World Economic Outlook April 2008

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


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)


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)


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)


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


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



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



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



……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


Nominal Effective Exchange Rate1

(deviation from trend)

-4-3-2-101234


Public External Debt1

-20

-15

-10

-5

0

5

10

15



Real Public Consumption1

-2

0

2

4

6

8

Full sample Large events Fuel exporters Nonfuelcommodityexporters


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


Real Private Consumption1

-2

0

2

4

6

8

Full sample Large events Fuel exporters Nonfuelcommodityexporters

Real Domestic Investment1

-5

0

5

10

15


Nonfuelexporters

FDI Liabilities1

-5

0

5

10

15



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


Portfolio Equity Liabilities1

-20

0

20

40

60

80

100


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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World Economic Outlook April 2008

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