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Commodity price uncertainty and shocks: implications for economic growth

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  • Jan Dehn

Abstract

It has long been believed that commodity price variability causes problems for primary-producing developing countries, but there is less agreement about which particular manifestations of commodity price movements matter to developing countries. This paper tests the effects of ex post shocks and ex ante price uncertainty on economic growth using the Burnside and Dollar (1997) data set. The shock and uncertainty variables are constructed using a new data set of unique aggregate commodity price indices for 113 developing countries over the period 1957Q1-1997Q4. The analysis shows that per capita growth rates are significantly reduced by large discrete negative commodity price shocks. The magnitude of the effect of negative shocks on growth is very substantial, and appears to work independently of investment, which suggests that adjustment is achieved through severe reductions in capacity utilization. Negative shocks remain highly significant after controlling for government economic policy and institutional quality, which indicates that the result is not attributable exclusively to inappropriate policy responses on the part of governments. The paper also shows that positive shocks have no lasting impact on growth, which is consistent with the findings of both Deaton and Miller (1995) and Collier and Gunning (1999a), but overturns an earlier result which suggested that the long run effects of positive temporary shocks are negative. The third key result is that ex ante uncertainty does not affect growth, which holds for nine different definitions of uncertainty. Hence, what reduces growth is not the prospect of volatile world prices, but the actual realizations of negative shocks. The results are robust to changes in sample composition, changing the time series dimensions of the data, instrumenting for endogenous regressors, and across different estimation methods.

Suggested Citation

  • Jan Dehn, 2000. "Commodity price uncertainty and shocks: implications for economic growth," CSAE Working Paper Series 2000-10, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2000-10
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    File URL: http://www.csae.ox.ac.uk/materials/papers/20-10text.pdf
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    1. Gyimah-Brempong, Kwabena & Traynor, Thomas L, 1999. "Political Instability, Investment and Economic Growth in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(1), pages 52-86, March.
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    Cited by:

    1. Jean-Louis COMBES & Christian EBEKE & Mireille NTSAMA ETOUNDI, 2011. "Are Foreign Aid and Remittances a Hedge against Food Price Shocks in Developing Countries?," Working Papers 201121, CERDI.
    2. Combes, Jean-Louis & Ebeke, Christian Hubert & Etoundi, Sabine Mireille Ntsama & Yogo, Thierry Urbain, 2014. "Are Remittances and Foreign Aid a Hedge Against Food Price Shocks in Developing Countries?," World Development, Elsevier, vol. 54(C), pages 81-98.
    3. repec:eee:jrpoli:v:52:y:2017:i:c:p:122-133 is not listed on IDEAS
    4. Chris Elbers & Jan Willem Gunning & Bill Kinsey, 2007. "Growth and Risk: Methodology and Micro Evidence," World Bank Economic Review, World Bank Group, vol. 21(1), pages 1-20.
    5. Giménez Gómez, José M. (José Manuel), 2016. "Linking social heterogeneity and commodity price shocks to civil conflicts," Working Papers 2072/290744, Universitat Rovira i Virgili, Department of Economics.
    6. Vedia Jerez, Daniel Hernan, 2007. "De riesgo y pánico: una analítica de volatilidad y crecimiento 1960-2006
      [About risk and panic, an overview of volatility and growth 1960-2006]
      ," MPRA Paper 21577, University Library of Munich, Germany.

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