Boom Will Not Continue For Long, Says World Bank

The commodity trading in large volumes on the international markets in New York, Chicago, London and Rotterdam involves much speculative buying and selling in anticipation of high price realisation at a later date.

This is basically the commodities futures trading.

This buying on paper in anticipation of selling again on paper on speculative purchase involves the element of risk due to the cycle of boom and bust.

The World Bank has come out with a booklet which has studied the cyclical nature of the booms and busts that mark the commodity markets.

It features a foreword by the Bank vice-president and chief-economist, Michael Bruno.

 

This is could be the first lesson for Indian commodity producers, plantation crops and oilseeds being the major commodities that are traded on the international commodity markets.

India is setting up futures trading in spices/pepper in Kochi.

It is the time for growers of crops such as coffee, rubber, oilseeds and other commodities to know that these commodities can now go global. In the booklet, it has also warned that the commodity exporting countries should be careful not to overspend or over commit themselves in the future. It has also studied the experience of developing countries in earlier boom-bust cycles and attempts to draw some lessons on management of commodity price volatility.

The document, while cautioning governments against long term spending commitments on the basis of the increased revenues and earnings in a boom, suggests that earnings could also be used for liberalisation of imports. All this will improve economic efficiency and produce permanent income gains, it suggests.

The study does not reveal what would happen to countries when the commodity boom cycle ends and export earnings fall.

Nor does it say anything on how the equally long term commitments of eased (and not easily reversible) capital controls and liberalised imports would be maintained and paid for.

It has stated that in the current boom, in doller terms, Malaysia has registered the biggest gain of $1.76 billion.

Palm oil leads the way with increased earnings of $1.36 billion, followed by rubber. Other beneficiaries were coffee exporters Brazil and Colombia in particular.

The other was Indonesia, with $400 million from rubber sales, $300 million from palm oil and $ 300 million out of coffee.

In Africa, Cote dIvoire gained $ 4,250 million on cocoa and $200 million on coffee.

The study talks of the detrimental effects to long-term economic growth because of fluctuating GDP and investments and the need for counter-cyclical fiscal policies.

The document also warns of the effects of soaring foreign exchange earnings during a boom, resulting in excessive appreciation of the currency, making some tradeable sectors less competent on global markets.

They say that this phenomenon known as the