World Economic Outlook April 2008

1. World Economic Outlook April 2008

2. Chapter V Globalization, Commodity Prices, and Developing Countries Prepared by Nikola Spatafora and Irina Tytell

3. Motivations for the study Developing countries have become more integrated into the world economy This happened recently against the backdrop of soaring commodity prices Are commodity prices driving integration? How sustainable is this integration?

4. Objectives of the study Document patterns of integration and the role of commodity trade Examine commodity price fluctuations and put the current boom in perspective Evaluate the importance of commodity prices in driving integration

5. Patterns of integration:has commodity dependence of developing countries changed?

6. International trade and financial flows have become more important to developing countries… Trade in Goods and Services (percent of regional GDP) Gross Foreign Capital (percent of regional GDP1) Developing Asia Advanced economies Middle East and north Africa CEE and CIS Sub-Saharan Africa Middle East and north Africa Sub-Saharan Africa Advanced economies Latin America Latin America CEE and CIS Developing Asia 1Total assets and liabilities of FDI, portfolio equity, and debt.

7. …while commodity prices have moved up and policy and institutional indicators have steadily improved Commodity Price Aggregates1 (index, 2000 = 100; deflated by MUV) Policy Barriers to Globalization (left scale unless otherwise indicated) Capital account restrictions1 Controls on FDI & liquidation of FDI Export repatriation & surrender requirements Tariff restrictions (right scale) Food and beverage Capital account restrictions2 Overall Commodity Institutions and Macro Policies (left scale unless otherwise indicated) Financial development (right scale) Institutional quality Industrial inputs Energy General government balance Current account balance 1Grilli and Milesi-Ferretti measure 2Chinn and Ito measure

8. In value terms, exports of both commodities and manufactures have been on the rise… Commodities Exports (values in percent of regional GDP; right scale unless indicated otherwise) Manufactures Exports (values in percent of regional GDP; right scale unless indicated otherwise) Developing Asia (left scale) CEE and CIS Middle East and north Africa (left scale) Advanced economies Middle East and north Africa Latin America CEE and CIS (left scale) Sub-Saharan Africa Developing Asia Sub-Saharan Africa Latin America Advanced economies

9. …but in volume terms, manufacturing exports have generally grown more steadily Commodities Exports (export volumes in percent of real GDP1) Manufactures Exports (export volumes in percent of real GDP1) Developing Asia (left scale) CEE and CIS (right scale) Advanced economies (right scale) Middle East and north Africa (left scale) Middle East and north Africa (right scale) Sub-Saharan Africa (right scale) CEE and CIS (left scale) Latin America (right scale) Sub-Saharan Africa (right scale) Developing Asia (right scale) Latin America (right scale) Advanced economies (right scale) 1Export values in percent of GDP in 2000

10. The rise in manufacturing exports has been aided by buoyant demand in developing countries… Manufacturing Exports1 Commodities Exports1 Advanced Economies Advanced Economies Other Developing Economies Other Developing Economies Developing Asia Developing Asia China China India India 1Exports from emerging and developing economies, excluding China and India, by destination in billions of 2000 U.S. dollars

11. …so that even commodity exporters have stepped up their manufacturing trade Manufacturing Exports1 Commodities Exports1 Advanced Economies Advanced Economies Other Developing Economies Other Developing Economies Developing Asia Developing Asia China China India India 1Exports from emerging and developing economy commodity exporters, excluding China and India, by destination in billions of 2000 U.S. dollars

12. Developing countries have also received (and supplied) more FDI, including in manufacturing Inward Stock of Foreign Direct Investment (share of GDP in percent) Outward Stock of Foreign Direct Investment (share of GDP in percent) 1990 1990 2005 2005

13. Commodity price fluctuations:the current commodity price boom in perspective

14. Commodity Terms of Trade A ratio of commodity export prices to commodity import prices: P – individual commodity prices MUV – manufacturing unit value index X – export share of a commodity in total trade or GDP M – import share of a commodity in total trade or GDP

15. Commodity TOT have moved unevenly across commodity exporters and regions Commodity Terms of Trade (index, 2000 = 100; unweighted averages) Commodity Terms of Trade (index, 2000 = 100; unweighted averages; right scale unless indicated otherwise) Latin America Sub-Saharan Africa CEE and CIS Nonfuel commodity exporters Developing Asia Fuel exporters Advanced economies Middle East and north Africa (left scale)

16. Commodity price events: definition • Identify country-specific booms and busts • find turning points of the commodity TOT index (peaks and troughs) • select peaks and troughs associated with large commodity TOT changes (top quartile)

17. The number and size of booms across time and regions Number of Large Booms over Time Number and Size of Booms by Region

18. Selected countries that are currently experiencinga commodity price boom

19. Commodity price events: analysis • Examine behavior of indicators during previous commodity price events, comparing booms to busts • compute average annual (percentage) change in indicator for each event • obtain median change across countries in booms and in busts • look at difference in the median between booms and busts • Likewise compare behavior of indicators during the current boom with that during previous booms • Also focus on subsets of countries/events • fuel exporters, non-fuel commodity exporters • large commodity TOT events (top quartile)

20. Exports, especially of manufactures, have generally grown faster than in previous booms… Real Exports of Manufactures1 Real Exports of Goods and Services1 Real Exports of Commodities1 Current boom (relative to past booms) Past events (booms relative to busts) 1Median differences in average annual percent change

21. …reflecting in part less real appreciation in fuel exporters and greater tariff reduction in non-fuel commodity exporters and elsewhere Average Tariff Rate1 Real Effective Exchange Rate1 (deviation from trend) Nominal Effective Exchange Rate1 (deviation from trend) Current boom (relative to past booms) Past events (booms relative to busts) 1Median differences in average annual percent change

22. Public borrowing has slowed and public consumption has generally moderated slightly relative to private consumption Public External Debt1 Real Public Consumption1 Real Private Consumption1 Current boom (relative to past booms) Past events (booms relative to busts) 1Median differences in average annual percent change

23. Domestic and foreign investment (including FDI) have grown more than in previous booms Real Domestic Investment1 FDI Liabilities1 Portfolio Equity Liabilities1 Current boom (relative to past booms) Past events (booms relative to busts) 1Median differences in average annual percent change

24. Determinants of integration:are commodity prices driving integration of developing countries?

25. How can commodity prices affect integration? • directly affect values of commodity exports and imports • can encourage changes in volumes of such exports and imports • indirect effects on investment (both domestic and foreign) in commodity-related, as well as other, exporting sectors • effects on real exchange rates and competitiveness, especially in non-resource exporting sectors ( “Dutch Disease”) • could motivate policy-makers to extend or curtail their countries’ external openness

26. What other factors are likely to affect integration? • Quality of domestic institutions • investments in tradable sectors could be more susceptible to expropriation; foreign investors are sensitive to perceived investment climate • Level of financial development • tradable sectors may be relatively capital-intensive and/or involve large-scale plants; foreign investors need formal credit markets • Quality of domestic macro policies • Direct policy barriers to integration • Location and external spillovers

27. Selected regression results Panel regressions using trade volumes produced broadly similar results with statistically insignificant coefficients on commodity price indices. Commodity prices, however, may have indirect effects on integration:

28. Integration of developing countries is linked to better institutions and policies, with only a minor contribution from commodity prices1 1selected contributions to changes in export volumes relative to real GDP; based on panel regressions

29. Summary and Policy Message • The current commodity price boom has proven more favorable to developing countries than previous booms: • Export volumes (especially of manufactures) are rising faster • Investment (domestic and foreign) is growing more rapidly • Governments are borrowing substantially less than before • The rise in manufacturing exports is not limited to the current boom and represents a longer term trend (although with significant differences in magnitude across regions). • Commodity prices are a relatively minor contributor to the long-run trend toward integration. Hence... • Even if commodity prices do not remain buoyant, developing countries’ growing integration into the global economy is unlikely to be reversed • Conversely, continued progress toward integration will require sustained efforts to further improve institutions and policy frameworks

30. Thank You The full text of the study is available at http://www.imf.org/external/pubs/ft/weo/2008/01/index.htm A short summary can be found at http://www.imf.org/external/pubs/ft/survey/so/2008/RES040308B.htm