The depressed condition of non-oil primary commodity markets during 1981–82 was the worst since World War II. The overall index of annual average prices of primary commodities (other than gold and petroleum) declined by 12 percent in 1982 (in dollar terms), following a 15 percent decline in 1981. The cumulative two-year decline of 25 percent was the largest and longest in more than three decades. During the last three decades, the largest annual decline occurred during the 1975 recession, when primary commodity prices fell by 19 percent; thereafter, they quickly recovered, increasing by 15 percent in 1976 and by 21 percent more in 1977. Commodity prices in real terms, estimated by deflating nominal prices by the United Nations price index of manufactured exports of developed countries, fell by 20 percent in 1981–82 to a postwar low. Commodity prices increased by 6 percent in 1983, but the aggregate index in 1983 was 20 percent below the previous peak attained in 1980 and 6 percent below the average index for 1977–83.
The 1981–82 price decline has had a severe impact on the external balance of primary commodity-exporting countries. After declining by about 10 percent during 1978–80, primarily because of the sharp rise in oil prices, the external terms of trade of non-oil developing countries declined by a further 8 percent in 1981–82, notwithstanding the relative stability of oil prices during this period. Combined with a decline in the volume of non-oil exports, these price developments resulted in large aggregate current account deficits of $109 billion in 1981 and $82 billion in 1982, the average of which was almost twice the average annual deficit during 1977–80.1 The low-income developing countries were most adversely affected because of their higher dependence on primary commodities for export earnings.
The sharp decline in commodity prices during 1981–82 was only the most recent indication of a pattern that was first visible in the early 1970s. Although nominal commodity prices sharply accelerated and there were intermittent surges in real prices, the long- term downward trend in real prices from 1972 to 1982 was more than twice as steep as the like price trend from 1957 to 1971. In addition, the price instability2 of non-oil primary commodity prices from 1972 to 1982 was more than three times greater than it was from 1957 to 1971, reflecting the significantly more unstable economic environment—as seen in the behavior of industrial production, world inflation, exchange rates, and interest rates—in the later period. Commodity price instability was one of the major causes of export instability for a large number of primary commodity exporting countries3; export instability, in turn, may have been a major cause of instability in countries’ external balances and domestic economies.4
This paper analyzes the depressed state of primary commodity markets during 1981–82 in the context of developments over a historical period. The causes of primary commodity price movements are investigated, along with the relatively high price in-stability in recent years.
The organization of the paper is as follows: Section I describes the historical movements of non-oil primary commodity prices, focusing on the long-term movements of broadly aggregated prices vis-à-vis the long-term movements of the prices of manufactures and petroleum, and on their short-run fluctuations; Section II analyzes the determinants of commodity prices, including the major causes of commodity price fluctuations over various phases of commodity price cycles; and Section III presents conclusions. Appendix I shows the derivation of the price equation; Appendix II describes the behavior of the variables underlying commodity price movements; Appendix III includes a list of the commodities; and Appendix IV presents some econometric results not reported in the main text.