Transcript are commodity prices driving integration of developing countries?

World Economic Outlook
April 2008
Chapter V
Globalization, Commodity
Prices, and Developing
Countries
Prepared by
Nikola Spatafora and Irina Tytell
Motivations for the study
Developing countries have become more
integrated into the world economy
This happened recently against the
backdrop of soaring commodity prices
Are commodity prices driving integration?
How sustainable is this integration?
Objectives of the study
Document patterns of integration and the
role of commodity trade
Examine commodity price fluctuations and
put the current boom in perspective
Evaluate the importance of commodity
prices in driving integration
Patterns of integration:
has commodity dependence of
developing countries changed?
International trade and financial flows have become
more important to developing countries…
120
Trade in Goods and Services
(percent of regional GDP)
100
400
Gross Foreign Capital
(percent of regional GDP1)
Developing Asia
Middle East and
north Africa
Advanced
economies
300
CEE and CIS
80
Middle East and
north Africa
Sub-Saharan
Africa
60
Sub-Saharan
Africa
200
Advanced
economies
40
100
Latin
America
Latin America
20
CEE and CIS
Developing Asia
0
1970
1Total
75
80
85
90
95
2000
05
assets and liabilities of FDI, portfolio equity, and debt.
0
1980 1983 1986 1989 1992 95 1998 2001 2004
…while commodity prices have moved up and policy
and institutional indicators have steadily improved
Policy Barriers to Globalization
Commodity Price
Aggregates1
(left scale unless otherwise indicated)
1.2
Capital account
1
restrictions1
(index, 2000 = 100; deflated by MUV)
350
Controls on FDI &
liquidation of FDI
0.8
Export repatriation &
surrender requirements
Tariff
0.2 restrictions
(right scale)
0.4
Food and
beverage
250
Capital account
restrictions2
-0.4
Overall
Commodity
85
90
95
5
0
2000
5
Institutions and Macro Policies
150
(left scale unless otherwise indicated)
12
Financial development
(right scale)
8
100
4
Institutional quality
0
50
Industrial
inputs
0
1970
1Grilli
-4
Energy
General
government
balance
-8
-12
75
80
85
90
and Milesi-Ferretti measure
95
2000
2Chinn
20
10
-0.2
1980
25
15
0
200
35
30
0.6
300
40
5
and Ito measure
1980
85
90
Current account
balance
95
2000
5
50
45
40
35
30
25
20
15
10
5
0
In value terms, exports of both commodities and
manufactures have been on the rise…
Commodities Exports
40
Manufactures Exports
20
40
16
32
24
12
24
16
8
16
(values in percent of regional GDP;
right scale unless indicated otherwise)
32
CEE and CIS
Middle East and
north Africa
(left scale)
8
Latin
America
Sub-Saharan
Africa
4
Developing Asia
Advanced
economies
87
90
93
96
99
2002
05
8
CEE and CIS
(left scale)
8
0
1984
12
Middle East
and north
Africa
Latin America
0
16
Developing Asia
(left scale)
Advanced economies
0
1984
20
(values in percent of regional GDP;
right scale unless indicated otherwise)
87
90
4
Sub-Saharan
Africa
93
96
99
2002
05
0
…but in volume terms, manufacturing exports have
generally grown more steadily
40
Commodities Exports
(export volumes in percent of real
CEE and CIS
(right scale)
32
24
20
GDP1)
16
Middle East and
north Africa
(left scale)
Sub-Saharan Africa
(right scale)
16
40
Manufactures Exports
Developing Asia
(left scale)
Advanced economies
(right scale)
32
12
24
8
16
8
4
8
0
0
1984
Advanced economies
(right scale)
0
1984
1Export
87
90
93
96
99
values in percent of GDP in 2000
2002
05
16
Middle East and
north Africa
(right scale)
12
8
CEE and CIS
(left scale)
Latin America
(right scale)
Developing Asia
(right scale)
20
(export volumes in percent of real GDP1)
Latin America
(right scale)
87
90
Sub-Saharan Africa
(right scale)
93
96
99
2002
4
05
0
The rise in manufacturing exports has been aided by
buoyant demand in developing countries…
700
Manufacturing Exports1
300
Commodities Exports1
600
Advanced Economies
Advanced Economies
500
200
400
Other
Developing
Economies
300
200
Developing
Asia
1Exports
Developing
Asia
China
100
0
1990
100
Other
Developing
Economies
China
India
1994
1998
2002
2006
0
1990
1993
India
1996
1999
2002
2005
from emerging and developing economies, excluding China and India, by destination in billions of 2000 U.S. dollars
…so that even commodity exporters have stepped
up their manufacturing trade
Manufacturing Exports1
20
160
Commodities Exports1
140
Advanced Economies
15
120
Advanced Economies
100
Other
Developing
Economies
10
80
Other
Developing
Economies
60
Developing
Asia
5
40
20
China
0
1990
1Exports
1998
2002
China
India
India
1994
Developing
Asia
2006
0
1990
1993
96
1999
2002
05
from emerging and developing economy commodity exporters, excluding China and India, by destination in billions of
2000 U.S. dollars
Developing countries have also received (and
supplied) more FDI, including in manufacturing
Inward Stock of Foreign
Direct Investment
30
Outward Stock of Foreign
Direct Investment
12
(share of GDP in percent)
25
(share of GDP in percent)
10
1990
1990
8
ta
l
Co
m
m
To
Se
rv
M
an
uf
ac
t
m
Co
m
ta
l
0
To
0
ic
es
2
Se
rv
5
od
it
ie
s
4
ic
es
10
ur
in
g
6
od
it
ie
s
15
ur
in
g
2005
2005
M
an
uf
ac
t
20
Commodity price fluctuations:
the current commodity price
boom in perspective
Commodity Terms of Trade
A ratio of commodity export prices to
commodity import prices:
X ij
 Pit

i  MUVt 
TOT jt 
M ij
 Pit


i  MUVt 
P – individual commodity prices
MUV – manufacturing unit value index
X – export share of a commodity in total trade or GDP
M – import share of a commodity in total trade or GDP
Commodity TOT have moved unevenly across
commodity exporters and regions
Commodity Terms of Trade
180
(index, 2000 = 100; unweighted averages)
Commodity Terms of Trade
150
140
160
140
130
Nonfuel
commodity
exporters
120
120
(index, 2000 = 100; unweighted averages;
right scale unless indicated otherwise)
Latin
America
Sub-Saharan
CEE and
Africa
CIS
110
Developing
Asia
120
110
100
100
100
80
90
60
80
Fuel exporters
40
70
20
0
1970
Middle East and
north Africa
(left scale)
60
75
80
85
90
95
2000
05
50
1970
90
Advanced
economies
75
80
85
90
95
2000
05
80
Commodity price events: definition

Identify country-specific booms and
busts
• find turning points of the commodity
TOT index (peaks and troughs)
• select peaks and troughs associated
with large commodity TOT changes (top
quartile)
The number and size of booms across time and regions
30
Number of Large Booms
over Time
Number and Size of
Booms by Region
120
9
25
8
100
20
80
Total number of booms
(left scale)
7
Average size of booms
(right scale)
6
5
60
4
15
40
3
2
10
20
1
ph
er
e
fr
ic
a
H
em
is
A
es
te
W
bSu
rn
ra
n
h
N
&
st
Ea
le
Sa
ha
or
t
pi
el
o
id
d
M
A
fr
a
A
si
ng
d
an
D
ev
an
c
A
dv
05
20
00
95
90
85
80
75
19
70
0
C
EE
ed
Ec
on
om
ie
s
5
ic
a
0
C
IS
0
Selected countries that are currently experiencing
a commodity price boom
country
start year
change in commodity TOT
Azerbaijan
2001
24.9%
Chile
2002
11.1%
Ecuador
2003
7.4%
Kazakhstan
2001
29.9%
Kuwait
2001
28.1%
Malaysia
2001
5.78%
Nigeria
2001
35.54%
Norway
2001
10.5%
Qatar
2001
26.0%
Russia
2001
10.9%
Saudi Arabia
2001
28.1%
Zambia
2002
24.7%
Commodity price events: analysis

Examine behavior of indicators during previous
commodity price events, comparing booms to busts
• compute average annual (percentage) change in indicator
for each event
• obtain median change across countries in booms and in
busts
• look at difference in the median between booms and busts


Likewise compare behavior of indicators during the
current boom with that during previous booms
Also focus on subsets of countries/events
• fuel exporters, non-fuel commodity exporters
• large commodity TOT events (top quartile)
Exports, especially of manufactures, have generally
grown faster than in previous booms…
12
Real Exports of Goods and
Services1
30
Real Exports of Manufactures1
20
10
10
0
-10
8
-20
-30
Full sample
6
4
Large events
Fuel
exporters
Nonfuel
commodity
exporters
Real Exports of Commodities1
30
20
2
10
0
0
-10
-20
-2
-30
Full sample
Large events
Fuel
exporters
Nonfuel
commodity
exporters
Past events (booms relative to busts)
1Median
differences in average annual percent change
Full sample
Large events
Fuel
exporters
Current boom (relative to past booms)
Nonfuel
commodity
exporters
…reflecting in part less real appreciation in fuel
exporters and greater tariff reduction in non-fuel
commodity exporters and elsewhere
Real Effective Exchange Rate1
Average Tariff Rate1
6
(deviation from trend)
4
3
2
1
0
-1
-2
-3
-4
4
2
Full sample
Large events Fuel exporters
0
Nonfuel
exporters
Nominal Effective Exchange Rate1
(deviation from trend)
4
3
2
1
0
-1
-2
-3
-4
-2
-4
-6
Full sample
Large events Fuel exporters
Nonfuel
exporters
Past events (booms relative to busts)
1Median
differences in average annual percent change
Full sample
Large events Fuel exporters
Current boom (relative to past booms)
Nonfuel
exporters
Public borrowing has slowed and public
consumption has generally moderated slightly
relative to private consumption
Public External Debt1
15
8
Real Public Consumption1
6
10
4
2
5
0
-2
0
Full sample
-5
8
Large events Fuel exporters
Nonfuel
commodity
exporters
Real Private Consumption1
6
-10
4
2
-15
0
-20
-2
Full sample
Large events
Fuel
exporters
Nonfuel
commodity
exporters
Past events (booms relative to busts)
1Median
differences in average annual percent change
Full sample
Large events Fuel exporters
Current boom (relative to past booms)
Nonfuel
commodity
exporters
Domestic and foreign investment (including FDI)
have grown more than in previous booms
15
FDI Liabilities1
Real Domestic Investment1
15
10
5
10
0
-5
Full sample
Large events Fuel exporters
5
Nonfuel
exporters
Portfolio Equity Liabilities1
100
80
0
60
40
20
0
-20
-5
Full sample
Large events
Fuel
exporters
Nonfuel
exporters
Past events (booms relative to busts)
1Median
differences in average annual percent change
Full sample
Large events
Fuel
exporters
Current boom (relative to past booms)
Nonfuel
exporters
Determinants of integration:
are commodity prices driving
integration of developing
countries?
How can commodity prices affect
integration?

directly affect values of commodity exports
and imports

can encourage changes in volumes of such
exports and imports



indirect effects on investment (both
domestic and foreign) in commodityrelated, as well as other, exporting sectors
effects on real exchange rates and
competitiveness, especially in non-resource
exporting sectors ( “Dutch Disease”)
could motivate policy-makers to extend or
curtail their countries’ external openness
What other factors are likely to
affect integration?

Quality of domestic institutions
• investments in tradable sectors could be more
susceptible to expropriation; foreign investors
are sensitive to perceived investment climate

Level of financial development
• tradable sectors may be relatively capitalintensive and/or involve large-scale plants;
foreign investors need formal credit markets

Quality of domestic macro policies

Direct policy barriers to integration

Location and external spillovers
Selected regression results
Cross-section regressions
Trade to GDP
Exports to GDP
FDI to GDP
+**
+*
+
+***
+***
+*
-
-
-
-**
-**
-**
Exchange rate overvaluation
+
+
+
Trade barriers in neighboring
countries
-*
-**
-
R2
.6
.6
.4
Institutional quality
Financial development
Trade barriers
Exchange restrictions
Panel regressions using trade volumes produced broadly similar results
with statistically insignificant coefficients on commodity price indices.
Commodity prices, however, may have indirect effects on integration:
Panel regressions
Trade barriers
Exchange
restrictions
Exchange rate
overvaluation
Commodity export prices
+**
+
+
Commodity import prices
-***
-
-
Integration of developing countries is linked to better
institutions and policies, with only a minor
contribution from commodity prices1
Quality of Institutions
Financial Development
0.9
External Liberalization
Commodity Prices
0.8
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
World export
volumes
1selected
Advanced
Developing
economies export economies export
volumes
volumes
contributions to changes in export volumes relative to real GDP; based on panel regressions
Share of total difference
between the 1980s and 2000s
0.7
Summary and Policy Message

The current commodity price boom has proven more favorable
to developing countries than previous booms:
• Export volumes (especially of manufactures) are rising faster
• Investment (domestic and foreign) is growing more rapidly
• Governments are borrowing substantially less than before


The rise in manufacturing exports is not limited to the current
boom and represents a longer term trend (although with
significant differences in magnitude across regions).
Commodity prices are a relatively minor contributor to the
long-run trend toward integration. Hence...
• Even if commodity prices do not remain buoyant, developing
countries’ growing integration into the global economy is unlikely
to be reversed
• Conversely, continued progress toward integration will require
sustained efforts to further improve institutions and policy
frameworks
Thank You
The full text of the study is available at
http://www.imf.org/external/pubs/ft/weo/2008/01/index.htm
A short summary can be found at
http://www.imf.org/external/pubs/ft/survey/so/2008/RES040308B.htm