Financial Markets and the Commodity Price Boom: Macroeconomic and Development Implications for Low-Income Countries

After nearly three decades of low commodity prices, commodities have experienced an unprecedented price boom since the early-2000s. Despite large fluctuations in recent years prices are projected to remain above their historical levels. Commodity prices are determined by fundamental supply and demand conditions, such as income growth in emerging countries, a growing demand for biofuels, supply shocks because of adverse weather conditions related to climate change, increasing prices of energy and fertilizers or declining inventories. There are also a range of macroeconomic factors which have an effect on commodity prices, such as low interest rates and a depreciating US Dollar. While a broad consensus exists that fundamental factors play an important role, there is a controversial debate if these factors are sufficient to explain recent commodity price developments. The debate centers on the question whether and to which extent financialisation of commodity derivative markets, reflected in the increased presence of financial investors and new financial products distort commodity prices from levels justified by fundamental factors. The question about determinants of commodity price developments and about possible measures to prevent similar price hikes and volatilities in the future have also become central in international and domestic policy debates.

Commodity price dynamics have crucial macroeconomic and development implications, in particular for commodity-dependent low-income countries. They are affected by high and volatile commodity prices through the import and export side with effects on import costs and export revenue as well as macroeconomic indicators, i.e. the balance of payments, public finances, inflation, and exchange rates. As many low-income countries are net importers of basic commodities such as fuel and food, commodity price dynamics have effects on food and energy security, poverty and economic stability. On the export side, the persistence of commodity dependence remains an important characteristic of many low-income countries, in particular in Sub-Saharan Africa. These countries have benefited from high prices but the high price volatility has also highlighted their vulnerability and difficulties in managing their economies. In the context of rising commodity prices, policy debates on the limited benefits of natural resource wealth and how development outcomes can be secured and improved have intensified in many resource-rich countries. At the same time, several industrialized countries have adopted strategies to secure “undistorted” access to raw materials. The obvious tensions related to those different positions will probably increase in the new future and call for international policy responses.

The ÖFSE research project “Financial Markets and the Commodity Price Boom” analyzes the nature of the current commodity price boom and the macroeconomic and development implications for commodity-dependent low-income countries. Based on the research results, policy recommendations are derived. The research focuses on three commodity-dependent countries in Sub-Saharan Africa – Burkina Faso, Ethiopia and Mozambique. Based on this selection, the research focus is on the commodities coffee, cotton, aluminium (export side) and wheat (import side). The panel will be structured along the main results of the first phases of the research project, and will also present policy conclusions and recommendations.