Is commodity-dependence pessimism justified? Critical factors and government policies that characterize dynamic commodity sectors

Economists often associate a country's dependence on primary commodities, for exports, income, and employment with underdevelopment and low income. The authors explore this commodity pessimism theoretically and empirically and suggest that it may be ill-founded. If it is, it could have adverse ramifications for many commodity-dependent developing countries. They examine successful commodity-exporting countries and show that commodity dependence does not necessarily lead to low income and export growth. Successful commodity-exporting countries achieve dynamic and viable commodity sectors by implementing appropriate policies that encourage private sector initiative and investment. Drawing on successful cases - including Uganda's coffee sector, Ghana's gold mines, Colombia's cut-flower industry - the authors identify government policies that encourage viable commodity sectors. These include: 1) eliminating price controls and state monopolies; 2) promoting research and extension; 3) developing sound infrastructure in transport and communications; 4) enticing foreign capital and technology transfers; and 5) establishing a legal system that encourages the use of innovative financial instruments, especially risk management instruments and a sound warehouse receipt system.