Question: Primary product dependency is a hindrance for the development of LDCs. Discuss.
Primary commodities include wheat, sugar cane, cocoa and bananas.
LDCs that are dependent on producing and exporting primary commodities encounter many problems lower export revenue. As primary commodities have an inelastic price elasticity of supply, a demand shock causes a significant price change. Additionally, because primary commodities have an inelastic demand, a supply shock also causes a significant price change. Because of these inelasticities, demand and supply shocks may cause primary commodity prices and revenue to fluctuate wildly. A fall in demand or an increase in supply will cause primary commodity prices to fall significantly. This is bad for LDCs because lower primary commodity prices means lower export revenues (and foreign currency) and less revenue for farmers and producers so living standards fall. Between 1985-1994, declining commodity prices cost Sub-Saharan Africa roughly $80bn in lost export revenues.
Moreover, LDCs may suffer from instability if they rely on primary products. Because primary commodity prices may fluctuate wildly, it is difficult to plan and invest, so the development of the primary commodity sector may be constrained.
Furthermore, LDCs could also suffer from supply-side shocks. Primary commodities are particularly in danger of supply side shocks because of natural disasters and extreme weather conditions (hurricanes, tornadoes, droughts and tsunamis), these can have a detrimental effect on primary commodity production.
Also, there is the issue of alternative products being developed by rivals in the future. Maybe a cheap alternative fuel source for cars will be developed (hydrogen), demand for oil will fall because people will no longer require oil for petrol. Maybe better synthetic diamonds are developed, demand for real diamonds will fall. Maybe crops are genetically modified to grow in countries where they could not grow before.
However, producing and exporting primary commodities may not be a major constraint on development because an LDC may export a large amount of commodities, it can then use the export revenues to develop its roads, ports, railways and utilities or invest in healthcare and education.
Additionally, maybe the LDC could use export revenues to develop other sectors of the economy and diversify so the LDC becomes less reliant on exporting primary commodities. For example, Dubai re-invested oil export revenues to develop its tourist sector.
Lastly, an LDC could focus on exporting primary commodities in the short-run and invest in its manufacture sector to change its comparative advantage in the long-run. For example, in the 1960s, South Korea changed its comparative advantage from rice production to manufacture goods like Samsung.