World Economic OutlookWorld Economic OutlookApril 2008April 2008
Chapter VChapter V
Globalization, Commodity Globalization, Commodity Prices, and Developing Prices, and Developing
CountriesCountries
Prepared by Prepared by Nikola Spatafora and Irina TytellNikola Spatafora and Irina Tytell
Motivations for the studyMotivations for the study
Developing countries have become more Developing countries have become more integrated into the world economyintegrated into the world economy
This happened recently against the This happened recently against the backdrop of soaring commodity pricesbackdrop of soaring commodity prices
Are commodity prices driving integration? Are commodity prices driving integration? How sustainable is this integration? How sustainable is this integration?
Objectives of the studyObjectives of the study
Document patterns of integration and the Document patterns of integration and the role of commodity traderole of commodity trade
Examine commodity price fluctuations and Examine commodity price fluctuations and put the current boom in perspectiveput the current boom in perspective
Evaluate the importance of commodity Evaluate the importance of commodity prices in driving integrationprices in driving integration
Patterns of integration:Patterns of integration:has commodity dependence of has commodity dependence of developing countries changed?developing countries changed?
International trade and financial flows have become International trade and financial flows have become more important to developing countries…more important to developing countries…
Trade in Goods and Services
(percent of regional GDP)
0
20
40
60
80
100
120
1970 75 80 85 90 95 2000 05
Sub-Saharan Africa
CEE and CIS
Developing AsiaMiddle East
and north Africa
Advanced economie
s
Latin America
Gross Foreign Capital(percent of regional GDP1)
0
100
200
300
400
19801983198619891992 95 199820012004
Sub-Saharan Africa
CEE and CIS
Developing Asia
Middle East and north
Africa
Advanced economies
Latin America
11Total assets and liabilities of FDI, portfolio equity, and debt.Total assets and liabilities of FDI, portfolio equity, and debt.
……while commodity prices have moved up and policy while commodity prices have moved up and policy and institutional indicators have steadily improvedand institutional indicators have steadily improved
Commodity Price Aggregates1
(index, 2000 = 100; deflated by MUV)
0
50
100
150
200
250
300
350
1970 75 80 85 90 95 2000 5
Policy Barriers to Globalization
(left scale unless otherwise indicated)
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1980 85 90 95 2000 5
0
5
10
15
20
25
30
35
40
11Grilli and Milesi-Ferretti measure Grilli and Milesi-Ferretti measure 22Chinn and Ito measureChinn and Ito measure
Institutions and Macro Policies
(left scale unless otherwise indicated)
-12
-8
-4
0
4
8
12
1980 85 90 95 2000 5
0
510
15
2025
30
35
4045
50
Industrial inputs
Energy
Food and beverage
Overall Commodity
Tariff restrictions (right scale)
Capital account
restrictions2
Capital account
restrictions1
Controls on FDI & liquidation of FDI
Export repatriation & surrender
requirements
Current account balance
Financial development (right
scale)Institutional
quality
General government
balance
In value terms, exports of both commodities and In value terms, exports of both commodities and manufactures have been on the rise…manufactures have been on the rise…
Commodities Exports(values in percent of regional GDP;
right scale unless indicated otherwise)
0
8
16
24
32
40
1984 87 90 93 96 99 2002 050
4
8
12
16
20
Sub-Saharan Africa
CEE and CIS
Developing Asia
Middle East and north
Africa(left scale)
Advanced economies
Latin America
Manufactures Exports(values in percent of regional GDP;
right scale unless indicated otherwise)
0
8
16
24
32
40
1984 87 90 93 96 99 2002 050
4
8
12
16
20
Sub-Saharan Africa
CEE and CIS(left scale)
Developing Asia
(left scale)
Middle East and north
Africa
Advanced economies
Latin America
……but in volume terms, manufacturing exports have but in volume terms, manufacturing exports have generally grown more steadilygenerally grown more steadily
Commodities Exports(export volumes in percent of real GDP1)
0
8
16
24
32
40
1984 87 90 93 96 99 2002 050
4
8
12
16
20
Sub-Saharan Africa
(right scale)
CEE and CIS(right scale)
Developing Asia
(right scale)
Middle East and north
Africa(left scale)
Advanced economies
(right scale)
Latin America
(right scale)
Manufactures Exports(export volumes in percent of real GDP1)
0
8
16
24
32
40
1984 87 90 93 96 99 2002 050
4
8
12
16
20
Sub-Saharan Africa
(right scale)
CEE and CIS(left scale)
Developing Asia
(left scale)
Middle East and north
Africa(right scale)
Advanced economies
(right scale)
Latin America
(right scale)
11Export values in percent of GDP in 2000Export values in percent of GDP in 2000
The rise in manufacturing exports has been aided by The rise in manufacturing exports has been aided by buoyant demand in developing countries…buoyant demand in developing countries…
Manufacturing Exports1
0
100
200
300
400
500
600
700
1990 1994 1998 2002 2006
Advanced Economies
China
Developing Asia
India
Other Developin
g Economies
Commodities Exports1
0
100
200
300
1990 1993 1996 1999 2002 2005
Advanced Economies
Developing Asia
Other Developin
g Economies
China India
11Exports from emerging and developing economies, excluding China and India, by destination in billions of 2000 U.S. dollarsExports 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 so that even commodity exporters have stepped up their manufacturing tradeup their manufacturing trade
Manufacturing Exports1
0
5
10
15
20
1990 1994 1998 2002 2006
Advanced Economies
China
Developing Asia
India
Other Developin
g Economies
Commodities Exports1
0
20
40
60
80
100
120
140
160
1990 1993 96 1999 2002 05
Advanced Economies
Developing Asia
Other Developin
g Economies
ChinaIndia
11Exports from emerging and developing economy commodity exporters, excluding China and India, by destination in billions Exports from emerging and developing economy commodity exporters, excluding China and India, by destination in billions of 2000 U.S. dollarsof 2000 U.S. dollars
Developing countries have also received (and Developing countries have also received (and supplied) more FDI, including in manufacturingsupplied) more FDI, including in manufacturing
Inward Stock of Foreign Direct Investment(share of GDP in percent)
0
5
10
15
20
25
30 Outward Stock of Foreign Direct
Investment(share of GDP in percent)
0
2
4
6
8
10
12
1990
2005
1990
2005
Commodity price fluctuations:Commodity price fluctuations:the current commodity price the current commodity price
boom in perspectiveboom in perspective
Commodity Terms of TradeCommodity Terms of Trade
A ratio of commodity export prices to A ratio of commodity export prices to commodity import prices:commodity import prices:
ij
ij
X
it
tijt M
it
ti
PMUV
TOTPMUV
P – individual commodity pricesP – individual commodity pricesMUV – manufacturing unit value indexMUV – manufacturing unit value indexX – export share of a commodity in total trade or GDPX – export share of a commodity in total trade or GDPM – import share of a commodity in total trade or GDPM – import share of a commodity in total trade or GDP
Commodity TOT have moved unevenly across Commodity TOT have moved unevenly across commodity exporters and regionscommodity exporters and regions
Commodity Terms of Trade
(index, 2000 = 100; unweighted averages)
0
20
40
60
80
100
120
140
160
180
1970 75 80 85 90 95 2000 05
Fuel exporters
Nonfuel commodity exporters
Commodity Terms of Trade
(index, 2000 = 100; unweighted averages; right scale unless indicated otherwise)
50
60
70
80
90
100
110
120
130
140
150
1970 75 80 85 90 95 2000 0580
90
100
110
120
Sub-Saharan Africa
CEE and CIS
Developing Asia
Middle East and north
Africa(left scale)
Advanced economies
Latin America
Commodity price events: definitionCommodity price events: definition
Identify country-specific booms and Identify country-specific booms and bustsbusts
• find turning points of the commodity find turning points of the commodity TOT index (peaks and troughs)TOT index (peaks and troughs)
• select peaks and troughs associated select peaks and troughs associated with large commodity TOT changes (top with large commodity TOT changes (top quartile)quartile)
The number and size of booms across time and regionsThe number and size of booms across time and regions
Number of Large Booms over Time
0
5
10
15
20
25
30Number and Size of Booms by Region
0
20
40
60
80
100
120
0
1
2
3
4
5
6
7
8
9
Total number of booms(left scale)
Average size of booms(right scale)
Selected countries that are currently experiencingSelected countries that are currently experiencinga commodity price booma commodity price boom
countrycountry start yearstart year change in commodity TOTchange in commodity TOT
AzerbaijanAzerbaijan 20012001 24.9%24.9%
ChileChile 20022002 11.1%11.1%
EcuadorEcuador 20032003 7.4%7.4%
KazakhstanKazakhstan 20012001 29.9%29.9%
KuwaitKuwait 20012001 28.1%28.1%
MalaysiaMalaysia 20012001 5.78%5.78%
NigeriaNigeria 20012001 35.54%35.54%
NorwayNorway 20012001 10.5%10.5%
QatarQatar 20012001 26.0%26.0%
RussiaRussia 20012001 10.9%10.9%
Saudi ArabiaSaudi Arabia 20012001 28.1%28.1%
ZambiaZambia 20022002 24.7%24.7%
Commodity price events: analysisCommodity price events: analysis
Examine behavior of indicators during previous Examine behavior of indicators during previous commodity price events, comparing booms to bustscommodity price events, comparing booms to busts• compute average annual (percentage) change in indicator compute average annual (percentage) change in indicator
for each eventfor each event
• obtain median change across countries in booms and in obtain median change across countries in booms and in bustsbusts
• look at difference in the median between booms and bustslook at difference in the median between booms and busts
Likewise compare behavior of indicators during the Likewise compare behavior of indicators during the current boom with that during previous boomscurrent boom with that during previous booms
Also focus on subsets of countries/eventsAlso focus on subsets of countries/events• fuel exporters, non-fuel commodity exportersfuel exporters, non-fuel commodity exporters
• large commodity TOT events (top quartile)large commodity TOT events (top quartile)
Exports, especially of manufactures, have generally Exports, especially of manufactures, have generally grown faster than in previous booms…grown faster than in previous booms…
Real Exports of Goods and Services1
-2
0
2
4
6
8
10
12
Full sample Large events Fuelexporters
Nonfuelcommodityexporters
Real Exports of Manufactures1
-30
-20
-10
0
10
20
30
Full sample Large events Fuelexporters
Nonfuelcommodityexporters
Past events (booms relative to busts) Current boom (relative to past booms)
11Median differences in average annual percent changeMedian differences in average annual percent change
Real Exports of Commodities1
-30
-20
-10
0
10
20
30
Full sample Large events Fuelexporters
Nonfuelcommodityexporters
Average Tariff Rate1
-6
-4
-2
0
2
4
6
Full sample Large events Fuel exporters Nonfuelexporters
Real Effective Exchange Rate1
(deviation from trend)
-4-3-2-101234
Full sample Large events Fuel exporters Nonfuelexporters
Past events (booms relative to busts) Current boom (relative to past booms)
……reflecting in part less real appreciation in fuel reflecting in part less real appreciation in fuel exporters and greater tariff reduction in non-fuel exporters and greater tariff reduction in non-fuel
commodity exporters and elsewherecommodity exporters and elsewhere
11Median differences in average annual percent changeMedian differences in average annual percent change
Nominal Effective Exchange Rate1
(deviation from trend)
-4-3-2-101234
Full sample Large events Fuel exporters Nonfuelexporters
Public External Debt1
-20
-15
-10
-5
0
5
10
15
Full sample Large events Fuelexporters
Nonfuelcommodityexporters
Real Public Consumption1
-2
0
2
4
6
8
Full sample Large events Fuel exporters Nonfuelcommodityexporters
Past events (booms relative to busts) Current boom (relative to past booms)
Public borrowing has slowed and public Public borrowing has slowed and public consumption has generally moderated slightly consumption has generally moderated slightly
relative to private consumptionrelative to private consumption
11Median differences in average annual percent changeMedian differences in average annual percent change
Real Private Consumption1
-2
0
2
4
6
8
Full sample Large events Fuel exporters Nonfuelcommodityexporters
Real Domestic Investment1
-5
0
5
10
15
Full sample Large events Fuelexporters
Nonfuelexporters
FDI Liabilities1
-5
0
5
10
15
Full sample Large events Fuel exporters Nonfuelexporters
Past events (booms relative to busts) Current boom (relative to past booms)
Domestic and foreign investment (including FDI) Domestic and foreign investment (including FDI) have grown more than in previous boomshave grown more than in previous booms
11Median differences in average annual percent changeMedian differences in average annual percent change
Portfolio Equity Liabilities1
-20
0
20
40
60
80
100
Full sample Large events Fuelexporters
Nonfuelexporters
Determinants of integration:Determinants of integration:are commodity prices driving are commodity prices driving
integration of developing integration of developing countries?countries?
How can commodity prices affect How can commodity prices affect integration?integration?
directly affect values of commodity exports directly affect values of commodity exports and importsand imports
can encourage changes in volumes of such can encourage changes in volumes of such exports and importsexports and imports
indirect effects on investment (both indirect effects on investment (both domestic and foreign) in commodity-related, domestic and foreign) in commodity-related, as well as other, exporting sectorsas well as other, exporting sectors
effects on real exchange rates and effects on real exchange rates and competitiveness, especially in non-resource competitiveness, especially in non-resource exporting sectors ( “Dutch Disease”)exporting sectors ( “Dutch Disease”)
could motivate policy-makers to extend or could motivate policy-makers to extend or curtail their countries’ external opennesscurtail their countries’ external openness
What other factors are likely to What other factors are likely to affect integration?affect integration?
Quality of domestic institutionsQuality of domestic institutions• investments in tradable sectors could be more investments in tradable sectors could be more
susceptible to expropriation; foreign investors susceptible to expropriation; foreign investors are sensitive to perceived investment climateare sensitive to perceived investment climate
Level of financial developmentLevel of financial development• tradable sectors may be relatively capital-tradable sectors may be relatively capital-
intensive and/or involve large-scale plants; intensive and/or involve large-scale plants; foreign investors need formal credit marketsforeign investors need formal credit markets
Quality of domestic macro policiesQuality of domestic macro policies Direct policy barriers to integrationDirect policy barriers to integration Location and external spilloversLocation and external spillovers
Selected regression resultsSelected regression results
Cross-section regressionsCross-section regressions Trade to GDPTrade to GDP Exports to GDPExports to GDP FDI to GDPFDI to GDP
Institutional qualityInstitutional quality +**+** +*+* ++
Financial developmentFinancial development +***+*** +***+*** +*+*
Trade barriersTrade barriers -- -- --
Exchange restrictionsExchange restrictions -**-** -**-** -**-**
Exchange rate overvaluationExchange rate overvaluation ++ ++ ++
Trade barriers in neighboring Trade barriers in neighboring countriescountries
-*-* -**-** --
R2R2 .6.6 .6.6 .4.4
Panel regressions using trade volumes produced broadly similar results Panel regressions using trade volumes produced broadly similar results with statistically insignificant coefficients on commodity price indices.with statistically insignificant coefficients on commodity price indices.
Commodity prices, however, may have indirect effects on integration:Commodity prices, however, may have indirect effects on integration:
Panel regressionsPanel regressions Trade barriersTrade barriers Exchange Exchange restrictionsrestrictions
Exchange rate Exchange rate overvaluationovervaluation
Commodity export pricesCommodity export prices +**+** ++ ++
Commodity import pricesCommodity import prices -***-*** -- --
Integration of developing countries is linked to better Integration of developing countries is linked to better institutions and policies, with only a minor institutions and policies, with only a minor
contribution from commodity pricescontribution from commodity prices11
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
World exportvolumes
Advancedeconomies export
volumes
Developingeconomies export
volumes
Sh
are
of to
tal d
iffere
nc
eb
etw
ee
n th
e 1
98
0s
an
d 2
00
0s
Quality of Institutions Financial Development
External Liberalization Commodity Prices
1selected contributions to changes in export volumes relative to real GDP; based on panel regressions
Summary and Policy MessageSummary and Policy Message
The current commodity price boom has proven more favorable The current commodity price boom has proven more favorable to developing countries than previous booms:to developing countries than previous booms:
• Export volumes (especially of manufactures) are rising fasterExport volumes (especially of manufactures) are rising faster
• Investment (domestic and foreign) is growing more rapidlyInvestment (domestic and foreign) is growing more rapidly
• Governments are borrowing substantially less than beforeGovernments are borrowing substantially less than before
The rise in manufacturing exports is not limited to the current The rise in manufacturing exports is not limited to the current boom and represents a longer term trend (although with boom and represents a longer term trend (although with significant differences in magnitude across regions).significant differences in magnitude across regions).
Commodity prices are a relatively minor contributor to the Commodity prices are a relatively minor contributor to the long-run trend toward integration. Hence...long-run trend toward integration. Hence...
• Even if commodity prices do not remain buoyant, developing Even if commodity prices do not remain buoyant, developing countries’ growing integration into the global economy is unlikely countries’ growing integration into the global economy is unlikely to be reversedto be reversed
• Conversely, continued progress toward integration will require Conversely, continued progress toward integration will require sustained efforts to further improve institutions and policy sustained efforts to further improve institutions and policy frameworksframeworks
Thank YouThank YouThe full text of the study is available atThe 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 atA short summary can be found athttp://www.imf.org/external/pubs/ft/survey/so/2008/RES040308B.htm
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