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Managing Booms: What Works for Producers

Global Economic Prospects 2009: Commodities at the Crossroads

The supply of oil and metals did not keep up with stronger demand, resulting in a price boom. In grain markets, demand was relatively stable but diversion of some grains toward biofuel production had a ripple effect, contributing to price rises for other crops.

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Historically, extractive economies have tended to perform less well than more diverse economies, reflecting an underperformance of their non-resource sectors. However, resource dependence need not result in slow growth. In order to generate strong growth in resource-dependent economies, governments need to:

  • Avoid increasing government spending during booms and then decrease it during busts
  • Prevent excessive currency appreciation (caused by strong revenue inflows) that hurts the competitiveness of other non-resource sectors of the economy
  • Create a regulatory and politico-legal environment that discourages rent-seeking behavior, corruption, and political violence.

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In fact, commodity-dependent countries have been managing their recent revenue windfall better than they have in the past.

Encouragingly, many have reined in their fiscal spending during the boom, and corruption has improved among commodity exporters, relative to diversified exporters.

Exceptions include newly independent commodity exporters and states with new-found resource wealth. Here, government spending has kept pace with or even exceeded export revenues, and currencies have appreciated more strongly than those of more experienced economies.

In addition, oil exporters with low reserves are not saving much more than those with high reserves. This affects the future competitiveness of their non-oil sectors, because they will have to fall back on these sectors for future growth.

Spending from resource revenues in the private sector remains high, especially for non-oil exporters (such as agricultural producers). Much of this spending is directed toward investment, which should contribute to future production potential.

However, in many African countries, investment has been financed by heavy bank borrowing, which may cause problems now that access to credit has tightened.

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Figure 0.7

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