Where developing countries, with economies heavily dependent on commodity production and export, have long suffered from the structural decline in the real price of commodities, what are the opportunities and challenges presented for developing countries by dramatic rises in commodity prices of the last few years?
By the end of the 20th century commodity prices were in the doldrums, mainly because of sluggish demand growth in relation to supply. They had been on the downward trend in real terms since the 1980's. However, since 2002, commodity prices have rebounded, driven largely by growing demand in newly industrialising developing countries. If the cycle of growth and industrialization in developing countries continues, the current commodity boom may mark the beginning of a changed commodity economy in the twenty-first century characterized by a long-term resurgence in the demand for, and concequently value of, primary commodities in world trade.
For commodity exporters, the rise in the unit price of exports, all else being equal, results in a positive development in the terms of trade (that is, the relative value of a country's exports to imports). This, in turn, results in a short-term improvement in the trade balance. One would expect then, the commodities production and export dominated economies of Sub-Saharan Africa to benefit from currently bouyant commodity prices. In practice, however, this is far from the case.
Only a few sub-Saharan countries have experienced an improvement in their terms of trade since 2003: (the Federal Republic of Nigeria, the Republic of Mozambique, Cameroon, and, to a lesser extent, Benin). The rest have faced a downturn, with Burkina Faso, the Republic of Ghana, and the Republic of Madagascar experiencing the worst deterioration.
This is at least partly down to the asymetrical impact high commodity prices are inclined to have on developing economies: this is because while on the one hand they are big commodity exporters, they are also often heavily relient on commodity imports, especially in many cases oil, as well as many African agro commodity exporters for example, also being net importers of food, and so the real income increase from rising comodity prices must be calculated against rises in the cost of imports. When price trends are unequal for different commodities, the impact on economies importing and exporting the wrong commodities can be acute. The fact that African oil exporters have done OK from the commodity price boom, while the majority of African states (who are generally high importers of oil - averaging some 16% of imports in 2004) have suffered, seems to support this analysis.
Questions to address:
How to take advantage of high commodity prices?
Who has benefited? Why?
Who has not benefited? Why?
Tendency for economic gains from improved commodity prices to be short lived? How do countries take advantage of and lock in gains from commodity pice boom? Policy? Investment?
Challenges for countries not benefiting? How to overcome/deal with these challenges?
Nature of changing commodity price economy?
Role of Asia (especially China) in shift in commodity economy and its effect on Africa (partly see answers to above, also China driven growth in African commodity exports).
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