Commodity Price Volatility and Inclusive Growth in Low-Income Countries
Front Matter

Front Matter

Rabah Arezki, Catherine Pattillo, Marc Quintyn, and Min Zhu
Published Date:
October 2012
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I have been a guest scholar at the IMF for almost two years, and I have learned that there is an IMF approach to economics. A great many people have told me “I used to believe that in graduate school, but since I have been at the IMF I have learned that the world is different.” Commodity Price Volatility and Inclusive Growth in Low-Income Countries is deeply experience-based, reality-based. It reflects this practical, empirical approach that is the center of IMF thinking.

This book concerns a crucial, practical issue, always on, or near, center stage at the IMF: commodity prices and their variations. Most immediately, food price increases plunge a significant fraction of the world’s consumers into instant poverty; also, food price declines, which are the opposite sign of the volatility coin, plunge a significant fraction of the world’s food producers into instant poverty of a different kind. How to buffer this volatility, and how to respond to it when it does occur, are two of the core topics of Commodity Price Volatility and Inclusive Growth. But that is just the beginning. Of course it is not just food prices that are volatile; it is the prices of all commodities produced and consumed by poorer countries. Nor is it just a micro problem of how to deal with the poor people who are suddenly impoverished.

Commodity price volatility produces wild macroeconomic swings in both producer and consumer countries. And then, there is the question of longer-term growth. It is a commonplace that there is a trade-off between growth and better income distribution. But, as is a major theme of this book, the opposite is the case. The better the income distribution, the higher, not lower, is economic growth. The resource curse provides an assay. The same redistributive mechanisms that channel resource income to the elites are the same mechanisms that redistribute resource earnings away from growth-producing investments. This is just one more example of the highly practical nature of the contents of this fine book. Its analysis and prescriptions for how to deal with the resource curse could put a good share of the world on the path to sustained growth.

Commodity Price Volatility and Inclusive Growth in Low-Income Countries is thus a very important contribution. Its fine-grained treatment of practical, immediate problems casts it at the very heart of economic development.

George Akerlof

Nobel Laureate in Economics, 2001

IMF Guest Scholar

© 2012 International Monetary Fund

Cover design: IMF Multimedia Services Division

Cataloging-in-Publication Data

Joint Bank-Fund Library

Commodity price volatility and inclusive growth in low-income countries. / editors, Rabah Arezki … [et al.] — Washington, D.C.: International Monetary Fund, 2012.

p. ; cm.

Includes bibliographical references.

ISBN 9781616353797

1. Prices – Developing countries. 2. Economic development – Developing countries. 3. Prices – Developing countries – Case studies. I. Arezki, Rabah. I. International Monetary Fund.

HB235.D44 C66 2012

Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its members.

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Over the past decade, low-income countries have witnessed a remarkable transformation. Strong economic growth has lifted millions of people out of abject poverty. The low-income countries also staged a rapid recovery from the global financial crisis. Last year, growth was expected to reach a strong 5 percent in the average low-income country.

This impressive performance is a testament to the hard work and dedication of policymakers across the developing world over the past decade. They reduced deficits and public debt. They brought down inflation and built up foreign exchange reserves. In short, they built up macroeconomic buffers and put their economies on a fundamentally stronger footing.

But the news has not all been good. Importantly, low-income countries still face enormous challenges in terms of pervasive inequalities and the lack of job opportunities, especially for the youth. Moreover, the food and fuel crisis of 2008, in conjunction with the global financial crisis that followed, has been devastating for the poor. And in 2011, we saw a renewed surge in commodity prices that could plunge an additional 44 million people into poverty, including in the Horn of Africa.

At the same time, downside risks to global growth have increased markedly—at a time when the capacity of many low-income countries to absorb further shocks has yet to be rebuilt from the two recent crises.

Once again, the low-income countries find themselves at a critical juncture. What policies are needed at this challenging time? And how best to rebuild resilience to future shocks? In the face of a more uncertain global environment, policymakers in low-income countries—as in many others—should be prepared to adapt policies as needed, according to country-specific circumstances. What policies are needed to unleash the growth potential of low-income countries over the medium term?

In the event of a sharp downturn, the key will be to protect vital spending, to mitigate the impact on growth, and to protect the most vulnerable. Because the scope for countercyclical fiscal policy has become more limited, monetary and exchange rate policy could be used more actively, provided that inflation is moderate.

For rebuilding resilience and promoting higher growth that is also inclusive of all the citizens, I see three priorities. The first priority is to build up “self-insurance” during the good times. When growth is strong and external conditions are favorable, it makes sense to rein in deficits and shore up reserves. This builds a cushion for the bad times—and especially for protecting the most vulnerable. Of course, self-insurance can only go so far. This is why low-income countries must be able to count on continued support from development partners when shocks hit.

The second priority is to strengthen social safety nets so that in times of crisis, support can reach the most vulnerable quickly and efficiently. This matters especially when food prices surge and when public support can mean the difference between life and death.

The third priority is structural change to boost longer-term resilience and achieve higher growth potential. Economies that are more diversified—and not overly dependent on a few products and trading partners—are better able to withstand shocks. Better domestic resource utilization (e.g., by deepening the financial sector and by broadening the tax base) also matters. More diversified economies are likely to deliver more inclusive growth; that is, growth that creates jobs for more people and shares the benefits more widely. We know from recent experience how much the social dimension matters for long-term stability.

Of course, countries that are commodity exporters have in recent years benefited from higher prices. For them, the challenge is to use the gains from higher prices wisely—to preserve macroeconomic stability, but also to share the natural resource wealth fairly across society and across generations.

The low-income countries have achieved remarkable gains during recent years, and they should be commended for that. But today, these gains are under threat. The international community—including the IMF—must be prepared to do even more to help the low-income countries help themselves. Aid commitments must be met. Trade channels must remain open. Private investment must be encouraged. All these would help low-income countries stay the course and address their important medium-term challenges ahead.

We must all do our part. If we do, I believe that the low-income countries will be able to withstand this new phase of the crisis, and we will be able to help bring lasting gains to the world’s poorest and most vulnerable people.

Christine Lagarde

Managing Director

International Monetary Fund


This volume is the culmination of the efforts of many policymakers, academics, and World Bank and IMF staff members. The majority 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 on the seminar’s themes are also included.

The book is aimed at fostering our understanding of how to design policies that take into account redistributive objectives in the face of large swings in commodity prices in both commodity-exporting and -importing low-income countries. It also explores ways in which policies can promote higher growth that is inclusive for all the citizens.

The leadership and vision of IMF Deputy Managing Director Min Zhu was instrumental in this book’s publication. As one of its editors, his strong commitment to the important issues discussed in the volume helped to ensure a high-quality result. The efforts of Tarhan Feyzioglu, Assistant to the Deputy Managing Director, were also invaluable in bringing the volume to fruition.

We are most grateful to Joanne Blake and Michael Harrup of the IMF’s External Relations Department for coordinating a very smooth editing and production process. Special thanks also go to Jeremy Mark, Anneta Orraca-Tetteh, Nathalie Kerby-Lachnani, Sandrine Albin-Weckert, Gloria Adidi, and Noor Abdul Rahman for their dedication throughout the process. Last, but not least, we would like to thank a large number of colleagues at the IMF for their intellectual support and suggestions both before and during the seminar and during the process of composing this volume.

Rabah Arezki, Catherine Pattillo, and Marc Quintyn

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