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  • As Commodities Prices Fall, Economic Freedom Should Rise

    Design Pics / Dave Reede/Dave Reede/Newscom

    Design Pics / Dave Reede/Dave Reede/Newscom

    New reports are hinting that an end to the decade-long run-up of the prices of commodities prices is here.

    For years, emerging markets such as China rapidly sucked up natural resources to fuel their hasty economic expansions, inflating the cost of commodities such as coal, iron, and oil. Meanwhile, resource-endowed emerging markets in South America, Europe, and Africa happily fueled this bubble, building their economies around resource extraction and breeding a culture of resource dependency.

    Riding this “commodity super-cycle” roller coaster certainly had advantages. Countries such as Brazil and Russia experienced rapid economic growth and increased government revenues, giving leaders a near blank check for funding social spending and investments in infrastructure, and allowing citizens to overlook problems such as corruption.

    But the good times seem to be coming to an end. According to the World Bank’s commodity price index, energy commodities have declined by over 10 percent, agriculture by 20 percent, and metal by 30 percent since peaks in early 2011 due to decreased demand in China and Europe. Meanwhile, analysts from Goldman Sachs, Deustche Bank, and Citigroup are hearing the death bells of the commodity super-cycle.

    The slowing growth and reduced revenues from commodities present specific challenges for resource-endowed emerging markets. Particularly, policymakers will have to restructure their economies away from faltering resource sectors while at the same time managing declining revenues and the threat of increased debt. But there is opportunity in these challenges if leaders begin to embrace the principles of economic freedom.

    Governments can start by attacking long-overlooked issues such as corruption, a spawn of the natural resource boom itself. According to The Heritage Foundation’s Index of Economic Freedom, corruption in major commodity exporters such as Brazil and Russia is rampant, with both countries ranking below the world average. Corruption and graft saps economic vitality, increasing the cost of services, undermining the rule of law, and shifting money into unproductive sectors.

    Falling commodity prices should be seen as a blessing rather than a curse. Restructuring economies away from natural resources and toward economic freedom would set millions on the path to sustainable growth.

    Posted in Energy [slideshow_deploy]

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