Commodity Prices - Cyclical Weakness or Secular Decline?
Commodity Prices: Cyclical Weakness or Secular Decline by Carmen M.
Reinhart and Peter Wickham
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.