The Prebisch-Singer Hypothesis with Comovements and Structural Changes

Abstract

The Prebisch-Singer (PS) hypothesis [Economic Development of Latin America and Its Principal Problems, United Nations Publications: New York, NY, (1950); The Distribution of Gains between Investing and Borrowing Countries, American Economic Review , 40 (1950) 473-485] implies that there should be a declining trend in the prices of natural resources (primary commodities) relative to that of manufactured goods, in the long run. We examine the validity of this hypothesis, which has important implications for resource management, growth, and terms of trade in developing countries. Key to this analysis is whether these prices are nonstationary, and several early studies found that they are [Ahrens and Sharma, Trends in Natural Resource Commodity Prices, Journal of Environmental Economics and Management , 33 (1997) 59-74; and Berck and Roberts, Natural Resource Prices? Journal of Environmental Economics and Management , 31 (1996) 65-78]. However, Lee et al. [Non-Renewable Resource Prices, Journal of Environmental Economics and Management , 51 (2006) 354-370], found these series are stationary. We build on that foundation and consider comovements in relative commodity prices with a dynamic factor model and a Fourier function to capture smooth structural breaks, and find significant evidence in favor of the PS hypothesis from 1900 to 2018.

Keywords: C12, C23, F00, F10, F30, F31