With multiple investment banks signposting the end of the commodity supercycle, a World Bank director has warned developing countries that have benefited from the surge to protect themselves against a price crash. Marcelo Giugale, the World Bank’s director of economic policy and poverty reduction programs for Africa, told CNBC that states which have gained from the commodity boom should prepare for a slump.
“We don’t want another wasted opportunity,” he said. “This time around, things should be done differently. The material bonanza has the potential to become a human bonanza – whereby the standard of living for many people across these developing countries can be raised.”
The high prices of commodities, such as industrial metals and oil, have boosted the revenues of countries rich in these resources. But notoriously volatile commodity markets have had catastrophic consequence for countries in the past. The so-called Commodity Crisis of the 1980s saw countries in Latin America and Africa battle financial, social and political instability, following rapid, commodity-driven expansions.
Economists describe the apparent pattern in these price booms and busts as the commodity supercycle, with decades of rising prices followed by a crash.
Last year, Columbia University’s Bilge Erten argued there have been three complete supercycles of between 30 and 40 years: the first peaking in 1917, the second in 1951 and the third in 1973.
We are in the midst of the fourth cycle, she said, which began at the start of the century and is driven primarily by the industrialization of China.
“It is not clear how long this cycle is going to be,” Erten told CNBC. “Overall, we found that supercycles have between 15 and 20 years of expansion. We’ve had about 10 years of expansion since 2000 so we have maybe five more years to go if this cycle fits the pattern of previous ones.”
But a number of economists – including Giugale – are far from convinced that these supercycles even exist.
“The commodity supercycle has been to economics what the Higgs boson has been to physics – all theories point towards their existence but we’ve never been able to see it,” Giugale said.
China’s Appetite
The rate of growth in China, the world’s largest consumer of industrial metals, would be crucial to prices, Giugale added.
Until recently, China had seen decades of unprecedented growth, driving up the price of commodities amid increasing demand.
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