Resources, Commodities & Economic Development
The idea of resource nationalism is one that has resurfaced during the 21st century as governments in developing countries seek to take advantage of the commodities boom to develop their national economies. Resource nationalism and the economic implications of riding a commodities boom wave have yielded different outcomes throughout the world.
Resources, Commodities & Economic Development
A first economic development and bargaining strategy is the market cycle model. Using the market cycle model, countries with large natural resource reserves enjoy a better negotiating position vis-à-vis private resource-exploiting companies in sectors such as mining and fossil fuels when international market prices are on the rise. This means that, when the price of a commodity (such as oil) is high, national governments may demand higher tax and royalties payments from companies that exploit these resources because they have much to lose in case of expropriation, nationalization, or forced sale. On the other hand, private companies enjoy an advantage over governments when negotiating terms during periods of low international market prices. This dynamic reversal is due to the fact that, in the absence of favorable investment and operating conditions, private companies can easily abandon projects without incurring large economic losses. Similarly, in the low-price scenario, private companies are aware that governments themselves do not have much incentive to exploit a resource whose international price does not justify the creation of a public company.
Another commodity-centered development strategy is the obsolescing bargain model. According to this model, governments gain an advantage in terms of bargaining as private companies become increasingly invested in fixed extractive infrastructure within the government’s territory. While private companies have not yet settled into a specific project on the ground and invested in fixed assets, such as offshore platforms and drilling machinery, the companies maintain a comparative advantage because they can abandon projects that seem economically unfavorable to them. Conversely, once private companies have invested in exploration studies and settled their operations infrastructure, the government has an advantage in negotiating because it could expropriate or threaten nationalization, thus causing substantial losses to these private capital investments.
Usually, the obsolescing bargain model is more applicable in less developed and some developing economies, whose governments tend to be more authoritarian or populist as well as highly dependent on the income generated from natural resources. Meanwhile, the market cycle model is more applicable in free market economies and more developed countries. However, neither model completely factors in the political institutions of the respective countries or their declared policy objectives. In fact, the economic development and bargaining models are no more than tools that enable governments to take actions as it relates to resources administration and nationalism. Nevertheless, a country’s specific political institutions ultimately condition its actions and behavior.
In this regard, traditional investments in international oil and mineral companies brings about inherent risks and market cycles. Meanwhile, the agricultural asset class offered by Farmfolio, as conceptualized by our CEO, J. Dax Cooke, represents a way for investors to diversify their portfolio through a unique sector that is immune to traditional market cycles.
(Read more about Honey and Chocolate in Colombia and Farmfolio)