Tuesday, May 10, 2011

Positive side of commodities

Last time I wrote about commodities and economic growth, I got some good comments that are worth expanding on a bit.  In particular, there is the question of the potentially positive consequences of a decrease in commodity prices, which otherwise are problematic for countries that are highly dependent upon them.

  • As commodity prices drop, so will inflationary pressures.  Chile might be experiencing that now.  Across the region, inflation is not high by historical standards but has been going up.
  • Commodity booms often entail currency appreciation (check out Brazil and Chile in this graph).  If that is reversed then other exports can become more competitive.  Currencies do seem to be slipping, but the $100,000 question is whether industrial exports will make up for the loss of revenue from commodities.
So the glass need not always be half empty.  Nonetheless, the underlying problems of dependency remain serious.


JHD 12:25 PM  

If the Latin American economy has matured and diversified enough to survive a drop in commodity prices then I think we can begin to believe in the future of Brazil as one of the next great economic and policy powers not only in the region but in the world. I think they will have to prove they have broken the boom/bust commodity cycle. I'm optimistic, but I'm not an economist, either. Of course the swelling middle class may get antsy with the PT and shift things to a more aggressively neo-liberal party - and that could have grave long term consequences ala Argentina.

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