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In the current literature, a universal definition of emerging markets does not exist. A fundamental reason behind that matter is the fact these markets are heterogeneous on the development spectrum, and therefore cannot be clustered by income level or geographical location (Zhang & Gao, 2015). Despite this, the economic future of these emerging markets has always been traditionalised by optimism and prosperity. Since the early 1990’s, the emerging economies have provided a key source of growth for the global economy. The markets of, most notably, China and India, have strongly fuelled such growth; considerably aided by their respective structural comparative advantages, large populations, age composition, and low-income levels. This has facilitated the emerging market share of global output to rise steadily. For instance, the BRIC countries in 1990 accounted for only 11% of the world’s GDP; that figure rose to almost 30% just twenty-five years later (Mminele, 2016). This increased amount of trade has resulted in technology and knowledge spill-overs through increased levels of foreign direct investment (FDI), which have allowed the emerging markets to develop faster; towards a state of convergence with the developed world. As a result, the emerging economies have recorded extreme growth, highlighted by the creation of investment opportunities, particularly those arriving from developed markets (Beckmann et al., 2015).
However, more recently the above-mentioned structural advantages are somewhat fading and the achievement of rapid growth rates has become more difficult to achieve, due to increased trade uncertainty and financial volatility present in world markets. The development of a country’s increased openness to trade has the potential to create trade dependency for certain markets, in particular, commodity markets. Therefore, although economic openness is viewed as being beneficial for development, the persistent volatility of commodity prices, often generated exogenously, provides a serious development challenge to those emerging economies through increased economic vulnerability. Poelhekke and van der Ploeg (2007) conducted an analysis of more than 60 countries between 1970 and 2003. Their results found considerable evidence towards the ‘core-periphery asymmetry’ hypothesis regarding volatility. As a result, they concluded that “the volatility influence is far greater in the poor periphery”.
Economic vulnerability refers to the risk of being negatively affected by shocks of any kind, a susceptibility to exogenous shock (Guillaumont, 1999), i.e., unforeseen and uncontrollable, shocks, in this case, the volatility of commodity prices on the international market. It can be viewed from a static standpoint, such as the immediate welfare cost of a shock, or a dynamic point of view, as the resultant consequences of such shocks on other crucial factors like growth and poverty reduction (Combes & Guillaumont, 2002).
Guillaumont (1999) segregated vulnerability into three elements; the potential size of the shocks, the exposure to them, and the country’s capacity to react to them. The latter is referred to as ‘resilience’. For example, the vulnerability of a commodity-exporting country thus depends on fluctuations in world prices for its exports; reflected by the instability of its terms of trade, in this case, commodity terms of trade (CToT). Thus, its exposure to these fluctuations is represented by the ratio of commodities export to GDP. Finally, the level of resilience purely depends upon the policy pursued by the respective government.
The specialisation in agricultural production is a core reason behind higher volatility in emerging markets. Thus, a desire towards government interventions to stabilize commodity prices, in particular, domestic food prices, commonly arises due to the fact households value price stability but also the poor are widely perceived to suffer disproportionately from food price instability (Lu et al., 2019). IMF (2011) reported that food price shocks have a large effect on inflation, in particular, in countries with a high share of food price in the Consumer Price Index (CPI), as seen amongst emerging economies. This reinforces the challenge to develop and implement structured policies to deal with food price volatility in emerging economies in the long-run; particularly as a result of agricultural–labour market linkages, higher commodity prices may also lead to higher wages; affecting potential economic development.
In December 2010, food price volatility reached its highest level in almost 30 years (Food and Agriculture Organization 2010). Primary products experience far greater price volatility than the manufacturing or service sectors (Loayza et al., 2007). Price fluctuations are both a standard and required attribute and a for the presence of competitive markets. However, the issue arises when such price movements are increasingly volatile; uncertain and subject to extreme swings. Consequently, that’s why governments, particularly across the emerging world, frequently consider commodity price stability to be an important goal of economic policy and vital for development. Though, policy instruments to stabilize prices, such as buffer stocks or variable tariffs, are often associated with limited success. (Bellemare et al., 2013).
De Cavalcanti et al. (2015) illustrated that the source of the coined-term ‘resource curse’ is not due to the abundance of the resource itself within a country but instead the volatility in commodity prices. Due to the exposure to international commodity markets and their resultant price swings, resource revenues are highly volatile for primary-product abundant countries. The results from their sample of 62 primary commodity exporters indicate that higher volatility of commodity terms of trade (CToT) harms growth. They conclude that such volatility represents a fundamental barrier to economic prosperity, but only in commodity-exporting countries. In late 2015, Goldman Sachs closed its BRIC investment fund, highlighting the issue of recent falling commodity prices and resultant weak global growth. Its assets fell a staggering 88% in value from their peak in 2010, mainly as a result of the collapse in oil and other commodity prices at that time (McLannahan, 2015).
Overall, the volatility of commodity prices poses a great challenge to the world’s emerging economies. Therefore, while export growth promotes economic growth, export instability will diminish it. Emerging markets are more volatile than rich countries and this volatility poses a threat to their growth performance (Bellemare et al., 2013). As per Poelhekke & van der Ploeg (2007, p. 3) the volatility of commodities is ‘‘the main reason why natural resources export revenues are so volatile’’ and thus why those pose a considerable threat to the development of emerging economies. Stronger governmental macroeconomic policies, as well as export diversification, can aid in tackling the fundamental issue of commodity price volatility (De Cavalcanti et al., 2015).
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