Wednesday, January 26, 2011

Political Instability and Commodity Prices

. Wednesday, January 26, 2011

I've been pondering this from Yglesias for a few hours:

Think of a world in which there are two kinds of growth. One is leap-ahead growth in which technologically advanced societies dream up even more advanced technology. The other is catch-up growth in which technologically backwards societies learn to use the advanced technology that already exists in the advanced countries. In the twentieth century we saw some instances of catch-up growth, but leap-ahead growth accounted for the majority of global growth in output. One result of that is that we got much much better at extracting natural resources (energy, food, metal) from the fixed supply of land, and commodity prices generally went down. But over the past ten years, catch-up growth in India, Brazil, and (especially) China has been the majority of world growth. Consequently, the rate of stuff-utilization is going up higher than the rate of stuff-production, meaning we’ll see rising commodity prices rather than falling ones.

For rich countries, that’s inconvenient but we’ll deal. For China, it’s fine—the whole point is that incomes will be rising faster than prices. But for poor countries that aren’t growing rapidly, it’s potentially a disaster. This kind of trend is what’s driving the current instability in North Africa and will probably be a major story for years to come.

My first thought was "This sounds plausible" and then "But why just North Africa?". A quick glance around the region gives me pause. Yemen is growing at over 5%, yet there is instability. Tunisia has had solid growth for years, and has a GDP/capita of nearly $10,000, among the highest in the region. Egypt has had high growth rates (5-7%) as well. Lebanon has been growing from 7-9% per year, and has a GDP/capita of over $16,000. Obviously there has been instability in all of those places lately. But also in Iran, which has had anemic growth. Sudan has obviously had lots of conflict, but has it always corresponded with rising commodity prices? The current peace has occurred at a time when energy prices have been relatively high. I'm less familiar with the rest of North Africa, but I don't see an obvious pattern here.

This new research (ungated pdf here) seems to support Yglesias' position:

We examine the effects that variations in the international food prices have on democracy and intra-state conflict using panel data for over 120 countries during the period 1970-2007. Our main finding is that in Low Income Countries increases in the international food prices lead to a significant deterioration of democratic institutions and a significant increase in the incidence of anti-government demonstrations, riots, and civil conflict. In the High Income Countries variations in the international food prices have no significant effects on democratic institutions and measures of intra-state conflict. Our empirical results point to a significant externality of variations in international food prices on Low Income Countries' social and political stability.

But Paul Collier's research suggests that conflict is more likely when commodity prices fall. (More precisely, when prices are volatile.) Many low-income countries are commodity-exporters, so their incomes go up when global commodity prices rise. Does this imply that if commodity prices rise conflict is less likely? Does it depend on which commodity? Does it depend on how the income gains are distributed? Surely there is some research on these, but I'm not familiar enough with the civil war/development literature to reach any firm conclusions. The Blattman/Miguel survey of the civil war econ literature indicates that poverty and slow growth is the most consistent factor, not necessarily commodity prices.

My provisional takeaway is that it will depend on which commodity prices are rising and which countries are producing those goods. Prices of different commodities do not necessarily covary (or has that changed?), so the effects will not necessarily be homogenous across countries.


Political Instability and Commodity Prices




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