Commodity Price Volatility and Inclusive Growth in Low-Income Countries
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Chapter 1. Introduction

Author(s):
Rabah Arezki, Catherine Pattillo, Marc Quintyn, and Min Zhu
Published Date:
October 2012
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Author(s)
Rabah Arezki, Catherine Pattillo, Marc Quintyn and Min Zhu 

Four years after the onset of the global financial crisis, low-income countries (LICs), especially those that have benefited from high commodity prices, have begun to register strong economic growth. However, at the same time, several LICs are facing severe economic and social challenges associated with very high food and fuel prices. The fallout from these elevated prices is being felt acutely by the most vulnerable members of society, leading to increases in already high and persistent levels of inequality. The 2011 surge in commodity prices provided a tragic example of that link—it pushed approximately 44 million additional people below the poverty line. While swift action from governments and the international community is required to address the impacts of these commodity price shocks, such actions should not take attention away from the fact that LICs also face a large agenda of promoting institutional development and structural change in their economies. In fact, failure to address these challenges will keep LICs systematically below their economic potential, which in turn would increase the likelihood of yet another food crisis in the future.

The fallout from both the global financial crisis and the uprisings in the Middle East and North Africa has put the need to design policies that cater to the welfare of the entire citizenry at the top of both national and international policymakers’ agendas. Achieving higher levels of economic growth in LICs has been seen as the only way out of poverty and income inequality. Experience shows, however, that while growth is the main driver of poverty reduction in the long term, episodes of higher growth in LICs have not necessarily led to fewer inequalities but, on the contrary, sometimes resulted in greater inequalities. Recent research suggests that the appropriate balance between growth and distribution strategies depends on the level of economic development (Ravallion, 2010). Moreover, allowing poor people to participate in both a country’s growth process and its social policies is essential for the growth to yield significant progress in poverty reduction.

This book is intended to contribute to the renewed debate on the design of macro-economic policies that both mitigate the consequences of commodity price volatility and promote growth that is inclusive of all the citizens in LICs. Many of the chapters are based on presentations at a high-level seminar organized by the International Monetary Fund, “Commodity Price Volatility and Inclusive Growth in Low-Income Countries,” which took place in Washington, D.C., on September 21, 2011. Additional chapters are presented on themes discussed during the seminar.

By bringing together contributions from top academics, senior policymakers, and leading thinkers from think tanks, nongovernmental organizations, and international organizations, the book takes a fresh look at these issues by asking what works and what does not, drawing from both leading research and cross-regional experiences. The book’s holistic approach of linking the issues of commodity price volatility and inclusive growth in LICs is new in the literature.

Addressing the issue of commodity price volatility in the short term and achieving inclusive growth in the medium term are intimately linked objectives. The book divides the treatment of these complex and intertwined topics into five parts. Part I offers an overview of the short- and long-term challenges for LICs stemming from commodity price volatility in both commodity exporters and importers. Part II studies the macroeconomic policy options in the face of commodity price volatility. Part III focuses exclusively on the challenges that the objective of inclusive growth poses for both commodity exporters and importers. Part IV complements these general approaches by offering regional and country-specific perspectives on the issues. Part V concludes with suggestions on how the international community can contribute to these issues to mitigate the impact of price volatility and use commodity wealth to promote inclusive development.

The overview chapters in Part I make it clear that the effect of commodity price volatility depends essentially on a country’s exporter status. Some LICs are exposed to commodity price volatility through their exports, such as oil and minerals. Others are exposed to volatility through their imports of commodities, such as food products. However, this dichotomy between commodity exporters and importers is not as clear cut as it first seems. A vast number of LICs—including resource exporters—have failed to modernize their domestic agricultural sector to respond to the needs of their fast-growing populations. Many natural resource exporters are also net food importers. In addition, new resource discoveries are adding more LICs to the ranks of commodity exporters, requiring a reorientation of their policies to meet these new challenges and opportunities.

In Chapter 2, Frankel surveys the literature that shows that resource-rich countries tend to have lower longer-term economic growth as well as growth of poorer quality than non-resource-rich countries. Short-term monetary and fiscal policy management to ensure macroeconomic stability presents particular challenges for commodity exporters; Frankel’s prescriptions include pegging the exchange rate to a nominal anchor based on the main export commodity. Ross argues in Chapter 3 that resource-rich LICs face a “political curse” that plagues the economy with rent seeking and a culture of patronage, which calls for specific design of government institutions such as petroleum funds. Chapter 4 by Bredenkamp and Bersch documents the significant impact of commodity price shocks on LICs’ trade and fiscal balances. Pragmatic policy responses could include targeted measures to protect the poor—fiscal space permitting, monetary policies that largely accommodate first-round impacts, and medium-term measures to build resilience.

Part II focuses on the macroeconomic policy options in the face of commodity price volatility. In light of the limited room for maneuvering that some LICs face in using fiscal measures to address higher food and fuel prices, new debates have emerged on the role that monetary policy can play in dealing with inflationary impacts. In Chapter 5, Anand and Prasad analyze the choice of core inflation, excluding food and energy prices, as the price target of central banks in LICs where individuals face credit constraints and have consumption baskets with large weights of food and fuel products.

Collier assesses the difficult balancing act that resource-rich LICs face, in both the short term and medium term, in making decisions on public savings and investment. He argues in Chapter 6 that countries need to watch three “policy clocks” ticking at different speeds, namely, the prospect of resource depletion, the need to strengthen public investment capacity, and the need to build buffers to hedge against commodity price volatility. The latter challenge is the focus of Chapter 7 by Schmidt-Hebbel, which explores the lessons that can be learned from Chile’s experience on the design of fiscal institutions and rules to prevent boom-and-bust cycles in commodity exporters.

Part III of the book examines policies to promote inclusive growth in LICs. In the medium term, LICs need to continue to ensure macroeconomic stability and economic growth while working to achieve inclusive outcomes by also paying attention to the distributive consequences of policies. In Chapter 8, Ianchovichina and Lundstrom Gable define inclusive growth as growth that provides rapid and sustained poverty reduction to allow people to contribute to, and benefit from, economic growth. In Chapter 9, Warner also discusses the concept and the analytics of growth inclusiveness in the context of resource-rich countries and provides empirical evidence on the limited inclusiveness of growth in selected resource-rich countries. Chapter 10 by Berg and Ostry finds that societies with more equal income distributions tend to have more durable growth. This evidence suggests that there may be some “win-win” policies, such as better-targeted subsidies, better access to education for the poor that improves equality of economic opportunity, and active labor market measures that promote employment. Bourguignon argues in Chapter 11 that the immediate challenge for governments facing commodity price volatility is to cushion the negative shocks by using transfers that target the most vulnerable. Because many LICs are unable to borrow internationally to finance these mitigation measures, prudent fiscal policies that allow LICs to build reserves in “good” times to be used in “bad” times are important.

Part IV, which presents some regional and country experiences on the nexus between inclusive growth and commodity price volatility, starts with a review of the Middle East and North Africa by Arezki and Nabli in Chapter 12. They document that the resource-rich countries in this region have experienced relatively low and noninclusive economic growth, as well as high levels of macro-economic volatility. Although important improvements in health and education have taken place, the quality of these services remains an important source of concern. The authors argue that the success of economic reforms in the region rests on the ability of those countries to invest boldly in building inclusive institutions as well as high levels of human capacity in public administrations. Next, in Chapter 13, Garcia-Verdu, Selassie, and Thomas analyze the extent to which sub-Saharan Africa’s recent high-growth experience has translated into benefits for the population at large, examining indicators of well-being, distributional dimensions of changes in consumption, and employment outcomes. Using household survey data for selected countries, they find that high per capita growth does have a strong bearing on good distributional outcomes and that strong agricultural employment is associated with robust consumption growth. In Chapter 14, Jha and Rhee provide lessons from the policies that were effective in developing Asia in addressing the distributional consequences of commodity price volatility, including targeted transfers and the building of safety nets. Higher agricultural sector productivity and improved supply chains as well as regional coordination, including through maintaining and managing regional grain reserves, have also proven effective in hedging against the consequences of food price volatility in developing Asia. In Chapter 15, Duclaud and Garcia describe, in the context of oil exporting in Mexico, the operational and institutional challenges in developing and operating a successful large-scale hedging program against fluctuation in oil prices by using financial instruments.

Part V concludes by considering how the international community could help. In Chapter 16, Jacquet discusses the international policy challenges associated with food security and price volatility. He first notes that, to meet the objective of food security, LICs need to articulate their public policies with local ownership so as to avoid top-down and exclusive policies. Jacquet also argues that current successful public policies in LICs have to be based on the involvement of various stakeholders with governments playing the role of coordinators and catalysts. He concludes that there is a need for more coordination among both domestic and international actors, who tend to work in silos, across sectors and policies. In Chapter 17, Martin and Anderson argue that fostering closer trade policy coordination between countries can prevent the nonconcerted interventions by individual countries that often render a bad situation worse, especially during episodes of food price surges. Finally, in Chapter 18, Heuty reviews the international initiatives on transparency and accountability aimed at ensuring that limited public resources in resource-rich LICs are used for the benefit of all citizens. He argues that the empowerment of civil society is of paramount importance for that inclusive process to take place.

Hopefully, the audience for this volume will include policymakers involved in the design of economic and social policies at the national and international levels to influence the debate on the best policies for economic stability and inclusive growth in LICs. As the contributions in this volume make clear, the order is tall and complex. To paraphrase from the opening remarks of Josette Sheeran and Joseph Stiglitz at the conference on which this volume is based, policymakers need to take economic and structural measures to avoid another “perfect storm” (such as in 2007–08) and ignite economic growth, so that the tide (economic growth) will rise more evenly in the future and that with this rising tide, all boats are lifted equally.

Reference

    RavallionM.2010Do Poorer Countries Have Less Capacity for Redistribution?Journal of Globalization and Development Vol. 1 No. 2 pp. 129.

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