Best of Times?

We all have heard, more than once, that these are great times for developing countries: world growth and commodity prices are at record highs, while interest rates are at record lows. China is supposed to be behind all that. Usually this assertion is accompanied, at least in LAC, by immediate concerns about the fact that even though international conditions are “the best in generations,” the region is not growing that fast after all, particularly when compared with other developing regions, including Africa. In my country, Argentina, the generalization about the “best of times” is usually part of an argument that tries to explain the very high economic growth of the last 4-5 years through the influence of external conditions (the “soybean effect”), downplaying or negating the key influence of domestic policies in that performance. I will get back to Argentina in another blog. But here I want to concentrate on the data behind the perception that we are living in the best of times.

It has been said that an optimist is someone who believes that we live in the best of all possible worlds, while a pessimist is someone who fears the optimist may be right. I am an optimist, but at the same time I try to look at the data. And, as I interpret the numbers, they do not paint such a clear picture to me. Today let me concentrate on commodity prices. In a next blog I will look at world growth.

COMMODITIES

The perception of across-the-board high commodity prices is related to aggregation issues. If you begin to disaggregate, a different picture emerges. The IMF/IFS calculates indices in nominal terms for 5 different groups of commodities: food, beverages, agricultural raw materials, metals and energy. Because the last index starts in the early 1990s, while the others go back to the 1950s, I used the index for oil (petrol) (which also goes back to the 1950s) instead of the one for energy as a whole. I utilized two deflators to calculate real indices: the export unit value of industrialized countries (which provides an idea of the purchasing power of the different commodities against the basket of exports from industrialized countries, a proxy for barter terms of trade), and the US CPI (which gives an idea of the purchasing power against the US consumption basket).

The following Charts tell the basic story (it is monthly data starting in January 1957 and ending on April 2007): food, beverages, and agricultural raw materials are not experiencing a price boom (in real terms); only metals and oil are close to (CPI deflated; red line) or above (Export Unit deflated; dashed blue line), their previous highs.

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This means that LAC, which has a larger incidence of agricultural net exports (i.e. agricultural exports minus agricultural imports) than developing countries in general (see the WB/WDI database; I do not want to extend this blog with more Tables) would benefit less from current levels of commodity prices. On the other hand, Sub-Saharan Africa, which does have a larger incidence of fuels and of ore and metals than developing countries in general, and LAC in particular (see WB/WDI), would gain more from current price trends (I mention this because one of the complaints about the “best of times” crowd is that, recently, LAC has been growing less than Africa, even with commodity prices at record highs).

Within LAC, the “best of times” story also requires some clear distinctions. Argentina has an export share of agricultural products of 48% (gross; average for 2000-20005; WB/WDI). Most countries in Central America, Paraguay, and other small countries, have even larger incidence of agricultural products in exports. This trade structure is very different from Venezuela, where fuels exports represent 84% of total exports (or Trinidad and Tobago, and Ecuador, with percentages above 60%). Chile is also different: exports of ores and metals represent 46% of total merchandise exports (Perú has also a large share of ore and metals with 41% of exports).

In summary, when someone asserts that high commodity prices are helping some developing region or country, check first the respective trade structure: for the many developing countries that are mostly agricultural exporters the prices they receive for their commodities do not look particularly high in real terms; the situation, however, is very different for exporters of fuels and metals .

4 Responses to "Best of Times?"

  1. Vitoria Saddi   June 28, 2007 at 8:41 am

    Eugenio, Very good piece. My question to you is if think that the export-led-growth model that most Latin countries refused to follow in the past (chosing instead industrialization via import substitution)is back on track or not?

  2. Guest   June 28, 2007 at 1:50 pm

    good note.  The theory goes that soft commodities play catch-up with their metallic cousins in the later stages of a bull run. In your opinion Eugenio, would this signal good times ahead for countries such as Argentina?

  3. Anonymous   June 28, 2007 at 2:47 pm

    Your points are right but some people argue that, after the “oil shock” and the “metals shock” we may soon observe a “protein” price shock: milk and dairy product prices are rising, soybean prices are rising, pork and other meat products are rising. Also, there is now evidence of wheat, grain, corn, sugar prices rising more, in some cases – corn, sugar – as these “food” commodities are now becoming “energy” commodities because of ethanol. So, with 2 billion plus Chinese and Indians to feed, the terms of trade of food and agricultural goods producers may soon rise more than in the recent past…This may be come good news for Latin America as long as these countries realize that their comparative advantage is in agricultural goods and other commodities.

  4. Eugenio Diaz Bonilla   July 2, 2007 at 2:38 pm

    Thanks Vitoria, Guest and Anonymous for the comments. I apologize for the delay in answering (too many things at work last week, and then I tried to answer on Friday, but apparently I did something wrong and it was not posted).   Vitoria: I am not sure if I would characterize LAC countries as refusing to follow an export-led-growth model in the past, but that is a larger debate. In any case, in 2005 LAC’s share of world exports was 5.6% compared to 4.3% in 1990, and 5% (2005) versus 3.7% (1990) in world imports (WTO database), suggesting a (marginally) greater integration in world trade.   Guest: with data from 1960-2005 I found a positive correlation between real world agricultural prices and Argentina’s growth. So I agree with your point about the positive impact on Argentina of potentially higher world agricultural prices (there are some caveats about the impact on real wages and poverty; see for instance Braun and Joy in The Economic Journal, December 1968). But in real terms, world agricultural prices do not seem high (this is different from the impact on domestic markets where the devaluation changed real relative prices in favor of tradables, including agriculture).   Anonymous: In real terms the prices of individual commodities I looked at (including beef, butter, corn, and sugar) are still clearly below their historical peaks. That may change in the future for the reasons you mention (China/India demand plus energy developments) and also because of weather events. But in real terms the current story for agricultural commodities in general is the one shown in the indices. The future impacts of China/India, demand for energy, and weather developments on agriculture are big topics that require detailed analysis. Also note that while China has become in the last years an agricultural net importer, India is an agricultural net exporter (although in value terms China dominates India about 10:1) (FAO Stat).