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Commodity prices: cycle, super-cycle or trend? Implications for Latin America. Mauricio Mesquita Moreira Principal Economist Integration and Trade Sector. G-20 Workshop on Commodities May 19-20, Buenos Aires, Argentina. Motivation. - PowerPoint PPT Presentation
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Mauricio Mesquita MoreiraPrincipal EconomistIntegration and Trade Sector
Commodity prices: cycle, super-cycle or trend? Implications for Latin America.
G-20 Workshop on CommoditiesMay 19-20, Buenos Aires, Argentina
• The rapid increase of commodity prices initiated early this decade, and only briefly interrupted by the financial crisis at the end 2008, has been motivating a number of interconnected policy debates related to issues such as renewable energy, the poverty impact of higher food prices and “Dutch Disease” effects.
• An effective policy response to those challenges hinges on a reliable diagnostic of the drivers behind these price increases and on the prospects for the medium to long-term. Is this a regular cycle, a super-cycle or a new upward trend?
• Latin America, perhaps like no other region in the world, has its long term growth prospects closely tied to the answers to those questions.
• Our policy “hunch”, based on still preliminary, but suggestive evidence is that the region is likely to face a super-cycle, if not an upward trend, driven by the emergence of giant Asian economies, whose scarcity of natural resources has no parallel among the economies that have led world growth.
• If that is the case, LAC faces key challenges in (a) diversifying and adding sophistication to its exports and (b) generating jobs, both in the context of an inevitable specialization natural resources.
Motivation
• Putting the recent surge into perspective• What is behind it? a review of the evidence
available• The role of the Asian giants and its impact on
LAC’s growth prospects• Making the most of the new trends
Outline
Getting some historical perspective
The recent surge
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201050
70
90
110
130
150All-commodities Index, IFS 1992-2010, real
(deflactor: export unit value index for advanced economies, 2005=100)
2005
= 1
00
The recent surge: determinants
• increased demand
• bio-fuel production
• lax monetary policy (interest rates)
• global growth, BRICs (India, China)
• speculation, risk
• constrained supply • input costs (crude oil)
• shortfalls (draught Russia Aug.‘10, flood Thailand ‘10)
• sluggish growth in production 1995-2003/1990s
• weak U$D
• policies (export taxes, import liberalization, bio-fuel subsidies)
Asia’s role
Asia’s role
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
50
100
150
200
250
300
350
400
40
60
80
100
120
140
160
180
200
Imports of mining products, China and India: 1992-2009(Sources: IFS, WITTS)
Mining Imports (partner: World)Mining Imports (partner: Latin America)General Commodities Price Index IFS
billi
on U
SD, d
efla
ted
by e
xpor
t uni
t val
ue fo
r adv
ance
d ec
onom
ies,
20
05=1
00
2005=100
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
10
20
30
40
50
60
70
0
20
40
60
80
100
120
140
160
Imports of agricultural products, China and India: 1992-2009
(Sources: IFS, WITTS)Agricultural Imports (partner: World)Agricultural Imports (partner: Latin AmericaGeneral Commodities Price Index IFSFood Price Index IFS
billi
on U
SD, d
efla
ted
by e
xpor
t uni
t val
ue fo
r adv
ance
d ec
onom
ies,
20
05=1
00
2005=100
Objective a) identify China and India income elasticity for imports of agricultural and mining productsb) view its evolution over the past decade
Methodology Gravity model with a two step estimator that controls both for extensive and intensive margin, Helpman, Melitz and Rubinstein(2007)
Sample 99 countries, 1992-2009Usual gravity control variables (distance, area, colonial ties, etc.)“Religion” is the exclusion restriction
Growing Asia demand is not just the result of higher growth but also increasing natural resource intensity
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5 Income Elasticity of China and India
Mining products from Latin America
Agricultural products from Latin America
Agricultural products (non Latin America)
Mining products (non Latin America)
Source: Jaumotte and Tytell. WEO 2007. IMF
Source: Mesquita Moreira 2010
Growing Asia demand for natural resources is compounded by growing competition in manufacturing
The competitive pressure: manufacturing
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
5
10
15
20
25
30
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Participaciones en las importaciones manufacturerasde EE.UU.: India, China y economías latinoamericanas
selectas. 1996-2010 (%)
Mexico China Peru India Brazil
Chin
a y
Mex
ico
(%)
Indi
a, B
rasi
l, Ce
ntro
Am
eric
a y
Perú
Fuente: IDB-INT con USITC data
The world has been experiencing a surge in commodity prices since the beginning of the decade, which raises challenging questions about medium and long-term trends;
A number of supply and demand determinants are discussed in the literature and all of them seem to play part in the surge, but we argue that the dominant factor in the long-term is Asia’s demand, driven by the super, natural-resource scarce economies of China and India.
We believe that China’s and India industrialization will fuel a long-term upward trend in commodity prices, perhaps unrivaled in world history, particularly with respect to manufacturing prices (the “Prebisch reversal”?)
A scenario like that challenges LAC’s long-held beliefs that it is the industry that will make us developed and rich.
It calls for different priorities: All-out protection and subsidies for manufacturing seems hopeless. Instead, the region should focus on: (1) maximize NR rents by improving regulatory frameworks and infrastructure; (2) allocate rents to (a) create conditions for tech upgrade within the NR cone of
diversification, i.e., investments in education and S&T; and (b) fund social programs to better distribute wealth and compensate for low job creation.
Conclusions
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