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.
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.
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 .