Low-income countries and commodity price volatility

KEY MESSAGES: ∙ Low-income countries (LICs) are highly vulnerable to fluctuations in commodity prices. Excessive price volatility complicates macroeconomic management and can worsen long-run growth and development prospects. ∙ Financial speculation has caused price volatility in the international markets beyond what could possibly be explained on the grounds of fundamentals of supply and demand alone. ∙ Field studies of the cotton and coffee sectors in Tanzania and Uganda show that sound market structures and institutions need to be in place for producers, households and villages to cope with price shocks. ∙ The case study of copper in Zambia highlights the extraordinary difficulties LICs encounter in devising appropriate monetary and exchange rate policies over the commodity price cycle. ∙ Overall, we reach the conclusion that LICs' vulnerability to commodity price volatility requires international support targeting supply-side constraints, together with the establishment of a financing scheme compensating the effects of price shocks. Of course, it is crucial that international support be premised on the pursuance of sound governance and macroeconomic policy at the domestic level. ∙ In support of our argument for an increased role of foreign aid as a temporary device to counter excessive price volatility, we outline the main features of our proposal for such a compensatory financing mechanism and show, in the case of Uganda, that its application would be highly effective and relatively cost-efficient in achieving the goal of increased protection from price volatility and trade shocks more in general

Macroeconomic Stability in Resource-rich Countries: The Role of Fiscal Policy

Resource-rich countries face large and persistent shocks, especially coming from volatile commodity prices. Given the severity of the shocks, it would be expected that these countries adopt countercyclical fiscal policies to help shield the domestic economy, either through larger spending at times of commodity busts or lower spending during commodity booms. Taking advantage of a new dataset covering 48 non-renewable commodity exporters for the period 1970–2014, we investigate whether fiscal policy does indeed play a stabilizing role. Our analysis shows that fiscal policy tends to have a procyclical bias (mainly via expenditures) and, contrary to others, we do not find evidence that this bias has declined in recent years. Further, we find that the adoption of fiscal rules does not seem to reduce procyclicality in a significant way, but the quality of political institutions does matter. Finally, we find that non-commodity revenues tend to respond only to persistent changes in commodity prices

Lessons Learnt from the Nordics: How to Fight Long-term Unemployment

This study examines policies that can successfully address long-term unemployment. It focuses on Denmark and Sweden, where, despite sizeable job losses during the crisis, labour market indicators are at present better than in any other EU country. By looking at the interaction between labour market flexibility (especially in hiring and firing regulations) and passive and active policies, we argue that well-designed active policies matter more than labour market flexibility for employment