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WEO Study: Commodity Price Boom Underlines Global Links

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
May 2008
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Emerging and developing economies have become significantly more integrated with the global economy in recent years, against the backdrop of soaring commodity prices and steadily improving institutions and policy frameworks, according to a new IMF study.

Published in the April 2008 World Economic Outlook and entitled “Globalization, Commodity Prices, and Developing Countries,” the study examines this growing integration and assesses its sustainability.

A new era

Although many developing economies continue to depend on commodity trade, their exports have become much more diversified in terms of both composition and destination. The volume of manufacturing exports relative to real GDP has grown steadily across the developing world, with gains ranging from about 2 percentage points in the Middle East and Africa to more than 20 percentage points in Asia since the late 1980s.

Advanced economies remain the most important destination for exports, but buoyant demand across developing economies has also helped advance industrialization in a broad range of countries. In 2000 U.S. dollars, manufacturing exports to advanced economies have tripled since the early 1990s, whereas those to China have grown even more dramatically, albeit from a low initial level (see chart).

Manufacturing exports to other developing countries in Asia and elsewhere have also picked up. And commodity exports to China and other Asian countries have risen sharply, but even commodity exporters have stepped up their manufacturing trade.

The current boom

By historical standards, the current commodity price boom has been broad based and sustained, with the prices of many commodities—oil, metals, major food crops, and some beverages—rising sharply. However, different developing economies have reaped uneven benefits, reflecting differences in the composition and relative magnitudes of their commodity exports and imports. For instance, since 2000, the commodity terms of trade have risen by more than 40 percent in the Middle East but fallen slightly in Asia.

Commodity-exporting developing economies currently experiencing a boom have benefited from it more than from previous booms in a number of ways. Their median total export volumes have grown more than 3 percentage points a year faster than in past booms, as have manufacturing exports. The rapid growth in manufacturing export volumes may have benefited from two policy shifts: in fuel exporters, less real appreciation than observed during past booms; in nonfuel commodity exporters, greater tariff reduction.

Export boom

Commodities remain important, but manufacturing exports are surging in emerging and developing economies.

Citation: 37, 4; 10.5089/9781451967661.023.A009

Sources: IMF, Commodity Price System database; UN Comtrade database; and IMF staff calculations. Note: Chart shows exports from emerging and developing economies, excluding India and China.

Also, output, foreign direct investment, and domestic investment have all accelerated, whereas foreign borrowing, especially by governments, has slowed relative to past booms.

Drivers of integration

Although commodity prices have substantial effects in the short term, the study implies that their longer-term contribution to trade and financial integration is relatively minor. In other words, commodity prices were not a key factor in the 26 percent long-term rise in developing countries’ export volumes relative to GDP between the 1980s and 2000s.

Instead, nearly two-thirds of this increase in export volumes can be explained by better institutions, financial deepening, and reduced policy distortions, which include fewer exchange restrictions, lower tariffs, and diminished overvaluation. The rising integration of developing countries with the world economy also reflects greater trade openness in other developing economies, helping promote South-South trade.

These findings imply that even if commodity prices were to lose their buoyancy, integration is unlikely to be reversed. Ongoing improvements in institutional quality, financial deepening, fiscal prudence, and external liberalization will continue to be important drivers of integration. Nevertheless, many developing economies remain dependent on commodity exports, and increased diversification and further progress on reforms would improve their ability to withstand abrupt changes in commodity prices and support further integration with the global economy.

Nikola Spatafora and Irina Tytell

IMF Research Department

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