Commodity Price Volatility and World Market Integration Since 1700
David S. Jacks
Simon Fraser University (SFU) - Department of Economics; National Bureau of Economic Research (NBER)
Kevin H. O'Rourke
University of Dublin, Trinity College; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Jeffrey G. Williamson
Harvard University - Department of Economics, Laird Bell Professor of Economics, Emeritus; Honorary Fellow, University of Wisconsin - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
CEPR Discussion Paper No. DP7190
Poor countries are more volatile than rich countries, and we know this volatility impedes their growth. We also know that commodity price volatility is a key source of those shocks. This paper explores commodity and manufactures prices over the past three centuries to answer three questions: Has commodity price volatility increased over time? The answer is no: there is little evidence of trend since 1700. Have commodities always shown greater price volatility than manufactures? The answer is yes. Higher commodity price volatility is not the modern product of asymmetric industrial organizations - oligopolistic manufacturing versus competitive commodity markets - that only appeared with the industrial revolution. It was a fact of life deep into the 18th century. Does world market integration breed more or less commodity price volatility? The answer is less. Three centuries of history show unambiguously that economic isolation caused by war or autarkic policy has been associated with much greater commodity price volatility, while world market integration associated with peace and pro-global policy has been associated with less commodity price volatility. Given specialization and comparative advantage, globalization has been good for growth in poor countries at least by diminishing price volatility. But comparative advantage has never been constant. Globalization increased poor country specialization in commodities when the world went open after the early 19th century; but it did not do so after the 1970s as the Third World shifted to labor-intensive manufactures. Whether price volatility or specialization dominates terms of trade and thus aggregate volatility in poor countries is thus conditional on the century.
Number of Pages in PDF File: 38
Keywords: Commodity prices, development, history, volatility
JEL Classification: F14, N7, O19working papers series
Date posted: March 11, 2009
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