Latin America’s Commodity Dependence: What if the Boom Turns to Bust?

Gustavo Adler,  Sebastián Sosa

November 1, 2011

As a commodity exporting region, Latin America has greatly benefited from the commodity price boom of the past decade. But with talk of a new global recession, what will happen to the region if the boom turns to bust?

The IMF’s latest Regional Economic Outlook: Western Hemisphere sheds light on Latin America’s reliance on commodities from a historical perspective. Our study also looks at the effect of a sharp decline in commodity prices on emerging market economies and on the policies that could shield countries from that shock.

More dependent but also more diversified

The reliance on commodity exports can be looked at as a share of GDP (commodity dependence) as well as relative to total exports of goods and services (export diversification).

The first ratio tells us about the potential impact of a commodity price shock on domestic output, while the second tells us about the economy’s ability to adjust to a commodity price shock. There are significant differences within the region across these two dimensions:

Metal and energy prices are highly sensitive to global growth

Prices of many commodities have moved closely during the last cycle, but the magnitude of their booms and their sensitivity to global output have varied across categories (see Figure 2):

Policies matter

The history of sharp terms-of-trade drops during the past 40 years tells us that these price shocks can have a sizeable impact on the region, and can be even more important than other external shocks (see Figure 3). But their magnitude cannot fully explain how countries fare during episodes of price busts.

Instead, policies during the boom years play a critical role in determining a country’s subsequent economic performance. Our study finds that:

Latin America has reaped the benefits of the commodity boom of the last decade. But preserving those gains requires undertaking the right set of policies to be prepared for a possible bust, while favorable conditions last. This is especially important in the case of metal and energy exporters, which are particularly vulnerable to a global slowdown.