The Global Implications of Falling Commodity Prices
By José Antonio Ocampo and Bilge Erten – August 27, 2013
NEW YORK – The decade-long commodity-price boom has come to an end, with serious implications for global GDP growth. And, although economic patterns do not reproduce themselves exactly, the end of the upward phase of the commodity super-cycle that the world has experienced since the early 2000’s dims developing countries’ prospects for continued rapid catch-up to advanced-country income levels.
Over the year ending in July, The Economist’s commodity-price index fell by 16.5% in dollar terms (22.4% in euros) with metal prices falling for more than two years since peaking in early 2011. While food prices initially showed greater resilience, they have fallen more sharply than those of other commodities over the past year. Only oil prices remain high (though volatile), no doubt influenced by the complex political events in the Middle East.
In historical terms, this is not surprising, as our research into commodity super-cycles shows. Since the late nineteenth century, commodity prices have undergone three long-term cycles and the upward phase of a fourth, driven primarily by changes in global demand. The first two cycles were relatively long (almost four decades), but the third was shorter (28 years).
The upward phases of all four super-cycles were led by major increases in demand, each from a different source. During the current cycle, China’s rapid economic growth provided this impetus, exemplified by the country’s rising share of global metals consumption.
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Super Cycles of Commodity Prices Since the Mid-Nineteenth Century
Bilge Erten and José Antionio Ocampo – World Development, Volume 44, April 2013, pp.14-30
Summary: Decomposition of real commodity prices suggests four super cycles during 1865–2010 ranging between 30 and 40 years with amplitudes 20–40% higher or lower than the long-run trend. Non-oil price super-cycles follow world GDP, indicating they are essentially demand-determined; causality runs in the opposite direction for oil prices. The mean of each super-cycle of non-oil commodities is generally lower than for the previous cycle, supporting the Prebisch–Singer hypothesis. Tropical agriculture experienced the strongest and steepest long-term downward trend through the twentieth century, followed by non-tropical agriculture and metals, while real oil prices experienced a long-term upward trend, interrupted temporarily during the twentieth century
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