Friday, October 9
Zsoka Koczan, Economist, International Monetary Fund
Marcos Poplawski-Ribeiro, Economist, International Monetary Fund
Will declining commodity prices inflict long-term damage on commodity exporters? What do the recent large exchange rate fluctuations imply for external trade? On October 9, 2015, Ms. Zsoka Koczan and Mr. Marcos Poplawski-Ribeiro from the IMF Research Department presented the two analytical chapters of the latest World Economic Outlook (WEO) providing some answers to these questions. They also provided a brief overview of the WEO’s current growth projections. Mr. Martin Schindler, JVI Deputy Director, chaired the event.
Ms. Koczan spoke on how the evolution of commodity prices has affected economic growth in commodity-exporting countries. Commodity prices have plunged in the past three years, and output growth has slowed considerably in emerging market and developing economies that are net exporters of commodities. A critical question for policymakers in these countries is whether commodity windfall gains and losses influence potential output or merely trigger transient fluctuations of actual output around an unchanged trend for potential output.
Model-based simulations and empirical evidence from event studies, regressions, and case studies suggest that while actual and potential output move together with the commodity terms of trade, actual output moves twice as much as potential output. The authors’ estimates imply that during 2015–17 the depressed commodity price outlook will subtract almost 1 percentage point annually from average economic growth in commodity exporters; for exporters of energy commodities, the drag is estimated to be even larger, averaging 2¼ percentage points. The projected drag on the growth of potential output is about one third of that on actual output.
On the connection between exchange rates and trade, Mr. Poplawski-Ribeiro pointed out that the magnitude of the past year’s exchange rate movements has triggered a debate about their likely effects on trade. History suggests that exchange rate movements typically have sizable effects on the volumes of exports and imports. Indeed, a 10 percent real effective depreciation in an economy is associated with an average rise in real net exports of 1½ percent of GDP, though there is a substantial amount of cross-country variation. Although these effects can take several years to fully materialize, much of the adjustment occurs in the first year. The boost to exports associated with currency depreciation is largest in countries with initial economic slack and with domestic financial systems that are operating normally.
There is some evidence that the rise of global value chains has weakened the relationship between exchange rates and trade in intermediate products used as inputs into other economies’ exports. However, global trade is still mostly conventional, and there is little evidence of any disconnect emerging between exchange rates and total exports and imports.
The rich discussion that followed was mainly concerned with the differences between demand-driven and supply-driven commodity price cycles, the role of diversification and of labor market reforms in resource-rich countries, cross-country differences in the degree of involvement in global supply chains, and geopolitical factors influencing commodity prices.
Thomas Mitterling and Adam Gersl
Joint Vienna Institute