- The Washington Times - Monday, June 2, 2008

The hardship of high food and fuel prices for the world’s most impoverished people has garnered much attention, but economists say the commodities boom is probably helping more poor people than it hurts because developing countries are the primary source of raw materials. Most Middle Eastern nations as well as countries such as Brazil, Argentina, Chile, Venezuela, Botswana, Zambia and Congo are major beneficiaries of the sixfold increase in oil prices since 2002 as well as record high prices for corn, rice, wheat, soybeans, copper, gold, diamonds and other basic goods the world needs for sustenance and growth.

While high costs are a burden on millions of people in the developing world - primarily the urban poor not engaged in farming or mining - the world’s richer countries are paying the biggest price because they are dependent on developing nations for the raw materials they need to fuel their economies.

¿High commodity prices are a problem for the industrial countries - almost all of which are commodity importers, but a boon to the emerging economies, many of which are net exporters of commodities,¿ said David Wyss, chief economist at Standard & Poor’s Corp.

The hundreds of billions more dollars each year that consumers in the United States, Europe and Japan pay for fuel and other raw materials amounts to a massive transfer of income to the developing world, where the money is fueling rapid growth, raising living standards and feeding the emergence of a middle class.

¿Latin America and the OPEC countries are the greatest beneficiaries, but sub-Saharan Africa is also a winner, averaging 5.4 percent real growth over the past five years, perhaps the best performance in history,¿ Mr. Wyss said.

Africa holds many of the crucial minerals - copper, nickel, aluminum, uranium - that fast-rising Asian economies like China and India needed to fuel their rapid development. China has cultivated close ties with African nations like Sudan and Angola to ensure it has the raw materials it needs - giving a shot in the arm to some of the weakest economies on the continent.

¿The strong revenues are even helping the countries where government policies are poor, since a rising tide can lift even a poorly sailed boat,¿ Mr. Wyss said.

Brazil’s star rising

Perhaps the most notable rising star among developing countries getting a lift from the commodities boom is Brazil, the Latin American giant whose exports of everything from beef to oranges have turned it into an economic force to contend with this decade. The surge in food prices after years of stagnation has been especially kind to Brazil, which at the turn of the decade was a debt-ridden ward of the International Monetary Fund.

Brazil’s economy expanded by 5.4 percent in 2007 - the fastest rate in three years - and its exports have tripled since 2003 amid booming global demand for steel, iron-ore, soybeans, orange juice and sugar. With a recent major discovery of oil off the coast of Rio de Janiero, some analysts think Brazil may soon become a major exporter of oil as well.

Brazil’s record commodity exports have bolstered its revenues and reserves to the point that it shed its external debts and became a net creditor to the world in January, prompting Wall Street ratings agencies to raise the nation’s credit rating above junk status - a fitting symbol for the country’s meteoric rise.

The growing incomes and rising opportunities for people in Brazil and other commodity-rich countries have raised living standards and enabled consumers to purchase more from abroad, causing imports of all kinds to leap by 172 percent to $6 trillion in those nations between 2000 and 2007, said Joseph P. Quinlan, chief market strategist at Bank of America Corp.

“The penchant to consume is gaining traction globally, most notably in developing nations,” he said. “Going to the mall on Saturday afternoon is just as popular in Bangkok and Sao Paulo as it is in Boston and San Antonio.”

Mideast expanding

Nowhere is the conspicuous consumption of newfound commodity wealth more visible than in the Middle East, where billions of petrodollars pouring in from the developed world are fueling the biggest building boom and economic expansion ever seen in that region.

At least a quarter of the world’s construction cranes can be seen dotting the skylines of Persian Gulf cities such as Dubai. Plans are on the drawing boards to build on the Arabian peninsula - among other ambitious projects - the world’s tallest building, longest bridge, highest hotel, biggest shopping mall and largest Disney resort. The latter is expected to become the world’s No. 1 tourist destination, eclipsing Florida’s Disney World, when it is completed.

The massive transfer of wealth to the Middle East is not only fueling a binge of building and consumption but it has enabled the region to amass huge war chests of dollar reserves that oil exporters are deploying to invest in choice Western companies and properties, from hotels to space enterprises and major financial firms such as Citibank and Merrill Lynch.

The dollar reserves of the Gulf Cooperation Council have soared from $52 billion in 2002 to $125 billion in 2007 and an estimated $150 billion this year.

While the burgeoning buying power of oil-rich countries from the Middle East to Russia and Venezuela has been a source of controversy, Mr. Quinlan said it should be viewed as “a rare opportunity” to strengthen the commercial ties between the Middle East and the West and perhaps defuse political hostilities.

“Middle East investors are signaling their long-term confidence in the West,” he said. “By purchasing stakes in Western banks, U.S. retailers and other corporations, many Middle East nations are becoming greater stakeholders in the Western capitalist system,” and thus will have a greater stake in maintaining the health and stability of western economies.

“A more globalized Middle East won’t solve all of the region’s ills and eliminate frictions between the Arab world and the West,” he said, but “shared financial interests would … clearly support U.S. and European long-term national security interests.”

Cities suffering

While soaring oil prices have funneled wealth from Western consumers to once-backward Middle Eastern countries, and high metals and minerals prices have lifted the fortunes of overwhelmingly poor African and Latin countries, the impact of high food prices has been more ambiguous on the developing world.

A few big winners such as Brazil, Thailand and Chile stand out, but a greater number of small developing countries have been stricken by food riots and rising poverty as prices rise. In general, countries with large rural farming and mining populations that export their produce are the doing well, while those that have to import food to survive - such as the Philippines, Haiti and Bangladesh - are suffering.

Two studies published this month come to contradictory conclusions. One sponsored by the Carnegie Foundation found that more people in developing nations are likely to gain from rising prices than lose, although many poor households will require urgent food assistance. The other study by the World Bank concludes that more poor people are hurt by high food prices than helped.

Rising food prices clearly helped lift the incomes and living standards of poor people in China and India, the two countries with the biggest concentrations of poor people in the world, most of whom live in rural areas, said Sandra Polaski, author of the Carnegie study.

“The large reduction in poverty in China since 1978 was based primarily on better incomes in rural areas, attributable mainly to higher prices for food,” she said. Also in India, which has the largest number of poor living on less than $2 a day, the poorest households saw the biggest gains from increasing rice prices.

But the World Bank study of nine small countries concluded that recent record food prices have increased poverty substantially. The countries in that study were among the world’s poorest, including Bolivia, Cambodia, Madagascar, Malawi, Vietnam and Zambia.

Declan Butler, an agriculture expert writing for Nature magazine last month, said that although the immediate impact of soaring food prices is to increase poverty, over the long run, it should be a boon to the world’s poor.

“Higher food prices, other things being equal, mean higher farm incomes, and there are a lot of poor farmers in the world who could do with such a boost,” he said.

Many of the poorest countries are now suffering in part because the World Bank stopped helping them improve their agriculture techniques in recent decades to encourage their economies to diversify. This prompted many rural poor to abandon farming and move to the cities because they could not compete with cheap imported food, analysts say. Once in the cities, they became dependent on imported food and vulnerable to today’s rising prices.

The World Bank admitted this spring that investment in improved agriculture in the Third World would pay off royally in increased incomes and wealth and announced it will double its agricultural lending in sub-Saharan Africa over the next year, Mr. Butler noted.

“Agriculture has poverty-busting powers beyond straightforward revenue increases,” he said. “Agricultural growth spurs economic growth from the bottom up” because farmers who earn more spend it on services and goods in their communities.

High commodity prices are unquestionably benefiting farmers and the oil and mining sectors in the U.S., making them among the strongest spots in an otherwise weak economy. Booming farm output in particular has contributed to robust exports, as has strong demand for U.S. goods from the developing world, helping to keep the domestic economy afloat in the past year.

But overall, the U.S. is a consumer nation, and high prices have daunted the country’s 300 million consumers. Consumer confidence has fallen to the lowest levels in decades and seems to sink further with each daily increase in gas prices.

“Commodity prices have steadily increased over the past five years, and we believe that because of international demand, they could continue rising for another five,” said S&P;’s Mr. Wyss. “Dealing with that reality will remain a challenge for consumers and producers alike.”