and price declines of manycommodities, it remains an open question whetherrecentcommoditypriceincreasesandsignsofgrowingscarcity,especiallyforstrategicrawmaterials,willgiverisetogreatergovernmentinvolvementandinterventioninresourcemarketsinthefuture.

An era of relatively free trade in natural resourcesduringthe19thcenturycametoanendinthefirsthalfofthe20thcentury.WiththeoutbreakoftheFirstWorldWarandtheefforttocutoffenemysupplies,countriesbecame increasingly concerned with securing accessto strategic sources of food, fuels and raw materialsneeded to feed their populations and to supply theirarmies. The dramatic collapse in prices for manycommodities after the war but especially during theGreat Depression of the 1930s also led governmentsaround the world to intervene in markets to assistfarmers andminers. This trend continued through theSecondWorldWarandthebeginningoftheColdWarinthe late 1940s, as governments again took action tosecure access to raw materials, both at home andoverseas,forstrategicandsecurityreasons.

The break-up of pre-war empires, and the resultingprocess of decolonization in the 1950s and 1960s,precipitatedanewwaveofgovernment interventioninnatural resource markets, as newly independentcountries in Africa and Asia sought to gain control ofmineralandenergysectorswhichhadpreviouslybeeninforeignhands.Underpinningmanyoftheinterventionsduringthisperiodwasapervasivefaithintheabilityofgovernments and state planning to correct perceivedfailuresinmarketsystems(Skidelsky,1996).

Thevariousinterventionsoverthisperiodwerediverse,wide-ranging and complex. A number of countries, inboth the developed and developing world, imposedexporttariffsorrestrictionsonwheat,sugar,rubber,tinand other commodities in an effort to controlinternational supplies and bolster prices. From the1920stothe1980sanumberofattemptsweremade– with varying degrees of success – to negotiateinternationalcommodityagreementsbetweenexportingand importingcountries for keycommodities, suchascoffee,rubberortin,tomanageinternationalsupplyandtradeflows.Onereasonwhytheseeffortsoftenfailedwas because consumers were interested in reducingprice volatility, while producers wanted to increaseprices.Forstrategicandeconomic reasons,anumberof countries also imposed export restrictions ordomesticpricecontrolsonkeycommodities,suchasoil.Concernsaboutgrowing relianceon foreign suppliersalso encouraged some countries to amass strategicstockpilesofoil,tinandotherkeyresources.

Another mechanism for influencing global commoditymarkets was foreign aid – either in the form ofguarantees by importing countries to buy pre-determined quantities of a given commodity, or in theformoffoodaidorothertypesofaid,wherebyexporting


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countrieseffectivelyshiftedtheircommoditysurplusesontopoorerdevelopingcountries(Radetzki,2008).

However,thetrendtowardsgovernmentinterventioninnaturalresourcemarkets–andindeedineconomiesingeneral – had started to recede by the 1980s for avarietyof reasons.Onewasthe ideologicalshiftawayfrom state planning and controls towards marketmechanismstoachieveeconomicgrowth.

With the partial exception of the energy sector,commodity markets have witnessed a general trendtowards greater openness. Successive rounds ofmultilateral trade negotiations have resulted in lowaverage tariff levels on most trade in raw materials.Internationalcommodityagreementshavealsodeclinedin number and importance, and greater emphasis hasbeen placed on hedging on commodity exchanges tohelp stabilize prices. Government-controlled strategicstockpiles have also fallen out of favour. Now largelylimited topetroleum, theyareasmall fractionofwhatthey were several decades earlier. Ideology is not theonly explanation for this change. A long-term trendtowards falling international prices across manycommodities, combined with declining strategicconcernsinthepost-ColdWarera,hasreinforcedthisgeneral shift away from state ownership and controlandtowardsmarketmechanismstobolsterinvestment,improveefficiencyandsecuregreaterpricestability.

While the retreat of governments from activeintervention in natural resource markets has beensignificant, it is hardly universal or even necessarilypermanent. The most obvious exceptions relate toagricultural commodities where developed-countrytariffs, subsidies and regulations continue tosignificantly distort global trade. The energy sectorrepresents another obvious example of stateintervention in international commodity markets. NotonlyamongOPECmembers,butamongotherenergy-producing states, governments remain the dominantplayersintheoilandgasindustry,notonlyowningandmanagingthemainassets,butactivelyshapingglobalmarkets through controls on output and investment(Institute of International Economics, 2004). Recenteffortsbysomecountriestostrengthentheirgripoverdomesticnaturalresourcesortolimitsuppliesonworldmarkets–especiallyofoilandgas–mayforeshadowanew wave of state involvement in natural resourcemarkets, especially as current high prices and profitsincreasetheincentivestodoso(Radetzki,2008).

(iii) Summary

Theon-going“globalization”ofnaturalresourcestradecontinuestotransformnotonlythenatureofcommoditymarkets but also the structure of the global economy(Krugman, 1991). The huge expansion in the volumeand range of natural resources on world markets inrecent decades has helped to open up and equalizeaccess to raw materials, lowering prices for manyresources, encouraging investment in new,geographically dispersed sources, and generally

contributingtoglobaleconomicexpansion.Proximityofnaturalresources,suchascoalorironore,isalsomuchless significant to industrial production today than itwas a century ago, gradually de-coupling industrialdevelopment from natural resource endowments,freeing up industries to establish themselves in themost cost-efficient locations around the world, andaccelerating the trend towards internationalspecialization (Radetzki, 2008; Sachs and Warner,1995). At the same time, the expansion of naturalresourcestrade–anditscontributiontogrowingglobalconsumption – may have implications for resourcedepletionandnegativeenvironmentalspillovers.

(b) Theintellectualdebate:scarcityorsurplus?

For over two centuries, a wide-ranging intellectualdebatehastakenplaceaboutthe impactofeconomicgrowthon theearth’s limitednatural resources.Somehave argued that unrestrained economic growth willleadinevitablytoresourcedepletionandenvironmentaldegradation. Others have contended that economicgrowthandtechnologicalprogresscanhelptomanagescarce resources and develop alternatives. A centralpointofdisagreementiswhethermarkets,aspresentlystructured,areequippedtodealwiththesepressures.Present-day concerns about the relationship betweenglobalization, resource scarcity and environmentalissues(suchasclimatechange)havegivenanewsenseof immediacy and relevance to these long-standingdebates.

(i) Free-market optimism

AdamSmithwasthefirsteconomisttosystematizetheargument for the central role of free markets inallocating resources, including natural resources,efficientlyandproductively.InhisWealth of Nations,hefamouslyarguedthatthepursuitofselfinterestwithinafreemarketplacewasthekeytoeconomicgrowthandsocialimprovement–“asifbyaninvisiblehand”.12

BuildingontheideasoftheFrenchphysiocrats,Smithrejectedtheprevailingmercantilistbeliefthatanation’swealth isfixed,socountriesshould try topartwithaslittleof it–and tohoardasmuchof it–aspossible.Instead,hearguedthatwealthiscreatedbyproductivework, the division of labour and international trade. Inparticular, he shared the physiocrats’ view that theproductivity of land (often synonymous with naturalresources in his writing) and the expansion ofagricultural output were central to prosperity – thusallowingagreaterproportionofthepopulationtoearnits livingfrommanufacturing.13Theproblemwasnotashortageofland,butratherashortageofinvestmentinlandproductivity.This,inturn,oftenreflectedproblemsof government interference in markets and resultingdisincentivestoentrepreneurship.

Althoughhisworkdidnotfocusexplicitlyonconcernsabout resource depletion or the limits of economicgrowth, Smith was essentially optimistic about


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mankind’s ability to prosper within the context ofexisting resource endowments – a view reinforced byhisday-to-dayobservationsabouthowtheworldaroundhim was being transformed by dramatic advances inmanufacturing,agricultureandmining(Kula,1998).Hisfaithinindividualeffortsandingenuity,andinthepowerof the market’s “invisible hand” to allocate resourcesefficiently, had a decisive impact on future thinkingabout resource management, and remains highlyinfluentialtothisday.

(ii) Malthusian pessimism

The ideas of Thomas Malthus ran directly contrary toSmith’sbelief in themarket’sability tohelp resolve thetension between growing human consumption and theearth’sfiniteresources–andindeedagainstthebroaderEnlightenment faith in an improving and perfectablesociety.Malthussawtheideaofendlessprogressasnotonly naïve, but dangerous because of the inexorablepressuresofpopulationgrowthandtheplanet’s limitedcapacity to support it. In his Essay on the Principle of Population, he argued that the impact of growingpopulationonafixedsupplyoflandandotherresourceswouldresultinstarvation.Economicgrowth,internationaltradeandsocialimprovementwerenosolutionbecausetheywouldonlyleadtofurther,unsustainablepopulationgrowth. This would, in turn, be checked by widespreadfamine,diseaseanddeath.14Malthusbelievedtherewasalong-termtendencyforthelivingstandardsofthemassofpeople tobedrivendown toasubsistence level–alevelatwhichthepopulationcouldonlyreproduceitself,notexpand,andtheeconomywouldattainasteadystate,with a constant population size and with constant,subsistence-levellivingstandards(Permanetal.,1996).

Malthus’s pessimism about the ability of economicgrowthtotranscendtheplanet’snaturallimitationswasas influential in itsday–and indeedbeyond–aswasSmith’s optimism. For example, David Ricardo sharedhisbeliefthatdiminishingnaturalresourcesasaresultof expanding economic activity would eventually haltboth population and economic growth. Althoughagricultural output could be expanded by exploitingexisting landmore intensivelyorbybringingnew landinto cultivation, Ricardo argued that the returns toincreased inputs would steadily diminish, resulting instagnantgrowthandlivingstandards(Ricardo,1817).

Likeotherclassicaleconomists,JohnStuartMillbelievedthat economic development was destined to reach aneventualequilibriumor steadystate.Hiscontribution tothedebatewastoquestionthedesirability,notsimplythefeasibility, of limitless economic growth (Mill, 1848).Writingatatimewhenoutputperpersonwasrising,notfalling, Mill accepted that technological innovation, thediscovery of new sources of raw materials, and theapplicationof fossil fuels toproductionprocesseswereplaying an important role in overcoming diminishingreturns fromnatural resourceconstraints.However,Milladopted a broader conception of the role of naturalresourcesintheeconomy.Foreshadowinglaterthinkingonconservation,hearguedthatthequalityofthenatural

environmentnotonlyshapedproductivity,butthegeneralliving standards and conditions of present as well asfuturegenerations.AccordingtoMill,theproblemwasnoteconomicgrowthinthedevelopedworld–wherematerialprogress was already reaching its apogee – but itsdistributionandimpacts(Permanetal.,1996).

Karl Marx, almost more than any previous economist,recognized the transformational power of capitalismand technology’s ability to overcome resourceconstraints–althoughhesharedtheclassicaltradition’sbasicassumptionthateconomicprogresswouldreachan eventual end or steady state. He argued that theimmiserizationoftheworkingclasswastheresultnotofpopulation pressures on fixed natural resources, butrather of the theft of surplus labour and value by thecapitalistclass(Marx,1867).Marxagreedthatacrisisincapitalismwasinevitable.However,whereasMalthusand Ricardo thought the crisis would result fromdiminishingreturnsinthefaceofagrowingpopulation,Marx argued that the crisis would flow from fallingprofits and the limited purchasing power of theimpoverishedmasses(Kula,1998).

(iii) Neo-classical economists: Cautiously optimistic

Not everyone shared the classical economists’pessimismaboutthelimitsofeconomicgrowth.HenryCarey, who became increasingly critical of classicalpolitical economy, believed in thepossibility of steadyeconomic progress and the potential for harmonizingdiverseeconomicinterests.InchallengingtheMalthus-Ricardo theory that economic expansion would leadinexorably to population growth, depleted resourcesand stagnating living standards, he noted that thehistory of agriculture and mining had been one ofsteadily increasingproductivityover time, theresultofcapital accumulation and improved methods (Carey,1840). Agricultural production had generally migratedfrom poorer to richer farmlands, a process aided bycontinuously improving agricultural and transportationtechnologies. A similar pattern was evident in themining industry. Even as old mines were graduallyexhausted,newandrichermineswereconstantlybeingdeveloped, as a result of new investments, theapplication of new technologies and the discovery offreshdeposits.15

However,neo-classicaleconomistsalsorecognizedthemarket’s limitations in solving all of the problemsassociated with resource allocation and depletion –especially through their work on the exhaustion ofresources and spillover effects. As early as the mid-1800s,Millhadrecognizedthatminingwasadifferenteconomicactivityfromfarmingormanufacturing,inthesensethatitwasanon-renewableresourcethatcouldeventually be exhausted (Perman et al., 1996).Extraction today meant a reduction in future profits;conversely, extraction tomorrow would involve areductioninpresentprofits.Inhiswidely-readbookThe Coal Question, William Jevons built and expanded onthis insight, drawing attention to the imminent


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exhaustionofenergysuppliesanddevelopingconceptsofresourcedepletionthathaverecentlybeenrevisitedinworkon“peakoil”.

Itwas inThe Coal Question that Jevonsfirstoutlinedtheso-called“JevonsParadox”–i.e.,thatimprovingtheefficiencyofresource-useleadstoanincrease,ratherthan a decrease, in the consumption of that resourcebecause of falling prices, eventually resulting in itsdepletion. Harold Hotelling offered a somewhatdifferent and more optimistic perspective on theexhaustion of resources. In his seminal article, “TheEconomicsofExhaustibleResources”,heargued thatrationalspeculators,anticipatingfutureshortagesofanon-renewable resource, will conserve or store thatresource in expectation of rising future prices. Theserisingpricesgeneratedbyspeculators’decisionstoputsupplies aside will in turn reduce consumption andencourage the search for cheaper substitutes(Hotelling,1931).

AlfredMarshalltookafurthersteptowardsaneconomicanalysis of resource depletion and environmentaldegradationbyhighlightingtheproblemofunintendedspilloversor “externalities”– i.e., thecostsorbenefitsconferredonothersthatarenottakenintoaccountbythe person taking the economic action. His student,Arthur Pigou expanded Marshall’s concept ofexternalities, and made the case for governmentintervention to correct for such market failures. Thelackofmarketincentivestostopsomeonefromcreatinganegativeexternality(suchaspollution)ortoencouragesomeone to create a positive externality (such asrecycling)waswhygovernmentshadakeyroletoplayin natural resources and pollution management,typicallybyinfluencingprivatebehaviourthroughtaxesorsubsidies(Pigou,1929).

(iv) Neo-Malthusians: Limits to growth

Neo-Malthusian ideas were resurrected in a highlypublicwayin1972withTheClubofRome’spublication,The Limits to Growth.Attemptingtomodeltheimpactofa rapidly growing population and economic expansionon finite natural resource supplies, it predicted thatexistingtrendscouldnotcontinueindefinitely,andthat“exponentialgrowthwouldeventually leadtoeconomicandenvironmentalcollapse”(Meadowsetal.,1972).Thestudyalsoappearedtoclaimthattheworldwasalreadyonthebrinkofrunningoutofkeyresources(oilin1975,gold in 1981, silver and mercury in 1985 and zinc in1991)–aconclusiontowhichthe1973oilcrisisseemedto lendsupport.Similarconclusionswere reached inaUS multi-agency assessment of the earth’s futurepublished in1980entitledGlobal 2000. This forecastthat theworld in2000wouldbe “morecrowded,morepolluted,lessstableecologically,andmorevulnerabletodisruption than the world we live in now” and that“serious stresses involving population, resources, andenvironment[were]clearlyvisibleahead”.16

Even mainstream economists, such as John KennethGalbraith(1974)andEzraMishan(1967;andPotterand

Christy, 1962) questioned the ability of the planet’sresourcestowithstandthestrainsofmodernsociety’sunrelenting and single-minded pursuit of economicgrowth.17 More recently, the focus of concern hasexpandedfromdwindlingsuppliesofnaturalresourcestounsustainableconsumption–anditsadverseimpacton the environment. Land, water and air pollution,speciesextinctions,andglobalwarmingallpointedtoafuture where unrestrained economic growth wouldoutstrip the ecosystem’s ability to sustain it.Malthusianism had returned to the economicsmainstream(Turner,2008).

Atthesametime,anumberofeconomistswerearguingfor the need to study economics within the widercontextofnaturalsystems.In1966,KennethBouldingpublished a short but influential article entitled “TheEconomicsoftheComingSpaceshipEarth”inwhichhecompared the planet to a small spaceship where alleconomic activity takes place within the context ofultimately exhaustible natural resources. He urgedeconomiststoshifttheirthinkingawayfromtheconceptof an open economy with unlimited resources to aconcept of a closed economy “without unlimitedresources of anything, whether for extraction or forpollution, and in which, therefore, man must find hisplaceinacyclicalecologicalsystem”(Boulding,1966).

Boulding argued that economics could only beconstructively understoodas a sub-systemof amuchbroadernaturalsystem,andthattotrytodisaggregateeconomic theory from the natural world in which itoperated risked environmental catastrophe. He iswidelyregardedasoneofthefoundersofecologicalorenvironmental economics, and subsequent work onsustainable development and “green accounting”(variously referred to as Natural Capitalism18 or TotalEconomic Value) often take as their starting pointBoulding’stheories.

(v) A resourceful earth

A number of modern economists have criticized theassumptions,methodsandconclusionsof theClubofRome.Onecriticismisthatcommoditieshaveseeminglybecomemore,notless,abundantonworldmarketsovertime.

InThe Resourceful Earth,JulianSimon,oneofthemostprominent sceptics of the Club of Rome’s claims,pointedoutthatalmostallcommoditieshadexperiencedfallinglong-termpricesoverthepreviouscentury,whichhearguedwas“primafacieevidence”ofgreaternaturalresourcesabundance,not increasingscarcity.19Simonwasnotthefirsttomakethisobservation. Intheearly1960s, the claims about growing resource scarcityweretestedbyPotterandChristy(1962),andBarnettand Morse (1963), who analysed the long-term pricetrendsacrossa rangeofnatural resources.Assumingthatrisingpriceswouldprovegrowingresourcescarcity,their finding in fact revealed that, with one or twoexceptions (such as timber), prices had followed adownward trend over the past century, implying that


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naturalresourcesupplieswerebecomingmoreplentiful,and that “technology could overcome increasingshortages of natural resources ad infinitum”. At thesame time, the researchers cautioned that a steadyincreaseintheproductionofnaturalresourcesdidnottake intoaccount thepossibleadverseeffectson theenvironmentofincreasedconsumption.

More recently, William Nordhaus (1992) has levelledsimilarcriticismsatthelatesteffortstoupdatetheClubofRome’sprojections, inthe1992publicationBeyond the Limits.Whilestressingthat“ourestimatesarecrude,themodelsareprimitive,thefutureisuncertainandourignoranceisvast”,hesuggeststhat“environmentalandresource constraints on economic growth should beonly modest over the next half century” and that “itwould take either a massive slowdown in productivitygrowthoramassiveunderestimateoftheconstraintstogrowthbeforetheresourceconstraintswouldproduceadeclineingloballivingstandards”(Nordhaus,1992).

A more fundamental criticism was that the Limits to Growth theory failed to take into account mankind’scapacity to innovate, adapt and harness technology toexpandtheuseofnaturalresourcesortofindsubstituteproducts.Asaneconomiclaw,diminishingreturnsholdsonlyforaconstantstateoftechnologyandnotforaworldin which methods and approaches are constantlyimproving.Inthepessimists’models,notedRobertSolow(1986), population, capital and pollution always growexponentially,buttechnologyrarelydoes.OrasNordhausputsit,“forthepasttwocenturies,technologyhasbeentheclearvictorintheracewithdepletionanddiminishingreturns”.Resourcescarcity,farfrombeingaproblem,wasthe motor that encouraged investment in finding newresources,developmentoftechnologiestoharnessnew,alternative resources, and improvement in efficiency sothat resource consumption was reduced. As a result,suppliesexpanded,productiongrewmoreefficient,andcostsdeclined.

(vi) Summary

TheworldofAdamSmithandThomasMalthuswasverydifferent fromourcurrentone,but theirconcernsandinsightsremainhighlyrelevant.Worriesaboutpeakoil,global warming and the many other resource andenvironmentalchallengesfacingustodayhavereigniteda two-centuries-longdebateaboutwhethercontinuedeconomicdevelopmentwillsaveordestroytheplanet.

It would seem that neither the pessimists nor theoptimistsofferacompleteorsatisfactoryanswer.WhatMalthusandhissuccessorsfailedtotakeintoaccountisanunfetteredeconomy’sadaptivepower,andtheextentto which technology and innovation have managed toovercome seemingly insurmountable resource andenvironmental constraints. Certainly the classicaleconomists’ assumption that an economy’s potential(the “economic pie”) is essentially fixed, that thechallengeismerelytoallocateresources(the“piecesofthepie”)moreefficiently,andthat,becauseofresourcelimitations, economic growth and living standards will

soonerorlaterreachanequilibriumorplateauhassofarbeen proved wrong. The planet’s population is overseventimeslargertodaythanitwastwocenturiesago,andyetmostpeoplelivelivesthatarelonger,healthierand materially richer than those of all but the mostprivilegedandwealthyinAdamSmith’sday.

Despitethefactthattodayweusefarlargerquantitiesofminerals,metalsandotherrawmaterialsthaninthepast–anddespiterepeatedwarningsoftheimminentexhaustionofthesematerials–themarketstillprovidesviable supplies of most natural resources. What thepessimists also failed to see is that as income andeducationallevelsimprove,peopletendtomodifytheirbehaviour,limitingthesizeoffamilies,curtailingcertainkinds of consumption, and investing more income inpreserving natural resources and protecting theenvironment.

However, what Adam Smith and his successors oftenunderestimated is the scope for market failure – and,indeed, the extent to which existing markets areundevelopedorincomplete.Asrecentlyas1974,RobertSolowarguedthatbecauseeverynaturalresourcehasapotentialsubstitute in themarketplace therecanbeno problem of depletion: “Exhaustion is just an event,not a catastrophe” (Solow, 1974). The problem is thatthe resources which are most threatened withexhaustion today, such as the atmosphere and theoceans, are precisely those without markets. Burningfossil fuels pollutes the air everyone breathes andwarms the atmosphere everyone needs. Loggingactivity erodes soil and diminishes greenhouse-gas-absorbing forests. Over-fishing may lead to anirreparable lossofbiodiversity. Ineachcase,thereareno viable markets to mediate between those causingthedamageandthosebeingharmed–especiallyfuturegenerations.

Whilemostresourceallocationdecisionstoday,suchasburningfossilfuels,entailconsequencesfortomorrow,thepeoplemakingthemdonotalwayshavetolivewiththeconsequencesof theirdecisions.AsPigou (1929)arguedahalfcenturyago,itseemstobehumannatureto underestimate – and hence under-provide for –futureneeds.Currentmarketsfornaturalresourcesareby definition incomplete if only because futuregenerationscannotparticipateinthem.

(c) Theintellectualdebate:Naturalresourceexportsandeconomicdependency

Another important intellectual debate has focused onthe question of whether natural resources are a“blessing”ora“curse”fortheeconomicdevelopmentofcountries.Althougheconomistshavetraditionallyseennatural resourceendowmentsasakeydeterminantofcomparativeadvantageandcriticaltoeconomicgrowth,some have argued that excessive dependency onnaturalresourceexportscanactuallytrapcountriesinastateof“underdevelopment”.


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(i) Singer-Prebisch thesis

The “underdevelopment” thesis was first advanced byRaul Prebisch (1950) and Hans Singer(1950) in the1950s. Noting that the price of primary commoditieshadcontinuedtodeclineovertimerelativetothepriceofmanufacturedgoods,theyarguedthattheresultingdecline in the terms of trade of primary commodity-exportingdevelopingcountrieslockedthemintoastateofunderdevelopment.

One source of the problem was the highly competitivenature of many commodity markets which meant thatproductivity improvements tended to result in decliningprices rather than higher incomes (versus the moremonopolistic organization of markets for manufacturedgoods, where productivity improvements could becapturedinhigherincomes).Anotherproblemwasthatasincomes rose, the demand for manufactured exportsgrewfasterthanforcommodityexports.Becausefallingcommoditypricesmeantthatdeveloping-countryexportshadtogrowcontinuallyinordertobuyagivenquantityofmanufactured goods, poor countries were unable toaccumulatethesurpluscapitalneededforinvestmentsintheinfrastructure,technologyandindustrialcapacitythatwasaprerequisiteforfurtherdevelopment.20

Itwasthesedifferencesinpowerbetweencommodity-dependent developing countries and manufacturing-intensive industrialized countries – between the“periphery” and the “core” – that trapped poorercountriesinacycleofdecliningexportearnings,weakinvestment and underdevelopment. In order to breakthis cycle, Prebisch and Singer urged developingcountriestodiversifytheireconomiesandlessentheirdependence on primary commodities by developingtheirmanufacturingindustry–includingthroughusingselectiveprotectionmethodsandattemptingtoreplaceimports with domestically produced goods. Moregenerally, theSinger-Prebischthesis impliedthenovelconcept that it was the intrinsic structure of worldmarkets,notthefailingsofindividualcountries,thatwasresponsible for widening inequalities in the globaleconomy.

(ii) Dependency theory

TheSinger-Prebischthesishasunderpinnedagrowingbody of economic thought, broadly referred to as“dependencytheory”,whichbuiltontheinsightthattheapparentfailureofmanycountriestodevelopwastheresultofunequalpowerrelationsbetweena“periphery”ofpoorandunderdevelopedcountriesanda “core”ofwealthy, industrialized states. Because of thesestructural inequalities, resources flow from theperipherytothecore,enrichingindustrializedcountriesattheexpenseofthepoor,denyingdevelopingcountriesthecapitalandtechnologyneededtoindustrialize,andperpetuating existing inequalities and disparities.Against the neoclassical idea that open trade andeconomic expansion benefits all countries and thatgrowthinindustrializedcountrieswilleventuallyleadtogrowth in poorer countries (the “stage theory” of

development), dependency theory holds that existingeconomicrelations–andthenatureofglobalintegration– lock developing countries into a state of perpetualunderdevelopmentandeconomicsubservience.

Undertheumbrellaofdependencytheory,anumberofexplanations have been advanced for how and whystructural inequalities are perpetuated in the globaleconomy.Aswehaveseen,Prebisch(1950)andSinger(1950)focusedonpoorercountries’decliningtermsoftrade and how this contributes to underdevelopment.PaulBaran(1957)highlightedthewaysthatdevelopingcountries’ “economic surplus” is extracted byindustrialized countries, and how the internationaldivisionoflabour(betweenskilledworkersinthecentreand unskilled workers in the periphery) reinforcedependency. Together with Samir Amin, he alsoemphasizedhowelitesinperipheralcountriescooperatewithelitesatthecentretoperpetuatenaturalresourceexploitation. Arghiri Emmanuel (1972) introduced theconcept of “unequal exchange” to the debate,suggesting that it was historically established wagelevelsthatsetprices,nottheotherwayaround,furthercontributing to developing countries’ deterioratingtermsoftrade.

Morerecently,MatiasVernengo(2004)suggestedthatthedependencyrelationshipisareflectionlessoftradeor technological inequality than of the differences infinancialstrengthbetweenthecoreandtheperipheralcountries – in particular, the inability of developingcountriestoborrowintheirowncurrency.AndreGunderFrank(1971;1972)andother“world-system”theoristsbroadenedthisanalysis,viewingthestratificationoftheworldeconomyinto“core”and“peripheral”countriesastheglobalreflectionofMarx’sclassdivisions–i.e.,theowners versus the non-owners of the means ofproduction.Similarideasaboutthestructuralnatureof“core” and “peripheral” relations can also be found inJohanGaltung’s(1971)structuraltheoryofimperialism.

Dependency theorists also differed in their proposedsolutions to unequal international economic relations.Writers ranging from Prebisch and Singer to OsvaldoSunkel(1969)andFernandoHenriqueCardoso(1979),viewedtheproblemintermsofthenatureoftheglobaleconomy and the history of international economicdevelopment.Poorercountriesneededtoembarkonaseparateorautonomousdevelopmentpathandreducetheirdependenceontradewithdevelopedeconomies,including by embarking on programmes of infantindustry protection and replacing imports withdomestically produced goods. In contrast, Marxisteconomists,suchasBaranandGunderFrank, tendedtoseetheproblemofdeveloping-countrydependencyasendemictothecapitalistsystemitself.Themovementtowards worldwide socialism – and an end to foreigndominationandimperialism–wasapreconditionfortheeliminationofunderdevelopment.


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5. Conclusions

Naturalresourcesareindispensableforthefunctioningofmoderneconomies,andforachievingandmaintaininghighstandardsoflivinginallcountries.Theyareprimaryinputsintheproductionofallmanufacturedgoods(e.g.ores and other minerals). They provide the energyneeded to transport people and goods from place toplace, to light our cities, and to heat our homes andplaces of work (fuels). They are also a potentiallyunendingsourceofvaluablematerialsandahabitatforwildlife and plant species (forests, oceans). Finally, inthecaseofwater,theyarenecessaryforsustainingalllifeontheplanet. It isnoexaggerationtosaythatthewaytheworldmanages itsnatural resourceswillgoalongwaytowardsdeterminingthesustainabilityof theglobaleconomy.

In thissectionwehaveexaminedsomeof the factorsthatmakenaturalresourcestradedifferentfromtradein other types of products, surveyed data on globaltrade flows, taken a closer look at some of themechanisms through which resources are actuallytraded in commodity exchanges, and sketched thehistory of this trade since the industrial revolution.Taken together, these analyses provide some insightinto why trade in natural resources is sometimescontroversial.

Onthepositiveside,tradeinresourcesallowscountrieswithlimiteddomesticsuppliestobenefitfromtheuseofthesematerials.Tradealsocontributestoefficiencyinproduction,providesexportingcountrieswithearningsthat can be re-invested in future production, andenables them to diversify their economies. On thenegativeside,bycontributingtoproduction,trademayexacerbate a number of adverse consequencesassociated with resource use, such as air pollutioncausedbytheburningoffossilfuels,orareductioninbiodiversitybroughtaboutbythedestructionofnaturalhabitats. Itshouldbeborne inmind,however, that thesolution tosuchproblems isnot likely to reside in thecontraction of trade, but rather in the propermanagementofscarceresourcesandthemitigationoftheharmfulenvironmentaleffectsofeconomicactivity.

The intellectual and political debate about naturalresources,summarizedinSectionB.4,hasseenpublicattitudes and expert opinion alternate betweenoptimism and pessimism about whether preciousnaturalresourceswillcontinuetobeavailableforfuturegenerations. Growing concern for the environment,combinedwiththesteadyriseinnaturalresourcepricesinrecentyears,hasonceagainbroughttheseissuestotheforefrontofpublicconsciousness.

While trade in natural resources will almost certainlycontinue to grow in the future, improved internationalcooperationanddomesticregulationshouldbeabletocontribute to efficiency gains, the elimination of theadverseconsequencesofextractingandusingnaturalresources,andperhapsincreasedstabilityinthemarketpricesofthesegoods.Thissectionhaspresentedsome

essentialbackground informationon these issues,butfor a deeper understanding of the challenges facingpolicymakers a coherent theoretical framework isneeded.ThedevelopmentofthistheoreticalapparatusisthesubjectofSectionC.


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endnotes1 Another way of expressing the idea that natural resources

must be scarce and economically useful is that they mustcommandapositivepriceinmarketsandcanbeusedeitheras inputs in production or directly as a source of utility toconsumers.

2 Proved reserves are defined as “quantities of oil thatgeological and engineering information indicates withreasonable certainty can be recovered in the future fromknown reservoirs under existing economic and operatingconditions”.

3 Thedistributionofotherfuels issimilarlyconcentrated,with20 countries possessing 90 per cent of global natural gassupplies and just nine countries having 90 per cent of theworld’scoalreserves(BritishPetroleum,2009).

4 These are distinct from “forward” contracts, which are nottraded in organized exchanges, but over-the-counter, i.e.directlybetweenabuyerandseller(Valdez,2007).

5 The clearing houses are under the watch of independentregulators.

6 Thesearelikelytobeimportantforlandlockedroutes.

7 In the case of natural gas, however, while markets in theUnited States and the United Kingdom, are dominated byorganizedexchanges,thoseinotherEuropeancountriesaredominated by long-term contracts (Neuhoff and vonHirschhausen,2005).

8 Such contracts may be characterized by an acute “hold-up”problem, i.e. governments are unable to commit not torenegotiatethetermsofanycontractandhenceinvestorsarelikely tobedeterredby theconsequent risk.This is likely toresult in a systematic bias towards under-exploration anddevelopment(CollierandVenables,2009).SeeSectionE.3.

9 Smith(2009)notesthatverticalintegrationintheoilindustryhas declined somewhat during the past two decades. Thismay simply be because several large oil producers haveagreementstoswapcrudeoilstreamstominimizetransportcosts.

10 Seewww.chevron.com.

11 Long-distanceironoretraderosefrom23percentofworldproductionin1960to36percentin1990.Tradeincoalrosefrom2percentin1960to13percentin2005.Tankersnowcarrysome2billionbarrelsofoilannually–upfromlessthan400millionbarrelsin1950.Naturalgas,thebulkiesttradednatural resource, is the latestcommodity tobesubjected tothe forces of globalization due to declining transport costs.Until the 1980s, transport by pipeline was the dominantdelivery mode, which meant that natural gas trade had alimitedgeographical reachandmarkets remainedregionallysegmented.However,advancesinliquefiednaturalgas(LNG)technology and the ability to transport gas economically inlargetankersarerapidlyerasingtheseremaininggeographicalbarriers.In2005,26percentofglobalnaturalgasproductionwastradedinternationally,morethanaquarterofthisasLNG(Lundgren,1996;Radetzki,2008).

12 As Smith explained, “every individual ... neither intends topromote the public interest, nor knows how much he ispromotingit....Heis,inthis,asinmanyothercases,ledbyaninvisible hand to promote an end which was no part of hisintention.Bypursuinghisowninteresthefrequentlypromotesthatofsocietymoreeffectivelythanwhenhereallyintendstopromoteit”(Smith,1776).

13 Hearguedthat “therewouldbenoattemptbycapitalists toinvest inmanufacturesdesigned for distant saleas longasagricultureresourcesremainedunused”(Smith,1776).

14 “Thepowerofpopulationisindefinitelygreaterthanthepowerintheearthtoproducesubsistenceforman”,Malthusargued:“No fancied equality, no agrarian regulations in the utmostextent, could remove the pressure of it even for a singlecentury”(Malthus,1798).

15 “Increasedcapitalenables theminer todescenddouble thedistancesandthevalueisnowgreaterthanatfirst.Afurtherapplicationofcapitalenableshimtodescendsuccessivelyto300,500,600,1,000or1,500feet,andwitheversuccessiveapplication the property acquires a higher value,notwithstandingthequalityofcoalthathasbeentakenout”(Carey,1840).

16 The Global 2000 Report was commissioned by PresidentCarter in 1977. An additional report under the title Global Future: Time to Act was published in 1981 (Council onEnvironmental Quality (CEQ) and the U.S. Department ofState,1980).

17 “Growth,being thecentralgoalofsociety,nothing,naturallyenough, is allowed to stand in its way”, observed Galbraith:“That includes itseffect, including itsadverseeffect,ontheenvironment, on air, water, the tranquillity of urban life, thebeautyofthecountryside”(Galbraith,1974;Mishan,1967).

18 Natural Capitalism is a movement that sees the world’seconomy as being within the larger economy of naturalresources and ecosystem services that sustain us. Thisimplies that we should attribute value to all things – fromhuman intelligence and cultures, to hydrocarbons, minerals,trees, and microscopic fungi. The authors argue that onlythroughrecognizingthisessentialrelationshipwiththeearth’svaluable resources can businesses, and the people theysupport,continuetoexist(Hawkenetal.,2009).

19 In1980,JulianSimonbetbiologistPaulEhrlich thatafteradecade,asetofnaturalresources(decideduponbyEhrlich)wouldbe cheaper in constant dollars than theywereat thestart.Simonwonthebet(Simon,1984).

20 A modern variant of this terms of trade thesis has been putforwardbyDaronAcemogluandJaumeVentura.Inattemptingtoexplaintherelativestability(andinequality)ofworldincomedistribution since the 1960s, they argue that countries thataccumulate capital faster than average experience fallingexport prices and declining terms of trade – which in turndepressestherateofreturntocapitalanddiscouragesfurtheraccumulation(AcemogluandVentura,2002).

b. natural resources: definitions, trade patterns and globalization

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