Commodity Prices, Aid and Debt: Implications for LDCs, Small Vulnerable States and HIPCs, Economic Paper 72 by Mohammad A. Razzaque, Philip Osafo-Kwaako, Roman Grynberg
The long run of decline in real commodity prices has had significant implications for least developed countries, small vulnerable states, and heavily indebted poor countries, which rely predominantly on primary commodities for their production and exports. Empirical investigation in this study has shown that the persistent downward trend in real commodity prices has resulted in significant foreign exchange losses for many commodity-dependent poor countries.
Since the long-term solution to declining commodity prices lies in export diversification and changes in the production structure, as opposed to policies that encourage price and revenue stability, the study proposes a Joint Diversification Scheme exclusively for export diversification schemes in the commodity-dependent poor countries. For the aid-based compensation scheme, the study proposes the establishment of a Joint Diversification Fund in addition to regular aid flows.
Efforts towards export diversification will have to be complemented by domestic policies aimed at the development of human resources, creation of a hospitable investment climate, institutional capacity building and poverty alleviation to achieve a sustainable solution.
Roman Grynberg is the Deputy Director of the Economic Affairs Division, Commonwealth Secretariat, London.
Mohammad A. Razzaque is Senior Lecturer in Economics at the University of Dhaka, Bangladesh. He has written extensively on trade policy issues.
Philip Osafo-Kwaako is an Overseas Development Institute fellow and trade policy analyst with the Zambian Department of Trade.
Table of Contents
Executive Summary 1. Introduction 2. Secular Decline in Relative Commodity Prices: A Brief Review of the Literature 3. Long-run Trend in the Relative Price: Empirical Estimation for Individual Commodities 4. Estimating Foreign Exchange Loss Due to Declining Commodity Prices 5. Instruments for Addressing Commodity Price Behaviour 6. Aid Flows and Commodity Prices 7. Commodity Prices and the Debt Relief Initiative 8. Conclusion Appendices, References, Tables, Figures