China and Commodities: Does A Southern Engine of Growth Lead to Disruptive Development?

IDC Seminar; 23rd September 2009

Raphie Kaplinsky  Masuma Farooki

Julia Tijaja Anne Terheggen 

Vuyo Mjimba Zeferino Teka

The Drive to Industrialisation

• Close association between incomes and industrialisation

• The terms of trade favour manufactures

UNIDO World Industrial Development Report 2009

Commodities-Manufactures Terms of Trade

The Drive to Industrialisation

• Close association between incomes and industrialisation

• The terms of trade favour manufactures• Manufactures are (relative to agriculture) income

elastic and price inelastic• Synthetic substitutes for natural products• Manufacturing embodies rents – agriculture does

not• Manufacturing can be labour intensive – primary

commodities are very capital intensive

A Southern Driver of Growth:Challenging Development Orthodoxy?

Masuma Farooki

A Southern Driver of Growth

• China: The Large Country Impact – Volume of Demand– International Sourcing

• China: The Developing Country Impact– Resource Intensive Growth– Years to maturity

A Southern Driver of Growth% Share of Costs of Minerals/Extractive Sector in Industrial Production and Per Capita Income (PPP).

2004

Source: Author’s calculations from GTAP and World Development Indicators.

A Southern Driver of Growth

Changing Traditional Relationships:

• Income Elasticity of Demand for Commodities– Resource Intensive Growth and Higher Elasticity

• Commodity Price Volatility– Active Financial Interests and Dampening of Fluctuations

• The Mining Industry– Supply Inelasticity and Super Cycles

A Case Study of the Cassava Industry in Thailand

Julia Tijaja

Outline

• The Thai Cassava Value Chains

• Restructuring of Markets

• Implications

The Thai Cassava VC (simplified)

Roots

Native starchModified starch

Pellets

Chips

FeedFood

Non food

Ethanol

Thai Dried Cassava Exports (FRE)

0

5,000

10,000

15,000

20,000

25,000

'000 m

etr

ic t

on

nes

Pellets

Chips

Calculated from TTTA Annual Report 2003 to 2008

Implications

1. A New Market Option

2. Change in Nature of Demand

Implication 1: A New Market Option

• Cushion impact from shrinking EU market

BUT

• Hamper pellet market diversification

• Disrupt growth of Thai chips users

• Restrict input into Higher Value Subsectors

Implication 2: Demand Changes

• Change in Quality Specifications

• Change in Standard Certification

• Change in Value Added >

Export unit price (by Sub-sector)

Calculated from TTTA Annual Report 2003 to 2008

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

'000 b

ah

t /

mt

(FR

E)

Chips

Pellets

Starch

The Tropical Timber Industry in Gabon

Anne Terheggen

Background

• Gabon:

– High GDP p.c. (USD 9,969) but poor social indicators

– Exports: oil (84.4%), timber (8.3%), manganese (3.1%)

– Oil-dependent, little economic diversification

Background

• Timber Industry: – Export-orientated industry with focus on logs (okoumé)– Among the top ten producers and exporters globally– Traditionally towards EU, now to China

Source: own calculations based on FAO ForesSTAT extracted June 2009

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

1998 1999 2000 2001 2002 2003 2004 2005 2006

Imp

ort

er

pe

rce

nta

ge

sh

are

of co

mb

ine

d to

tal vo

lum

e

0

500

1000

1500

2000

2500

3000

Ga

bo

n to

tal lo

g e

xp

ort

s to

wo

rld

(t cu

m)

of which to China of which to EU-15 GA total EX to world

• Timber Industry:

– State-controlled concession system

– State ‘intervention’

= Forest Code

Background

Source: World Resources Institute: Interactive Forest Atlas for Gabon (2009)

Relegation of EU-Standards

• Buyer-specific Standards (CSFs)

– Stage of processing, species variety, quality, volume, product specifications, and price

• International Standards

– Fewer applications and these less important (phytosanitary certificate)

• Private Standards

– No requirements of environmental production methods and adherence of national legislation

Restructuring of Domestic Industry

• Change of Ownership of Productive Assets– Influx of Chinese &

Malaysian (Chinese descent) companies and traders

– In addition to and replacing EU and Gabonese owned companies

Source: World Resources Institute: Interactive Forest Atlas for Gabon (2009)

Restructuring of Domestic Industry

• Activities

– Increase of intensive + extensive margin

– Management ‘style’

– Easy cash vs. value-added ‘hurdle’

– Certification vs. lack of skills + capital

– Slow change of attitude

• Clash of (political) Interests at Given Opacity

– Gabon vs. EU vs. China

Making the Most of Commodities (The MMCP Programme)

Making the Most of Commodities (MMCP Programme)• The Resource Curse

– Dutch Disease– Corruption– Violence

• Sachs-Warner

• But US, Canada, Australia experience

OU and UCT Programme

• Sectors– Copper, diamonds, gold, offshore-oil, oil, LNG,support

service sector, infrastructure

• Countries– Algeria, Angola, Botswana, Nigeria, Tanzania, South

Africa, Zambia,

Core MMCP Hypotheses: Linkages affected by

• Ownership • Employment spillovers • National Systems of Innovation • Regional links • Infrastructure • Policy

The Nature And Determinants Of Linkages In A Remote Minerals Commodity Sector: A Case Study Of Gold Mining In Tanzania.

Vuyo Mjimba

Gold Prices Trend 1960-2008

0

200

400

600

800

1000

1200

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Close

High

Low

Source: FinFacts 2009

The Scene

• Poverty

• Royalties and Taxes

• Ownership

• Globalization

Tanzania South Africa Australia Canada

Theories

• Value Chain

• Outsourcing

• The NSI

• The Resources Curse Thesis

Themes

• Firms Strategies

• The Local Economy

Impact of firm strategy on upstream and down stream

linkages.

Impact of the local economy on linkages

Questions

• Spillovers

• Policy

Spillovers between gold mining industry, upstream/downstream suppliers and the wider economy

Impact of policy regime upstream and downstream linkages

Maintenance and Repair Services Market in Offshore Oil and Gas Upstream Industry on the West African Coast: The Chain of Labour and Rents

Zeferino Teka

Oil & Gas Industry Value Chain

Upstream

Surface Activity

(geology)

Geophysical (seismis) Activity

Subsurface Activity

(geochemistry)

Transportation Services

Drilling ServicesDUs Contracting

Pipelines

Seismic Data Acquisition & Processing

ManufacturingMaintenance &

Repair Services

Wellheads

Construction of Production Facilities

Platforms

Decommissioning

Crude Processing Manufacturing of non-fuel products

Product Trading

Product Distribution

Services Sector

Exploration Extraction/Production

Midstream

Downstream

Ref ining Marketing Transport & Freight

DUs, Vessels, Production Facilities, EquipmentsDUs, Vessels,

Equipments

What About?

KEY ISSUES

1. Power & Governance Structure of the Market

• Mapping out the value chain

• Identify LEAD firms

• Rules of participation Structure of the Market

KEY ISSUES

2. Procurement & Outsourcing

• Criteria & incentive for outsourcing

• Ownership

• Inputs sourcing: local & foreign distribution

• Types of contracts & distribution

Determinants of Rent, Division of Labour, &

Entry Barriers

KEY ISSUES

3. Upgrading & Learning

• Form of chain governance

• Absorptive capacity

• Upgrading strategy

• Knowledge producers & brokers

Status of Dynamic & Technological Capabilities

KEY ISSUES

4. NSI Trajectory

• Macro Policy

• Meso (horizontal) Policy

• Micro Policy

Context Determinants

KEY ISSUES5. Spillovers

• Skills & Technology

• Labour

• Capital

• Infrastructure

Backward & Forward Linkages

Thank You