Recent events have rekindled interest in the role of primary commodities
in development. Was the boom in commodity prices from 2003 through 2008
just a cyclical event or does it herald a period of long-term strength,
driven by factors such as demand in fast-growing developing countries
like China? It is notable that, while commodity prices fell sharply with
the onset of the global recession, they generally remained much higher
than previous recession lows and rebounded smartly over the course of
2009 (figures 1 and 2). If a period of commodity strength is imminent,
what are the implications for development policies?
Although it has fallen over time, developing country specialization in
commodities remains high. Commodities still comprise over 60 percent of
the merchandise exports of the average developing country, although this
is down from 90 percent in the 1960s. Half of developing countries still
have commodity export dependence of over 70 percent.(1)
What is the outlook for primary commodity prices?
The present consensus appears to be that real commodity prices do not
display any permanent trend over the long run. In technical terms it is
not possible to reject the so-called unit root hypothesis for real
commodity prices Such processes tend to be highly correlated over time,
so it is possible for them to move significantly lower or higher for
long periods even in the absence of an underlying trend. Based on
statistical properties alone, then, one would not be surprised to see a
sustained period of high prices following the earlier period of low
prices from the mid-1980s through the 1990s.
Are there plausible fundamentals to support such an outlook? The price
of commodities relative to the price of manufactures can be analyzed in
terms of the demand for and supply of primary commodities relative to
the demand for and supply of manufactures.
On the supply side, investment in energy and minerals was slashed when
prices were low in the 1980s and 1990s and is recovering only slowly,
due to skill shortages, technical difficulties in developing new
reserves (for example, deep offshore), and political uncertainty in
regions with new reserves. Relative demand for commodities could also
rise in the medium term to the extent world growth after the financial
crisis is more dependent on developing countries and demand in these
countries is more commodity intensive than elsewhere. There is also
evidence that real commodity prices tend to be high when real interest
rates are low, as at present. So both supply and demand factors could
support the present relatively high level of real commodity prices into
the medium term, although these factors will tend to dissipate in the
longer term. Most current forecasts are consistent with this scenario,
projecting only a gradual easing in real commodity prices from existing
levels by 2015. (Figure 3).
Is there a natural resource “curse” (or blessing)?
The short answer is “it depends,” that natural resources are “neither
curse nor destiny”. Recent work finds that negative long-run growth
effects associated with natural resources are mostly related to oil and
minerals —concentrated “point source” resources that stimulate
rent-seeking and redistributive struggles. Further, high oil and mineral
prices mostly have a negative impact on long-run growth in countries
with bad governance.
In part this is because countries with weak governance are more likely
to adopt poor economic policies to manage commodity booms, for example
by increasing public spending too much and too rapidly as a way of
buying votes or expanding political patronage networks. But resource
booms create challenging problems in macroeconomic management even for
economies with good governance. These include Dutch Disease effects
which result in appreciation of the real exchange rate and output
contraction in the manufacturing sector, as well as volatility in
government spending and real exchange rates that damages investment and
growth because of increased uncertainty.
Resource–abundant countries also face longer-run questions about the
optimal pace of resource depletion. Is the country’s strategy
sustainable, transferring sufficient capital to future generations to
allow them to achieve at least the same welfare as today? Countries with
high resource depletion are often on unsustainable development paths,
with negative net savings.
What policies can help poor countries best manage commodity resources
Given the role of weak governance, efforts to enhance transparency and
strengthen checks and balances on natural resource extraction are vital,
as are broader anti-corruption reforms. There has also been much
attention to the use of separate Natural Resource Funds to counter
corruption and facilitate good revenue management, although such funds
are more likely to succeed if part of broader efforts to strengthen
governance and fiscal policy. Policies regarding the actual allocation
of resource revenues are also crucial, for example whether to return
revenues to citizens (via tax cuts or transfers) or to retain them in
public hands, and how to allocate public revenue between government
consumption and investment (or reductions in debt).
A common benchmark, the permanent income rule, suggests saving all
resource revenues after funding a certain permanently sustainable
increase in consumption, usually by establishing a Natural Resource or
Sovereign Wealth Fund to invest in foreign assets. There is however
something anomalous about viewing the permanent income rule - where
poor, capital-scarce countries invest in rich countries - as a long-run
development strategy. Some analysts argue that the permanent income rule
is optimal only under special circumstances that do not apply to most
developing countries, notably the ability to freely borrow and lend at
the world rate of interest. Given potentially high domestic rates of
return, especially if the government can supply scarce public goods that
raise returns on private investment, a better strategy may be to spend
more on high-return domestic public investments.
The success of such a strategy will depend on how efficiently public
investment funds are allocated and managed. So reforms to strengthen
public investment management, cost benefit analysis, monitoring and
evaluation, and budget processes and institutions provide another
crucial element of a successful resource–based development strategy.
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