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World Economic Outlook April 2008

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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

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slide2

Chapter V

Globalization, Commodity Prices, and Developing Countries

Prepared by

Nikola Spatafora and Irina Tytell

slide3

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?

slide4

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

international trade and financial flows have become more important to developing countries
International trade and financial flows have become more important to developing countries…

Trade in Goods and Services

(percent of regional GDP)

Gross Foreign Capital

(percent of regional GDP1)

Developing Asia

Advanced economies

Middle East and north Africa

CEE and CIS

Sub-Saharan Africa

Middle East and north Africa

Sub-Saharan Africa

Advanced economies

Latin America

Latin America

CEE and CIS

Developing Asia

1Total assets and liabilities of FDI, portfolio equity, and debt.

while commodity prices have moved up and policy and institutional indicators have steadily improved
…while commodity prices have moved up and policy and institutional indicators have steadily improved

Commodity Price Aggregates1

(index, 2000 = 100; deflated by MUV)

Policy Barriers to Globalization

(left scale unless otherwise indicated)

Capital account restrictions1

Controls on FDI & liquidation of FDI

Export repatriation & surrender requirements

Tariff restrictions (right scale)

Food and beverage

Capital account restrictions2

Overall Commodity

Institutions and Macro Policies

(left scale unless otherwise indicated)

Financial development (right scale)

Institutional quality

Industrial inputs

Energy

General government balance

Current account balance

1Grilli and Milesi-Ferretti measure 2Chinn and Ito measure

in value terms exports of both commodities and manufactures have been on the rise
In value terms, exports of both commodities and manufactures have been on the rise…

Commodities Exports

(values in percent of regional GDP;

right scale unless indicated otherwise)

Manufactures Exports

(values in percent of regional GDP;

right scale unless indicated otherwise)

Developing Asia

(left scale)

CEE and CIS

Middle East and north Africa

(left scale)

Advanced economies

Middle East and north Africa

Latin America

CEE and CIS

(left scale)

Sub-Saharan Africa

Developing Asia

Sub-Saharan Africa

Latin America

Advanced economies

but in volume terms manufacturing exports have generally grown more steadily
…but in volume terms, manufacturing exports have generally grown more steadily

Commodities Exports

(export volumes in percent of real GDP1)

Manufactures Exports

(export volumes in percent of real GDP1)

Developing Asia

(left scale)

CEE and CIS

(right scale)

Advanced economies

(right scale)

Middle East and north Africa

(left scale)

Middle East and north Africa

(right scale)

Sub-Saharan Africa

(right scale)

CEE and CIS

(left scale)

Latin America

(right scale)

Sub-Saharan Africa

(right scale)

Developing Asia

(right scale)

Latin America

(right scale)

Advanced economies

(right scale)

1Export values in percent of GDP in 2000

the rise in manufacturing exports has been aided by buoyant demand in developing countries
The rise in manufacturing exports has been aided by buoyant demand in developing countries…

Manufacturing Exports1

Commodities Exports1

Advanced Economies

Advanced Economies

Other Developing Economies

Other Developing Economies

Developing Asia

Developing Asia

China

China

India

India

1Exports 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
…so that even commodity exporters have stepped up their manufacturing trade

Manufacturing Exports1

Commodities Exports1

Advanced Economies

Advanced Economies

Other Developing Economies

Other Developing Economies

Developing Asia

Developing Asia

China

China

India

India

1Exports 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
Developing countries have also received (and supplied) more FDI, including in manufacturing

Inward Stock of Foreign Direct Investment

(share of GDP in percent)

Outward Stock of Foreign Direct Investment

(share of GDP in percent)

1990

1990

2005

2005

slide14

Commodity Terms of Trade

A ratio of commodity export prices to commodity import prices:

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 TOT have moved unevenly across commodity exporters and regions

Commodity Terms of Trade

(index, 2000 = 100; unweighted averages)

Commodity Terms of Trade

(index, 2000 = 100; unweighted averages;

right scale unless indicated otherwise)

Latin America

Sub-Saharan Africa

CEE and CIS

Nonfuel commodity exporters

Developing Asia

Fuel exporters

Advanced economies

Middle East and north Africa

(left scale)

commodity price events definition
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
The number and size of booms across time and regions

Number of Large Booms over Time

Number and Size of Booms by Region

commodity price events analysis
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
Exports, especially of manufactures, have generally grown faster than in previous booms…

Real Exports of Manufactures1

Real Exports of Goods and Services1

Real Exports of Commodities1

Current boom (relative to past booms)

Past events (booms relative to busts)

1Median differences in average annual percent change

slide21

…reflecting in part less real appreciation in fuel exporters and greater tariff reduction in non-fuel commodity exporters and elsewhere

Average Tariff Rate1

Real Effective Exchange Rate1

(deviation from trend)

Nominal Effective Exchange Rate1

(deviation from trend)

Current boom (relative to past booms)

Past events (booms relative to busts)

1Median differences in average annual percent change

slide22

Public borrowing has slowed and public consumption has generally moderated slightly relative to private consumption

Public External Debt1

Real Public Consumption1

Real Private Consumption1

Current boom (relative to past booms)

Past events (booms relative to busts)

1Median differences in average annual percent change

slide23

Domestic and foreign investment (including FDI) have grown more than in previous booms

Real Domestic Investment1

FDI Liabilities1

Portfolio Equity Liabilities1

Current boom (relative to past booms)

Past events (booms relative to busts)

1Median differences in average annual percent change

how can commodity prices affect integration
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 commodity-related, 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
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 capital-intensive 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
Selected regression results

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:

slide28
Integration of developing countries is linked to better institutions and policies, with only a minor contribution from commodity prices1

1selected contributions to changes in export volumes relative to real GDP; based on panel regressions

summary and policy message
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
slide30

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

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