Commodity price slump affects emerging economies

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: Still like your dal-bhat? Well, it is getting expensive thanks to the falling world markets. Traditionally, commodities have always driven a spike between industrialised economies and developing ones. This has been a normal trend as raw material prices have been soft and yielded adverse terms of trade vis-à-vis value-added industrialised exports. Add price volatility to that; it is yet another unwelcome dimension for commodity exporters. Even then, it was during the commodity boom that the christening occurred of Brazil, Russia, India and China. They became Bric in 2003 under the aegis of Jim O’Neill of Goldman Sachs. The year was also marked by the ongoing commodity boom that took-off in 2001. Commodities suddenly started to matter then, driving the Commodity Research Bureau (CRB) index to 132%.

Crude was up, as were copper, gold, accompanied by foodgrains, metals and energy. All of them hit fresh highs thanks to growing Asian demand—from China and India in particular. Amongst the other contributory factors were bigger emerging economy disposable incomes, plus (relatively) stronger OECD growth.

That momentum lasted until the July of this year, meaning that raw material producers never had it so good for almost eight full years. Exporters like Chile, Peru, Brazil, Kazakhstan and Russia saw the waxing of their hard-currency reserves, accompanied by currency appreciation. Some—like Brazil—even went ahead to retire international debt.

But there is a difference now. Not only has the current price slump marshaled together traditional commodity exporters like Australia, Brazil, Russia and South Africa. It has also pitted their interests against those of such net commodity importers as China, Japan, the US and the 27 European Union economies.

And it is not just stray chance that the trigger has been the US sub-prime crisis. The demand, and stock-market, slump that the crisis has engendered hits at the very roots of the US’ proclivity for dollar seignorage and excess consumption—two factors that fuelled the worldwide growth in economic activity, overseen by an accommodative federal reserve.

Clearly, the party could not last, and matters started unravelling by July-end. Currently, there is every sign that prices must fall further before they can even begin to recover. Meanwhile, IMF estimates suggest that developing countries have accounted for 75% of world GDP growth (PPP-measure) in recent years.