The Commodity-Finance Nexus: Twin Boom and Double Whammy

Abstract

International commodity prices and capital inflows to developing countries are increasingly synchronized, subjecting commodity-dependent economies to double boom-bust cycles. On the one hand, there are a number of common monetary factors, notably international interest rates and the exchange rate of the dollar that influence commodity prices and capital inflows in the same direction. On the other hand, commodity prices and capital inflows reinforce each other through their influence on economic activity in developing countries. Capital inflows move pro-cyclically with commodity prices, aggravating both positive and negative external trade shocks. This synchronization has greatly heightened the vulnerability of commodity-dependent developing economies to global boom-bust cycles.

The triple crisis of debt, demand and decarbonisation: a preliminary analysis of the impact of COVID-19 on commodity-dependent developing economies

“…Countries that rely on fossil fuels, as compared to minerals like lithium or iron ore for instance, may continue to experience downward demand trends taking into account how volatile capital flows and financialisation through the exchange rate that have affected their capital and institutional structure (Allami and Cibils, 2018). In other words, those countries that continue to integrate with global financial systems and architecture or which have reached a point of "intensive integration" would continue to experience this worsening scenario (Akyüz and Akyüz, 2020). The consistent demand uptick we saw during the 2000sand up to the major slump of 2014 is unlikely to return to the levels witnessed in that period (Castañeda et al, 2020;Jepson, 2020).This super-cycle period undoubtedly offered commodity reliant countries an opportunity to expand their fiscal revenue base by increasing increase tax and royalty hauls, investments in their national oil and mining companies and through new bargaining power of such states (Castañeda et al, 2020;Massi and Singh, 2018).…”