Commodity price volatility and the sources of growth

Commodity price volatility and the sources of growth

Published Jan 2011

Authors

T.V.D.V. Cavalcanti, K. Mohaddes, M. Raissi et al.

Publisher

Focus themes

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Countries specialised in the export of just a few primary products are usually exposed to substantial commodity price volatility and suffer from a high degree of macroeconomic instability. The central message of this paper is that the volatility of commodity prices and export revenues should be considered in the growth analysis alongside the levels of resource revenues and other determinants of output per capita.

The document examines empirically the effects of commodity price booms and terms of trade volatility on GDP per capita growth and its sources, using two econometric techniques and utilising a panel dataset of 118 countries. The authors demonstrates that while the resource curse hypothesis postulates a negative effect of resource abundance on output growth, the results show the contrary: commodity terms of trade growth seems to impact the primary-product exporters positively.

Identically, the paper underlines the negative impact of commodity terms of trade volatility on economic growth, pointing that it is larger than the growth enhancing effects of commodity booms. Thus, the authors argue that volatility, rather than abundance per se, drives the resource curse paradox.

Overall, suggested growth enhancing policies include:

  • improving the functioning of financial markets
  • diversifying the production structure away from a small set of commodities
  • pegging the exchange rate to the price of a main export commodity
  • establishing Sovereign Wealth Funds to act as stabilisation reserves

 

 

 

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