Commodity Prices, Stabilization, and Growth in Africa

Many African countries are dependent on the exports of a small number of primary commodities whose prices are extremely volatile. It has often been argued that commodity price fluctuations are poorly dealt with by African policy makers, that effective stabilization is rarely achieved, and that commodity price booms generate irreversible and often unproductive booms in government expenditures. This paper considers the nature of commodity prices, and whether it is possible to use an understandihg of their behavior to help design better policies. Neither time-series models nor more elaborate structural models are very helpful for the four commodities examined, and the results suggest that there is little scope for countries to stabilize their domestic consumption levels through compensation funds or through borrowing and lending on international capital markets. Political and fiscal arrangements are also examined as a possible source of poor policy making. The paper reviews the economic and political economy literature on pricing and taxation in Africa, and presents econometric evidence on the effects of commodity prices on GDP for 35 African countries taken together. Somewhat surprisingly in view of the literature, the evidence shows generally positive effects of commodity price booms; they generate a good deal of economic growth, and do so by stimulating productive investment.