Marcelo GiugaleWorld is the World Bank’s Director of Economic Policy and Poverty Reduction Programs for Africa
The average developing country lives off exporting commodities like oil, gas, copper, cocoa or soybeans. The sale of these resources brings both revenue to the government and foreign currency to import what is not produced at home–which, in these places, tends to be most things. So whatever happens to the price of those commodities matters a great deal for development and, even more, for the war on poverty. The problem is that those prices are famously volatile.
They can jump up and down seemingly at random, from year to year, month to month, even within a single minute. This makes life miserable for those who have to plan public investments in schools, hospitals or roads. Statisticians and investors have studied the problem to death, not least because there is a lot of money to be made if you can find a predictable pattern. And despite all their efforts, they have come up mostly empty-handed.
Mostly. There has always been suspicion that, if you took a really long view–we are talking centuries here–you might uncover periods of about forty years when commodity prices steadily climb for a decade or two, only to fall slowly back to where they were. That is, you might uncover “super-cycles”. It may sound crazy but, before anyone could actually find one, plenty of theories were put forward to explain why super-cycles happened and what to do about them.
The stories went more or less like this: a technological innovation triggers a period of prosperity in a large, advanced country–after all, they have most of the scientists–and its industries and cities begin to demand more energy and food from abroad. Think of Britain’s industrial revolution in the late 1700’s sucking raw materials from the developing world and you’ll get the picture. Prices for coal, cotton, sugar, tea and the like go up and greater quantities are produced. But over time, the innovation wears out, demand dwindles right when supply is growing, and the prices of commodities tumble. End of the super-cycle.
Now, all this could have just been a topic of academic banter–fun but inconsequential. Except that it came with a dangerous recommendation to governments in poor countries: try to use the times of commodity bonanza to create local industries, at any cost, even if you have to use taxpayers’ money. Otherwise, you will be left with nothing when the down-turn comes. Many heeded the advice and followed this path, with disastrous results, from isolation to corruption to inflation. [If you are a Latin-American over 50, you probably suffered through this.] Remember, this advice was based on a phenomenon that we could not see! By the late 1980’s, two Nobel-laureate economists had denounced super-cycles as, well, baloney.
Was it? In 2012, new research claimed to have found evidence of commodity super-cycles. What’s more, it suggested that we may be in the middle of one as we speak. The claim is based on two methodological break-throughs. One is better and longer data. The other is a statistical technique called “the band-pass filter”–you really don’t want to know, but think of it as playing with your camera’s zoom until you get the right photo of your son’s entire soccer team.
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