Essex research looking at commodity prices over the last 400 years has changed the way banks, governments and international and third sector organisations plan for future economic growth. Professor Neil Kellard, from Essex Business School, showed that in the medium-term there can be large swings with commodity prices going both up and down, but in the long-term prices fall or remain unchanged, relative to manufactured goods. This makes diversifying exports, to include manufactured goods and services as well as commodities, crucial for the prosperity of a country and the health and well being of its people.
Many developing countries rely heavily on a small number of primary commodities, such as oil, wheat, maize and gold, to generate the majority of their export income. Overall, for the least developed countries, approximately 60% of export earnings come from primary commodities. And for 40 countries, the production of three or fewer commodities explains virtually all export earnings.
This level of commodity dependency means their economy is at huge risk if prices fall and any fluctuation can have an enormous impact on poverty, inequality and the health of those living there.
Professor Kellard conducted the most detailed analysis ever undertaken into commodity prices over a long period of time looking at the price of 25 commodities, including cocoa, coffee, tea, copper, gold and silver, beef, lamb and wool, from the 17th century to the present day.
As he explained: We found that for some major commodities, such as sugar and tea, there was a long-term downward trend in prices. Several prices remained fairly stable in the long run, including gold and oil, but there was very little statistical evidence that commodity prices have every trended upwards.”
Also he found prices went in cycles – some lasting over 30 years – and this has important consequences.
“Any increases in real prices, and the export income derived from them, should be seen as temporary. Part of the explanation for the resource curse, where resource rich countries grow less quickly than resource poor, is that the former spend too much revenue from commodity booms rather than saving it for when prices come back down again.
“Our findings have highlighted a number of issues. Countries that produce raw commodities will potentially become poorer in the long run unless action is taken to prevent this. Policy makers and forecasters need to take a long-term view when deciding what to do to ensure financial stability.
“Periods of falling commodity prices will support GDP growth for commodity importers like the U.S. but depress growth for commodity exporters such as Chile.”
Professor Kellard’s research has changed thinking and the behaviours of banks, governments, and international and third sector organisations across several countries.
It has informed policy debate and underpinned policy recommendations on food prices at the World Bank, United Nations, and International Monetary Fund (IMF).
It’s been used by central banks in their investigations of price behaviour and by governments in countries such as New Zealand and Australia to inform debates about future prices that have provided the framework for fiscal policy and recommendations for diversifying exports.
In Bangladesh, where export income is increasing, research employing Professor Kellard’s work uncovered that this is because of increased quantity, rather than quality, so as well as the need to diversify exports, it is also important for them to improve the quality of those exports. This research was used by a think tank advising the Bangladeshi government on strategies for securing the country’s long-term financial future.
Action Against Hunger, an international global charity committed to saving the lives of malnourished children, has used Professor Kellard’s research to uncover some of the drivers for world hunger.