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Commodity prices: cycle, super-cycle or trend? Implications for Latin America. Mauricio Mesquita Moreira Principal Economist Integration and Trade Sector. G-20 Workshop on Commodities May 19-20, Buenos Aires, Argentina. Motivation.

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Presentation Transcript
slide1

Commodity prices: cycle, super-cycle or trend? Implications for Latin America.

Mauricio Mesquita Moreira

Principal Economist

Integration and Trade Sector

G-20 Workshop on Commodities

May 19-20, Buenos Aires, Argentina

motivation
Motivation
  • The rapid increase of commodity prices initiated early this decade, and only briefly interrupted by the financial crisis at the end 2008, has been motivating a number of interconnected policy debates related to issues such as renewable energy, the poverty impact of higher food prices and “Dutch Disease” effects.
  • An effective policy response to those challenges hinges on a reliable diagnostic of the drivers behind these price increases and on the prospects for the medium to long-term. Is this a regular cycle, a super-cycle or a new upward trend?
  • Latin America, perhaps like no other region in the world, has its long term growth prospects closely tied to the answers to those questions.
  • Our policy “hunch”, based on still preliminary, but suggestive evidence is that the region is likely to face a super-cycle, if not an upward trend, driven by the emergence of giant Asian economies, whose scarcity of natural resources has no parallel among the economies that have led world growth.
  • If that is the case, LAC faces key challenges in (a) diversifying and adding sophistication to its exports and (b) generating jobs, both in the context of an inevitable specialization natural resources.
outline
Putting the recent surge into perspective

What is behind it? a review of the evidence available

The role of the Asian giants and its impact on LAC’s growth prospects

Making the most of the new trends

Outline
the recent surge determinants
The recent surge: determinants
  • increased demand
  • global growth, BRICs (India, China)
  • bio-fuel production
  • lax monetary policy (interest rates)
  • weak U$D
  • speculation, risk
  • constrained supply
  • input costs (crude oil)
  • shortfalls (draught Russia Aug.‘10, flood Thailand ‘10)
  • sluggish growth in production 1995-2003/1990s
  • policies (export taxes, import liberalization, bio-fuel subsidies)
slide11

Growing Asia demand is not just the result of higher growth but also increasing natural resource intensity

Objective a) identify China and India income elasticity for imports of agricultural and mining products

b) view its evolution over the past decade

Methodology Gravity model with a two step estimator that controls both for extensive and intensivemargin, Helpman, Melitz and Rubinstein (2007)

Sample 99 countries, 1992-2009

Usual gravity control variables (distance, area, colonial ties, etc.)

“Religion” is the exclusion restriction

slide13

Growing Asia demand for natural resources is compounded by growing competition in manufacturing

Source: Mesquita Moreira 2010

Source: Jaumotte and Tytell. WEO 2007. IMF

conclusions
Conclusions
  • The world has been experiencing a surge in commodity prices since the beginning of the decade, which raises challenging questions about medium and long-term trends;
  • A number of supply and demand determinants are discussed in the literature and all of them seem to play part in the surge, but we argue that the dominant factor in the long-term is Asia’s demand, driven by the super, natural-resource scarce economies of China and India.
  • We believe that China’s and India industrialization will fuel a long-term upward trend in commodity prices, perhaps unrivaled in world history, particularly with respect to manufacturing prices (the “Prebisch reversal”?)
  • A scenario like that challenges LAC’s long-held beliefs that it is the industry that will make us developed and rich.
  • It calls for different priorities: All-out protection and subsidies for manufacturing seems hopeless. Instead, the region should focus on:
    • (1) maximize NR rents by improving regulatory frameworks and infrastructure;
    • (2) allocate rents to (a) create conditions for tech upgrade within the NR cone of diversification, i.e., investments in education and S&T; and (b) fund social programs to better distribute wealth and compensate for low job creation.