The Great Financial Crisis, Commodity Prices and Environmental Limits

This paper examines how certain new structural factors have contributed to the latest great financial crisis and world recession of 2008-09. We focus on three of these structural factors: (i) the incorporation of highly populated countries into the growth process; (ii) The increasing scarcity of the environment and certain natural resources; (iii) the unprecedented concentration of wealth and income in the advanced economies over the last three decades. These structural changes have significantly tightened the links between world growth and commodity prices, have made the world commodity supply to become increasingly inelastic, and have made growth to become more dependent on lax monetary policies, respectively. All this may make the recovery from the current crisis much more difficult, implying a deeper and more protracted crisis than most previous crises. With this framework in mind we focus on the likely affect of the financial crisis upon the natural resources in the developing world, by drawing implications from the 1995 Mexico-originated Peso crisis and the 1998-99 Asia crises. We find that the impact of the current crisis is likely to degrade further the environmental resources and the tightening of environmental policies in response to such degradation may make the commodity supply curve of commodities even steeper in the future.