Commodity price shocks, growth and structural transformation in low-income countries

This paper uses a panel-VAR approach to estimate both the dynamic and structural macroeconomic response of resource-rich, low-income countries to global commodity price shocks. I use a block recursive ordering, as well as a simple Choleski decomposition, to identify structural commodity price shocks for a set of developing countries. The block recursive identification strategy assumes only that global macroeconomic conditions do not respond to individual low-income country conditions contemporaneously. The results suggest that a one standard deviation increase in commodity prices raises per capita income in developing countries by 0.26% and government spending and investment by 4.4% and 12.4%. The effects are larger for less developed countries, economies with fixed exchange rate regimes and those that are more depended on commodity exports. Commodity price shocks also result in significant transformation of these economies, with the share of value-added in manufacturing contracting by 0.17–0.22 percentage points. Whilst these effects may appear small, they represent the effect of exogenous commodity price shocks that are not due to changes in aggregate demand or global financial conditions. This suggests that commodity price movements alone may be less important in explaining the volatility of low-income country growth than other explanations. Taken together, these results present a more nuanced picture of the ‘resource curse’ in poor countries. Whilst per capital income levels are positively affected by resource booms, the potential for de-industrialisation does exist. The channel through which this link operates appears to be the real exchange rate, with resource booms leading to appreciation pressures. To illustrate the relevance of these results, I investigate the impact of the recent oil price collapse on the Nigerian economy.