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Commodity price uncertainty in developing countries

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  • Dehn,Jan

Abstract

Uncertainty about commodity export prices is important to developing countries -- both governments and producers -- that export primary commodities. Commodity export price uncertainty is typically measured as the standard deviation in the terms of trade. There are three problems with this approach: 1) Terms of trade indices are unsuitable as proxies for commodity price movements per se. 2) The shortness of terms of trade time series makes them inappropriate as a base for constructing time-varying uncertainty measures. 3) Simple standard deviation measures ignore the distinction between predictable and unpredictable elements in the price process, so they risk overstating uncertainty. 4) The author examines commodity price uncertainty in developing countries using new data for quarterly aggregate commodity price indices for 113 developing countries for the period 1957-97. Each index is a geometrically weighted index of 57 commodity prices. He constructs six different measures of uncertainty. The uncertainty measures confirm the importance of distinguishing between predictable and unpredictable components in the price process. But there is a positive, highly significant relationship between commodity export concentration and commodity price uncertainty for all six measures. No obvious link is found between a country's regional affiliation and its exposure to uncertainty. Sub-Saharan African countries, for example, are no more prone to commodity price uncertainty than countries in other commodity-producing regions, although to the extent that they depend more on commodities, they will be affected more than countries with more diversified export baskets. Similarly, there is no apparent relationship between a country's experiences of uncertainty and the type of commodities that dominate its exports-except that oil producers face greater uncertainty (because of discrete, well-publicized oil shocks). A measure of uncertainty based on generalized autoregressive conditional heteroskedasticity (GARCH) indicates considerable time variation in uncertainty. Uncertainty is sometimes characterized by discrete spikes, although uncertainty in countries exhibits a secular increase over time. Most countries experience uncertainty, which tends to persist. It is unclear what lies behind the time variation in uncertainty.

Suggested Citation

  • Dehn,Jan, 2000. "Commodity price uncertainty in developing countries," Policy Research Working Paper Series 2426, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2426
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    Citations

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    Cited by:

    1. Paul Collier & Benedikt Goderis, 2010. "Does Aid Mitigate External Shocks?," Working Papers id:3216, eSocialSciences.
    2. George Rapsomanikis & Alexander Sarris, 2008. "Market Integration and Uncertainty: The Impact of Domestic and International Commodity Price Variability on Rural Household Income and Welfare in Ghana and Peru," Journal of Development Studies, Taylor & Francis Journals, vol. 44(9), pages 1354-1381.
    3. Williams, Andrew, 2011. "Shining a Light on the Resource Curse: An Empirical Analysis of the Relationship Between Natural Resources, Transparency, and Economic Growth," World Development, Elsevier, vol. 39(4), pages 490-505, April.
    4. Paul Collier & Benedikt Goderis, 2009. "Structural policies for shock-prone developing countries," Oxford Economic Papers, Oxford University Press, vol. 61(4), pages 703-726, October.
    5. Romano, Donato, 2006. "Agriculture in the Age of Globalization," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25253, International Association of Agricultural Economists.
    6. Paul J. Burke & Andrew Leigh, 2010. "Do Output Contractions Trigger Democratic Change?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 124-157, October.
    7. Monoj Kumar Majumder & Mala Raghavan & Joaquin Vespignani, 2020. "Commodity price volatility, fiscal balance and real interest rate," CAMA Working Papers 2020-79, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Joël Cariolle & Michaël Goujon, 2015. "Measuring Macroeconomic Instability: A Critical Survey Illustrated With Exports Series," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 1-26, February.
    9. David Roodman, 2007. "The Anarchy of Numbers: Aid, Development, and Cross-Country Empirics," World Bank Economic Review, World Bank Group, vol. 21(2), pages 255-277, May.
    10. Tony Addison & Atanu Ghoshray & Michalis P. Stamatogiannis, 2016. "Agricultural Commodity Price Shocks and Their Effect on Growth in Sub-Saharan Africa," Journal of Agricultural Economics, Wiley Blackwell, vol. 67(1), pages 47-61, February.
    11. Tristan Le Cotty & Elodie Maître d'Hôtel & Moctar Ndiaye & Sophie Thoyer, 2021. "Input use and output price risks: the case of maize in Burkina Faso [Utilisation d'intrants et risques de prix : le cas du maïs au Burkina Faso]," Working Papers hal-03252026, HAL.
    12. Musayev, Vusal, 2014. "Commodity Price Shocks, Conflict and Growth: The Role of Institutional Quality and Political Violence," MPRA Paper 59786, University Library of Munich, Germany.
    13. George Rapsomanikis & Alexander Sarris, 2006. "The Impact of Domestic and International Commodity Price Volatility on Agricultural Income Instability: Ghana, Vietnam and Peru," WIDER Working Paper Series DP2006-04, World Institute for Development Economic Research (UNU-WIDER).
    14. Paul Collier & Benedikt Goderis, 2009. "Does Aid Mitigate External Shocks?," Review of Development Economics, Wiley Blackwell, vol. 13(s1), pages 429-451, August.
    15. Majumder, Monoj Kumar & Raghavan, Mala & Vespignani, Joaquin, 2020. "Oil curse, economic growth and trade openness," Energy Economics, Elsevier, vol. 91(C).
    16. Joël CARIOLLE, 2012. "Measuring macroeconomic volatility - Applications to export revenue data, 1970-2005," Working Papers I14, FERDI.
    17. Collier, Paul & Dehn, Jan, 2001. "Aid, shocks, and growth," Policy Research Working Paper Series 2688, The World Bank.
    18. Hélène Ehrhart & Samuel Guérineau, 2012. "Commodity price volatility and Tax revenues: Evidence from developing countries," Working Papers halshs-00658210, HAL.
    19. Benedikt Goderis & Samuel W. Malone, 2011. "Natural Resource Booms and Inequality: Theory and Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113, pages 388-417, 06.

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