Commodity Price Volatility and the Sources of Growth

IMF Working Papers, January 1, 2012

Source details

Research focus:
- Impact of the level and volatility of the commodity terms of trade on economic growth and on three growth channels: total factor productivity, physical capital accumulation, and human capital acquisition.
Estimation approaches:
- Standard system GMM approach.
- Cross-sectionally augmented pooled mean group (CPMG) methodology of Pesaran et al. (1999), which accounts for cross-country heterogeneity and cross-sectional dependence.
Data:
- Annual data for 1970-2007.
- Five-year non-overlapping observations.

Effects on aggregate growth:
- Commodity terms of trade growth enhances real output per capita.
- Commodity terms of trade volatility exerts a negative impact on economic growth.
Magnitude and channels:
- The negative growth impact of volatility operates mainly through lower accumulation of physical capital.
- The negative growth effects of commodity terms of trade volatility offset the positive impact of commodity booms.
Additional finding:
- Export diversification of primary commodity abundant countries contributes to faster growth.
Interpretation:
- Volatility, rather than abundance per se, drives the "resource curse" paradox.

Total factor productivity (TFP).
Physical capital accumulation (identified as the main channel through which volatility reduces growth).
Human capital acquisition.
The study links commodity terms of trade level and volatility to these three channels using the specified econometric approaches.

Policies aimed at reducing commodity price volatility or mitigating its effects can support physical capital accumulation and thereby growth.
Export diversification in primary commodity abundant countries is associated with faster growth and can help offset volatility-related harms.
Focus on volatility management may be more important than concerns about resource abundance per se in addressing the "resource curse."