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Global Economic Prospects 2009: Commodities at the Crossroads - Overview

Report by World Bank, 2009

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The release of this year's Global Economic Prospects finds the world economy at a crossroads. Markets all over the world are engulfed in a global economic crisis, with stock markets sharply down and volatile, almost all currencies having depreciated substantially against the dollar, and risk premiums on a wide range of debt having increased by 600 or more basis points. Commodity markets too have turned a corner. Following several years of increase, prices have plummeted, and although well above their 1990s levels, they have given up most of the increases of the past 24 months. This year's Global Economic Prospects analyzes the implications of the crisis for low- and middle-income countries, including an in-depth look at long-term prospects for global commodity markets and the policies of both commodity producing and consuming nations. The government responses to the recent price boom are also analyzed in this year's edition. Producing-country governments have been more prudent than during earlier booms, and because they have saved more of their windfall revenues, they are less likely to be forced to cut into spending now that prices have declined. The spike in food prices tipped more people into poverty, which led governments to expand social assistance programs. Ensuring such programs are better targeted toward the needs of the very poor in the future will help improve the capacity of governments to respond effectively the next time there is a crisis.



The release of this year’s Global EconomicProspects finds the world economy at a
crossroads. Markets all over the world are en-
gulfed in a global economic crisis, with stock
markets sharply down and volatile, almost all
currencies having depreciated substantially
against the dollar, and risk premiums on a wide
range of debt having increased by 600 or more
basis points. Commodity markets too have
turned a corner. Following several years of in-
crease, prices have plummeted, and although
well above their 1990s levels, they have given
up most of the increases of the past 24 months.

Chapter 1 of this report examines the
medium-term implications of this crisis for
developing-country growth, inflation, and
world trade. Chapter 2 looks at longer-term
supply and demand prospects in commodity
markets. It takes into account the long-term
growth prospects of developing countries
and their rising share in world GDP (gross
domestic product), the declining quality of
new pools of resources, and the influence
of technology on both demand and supply.
Finally, chapter 3 reports on the poverty im-
pacts of high commodity prices and examines
the effectiveness of policies in both produc-
ing and consuming countries in dealing with
the challenges posed by periodic bouts of
high commodity prices.

This report does not deal with water, fish,
or timber, all commodities of critical impor-
tance to developing countries and the globe
but which fall outside the scope of this report
either because of their public-goods character
or, in the case of timber, because of its treat-
ment in a recent report (World Bank 2007).

The global financial crisis threatens short-
term prospects in developing countries
The banking crisis that erupted in September
2008, following more than a year of less acute
financial turmoil, has substantially reinforced
the cyclical downturn that was already under
way. Following the insolvency of a large num-
ber of banks and financial institutions in the
United States, Europe, and the developing
world, financial conditions have become
much tighter, capital flows to developing
countries have dried up, and huge amounts of
market capitalization have evaporated.

The crisis began in high-income countries,
but developing countries have been caught up
in its wake. As of mid-November, developing-
country equity markets had given up almost all
of their gains since the beginning of 2008 and
initial public offerings had disappeared. Risk
premiums, which had risen to more than 800
basis points on sovereign bonds and 1,000 on
commercial debt, have declined but remained
well above 600 basis points in every develop-
ing region. As corporate bonds had been one
of the most important source of developing-
country finance, these developments suggest
that a sharp slowing in developing-country
investment growth is to be expected. Bank
lending and foreign direct investment inflows
were also down, but less dramatically. The in-
creased volatility and losses emanating from
the banking sector have caused investors
worldwide to sell stocks and increase their
holdings of less risky assets, notably U.S. trea-
suries. As a result, the currencies of virtually
every developing country in the world has de-
preciated vis-à-vis the dollar.

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Following a series of efforts by central banks
and governments to resolve the growing crisis
through liquidity injections and various ad
hoc measures, policy makers have now acted
forcefully to restore confidence in the interna-
tional banking system, including the partial
nationalization of nine banks and trillions of
dollars in rescue plans introduced by govern-
ments in the United States and Europe and
recent multilateral meetings to address weak-
nesses in the global financial architecture. At
the time of this writing (November 20, 2008),
it is too soon to judge the effectiveness of these
measures in restoring confidence in the bank-
ing system. However, they do constitute the
kind of forceful and credible action that has
been needed, and interbank lending rates have
fallen substantially and although they remain
volatile, stock and bond markets have greeted
these measures favorably.

Notwithstanding these steps, growth
prospects for both high-income and develop-
ing countries have deteriorated substantially,
and the possibility of a very deep global reces-
sion cannot be ruled out.

Even before the emergence of a full-blown
financial crisis in September 2008, global
growth showed significant weakening. Eco-
nomic growth slowed sharply in Europe and
Japan and in many developing countries in
the second quarter of 2008. In the United
States, the continued disruption in financial
markets and the fall in housing prices caused
domestic demand to fall in 6 of the past 12
quarters. However, strong export growth—
driven in part by developing-country import
demand—spared the U.S. economy from re-
cession until recently when its GDP declined
0.5 percent in the third quarter of 2008. In
developing countries, overall GDP growth
also remained robust in the first half of the
year. However, slower growth in high-income
countries and the weakening of capital inflows,
in combination with commodity-price-
induced losses in real income, generated a
sharp deceleration in industrial production,
investment, and international trade beginning
in the third quarter.

At the same time, rising commodity prices
and tight capacity in many countries (following
years of very fast growth fueled by ample liq-
uidity) caused both headline and core inflation
to pick up throughout the world, with headline
inflation rising by some 5 percentage points
among developing countries. Weaker growth
and falling commodity prices have already
caused inflationary pressures to ease in some
countries. However, the significant losses in real
income endured by many people in developing
countries and the still overheated state of some
of their economies could generate second-
round price increases that either push inflation
higher or stabilize expectations at high levels.

The combination of a relatively strong
first half and a much weaker second half is
expected to cause GDP growth to slow to 1.3
percent in high-income countries and to 6.3 per-
cent in developing countries in 2008. The slow-
down is projected to intensify in 2009 because
most of the real-economy side effects of the
banking crisis will be felt in the final months of
2008 and the first two quarters of 2009.

The main mechanism for the slowdown in
both developing and high-income countries
will be through investment, which for 2009 is
expected to decline 3.1 percent in high-income
countries. In developing countries, investment
growth is projected to slow sharply to 3.4 per-
cent in 2009 from more than 13 percent in
2007. Because low-income countries have less
access to international capital markets, the
slowdown will affect them mainly through in-
direct mechanisms, including slower global
growth, lower commodity prices, slackening
remittance receipts, and partial scaleback in
aid flows.

Overall global GDP growth is projected to
decline to 0.9 percent in 2009, with develop-
ing economies expanding by 4.5 percent—well
below the 7.9 percent growth rate recorded in
2007. International trade should decelerate
sharply, with global export volumes declining
for the first time since 1982. As a result, both
commodity prices and inflation are projected
to ease, with oil prices averaging about $75 a
barrel in 2009 and food prices projected to

G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 2

decline by about 23 percent compared with
their average for 2008.

This financial crisis and the expected
abrupt slowing of global growth come at a
moment when developing countries consid-
ered as a whole are more vulnerable than they
have been in the recent past. Higher commod-
ity prices have raised the current account
deficits of many oil-importing countries to
worrisome levels (they exceed 10 percent of
GDP in about one-third of developing coun-
tries), and after having increased substantially,
the international reserves of oil-exporting
developing countries are now declining as a
share of their imports. Moreover, inflation is
high, and fiscal positions have deteriorated
both for cyclical reasons and because govern-
ment spending has increased to alleviate the
burden of higher commodity prices.

Thus, even in the baseline scenario, where
the rapid equity declines of September and
October are assumed to end and where credit
begins to thaw as recent policy actions im-
prove financial market confidence, a number
of developing countries are likely to be sub-
jected to substantial strains, possibly including
bank failures and currency crises. In these very
uncertain circumstances, policy makers must
place a premium on reducing the likelihood
of domestic turmoil, by reacting swiftly and
forcefully to emerging difficulties, including, if
necessary, seeking assistance from the Interna-
tional Monetary Fund (IMF).

Uncertainty continues to cloud the outlook
While this sober outlook represents a likely
outcome, a wide range of outcomes remains
possible. The financial turmoil could intensify
further, sparking a prolonged credit crunch
and global recession. A milder downturn is
also possible, if credit conditions do not dete-
riorate as much as anticipated in the baseline.

At the time of this writing, the possibility
that the situation in high-income countries will
deteriorate substantially cannot be ruled out.
Should credit markets fail to respond to the ro-
bust policy interventions taken so far, the con-
sequences for developing countries could be



very serious. Global financing conditions
would deteriorate rapidly, and apparently
sound domestic financial sectors could find
themselves unable to borrow or unwilling to
lend—both in international and domestic mar-
kets. Such a scenario would be characterized
by a long and profound recession in high-
income countries and substantial disruption
and turmoil, including bank failures and cur-
rency crises, in a wide range of developing
countries. Sharply negative growth in a number
of developing countries and all of the attendant
repercussions, including increased poverty and
unemployment, would be inevitable.

Although a receding concern, high inflation
in developing countries, remains a problem, es-
pecially if the financial turmoil is resolved rela-
tively quickly. While global growth would still
slow in 2009 under such a scenario, the sub-
stantial policy stimulus that has been introduced
could cause growth in both developing and de-
veloped countries to surge in 2010, reigniting in-
flationary pressures and forcing a subsequent
tightening of policy and a second bout of slow-
ing growth. Policy in countries that currently
have large current account deficits and high in-
flation needs to be particularly vigilant. These
economies continue to be vulnerable and in-
vestors skittish; under these conditions, their
currencies are likely to remain particularly sen-
sitive to changing market perceptions.

The commodity market boom has come to
an end
The sharp rise in commodity prices over the
past five years, like the earlier booms of the last
century, was associated with a period of strong
economic growth (partly fueled by relatively
loose fiscal and monetary policy) and a period
of global uncertainty, and it has generated
significant inflationary pressures. This most
recent boom has been the most marked of the
past century in its magnitude, duration, and
the number of commodity groups whose prices
have increased (figure O.1).

The strength and duration of the boom
mainly reflected the resilience of GDP growth
between 2003 and 2008.

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In the oil and metals sector, the supply pres-
sures that built up over the past five years and
which drove prices to record heights stemmed
mainly from slow-growing supply capacity.
That slow growing supply capacity resulted
because for much of the 1990s rising demand
in the rest of the world was met by the slow
reabsorption of idle capacity created follow-
ing the 1980 oil shock and the collapse of
demand in the former Soviet bloc when these
formerly communist countries began to allo-
cate resources according to market signals. As
a result of this idle capacity, prices remained
low in the oil and metals sectors and firms did
not have the economic incentives to increase
productive capacity.

Furthermore, because of low prices and be-
cause incremental demand was being met by this
capacity, investment in the oil and metals indus-
tries plummeted, and the sectors that supplied
the inputs necessary for exploration and ex-
ploitation atrophied. That in turn created a mis-
match between the underlying rate of growth of
supply capacity and demand.When the spare ca-
pacity was exhausted in the early 2000s, supply
was no longer able to keep pace with strength-
ening demand, and prices began to rise.

The story in agricultural markets is different.
Food-based demand for agricultural crops has
been relatively stable. However, diversion of
food crops toward biofuel production has
increased sharply. Between 2003 and 2007,

two-thirds of the global increase in maize pro-
duction went to biofuels. Although the initial
impact was confined to the maize market, as
farmers switched land away from wheat and
soybean production to grow maize, the price of
these commodities also began to rise. Higher oil
and fertilizer prices also increased food produc-
tion costs, especially in high-income countries
where they can account for as much as 30 per-
cent of overall costs. This factor, plus biofuel de-
mand for grains, has made the price for these
products much more sensitive to changes in oil
prices. Finally, a series of poor wheat crops in
Australia compounded the situation, driving
down stocks and contributing to the price rise.

In addition to these fundamental drivers,
agricultural prices have been influenced both by
increased investor interest in these commodities
as an asset class and by government policies, in-
cluding the decision by several countries to im-
pose export bans. All of these factors are driven
by forward-looking expectations and may have
exacerbated both the upward rise in prices dur-
ing 2007–08 and their more recent decline.

Commodity prices are declining in
response to slower GDP growth
Like earlier commodity booms, this one has
come to an end. Prices in all commodity markets
have fallen sharply since July 2008 (figure O.2),

G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9
















Figure O.2 Real commodity prices in local
currency units increased by between
75 and 150 percent but have fallen since



Metals and minerals

Source: World Bank.

Real local currency commodity price indexes, CPI-deflated
(Jan. 2000 5 100)









Source: Grilli and Yang (1988) for 1900 to 1947; World Bank for
1948 to 2008.

1920 1940 1960 1980 2000

Real non-energy commodity prices, index (1977–79 5100)

1917 (just prior to WW I)
1951 (postwar rebuilding)

2008 (forecast)

1974 (first oil crisis)

Figure O.1 The recent commodity boom was
the largest and longest of any boom
since 1900

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reflecting slower GDP growth, increased sup-
plies and revised expectations. Because com-
modity prices reflect forward-looking
expectations, the sharp slowing of growth that
is expected over the next year has caused
prices to decline rapidly even though the un-
derlying supply and demand tensions are little
changed from just a few months ago when
these prices were close all-time highs.

Some metals prices have already fallen to
pre-boom levels and the dollar price of many
internationally traded foods has fallen back to
their 2006 levels. While much weaker GDP
growth is projected to cause commodity prices
to ease further in the short run, they should
nevertheless remain higher than they were dur-
ing the 1990s. Real food prices are projected to
decline by 26 percent between 2008 and 2010,
energy prices to fall by 27 percent, and metals
prices to decline by 32 percent.

In the longer term, growth in the demand
for commodities should ease
The strength, breadth (in terms of the number of
commodities whose prices have increased), and
duration of the current commodity boom have
prompted speculation that the global economy
is moving into a new era characterized by rela-
tive shortage and permanently higher (and even
permanently rising) commodity prices.

This outcome does not appear likely. Over
the next two decades, slower population
growth andweaker (though still strong) income
growth are projected to cause trend global GDP
growth to ease (figure O.3) and, with it, the de-
mand for commodities. As discussed later, the
extent to which commodity demand does slow
and how easily supply is able to keep pace with
demand will very much depend on the policy
environment, the pace of technological change,
and external factors such as climate change.

Moderating demand for metals depends
critically on increased efficiency in China
Over the past 50 years, a combination of con-
servation measures, technological change, and
changes in the structure of global GDP (ser-
vices tend to be less commodity-intensive than

manufactured goods) has reduced the quantity
of metals and energy required to produce a
unit of GDP by an average of 0.9 and 0.8 per-
cent a year respectively (figure O.4). The food
intensity of GDP has also declined as an in-
creasing share of the world’s population has
reached income levels where per person de-
mand for basic food commodities is stable.

Beginning in the middle 1990s, the decline
in metals intensities began to reverse. That re-
versal is explained almost entirely by increas-
ing metal intensities in China, which began









Growth of GDP, annual average (percent)

Figure O.3 Slower population growth should
result in weaker GDP and commodity demand

1990s 2000s 2015–30

to GDP
growth from

to GDP
from per

Source: World Bank LINKAGES model.







s D







Figure O.4 Technological progress has
reduced the quantity of commodities used
per unit of GDP

1971 1977 1983 1989 1995 2001

Commodity intensity of demand index (1971 5 1.00)

Source: World Bank calculations, using data from the World
Bureau of Metal Statistics, the IEA, and the FAO.

Energy Metals
Metals (excluding China) Food

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in 1995 and grew even more sharply at the
beginning of the 2000s. The uptick in metals
intensities was associated with the investment,
manufacturing, and export booms in that
country. Currently, metal intensity in China is
four times higher than in developed countries
and twice as high as in other developing coun-
tries. China’s metal intensities are expected
to stabilize in coming years and then begin to
fall as the country’s very high investment rate
declines and the transitional shift in global
manufacturing capacity from high-income
countries to China slows.

Assuming China’s metal intensity stabilizes
and then falls in coming years, global demand
for metals—which has outpaced GDP in recent
years—should first realign itself with GDP
growth over the next few years and then decline
further during the next decade, reaching about
2.7 percent a year in the period 2015–30.

Future energy demand depends on
improving automobile efficiency
Demand in the energy sector will depend
critically on the pace at which energy effi-
ciency continues to improve, especially in the
transport sector. Since 1970 conservation ef-
forts and technological progress have reduced
energy demand by 56 percent, compared with
a no-change scenario (IEA 2006). With some
75 percent of future energy demand expected
to come from the transport sector, especially
from developing countries, the pace of future
energy demand growth (and its composition)
will depend heavily on future efficiency gains
in car technology.

Prospects for such improvements are good,
if policy continues to be supportive of both
conservation and efficiency measures. Already
existing technologies—available either in ini-
tial rollout phases or as prototypes (flex-fuel
and hybrid cars, plug-in hybrids, and electric
and hydrogen-powered vehicles)—could help
to more than double fuel efficiency. An ambi-
tious (and successful) policy to speed the de-
velopment and diffusion of these technologies
could see the share of these vehicles rise to
90 percent in the high-income world and to

75 percent in developing countries by 2050,
substantially reducing private transportation’s
dependency on liquid fuels.

In the baseline scenario, demand for oil is
expected to continue rising to around 114 mil-
lion barrels a day (mb/d) by 2030 (compared
with 87 mb/d today). Energy demand is pro-
jected to grow somewhat more quickly as coal,
natural gas, and non-fossil-fuel energy sources
increase their share in total energy supply. The
extent to which this shift occurs will depend
importantly on the policy environment. A
more proactive stance toward restraining car-
bon emissions could speed the pace at which
alternative energies become economically
viable and reduce the expected increase in
reliance on coal-powered electrical plants.

Over the next 20 years, supplies of
extracted commodities are likely
to remain ample
The pace at which the growth in supply capac-
ity in the oil and metals sectors catches up to
demand will depend on how quickly capacity in
the heavy and specialized equipment and labor
supply sectors can be restored. Years of low
prices and weak investment have reduced
capacity in these sectors, and as a result,
delivery times and costs of inputs have more
than quadrupled in many instances. High prices
for these components are speeding the allevia-
tion of these constraints. With the expected
slowing of global GDP growth and lower com-
modity prices, investment demand has eased
and prices for these specialized investment
goods are expected to fall further. Nevertheless,
deliveries are projected to continue trailing
demand for some time, and prices will remain
relatively high for the next several years.

Over the longer run, the price of extracted
commodities should fall—although they are
not expected to fall to their levels in the
1990s. Higher prices than in the past will be
required to ensure that firms continue to in-
vest in new capacity.

Although the absolute quantity of fossil
fuels and metals in the earth’s crust is declin-
ing and the quantity that is extracted each

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10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 6

year is rising, there appears little likelihood
that the world will run out anytime soon. His-
torically, proven reserves of both metals and
oil have tended to rise even more rapidly than
production, remaining surprisingly constant in
the case of oil at about 40 years of production.
In part, that is because measured reserves,
rather than being an accurate count of the re-
sources remaining in the ground, bear a closer
resemblance to the inventory of product that
firms can readily bring to the market. So long
as firms have ample “known reserves” for ex-
pected future demand, they have little incen-
tive to find more.

As production increases and more known
reserves are brought into service, additional
reserves will likely be discovered. In general,
these newer reserves tend to be of lower qual-
ity and higher cost than existing ones. How-
ever, historically improvements in extraction
technology have advanced quickly enough to
keep the cost of exploiting new sources stable
or even falling, despite increased remoteness
and poorer quality. The projected long-term
price of a barrel of oil of $75 (real 2008 dol-
lars) is based on the expectation that such a
price will be sufficient to incite additional
output from high-cost sources such as the
Canadian oil sands.

Even if certain resources do become scarce,
ample alternatives exist. For example, if the
pace at which new oil reserves are discovered
declines, the rising price for oil will make
alternative sources of energy (including coal,
natural gas, nuclear, and renewable alterna-
tives) more competitive and induce increased
conservation and technological change. Simu-
lations suggest that if oil production fails to
rise between now and 2030, oil prices might
double but most of the energy shortfall would
be met by increased coal and natural gas con-
sumption—albeit at higher cost.

Food demand will slow with lower
population growth, but biofuels could
expand crop demand very rapidly
Because an increasing share of the world’s
population has reached income levels where



demand for most primary food commodities
no longer rises with income, demand for food is
expected to slow—broadly in line with weaker
population growth. However, the potential
role of biofuel demand for food crops greatly
complicates the picture. Given today’s tech-
nology, maize can be profitably transformed
into ethanol at oil prices in excess of $50 a
barrel. Above that price, every percentage
point increase in the barrel price of oil causes
maize price to rise by 0.9 percent (figure O.5),
which means the maize market is effectively
tied to the oil market (this relationship is not
statistically significant when oil is below $50 a
barrel). Moreover, because farmers have re-
sponded to high maize prices by increasingly
growing maize in fields where they once grew
wheat and soybeans, prices of these (and other)
commodities have also become increasingly
sensitive to oil prices.

Given that the energy market is much
larger than the market for maize (if all the
world’s maize were used to produce biofuels,
it would only meet 8 percent of energy de-
mand), biofuel demand has the potential to
change permanently the nature (and price)
of agricultural commodities. The International
Energy Agency (IEA), for example, suggests
that biofuel demand for grains could increase
by 7.8 percent a year over the next 20 years
(compared with 1.2 percent annual increases
for food demand). If this prognosis is borne
out, 40 percent of global grain production
could be going to biofuels by 2030.

It is probably premature to argue that the
nature of these markets is permanently
changed. On the one hand, technological im-
provements are likely to lower the cost of
producing ethanol from maize (and sugar),
which in turn will lower the threshold oil
price above which these food crops become
sensitive to oil prices. However, technological
change may also give rise to alternative
sources of energy that make ethanol produc-
tion from food crops uneconomic. Such alter-
natives might include biofuels made from cel-
lulose or other nonfood sources, solar power,
or hydrogen-based systems. In these cases, the

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new, stronger connection that has been cre-
ated between the energy market and the grain
markets would be broken, and food prices
would likely fall significantly.

Strong productivity growth and unused
crop land should ensure adequate food
supply at the global level
Food supplies are unlikely to fall short of de-
mand. Over the past 30 years, agricultural
productivity has improved much faster than
demand; as a result, agricultural output has
increased rapidly even as the share of agricul-
tural workers in total employment has steadily
declined and prices fallen.

Longer-term prospects are somewhat
clouded by the gradual exhaustion of the easy
productivity gains offered by the green revolu-
tion. In addition, climate change threatens
yields in many developing countries, although
most of this effect is not likely to be felt until
after 2030. Assuming that policies are put
in place to expand infrastructure and facili-
tate the diffusion of the new technologies
(including biotechnologies) that have sustained
agricultural productivity in high-income coun-
tries, agricultural output should more than keep
pace with food demand over the long term.

However, if developing countries are not
successful in combating recent trends for yields
to decline by increasing investment in rural
agriculture and through the spread and adop-
tion of more productive seed varieties and
farming techniques, there is a real risk that
many countries, notably in Africa (where pop-
ulation growth is expected to be faster), will
move from a position of being broadly self-
sufficient in food to being net food importers.
Most of the shortfall would be met by produc-
tion from high-income countries, where pro-
ductivity growth has not slowed.

Even if biofuel demand increases substan-
tially, enormous potential exists for bringing
additional (albeit lower productivity) land into
cultivation. That said, if biofuel-related de-
mand for crops is much stronger or productivity
performance disappoints, future food supplies
may be much more expensive than in the past.

G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


Figure O. 5 Oil prices are having a direct
impact on food prices
Oil price per barrel versus food price per ton

a. Soybeans vs. Crude Oil Prices









Crude oil ($/bbl)

Crude oil ($/bbl)

Soybeans ($/ton)

b. Wheat vs. Crude Oil Prices



0 20 40 60 80 100 120 140

0 20 40 60 80 100 120 140

Crude oil ($/bbl)
0 20 40 60 80 100 120 140




Wheat ($/ton)

c. Maize vs. Crude Oil Prices








Maize ($/ton)

Source: World Bank.

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Primary exports per capita
(left axis)

Primary exports/exports
(right axis)

Value of per capita primary
commodities in exports
(US$ thousands)

Source: World Bank.

Share of primary
commodities in total

merchandise exports (%)

Figure O.6 On average, poor countries are
dependent on commodities but relatively
resource poor




for resource dependence to generate poor
growth outcomes. These include:

• The tendency for government spending
in resource-dependent countries to rise
in booms and fall procyclically during

• The tendency for strong revenue inflows
to cause an excessive real appreciation
of the currency that hurts the competi-
tiveness of the nonresource sectors of
the economy; and

• The tendency for large commodity-
based revenues to foster rent-seeking
behavior, corruption, and even political

Encouragingly, during the course of the re-
cent commodity boom, fiscal spending in
resource-dependent developing countries has
been much more prudent than during earlier
booms. Partly as a result, the currencies of
most countries have appreciated by less than
in the past. Moreover, corruption among com-
modity exporters has improved relative to
diversified exporters (figure O.7), suggesting
that perhaps this mechanism for reducing the
development potential of resource wealth has
been weakened as well.

Exceptions include newly independent
commodity exporters or states with newly
found resource wealth. Government spending
in these countries has kept pace with or even
exceeded export revenues, and their currencies
have appreciated much more strongly than
those with more experience of commodity
booms (figure O.8). With prices now sharply
lower, such countries may be encountering
additional fiscal pressures. In addition, oil ex-
porters with relatively low reserves are not
saving significantly more than those with high
reserves and, as a result, may be exacerbating
the competitiveness problems of their non-oil
sectors. That, in turn, could be creating a
future problem, because these countries, unlike
those with ample reserves, will have to rely on
their non-resource-based sectors to generate
most of the growth in coming years.

Simulations suggest that under these unfavor-
able circumstances, food crop prices could be as
much as 30 percent higher than in the baseline

Commodity-producing countries are
managing the revenue windfall better than
they have in the past
Historically, countries whose economies are
heavily dependent on commodities exports
have tended to grow less quickly than those
with more diverse economies. This tendency
mainly reflects low GDP and underdevelop-
ment of their nonresource sectors rather than
the actual quantity of resources held by these
countries. Indeed, measured by per capita
value-added from resources, high-income
countries tend to be more resource rich than
developing countries, while their large nonre-
source sectors mean they are also less resource
dependent (figure O.6).

Resource dependence need not result in
slow growth. But to realize the potential of
resource wealth, governments need to avoid
following policies that exacerbate the tendency

10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 9

commodities, such as agricultural producers,
where the benefits of high prices are less con-
centrated. Encouragingly, much of the spend-
ing appears to be directed toward investment
goods, which should contribute to future
production potential. In a number of African
countries, however, investment spending has
been financed by heavy bank borrowing,
which may pose significant problems as loans
become due, now that commodity prices have
declined and access to credit has become
much more difficult.

High commodity prices pose challenges for
the poor, especially in consuming nations
For consuming nations, high commodity
prices pose a number of challenges. In the case
of heavily traded commodities such as oil,
sharp price hikes can pose serious balance of

G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


Figure O.8 Exchange rates, inflation, and
government expenditures in new versus
established oil exporters, 2001–06
% change

Real exchange
rate with US$

change in
CPI, 2008

Change in

GDP, 2001–07

Source: World Bank and IMF data.

Note: New producers are defined as countries dependent on oil
that began production after 1985 or were established as a country
after 1985, including Azerbaijan, Chad, Equatorial Guinea,
Kazakhstan, Sudan, and the Republic of Yemen (Turkmenistan
lacks data for inflation and the real exchange rate). The
established producers include Algeria, Angola, Republic of Congo,
Gabon, Islamic Republic of Iran, Libya, Nigeria, Oman, and
República Bolivariana de Venezuela. The real exchange rate with
the United States (rather than the trade-weighted real exchange
rate as in figure 3.5) is reported here to include sufficient countries
for a useful comparison between the two groups.

a. Real exchange rate with the U.S. dollar, where increase
indicates appreciation. Data for Equatorial Guinea are for
b. Percentage change in consumer price index in 2008.
c. Change in ratio of government expenditure to GDP from
2001 to 2007.









New producers

Established producers

Figure O.7 Primary commodity exporters are
exhibiting fewer signs of the behaviors
linked to the “resource curse”

Percentage change in the share of GDP

a. Government expenditures have increased by much less
than export revenues









1980s 2000s














Source: World Bank.

b. The currencies of commodity exporters have appreciated

c. Corruption in commodity exporting countries
has declined

Percentage change in trade-weighted real effective
exchange rate

Source: IMF data; World Bank staff calculations.

Note: Increase indicates appreciation.

Source: Kaufmann, Kraay, and Mastruzzi 2007; World Bank data.

Change in

Change in government








Non-oil exporters Oil exporters

1980s boom

Recent boom

Oil and mineral exporters

Agricultural exporters

Diversified exporters

In addition, spending from resource rev-
enues in the private sector remains high. This
is especially true for exporters of non-oil

10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 10

payment difficulties and increase the vulnera-
bility of net importers. In the case of food
commodities, which are mainly consumed in
the same country in which they are pro-
duced, the issue for most countries is one of a
transfer of wealth between producers and
consumers. That said, some countries are sig-
nificant net importers of food and have suf-
fered significant balance of payment impacts
from high food prices as well. Both fuel and
food prices have boosted inflation and cut into
real incomes in developing countries.

In general, economic policy should not re-
sist changes in relative prices but should seek
to assist adjustment to changing circum-
stances. However, the magnitude of the
changes over the past several years has been
unusually large with important implications
for inflation, balance of payments, and poverty
in developing countries. Moreover, because
high food prices can increase malnutrition
among the very poor, resulting in permanent
cognitive and physical damage, even a tempo-
rary but large hike in food prices demands a
prompt and well-targeted policy response.

At the global level, the cost of higher food
and fuel prices to consumers in developing
countries during 2008 is estimated to have
been about $680 billion. The price increases
had major macroeconomic effects. High oil
prices increased current account deficits in a
number of countries by as much as 5 percent
of their GDP. Both food and fuel price in-
creases have led to a sharp uptick in inflation.
In addition, by increasing costs, the food and
fuel increases have increased the number of
poor and the extent of their poverty. In gen-
eral, higher food prices have had a more pro-
nounced effect on poverty, because households
in poor countries spend 50 percent or more of
their income on food and only 10 percent on
fuel. Moreover, for very poor households, food
tends to claim an even higher share in expen-
ditures, and fuel a much lower share. Finally,
the poverty impacts are likely to be more sig-
nificant because the demand for food is more
inelastic than household demand for fuels, be-
cause the former can be replaced by biomass.

Not all foods prices have risen by as much as
the prices for rice, maize, and wheat, however.
Moreover, during 2007 and the first half of
2008, the dollar was depreciating so that local
currency prices rose by less than the dollar
prices. As a result, the real-local-currency in-
crease in the price of food actually consumed in
developing countries was much less than the
54 percent increase observed in internationally
traded and dollar-denominated food prices
(table O.1). Moreover, not all food consumed in
poor countries is traded and the share of non-
traded foods in total consumption varies across
regions. In Africa, for example, real food prices
rose by an average of 8.3 percent, compared
with 19.8 percent in the Middle East, which re-
lies much more heavily on imported foods.

Overall, the rise in food prices between 2005
and the beginning of 2008 is estimated to have
increased the share of the population of East
Asia, the Middle East, and South Asia living
in extreme poverty by 1 or more percentage
points. Impacts in Africa were less pronounced
because food prices rose by less on average and



Table O.1 Food price hikes and consump-
tion shares vary by region

Price share among

Region shock the poor

Rural population
East Asia and Pacific 12.4 71.5
Europe and Central Asia 0.2 63.4
Latin America and the Caribbean 6.9 51.2
Middle East and North Africa 25.9 64.5
South Asia 5.0 65.3
Sub-Saharan Africa 9.6 68.0

Developing world 6.7 66.1

Urban Population
East Asia and Pacific 13.8 67.5
Europe and Central Asia 0.5 57.9
Latin America and the Caribbean 1.6 44.1
Middle East and North Africa 12.5 57.1
South Asia 4.8 64.4
Sub-Saharan Africa 4.9 53.0

Developing world 4.1 60.4

Source: World Bank.
Note: Price shocks differ between the rural and urban popu-
lations because of differing degrees of urbanization among
countries included in the aggregates.

10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 11

because a much larger share of the population
lives in rural areas. In general, rural dwellers
have been less seriously affected because, in ad-
dition to being consumers, many are producers
and benefit from higher revenues. The impact
on the urban poor was much higher, increasing
the incidence of poverty by more than 1.5 per-
centage points in East Asia, the Middle East,
South Asia, and Sub-Saharan Africa (table O.2).
Overall the number of extremely poor is esti-
mated to have increased by between 130 and
155 million, and the poverty deficit (the annual
cost of lifting the incomes of all of the poor to

the poverty line) increased by $38 billion, or 0.5
percent of developing-country GDP.

For the very poor, reducing consumption
from already very low levels, even for a short
period, can have important long-term conse-
quences. Already, higher food prices during
2008 may have increased the number of
children suffering permanent cognitive and
physical injury caused by malnutrition by
44 million. It is therefore critical that coun-
tries react to higher food prices by increasing
the assistance they make available to those
most at risk.

Most countries have reacted to the hike in
food and fuel prices by some combination of
increased government spending on existing
social safety net programs, be they subsidies,
conditional transfer systems, or food distribu-
tion schemes. Others have responded by seek-
ing to hold domestic prices down by reducing
taxes or instituting restrictions on exports.

Such programs have been relatively expen-
sive, increasing government expenditures by
as much as 2–4 percent of GDP. Moreover, in
many cases poor targeting means that much of
this spending does not benefit those most in
need. And, by interfering with market prices,
these programs often impede adjustment, re-
ducing producers’ incentives to increase out-
put and consumers’ incentives to conserve. As
such they likely exacerbated the extent of price
rises and extended their duration.

Going forward, policy makers need to
restructure their support so that it is better
targeted on the very poor. Doing so will help en-
sure that the next time food (or energy) prices
spike, assistance programs will be both more
affordable and more effective at delivering assis-
tance to those most in need. Of the options
available, targeted cash transfers tend to succeed
best because they have relatively low adminis-
trative requirements and minimize the diversion
of benefits toward less needy population groups.
Unfortunately, these programs may also exclude
the many poor who are either unable or unwill-
ing to meet the conditions attached to the pro-
gram, which are designed to dissuade all but the
most needy from participating. In-kind

G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


Table O.2 Higher food prices have
increased both the incidence and severity
of poverty worldwide
January 2005–December 2007

Initial levels: Change in:

Poverty Income Poverty Income
Region headcount gap ratio headcount gap ratio

(percent) (percentage points)
Urban population
East Asia and Pacific 13.2 20.3 6.3 2.7
Europe and

Central Asia 2.5 8.7 0.0 0.2
Latin America

and the Caribbean 3.7 37.6 0.1 0.7
Middle East

and North Africa 2.7 17.8 2.4 5.7
South Asia 32.3 25.0 2.0 0.5
Sub-Saharan Africa 34.1 38.1 1.7 0.3

Developing world 15.3 27.1 2.9 0.5

Rural population
East Asia and Pacific 31.9 23.2 4.9 0.7
Europe and

Central Asia 8.2 6.6 0.0 0.0
Latin America

and the Caribbean 18.6 43.9 0.1 0.1
Middle East

and North Africa 15.4 22.9 0.7 0.9
South Asia 43.3 24.0 0.8 0.3
Sub-Saharan Africa 54.9 41.5 0.3 0.0

Developing world 37.1 28.2 2.1 0.1

Source: World Bank, using the Global Income Distribution
Dynamics model.
Note: The per capita poverty line equals 1.25 international
2005 dollars a day. The ratio of food in total consumption
among the poor is computed as described in De Hoyos and
Lessem (2008). East Asia excludes China, and the Middle
East comprises Jordan, Morocco, and the Republic of Yemen.
The income gap ratio expresses, as a percent of the poverty
line, how much the income of the average poor person is
lower than the poverty line.

10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 12

programs, such as school feeding and the distri-
bution of fortified weaning food for toddlers,
can be effective, especially in fiscally constrained
countries. Subsidies, even targeted ones, tend to
be much less efficient, with as little as one-fifth
of the money spent benefiting the poor. Public
works programs rarely provide sufficient cover-
age to meaningfully target poor families. What-
ever policies are adopted, it is critical that the
offsetting income support be clearly presented
as temporary and include phaseout strategies to
avoid creating an unnecessary longer-term fiscal

The role for international policy
Ultimately, given the scope of the costs in-
volved, neither individual governments nor in-
ternational agencies are in a position to offset
the costs of higher food and fuel prices en-
tirely. However, well-targeted programs are
much more affordable. For the poorest coun-
tries, these too may be beyond reach fiscally,
and in these cases, the international commu-
nity has a role.

Steps so far have concentrated on reallocat-
ing existing funds toward those most in need
and on strengthening both the financial and
infrastructural capacity of emergency food aid
agencies such as the World Food Programme
(WFP). Further steps that might be considered
include providing the WFP with a more stable
source of financing and affording it a line of
credit so that it is able to act quickly in in-
stances where food prices are unusually high.

Policy makers might also examine
prospects for improving the coordinated man-
agement of grain reserves so that they can be
more easily brought to the aid of those in
need. Steps might include the construction
of storage facilities in strategic parts of the
world and the creation of a management
system perhaps along the lines of that used
by the IEA for oil. Individual food-importing
and -exporting nations may wish to explore
the use of market-based future contracts as an

alternative to building stocks and restricting
exports. Such contracts can reduce both price
and quantity uncertainty by providing for
guaranteed delivery of fixed quantities of
grains at fixed prices. They can even be writ-
ten conditionally, providing an option to sell
or buy that can be exercised depending on
market conditions.

Trade reform will necessarily form part of
the solution as well. Steps are required to
sanction effectively countries that use export
restrictions as a mechanism to control domes-
tic prices. Not only do such restrictions
interfere with the domestic supply response,
they also tend to exacerbate the price hikes
and shortages in the rest of the global econ-
omy. Although a successful conclusion to the
World Trade Organization’s Doha Round of
multilateral trade negotiations might result in
higher prices in the short run, it would likely
prove beneficial to developing countries by
improving the competitiveness of their agri-
cultural sectors and reducing their reliance on
imported food.

De Hoyos, R., and R. Lessem. 2008. “Food Shares

in Consumption: New Evidence Using Engel
Curves for Developing Countries.” World Bank,
Washington, DC.

Grilli, Enzo R., and Maw Cheng Yang. 1988. “Primary
Commodity Prices, Manufactured Good Prices,
and the Terms of Trade of Developing Countries:
What the Long Run Shows.” World Bank Eco-
nomic Review 2: 1–47.

IEA (International Energy Agency). 2006. Energy
Technology Perspectives: Scenarios & Strategies
to 2050. Paris: OECD/IEA.

Kaufmann, D., A. Kraay, and M. Mastruzzi. 2007.
Governance Matters VI: Aggregate and Individ-
ual Governance Indicators for 1996–2006. World
Bank Policy Research Working Paper 4280,
Washington, DC.

World Bank. 2007. At Loggerheads: Agricultural
Expansion, Poverty Reduction, and Environment
in the Tropical Forests. Washington, DC: World



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