Global Commodity Markets and Development Economics

Stephan Pfaffenzeller

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9781138898257
• eBook ISBN: 9781317483601
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The early 21st century has seen a prolonged price boom in non-fuel commodities, coupled with a volatile performance in fuel prices. This new collection presents the latest research on commodity prices and economic development in the context of this changing globalized economy.

Global Commodity Markets and Development Economics brings together analyses from a number of perspectives in order to explore commodity price developments. Chapters explore long term commodity trends, the evolution of relative price developments, the relationship of the domestic commodity sector with global supply chains, agri-food prices, and the role of oil markets in the global economy. Through considering a diverse range of countries including China, Russia and the United States, the authors examine key fuel and non-fuel commodity markets and offer a window into important trends and developments.

This book will be relevant to those with an interest in development economics, international economics and energy markets.

1 The resource curse, commodity prices and economic growth

David I. Harvey, Neil M. Kellard, Jakob B. Madsen and Mark E. Wohar

1 Introduction

The recent ‘food crisis’ in 2008 starkly demonstrated the importance of global commodities markets. In particular, sharply rising prices for commodities such as wheat, maize, rice and oil pushed many vulnerable groups deeper into poverty (see Ivanic and Martin 2008).¹ In any case, the behaviour of primary commodity prices is typically important to many developing countries, wherein a significant proportion of national income is often generated by a small number of primary products (see Harvey et al. 2010).² The nature and causes of movements in primary commodity prices therefore have significant implications for growth and poverty reduction policies in developing countries.

Analysis of long-run commodity prices is dominated by the Prebisch-Singer (PS) hypothesis, which implies a secular, negative trend in commodity prices relative to manufactures.³ Possible theoretical rationales include low income elasticities of demand for commodities, asymmetric market structures that result from comparatively homogeneous commodity producers generating highly competitive commodity markets whilst facing oligopolistic manufacturing markets, and technological and productivity differentials between core (industrial) and periphery (non-industrial) countries. If a country’s export commodities present long-run downward trends in their relative prices, the policy advice is typically to diversify the export mix to include significant proportions of manufactures and/or services. Additionally, as is noted in Arezki et al. (2014a), understanding the trend and other time series characteristics should enable improved forecasting of commodity price movements.

Empirical evidence examining the PS hypothesis provides an ambiguous picture. The vast majority of recent studies employ the Grilli and Yang (1988) dataset of 24 annual non-fuel primary commodity prices which commences in 1900.⁴ However, the relatively large variance of commodity prices (see Deaton 1999) and the possibility of trend structural breaks inhibits statistical determination of any trend magnitude and direction with this sample size. A possible approach to address this issue is to provide greater degrees of freedom via a backwards extension of the sample. Recently, Harvey et al. (2010) and Arezki et al. (2014b) employ a unique disaggregated dataset, comprised of 25 separate commodity time series and spanning the 17th to the 21st centuries.

Although there is a large body of literature examining the veracity of the PS hypothesis, there are far fewer attempts to establish a plausible rationale for any estimated trend and associated breaks. In many ways, this is understandable; reliable historical data on possible causal variables such as technology differentials, relative market structures or income elasticities of demand are clearly difficult to source. However, the primary goal of this chapter is to explore the causal underpinnings of long-run commodity prices and hence to provide input to long-range forecasting and policy design. To circumvent the lack of data we suggest a threefold approach. Firstly, aggregate measures of relative commodity prices would be useful over a very long time frame. An aggregate measure of commodity price movements should smooth the idiosyncratic effects of individual commodity prices and provide a summary series shaped primarily by common factors. Secondly, the time series characteristics of these new series can subsequently be cross-referenced with the existing economic history literature to elucidate possible common factors. Finally, we suggest that the trend growth rate of economic activity, data that is available over an historical timeframe, is a useful proxy for these common factors (see, for example, Sachs and McArthur 2002).

In this chapter, our first contribution is to collect a large historical dataset on the export values of 23 individual commodities, which is not a straightforward task. This new data is then used as weights when combined with updated individual commodity series from Harvey et al. (2010) to create aggregate annual series beginning in 1650 and running continuously until 2010. Subsequently, our second contribution is to use the new aggregate series to examine the statistical properties of relative commodity prices over the very long run. Given the well-known problems of identifying the order of integration of price series, and the pervasive influence of any unit root/stationarity pre-tests on subsequent tests of commodity time series characteristics (see Harvey et al. 2010), we apply trend tests and multiple trend break tests which are robust to whether or not the series under consideration contains a unit root. The results show that the trend path of our new aggregate series can be split into four regimes (i.e. 1650 to the early 1820s, the early 1820s to the early 1870s, the early 1870s to the mid-1940s, and the mid-1940s to 2010). Through all but the second regime, a long-run downward trend can be clearly detected, giving new historical support to the PS hypothesis.

Our understanding of the regimes suggested earlier can be deepened...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Notes on contributors
• Acknowledgements
• Introduction: commodity-export dependence and economic development
• 1 The resource curse, commodity prices and economic growth
• 2 Which terms of trade – recent developments in relative commodity prices
• 3 A diversification path for resource intensive economies
• 4 Rice market integration in India
• 5 Do export restrictions reduce domestic price volatility? Evidence from the wheat export controls in Kazakhstan, Russia and Ukraine
• 6 The impact of peak oil on trade globalisation: An example of steel exports from Europe and North America to the United States
• 7 The role of trade in energy security for developing nations and a globalised economy
• Index