Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
The reliance on primary commodities as the main source of export earnings has not diminished for many countries, particularly in Africa, where manufactures often account for less than 15 percent of merchandise exports. Since their short-lived recovery in 1984, real commodity prices have fallen by about 45 percent, translating into a sharp deterioration in the terms of trade for most commodity exporters. Not surprisingly, therefore, the performance of real export earnings for many developing countries during the 1980s and 1990s has been closely linked to the countries’ success in diversifying their export base.
During 1992 (the latest year for which an annual average is available) the price of commodities relative to that of manufactures reached its lowest level in over 90 years. While the data might appear to support the Prebisch-Singer hypothesis of a negative trend in real commodity prices over the longer term, the focus of the paper is more on the current policy implications of the behavior of real commodity prices. For example, efforts to stabilize incomes of commodity producers for an extended period of time must take into account the fact that real commodity prices have not shown signs of fluctuating around a constant mean.
The paper aims to provide stylized facts about the behavior of commodity prices that may be useful in formulating the policy response to commodity price shocks. For instance, the usefulness of a stabilization fund depends crucially on whether the shocks to commodity prices are primarily of a temporary or a permanent nature. Further, even if temporary shocks play a dominant role, the ability to stabilize depends on the persistence of shocks and the duration of cycles. Similarly, the benefits that can be obtained from precautionary savings and hedging strategies will be greater in a more volatile and uncertain environment.
The paper examines these issues using quarterly data for the period 1957:I-1993:II for some of the major commodity groupings. It reaches the following conclusions. First, the recent weakness in real commodity prices is primarily of a secular persistent nature, and not the product of a large temporary deviation from trend. Therefore, a rebound in real commodity prices to their pre-1980s level, while always possible, does not appear probable. Second, the relative importance of permanent shocks varies considerably across commodity groupings, as do the characteristics of the cycle, suggesting that the scope for stabilization policies is commodity-specific. Finally, the volatility in commodity prices has risen steadily and considerably since the early 1970s, particularly for the once relatively-stable food grouping.