Kazakhstan has enjoyed a decade and a half of growth by basing its economy on commodities exports. But now it may have to pay an unwelcome price for doing so.
When the resource-rich Central Asian country decided last week to let its currency float freely without government intervention to prop up its exchange rate, the Kazakh tenge promptly lost 25 percent of its value against the dollar.
That was a sign that international investors regard Kazakhstan as now being in the same unenviable situation as other commodity-exporting emerging-market countries around the world. It is saddled with export products whose global prices have fallen. And, because it has focused so heavily on commodity exports in the past, it has developed few other sectors to attract foreign capital.
Economic analysts say that what is happening to Kazakhstan and to similar emerging economies around the world provides a measure of how risky it can be for countries to pin their hopes for economic growth exclusively upon exporting commodities, such as oil and metals, whose global prices are highly unpredictable.
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"They benefitted greatly from the surge in commodity prices over the past decade, which led to increased incomes and allowed them to increase domestic demand too," says William Jackson, an emerging-markets economist at London-based Capital Economics. "But over the past year or so we have seen this unwind; growth in China slowed and there are concerns about the outlook for investment there, which will reduce the demand for commodities, and this has caused commodity prices to fall."
Now, as reduced global demand for commodities has also reduced investor demand for emerging-market currencies, the commodity-exporting states are seeing the value of their currencies decline. Their governments feel the effect in smaller revenues and in the increased cost of paying off foreign-currency debt. Their citizens feel the effect because imported goods, and domestic products that use imported materials, become more expensive.
The current slump in commodity prices has caught many commodity exporters by surprise because for years the demand for their products had surged, thanks to the rapid economic growth of China. As China has rapidly industrialized, urbanized, and built new infrastructure, its demand for building materials such as aluminum, copper, and steel, as well as for energy, has surged. Today, China is the world's biggest consumer of commodities -- a great many of them the exports of other emerging economies.
China Lifts, Then Pulls Down
But the fact that China's growth has been such a big driver of the rise in commodity prices also means, conversely, that any perceived weakening of the Chinese economy can send commodity prices into reverse. Just how much so has been amply illustrated this month.
Beijing's sudden devaluation of its renminbi currency (also known as the yuan) by 2 percent on August 11 -- the most in two decades -- raised fears of a slowdown of the Chinese economy that could mean a shrinking demand for oil in the coming months. The move, along with greater OPEC production output, immediately sent oil prices tumbling, with the U.S. benchmark price for oil swiftly falling to $43 a barrel, its lowest level in more than six years.
Since then, the fears of a Chinese slowdown have shown no sign of going away. On August 24, stock markets in London, Paris, and Frankfurt all fell sharply after the Shanghai Composite -- a Chinese stock-market index -- tumbled by 8.5 percent, its biggest fall since 2007. Wall Street suffered its worst day in four years, with the Dow Jones Industrial Average falling 3.6 percent as world stock and commodity prices plummeted.
The falls in the European and U.S. stock markets are widely seen as a measure of international investors' uncertainty over how well Beijing can address a number of economic problems, from bolstering its own stock market to reversing a decline in productivity that saw China post 7 percent growth in gross domestic product (GDP) during the first and second quarters of this year, its slowest pace in six years.
No Golden Path To Prosperity
Amid so much turmoil, many economists say there is an important lesson to learn for emerging nations that rely too heavily on commodity exports. That is, to diversify their own economies.
Writing on August 24 for Bloomberg View, columnist Leonid Bershidsky said that Kazakhstan had fallen into a "commodity trap" that gives the country steady growth when prices are high but makes its economy very vulnerable when prices are low.
He noted that Kazakhstan had poured its resources into developing its commodity-export sector and had "tripled oil production and more than doubled metals output between 1990 and 2014." Today, "crude oil still accounts for 55 percent of exports. Metals provide an additional 14 percent. The share of manufactured goods in exports remains negligible."
Former Soviet Republics Suffer
A similar heavy reliance on commodities exports characterizes all the countries of the former Soviet Union.
-- Russia, which depends on crude oil for 39 percent of its exports, has lost billions of dollars as the price of oil has dropped by more than half since June 2014.
-- So has Azerbaijan, where oil makes up 88 percent of exports.
-- In Turkmenistan, natural gas accounts for 81 percent of total exports. But gas prices have slumped as global production continues to rise in spite of oversupply in the market.
-- Uzbekistan has two main exports, cotton and cars, both of which account for 15 percent of the country's total exports. But cotton prices are weak as world production has exceeded demand for five years running.
-- Ukraine's biggest export is iron, accounting for 9 percent of its total exports. But the price of iron has sagged worldwide due both to slack export demand and to declining iron-ore prices caused by oversupply.
-- Belarus, where potash accounts for 6 percent of its total exports, has seen the fertilizer component drop from a high of $475 per metric ton in 2012 to $300 due to global oversupply.
-- Kyrgyzstan banks heavily on gold, which accounts for 34 percent of total exports. Its price suffered its largest monthly fall in two years in July, dipping as low as $1,080 an ounce, before recovering to about $1,150 on August 25 after investors sought a safe haven from plummeting stock prices.
-- Tajikistan's main exports are raw aluminum, which accounts for 59 percent of its total exports, and raw cotton, at 12 percent. The price of aluminum has fallen 19 percent over the past 12 months amid fears of oversupply and shrinking demand.
-- Armenia has suffered losses in its export of copper ore, which comprises 13 percent of its total exports, as the price of copper has fallen 27 percent over the past 12 months.
-- Georgia has seen shrinking returns from its exports of gold and copper, each of which represents a 5 percent share of total exports.
The current volatility of commodity prices illustrates what many development experts say is the central danger of the "commodity trap." That is, commodity exports alone cannot deliver the sustained economic growth that emerging-market countries need to become prosperous.
"Exporting commodities by themselves doesn't seem to be a very sustainable way of growing, it doesn't employ very many people, it doesn't allow workers to be skilled up, trained, brought on to use more technology and machinery which increases productivity," economist Jackson says.
"So it is not a particularly sustainable way of raising living standards. And it is notable that the main emerging-market success stories, like China, Eastern Europe, other parts of East Asia, have all relied on manufacturing as a base."
Those more successful emerging-market countries developed a commodity-based economy first but then converted it into a manufacturing- and technology-based economy later, giving themselves strong export products in multiple sectors rather than relying upon commodities alone.