U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T

COMMODITIES &
DEVELOPMENT
REPORT 2023

Inclusive Diversification
and Energy Transition
 U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T

COMMODITIES &
DEVELOPMENT
REPORT 2023

Inclusive Diversification
and Energy Transition

Geneva, 2023
 COMMODITIES
DEVELOPMENT
REPORT 2023

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Acknowledgements
The 2023 edition of the Commodities and Development Report was prepared by a team
at the Commodities Branch, under the guidance of Miho Shirotori, Acting Director of the
UNCTAD Division on International Trade and Commodities. The report team was led by
Janvier D. Nkurunziza, Chief of the Commodities Branch, and comprised Stefan Csordas,
Sofia Dominguez and Clovis Freire.

Amir Lebdioui, of the School of Oriental and African Studies, University of London, provided
substantive inputs. Comments and suggestions provided by the following experts and
colleagues are gratefully acknowledged: from UNCTAD, Benjamin Banda, Rodrigo Carcamo,
Mathilde Closset, Cambiz Daneshvar, Junior Davis, Chantal Dupasquier, Graham Mott,
Romain Perez, Bojan Nastav and Amelia U. Santos-Paulino; Lynda Pickbourn, of the University
of Massachusetts; Ingo Pitterle, of the Department for Economic and Social Affairs, United
Nations; Albert Bredt, of the Economic Commission for Latin America and the Caribbean; and
Fotios Kalantzis, of the European Investment Bank.

Comments and suggestions received from participants at the peer review meeting held on
13 February 2023 are gratefully acknowledged: from UNCTAD, Christine Awiti, Taro Boel,
Ana Cipriano, Piergiuseppe Fortunato, Marco Fugazza and Tansuğ Ok; Romain Houssa,
University of Namur; Keiji Inoue, Economic Commission for Latin America and the Caribbean;
Jean-Marc Kilolo, Economic Commission for Africa; and Leonce Ndikumana, University of
Massachusetts. Research support was provided by UNCTAD interns Carlos Leiva, Henrique
Pinto Coelho and Taiye Chen.

The manuscript was substantively edited by Peter Stalker. Magali Studer designed the cover
and prepared infographics. Danièle Boglio and Gabriela Riffard-Arjonas provided administrative
support. The layout of the report was undertaken by Danièle Boglio.

For further information about this publication, contact the Commodities Branch, UNCTAD,
Palais des Nations, 1211 Geneva 10, Switzerland, tel. 41 22 917 62 86, email: commodities@
unctad.org.

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Acronyms and Abbreviations

CDDC ......... commodity-dependent developing country
CO2 ............ carbon dioxide
COP 27 ....... Conference of the Parties
COVID-19.... coronavirus disease (of 2019)
DDC ........... diversified developing country
FAO ............ Food and Agriculture Organization of the United Nations
FDI ............. foreign direct investment
GDP ........... gross domestic product
GHG ........... greenhouse gas
GIP .............. green industrial policy
HCI ............. human capital index
HDI .............. human development index
IEA ............. International Energy Agency
IPCC ........... Intergovernmental Panel on Climate Change
LDC ............ least developed country
LLDC .......... landlocked developing country
LNG ............ liquefied natural gas
MNE ........... multinational enterprise
NCDDC ...... non-commodity dependent developing country
NDC ........... nationally determined contribution
NTMs ......... non-tariff measures
OECD ......... Organisation for Economic Co-operation and Development
SDG ........... Sustainable Development Goal
SIDS ........... small island developing States
SWF ............ sovereign wealth fund
tCO2e .......... tons of carbon dioxide equivalent
UNCTAD...... United Nations Conference on Trade and Development
UN DESA .... United Nations Department of Economic and Social Affairs
UNDP .......... United Nations Development Programme
UNFCCC ..... United Nations Framework Convention on Climate Change

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Contents
Acknowledgements .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. iii
Acronyms and Abbreviations .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. iv
Overview . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..ix
1. The predicament of commodity-dependent developing countries . .. 1
The commodity trap ....................................................................................................................5
Fluctuating revenues .............................................................................................................6
Left with stranded assets .......................................................................................................7
Risks for commodity-importing countries .....................................................................................8

2. Strength in diversification .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .13

Directions for diversification.......................................................................................................15
Enablers of diversification.....................................................................................................16
Malaysia moves on from rubber and tin ................................................................................18
Mauritius sees beyond sugar ................................................................................................19
Reliable access to electricity .....................................................................................................20
Diversifying sources of imports ..................................................................................................20
Diversifying through a climate emergency..................................................................................22
From link to link .........................................................................................................................24

3. Ensuring inclusiveness.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .27

Measuring inequality..................................................................................................................29
Diversification and income inequality ........................................................................................31
Commodity dependence and inequality ......................................................................................33
An inclusive diversification and energy transition .......................................................................36
Energy disparities and the just transition....................................................................................38

4. Diversifying the traditional way will have high environmental costs 45

Tracking the links between GHG emissions and output...............................................................48
A longer-term view: Decoupling is possible ...............................................................................56

5. Greener economy ahead .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .61

Traditional enablers of economic diversification .........................................................................63
Economic diversification in a low-carbon economy ....................................................................65
Green industrial policies in CDDCs .............................................................................................67
Designing GIPs for CDDCs..........................................................................................................69
Principles .............................................................................................................................69
Priority sectors .....................................................................................................................70
Entry points ..........................................................................................................................70
Regional integration .............................................................................................................72
International support ............................................................................................................72
Towards a greener world ...........................................................................................................74

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Appendices .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .77
Appendix A – Technical note on the relationship between diversification and inequality..............79
Appendix B – Estimating the cyclical and trend components of output-elasticities of emissions .84
Empirical results – output-elasticities of emissions:..............................................................85
Long-run elasticities for early industrializers .........................................................................87

Bibliography.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .89

Boxes
Box 3.1 The elements of a just transition ..............................................................................38
Box 5.1 Biodiversity-based products ....................................................................................66

Tables
Table 2.1 Many African CDDCs suffer from low access to electricity: Countries with the lowest
levels of access to electricity ...................................................................................21
Table 3.1 Country classifications and number of observations.................................................33
Table 4.1 Summary statistics for income and emissions, different country groups, 2018 ........50
Table 4.2 Top emitters (all values reported for 2018) ...............................................................51
Table A1 Fixed effects coefficients (Linear, full sample) ..........................................................80
Table A2 Fixed effects coefficients (Linear, subsamples).........................................................81
Table A3 Countries included in the analysis ............................................................................83
Table B1 Trend and cycle elasticities by country status (fixed-effects estimates) ....................85
Table B2 Trend and cycle elasticities for CDDCs by type of commodity export ........................86
Table B3 Trend and cycle elasticities for CDDCs by income group (fixed-effects estimates) ....86
Table B4 Elasticities of CDDCs by region (fixed-effects estimates) ..........................................86

Maps
Map 3.1 Access to electricity in 2020 ...................................................................................39
Map 3.2 Access to clean fuels and technologies for cooking in 2020 ....................................40

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Figures
Figure 1.1 Diversification has been associated with higher total greenhouse gas emissions:
CDDCs need to diversify through a new low carbon-path ...........................................4
Figure 1.2 Commodity dependence is more prevalent in the developing world: Commodity
dependence by country group, 2019–2021 ...............................................................6
Figure 1.3 Commodity prices rose sharply amidst the COVID-19 pandemic: UNCTAD commodity
price index, excluding fuels 2010-2022 ....................................................................9
Figure 1.4 The commodity price shock in early 2022 came on top of a rising price trend: Price
changes from the 2019 average, selected commodities ...........................................9
Figure 1.5 Food and fertilizer prices remain high: Food and fertilizer prices, index January 2019
– January 2023 .......................................................................................................10
Figure 2.1 Commodity dependence and low human capital often go hand-in-hand: Commodity
dependence, 2019–2021, and the quality of human capital, 2020 ..........................16
Figure 2.2 Malaysia is a successful case of manufacture-led diversification: Malaysia,
commodities in total merchandise exports, 1980–2021, and exports, 1995-2021 ... 18
Figure 2.3 Services played a key role in the diversification process of Mauritius: Mauritius,
commodities in total merchandise exports, and of services exports, 1995–2021 ... 19
Figure 2.4 Cereal yields differ significantly across regions: Cereals yields in selected regions,
2020 .......................................................................................................................22
Figure 2.5 Countries differ in terms of their development status and natural endowments:
Selected energy and socio-economic indicators ..................................................... 23
Figure 3.1 Inequality within and between countries, Gini coefficients, 1990-2020 .................. 30
Figure 3.2 Transmission channels from economic diversification to the potential impact on
inequalities ............................................................................................................ 32
Figure 3.3 Factors interacting with income inequality ............................................................. 34
Figure 3.4 Access to energy has been on the rise between 2000 and 2020 .............................39
Figure 4.1 GHG emissions, metric tons per capita, 2019 ..........................................................49
Figure 4.2 Cyclical GHG and GDP per commodity dependence status and commodity type .......53
Figure 4.3 Trend GHG and GDP per commodity dependence status and commodity type ..........54
Figure 4.4 Estimates of trend and cycle elasticities for different country groups .....................55
Figure 4.5 Decoupling in industrialized countries followed a long period of industrialization:
Trend emissions-output elasticities .........................................................................56
Figure 5.1 Links between policies for export diversification .....................................................64

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Overview

Strength through diversification

This report explores ways in which commodity-dependent developing countries can diversify their production
and move up value chains to produce and export a wider variety of products – and do so in ways that are
inclusive and protect the global climate.

Most economic value chains originate in commodities, such as crude oil, copper, cotton or
wheat. Developing countries that depend on exporting commodities are often very vulnerable.
They are, for example, exposed to fluctuations in exchange rates: a drop in commodity prices
reduces export revenues in United States dollars, which tends to lower the demand for the local
currency and puts downward pressure on the exchange rate. As a result of these fluctuations,
commodity-dependent developing countries (CDDCs) often have volatile incomes and slow
economic growth. Overconcentration of exports also affects public revenue and the potential
for investing in sustainable development.

In addition, CDDCs are impacted by economic and political shocks transmitted through global
commodity markets – such as those arising from the COVID-19 pandemic and the war in
Ukraine – which have come on top of the climate crisis and the global energy transition.
An additional challenge is that, to limit global warming to 2°C above pre-industrial levels,
a significant proportion of natural resources will need to remain unused – one-third of oil
reserves, half of the natural gas reserves and over 80 per cent of coal reserves.

While there are risks for commodity exporters, there are also risks for importers. Many developed
and developing countries depend on imports of basic commodities such as food, fuels and
fertilizers. In 2019-2021 among the 195 UNCTAD member States, 131 were net importers of
basic food, 143 of fuels, and 154 of fertilizers. In highly integrated global commodity markets,
supply disruptions in one region have knock-on effects around the world. For example, in
2022, reduced gas supply to Europe pushed up liquified natural gas (LNG) prices globally –
with dire consequences for some Asian countries.

Diversifying exports

As the world moves to more advanced products that command higher prices in international
markets, CDDCs risk falling behind. If they are to achieve the Sustainable Development Goals
(SDGs) in an increasingly uncertain global economic and political environment, they will need
to become more resilient – by moving along value chains and diversifying production to offer
a greater variety of exports. Diversification not only insures against future market shocks, but
also generates economic growth and drives structural transformation.

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This diversification can take place across broadly defined economic sectors, such as an
extension from agriculture to manufacturing or services, but it can also happen within sectors,
such as when farmers start to produce non-traditional agricultural goods.

Diversification can thus be horizontal or vertical. Horizontal diversification typically broadens

the range of production and exports. Vertical diversification can involve greater variety in a
sector’s value chain, such as refining crude oil to produce gasoline or petrochemicals.

Common approaches

Each CDDC will diversify according to its own priorities and capabilities, but there are common
broad approaches. Successful countries have, for example, generally promoted priority sectors
while making the economic environment more conducive to investment, business activity
and international trade. They have also maintained stable and competitive macroeconomic
conditions and built regulatory frameworks that facilitate private-sector initiatives.

Market access conditions are also a key factor in successful diversification. The challenge for
CDDCs is that many trading partners impose low tariffs for commodities, but higher tariffs for
goods made from those commodities, since these might compete with their own production.

A critical component of diversification is access to reliable energy services, since adding

more value usually means consuming more energy. In addition, diversification requires a
strong human capital base – a well-trained workforce that can seize higher-skill employment
opportunities.

Diversifying imports

While reducing reliance on a few commodities for exports, developing countries also need to
avoid over-reliance on imports from one or two countries – particularly for food. Some net-
food-importing developing countries could increase their own agricultural output – especially
those in Africa, where, in 2020, average cereal yields were less than half the global average.

To be prepared for emergencies, countries also need to build up public food stocks while
strengthening safety nets and social protection. And at times of crisis, fertilizers and fuel
markets must remain open – to balance food supply and demand across the globe and avoid
price spikes.

Ensuring inclusiveness

Diversification brings economic benefits, but if not accompanied by inclusiveness and

sustainability policies, it may have drawbacks. Producing more sophisticated products may
widen inequalities if higher-skilled workers capture most of the opportunities and command
higher wages. This could widen within-country disparities, which have been exacerbated
by recent shocks in the economy. At the same time, diversification could create low-skilled
jobs, for example, when a food-processing firm introduces a new product in the market and
procures agriculture inputs from smallholder farmers.

There has been limited research on the links between diversification and inequality, and the
results have been mixed. A few studies have found that rising specialization resulted in higher
wages for the more skilled workers. Others have found that export diversification may expand
employment opportunities to a larger share of the population.

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The relationship between inequality and diversification may also be U-shaped. Initially, export
diversification can widen wage gaps if it increases the demand for high-skilled labour. In the
long run, however, as the benefits spread throughout the economy, there are more jobs for
low-skilled workers, and inequality falls again.

This report presents an analysis of 182 countries which shows that overall export diversification
is associated with greater inequality, but as diversification generates more widespread
opportunities within the economy, inequality declines.

These results suggest that it may be necessary for Governments in CDDCs to consider
supplementary interventions to ensure inclusive change. Governments may also need to
intervene to provide public goods and increase investment in education, healthcare and skills
building.

Diversifying through a climate emergency

Historically, economic development and diversification relied on the extensive use of fossil
fuels. The same is true of countries that have diversified over recent decades. This report has
tracked the links between greenhouse gas (GHG) emissions and gross domestic product
(GDP) over the period 1980-2018. As expected, more diversified developing countries and
developed countries had higher emissions than CDDCs. Emissions were lowest in sub-
Saharan Africa and among low-income countries. Among CDDCs, the highest emissions
were from fuel exporters. In the absence of energy transition, in general, for both CDDCs and
non-commodity-dependent developing countries (NCDDCs), emissions growth seems to be
increasing at the same rate as GDP, if not faster.

Developing countries aiming to emulate the traditional transition from agriculture to industry
will have to achieve this under fundamentally different circumstances – notably a climate
emergency. They cannot, therefore, stake their futures on fossil fuels.

They should reduce GHG emissions from economic activity by making growth less emissions-
intensive without compromising their economic development. Limiting growth is not an option
if developing countries are to attain the SDGs, so they need to minimize GHG emissions while
taking advantage of the changing global energy landscape by reconfiguring their economic
structures and energy systems.

A just transition
The Paris Agreement calls for a ‘just transition’ to a lower-carbon world that provides decent
and quality jobs for the whole workforce. A just transition also requires addressing prevalent
issues in energy access.

Currently, access to electricity and clean cooking fuels in developing countries is very
unequal, particularly in Africa and the Asia and the Pacific region. Access to clean energy
also has an important gender dimension since women are more exposed to the hazards
associated with dirty energy sources.

To accelerate progress towards SDG 7, CDDCs and their development partners need to
ensure universal access to affordable, reliable, sustainable, and modern energy. But this will
only contribute to the green energy transition if energy sources are renewable and enable

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countries to follow a new development path that avoids some of the worst by-products of
industrialization, such as smog and polluted rivers.

During this transition, both CDDCs and net-commodity-importing developing countries should
upgrade their value chains. For example, many CDDCs provide the raw materials for clean
energy technologies – including minerals critical for energy transition, such as cobalt, lithium
and copper. They should avoid getting trapped at the entry of the value chains, as has often
been the case, but upgrade to higher segments of these chains.

At the same time, net-commodity-importing developing countries can diversify their sources
of imports of basic commodities such as food, fuels and fertilizers – while boosting their own
production, particularly of food and renewable energy, where economically viable. For this,
they will need the full support of the development partners, particularly for technology transfer
as well as strengthening social safety nets and emergency preparedness.

Making the transition to low-carbon energy

Efforts towards an energy transition will depend on a country’s starting point, including its
ability to invest, as well as existing capabilities. While technologically advanced countries
may have the resources and capacities to introduce renewable technologies, low-income
countries may prioritize energy access or clean cooking technologies while building capacity
for developing renewable energy such as wind or solar industries. Meanwhile, fuel-exporting
CDDCs may initially shift from petroleum and coal to natural gas while advancing to greener
energy sources.

As diversification and economic growth boost income, countries have more resources to
invest in environmental protection. Advocates of green industrialization argue that countries
can minimize carbon emissions by changing production and consumption patterns, using
natural resources more efficiently and minimizing pollution and environmental damage. This
calls for cuts in the use of fossil fuels and huge investments in efficient and green energy. In
addition to solar sources, many CDDCs have considerable potential for hydropower and wind
energy and for producing and exporting green hydrogen. At the same time, countries need
to protect workers and communities whose livelihoods have depended on fossil-fuel-based
industries.

If a transition to a greener economy increases employment and social welfare, it is likely to be

more politically and socially acceptable and thus offer a pragmatic path towards a low-GHG
economy.

The energy transition may, in addition, offer a much-needed impetus for countries to address
social and economic disparities. Electrification of schools, for example, allows them to use
IT equipment and adopt more advanced curricula and teaching materials that enable low-
income households to acquire more skills. Households would further benefit from energy
access and cleaner cooking technologies, for example, freeing more women to participate in
the labour force.

As a global challenge, the climate crisis requires a collective response. Given the obstacles
that the CDDCs face on their path to a low-carbon future, they will need the support of
development partners. This may include financial and capacity-building support, along with
knowledge transfers that would allow the uptake of new low-carbon technologies.

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Striking policy balances

Experience will differ from one country to another and between the types of commodities
that countries depend on. Fossil-fuel-dependent economies, for example, may have more
resources than agriculture-dependent economies to invest in economic transformation. The
capacity to transform will also depend on the current level of emissions, the sensitivity of
emissions to changes in output, and existing productive capabilities.

For lower-income CDDCs, focussing exclusively on cutting emissions may therefore constrain
their development without significant emissions benefits. And since energy access is critical
for human wellbeing, for these countries, it may be more realistic to concentrate on building
basic capabilities and ensuring access to energy using all available sources. These countries
should have priority consideration in the allocation of the current carbon budget.

If the CDDCs are to meet their development goals while decreasing emissions, they will therefore
need to strike balances between traditional sources of energy and greener alternatives such
as solar and wind power. Over time, the demand for green products will increase while that
for traditional carbon-based products shrinks. And during this period, CDDCs should not just
be buyers of green energy systems but be active participants as producers and innovators of
green technologies.

Greener economies ahead

To achieve sustainable economic growth and enhance human development, CDDCs should
reshape their economic structures to become more diverse, resilient, and prepared for a
low-carbon future. They need to adapt their productive capabilities in the face of evolving
energy and transportation systems. They should aim to develop productive capacities that
foster increased productivity and prosperity while transitioning to a low-carbon economy.
They should enact policies that prioritize inclusivity by creating employment opportunities and
minimizing potential inequalities that may arise from that process. Green industrial policies
(GIPs) are crucial in driving this transformation.

A well-designed GIP for CDDCs will:

• Be multisectoral – Industrial policy should extend beyond manufacturing to all sectors of

the economy, including agriculture, mining and services, with a particular focus on reducing
CDDCs’ dependence on traditional commodities.

• Have social goals – Industrial policy should also be driven by societal goals, including
those for climate, health, reducing poverty and inequality and creating decent jobs outside
the commodity sector.

• Collaborate with the private sector – Instead of the traditional top-down policymaking,
industrial policy should be a sustained collaboration between the public and private sectors
to create the appropriate institutional environment for diversification outside of the com-
modity sector.

• Guide technological change – Industrial policy should steer technological change to

non-commodity sectors that promote pro-poor, pro-environment and pro-labour activities.

CDDCs transitioning along low-emissions paths have the opportunity to start now at the
beginning of the green technological revolution. If they delay, they may find themselves firmly

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locked into older infrastructure and technologies, in which case the costs of greening their
economies will become higher.

It is also worth emphasizing that instead of merely being consumers of green energy and
relying on technology imports, CDDCs should strive to participate in the development of new
technologies and productive capabilities and establish dynamic comparative advantages in
green products and technologies.

Principles in practice

Instead of copying models from elsewhere, CDDCs should identify pragmatic policies suited
to their levels of development and productive capabilities. These will differ from one economy
to another, but could be guided by common principles.

Develop foundational capabilities – Most CDDCs will need to ‘jump’ from a limited set of
productive capabilities into more technologically advanced production. To succeed, CDDCs
will require ‘foundational capabilities’ that allow them to learn these new technical solutions
and apply them in innovative ways. Hence, States should support research and development
to build and accumulate production capabilities.

Ensure political and public support – A successful GIP needs to identify the distributional
effects of structural changes and manage potential conflicts, given that reforms might have
short-term costs on segments of the population. Moreover, success in such structural
transformations takes years, or even decades, after the reforms have started, so they will
need consistent support from the population and successive governments.

Create jobs – CDDCs typically have relatively limited high-quality employment opportunities,
so the creation of such jobs should be a priority for GIP, particularly for workers in the informal
sector. This could include initiatives such as providing training and support for entrepreneurship
and small businesses, creating public works programmes that can develop skills, and investing
in labour-intensive green technologies and related infrastructure projects.

Promote social cohesion and a just transition – Ensure GIP accounts for all segments of
society and includes marginalised and under-represented groups in their design to address
and prevent widening existing disparities. This should include measures targeting actors who
are vulnerable to the energy transition.

Ensure gender equality – Gender equality should be an integral component of GIP design
– including measures that specifically address the structural barriers faced by women in
accessing the labour market, such as improving childcare, increasing access to education
and training, promoting equal pay for equal work, and ensuring equal opportunities for career
advancement.

Identify priority sectors and value chains

GIPs should identify priority sectors for economic diversification that offer the greatest
opportunities and lowest risks. This requires an understanding of a country’s current
productive capabilities and sectoral opportunities. Certain sectors may offer significant export
opportunities for CDDCs due to their potential for upgrading, high unit values, and favourable
market conditions. The type of commodity dependence (agriculture, fuel, minerals), income
level, and the export and import replacement potential of these sectors play a role in the
feasibility of diversification strategies. CDDCs can also capture more value in existing value

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chains. Policymakers need to consider these factors when identifying potential new sectors
for economic diversification.

Seek entry points

Entry points for diversification will depend on the commodity being exported.

Fossil fuels – One option is to transfer income during boom periods into a diverse asset
portfolio through commodity-based sovereign wealth funds (SWFs). However, SWFs are only
effective and sustainable if they remain transparent, with strong governance and robust inflow/
outflow rules.

Minerals – For important clean-technology metals such as cobalt and lithium, mining
should be linked with domestic or regional value chains. The recent agreement between
the Democratic Republic of the Congo and Zambia to jointly manufacture precursors to
electric car batteries is an example of what CDDCs could consider doing. While developing
capabilities for diversification, mineral-exporting CDDCs should promote environmental, social
and governance (ESG) guidelines, and ensure equitable distribution of gains, as well as build
strong institutions governing the commodity sector.

Agriculture – CDDCs that depend on agriculture can process more crops locally while
shortening supply chains. This is not easy. Newcomers may need access to deep and cheap
capital to compete. All countries should also seek to move to smarter agriculture – to increase
efficiency and crop productivity while reducing GHG emissions.

Regional integration

Coordinated regional diversification policies can be advantageous given the small sizes of
individual CDDC markets and variations in export potential across countries. By prioritizing
diversification efforts in different sectors, CDDCs can expand their opportunities for linking
into new supply chains and positioning themselves in the global markets. Effective policies,
institutional support, and regional cooperation are crucial for creating a supportive environment
that enables sustainable and inclusive economic diversification. Leveraging regional trade,
particularly in Africa, where intra-regional trade is low, presents opportunities for CDDCs export
diversification. For example, by utilizing regional trade agreements and partnerships, African
countries can tap into the growing demand for processed products within the continent,
reducing reliance on traditional commodities. Additionally, fostering regional value chains
through partnerships allows CDDCs to collaborate and benefit from each other’s strengths
and resources, enhancing collective bargaining power and market access. Such partnerships
require careful planning and management, as well as strong institutional frameworks and
governance mechanisms.

International support

GIPs in most CDDCs cannot succeed without support from the international community.
CDDCs and their development partners should join forces to:

Stabilize commodity markets – Introduce rules to limit speculation and implement counter-
cyclical financing facilities that mitigate price shocks. To help create space for industrial policy,
the international community could also consider reinstating stabilization funds to limit CDDCs’
volatility of export revenues.

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Combat tax evasion and illicit financial flows – In the context of ESGs, measures could include
greater international collaboration to reduce tax avoidance and tax evasion while directing the
global financial system towards more productive investment.

Promote technology transfer – For CDDCs to successfully transition to low-carbon

development paths, they will need better access to new technologies and be able to adapt
them to local contexts. There should be an international framework along the lines of the
Technology Mechanism created under the United Nations Framework Convention on Climate
Change (UNFCCC) to ensure the transfer of green technology to CDDCs.

Use stronger measures on trade and investment – CDDCs can stimulate transitions with
targeted investments in infrastructure and research and development, and those eligible can
take advantage of the special and differentiated treatment provided for in WTO rules.

Support energy transition and mitigate the consequences of stranded resources – It

is unrealistic to expect CDDCs to voluntarily strand fossil-fuel resources without an alternative
development path supported by the international community. International financial institutions,
large multinational enterprises (MNEs), donor governments, and aid agencies could facilitate
this transition.

Be supported by international funding – To implement nationally determined contributions,

many countries will need international support. A regular assessment of progress and
challenges could guide industrial policy and provide opportunities for mutual learning in
CDDCs.

Towards a greener world

Until recently, the benefits of industrial policy and economic diversification in CDDCs were
thought to be accrued primarily by these countries, offering little incentive for other economies
to support this transition. Climate change has shifted that calculus: the global community
stands to benefit if CDDCs succeed in transitioning along low-carbon development paths. The
only way to a greener world is through mutual support and cooperation.

This report is structured as follows:

Chapter 1 – The predicament of commodity-dependent developing countries:
Summarizes the status of commodity dependency, indicating the main challenges.

Chapter 2 – Strength in diversification: Commodity-dependent developing

countries will need to become more resilient – by moving up value chains and offering
a greater variety of exports.

Chapter 3 – Ensuring inclusiveness – Producing more sophisticated products can

increase inequalities. While moving along the value chains, countries need to ensure
that the benefits are widely shared.

Chapter 4 – Diversifying the traditional way will have high environmental cost:
CDDCs seeking ‘diversification’ need to carefully balance old and new sources of
energy to meet the needs of current and future generations.

Chapter 5 – Greener economies ahead: This chapter considers potential future

directions and argues for ‘green industrial policies.’

xviii
 CHAPTER

1
The predicament
of commodity-dependent
developing countries
 COMMODITIES
DEVELOPMENT
REPORT 2023

1 The predicament of
commodity-dependent
developing countries
Commodity-dependent developing countries (CDDCs), defined as countries that derive at least 60 per cent
of their total merchandise export revenues from commodity exports, have long over-relied on the extraction
and export of natural resources to support their economies. While this concentration on the commodity
sector has brought revenues to these countries, it has also created numerous challenges and vulnerabilities.
These include macroeconomic instability, delayed industrialization or deindustrialization, the long-term
declining trend of prices of exported primary commodities relative to the prices of imported manufactured
goods,1 and volatility of export revenue caused by commodity price fluctuations.2 Many CDDCs are among
the most vulnerable to the impacts of climate change, such as extreme weather events, rising sea levels, and
droughts.3 The COVID-19 pandemic and the war in Ukraine have further exposed CDDCs’ vulnerabilities4 and
highlighted the urgent need for these countries to diversify their economies.

Diversification has eluded the majority of these countries for decades. In fact, most CDDCs
seem to be trapped in a state of commodity dependence.5 To make matters worse, CDDCs
now have to diversify in ways never done before: through low carbon paths in the context of
climate change mitigation and the energy transition.6 This is challenging because diversification
has been associated with the increasing use of fossil fuels and rising greenhouse gas (GHG)
emissions.7 Figure 1.1 illustrates this point by showing the relationship between average
diversification and total GHG emissions in the past two decades. Hence, efforts to reduce
global GHG emissions will undoubtedly impact CDDCs’ policy space to diversify their
economies and achieve the Sustainable Development Goals (SDGs). And diversifying in the
context of the energy transition should be done in a way that is just and equitable rather than
worsening income inequality.

If the current and emerging global context will not permit CDDCs to follow the same
development model that has allowed other economies to prosper, will they be able to chart
their own pathways? What will such pathways look like? And what will be the meaning of
economic transformation and diversification for these economies?

Economic and export diversification is the key to reducing commodity dependence and
increasing the economic resilience of this group of countries. Diversification not only minimizes
the risks associated with economic concentration but also generates faster economic growth8
by expanding productive capacities and shifting resources from low to high-productivity
sectors, and promoting economic structural transformation. Successful cases of diversification
often combine various pathways, for example, by adding value to primary commodities such
as producing and exporting chocolate instead of cocoa or producing a larger number of
products within or outside the commodity sector. A country may also diversify by investing
its financial resources into a broad set of assets to minimize risk, as is the case with Norway.9

3
 COMMODITIES
DEVELOPMENT
REPORT 2023
Inclusive Diversification and Energy Transition

To successfully diversify, CDDCs will have to deal with old and new issues that have been
hampering their socioeconomic development. These include the structural barriers that have
prevented them from fully realizing their potential, such as political instability, limited institutional
capacity and governance, poor infrastructure, and insufficient investment in education and
skills training. CDDCs will also need to embrace new technologies and business models to
create more resilient and sustainable economies.10

While the challenges seem daunting, this might be the time, more than before, when CDDCs
should focus on overcoming commodity dependence. While decarbonization and the energy
transition might represent challenges, they also come with opportunities for countries that are
able to harness them.

In the current paradigm, which calls for decarbonization of production and consumption,
the demand for traditional high-carbon commodity exports from CDDCs, such as fossil

Figure 1.1 Diversification has been associated with higher total greenhouse gas emissions:
CDDCs need to diversify through a new low carbon-path
40 2017 2018
2014
2016 2019
2010
2007
Total greenhouse gas emissions (million kt of CO2 equivalent)

35 2015
2008 2013
2006
2012
30 2009 2005 2011
1996
2004
2003
25 1995
2002
2000 1999
1998 2001
20 2013 2012
1997
2018 2011
2014 2016
15
2009 2019
2005
2015
2001
10 1998 2017
2000 2008
1997 2010
1999 2007
5 2004
2006
1995 2002 2003
1996

0 2 000 4 000 6 000 8 000 10 000 12 000

Average diversification (Number of products)

Non-commodity dependent countries Commodity dependent developing countries (CDDC)

Linear (Non-commodity dependent countries) Linear (Commodity dependent developing countries (CDDC))

Source: UNCTAD based on UNCTADstat database and World Bank data.

Note: Diversification shows the number of products exported based on the HS 6-digit classification, further
disaggregated by unit value.

4
 COMMODITIES
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CHAPTER 1 The predicament of commodity-dependent developing countries

fuels, is expected to drop drastically.11 Due to declining demand for fossil fuels in the future,
such natural resources and their associated assets might become stranded. This will have a
devastating effect on CDDCs dependent on fossil fuels if the global energy transition is not
accompanied by inclusive diversification in these countries.

At the same time, the global shift towards renewable energy presents opportunities for
countries with abundant solar, wind, and geothermal resources. Embracing a transition
towards green energy sources will give distinct advantages to early adopters from the CDDC
group. Green energy will be an important commodity which, if produced in large quantities,
could be exported to regional and global markets. Green hydrogen could be an example.12

Moreover, some CDDCs with the required basic capabilities could leapfrog old technologies
and develop their productive systems based on low-carbon technologies and processes.
Markets will likely be moving towards consuming goods with low carbon content, and
countries that can use green energy in their production systems will be well-positioned to reap
the benefits of expanding markets in green products.13 CDDCs could position their economies
in such a way that they maximize the benefits derived from this new economic landscape.

While all CDDCs share challenges and opportunities, their diversification pathways will need
to be tailored to country circumstances. CDDCs will need to define relevant green industrial
policies (GIPs) that focus on enabling these countries to benefit from opportunities created by
the global energy transition. One important element of such a policy would be its inclusivity
through, for example, its capacity to create jobs that cater to the needs of different segments
of the workforce.

CDDC diversification efforts are more likely to succeed if they are embraced and genuinely
supported by the global community. Support can take different forms, including favourable
international trade policy that provides room for developing countries’ non-traditional exports,
financial assistance, capacity building to acquire and use more sophisticated productive
systems, and technology transfer.

Given that CDDCs’ economic transformation will require an increase in energy use, often from
very low bases, they will need to use all their energy resources in line with commitments under
CDDCs nationally determined contributions (NDCs) in the context of the Paris Agreement, and
conditional on external assistance.14 The quicker the scaling up of this assistance, the more
GHG emissions can be mitigated in these countries.

This report explores ways in which CDDCs can become more resilient by diversifying
production and moving up value chains to produce and export a wider variety of products –
and do so in ways that are inclusive and protect the global climate.

The commodity trap

Most economic value chains originate in commodities such as crude oil, copper, cotton or
wheat. As prices fluctuate in international markets, developing countries that depend on
exporting these commodities often have volatile incomes and slow productivity growth and
can be politically unstable. As the world moves to more advanced products that command
higher prices in international markets, CDDCs risk falling further behind.

UNCTAD considers a country to be commodity-dependent if it derives 60 per cent or more

of its merchandise export revenues from primary commodities. On this basis, in 2019-2021,
95 of the 195 UNCTAD member States were CDDCs, and an additional 15 were also very
exposed, with shares in the 50 to 60 per cent range.15 Generally, CDDCs are countries at

5
 COMMODITIES
DEVELOPMENT
REPORT 2023
Inclusive Diversification and Energy Transition

earlier stages of development: for landlocked developing countries (LLDCs), the proportion
of merchandise export revenues from primary commodities was 81 per cent; for small island
developing States (SIDS), it was 61 per cent, and for the least developed countries (LDCs), it
was 76 per cent (Figure 1.2).

In 38 CDDCs in 2019-2021, the dominant commodity export was agricultural goods; in 31,
it was mining products; and in 30, it was energy.16 Moreover, many CDDCs depend on a
narrow range of exports or even a single commodity. For Zambia, for example, 69 per cent
of merchandise exports were of copper; for Suriname, 77 per cent were of gold; and for Iraq,
91 per cent were of crude oil. Of the developed countries, however, only 13 per cent were
commodity dependent.

Countries dependent on commodities often experience slow productivity growth, volatile

incomes, macroeconomic and political instability, and overvalued exchange rates.17 Typically
such dependence goes hand-in-hand with underdevelopment – as reflected in UNDP’s human
development index (HDI). For instance, in 2021, 29 of the 32 countries classified as having low
human development in UNDP’s human development index (HDI) were CDDCs. Low-human
development countries have average commodity export shares of 82 per cent.18

Fluctuating revenues

Overconcentration of exports also affects public revenue and the potential for investing in
sustainable development. For example, in 2020, Angola generated 51 per cent of its central
government revenue from oil, a figure projected to increase in 2022 to 59 per cent. 19

Without proper fiscal policy frameworks, this can result in volatile and unsustainable spending
and fluctuations in output. One way to address this is by saving a portion of commodity
revenues for future use through sovereign wealth funds (SWFs). Examples of such funds
include the Norwegian Oil Fund – the largest commodity-linked SWF with over $1.1 trillion
worth of assets, and the copper-based Economic and Social Stabilization Fund in Chile.20
Such funds can also make countries more resilient by transforming wealth based on natural

Figure 1.2 Commodity dependence is more prevalent in the developing world: Commodity
dependence by country group, 2019–2021
(percentage)

81 80
74 76
Prevalence of
65 commodity
61 61 dependence
55

33 Average
commodity export
share
13

LLDC LDC SIDS Other Developed

developing countries
countries

Source: UNCTAD based on data from the UNCTADstat database.

6
 COMMODITIES
DEVELOPMENT
REPORT 2023
CHAPTER 1 The predicament of commodity-dependent developing countries

resources into other types of assets.

CDDCs are very exposed to fluctuations in exchange rates. A drop in commodity prices
reduces export revenues in United States dollars, which tends to lower the demand for the
local currency and puts downward pressure on the exchange rate. In Zambia, for instance,
between July 2014 and January 2016, the price of copper per metric ton dropped from
$7,113 to $4,472. Over the same period, the exchange rate of the Zambian kwacha fell from
K6.14 to K11.13 per United States dollar – increasing the local currency value of external debt
denominated in United States dollars.

Further recent shocks transmitted via global commodity markets have been the COVID-19
pandemic and the war in Ukraine – which have come on top of the climate crisis and the
global energy transition, all of which are affecting patterns of production and consumption.
These disruptions have hit hardest at vulnerable developing countries – but particularly at
CDDCs, many of which rely on the export of one commodity group, such as fuels, while
also being net importers of other basic commodities, including food. In 2020, according to
the Notre Dame Global Adaptation Initiative, all the 25 countries most vulnerable to climate
change impacts were CDDCs.21

Left with stranded assets

In addition, many CDDCs that depend on fossil fuel exports will suffer from a rapid
decarbonization of the global economy. This could leave them with ‘stranded assets’ –
resources that have lost their value or become liabilities, such as abandoned oil fields or
equipment. CDDCs that depend on the export of crude oil, natural gas and coal fossil fuels
will need to prepare for shrinking markets.

One estimate suggests that, to limit global warming to 2°C above pre-industrial levels, a
significant proportion of fossil fuel reserves will need to remain unused – one-third of oil
reserves, half of the natural gas reserves and over 80 per cent of coal reserves.22 In Africa,
for example, this comprises 28 billion barrels of oil, 4.4 trillion cubic metres of natural gas
and 30 gigatons of coal. In Central and South America, it comprises 63 billion barrels of oil,
5 trillion cubic metres of natural gas and 11 gigatons of coal. Even more assets would need
to be stranded to achieve the 1.5°C target: to have a 50 per cent probability of reaching the
1.5°C target by 2050 would leave unextracted 58 per cent of oil reserves, 56 per cent of gas
reserves, and 89 per cent of coal reserves.23, 24 These proportions would be even higher if the
1.5°C target is to be reached with a probability higher than 50 per cent.

The 1.5°C target might already be out of reach, but the global energy landscape is nevertheless
undergoing a profound transformation. The latest forecasts of the International Energy Agency
for the first time show that global fossil-fuel demand is peaking.25 Under current policies, coal
use would drop within the next few years, natural gas demand would plateau by the end of
the 2020s, and oil demand would peak in the mid-2030s. If countries follow through on their
climate pledges, fossil fuel demand would drop even faster. This is already reflected in lower
investment in fossil fuels: between 2019 and 2022, investment in upstream oil and gas fell by
17 per cent to around half its 2014 level.26

Fossil fuels will remain part of the global energy mix in the coming decades, but the mid-to
long-term trends show slackening demand.

7
 COMMODITIES
DEVELOPMENT
REPORT 2023
Inclusive Diversification and Energy Transition

Risks for commodity-importing countries

While there are risks for countries that depend on commodities for exports, there are also risks
for commodity importers. Many developed and developing countries depend on imports of
basic commodities such as food, fuels and fertilizers. In 2019–2021 among the 195 UNCTAD
member States, 131 were net importers of basic food, 143 of fuels, and 154 of fertilizers.27
And of the 95 CDDCs, 73 were net importers of basic food, 60 of fuels and 79 of fertilizers.
And 42 were net importers of all three basic commodity groups.28

International trade helps to balance the global supply and demand of commodities and
provides more diverse food. But, as demonstrated after the onset of the war in Ukraine,
import dependence is also a risk. For example, in 2021, Egypt sourced 75 per cent of its
wheat imports from the Russian Federation and Ukraine; Mexico sourced 98 per cent of its
maize imports from the United States of America; and Nepal sourced 99 per cent of its rice
imports from India.29

In mid-2020, as national economies started to rebound from the shock of the COVID-19
pandemic, supply chains could not keep pace, and commodity prices started to rise (Figure
1.3). Commodity production also depends on supplies of energy, so prices were also driven
up by high energy prices. At the same time, there were increases in the cost of transport,
notably for container freight.30

The broad-based upward trend in commodity prices was given a boost by the start of the
war in Ukraine, which affected basic food items such as wheat and sunflower oil, as well as
fertilizers and fossil fuels. In 2021, the Russian Federation and Ukraine jointly accounted for
27 per cent of global wheat exports, according to figures in UNCTADStat database. Supplies
were also affected when commercial vessels were prevented from leaving Black Sea ports
after the war started. Net importers of food faced not just rising prices but also increasing
uncertainty in supplies, especially in countries that depended on imports coming through
Black Sea ports, including many LDCs. Some countries responded by restricting exports of
wheat and other grains, which further exacerbated the situation.

Between 2021 and March-April 2022, after the start of the war, the price of wheat rose by 56
per cent and that of sunflower oil by 65 per cent. Over the same period in Europe, prices of
natural gas, for which the Russian Federation was the main supplier, increased by 131 per
cent (Figure 1.4).

Prices of food started to fall after the Black Sea Grain Initiative was signed by the Russian
Federation, Türkiye, Ukraine and the United Nations, which facilitated exports of food items
and fertilizers from Ukraine and the Russian Federation.31 Between 3 August 2022 and 5
March 2023, 23 million tons of grain and other food products were exported.32

Nevertheless, as of January 2023, many commodity prices remained higher than before the
COVID-19 pandemic. Between 2019 and 2023, the price of wheat increased by 89 per cent
and that of sunflower oil by 64 per cent. Also worrying for food production and supplies is the
high price of fertilizers: over the same period, the average monthly price of urea increased by
81 per cent and that of potassium chloride by 120 per cent (Figure 1.5).

The price hikes since mid-2020 created a significant problem for net-commodity-importing
developing countries – which were faced with higher import bills, inflationary pressures and
rising levels of debt. This hit particularly hard at the poor, who tend to spend a higher share
of their incomes on food – so that in 2022 the number of acutely food-insecure people hit a
record of 349 million.33 In 2022 and 2023, for the 48 most-affected countries, higher food and

8
 COMMODITIES
DEVELOPMENT
REPORT 2023
CHAPTER 1 The predicament of commodity-dependent developing countries

Figure 1.3 Commodity prices rose sharply amidst the COVID-19 pandemic: UNCTAD commodity
price index, excluding fuels 2010-2022
(2015=100)
250

200
All groups

150 All groups excl.

fuels

100

50

0
Jan. 2010
Aug. 2010
Mar. 2011
Oct. 2011
May 2012
Dec. 2012
Jul. 2013
Feb. 2014
Sep. 2014
Apr. 2015
Nov. 2015
June 2016
Jan. 2017
Aug. 2017
Mar. 2018
Oct. 2018
May 2019
Dec. 2019
Jul. 2020
Feb. 2021
Sep. 2021
Apr. 2022
Nov. 2022
Source: UNCTAD based on data from UNCTADStat database.

Figure 1.4 The commodity price shock in early 2022 came on top of a rising price trend: Price
changes from the 2019 average, selected commodities
(Percentage)

750 2020

650 2021

550 Mar-Apr 2022

450

350

250

150

50

-50
Natural Coal, Crude oil, Sunflower Wheat, Barley, Urea Potassium
gas, South Brent oil United States Black Sea chloride
Europe African HRW

Source: UNCTAD based on data from FAO and the World Bank.

9
 COMMODITIES
DEVELOPMENT
REPORT 2023
Inclusive Diversification and Energy Transition

Figure 1.5 Food and fertilizer prices remain high: Food and fertilizer prices, index January
2019 – January 2023
(Average 2019 =100)
400

350

300
Potassium chloride
250
Urea
200 Wheat, United States HRW

150 Sunflower oil

100

50

0
Jul-19

Jul-20

Jul-21

Jul-22
Oct-19

Oct-20

Oct-21
Apr-19

Oct-22
Apr-20
Jan-19

Apr-21
Jan-20

Apr-22
Jan-21

Jan-22

Jan-23

Source: UNCTAD based on data from the World Bank.

fertilizer prices raised import bills by $9 billion, and governments had to spend $5 billion–$7
billion to protect vulnerable households.34 There is also an important gender dimension: in
2019, women were 13 per cent more likely than men to experience either moderate or severe
food insecurity35 – a gap that widened in 2020 and 2021 during the COVID-19 pandemic.36

In combination with rising energy prices, the world faces a cost-of-living crisis.37 In Rwanda
in January 2023, for example, year-on-year nominal food inflation was 41 per cent,38 and in
Ghana, it was 61 per cent.39 Many net commodity-importing developing countries were also
affected in 2022 by a depreciation of their currencies against the United States dollar – the
main invoicing currency in international trade.40

In highly integrated global commodity markets, supply disruptions in one region have knock-
on effects around the world. For liquified natural gas (LNG), for example, as the technology
and infrastructure have been extended to more countries, the market has become more
integrated. In 2022, reduced pipeline flows from the Russian Federation to Europe pushed
up LNG prices globally – with dire consequences for some Asian countries. Pakistan, for
instance, was forced to shut down gas-fuelled power plants, causing widespread blackouts.41
Bangladesh had to stop purchasing LNG on the spot markets in 2022 and faced an energy
crisis and power outages.42 Higher LNG prices have also encouraged countries to turn to
coal and oil – undermining global efforts to reduce GHG emissions. For example, Germany
reactivated and prolonged the operation of coal-fired power plants to boost supply in 2022.43

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 COMMODITIES
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CHAPTER 1 The predicament of commodity-dependent developing countries

Endnotes
1 20
Prebisch, 1950; Singer, 1950 See data on SWF’s assets under management:
2
UNCTAD, 2021d https://globalswf.com/ranking (on 16 May 2023, the
3 Norwegian Oil Fund was the largest in the world).
UNCTAD, 2019a
21
4 The ND-GAIN vulnerability score includes indicators
Including in the form of inflation, food insecurity, and
on biophysical exposure, adaptive capacity and
unsustainable debt levels (UNCTAD, 2022h).
sensitivity, i.e. the extent to which a country is
5
UNCTAD, 2021d dependent upon a sector negatively affected to by
6
The energy transition is generally understood as the climate hazard. Available at: https://gain.nd.edu/our-
process of moving away from fossil fuel sources of work/country-index/, accessed 1 December 2022.
energy, namely coal, oil, and natural gas, towards 22
McGlade and Ekins, 2015
low-carbon energy sources, including solar and wind 23
Welsby et al., 2021
energy sources. The increasing use of lithium-ion
24
batteries also contributes to the energy transition. In Africa this would comprise 51 per cent of current
7 oil reserves, 49 per cent of natural gas reserves and
See, for example, Wang et al., (2020), Iqbal et al.,
86 per cent of coal reserves in Africa. In Central and
(2021), and UNCTAD (2023a).
South America, it would comprise 73 per cent of oil,
8
Empirical research establishes a strong link between 67 per cent natural gas reserves, and 84 per cent of
economic diversification and growth, particularly coal reserves.
export-led diversification e.g., Hausmann et al., 2007; 25
IEA, IRENA, UNSD, World Bank and WHO, 2022
Agosin, 2009; Freund and Pierola, 2012.
26
9 Ibid
In this report, diversification is used to mean any or all
27
its associated concepts discussed here, depending countries in which imports are greater than exports,
on the context. in value terms.
28
10
UNCTAD, 2021d Also, at global level, food security depends to a large
11 extent on a few key staples. For example, wheat, rice
For example, in developing countries, international
and maize jointly accounted for 41 per cent of food
investment in fossil fuels power generation and
calories in 2018-2020 according to data in FAOStat.
extraction has declined by half from 2019 to 2022
29
(UNCTAD, 2023b). Based on data from UNCTADStat database.
30
12
UNCTAD, 2023a UNCTAD, 2022g
31
13
For example, a recent report found significant price UNCTAD, 2022i
32
premia being paid for green upstream products such https://unctad.org/a-trade-hope-2
as green plastic or green steel (WEF and Boston 33
WFP, 2022
Consulting Group, 2023). 34
Rother et al., 2022
14
UNCTAD, 2019a 35
FAO; IFAD; UNICEF; WFP; WHO, 2020
15
Data are not available for Monaco, San Marino 36
FAO; IFAD; UNICEF; WFP; WHO, 2022
and the Holy See; trade data for Liechtenstein are
37
reported together with data for Switzerland. UNCTAD, 2022h
38
16
For two CDDCs it is not possible to identify the National Institute of Statistics of Rwanda, 2023
39
dominant commodity group in a consistent way, see Ghana Statistical Service, 2023
Osakwe and Solloder (2023) for details. 40
UNCTAD, 2022; Boz et al., 2022
17
See, for example, references in UNCTAD (2021d). 41
Bloomberg, 2022
18
UNDP, 2022 42
Reuters, 2022a
19
Calculation based on data in IMF (2022). 43
Reuters, 2022b

11
 CHAPTER

2
Strength in
diversification
 COMMODITIES
DEVELOPMENT
REPORT 2023

2 Strength
in diversification

This chapter delves into the crucial topic of economic diversification, specifically focusing on its significance
for CDDCs. It highlights the traditional drivers of diversification, such as human capital development,
competitive industries, and reliable infrastructure, including access to energy and information and
communication technologies (ICTs). Despite the dynamic and ever-evolving nature of economies worldwide,
these traditional drivers of economic diversification continue to be of utmost relevance for CDDCs. By
analysing successful cases of diversification and addressing key challenges, the chapter offers insights into
how CDDCs can navigate the complexities of diversification to foster sustainable and resilient economies.

If CDDCs are to achieve the Sustainable Development Goals in an increasingly uncertain

global economic and political environment, they will need to become more resilient – by
moving along value chains and diversifying production to offer a greater variety of exports.
Diversification not only insures against future market shocks, but also generates economic
growth and drives structural transformation.

To become more resilient, CDDCs will need to produce more varied products and exports.1
Diversification is thus associated with structural transformation – reallocating labour and
capital across sectors, industries, and firms to produce a wider assortment of goods and
services. This reallocation can take place across broadly defined economic sectors, such as a
shift from agriculture to manufacturing or services, but it can also happen within sectors, such
as when farmers start to produce non-traditional agricultural goods.

Directions for diversification

Diversification can be horizontal or vertical. Horizontal diversification typically broadens the range
of production and exports. Costa Rica, formerly a CDDC, for example, has established new
industrial sectors and is exporting medical instruments and semiconductors. Or diversification
can be vertical, involving greater variety in a sector’s value chain, such as refining crude oil to
produce gasoline or petrochemicals or using locally mined cobalt, nickel and manganese to
make and export precursor materials for batteries. On a smaller scale, local companies can
process raw agrifood commodities such as cocoa beans into cocoa butter. CDDCs can also
diversify their markets – by increasing the range of countries to which they export.

CDDCs have significant potential for structural change through both manufacturing and
services.2 As agriculture becomes less labour-intensive, some agricultural workers can
move to the manufacturing sector, which can absorb low-skilled workers and produce more
tradeable goods for exports.3 At the same time, diversification should expand the services
sectors, with a focus on dynamic, high-productivity, and tradeable activities.

15
 COMMODITIES
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Inclusive Diversification and Energy Transition

Enablers of diversification

Each CDDC will diversify according to its own needs, but there are some common broad
approaches. Successful countries have, for example, first targeted priority sectors while
making the economic environment more conducive to investment, business activity and
international trade.4 They have also maintained stable macroeconomic conditions and built
regulatory frameworks that facilitate private-sector initiatives.

In addition, diversification requires a strong base of human capital – a well-trained workforce

that can seize higher-skill employment opportunities. And there is empirical evidence of the
importance of education for diversification.5 To measure a country’s strengths in this respect,
the World Bank has produced a composite human capital index (HCI). Non-CDDCs have an
average HCI of 0.63, while CDDCs have an average HCI of 0.48.

Figure 2.1 plots the HCI against each country’s share of commodities in merchandise exports
– indicating a more general negative correlation.6 In Costa Rica, for example, an educated
workforce with high technical skills has attracted high-tech companies.7 Similarly, in Gabon,
the International Multisectoral Centre for Vocational Education and Training, established in
2021, provides training in competencies such as mechanical engineering and computer
maintenance.8

Figure 2.1 Commodity dependence and low human capital often go hand-in-hand: Commodity
dependence, 2019–2021, and the quality of human capital, 2020
1.00

0.90

0.80
Human Capital Index

0.70

0.60

0.50

0.40

0.30

0.20
0 20 40 60 80 100

Share of total merchandise exports composed of commodities (percentage)

CDDCs non-CDDCs Linear (CDDCs)

Source: UNCTAD based on data from the World Bank and the UNCTADstat database.
Note: The human capital index is available for 171 United Nations Member States.

16
 COMMODITIES
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CHAPTER 2 Strength in diversification

Market access conditions are also a key factor in successful diversification. Many countries
impose low tariffs for commodities but higher tariffs for goods based on those commodities.
Such ‘tariff escalation’ is more common in manufacturing than in agriculture and can be found
in both developed and developing countries and for imports of apparel, animal products,
tanning and light manufacturing – as well as for food products.9 Hence, tariff escalation in
manufacturing could be a contributing factor to the lack of industrialization in CDDCs and
poses an obstacle to export diversification. Tariff peaks that are often concentrated in
agricultural goods, such as food products, can also limit the scope for export diversification
in these countries. In this regard, it is important that trade liberalization under the framework
of the World Trade Organization continues to address, through trade negotiations, the issue
of tariff escalation and tariff peaks faced by many CDDCs. In addition, these countries should
include in diversification strategies a detailed analysis of the tariff structure they face in export
markets, as well as opportunities arising from existing trade preferences, such as under the
Generalized System of Preferences and other schemes, given country-specificities that need
to be taken into account.

Exports of goods from CDDCs can be further impeded by non-tariff measures (NTMs),
which are generally more pervasive and present higher barriers.10 NTMs include technical
requirements and sanitary and phytosanitary measures. For agrifood products, NTMs can take
the form of quality standards, food safety regulations, as well as requirements on labelling and
traceability. Such measures raise compliance costs and further stretch limited administrative
capacities of CDDCs.

To address NTMs, developing countries and their development partners need to boost
product quality and safety, improve domestic infrastructure, and build national capacity to
reduce the costs of trade, such as customs clearance. In addition, the trading partners of
CDDCs should remove unnecessary NTMs and increase transparency by offering companies
clearer information on regulations and requirements. Diversification and upgrading will often
mean importing capital goods such as machinery and inputs, for which CDDCs can reduce
import tariffs to zero.

Diversification and value upgrading also depend on the availability of capital goods and inputs
for new and higher value-added products. In this context, a lack of competition in domestic
input markets can compromise the competitiveness of exporters in international markets and
needs to be addressed through an appropriate competition policy response. For example,
there is evidence suggesting that, in Malawi and the United Republic of Tanzania, a lack
of competition led to markups of the price of fertilizers, an essential input.11 Key services
such as transportation and telecommunications can also be subject to anticompetitive
behaviour, resulting in lower quality standards and higher prices and thereby hindering the
competitiveness of firms that depend on these services. A strong competition authority that
effectively prosecutes collusion and other anticompetitive behaviour can help maintain efficient
input markets and thereby strengthen the competitiveness of exporting firms in CDDCs.

Another key requirement is good physical infrastructure, including roads, ports and airports.
This is a major concern for CDDCs, particularly the landlocked developing countries (LLDCs)
that must export most goods through neighbouring countries. Links with global markets can
therefore be improved through regional integration – as through the implementation of the
African Continental Free Trade Area.

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Some countries are diversifying by creating special economic zones (SEZs) where business
and trade laws are different from those in the rest of the country. In 2019, across 147
economies, there were nearly 5,400 SEZs.12 Such zones need to be carefully designed to
correspond to local conditions and international economic trends and have good electricity
and telecommunications services and connections to transport routes.13 And they need to
connect well with the rest of the economy and spread knowledge and innovation beyond
SEZ borders – through partnerships between governments, international institutions, and
local firms. Such measures could include capacity building and training programmes and
networking events where local suppliers can make links with foreign firms. In Ethiopia, for
example, there has been success in linking some industrial parks with local suppliers for the
garment industry.14

Malaysia moves on from rubber and tin

Malaysia provides a good example of manufacture-led diversification. In 1980, primary

commodities accounted for 72 per cent of merchandise exports, mainly rubber and tin ores.15
From the 1980s, the Government promoted both vertical and horizontal diversification and
value upgrading – by promoting foreign direct investment (FDI), creating industrial clusters
and funding research and development. The result was sustained growth in manufacturing,
particularly electronics. At the same time, Malaysia stepped up the value-added for commodities
such as rubber (Figure 2.2). As a result, Malaysia is now among the top global exporters of

Figure 2.2 Malaysia is a successful case of manufacture-led diversification: Malaysia,

commodities in total merchandise exports, 1980–2021, and exports, 1995-2021
Merchandise export shares Exports
100
350
90
300
80

70 250
Billions of dollars
Percentage

60
200
50

40 150

30 100
20
50
10

0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019

Commodities Manufactured goods Merchandise Services

Source: UNCTAD based on data from the Department of Statistics Malaysia (merchandise export shares) and
UNCTADstat database (Exports).

Note Commodities correspond to SITC sections 0 to 4; manufactured goods correspond to SITC sections 5 to 8.

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CHAPTER 2 Strength in diversification

surgical gloves, which in 2021 generated $455 million in export revenue. In addition, Malaysia
had oil resources that it was able to convert into petrochemicals.16 The overall result has
been a deep structural transformation. Between 1982 and 2000, the share of employment
in agriculture fell from 31 to 17 per cent, while that in manufacturing increased from 16 to 23
per cent. Commodity exports became less significant: between 1980 and 2000, their share of
total merchandise exports dropped from 71 to 18 per cent.

Mauritius sees beyond sugar

Mauritius is a good example of how to upgrade and add value in both manufacturing
and services. At independence in 1968, 90 per cent of merchandise export revenue was
generated by raw sugar and molasses.17 The Government realized that reliance on a single
cash crop posed a significant risk and, from the early 1970s, set up export processing zones,
particularly for textiles and garments. Then in the 1980s, it sought FDI for the expansion of the
services sectors – notably tourism, information and communications technology, and banking
and finance.18 From 2008 to 2019, the value of services exports usually exceeded that of
merchandise exports (Figure 2.3). The drop in 2020 was due to the COVID-19 pandemic,
which hindered tourism and travel.

Figure 2.3 Services played a key role in the diversification process of Mauritius: Mauritius,
commodities in total merchandise exports, and of services exports, 1995–2021
Merchandise export shares Exports
100 4.0
90 3.5
80
3.0
70
Billions of dollars

2.5
60
Percentage

50 2.0

40 1.5
30
1.0
20
0.5
10
0 0.0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021

Commodities Merchandise
Sugar, sugar preparations and honey Services
Manufactured goods

Source: UNCTAD based on data from UNCTADstat database.

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Other countries have diversified production and exports or moved along commodity value
chains.

• Costa Rica – Diversified its exports away from coffee and bananas towards the
manufacture of medical instruments as well as ICT services and eco-tourism.

• Botswana – Established a diamond-processing industry, cutting and polishing raw

diamonds, and has developed a tourism sector.

• Chile – In parallel with growing exports of copper, Chile diversified to non-mineral

exports.

• Indonesia – Moved from exports of iron ore to become a leading exporter of stainless
steel. Between 2016 and 2021, exports of iron and steel rose from $2 billion to $21
billion.19

Other CDDCs are at various stages on the path towards diversification and value upgrading.20

Reliable access to electricity

A critical component of diversification is access to reliable energy services, since adding more
value usually means consuming more energy. This is a major problem in Africa. In 2020, of
the 20 countries that had the lowest share of the population with access to electricity, all were
African CDDCs whose average share of commodities in exports was 90 per cent (Table 2.1).
Electricity in CDDCs can also be very expensive.

Households and firms in CDDCs typically experience frequent power outages and voltage
fluctuations.21 In Zambia in 2019, for instance, 86 per cent of manufacturing firms experienced
electricity outages – typically for 13 hours a month.22 Interruptions in supply hinder the adoption
of new technology and modern production methods and require firms to invest in generators
that add to their production costs – all of which reduce their competitiveness in international
markets.

Good access to electricity is also vital for education and training. In Chad, for example, in 2021,
only 4 per cent of primary schools had access to electricity.23 Lack of electrical power also
affects the health of the workforce, particularly in rural areas. In the developing world in 2020,
around 2.4 billion people cooked with open fires or inefficient stoves, polluting household air
and killing around 3.2 million people each year.24 There is also an important gender dimension
since women often take on time-consuming tasks such as fetching fuelwood. The productivity
of women-led microenterprises is boosted by access to modern energy sources, particularly
for heat-intensive food processing or for lighting for home-based work carried out in the
evenings. Street lighting also contributes to women’s security.

Diversifying sources of imports

While reducing reliance on a single commodity for exports, countries also need to be concerned
about overreliance on one or two countries for imports – particularly for food. At times of acute
crisis, development partners can offer more support and help prevent hardship in the most
vulnerable countries. FAO, for example, has proposed a food-importing financial facility which
would help the most vulnerable countries, including the LDCs, access critical foodstuffs.

Boosting food emergency preparedness should involve building up public stocks while
strengthening safety nets and social protection.25 Net-commodity-importing developing

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CHAPTER 2 Strength in diversification

Table 2.1 Many African CDDCs suffer from low access to electricity: Countries with the lowest
levels of access to electricity
Percentage of population with Percentage of commodities
access to electricity, in total merchandise exports,
2020 2019–2021
South Sudan 7 100
Chad 11 98
Burundi 12 95
Central African Republic 15 76
Malawi 15 93
Burkina Faso 19 97
Democratic Republic of the Congo 19 82
Niger 19 89
Sierra Leone 26 87
Liberia 28 74
Mozambique 31 94
Guinea-Bissau 33 98
Madagascar 34 74
United Republic of Tanzania 40 88
Benin 41 92
Uganda 42 86
Guinea 45 95
Zambia 45 89
Angola 47 98
Rwanda 47 91
Source: UNCTAD based on data from the UNCTADstat database and the World Development Indicators
database of the World Bank.

countries, particularly the LDCs, may not have the financial resources to achieve these
objectives. In this context, the recent worsening of indicators of fiscal sustainability of LDCs
illustrates this point. Indeed, the fiscal deficit as a share of GDP in the median developing
country that was a net importer of basic food in the period 2019-2021 worsened from 2.1 per
cent in 2019 to 3.5 per cent in 2022.26 Therefore, these countries will need additional financial
support if they are not to cut spending on essential services such as health or education.

At times of crisis, markets for food, fertilizers and fuel must remain open – to balance supply
and demand across the globe and avoid price spikes. In 2022, the WTO’s 12th Ministerial
Conference exempted the World Food Programme’s humanitarian food purchases from
export prohibitions or restrictions.27 This is a useful contribution, but LDCs and other vulnerable
countries need far-reaching commitments that ensure access to essential foodstuffs and other
basic commodities. Efforts to stabilize commodity markets will benefit from greater market
transparency.

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In addition, net-commodity-importing developing countries need to be more resilient to future

commodity market shocks – particularly for key food staples. Some countries could increase
their own agricultural output – especially those in Africa, where, in 2020, average cereals
yields were less than half the global average (Figure 2.4). Yields can be increased through
higher-quality inputs along with finance, capacity-building and better technology, including
climate-smart agriculture, while also reducing post-harvest losses through better storage,
processing and transportation. Moreover, food production can also be increased along the
extensive margin where planted areas can be expanded sustainably, i.e. without contributing
to deforestation or loss of biodiversity. Food security in food-deficit countries can be further
bolstered by cutting food waste and distributing food more equitably across the world.

Countries can also cut energy imports by making greater use of renewable energy sources.
Africa has 60 per cent of the best solar resources globally but only 1 per cent of installed
photovoltaic capacity.28 The SIDS too have substantial potential to expand renewable energy.29
Seychelles, for example, in its updated NDC, has set a target of 15 per cent renewables in the
energy mix by 2030.30 The updated NDC of the Bahamas includes the target of at least 30
per cent renewables in the energy mix by 2030.31 In its National Energy Policy, Barbados has
set a target for 100 per cent renewable energy by 2030.32 And in its National Development
Plan, Fiji aims to generate 100 per cent of its electricity from renewable sources by 2036.33
The Small Island Developing States Accelerated Modalities of Action (SAMOA) Pathway calls
for an acceleration of renewable energy deployment with more financial resources, technology
transfer and capacity building.

Diversifying through a climate emergency

Today’s developed countries reached their high income and consumption levels by
restructuring from agricultural to energy-intensive industrialized output. Developing countries
are following a similar trajectory but under fundamentally different circumstances – notably a
climate emergency. They cannot, therefore, stake their futures on fossil fuels.

Figure 2.4 Cereal yields differ significantly across regions: Cereal yields in selected regions,
2020
(kg per hectare)

7 000

6 000

5 000

4 000

3 000

2 000

1 000

0
Americas Europe Asia World Africa
Source: UNCTAD based on data from FAOStat.

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There are two ways of reducing greenhouse gas emissions from economic activity. One is
to make growth less emissions-intensive; the other is to deliberately slow economic growth.
In particular for developing countries, limiting growth is not an option if they are to attain the
SDGs, so they need to look instead to minimize GHG emissions while taking advantage of
the changing global energy landscape by reconfiguring their economic structures and energy
systems.

Many CDDCs provide the raw materials essential for clean energy technologies – including
battery metals such as cobalt, lithium and copper. They should not get trapped at the entry
of value chains but rather move along them to add value locally. A promising example is the
recent cooperation agreement signed between the Democratic Republic of the Congo and
Zambia to jointly develop a battery precursor industry.34 CDDCs that have large potential for
renewable power generation can also become suppliers of green hydrogen while using this to
generate electricity in remote and currently unserved areas.35

CDDCs have a chance to take a new development path and avoid some of the worst by-
products of industrialization, such as smog and polluted rivers that cause disease and
premature death. Most CDDCs have already spelt out plans for scaling up renewable energy,
strengthening energy efficiency and have presented other strategies to reduce GHG emissions
in their NDCs. Green industrialization and green growth will require large investments in
infrastructure and energy systems. Most of the targets in their NDCs are conditional on
financial, technological and capacity-building support from the international community.36
CDDCs will therefore need to work with their development partners to mobilize the necessary
finance and transfer of technologies.

Countries and regions will follow their own energy transition paths, considering their resource
endowments and availability of financial and technical capacity – and the needs of their
current and future populations. The different circumstances they face are illustrated in Figure
2.5. Burundi, Nigeria and Switzerland have very different endowments and population growth
rates.

Figure 2.5 Countries differ in terms of their development status and natural endowments:
Selected energy and socio-economic indicators
71 033 100 70 2.62
59 2.37
Switzerland

55
Burundi
Nigeria

23
Burundi

Switzerland

Switzerland

Switzerland

0.47
Burundi

Burundi
Nigeria

Nigeria

Nigeria

4 923 12
705

GDP per capita, PPP, 2021 Access to electricity, 2020 Share of renewables in Population growth rate, 2021
(constant 2017 $) (percentage of population) power generation, 2020 (percentage)
(percentage)

Source: UNCTAD based on data from the World Bank (GDP per capita), United Nations World Population
Prospects database (population growth rate) and IRENA.
Note: These countries were selected for purely illustrative purposes to highlight the diversity of challenges of
countries at different stages of development and with different natural resource endowments.

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 COMMODITIES
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Inclusive Diversification and Energy Transition

Hence, as CDDCs diversify, transform, and upgrade their economies to achieve the SDGs,
they have to take these differences and inequalities into account.

From link to link

In an increasingly volatile global economic and geopolitical environment, both CDDCs and
net-commodity-importing developing countries need to diversify and upgrade their value
chains. A number of CDDCs have demonstrated that it is possible to move along the value
chains of commodity and non-commodity sectors so as to be more resilient.

At the same time, net-commodity-importing developing countries need to diversify their

sources of imports of basic commodities such as food, fuels and fertilizers – while boosting
their own production, particularly of food and renewable energy. For this, they need the full
support of the development partners, particularly for strengthening social safety nets and
emergency preparedness.

Many of these processes do, however, carry the risk of increasing inequalities, both within and
between countries, as analysed in the next chapter.

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 COMMODITIES
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CHAPTER 2 Strength in diversification

Endnotes
19
Based on Comtrade database for harmonized
1
Independent of the structural composition of an system code 72.
economy, a reduction of concentration of export 20
For example, economic diversification is included in
destinations is also a form of diversification. key forward-looking policy documents of gas and
2
UNCTAD, 2021d oil-dependent economies of the Gulf Cooperation
3 Council, such as in Vision 2030 of Bahrain; Vision
Hallward-Driemeier and Gaurav, 2018
4
2035 of Kuwait; Vision 2040 of Oman; National Vision
See e.g. UNCTAD (2015) for specific 2030 of Qatar; Vision 2030 of Saudi Arabia; and
recommendations in this regard. Economic Vision 2030 of Abu Dhabi, United Arab
5
Giri et al., 2019 Emirates.
6
The key components of the Human Capital Index 21
Ayaburi et al., 2020
are education and health measured by survival rates, 22
According to World Bank Enterprise Survey data.
quality-adjusted years of schooling and prevalence of 23
UNESCO Institute for Statistics, 2023
stunting.
24
7 IEA et al., 2022
Rodríguez-Clare, 2001
25
8 Gentilini, et al., 2022
https://www.uneca.org/stories/gabon-launches-
26
technical-training-hub-to-revolutionise-skills-for- UNCTAD calculation based on data from
economic-diversification UNCTADStat database and Kose et al. (2022).
27
9
UNCTAD, 2022a WTO, 2022
28
10
UNCTAD and World Bank, 2018 IEA, 2022
29
11
World Bank; Organisation for Economic Co-operation Blechinger et al., 2016
30
and Development, 2017 UNFCCC, 2021a
12 31
UNCTAD, 2019b UNFCCC, 2021b
13 32
UNCTAD, 2021a Ministry of Energy and Water Resources of Barbados,
14
Whitfield et al., 2020 2021
33
15
Based on data from the Department of Statistics Ministry of Economy of the Republic of Fiji, 2017
34
Malaysia. UNECA, 2022b
16 35
Based on data from COMTRADE. UNCTAD, 2023c
17 36
Based on mirror data from COMTRADE. UNCTAD, 2019a
18
See also UNCTAD (2001) on the role of FDI in the
diversification process of Mauritius.

25
 CHAPTER

Ensuring
inclusiveness
 COMMODITIES
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3 Ensuring
inclusiveness

This chapter examines the relationship between export diversification and income inequality. While
some studies suggest that diversification can lead to higher income inequality by favouring high-skilled
workers, others argue that it can create employment opportunities and narrow inequalities in the long
run. However, the results remain inconclusive, highlighting the need for further empirical research. The
chapter presents the results of an econometric analysis exploring the relationship between inequality and
export diversification. This approach provides policymakers with possible entry points to pursue inclusive
diversification. The chapter also examines the impact of the energy transition on income disparities within
and between countries and the role of international cooperation in supporting CDDCs. Inclusive policies and
capacity-building are critical for CDDCs to achieve a just energy transition and promote sustainable growth.

Rapid economic development has often resulted in increasing inequality, as the benefits are
unequally shared between capital and labour and within the workforce. Economic inequality
can be broadly considered in terms of both outcomes and opportunities.1 Inequality of
outcomes concerns differences in income, material wealth or living standards. Inequality
of opportunities focuses on disparities in access to energy, education, employment, or
health services. Nevertheless, these two dimensions are interrelated and may be difficult to
disentangle.

A further cross-cutting aspect of inequality is gender. Women and men do not always have
the same access to education, health, credit or economic opportunities.2 Moreover, women
typically have lower wages and economic participation rates, resulting in lower incomes.3

Measuring inequality
The most common indicator of inequality is the Gini coefficient which measures the extent to
which the income distribution among individuals or households within an economy deviates
from a perfectly equal distribution. The Gini coefficient takes a value between 0 and 100,
where 0 represents perfect equality, and 100 represents perfect inequality, that is, a situation
where a single entity controls all resources.4 The Gini coefficient is independent of the size
of the economy and the population, making it appropriate for cross-country comparisons.5
Nonetheless, it also has limitations. It is, for example, more responsive to changes in the middle
of the distribution than at the opposite tails, which include the most extreme disparities.6 It also
depends on what is measured, for example, income inequality pre- or post-tax, or consumption
inequality pre- or post-housing costs.7 For cross-country comparisons, therefore, it is vital to
use the same source or unit of measurement. Other indices include Theil’s L index and the
Palma ratio, though these are more complex.8

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Despite shortcomings, the Gini coefficient is easy to interpret and provides a general overview
of income inequality, both within and among countries. Within-country inequality describes the
distribution of income between households in a single economy. Between-country inequality
describes the income distribution across countries, that is, the average income differences
between countries.9, 10 SDG 10 aims to reduce both components of income inequality, which
are important to differentiate as they can follow different trends (Figure 3.1).

Figure 3.1 shows the Gini coefficients within and between countries from 1990 to 2020. It
indicates two different trajectories. Inequality between countries has been declining. Between
1990 and 2020, the Gini-coefficient fell from 61 to 47. This means that the gap between
the average incomes of the wealthiest and poorest countries has declined, as a result of
decelerating growth in wealthier countries, particularly after the 2008 financial crisis, while
emerging economies had stronger growth.11

On the other hand, inequality within countries showed a small increase, from 42 to 45 – reflecting
widening inequality between the rich and the poor within countries. While this represents
a small increment in absolute terms, within-country inequality threatens socioeconomic
development and hampers the achievement of SDGs. In addition, within-country inequality is
more notorious at the national level due to the significant differences in wealth within the same
population.

Recent shocks have reversed some of the progress in reducing among-country inequality
and further widened within-country disparities. The COVID-19 pandemic, along with uneven
vaccine access, has hit low-income households the hardest.12 Indeed, the United Nations
2022 Sustainable Development Goals Report estimates that over the period 2017 to 2021,
between-country inequality, measured by the Theil’s L index, has increased by 1.2 percentage
point, a stark difference from the pre-COVID-19 estimate of -2.6 percentage points.13 Currently,
inequalities could widen further as a result of rising inflation and the cost of debt servicing,
which can hinder countries’ ability to protect their most vulnerable people.

Figure 3.1 Inequality within and between countries, Gini coefficients, 1990-2020

65

60

Between - country inequality

55

50

45
Within - country inequality

40
1990 1995 2000 2005 2010 2015 2020

Source: UNCTAD based on data from the UNU-WIDER WIID Companion database.

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 COMMODITIES
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CHAPTER 3 Ensuring inclusiveness

Diversification and income inequality

In the process of economic development, how income is distributed determines the extent
to which wealth creation benefits most or a portion of the population. This is a crucial issue
debated among academics and policymakers. While there is abundant research on the
inequality-growth nexus, studies remain inconclusive as to whether inequality affects growth
or if the relationship runs in the opposite direction. Existing literature highlights that studies
have reported positive, negative, or inconclusive associations.14

One school of thought suggests positive distributional effects, which is in line with the Kuznets
curve hypothesis, which posits that economic growth and income inequality have an inverted
U-shaped relationship.15 According to this hypothesis, as economies shift from rural to urban
areas and industrialize, income inequality tends to increase initially due to higher per capita
income and productivity in urban settings. However, over the long term, inequality is expected
to decline as more workers migrate and a smaller portion of the population remains in
agriculture. Critics argue that external shocks and data limitations may confound the Kuznets
curve’s findings.16 While Kuznets acknowledges that more data is required to prove this
hypothesis, later studies17 support the existence of the curve, indicating positive distributional
effects in the long run.

A few studies have similarly concluded that as countries diversify or ‘deconcentrate’ their
exports, their per capita incomes increase.18 Initially, low-income countries can have frequent
episodes of product ‘discoveries’ and diversify.19 But beyond a certain level of income, such
events become less frequent – and exports start to concentrate again, as companies can take
advantage of economies of scale, and they start to specialize in different export products.20,
21
This new phase of concentration in trading activities tends to reduce employment, labour
force participation, and wages.22

Closely interlinked is the accumulation of human capital, which increases workers’ mobility
and ability to absorb new technology. Human capital has the potential to reduce the skill and
income gap by facilitating knowledge diffusion and employment.23 However, this may depend
on the extent to which opportunities to build capital are equally distributed in the population,
for example, through the location of training institutions in a country. If such opportunities are
unequally distributed, the income gap between highly-skilled and low-skilled workers may
widen.

In theory, economic diversification changes the economy’s structure and can impact inequality
through various channels, including disparities between sectors, firms, occupation levels, and
skills. These different factors influence the resulting income inequality between individuals
(Figure 3.2).

Economic diversification creates new sectors (goods and services) in the economy. The
varying productivity levels of these sectors may contribute to inequality between sectors
within a country;24 those that are more productive can claim higher average profits and
pay higher average wages. Diversification can also boost firms’ profitability within existing
sectors, affecting inequalities across firms.25 Firms that embrace innovation and diversify their
production can achieve higher profits and offer higher average wages.

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Figure 3.2 Transmission channels from economic diversification to the potential impact on
inequalities

Economic diversification

Differences in profitability between

Results in the creation of sectors drives disparities in wages
new economic sectors between sectors
Boosts the profitability of some Difference in profitability drives
firms in existing sectors disparities in wages between firms

Creates new occupations Inequality of wages between

(tasks) occupations

Benefits people with different skills Inequality of wages due to

differences in skills
Affects employment (usually Inequality (employed vs
a net-creator of jobs) unemployed)
Inequality in access to jobs due to
Benefits those who have access income, education, gender, age,
to the new jobs ethnicity

Affecting inequalities within countries

Source: UNCTAD.

Inequalities can also arise from wage differences resulting from diversification. Some emerging
occupations could be more productive and be rewarded with higher wages. Similarly, increased
demand for specific or scarcer skills can also command higher wages. These disparities result
from differences in occupations within a firm26 and skills at the same occupation level.27

Economic diversification usually creates jobs, thereby impacting inequalities between the
employed (receiving a labour income) and the unemployed. Moreover, diversification in some
sectors can influence individuals’ access to skills and their choice of occupation, firm and
sector to work in. Consequently, this affects individuals’ work opportunities and income levels.
For instance, gender disparities in education can limit girls’ access to skills and opportunities in
certain family and social contexts and are likely to constrain skills development. Similarly, social
perceptions may discourage women from working in some sectors, such as construction and
mining, limiting their options for employment.

Diversification (or lack thereof) can determine people’s choices regarding which skillset to
develop or which industry to work in. For instance, in CDDCs, the absence of industries such
as light manufacturing, automotive, electronics, and digital products such as online gaming
restricts employment opportunities in these sectors for their population.

While there has been extensive literature on the association between export diversification
and income, there has been less attention to the links between diversification and inequality.
And similar to the research on income and inequality, the results have been mixed, probably
because of differing samples, methodologies and underlying assumptions. Few studies
indicate a monotonic relationship, where rising specialization leads to a greater distinction

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between low and high-skilled workers, translating to higher wages for the more skilled workers
and increasing income inequality.28, 29, 30

On the other hand, export diversification may also expand employment opportunities and
learning to a larger share of the population, which would result in narrowing inequalities.
There is a third proposition in the literature, that of an inverted-U-shaped relationship: initially,
export diversification increases the demand for high-skilled labour as firms pursue productivity
and efficiency.31 In the long run, however, as the benefits spread throughout the economy,
more diverse production creates more jobs for high and low-skilled workers, and inequality
falls.32 Nonetheless, changes in the demand for high-skill labour are likely to depend on the
diversification avenue an economy pursues; if the country, for example, increases domestic
backward linkages, lower-skilled labour may be preferred.

It should also be noted that inequality may be high in developing countries that depend on a
narrow export basket. Countries with large natural resource endowments, such as minerals,
may have very concentrated ownership and capital-intensive production, which results in high-
income inequality.33 While these studies provide valuable insight into the potential channels
through which diversification may affect inequality, results remain inconclusive.

Commodity dependence and inequality

For this report, UNCTAD has examined the relationship between diversification and inequality
for 182 countries,34 using three-year averages and covering the period 1998 to 2018, based
on data from UNU-WIDER and UNCTAD.35 The sample comprises 1,109 observations across
different income levels, as classified by the World Bank (Table 3.1).36 About 56 per cent of the
sampled countries are considered CDDCs.

The main measure of income inequality used is the Gini coefficient, supplemented with three
other indicators: the Palma ratio, Theil’s L index and the inter-decile ratio, which tend to be
more responsive to changes in the distribution tails.37, 38 The measure of export diversification
is the share of commodities in total merchandise export values; a low share implies greater
diversification. This is supplemented with an export concentration index39 and a second
diversification measure, defined as the number of country exports classified using the
Harmonized System (HS) at the 6-digit level and further disaggregated by unit value. Other
factors taken into account in this analysis are per capita GDP, population, the extent of trade
openness, and endowments of human capital (Appendix A).

Table 3.1 Country classifications and number of observations

Group Income level Number of observations

Low-income < $1,045 224

Lower-middle income $1,046-4,095 354

Upper-middle income $4,096-12,695 272

High- income > $12,695 259

Source: UNCTAD based on World Bank, 2021.
Note: The use of the World Bank income classification was used due to the relevance of income
differentiation across groups. The thresholds are based on 2021 prices in United States dollars.

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The results are summarized in Figure 3.3. The matrix presents the coefficients of the fixed
effects regressions between export diversification measures and various income inequality
indicators. The colour of the circles represents how factors affect inequalities (green – positively,
red – negatively), and their sizes represent the strength of the relationship. Note that the
covariate results correspond to models using the primary measure of export diversification,
i.e., the share of commodities in total merchandise export values. Non-statistically significant
coefficients are excluded.

Figure 3.3 Factors interacting with income inequality

Source: UNCTAD.
Note: This figure presents the coefficients of the fixed effects regressions between export diversification
measures and various income inequality indicators. All coefficients presented are statistically
significant at a maximum of 10 per cent.

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The results indicate that export diversification is associated with greater inequality – a relationship
that remains statistically significant across most different measures of income inequality.40 This
suggests that diversification has adverse distributional effects on the population, which may
be attributed to a more differentiated occupational structure and wage differentials that arise
with a more diversified economy.

Inequality is negatively associated with income per capita, which can proxy for economic
development and implies that change in income by itself has a beneficial impact on inequality
even after controlling for export diversification. Trade openness is also negatively associated
with income inequality, which implies that as trade increases, more people may be able to take
advantage of different opportunities that arise.

A less-intuitive outcome from this analysis is that as human capital increases, so does income
inequality. As a composite variable that captures a population’s education, skills and health
conditions, this may be the result of imbalances in education or healthcare access which limit
the potential and prospects of lower-income earners.

Another significant factor is population size. When accounting for other factors, it seems that
income disparities tend to be smaller in countries with larger populations, perhaps because
larger economies can afford the transfers needed to even out imbalances in income.

From a wider perspective, the analysis considers the experience of country income groups.
While there are no statistically significant differences when considering the Gini coefficient,
differences emerge when using two other measures – the Palma ratio and the inter-decile
ratio, which are more sensitive to changes at the opposite ends of the income distribution.
They indicate that export diversification negatively affects inequality in low- and lower-
middle-income countries, which also suggests there is more of a skilled-wage premium in
the economies belonging to these income groups. On the other hand, these countries are
also more likely to see inequality fall as they become more open to trade.41 For high-income
countries, the only variable that appears to be statistically significant is population size.

Similar results are observed for CDDCs, where only a small segment of the population benefits
from diversification. However, this could be because diversification is relatively limited in these
economies and perhaps not extensive enough to create possible opportunities in all segments
of the population. The results suggest that it may be necessary for governments in low- and
lower-middle-income economies and CDDCs to consider interventions to ensure inclusive
change. This is an important aspect to consider when designing a diversification strategy,
which should ideally provide opportunities to all groups from an early stage. Resource rents
may also be captured by a small elite, so governments may need to intervene to provide
public goods and increase investment in education, healthcare and skill building.

UNU-WIDER data provides the most comprehensive set of inequality statistics up to date,
though some data within UNU-WIDER has been synthetically constructed using complex
methods due to missing figures. Appropriate and consistent primary data collection at the
country level is imperative to examine the factors influencing inequality more precisely. This
is particularly important for countries. In addition, further research may be needed using
a dynamic panel setting to better understand inequality dynamics. Finally, other studies,
including microeconomic analyses, are encouraged to better understand the mechanisms
through which diversification affects inequality in a given context.

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An inclusive diversification and energy transition

Similar to diversification, the energy transition entails an economic transformation and is likely
to lead to the creation of various jobs in greener markets. For CDDCs, this process is closely
intertwined with economic and export diversification as they shift towards new sectors.

The empirical results discussed above suggest that export diversification may lead to higher
income inequality, particularly in CDDCs. This implies that governments should design
complementary inclusive labour policies to mitigate the impacts that diversification and the
energy transition may have on income inequality.

Local capacity building is essential for the population to be able to participate and benefit from
new employment opportunities. In this regard, governments can identify vulnerable sectors,
firms and workers that require technical capacity-building or financial assistance to retrain or
upgrade skills necessary for the evolving labour market.

As an example, the Philippines Green Jobs Act of 2016 focuses on job creation and skills
development in emerging green sectors. It involves identifying skill needs and implementing
training programmes and certification schemes for workers in related industries to support
the transition.42 The Act also includes financial incentives such as tax deductions for skills
training, research and development, and tax-free imports of capital equipment for green job
promotion.43

A similar initiative was launched in Spain to support the automotive industry’s transition to
modern, lower-emission vehicles. Titled “Plan to boost the value chain of the automotive
industry towards sustainable and connected mobility,” this includes retraining and updating
workers’ qualifications to adapt to new labour demands.44 In addition to professional
accreditations, the initiative also offers training plans for managerial and technical roles for a
modernized automotive industry.45

Such schemes can be geared toward providing opportunities for under-represented groups,
including women, youth, and minority groups. In Canada, the Youth Employment and Skills
Strategy was implemented to promote youth training across natural resource sectors.46 This
strategy included targeting immigrant youth, youth with disabilities and youth from among
Indigenous populations underrepresented in such sectors, to narrow existing gaps.

Coordinated industrial and education policies are also needed to support an evolving economic
and labour landscape. Such measures would avoid skills mismatches and, assuming they
include all social groups, can help ensure that the benefits from export diversification extend
beyond those who were previously in higher-skill positions.

The decarbonization efforts of Chile, for example, have been complemented with measures to
spread the gains more evenly among the population. The country, which is heavily dependent
on copper mining, has vast potential for renewable energy and has been exploring avenues to
gradually discontinue the use of fossil fuels in favour of solar and wind energy. Chile also has
ambitions to become an exporter of green hydrogen. To support these goals, the country’s
National Energy Plan envisages inclusive capacity building and training schemes for existing
and new workers and, in coordination with research institutions, is working on the training and
certification of 27,000 people by 2030.47

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Given the positive correlation between human capital and income inequality in the analysis
above, governments should additionally revise their public education and health schemes to
ensure equal access to education and other services. This would entail improving infrastructure
and expanding educational and health facilities, particularly in rural and remote areas.

Governments may also provide technical and financial support to firms to explore avenues
for diversification in low-carbon sectors. These may include financial incentives or direct
investments in cleaner technologies and energy efficiency. Another policy option is to open
opportunities for SMEs and encourage links with multinational enterprises (MNEs) to allow
for knowledge spillovers that would enrich the human capital and productive capacity of the
host country. Added knowledge and absorptive capacity may facilitate the uptake of new
technologies and mobility needed for the energy transition.

In Costa Rica, for example, knowledge spillovers played an important role in the country’s
diversification strategy due to labour mobility.48 These knowledge and technology transfers
resulted from lateral flows between subsidiaries and the parent MNEs and from backward
linkages with domestic suppliers.49, 50 An important enabling factor was the country’s strong
human capital and its educated population, which attracted foreign investment and allowed
for the absorption of new technologies and knowledge brought by MNEs.51 In addition, such
spillovers can increase gender equality: in Costa Rica, labour mobility and imitating new
competitors allowed workers to apply new gender practices and skills to local firms and
increase female participation.52

While this example does not directly relate to the energy transition, this approach would notably
benefit CDDCs seeking vertical diversification, for example, in the manufacturing process of
batteries, which requires technology, high skills, and forward linkages in production chains.

Social dialogue and inclusive decision-making can foster trust and better inform policymaking.53
Engagement with stakeholders can aid target-setting and anticipate policies for minimizing
the impact of the transition on exposed sectors and firms. This may also alleviate tensions
between governments and industries affected by the transition.

For example, in Germany, social dialogue played a crucial role in the transition of the Ruhr
Valley from a coal and steel-dependent region to a knowledge and service-based economy.54
The government, coal sector, trade unions, environmental groups, industry, and academia
actively engaged in discussions to develop policies that facilitated a smooth coal phase-
out while minimizing labour market disruptions.55 These measures included monthly stipends
and early retirement for miners with over 25 years of employment, as well as guaranteed
alternative employment opportunities for younger workers.56

Governments may also benefit from the ILO’s Climate Action for Jobs Initiative. Established
in 2019, this multi-stakeholder partnership aims to help countries generate decent jobs
while delivering climate goals through policy and planning instruments. These include skill
matching, enterprise development and investment measures, and inclusive social protection
for vulnerable workers.57 Such mechanisms can enable CDDCs and other developing
countries to sustain social cohesion and inclusion at times of structural change. In a similar
vein, countries implementing new green industrial policies can exchange best practices for
target-setting and policymaking.

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Energy disparities and the just transition

The Paris Agreement calls for a ‘just transition’ to a lower-carbon world that provides decent and
quality jobs for the whole workforce (Box 3.1). A rapid shift towards low-carbon technologies
and decarbonization should also be inclusive and minimize any welfare losses, addressing
existing disparities and leaving no one behind. A just transition requires addressing current
gaps and prevalent issues in energy access, which constitutes a dimension of economic
inequality and can impact income disparities. Low household income limits the affordability of
energy. At the same time, a lack of access to energy constrains households’ human capital
accumulation and may widen the income gap.

Disparities in energy access mirror existing income inequalities. While access to electricity
and clean fuels, and technologies for cooking have been on the rise between 2000 and
2020 (Figure 3.4), there are substantial regional differences in access. For instance, in North
America, the average energy consumption per capita in 2021 was more than 15 times higher
than in Africa.58 Moreover, within countries, access to energy tends to be higher in urban areas
than in rural areas: in 2020, around 80 per cent of the world’s population without electricity
lived in rural areas.59

Map 3.1 and Map 3.2 illustrate the percentage of the population with access to electricity
and access to clean fuels and technologies for cooking, respectively. In both maps, the
darker the colour, the greater the access. Dark blue indicates that a greater percentage of the
population enjoys energy access. The lighter the colour, the more limited the access among

Box 3.1 The elements of a just transition

The precise definition of a just transition varies by source, but the latest IPCC Global Assessment Re-
port identifies common elements:
• Investments in low-emission and labour-intensive technologies and sectors.
• esearch and early assessment of the social and employment impacts of climate policies.
• Social dialogue and democratic consultation of social partners and stakeholders.
• Creation of decent jobs, active labour market policies, and rights at work.
• Fairness in energy access and use.
• Economic diversification is based on low-carbon investments.
• Realistic training/retraining programmes that lead to decent work.
• Gender-specific politics that promote equitable outcomes.
• Fostering international cooperation and coordinated multilateral actions.
• Redressing past harms and perceived injustices.
• Consideration of inter-generational justice concerns, such as the impacts of policy decisions on
future generations.

Source: UNCTAD based on IPCC, 2022. Sixth Assessment Report, Climate Change 2022: Mitigation of Climate Change
(Working Group III).

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Figure 3.4 Access to energy has been on the rise between 2000 and 2020
(Percentage of people with access)
100
90
Access to electricity
80
70
60
50
Access to clean fuels and technologies for cooking
40
30
20
10
0
2000 2005 2010 2015 2020
Source: UNCTAD based on data from the World Bank.

Map 3.1 Access to electricity in 2020

(percentage of population with access)

0% 100%

The boundaries and names shown and the designations used on this map do not imply official endorsement or acceptance by the United Nations.

Source: UNCTAD based on data from the World Bank (2020).

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Map 3.2 Access to clean fuels and technologies for cooking in 2020
(Percentage of population with access)

0% 100%

The boundaries and names shown and the designations used on this map do not imply official endorsement or acceptance by the United Nations.
Source: UNCTAD based on data from the World Bank (2020).

the population. From these figures, it can be observed that access to electricity and clean
cooking fuels is highly unequal and remains a developmental challenge among developing
countries, particularly in Africa and Asia and the Pacific.

CDDCs and their development partners should therefore accelerate progress towards SDG
7 by ensuring universal access to affordable, reliable, sustainable, and modern energy.
Nonetheless, this will only contribute to the green energy transition if they do so using
renewable energy rather than fossil fuels.

For this purpose, however, CDDCs with low fiscal capacity start at a disadvantage.60 Faced with
many competing priorities, their governments may struggle to invest in just decarbonization,
particularly given the impacts of COVID-19 and the war in Ukraine.

A just transition will require significant investment. The total financing requirement globally to
meet SDG 7 is estimated at $1.3 trillion to $1.4 trillion annually until 2030.61 For the poorest
countries, much of this needs to come from development partners. However, aid flows
to developing countries for clean energy have been declining.62 Between 2017 and 2020,
international public financial flows to developing countries in support of clean energy fell from
$24.7 billion to $10.9 billion – making it more difficult for low-income countries to ensure a just
transition that meets decarbonization targets.63

Reducing fossil fuel subsidies can help level the playing field for clean energy, allowing more
resources to be invested in expanding sustainable energy access and improving energy
services. Fossil fuel subsidies have been shown to be costly, inequitable and harmful.64, 65

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In developing countries, 43 per cent of the benefits from such subsidies have gone to the
wealthiest 20 per cent of households, while the poorest 20 per cent of the population get only
7 per cent.66 Nonetheless, in practice, removing or even reducing fuel subsidies is politically
sensitive and requires careful planning, with targeted social programmes to mitigate potential
negative impacts for poor households.

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Endnotes
1 25
UN DESA, 2015a Mueller et al., 2017
2 26
IMF, 2015 Barth et al., 2016
3 27
Ibid Juhn et al., 1993
4 28
UN DESA, 2015b Linear models such as Blancheton and Chhorn
5
Trapeznikova, 2019 (2019) and Gupta et al. (2002) would only provide
6 a partial understanding of the overall effect if the
UN DESA, 2015b; Trapeznikova, 2019
relationship between export diversification and
7
Trapeznikova, 2019 inequality is found to be non-linear. Differences
8
General entropy measures are a series of indicators in samples may also play a role. For example,
based on ratios of incomes to the mean. A parameter Blancheton and Chhorn (2019) find that diversification
alpha is used to compute these measures, which positively affects income inequality in the overall
assigns a weight to distances between incomes in sample. However, when examining the effect across
different parts of the distribution. The most popular subsamples, results hold only for higher-income
is the Theil’s L index, also known as the mean log countries, and the authors find no significant impacts
deviation, for which alpha is equal to 0, meaning that in low-income countries. Gupta et al. (2002) find
it is more sensitive to changes in the lower tail of the a negative correlation when examining the overall
distribution. The Theil’s L index equates to 0 in the sample. Nonetheless, data availability at the time
case of perfect equality and increases as incomes means that, at most, 38 countries were included in
become more unequally distributed. The Palma the study.
and the inter-decile ratio are part of a wider group 29
Autor et al., 2013
of percentile and share ratios that focus on specific 30
Blancheton and Chhorn, 2019; Lee et al., 2022
differences in the distribution. The Palma ratio
31
measures the income gap between the richest 10 per Le et al., 2020
32
cent and the poorest 40 per cent of the distribution. This is based on the results of Le et al. (2020), which
The higher the Palma ratio, the higher the income find an inverse U-shaped relationship between
inequality. Lastly, the inter-decile ratio measures the income inequality and export diversification in a global
income gap between the ninth decile, i.e., the 10 sample of 90 countries.
per cent of people with the highest income, and the 33
Gupta et al., 2002
first decile, representing the bottom 10 per cent of 34
This is based on research conducted by UNCTAD
the distribution. The higher the inter-decile ratio, the
for this report. A list of the countries included in the
higher the income inequality. These ratios are typically
analysis can be found in Appendix A.
more sensitive to changes at the opposite ends of
35
the distribution. Note that due to the sparseness of inequality
9 statistics, especially the Gini data, 3-year period
Chancel et al., 2022
average values are used.
10
This chapter’s analysis of inequality is based on 36
World Bank, 2021
the United Nations University World Institute for
37
Development Economics Research dataset – which The Palma and the inter-decile ratios focus on
uses household survey data, complemented by the difference between the two opposite ends
synthetic data. For more on the methodology of the distribution, whereas the Theil’s L index is
used by WIID to compute the presented inequality particularly sensitive to changes in the lower tail of the
statistics, refer to UNU-WIDER, 2022. distribution.
38
11
World Bank, 2016; Chancel et al., 2022 Inequality data was drawn from the UNU-WIDER
12 WIID Companion (UNU-WIDER : World Income
UN DESA, 2022
Inequality Database - WIID, 2022), which covers 201
13
Ibid economies from 1960 to 2021. Data covering 1998
14
Mdingi and Ho, 2021 to 2018 was considered based on the availability
15
Kuznets, 1955 of export diversification and covariates data from
16 UNCTAD.
Lyubimov, 2017
39
17 This is a modified version of the Finger-Kreinin
Barro, 2000; Thornton, 2010
measure of similarity in trade. For more information
18
Imbs and Wacziarg, 2003; Giri et al., 2019 on this measure, see Finger and Kreinin (1979).
19
Al-Marhubi, 2000; Hausmann et al., 2007; Cavalcanti 40
Palma ratio, Theil’s L index and the inter-decile ratio
et al., 2014 41
This is consistent with the Stolper-Samuelson (1941)
20
Imbs and Wacziarg, 2003; Giri et al., 2019 theorem, where an increase in trade in countries with
21
Klinger and Lederman, 2006 relatively abundant low-skill factors leads to lower
22
Autor et al., 2013 inequality (Furceri and Ostry, 2019).
42
23
Asteriou et al., 2014 International Energy Agency, 2022
43
24
Hartmann et al., 2017 ILO, 2019

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44 58
International Energy Agency, 2022 British Petroleum, 2022
45 59
Ibid IEA et al., 2022
46 60
Youth Employment Strategy, 2017 UNCTAD, 2019a
47 61
Government of Chile, Ministry of Energy, 2022; IEA et al., 2019
Bartlett, 2022 62
As defined by IEA et al. (2022), international
48
Monge-González et al., 2021 public financial flows include official development
49
Giuliani, 2008 assistance and other official flows that are transferred
50 internationally to developing countries for renewable
Monge-González et al., 2021
energy. For more information on the methodology
51
Giuliani, 2008 used to measure this variable, see IEA et al. (2022).
52
Monge-González et al., 2021 63
IEA et al., 2022
53
Mercier, 2020 64
OECD and IEA, 2021
54
Ibid 65
UNDP, 2021
55
Arora and Schroeder, 2022 66
IMF, 2010
56
Ibid
57
ILO, 2019

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 CHAPTER

4
Diversifying
the traditional
way will have high
environmental costs
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4 Diversifying the traditional

way will have high
environmental costs
This chapter highlights the historical perspective of successful economic diversification and its implications
for energy use, emphasizing the need for CDDCs to transition to a low-carbon economy. It explores the
relationship between economic diversification, growth, and energy intensity, using emissions-output
elasticity estimates in an UNCTAD study.1 Even though the elasticity estimates need to be interpreted with
caution, they provide information that emphasizes the challenge of balancing development goals with
reducing GHG emissions. They also illustrate the complexity of the relationship between output and GHG
emissions. It depends on the income level of a country, the type of commodity a country depends on, and the
timeframe considered. The chapter suggests that CDDCs would need to put in place a green industrial policy
framework that could help them to develop an alternative diversification pathway that is compatible with
the energy transition imperative. The policy framework is the subject of chapter 5.

Countries broaden their production and export bases by diversifying their economies.
Diversification can change the structure of the economy when it creates more complex and
sophisticated value chains in existing sectors or when it introduces new products and services.
A number of countries have diversified and become more economically resilient.2 In most
cases, however, this has involved greater use of fossil fuels and emitting more greenhouse
gases. In the current context of decarbonization, this is not a viable long-term option. CDDCs
seeking just transitions will therefore need to carefully balance their sources of energy to meet
the needs of current and future generations.

As the experiences of East Asia and Latin America have shown, economic diversification
increases the number and value of exported goods, boosting sustainable economic growth.
In turn, export diversification increases the stock of foreign currency needed to finance foreign
inputs and develop infrastructure, and allows for more stable revenue that increases the capital
available for investment, which in turn sustains economic growth, creating virtuous loops.3, 4

In addition, economic growth widens the tax base – boosting fiscal revenues that increase
government capacity to invest in infrastructure, human capital, and skills. Governments
can also offer local firms targeted subsidies for acquiring technologies and discovering new
comparative advantages, opening up a wider range of possibilities.5 For example, frontier
technologies such as blockchain can improve traceability and transparency in commodity
value chains. The use of robotics can also make operations more efficient, positively affecting
firm profitability. CDDCs that are well-positioned to exploit these opportunities will reap
valuable benefits.6

Most CDDCs need to transition from agrarian economies and low bases of industrialization,
so at first they are likely to use more energy.7,8 In countries that have recently achieved a
high level of diversification, there was an increase in GHG emissions resulting from a high
energy intensity of the production process. In China, for example, strong growth of the export

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sector and infrastructure development between 1997 and 2007 became the two main drivers
of increasing energy intensity.9 But this pattern need not continue indefinitely. As economic
growth boosts income, countries have more resources to invest in environmental protection,
so the environmental impact first grows with GDP and then falls – along an inverted ‘Kuznets
curve’.10 However, the empirical evidence has been inconclusive, as different countries seem
to follow different paths. For example, by adopting the right environmental policies, some
CDDCs could leapfrog the worst phases of environmental degradation.11

In the process of diversification, CDDCs will continue to produce, and even increase, their
current GHG emissions if they adopt the traditional energy systems and technologies that
allowed developed countries to diversify. Indeed, there seems to be a trade-off between
growth and environmental degradation, as suggested by the so-called ‘Kaya Identity’ that
expresses GHG emissions as the product of population, per capita GDP, energy-intensity
of GDP, and carbon-intensity of energy consumed.12 However, adopting diversification
strategies associated with a lower energy intensity of GDP or carbon intensity of GDP would
generate lower GHG emissions while delivering the same level of GDP. Advocates of green
industrialization argue that all countries can minimize carbon emissions by changing production
and consumption patterns to achieve ‘green growth,’ which uses natural resources more
efficiently and minimizes pollution and environmental damage.13, 14 This calls for cuts in the
use of fossil fuels and huge investments in efficient and green energy – while also protecting
workers and communities whose livelihoods have depended on fossil-fuel-based industries.15

Because green growth ultimately increases employment and social welfare, it is likely to be
more politically and socially acceptable and thus offers a pragmatic path towards a low-GHG
economy. But whether CDDCs in their earlier stages of development will be able to follow this
path remains an open question.

Tracking the links between GHG emissions and output

The link between GHG emissions and economic growth has been analysed using estimates
of emissions-output elasticities. These elasticities provide measures of the number of units of
GHG emissions associated with one unit of output. These measures provide a general view of
this relationship but should be used with caution as the quality of the results depends on the
quality of the data used. This report uses the most widely used data on GHG emissions, as
in previous UNCTAD analyses (e.g., UNCTAD, 2019). Moreover, elasticities relating to groups
of countries might hide country-specificities.16 Nevertheless, empirical results on the links
between GHG emissions and output provide a rich view of the complexity of this relationship,
as discussed below.

The methodology used to estimate emissions-output elasticities is outlined in Appendix B.

This methodology has been mostly used in advanced economies. The few studies focusing on
developing countries found that as incomes grew, so did emissions.17 However, in the longer
term, 15 of the 43 countries covered in one of the studies, for example, managed to reduce
their emissions intensity of GDP.18 Nevertheless, the result that long-run emissions-output
elasticities were positive for all but six countries suggests that the majority of countries in the
sample still needed to do more to decouple long-run income growth from GHG emissions.

Subsequent studies broke down growth in emissions and real GDP into their trend and
cyclical components and estimated cyclical and trend elasticities (see Appendix B). Cyclical
elasticities capture the fact that changes in emissions may be associated with the booms
or downturns in business cycles. Trend elasticities capture structural or long-term effects
that make the economy more or less emissions-dependent. Applying this method, previous

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CHAPTER 4 Diversifying the traditional way will have high environmental costs

studies found that trend emissions-output elasticities decline with per capita income. Hence,
advanced countries have been able to decouple more rapidly in recent years.19, 20 Another
study of 46 commodity-exporting countries over the period from 1990 to 2014 found further
evidence of decoupling, and that these changes were not cyclical but structural.21

To offer a wider perspective, this report uses material from an UNCTAD study that uses a larger
data set, covering 186 countries classified as CDDCs, non-commodity dependent developing
countries (NCDDCs), or developed countries over the period 1980-2018 (see Appendix B).22
As indicated by descriptive statistics in Table 4.1, in 2018, CDDCs had the lowest average
GDPs and had lower emissions than NCDDCs and developed countries. Emissions were
lowest in sub-Saharan Africa and among low-income countries and highest in North America.
Among CDDCs, fuel exporters had the highest emissions, though these were still substantially
below those from North America. Emissions in NCDDCs and upper-middle-income countries
were higher than those of high-income countries.

As indicated in Table 4.1, most of the emissions were of CO2, which is why this report and
other publications use carbon dioxide interchangeably with GHGs.23 In fact, the concept
of decarbonization, often used to refer to the reduction of GHG emissions, reflects the
dominance of carbon dioxide among GHGs. Moreover, the analysis uses total rather than
per capita emissions – though both measures convey a similar message – to account for
the fact that what matters most is the total amount of CO2 that a country emits into the
atmosphere. Using per capita emissions in the analysis may convey an incorrect message
that a small, sparsely populated country contributes more to GHG emissions than a larger,
highly populated country. Irrespective of the measure used, CDDCs often have the lowest
CO2 emissions (Figure 4.1 and Table 4.2). Using data in Table 4.1, emissions in low-income
countries are only about 10 per cent of those in high-income countries and 7 per cent of those
of upper-middle-income countries – which are catching up with the developed countries and
increasing GHG emissions per unit of output.

Figure 4.1 GHG emissions, metric tons per capita, 2019

20
18 CO2

16 Total GHG
(CO2 equivalent)
14
12
10
8
6
4
2
0
CDDCs NCDDCs Eurpean China Russian United
Union 27 Federation States

Source: UNCTAD based on data from UNCTADstat database and World Development Indicators.
Note: Values for country groups represent population-weighted averages.

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Table 4.1 Summary statistics for income and emissions, different country groups, 2018
Group Average GDP Average Average Greenhouse
(millions of dollars, 2015) CO2 emissions (ktons) Gas emissions (ktons)

Commodity Dependence Status

CDDC 99 530 90 625 92 149

NCDDC 479 519 436 640 440 073

Developed Countries 1 257 598 332 916 334 622

Commodity Type

Agricultural CDDC 91 161 65 652 67 046

Fuel CDDC 178 541 186 131 188 777

Mineral CDDC 32 638 26 396 26 981

CDDCs by region

East Asia and the Pacific 836 531 604 464 608 522

Europe and Central Asia 455 144 159 639 160 860

Latin America and the 163 974 91 145 92 748

Caribbean

Middle East and North Africa 172 692 138 912 140 765

North America 10 605 611 3 159 749 3 175 320

South Asia 412 374 544 153 550 193

Sub-Saharan Africa 38 703 47 106 48 029

Income

High 921 397 264 144 265 685

Low 17 510 27 449 28 161

Lower-middle 151 437 175 408 177 784

Upper-middle 436 648 383 338 386 605

Source: UNCTAD based on data from World Bank’s World Development Indicators and Emissions Database for
Global Atmospheric Research (EDGAR).
Note: Data on real output (in 2010 millions of United States dollars) are from the World Bank’s World
Development Indicators. Data on greenhouse gas emissions come from the EDGAR, which contains
data sets covering the three direct greenhouse gases – carbon dioxide, nitrous oxide and methane
aggregated by country and sector, using the IPCC 2006 sector designations.24 For the historical
analysis focusing on the five major industrialized economies, data for real GDP is from the Maddison
Project, and data for historical carbon dioxide emissions are from the Carbon Dioxide Information and
Analysis Center (CDIAC).25 Total CO2 emissions is the sum of fossil fuel emissions for solid, liquid, and
gas fuels, as well as gas flaring and cement production. Combined GDP and CO2 emissions data for
each country is available as follows: United States (1800 - 2017), United Kingdom of Great Britain and
Northern Ireland (1751 – 2017), Germany (1850 – 2017), France (1820 – 2017), and Japan (1870 –
2017).

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Table 4.2 Top emitters (all values reported for 2018)

GDP Total CO2 emissions Total GHG emissions
Country
(millions of dollars, 2010) (ktons) (ktons)
CDDCs
Brazil 1 797 739 1 201 539 1 224 978
Islamic Republic of Iran 425 620 666 693 675 341
Nigeria 492 075 591 952 600 732
Saudi Arabia 676 340 593 815 598 190
DDCs
China 13 493 418 11 852 621 11 919 523
India 2 590 899 3 642 851 3 674 494
Indonesia 999 1789 991 355 1 006 355
Republic of Korea 1 601 904 696 868 698 605
Mexico 1 255 065 581 186 588 185
Developed countries
United States 19 551 981 5 651 108 5 677 674
Russian Federation 1 430 115 1 823 398 1 840 037
Japan 4 578 914 1 225 865 1 228 035
Germany 3 561 302 853 765 856 454
Canada 1 659 241 668 390 672 966
Australia 1 463 016 478 238 482 964
Agricultural CDDCs
Brazil 1 797 739 1 201 539 1 224 978
Argentina 583 430 276 514 281 884
Ethiopia 82 721 188 687 192 593
Myanmar 72 422 108 173 111 848
Uganda 37 239 72 737 73 944
Fuel CDDCs
Islamic Republic of Iran 425 621 666 693 675 341
Nigeria 492 075 591 952 600 732
Saudi Arabia 676 340 593 815 598 190
Kazakhstan 202 016 284 797 287 526
Mineral CDDCs
Chile 260 355 129 783 130 713
Democratic Republic of the
42 619 95 172 96 705
Congo
Uzbekistan 95 650 93 780 96 502
Peru 210 308 73 978 75 189
United Republic of Tanzania 57 012 72 986 74 863

Source: UNCTAD.

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Analysis of the data on the cyclical patterns of output and GHG emissions (Figure 4.2) suggests
that in developed countries, GHG emissions seem to generally fluctuate with business cycles.
This is an indication that GHG emissions in those countries vary with changes in economic
activity. Another finding, from the relationship between emissions and GDP growth by type of
commodity dependence, namely agriculture; minerals, ores and metals; and fuels; suggests
that the cyclical relationship is stronger in agricultural and mineral CDDCs than in fuel-
dependent CDDCs. This finding confirms that movements in fuels markets are less correlated
with the business cycle than are markets for the other two types of commodities. Indeed, it is
well known that fuel markets are highly volatile, responding to market as well as non-market
signals that may not be associated with business cycles. For example, political events in
major oil-producing countries generally have an immediate effect on prices, irrespective of the
business cycle.

The trend relationship suggests that over time emissions rise with GDP growth in CDDCs
and NCDDCs (Figure 4.3). Indeed, in developing countries, for both CDDCs and NCDDCs,
changes in emissions are more likely to reflect long-term structural trends, as emissions
gradually rise with GDP. Trend emissions in CDDCs have increased at least as fast as, or
faster than, GDP, although starting from very low bases. This feature suggests that over time,
as CDDCs diversify, they should pursue opportunities that help to restructure their economies
in ways that decouple production from GHG emissions.

Moving on to the discussion of the estimates of cycle and trend emissions-output elasticities
(Figure 4.4), it is worth highlighting, once more, a few findings that confirm the complexity
of the relationship between output and GHG emissions. First, while developed countries
have lower trend elasticities but higher cycle elasticities than CDDCs and NCDDCs, there are
differences within the group of CDDCs. Trend elasticities are higher for CDDCs that depend on
agricultural and fuel exports than those that are dependent on mineral exports, implying that
efforts towards decarbonization of these economies as they diversify will need to be group or
even country-specific.

The second finding relevant to the discussion of decarbonization and diversification in CDDCs
is that high-income CDDCs have an average trend output-elasticity of GHG emissions that
is almost double that of low-income and middle-income CDDCs. This result indicates that
diversification strategies in high-income CDDCs would not necessarily be the same as those
in lower-income CDDCs; there are specificities that will need to be accounted for.

The third finding given in Figure 4.4 is that there are remarkable regional differences in terms
of elasticity sizes. Elasticity estimates are highest in the Middle East and North Africa, a region
that is highly dependent on hydrocarbons. A possible policy implication of this result is that
this group of countries might consider diversification strategies that are oriented towards non-
energy sectors with lower elasticities. But this will be contingent on each country’s current and
potential production possibilities in those sectors. A pairwise comparison of means reveals
that compared with Europe and Central Asia, long-run elasticities are statistically higher in
the Middle East and North Africa, sub-Saharan Africa, and Latin America and the Caribbean.
Emissions are also the least pro-cyclical in sub-Saharan Africa and more procyclical in Latin
America and the Caribbean. These regional differences are probably due to differences in
types of commodity dependence and production processes across regions. It is also worth
noting that within each region, there is considerable heterogeneity among countries.26

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Figure 4.2 Cyclical GHG and GDP per commodity dependence status and commodity type
(in logarithm)
CDDCs Mineral CDDCs
0.20 0.08
0.15 0.06
0.10 0.04
0.05 0.02
0.00 0.00
-0.05 -0.02
-0.10 -0.04
-0.15 -0.06
-0.20 -0.08
1980 1992 2004 2016 1980 1992 2004 2016

NCDDCs Fuel CDDCs

0.06 0.50
0.40
0.04
0.30
0.02 0.20
0.10
0.00
0.00
-0.02 -0.10
-0.20
-0.04
-0.30
-0.06 -0.40
1980 1992 2004 2016 1980 1992 2004 2016

Developed countries Agricultural CDDCs

0.15 0.15

0.10 0.10
0.05
0.05
0.00
0.00
-0.05
-0.05
-0.10

-0.15 -0.10
1980 1992 2004 2016 1980 1992 2004 2016

Average In GDP Average In GHG

Source: UNCTAD.

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Figure 4.3 Trend GHG and GDP per commodity dependence status and commodity type
(in logarithm)

CDDCs Mineral CDDCs

30 11.60 30 10.40

25 11.40 25 10.20

10.00
20 11.20 20
9.80
Avg. ln GDP

Avg. lnGHG

Avg. ln GHG
Avg. ln GDP
15 11.00 15
9.60
10 10.80 10
9.40
5 10.60 5 9.20
0 10.40 0 9.00
1980 1992 2004 2016 1980 1992 2004 2016

NCDDCs Fuel CDDCs

30 13.50 30 12.30
12.20
25 13.00 25 12.10
20 12.00
20
12.50 11.90

Avg. ln GHG
Avg. ln GDP
Avg. ln GHG
Avg. ln GDP

15 15 11.80
12.00 11.70
10 10 11.60
11.50 5 11.50
5
11.40
0 11.00 0 11.30
1980 1992 2004 2016 1980 1992 2004 2016

Developed countries Agricultural CDDCs

30 12.85 30 11.40
11.20
25 25
12.80 11.00
20 20 10.80
12.75
Avg. ln GHG
Avg. ln GDP

Avg. ln GHG
Avg. ln GDP

10.60
15 15
12.70 10.40
10 10 10.20
5 12.65 10.00
5
9.80
0 12.60
0 9.60
1980 1992 2004 2016
1980 1992 2004 2016

Average In GDP Average In GHG

Source: UNCTAD.

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Figure 4.4 Estimates of trend and cycle elasticities for different country groups

Log Emission
Trend Cycle

CDDC 0.67 0.23

NCDDC 0.65 0.39

Developed countries 0.30 0.63

Agricultural CDDC 0.72 0.25

Fuel CDDC 0.71 0.20

Mineral CDDC 0.53 0.27

High income CDDC 1.12 0.39

Low income CDDC 0.60 0.11

Lower middle income CDDC 0.62 0.23

Upper middle income CDDC 0.60 0.27

East Asia and Pacific CDDC

0.48 0.23

Latin America and the Caribbean CDDC

0.73 0.61

Middle East and North Africa CDDC

1.04 0.18

Sub - Saharan Africa CDDC

0.62 0.16

Log Output

Source: UNCTAD.

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A longer-term view: Decoupling is possible

Historical analysis using estimates of output and carbon emissions spanning more than two
centuries provides insights into the process of decoupling as experienced by major industrialized
economies. Two important messages may be derived from the elasticities captured in Figure
4.5. The first is that decoupling is possible, even though it took industrialized countries a
relatively long time for their economies to experience a pattern of growth decoupled from
emissions. As shown in Figure 4.5, output growth in the early periods of industrialization of
major economies led to more than proportionate increases in emissions, with trend elasticities
greater than 2 in the mid to late 19th century for all the countries. Over time, elasticities
declined, hovering around zero in the most recent period, with experiences varying across
countries.

For example, the United Kingdom had the lowest elasticity in its early industrialization, and
it seems to have experienced a decoupling trend before 1880 when other countries had
elasticities greater than one. Japan seems to have undergone a decoupling phase before
1930 but then increased its elasticity before showing another phase of decoupling by the
end of the sample period in 2017. France had the highest elasticity at the beginning of the
sample period in 1800 but continuously reduced its carbon emissions per unit of output until
the end of the observation period in 2017. The lesson from these results is that decoupling
experiences in industrialized countries were different, inviting some caution when referring to
them. This might imply that CDDCs will also follow different pathways, with some countries
decoupling faster than others. The difference between now and a century ago is that, on
the one hand, the climate imperative is more acute now, and on the other hand, there are
technologies that can help countries to follow a less carbon-intensive economic model.

Figure 4.5 Decoupling in industrialized countries followed a long period of industrialization:

Trend emissions-output elasticities

France
2
Germany
1 Japan
United Kingdom
0
United States
-1

-2
1780 1830 1880 1930 1980 2030

Source: UNCTAD.
Note: The full-time series of the five countries are split up into 30-year periods. The trend elasticity equations
are estimated on each of these 30-year subperiods.

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The second message is that even though the only tested model for successful industrialization
is the one followed by developed countries such as the ones depicted in Figure 4.5, CDDCs
that would like to diversify today should aim for a different model; the traditional trajectory
will not be compatible with the current and future efforts towards decarbonization. For those
countries, embracing clean energies as early as possible should be considered as a part of
their economic and environmental priorities.

Currently, developing countries – both CDDCs and NCDDCs – have emissions-output

elasticities comparable to (and in several cases, less than) those of early industrializers
when the latter were mostly well past a century of industrialization. The elasticities of several
developing countries are at about the levels that the early industrializers reached in the mid-
20th century.27

Experience will differ from one country to another and between the types of commodities
countries depend on. Fossil-fuel-dependent economies, for example, may have more
resources than agriculture-dependent economies to invest in economic transformation. The
capacity to transform will also depend on the current level of emissions, the sensitivity of
emissions to changes in output, and existing productive capabilities.

For low-income CDDCs, focusing exclusively on cutting emissions may therefore constrain
their development without significant emissions benefits. And since energy access is critical
for human wellbeing, for these countries, it may be more realistic to concentrate on building
basic capabilities and ensuring access to energy using all available sources, including fossil
fuels. A just energy transition implies that CDDCs, in general, and low-income CDDCs, in
particular, might require relatively more of the remaining carbon budget. Moreover, these
countries’ development needs and their marginal responsibility in the climate crisis, as well
as the principle of common but differentiated responsibilities, should justify more financial
and technical support from developed partners in order to ensure that the process of
decarbonization does not leave them behind.28 Indeed, CDDCs should not stay at the margins
of the decarbonization process. On the other hand, continuing to depend on carbon-intensive
resources, as fossil fuels are being phased out elsewhere, may expose fossil fuel-dependent
countries to significant losses as the natural resources and associated assets they have
depended on are stranded.

Lowering GHG emissions will require efforts that should be commensurate with each
stakeholder’s capabilities. Some argue that given the strong association between economic
growth and carbon emissions, more advanced economies should now forego economic
growth while allowing “ecological space to permit development-through-growth to proceed
for a short time in the Global South.”29

However, allocating the burden solely to developed countries does not seem to be realistic.

Moreover, even if that were feasible, it would not slow the pace of climate change sufficiently.
Contracting global GDP by 10 per cent between 2015 and 2030 might reduce emissions to
30 billion tons, but to achieve global climate mitigation targets, CO2 emissions would need to
fall to 20 billion tons by 2035.30 In other words, that would require a reduction in global GDP
four times larger than during the 2007-2009 recession.31 The growth reduction necessary to
bring about sufficient reductions in global CO2 emissions would reduce living standards with
little impact on overall emissions – and would probably widen inequality in wealth and income
between and within countries.32

If the CDDCs are to meet their development goals while decreasing emissions, they will therefore
need to strike a balance between traditional sources of energy and greener alternatives such

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as solar and wind power. This will require time and patience. They cannot base their current
industrialization solely on green energy, which is not yet sufficiently widespread or efficient.
Rather, they should use the most available and reliable sources of energy, while establishing
the infrastructure that will enable them to switch seamlessly to greener sources. Over time,
the demand for green products will increase, while that for traditional carbon-based products
shrinks. And during this period CDDCs should not just be buyers of green energy systems but
active participants as producers and innovators of green technologies.

The following chapter shows how they can do so in a comprehensive way through ‘green
industrial policy.’

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Endnotes
1 22
Pickbourn et al., 2022 Pickbourn et al., 2022. These country categories
2
Including highly vulnerable economies, particularly were used in previous reports, including in UNCTAD
CDDCs, dependent on the export of a single (2019a) and UNCTAD (2021d). CDDCs are
commodity (e.g., sugar in Mauritius until the 1970s) developing countries (using UNCTAD classification)
or a limited number of commodity exports (e.g., that derive at least 60 per cent of their merchandise
coffee and bananas in Costa Rica until the 1980s). export revenue from commodities, as defined earlier.
3 NCDDCs are developing countries that are not
UNCTAD and FAO, 2017
commodity-dependent. Developed countries are as
4
Agosin, 2009 defined by UNCTAD classification.
5
Ibid 23
see also UNCTAD, (2019a).
6
UNCTAD, 2021d 24
The IPCC sectors are defined as follows: energy
7
Agosin, 2009 industries comprises emissions from fuels combusted
8
Panayotou et al., 2000 by the fuel extraction or energy-producing
9 industries; manufacturing industries are emissions
Zeng et al., 2014; Lin and Chen, 2019
from combustion of fuels in industry, and includes
10
Pickbourn et al., 2022 combustion for the generation of electricity and
11
Padilla, 2017 heat for own use in these industries; transportation
12
Kaya and Yokobori, 1997 sector refers to emissions from the combustion and
13 evaporation of fuel for all transport activity excluding
Anzolin and Lebdioui, 2021
military transport; manufacturing non-energy covers
14
World Bank, 2012 emissions from industrial processes and product use,
15
Pollin, 2015: 109, 111 excluding those related to energy combustion. See
16
Please refer to Pickbourn et al. (2022) for the country the IPCC guidelines for further details.
level results.
25
This dataset provides country-level time-series
17 estimates of carbon dioxide CO2 emissions from
Narayan and Narayan, 2010
fossil fuel combustion and cement manufacture
18
More specifically, the authors find that for 15 out going back to 1751, and include emissions from
of the 43 countries in their sample, the long-run solid fuel consumption, liquid fuel consumption,
elasticity of emissions with respect to income is lower gas fuel consumption, cement production, and
than the short-run elasticity, suggesting that in these gas flaring https://data.ess-dive.lbl.gov/view/
countries, increases in income are associated with doi:10.15485/1712447
lower carbon dioxide emissions. However, the long- 26
Detailed information can be found in Pickbourn et al.
run income elasticity of carbon dioxide emissions
(2022).
was positive for all but six countries (the Congo, Iraq,
27
Kenya, Nigeria, the United Arab Emirates and Yemen) Pickbourn et al., 2022
28
indicating that the majority of countries in the sample UNCTAD, 2022b
still need to do more to decouple long-run income 29
Gough, 2017: 171
growth from carbon dioxide emissions. 30
Pollin, 2015
19
Gough, 2017; Jalles and Ge, 2020 31
Pollin, 2015: 108
20
Cohen et al., 2018 32
Gough, 2017
21
Jalles and Ge, 2020

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5
Greener economy
ahead
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5 Greener
economy ahead

To achieve sustainable economic growth and accelerate human development, CDDCs need to transform their
economic structures to make them more diverse and resilient, while anticipating a low-carbon future. This
chapter outlines potential directions and actions and argues for ‘green industrial policies.’

CDDCs face the challenge of diversifying their economies while aligning with global efforts
to reduce GHG emissions and address the climate crisis. This requires transforming their
productive capabilities amidst changes in energy and transportation systems. To tackle this
challenge, CDDCs should utilize all available resources. The efficient use of traditional energy
sources and the expansion of renewables are both essential in their pursuit of economic
diversification. They need to develop productive capacities that promote increased productivity
and prosperity while transitioning to a low-carbon economy. These policies should also
prioritize inclusivity by creating employment opportunities and minimizing potential negative
income distribution effects within countries.1 Green industrial policies (GIPs) play a vital role
in this transformation.

Figure 5.1 represents the types of policies required to support CDDCs in diversifying their
economies while contributing to climate change mitigation efforts. This chapter begins by
highlighting the conventional factors that have historically driven economic transformation,
which remain relevant in green structural transformation. It then explores specific drivers
for diversification within the low-carbon economy. Finally, it emphasizes the importance of
implementing a green industrial policy in CDDCs for leveraging diversification opportunities
arising from the global energy transition.

Traditional enablers of economic diversification

Most countries that have successfully diversified their economies have relied on a policy mix
that addresses country- and sector-specific challenges and market failures, which have also
generally improved the business and investment climate in the country (see chapter 2).

Human capital – A well-designed GIP framework should align the skills of the labour force with
the needs of the labour market and enable workers to adapt to new and emerging industries.
Governments should work with the private sector on vocational education and on-the-job
training – and extend this to workers in the informal sector to make them more productive, and
offer paths to formal employment. When they have learned new skills, workers in traditional
energy production can be redeployed in clean energy sectors. In India, for example, the Skill
Council for Green Jobs identifies and builds skills for green industries. Support can also come
through international development cooperation and South-South cooperation – as with the
establishment in 2014 of the Brazil-Sao Tome and Principe Professional Training Centre.2

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Figure 5.1 Links between policies for export diversification

E N E R G Y T R A N S IT I O N
S
L ER
AB
L EN
O NA
IT I GR
RA
D PO EEN
T LIC IND
Y US
TR
IAL

GREEN INDUSTRIAL POLICY

• Green productive capabilities
• Political economy and
ENERGY TRANSITION inclusiveness: job creation,
TRADITIONAL ENABLERS gender, SMEs
• Boost access to energy
• Human capital • Country specificity
• Consider right energy mix
• Market access (export • Adjust rules governing trade,
and import) • Harness green growth opportunities
finance, investment,
• Infrastructure: Export • Account for initial conditions technology
Processing Zones (EPZs) • Decent jobs and just transitions • Make the switch in CDDCs to
• Economic and political • Benefit from international cooperation low-carbon economy
stability and agreements compatible with incentives

Source: UNCTAD.

Skills development should also be gender inclusive. In Ghana, for instance, the Women in
the Driving Seat tractor operation aims to break down barriers for women in agricultural
mechanization by providing exclusive tractor training and certification for women, to enhance
the skills and expertise of women operators, mechanics, and technicians, leading to long-
term growth in their involvement and leadership in agricultural machinery operation.3

Market access – In countries where the domestic capital market is underdeveloped,

governments need to prioritize financial sector development and can consider designing
targeted financing instruments through specialized funds or development banks that
improve access to finance. In this regard, SMEs need particular attention as they represent
most businesses and employment worldwide but face significant unmet financing needs.4
For instance, blended concessional finance can help expand access for underfinanced
enterprises by offsetting some risks. Also, instruments tailored to women-owned and women-
led businesses can help to address the gender finance gap.5 International financial institutions

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can also strengthen their support for private sector access to finance in CDDCs in line with
government priorities and thus promote diversification and value upgrading. Moreover, an
appropriate trade policy framework can contribute to diversification and value upgrading by
facilitating access of domestic firms to key inputs. In this regard, there is evidence that tariffs
on imported capital and intermediate goods can limit productivity and growth in developing
countries.6

Infrastructure – Infrastructure plays a crucial role in enabling economic diversification by

providing not only the necessary physical and logistical support for the development of diverse
industries and sectors, but also facilitating the development of other enablers of diversification.
Access to affordable and reliable energy, for example, is not just a precondition for diversified
industrial development; it is also essential for improving education and health standards.
Modern transport and telecommunication services only thrive with reliable energy services
and functioning digital infrastructure.7 Special industrial zones can only fulfil their potential if
they have strong links with their domestic economies. While such linkages pose a challenge in
terms of policy coordination, they also provide opportunities for creating a mutually reinforcing
policy approach.

Economic and political stability – All these components should coalesce into a whole-
of-government strategy based on strong leadership with coordination at the highest levels of
government – to build a national consensus that extends beyond immediate political cycles.8
Costa Rica, for instance, initiated measures in the early 1980s that did not bear fruit until the
1990s and 2000s; these included exchange-rate reforms, export tax reduction, government
subsidies, and regulatory frameworks to help “non–traditional” exporters concerning export
contracts, the establishment of maquiladora firms in the apparel sector, and the promotion of
new exports via free trade zones.9

Economic diversification in a low-carbon economy

The energy transition offers countries the potential for economic diversification through low-
carbon activities, opening doors to positive socioeconomic outcomes such as improved
energy access and green growth opportunities. At the same time, countries must be mindful
of the potential impact of diversification and the transition on income inequality. Each country’s
prospects will depend on its unique characteristics, including natural resources, productive
capacities and existing disparities. This means that progress towards a low-carbon world
may be uneven and slower in developing countries compared to advanced economies. This
section outlines key aspects of an inclusive energy transition.

Boost access to energy – The energy transition and expansion of renewable energy markets
may offer a much-needed impetus for countries to address energy disparities. Decentralized
renewable energy systems can boost rural electrification in areas with large distances to
the grid. Electrification of schools, for example, allows them to use IT equipment and adopt
more advanced curricula and teaching materials that enable low-income households to build
higher levels of skill. Households would also benefit from energy access and cleaner cooking
technologies, freeing more women to participate in the labour force.10 This is particularly
important for rural areas and could reduce the urban-rural divide. There has been some
progress in this regard. For example, between 2014 and 2019, the number of people with
access to solar home systems in Africa increased from 1.6 million to 12.6 million.11

Consider the right energy mix – As discussed in chapter 2, natural endowments and
renewable energy potentials vary from country to country. These differences mean that

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governments must consider their natural endowments to strategically develop renewable

markets that align with their resource abundance. Morocco, for example, has focused on
solar energy due to the high rates of solar irradiation it possesses.12 By contrast, Albania has
concentrated efforts on hydropower due to its river systems.13

Harness green growth opportunities − New opportunities may arise in various low-carbon
sectors – ranging from the production of renewable energy and the operation and maintenance
of equipment to nature-based solutions, expanding the circular economy, and climate change
adaptation. In addition to solar energy, many CDDCs also have considerable potential for wind
energy and for producing and exporting green hydrogen.14 Indeed, in the new global markets
for green energy and related products, developing countries, particularly in Africa, can have a
comparative advantage and exploit new employment opportunities. Other CDDCs may also
have opportunities in biodiversity-based products (Box 5.1).

Account for initial conditions – Much of the effort towards a low-carbon energy transition
will depend on a country’s starting point, including its ability to invest and existing disparities.
Higher-income countries will be better able to introduce renewable technologies.15 Many lower-
income economies, on the other hand, may prioritize rural energy access or the use of clean
cooking technologies and have fewer resources for developing wind or solar. Meanwhile, fuel-
exporting CDDCs may initially shift from petroleum and coal to natural gas before advancing
to greener energy sources at a later stage.

Fuel-exporting countries should be particularly cognizant of the challenges the transition

implies, as it represents an immense reconfiguration of economic activity and may have
important distributional implications. It is important for governments to find a balance so that
they do not lag behind decarbonization efforts while also minimising the disruptions net-zero
would bring to the economy. That said, the transition is likely to be achieved through gradual
interventions rather than bringing an abrupt halt to carbon-intensive activities.16

Decent jobs and just transition – About 1.2 billion jobs around the world rely directly on a
healthy, sustainability-based environment, particularly jobs in agriculture, forestry, and related
sectors that depend on functioning ecosystems. A green transition could lead to a net gain of

Box 5.1 Biodiversity-based products

Agricultural CDDCs that are rich in biodiversity can benefit from products derived from biological re-
sources, such as coffee, cotton or natural oils and fats. An example is marula oil in Namibia. Marula is
an indigenous plant that is used in various cosmetics for personal and skincare. A cooperative that is
processing and commercializing marula oil has generated employment opportunities for 2,500 women
in rural communities in the country.
The cooperative’s factory produces up to 12 tons of processed oil each year, which is either traded
locally or sold in international markets. This is a small-scale initiative, but it has improved the access
of women in rural communities to the labour market and constitutes a value upgrade along the marula
commodity chain. Similar initiatives in other agricultural CDDCs can take advantage of opportunities
that may arise from the energy transition and increased green consumption based on pre-existing
productive capacities and resources. Large-scale efforts may also contribute to a country’s export
diversification.

Source: UNCTAD. 2021a. Women in rural Namibia profit from biodiversity-friendly trade. UNCTAD. Available at: https://
unctad.org/news/women-rural-namibia-profit-biodiversity-friendly-trade

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18 million jobs by 2030.17 This is an opportunity for countries to diversify into greener activities
and to increase participation from previously excluded groups.

To this end, governments will need national plans to ensure that the benefits of the transition
are not concentrated in a single group. This would entail pursuing inclusive labour policies,
including social protection, retraining and upskilling schemes and social dialogue, as detailed
in chapter 3. In addition, governments should ensure equal access to energy, education and
healthcare.

Benefit from international cooperation and agreements – Governments would benefit

from regional and international cooperation and existing climate-related mechanisms such as
ILO’s Climate Action for Jobs Initiative to ensure inclusive policies that support a just transition
by creating decent jobs and measures to safeguard vulnerable workers.

An encouraging outcome following the 2022 Climate Change Conference (Conference of the
Parties of the UNFCCC – COP 27) in Sharm el-Sheikh, Egypt, was the decision to establish
new funding arrangements and a dedicated ‘loss and damage’ fund to assist developing
countries disproportionally impacted by climate change,18 which may help contribute to the
funding of a green transition in vulnerable countries.

As CDDCs may be affected by external policies, advanced economies need to be cognizant

of the potential distributional effects of their own policies, such as the Carbon Border
Adjustment Mechanism (CBAM) in the European Union, which aims to put a fair price on
the carbon emitted during the production of carbon-intensive goods that are entering the
European Union. A recent carbon pricing analysis by UNCTAD19 estimates that the CBAM
would decrease global real income by $3.4 billion, with developed countries’ incomes rising
by $2.5 billion and developing countries’ incomes declining by $5.9 billion.20 Although the
CBAM is likely to exempt SIDS and LDCs, it is expected to further widen the gap between
developing and developed countries.21

Green industrial policies in CDDCs

Industrial policy plays a crucial role in economic development by stimulating dynamic market
forces and driving structural change and growth,22 and the state plays a pivotal role in
promoting development-oriented industrial policies.23 Industrial policies have been instrumental
in supporting the catch-up process in East Asia by addressing information and coordination
challenges in capital formation and enabling private firms to unleash their creative potential
and translate production experience into productivity gains.24

A well-designed industrial policy is essential for nurturing the learning process of companies,
especially in new products and markets. It encompasses mechanisms that encourage
innovation, promote research and development activities, simplify patent access, and provide
fiscal and financial incentives for new production.25 Effective industrial policies also include
strategies such as information dissemination, favourable FDI policies, and government
procurement, which enhance integration into global production chains.26 Aligning industrial
policy with trade policy objectives allows countries to strive for international competitiveness
in increasingly sophisticated products,27 while a strategic trade policy that complements the
industrial policy further enhances its impact.28

Recognizing the urgency of addressing climate change, industrial policies can serve as a
starting point for sustainable development strategies. Some developing countries can

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leverage their natural comparative advantages in the production of low-carbon energy (e.g.,
solar and wind energy) by using industrial policy to develop dynamic comparative advantages
in this area.29 Also, by providing the right incentives, domestic producers can participate in
producing climate-friendly goods and tailor products to local needs.30

Such inclusive diversification and a green transition require an appropriate policy framework –
a green industrial policy.31 A GIP incorporates “any government measure aimed to accelerate
the structural transformation towards a low-carbon, resource-efficient economy in ways that
also enable productivity enhancements.”32 There are some similarities with traditional notions
of industrial policy but also some important differences such as: identifying environmental
externalities as important market failures; promoting technologies and patterns of consumer
behaviour that are desirable because of their environmental impacts; achieving structural
change in a short timeframe; and stimulating positive spillovers that extend beyond the
boundaries of the domestic economy.33

History has shown that left on their own, markets have their limits, not just for achieving greener
development but also for generating employment and promoting human development in the
face of globalization, disruptive technological change, and financial crises.34

A well-designed GIP will respond to the shortcomings of traditional industrial policy. It will:
• Be multisectoral – Industrial policy should be more inclusive, extending beyond manu-
facturing to all sectors of the economy, including agriculture, mining and services, with a
particular focus on reducing CDDCs’ dependence on traditional commodities.35
• Have social goals – Industrial policy should be driven by societal goals, including those
for climate, health, reducing poverty and inequality and creating decent jobs outside the
commodity sector.36
• Collaborate with the private sector – Instead of the traditional top-down policymaking,
industrial policy should be a sustained collaboration between the public and private sectors
to create the appropriate institutional environment for diversification outside of the com-
modity sector.37
• Guide technological change – Industrial policy should steer technological change to
non-commodity sectors that promote pro-poor, pro-environment and pro-labour activities.38

These policies can help to create new markets for green products and services, stimulate
economic growth, and create jobs in the green economy. By supporting green innovation,
countries can also enhance their resilience to climate change impacts and reduce their
vulnerability to environmental risks. Overall, green innovation policies are a key component of
efforts to transition towards a more sustainable and low-carbon future.39

A GIP is, therefore, highly suited to the needs of CDDCs. Diversifying away from commodities
without further increasing emissions can only be achieved with large, coordinated investments
in energy systems, infrastructure, and technological innovation.40 In the short term, these
investments can reduce emissions associated with expansions in the use of fossil fuel-
based energy. For example, the Optimization of Power Generation and Energy Efficiency
Programme in Ecuador succeeded in reducing the flaring of gas and the use of diesel for
electricity generation, making it possible to lower emissions by 848,500 tCO2e between 2009
and 2015.41

Furthermore, a GIP can also mitigate the risk of stranded assets. Decarbonization in China,
the United States and the European Union involves revaluing carbon assets downwards and,
by implication, depreciating the underlying natural resources.42 CDDCs can avoid creating

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more stranded assets by depending less on commodities and transitioning to low-carbon

economies. The Government of Namibia, for example, is aiming to be a global leader in
alternative energy markets through the production of green hydrogen.

CDDCs transitioning to a low-emissions development path should start this transition now, at
the start of the new green technological revolution.43 At the beginning of a new technological
wave, every country is more or less in the same position, but early adopters move ahead
quicker and create advantages that make others struggle to catch up. Access to technologies
and know-how is not enough – timing is especially crucial. If they postpone the changes to a
later stage, when they are more firmly locked into older infrastructure and technologies, the
costs of greening their economies may be very high.44

It is also worth emphasizing that instead of merely being consumers of green energy, relying on
technology imports, CDDCs implementing GIPs can actively participate in the development of
new technologies and productive capabilities and establish dynamic comparative advantages
in green products and technologies.45

Designing GIPs for CDDCs

Instead of copying models from elsewhere, CDDCs should identify pragmatic policies suited to
their levels of development and productive capabilities. These will differ from one economy to
another, but in general, they should be guided by common principles, identify priority sectors,
take advantage of commodity-related entry points, build on regional integration opportunities
and be strongly supported by the international community.

Principles

Develop foundational capabilities – Most CDDCs will need to ‘jump’ from a limited set
of productive capabilities into more technologically advanced production.46 To succeed in
acquiring the productive capabilities specific to a particular technology, developing countries
need ‘foundational capabilities’ that allow them to learn these new technical solutions and
apply them in innovative ways.47 Hence, States should support research and development
while attracting long-term capital to build and accumulate production capabilities. Promoting
learning in production is essential, i.e., developing and accumulating productive capabilities
in an environment where firms can stay in business and expand and improve their production
processes.48

Ensure political and public support – A successful GIP needs to identify the distributional
effects of structural reforms and manage potential conflicts, given that reforms might have
short-term costs on segments of the population.49 Managing potential conflicts between
different groups is essential to the success of a GIP. This involves carefully fine-tuning the
reform measures while implementing compensatory measures or social safety nets. It is
important to foster long-term support for these reforms, as their true benefits may only be
realized after several years or even decades. Consistent backing from the population and
a sustained commitment across successive governments are key factors for success.50 An
example is Costa Rica and their journey towards diversification, which relied on steady support
from politicians, who understood that the political benefits of the reforms would materialize
several years down the line, even if they personally wouldn’t directly benefit from them.51

Create jobs – CDDCs typically have relatively limited high-quality employment opportunities,
so the creation of such jobs should be a priority for GIP, particularly for workers in the informal
sector. Creating jobs for this critical segment of the labour force would help address the

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income inequalities often associated with diversification. This could include initiatives such
as providing training and support for entrepreneurship and small businesses, creating public
works programmes that can develop skills, and investing in labour-intensive green technologies
and related infrastructure projects.

Promote social cohesion and a just transition – Ensure GIP accounts for all segments
of society and includes marginalized and underrepresented groups in their design. This is
important to address existing disparities and prevent widening income and opportunity gaps
in the population. As outlined in the previous chapters, this should include measures targeting
actors who are vulnerable to the energy transition.

Ensure gender equality – A GIP should increase women’s access to employment

opportunities. Gender equality should not be a by-product of industrial policy or be sacrificed
for environmental sustainability or green growth.52 Gender equality should be an integral
component of GIP design. It should include measures that specifically address the structural
barriers faced by women in accessing the labour market, such as improving childcare,
increasing access to education and training, promoting equal pay for equal work, and ensuring
equal opportunities for career advancement. The GIP should also monitor gender disparities
in the workforce and introduce corrective measures as necessary.

Priority sectors

Diversification towards complex,53 greener, and more socially inclusive sectors is crucial to
achieving more inclusive and sustainable economic growth. Therefore, GIPs should identify
potential new sectors that meet these criteria in view of the opportunities and risks in individual
economies.

Identifying potential new sectors for economic diversification – This requires an

understanding of a country’s current productive capabilities. Certain sectors offer significant
export opportunities for CDDCs due to their potential for upgrading, high unit values, and
favourable market conditions. For example, UNCTAD analysis suggests that for CDDCs,
these sectors include articles of machinery and mechanical appliances, plastics and plastic
articles, electrical and electronic equipment, iron and steel, organic chemicals, and optical,
photo, technical, and medical apparatus.54 However, the type of commodity dependence
(agriculture, fuel, minerals) and income level of CDDCs play a role in the feasibility and potential
impact of diversifying towards these sectors. Also, the export potential of these sectors
varies by region, with some sectors showing greater potential in certain areas than others.
Policymakers should carefully consider these factors when identifying potential new sectors
for economic diversification.

Capturing more value in existing value chains – GIPs should also promote the capture of
more value along the commodity value chains. In response to the COVID-19 pandemic and
the war in Ukraine, businesses are likely to revisit the just-in-time business model of global
value chains (GVCs) to reduce supply uncertainties. This might mean less reliance on imports
from long distances, potentially changing the nature of CDDCs involvement in GVCs. This may
encourage the development of short-distance regional value chains in developing countries,
helping CDDCs to design a different diversification path that could capture more value in
commodity value chains.

Entry points

Green industrial policies in CDDCs should also be tailored to the opportunities and risks present

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in individual economies. In many cases, these are strongly linked to the type of commodity
dependence:
Fossil fuels – In countries that depend on the export of fossil fuels, one entry point for
GIP could be the transformation of hydrocarbon assets and resources, which risk being
stranded, into other, more sustainable forms of capital such as human capital, infrastructure
and productive capacity.
• Create sovereign wealth funds – Considering the large flows of capital associated with
fossil fuels transactions, especially during periods of high prices, windfall gains and large
capital inflows during boom periods could be used for creating commodity-based sover-
eign wealth funds (SWFs), which stabilize fiscal policy by transferring income into a diverse
portfolio of assets (see chapter 2). However, SWFs are only effective and sustainable if they
remain transparent, with strong governance and have robust inflow/outflow rules.

Minerals – In CDDCs with large mining sectors and reserves of critical energy transition
minerals, harnessing the potential economic benefits of a large-scale expansion of markets
for clean technology could be a key area for GIPs.
• Harness clean technology markets – From 2025 to 2030, the energy transition will
globally bring cumulative global mining investments of $1.7 trillion.55 This represents a huge
opportunity for countries such as the Democratic Republic of the Congo, which in 2022
accounted for 68 per cent of global cobalt mine production and 48 per cent of global cobalt
resources.56 Rather than contributing to ‘resource curses’, the mining of these resources
should be linked with domestic or regional value chains in mineral-based products. The
recent agreement between the Democratic Republic of the Congo and Zambia to jointly
manufacture precursors to electric car batteries is an example of what CDDCs could do. 57
• Respect environmental, social and governance (ESG) guidelines – The mining indus-
try is under external pressure to address environmental and social concerns, with national
governments and legislation enforcing compliance with environmental and social laws and
companies participating in sustainability initiatives and industry associations to demonstrate
their commitment to sustainable practices and adopt best practices.58 Ensuring responsible
mining operations will mitigate the negative impact of mining operations on communities,
while maximizing the benefits in terms of job creation, tax revenue, and infrastructure de-
velopment. Also, building strong institutions and preventing corruption is vital to promote
inclusive mineral development and equitable distribution of its benefits.

Agriculture – For CDDCs that depend on the agriculture sector, potential entry points for GIPs
are sustainable value upgrading into agri-processing industries and climate-smart agriculture.
• Process crops locally – Currently, African CDDCs grow most of the global cashew nut
crop but export this for processing in Asia.59 Instead, producer countries could also process
the crops and add value locally while shortening supply chains. This may not be easy. MNEs
have often used their market power to create entry barriers, limiting the scope for learning
in developing countries – as with cocoa and coffee.60 In Ghana, MNEs have financialized
the cocoa and chocolate sectors, constraining the ability of local producers to move along
the global value chains. Large corporations have created food-based assets for financial
investors. As a result, financial institutions are now part of the agri-food system, while agri-
food companies are behaving like financial institutions. Newcomers, therefore, need access
to deep and cheap capital markets to compete, which is difficult for most companies in
developing and emerging markets.61
• Move to smarter agriculture – Through climate-smart agricultural practices, agricultural

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productivity growth – an important element for structural transformation – could be safe-

guarded from the impacts of climate change and/or decoupled from rising GHG emis-
sions.62 The timed release of nitrogen fertilizers, for example, increases crop productivity
while reducing GHG emissions.

Regional integration

Given the small sizes of individual CDDC markets and differences in the potential for export
diversification across CDDCs, regionally coordinated diversification policies could be beneficial.

Coordinate diversification strategies regionally – Infant industries in CDDCs can avoid

competing for space in global markets by prioritizing diversification efforts in different sectors
based on a region’s type of commodity dependence and income level. Such a regional
strategy could ensure that such policies do not lead to regional imbalances or exacerbate
existing inequalities. It would create a coordinated and supportive environment that enables
all CDDCs to pursue sustainable and inclusive economic diversification. Such coordination
requires effective policies and institutional support, as well as strong regional cooperation and
integration to ensure that all countries benefit from the process of economic diversification.

Leverage regional trade – Regional markets can be a valuable avenue for CDDCs to
promote their diversification, particularly in Africa, where intraregional trade is lower than in
other regions.63 Indeed, there are significant opportunities for African CDDCs to diversify their
exports in sectors such as plastics, iron and steel, machinery, and electrical equipment.64 By
focusing on these sectors and leveraging regional trade agreements and partnerships, African
countries can tap into a growing demand for these goods and services within the continent.
This can reduce their dependence on traditional commodity exports while also promoting
regional integration and economic development.

Foster regional value chains – Promoting partnerships within regions can be an

effective strategy for CDDCs to participate in sectors that offer common opportunities for
diversification. By joining forces, countries at different levels of development can collaborate
in different stages of value chains, allowing them to take advantage of each other’s strengths
and resources. This can include sharing knowledge and expertise, pooling resources and
investments, and establishing joint ventures and partnerships with firms in more developed
countries. By working together, CDDCs can improve their bargaining power and access to
markets, while also building more robust and resilient economies that rely less on a single
commodity or market. However, such partnerships require careful planning and management,
as well as strong institutional frameworks and governance mechanisms to ensure that all
partners benefit from the collaboration.

International support

Green industrial policies take place in a changing global context that will determine their
success or failure, and CDDCs cannot succeed without important contributions from the
international community. Indeed, GIPs and diversification in CDDCs should be considered a
global objective as part of the mitigation response to climate change. Therefore, international
actors will have an important role to play:

Stabilize commodity markets – International action will be needed to tackle the increasingly
financialized commodity markets – with rules to limit speculation, and new, counter-cyclical
financing facilities that can mitigate price shocks.65 South-South cooperation among CDDCs
would increase their bargaining power with international commodity buyers and their ability
to negotiate for more favourable rules governing global trade and investment. To help create

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space for industrial policy, the international community could also reinstate stabilization funds.

Combat tax evasion and illicit financial flows – Measures could include greater regulation
of transnational capital flows and international collaboration to reduce tax avoidance and tax
evasion while directing the global financial system towards more productive investment.66 In
this connection, the implementation of the Base Erosion and Profit Shifting (BEPS) framework,
which aims to prevent multinational enterprises from shifting profits to low-tax jurisdictions,
is expected to reduce some types of tax avoidance.67 The international community should
increase technical assistance to developing countries to support BEPS implementation
and investment in policy adjustment. Another important measure is improving transparency
and information exchange between tax authorities, as well as strengthening the capacity of
developing countries to participate in international tax cooperation.68 Multiple donors have
made commitments to double their aid for tax capacity-building from 2015 to 2020 as part
of the Addis Ababa Tax Initiative, which aims to enhance domestic resource mobilization in
partner countries by increasing the quantity and quality of technical assistance provided.69
Additionally, the Organisation for Economic Co-operation and Development ( OECD), in
collaboration with Germany, Italy and Kenya, launched a pilot program known as the Africa
Academy for Tax and Financial Crime Investigation during the Group of 20 Africa Conference in
Berlin in June 2017. 70 These collective efforts hold great potential to support African countries
in mobilizing resources and attaining their sustainable development goals by combating illicit
financial flows.

Promote technology transfer – Support for the development of green technologies is

likely to be the most effective policy for achieving the goals of green development in the
long run. Currently, green technologies are developed in the North, and most low-income
and middle-income CDDCs have limited means to acquire these independently. For CDDCs
to successfully transition to low-carbon development paths, they will need better access to
new technologies and should be able to adapt them to local contexts. They should thus
take maximum advantage of policy instruments such as the possibility to impose on foreign
investors requirements for technology transfer and hiring local labour, as provided for in the
Trade Related Investment Measures (TRIMs) agreement. There is a need for an international
framework along the lines of the Technology Mechanism created under the UNFCCC to
ensure the transfer of green technology to CDDCs.71

Use stronger trade and investment measures – CDDCs can stimulate transitions with
targeted investments in infrastructure, research and development,72 and those eligible can
take advantage of the special and differentiated treatment provided in most WTO rules for
increasing protective tariffs and regulating some aspects of foreign direct investment.73 For
example, many developing countries that have not met the upper limits on tariffs still have
room to increase them; these countries are also able to regulate some aspects of foreign
direct investment and make use of provisions for emergency tariff increases, over which
they have considerable discretion. CDDCs should also be strategic about attracting FDI into
targeted industries.74

Support energy transition and mitigate the consequences of stranded resources –

It is unrealistic to expect CDDCs to voluntarily strand fossil-fuel resources that provide the
bulk of their export revenues without a transparent and credible compensatory mechanism.
International financial institutions, large MNEs, donor governments, and aid agencies could
rally behind CDDCs to offer them incentives for transitioning.

Be supported by international funding – To implement nationally determined contributions,

estimates show that countries in Africa alone needs to invest $3 trillion in mitigation and
adaptation by 2030.75, 76 In Latin America and the Caribbean, several countries’ GHG mitigation

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commitments are contingent on international assistance. In the Caribbean, between 50 and

100 per cent of NDC pledges are conditional on international funding.77 Investment is needed
to fund research and development of new technologies, as well as to provide incentives for
businesses and individuals to adopt these technologies. Coordinated investment is particularly
important because green innovation often involves complex supply chains and global markets,
which require collaboration between different actors across sectors and countries. By working
together, countries can pool their resources and expertise to accelerate the development and
adoption of cleaner technologies, while ensuring that these innovations are supported by a
supportive policy environment.78

Towards a greener world

Just diversification and green transitions in CDDCs will require strong political commitment
and leadership in CDDCs and at the global level. While many issues relating to diversification
and the green transition in CDDCs are similar around the world, each country has to chart its
own path – making a detailed assessment of opportunities and obstacles and designing a
green industrial policy.

Until recently, the benefits of industrial policy and economic diversification were thought to
accrue primarily to individual CDDCs, offering little incentive for other countries to support this
transition. Climate change has shifted that calculus: the global community as a whole stands
to benefit if CDDCs succeed in transitioning along low-carbon development paths. Simply
calling for these countries to ‘leave the resources in the ground’ is a political and economic
dead end. The only way to a greener world is through mutual support and cooperation.

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Endnotes
1 40
Altenburg and Assmann, 2017 Okereke et al., 2019; Anzolin and Lebdioui, 2021;
2
https://my.southsouth-galaxy.org/en/solutions/detail/ Chang and Andreoni, 2021; UNCTAD, 2021b
41
establishment-of-the-brazil-sao-tome-and-principe- Anzolin and Lebdioui, 2021
professional-training-centre 42
Altenburg and Rodrik, 2017
3
https://unevoc.unesco.org/pub/nqc_mofa_women_ 43
UNCTAD, 2023a
in_the_driving_seat.pdf 44
Padilla, 2017
4
IFC, 2017 45
Anzolin and Lebdioui, 2021; Padilla, 2017
5
IFC, 2022 46
UNCTAD, 2021d
6
Estevadeordal and Taylor, 2013 47
Chang and Andreoni, 2021
7
UNCTAD, 2017 48
Ibid
8
See background documentation to the Commodities 49
See, for example, Gemmell and Morrissey (2005),
and Development Report 2021 at https://unctad.
Mourougane and Vogel (2008), and Causa et al.
org/system/files/non-official-document/DITC_
(2016) for discussion on distributional effects of
COM_2021_D_BN01_en.pdf
structural reforms such as tax, labour market, and
9
Ferreira et al., 2018 social protection reforms and Stiglitz (2017) for
10
IEA et al., 2022 discussion on tackling inequality as an objective of
11
IRENA, 2021 industrial policies.
50
12
World Economic Forum, 2022 Ngaruko and Nkurunziza, 2006
51
13
International Hydropower Association, 2019 See background documentation to the Commodities
14 and Development Report 2021 at https://unctad.
UNCTAD, 2023b
org/system/files/non-official-document/DITC_
15
This publication uses country groupings by income in COM_2021_D_BN01_en.pdf
the analysis and discussion of energy transition given 52
Berik et al., 2009; Seguino, 2000a, 2000b
that income is a relevant factor in this process.
53
16 The term complexity refer to the level of non-tradable
UNCTAD, 2023b
capabilities in the economy as defined in the strand of
17
ILO, 2022 literature on economic complexity See, for example,
18
Report of the Conference of the Parties on its twenty- Hidalgo and Hausmann (2009) and Tacchella et al.
seventh session, held in Sharm el-Sheikh from 6 (2012).
to 20 November 2022(FCCC/CP/2022/10/Add.1). 54
Based on UNCTAD’s research on economic
Available at https://unfccc.int/documents/626561 complexity and product space estimates indices for
19
UNCTAD, 2022c economic complexity, carbon footprint, and inequality
20
UNCTAD, 2021b, 2022c associated with the production of over 43,000
21 internationally traded products. The methodology
UNCTAD, 2021b
is similar to that used in UNCTAD (2022d, 2022e,
22
UNCTAD, 2006 2023a).
23
UNCTAD, 2010 55
Reuters, 2021
24
UNCTAD, 2006 56
USGS, 2023
25
UNCTAD, 2009 57
Information on this initiative may be found at: https://
26
Ibid uneca.org/stories/zambia-and-drc-sign-cooperation-
27
UNCTAD, 2006 agreement-to-manufacture-electric-batteries
58
28
UNCTAD, 2010 See, for example, Ivic et al. (2021).
59
29
UNCTAD, 2009 UNCTAD, 2021c
60
30
Ibid Chang and Andreoni, 2021; UNCTAD, 2016;
31 UNCTAD, 2018a
This section draws from Pickbourn et al. (2022).
61
32 van Huellen and Abubakar, 2021
Altenburg and Rodrik, 2017: 11
62
33 UNCTAD, 2018b
Altenburg and Rodrik, 2017: 11–16
63
34 Intra-regional trade in Africa has remained around 15
Aiginger and Rodrik, 2020; Ferrannini et al., 2021
per cent in the past years (UNCTAD, 2019d, 2019c).
35
Altenburg and Rodrik, 2017; Ferrannini et al., 2021 64
UNCTAD, 2022d
36
Aiginger and Rodrik, 2020; Ferrannini et al., 2021; 65
Tröster, 2020
Mazzucato, 2018
66
37 Chang and Andreoni, 2020
Aiginger and Rodrik, 2020
67
38 UNCTAD, 2022f
Ibid
68
39 Ibid
UNCTAD, 2021b

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69 75
UNCTAD, 2020 UNECA, 2022a
70 76
Ibid It is estimated that investment needs are about US$
71
UNCTAD, 2021d 125 trillion to put the world towards the path to net
72 zero, of which US$ 32 trillion is required over 2021-
Chang, 2011; Chang and Andreoni, 2020
2030 (GFANZ, 2022; UNFCCC, 2022).
73
Chang, 2011; Chang and Andreoni, 2021 77
Institute of the Americas, 2021
74
Chang, 2011 78
UNCTAD, 2021b

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Appendices
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Appendices
Appendix A – Technical note on the relationship between
diversification and inequality
Chapter 3 outlines the results of an analysis of the relationship between diversification and
inequality based on a sample of 182 countries over the period 1998 to 2018. The data used in
this study was primarily collected from UNU-WIDER and UNCTAD. Inequality data was drawn
from the UNU-WIDER WIID Companion, which provides the most comprehensive adjusted
income inequality statistics covering 201 economies from 1960 to 2021.1,2 Data covering
1998 to 2018 was considered based on the availability of export diversification and covariates
data from UNCTAD. These covariates include GDP per capita (lagged term, in log), population
size (in log), trade openness (expressed as the sum of imports and exports over GDP, in log),
and human capital (expressed as a composite score, which captures the education, skills,
and health conditions possessed by the population.

Appendix table A1 reports the regression results of the linear fixed effects model for the overall
sample. The econometric analysis suggests a linear negative relationship between commodity
dependence and income inequality, indicating that export diversification is associated with
higher inequality. This suggests that diversification has adverse distributional effects on the
population. This may be attributed to a more differentiated occupational structure, and wage
differentials that arise with a more diversified economic structure. This relationship remains
statistically significant across most different income inequality measures (Palma ratio and
Theil’s L index).

With respect to the effect of income, there is a statistically significant effect between GDP per
capita (lagged term) and inequality, which is negative when considering the whole sample.
This can proxy for economic development and implies that as incomes increase, inequality
declines. Past income is used to reduce the effect of potential endogeneity between income
and inequality. Indeed, the variable used measures income three years prior to current
inequality, so it is a pre-determined variable. Trade openness is also negatively correlated with
income inequality. This result is robust to the different specifications and dependent variables
measuring inequality. This suggests that trade offers opportunities to different segments of the
population, reducing the income gap.

Human capital appears to be positively correlated with income inequality measured by the
Gini coefficient. This coefficient is also positive and statistically significant when considering
the inter-decile ratio as the dependent variable. Population size is also significant and shows
a negative coefficient. These findings remain robust when using the concentration index as
the main regressor, which shows a significant negative association between income inequality
(measured by the Gini coefficient) and export concentration (measured by the Finger-Kreinin
similarity in trade indicator). Results also hold when considering the third export diversification
measure (number of country product exports at the HS 6-digit level), which shows a positive
association between export diversification and income inequality (measured by the Gini
coefficient, the Palma ratio and Theil’s L Index).

When disaggregating the sample by income and commodity dependence groups, table A2
unveils the following results. While there seem to be no statistically significant differences
across income groups when measuring inequality with the Gini coefficient, there are
differences when using the Palma ratio, the Theil’s L index and the inter-decile ratio. These
inequality measurements are more sensitive to changes in the tails of the income distribution

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and may provide additional information on the association between export diversification and
income inequality. It seems that the positive relationship between diversification and inequality
only holds in low and low-middle-income countries (and CDDCs), reflected by the significant
coefficients in these specifications compared to high-income countries (non-CDDCs), where
no diversification coefficient is statistically significant. The associations related to commodity
exports highlighted in the low and low-middle-income subsamples remain statistically
significant when using the Theil’s L index and the inter-decile ratio as income inequality
measures. This suggests that export diversification has negative distributional effects in lower-
income countries. However, an alternative explanation could be that diversification in low-
income and lower-middle-income countries is relatively limited and perhaps not extensive
enough to create opportunities in all segments of the population. These results also suggest
that trade openness decreases inequality in low and lower-middle-income countries. This is
consistent with the Stolper-Samuelson theorem,3 where an increase in trade in countries with
relatively abundant low-skilled labour leads to lower inequality.

Table A1 Fixed effects coefficients (Linear, full sample)

(1) (2) (3) (4)
Inter-decile
Variables Gini Palma ratio Theil’s L Index
ratio

Commodity exports (% total merchandise -0.655* -0.197* -1.860* -1.476

exports, in log) (0.380) (0.118) (1.067) (0.950)

-2.127** -0.134 -3.016* -1.919

Lagged term of GDP per capita (in log)
(1.064) (0.170) (1.795) (1.524)

-1.007** -0.277** -2.646** -2.339*

Trade openness (in log)
(0.449) (0.122) (1.216) (1.336)

-3.263** -0.693* -6.790* -2.077

Population (in log)
(1.414) (0.354) (3.489) (3.147)

0.0988* 0.00738 0.195 0.242**

Human capital index
(0.0560) (0.0128) (0.119) (0.108)

89.70*** 10.73*** 123.0*** 43.17

Constant
(13.60) (3.146) (31.50) (31.78)

Observations 1,109 1,109 1,109 1,109

R-squared 0.149 0.077 0.102 0.026

Number of countries 182 182 182 182

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

Source: UNCTAD.

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Similar results are observed in the subsample comprising CDDCs, which indicates that the
benefits of diversification may be constrained to a specific portion of the population in these
countries. Nonetheless, as outlined previously, another interpretation could be that the limited
diversification happening in these countries in the first place generates little benefits that
cannot be spread out among the population. By contrast, most variables in the subsample
containing non-CDDCs are statistically non-significant.

Table A2 Fixed effects coefficients (Linear, subsamples)

Dependent variable: Gini Dependent variable: Palma ratio
(1) (2) (3) (4) (5) (6) (7) (8)
Low- Low-
and and
High Non- High Non-
Variables Low- CDDCs Low- CDDCs
income CDDCs income CDDCs
middle- middle-
income income

Commodity exports -0.764 -0.462 -1.847 -0.625 -0.399** -0.0474 -1.193* -0.1
(% total merchandise
exports, in log) (0.528) (0.585) (0.437) (0.696) (0.181) (0.0523) (0.147) (0.0509)

L.GDP per capita -1.173 -0.0636 -2.320** -1.257 -0.0293 0.0243 -0.143 -0.134
(in log) (1.200) (1.466) (1.159) (2.119) (0.305) (0.121) (0.195) (0.151)
Trade openness -1.153 0.624 -1.411*** 0.772 -0.322* 0.0604 -0.350** 0.0487
(in log) (0.703) (0.450) (0.505) (0.764) (0.187) (0.0445) (0.145) (0.0599)
-4.899 -1.184 -2.138 2.198 -1.074* -0.128** -0.445 0.196
Population (in log)
(2.960) (0.721) (1.403) (2.685) (0.634) (0.0558) (0.335) (0.191)
0.159 -0.0165 0.0695 0.0292 0.0191 -0.00189 -0.00200 0.00158
Human capital index
(0.110) (0.0491) (0.0723) (0.0535) (0.0308) (0.00377) (0.0187) (0.00394)
98.82*** 44.02*** 86.68*** 19.53 13.67** 2.239** 9.634*** 0.503
Constant
(26.42) (13.73) (13.55) (27.02) (5.867) (1.071) (2.996) (1.855)

Observations 578 259 855 254 578 259 855 254

R-squared 0.119 0.031 0.188 0.032 0.074 0.035 0.09 0.03
Number of countries 105 48 136 46 105 48 136 46

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Table A2 Fixed effects coefficients (Linear, subsamples) [Continued]

Dependent variable: Theil’s L index Dependent variable: Inter-decile ratio
(9) (10) (11) (12) (13) (14) (15) (16)
Low- Low-
and and
High Non- High Non-
Variables Low- CDDCs Low- CDDCs
income CDDCs income CDDCs
middle- middle-
income income

Commodity exports -3.196** -0.636 -8.219* -1.400 -3.122** -0.202 -9.200* -0.934
(% total merchandise
exports, in log) (1.587) (0.822) (4.924) (1.028) (1.437) (0.418) (5.376) (0.775)

L.GDP per capita -2.304 -0.123 -3.245 -2.022 -2.283 -0.202 -2.106 -0.524
(in log) (3.030) (2.174) (2.301) (1.788) (2.666) (0.909) (2.122) (1.143)

Trade openness -2.987 1.136 -3.570** 0.579 -2.916 0.425 -3.212 -0.203
(in log) (1.892) (0.728) (1.711) (1.260) (1.865) (0.383) (2.081) (1.026)

-10.56 -1.786* -1.823 -12.37*** -5.007 -0.470 0.425 -4.504**

Population (in log)
(7.265) (1.061) (3.572) (3.851) (6.906) (0.471) (2.880) (2.183)

0.369 -0.00553 0.0116 0.186 0.495* 0.0190 0.179 0.181*

Human capital index
(0.289) (0.0719) (0.219) (0.128) (0.265) (0.0308) (0.198) (0.107)

152.0** 34.43* 95.74*** 148.1*** 66.33 9.974 30.21 44.96**

Constant
(65.11) (19.40) (34.47) (34.09) (66.29) (7.633) (33.01) (20.36)

Observations 578 259 623 486 578 259 623 486

R-squared 0.090 0.029 0.111 0.107 0.028 0.023 0.033 0.055

Number of countries 105 48 114 99 105 48 114 99

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1
Source: UNCTAD.

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Table A3 Countries included in the analysis

Afghanistan Dominica Lebanon Samoa
Albania Dominican Republic Lesotho Sao Tome and Principe
Algeria Ecuador Liberia Saudi Arabia
Andorra Egypt Libya Senegal
Angola El Salvador Lithuania Serbia
Argentina Equatorial Guinea Luxembourg Seychelles
Armenia Eritrea Madagascar Sierra Leone
Australia Estonia Malawi Slovakia
Austria Eswatini Maldives Slovenia
Azerbaijan Ethiopia Mali Solomon Islands
Bahamas Fiji Malta Somalia
Bahrain Finland Marshall Islands South Africa
Bangladesh France Mauritania South Sudan
Barbados Gabon Mauritius Spain
Belarus Gambia Mexico Sri Lanka
Belize Georgia Republic of Moldova Sudan
Benin Germany Mongolia Suriname
Bhutan Ghana Montenegro Sweden
Bolivia (Plurinational State of) Greece Morocco Switzerland, Liechtenstein*
Bosnia and Herzegovina Grenada Mozambique Syrian Arab Republic
Botswana Guatemala Myanmar Tajikistan
Brazil Guinea Namibia Tanzania, United Republic of
Brunei Darussalam Guinea-Bissau Nepal Thailand
Bulgaria Guyana Kingdom of the Netherlands Timor-Leste
Burkina Faso Haiti New Zealand Togo
Burundi Honduras Nicaragua Tonga
Cabo Verde Hungary Niger Trinidad and Tobago
Cambodia Iceland Nigeria Tunisia
Cameroon India North Macedonia Turkmenistan
Canada Indonesia Norway Türkiye
Central African Republic Iran (Islamic Republic of) Oman Tuvalu
Chad Iraq Pakistan Uganda
Chile Ireland Palau Ukraine
China Israel Panama United Arab Emirates
Colombia Italy Papua New Guinea United Kingdom of Great
Comoros Jamaica Paraguay Britain and Northern Ireland
Congo Japan Peru United States of America
Democratic Republic of the Jordan Philippines Uruguay
Congo Kazakhstan Poland Uzbekistan
Costa Rica Kenya Portugal Vanuatu
Côte d’Ivoire Kiribati Qatar Venezuela (Bolivarian
Croatia Republic of Korea Romania Republic of)
Cuba Kuwait Russian Federation Viet Nam
Cyprus Kyrgyzstan Rwanda Yemen
Czechia Lao People’s Democratic Saint Lucia Zambia
Denmark Republic Saint Vincent and the Zimbabwe
Djibouti Latvia Grenadines
Note: Commodity-dependent developing countries are marked in bold; the standard font is for non-CDDCs. Grouping countries into CDDCs
and non-CDDCs is derived from the UNCTAD definition of commodity export dependence, when more than 60 per cent of its total
merchandise exports are composed of commodities, in line with the State of Commodity Dependence 2021.
* This grouping is based on the UNCTAD target economies classification, available at https://unctadstat.unctad.org/EN/Classifications/
DimCountries_TargetEconomies_Classification.pdf. For the purposes of this study, they are counted as a single country.

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Appendix B – Estimating the cyclical and trend components of

output-elasticities of emissions
Following (Cohen et al., 2018) and (Jalles and Ge, 2020), this report uses the Hodrick-Prescott
(HP) filter to decompose real GDP per capita and GHG emissions series into their trend and
cyclical components.4 Despite its limitations, the HP filter has been widely used in the literature,
so this report follows past practice. The cyclical component reflects the relationship between
output and emissions due to the business cycle, and the trend component captures the
long-run, structural relationship between output and emissions.5 These decompositions were
carried out for 186 countries classified as CDDCs, diversified developing countries (DDCs) or
developed countries, over the period 1980-2018.

Data on real output (in 2010 United States dollars) are from the World Bank’s World Development
Indicators. Data on greenhouse gas emissions come from the Emissions Database for
Global Atmospheric Research (EDGAR) which contains data sets covering the three direct
greenhouse gases – carbon dioxide, nitrous oxide and methane aggregated by country and
sector, using the IPCC 2006 sector designations.6 For the historical analysis focusing on the
five major industrialized economies, data for real GDP is from the Maddison Project, and data
for historical carbon dioxide emissions are from the Carbon Dioxide Information and Analysis
Center (CDIAC).7 Total CO2 emissions are the sum of fossil fuel emissions for solid, liquid, and
gas fuels, as well as gas flaring and cement production. Combined GDP and CO2 emissions
data for each country is available as follows: United States (1800–2017), United Kingdom
(1751–2017), Germany (1850–2017), France (1820–2017), and Japan (1870–2017).

The cyclical relationship between emissions and output is established by estimating the
following fixed effects specification:8

(1)

where and are respectively the cyclical components of the log of emissions and log of
real output for each country in the group, is the estimated cyclical elasticity of emissions
with respect to output, captures country-fixed effects and is a random error term.

The trend elasticity is estimated as follows:

= 0 + + + (2)

Where and are the trend components of the log of emissions and the log of real output,
is the estimated trend elasticity of emissions with respect to output and is a random
error term. An intercept is included to account for differing initial levels of output and emissions.

In both specifications, are the country-specific fixed effects and and are the error
terms.

For individual countries, the cyclical and trend output elasticities of emissions are estimated
using OLS regressions as follows:

= + (3)
0
= + + (4)

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where and are the cyclical and trend components of the log emissions series for each
country, and are the cyclical and trend component of log GDP, and and are the
trend and cyclical elasticities.

Typically, the cyclical (trend) component of the log of emissions is regressed on the cyclical
(trend) component of the log of real GDP for a country in a given year. The estimated coefficient
beta is the cyclical (trend) elasticity of emissions with respect to output, accounting for country-
fixed effects.

In addition, to provide a longer-term context about how these elasticities evolve, the same
decompositions are conducted for much longer time periods – starting from the mid-18th or
mid-19th centuries – for five major developed countries: France, Germany, Japan, the United
Kingdom and the United States. These decomposed series are then divided into 30-year
periods for each country, and elasticities are estimated on these shorter periods to better
reflect changes in output-elasticities of emissions for these countries at different stages of their
industrial development.

Furthermore, the time-series properties of the variables are analysed to ensure that the
relationships are not spurious. For each country with adequate data, Augmented Dicky-Fuller
tests are conducted to test for the presence of a unit root of the individual series before
estimating the relevant elasticities. The results are presented for different country groups.
Pickbourn et al. (2022) provides more information about country-level elasticities. Nevertheless,
more in-depth country analyses might be needed to properly account for country specificities.

Empirical results – output-elasticities of emissions:

Table B1 shows the cyclical and trend elasticities for CDDCs, DDCs and developed countries.
In general, these results are similar to those obtained for individual countries by Cohen et al.
(2018) and Jalles and Ge (2020). These empirical results confirm the information in appendix
table B2: higher trend elasticities for both CDDCs and DDCs suggest that emissions are more
sensitive to changes in output in the long run than in the short run. A pairwise comparison
of the means test confirms that while the trend elasticities for CDDCs and DDCs are not
statistically different between them, both values are highly statistically different from the
elasticity for developed countries.

Table B1 Trend and cycle elasticities by country status (fixed-effects estimates)

Country category Trend elasticity Trend p-value Cycle elasticity Cycle p-value
CDDC 0.67 0.00 0.23 0.00

DDC 0.65 0.00 0.39 0.00

Developed countries 0.30 0.00 0.63 0.00

Source: UNCTAD.

Disaggregating the group of CDDCs by type of commodity dependence reveals some

heterogeneity within the group: trend elasticities are higher for CDDCs that depend on
agricultural and fuel exports than among mineral exporters (Appendix Table B3). Analysis at
the country level reveals even more heterogeneity within these groups (see Appendix Table A3
in Pickbourn et al. (2022)).

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Table B2 Trend and cycle elasticities for CDDCs by type of commodity export

Trend Trend Trend Cycle Cycle Cycle

Country category
elasticity SE p-value coefficient SE p-value

Agricultural CDDC 0.72 0.03 0.00 0.25 0.05 0.00

Fuel CDDC 0.71 0.02 0.00 0.20 0.08 0.01

Mineral CDDC 0.53 0.02 0.00 0.27 0.07 0.00

Source: UNCTAD.

The differences among CDDCs are more striking when the elasticities are analysed by income
(Table B3). How rich or poor a CDDC is clearly has some bearing on the sensitivity of emissions
to output in that country: the trend output-elasticity of emissions in low-income CDDCs is 0.6,
the same as in middle-income countries and 1.1 among high-income CDDCs. Again, elasticity
estimates at the country level reveal considerable heterogeneity within these income groups.

Table B3 Trend and cycle elasticities for CDDCs by income group (fixed-
effects estimates)

Income level (World Bank Trend Trend Cycle Cycle

classification) coefficient p-value coefficient p-value

High 1.12 0.00 0.39 0.00

Low 0.60 0.00 0.11 0.00

Lower middle 0.62 0.00 0.23 0.00

Upper middle 0.60 0.00 0.27 0.01

Source: UNCTAD.
Note: See income group thresholds in Table 3.1.

Table B4 Elasticities of CDDCs by region (fixed-effects estimates)

Trend Cycle
Region Trend p-value Cycle p-value
coefficient coefficient

East Asia and the Pacific 0.48 0.00 0.23 0.09

Latin America and the

0.73 0.00 0.61 0.00
Caribbean

Middle East and North Africa 1.04 0.00 0.18 0.08

Sub-Saharan Africa 0.62 0.00 0.16 0.01

Source: UNCTAD.

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Regional analysis also reveals some important differences (Table B4). The long-run output-
elasticity of emissions is highest in the Middle East and North Africa, which is rich in
hydrocarbons, and considerably lower in East Asia and the Pacific, as well as in sub-Saharan
Africa. A pairwise comparison of means reveals that compared with Europe and Central Asia,
long-run elasticities are statistically higher in the Middle East and North Africa, sub-Saharan
Africa, Latin America and the Caribbean. Emissions are also the least pro-cyclical in sub-
Saharan Africa and more procyclical in Latin America and the Caribbean. These regional
differences are likely due to differences in types of commodity dependence and production
processes across regions. Within each region, there is again considerable heterogeneity
among countries.

Long-run elasticities for early industrializers

Given the time that countries need to fully diversify their economies, it is important to take
a long-term perspective. In this regard, the elasticities discussed in the previous section are
compared with the historical elasticities of more developed countries. The trend growth-
emissions elasticities are analysed for the five major developed economies since the middle
of the 18th century. It is particularly interesting to consider these countries’ elasticities in the
early stages of industrial development, which is the stage where most CDDCs currently are.
To do this, the full-time series of the five countries are split up into 30-year periods. The
trend elasticity equations are estimated on each of these 30-year sub-periods. The results
are plotted in Appendix A. The findings could inform the following argument that is frequently
made: since today’s developed countries are responsible for most of the accumulated stock
of GHG emissions and currently have higher emissions than developing countries, should
the latter not be allowed a greater share of the global carbon budget, at least until they have
put in place the basic capabilities needed to fully engage and take advantage of the green
transition? This debate is important in defining paths to the industrialization and diversification
of CDDCs. Note that this analysis focuses only on CO2 emissions, but as noted earlier, other
emissions represent a marginal share of the total.9

Overall, the major industrialized economies appear to have followed highly carbon-intensive
industrial growth paths, with a levelling-out of emissions growth in the late 20th century and
ending with some modest attempts to reduce emissions.10 Output growth in the early periods
of industrialization led to more than proportionate increases in emissions, with trend elasticities
greater than 2 in the mid to late 19th century for all the countries (Table A1). Each subsequent
period generally witnesses a decline in the output elasticity of emissions. In their final period,
they are at or near zero elasticity, suggesting most early industrializers have reached a state of
relative decoupling. As earlier noted, this needs more investigation as this apparent decoupling
might reflect the ability of the United States and Europe to outsource their most polluting
productive activities to other regions, particularly East Asia, so that consumption in these
countries embodies substantially more emissions than production (see Gough (2017), page
73; Pitron (2018); Jalles and Ge (2020)). The results show that these countries reached output-
elasticities of emissions lower than one several decades after setting up their industrialization.

Country results show that generally, developing countries – both CDDCs and DDCs – have
output-elasticities of emissions comparable to (and in several cases, less than) those of
early industrializers when the latter were mostly well past a century of industrialization. The
elasticities of several developing countries are at about the levels that the early industrializers
reached in the mid-20th century (Pickbourn et al., 2022).

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Endnotes
1 7
UNU-WIDER, 2022. UNU-WIDER: World Income This dataset provides country-level time-series
Inequality Database - WIID [WWW Document]. UNU- estimates of CO2 emissions from fossil fuel
WIDER. URL https://www.wider.unu.edu/database/ combustion and cement manufacture going
world-income-inequality-database-wiid (accessed back to 1751, and include emissions from solid
4.27.23). fuel consumption, liquid fuel consumption, gas
2
See WIDER Technical Notes for further fuel consumption, cement production, and
gas flaring https://data.ess-dive.lbl.gov/view/
information on the construction of the WIID
doi:10.15485/1712447)
Companion datasets (https://www.wider.unu.edu/
8
publications?f%5b%5d=biblio_type:Technical+Note& For more details on the methodology, refer to the
query=WIID&order=desc&sort=string_date). Pickbourn et al. (2022).
9
3
Stolper-Samuelson, 1941. As shown previously, CO2 dominates GHG emissions
4 so limiting the analysis to this type of gas does not
The Hodrick-Prescott Filter is a data-smoothing
affect the general view about GHG emissions.
technique that minimizes the function where is a
10
given series, is the trend component, is the cyclical The trend-cycle decompositions for these five
component, and is the error component Hodrick and countries over the entire timespan are available upon
Prescott (1997). Following Cohen et al. (2019) and request.
Jalles and Ge (2019), the smoothing parameter is
used.
5
The values for the aggregate series are initially
calculated by using the unweighted mean. For
robustness, the series was also aggregated using
population weights.
6
The IPCC sectors are defined as follows: energy
industries comprises emissions from fuels combusted
by the fuel extraction or energy-producing
industries; manufacturing industries are emissions
from combustion of fuels in industry, and includes
combustion for the generation of electricity and
heat for own use in these industries; transportation
sector refers to emissions from the combustion and
evaporation of fuel for all transport activity excluding
military transport); manufacturing non-energy) covers
emissions from industrial processes and product use,
excluding those related to energy combustion. See
the IPCC guidelines for further details.

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