Financial Market Crises and Natural Resource Production
International Review of Finance, Vol. 10, No. 1, pp. 93-124
41 Pages Posted: 8 Nov 2009 Last revised: 24 May 2010
Date Written: August 11, 2009
During a financial crisis, the loss of access to world capital markets may force heavily indebted countries to accelerate their production of exhaustible resources. Few studies consider the impact that financial crises have on real behavior, and no existing studies appear to consider the impact a crisis might have on resource production. We find that four major state-owned enterprises in Brazil, Chile and Mexico substantially expanded their production and world market share of copper, iron ore and oil during the 1980s international financial crisis. There was also a very large expansion, followed by a sharp contraction, of production of tin in Brazil and silver in Mexico. In contrast, Indonesia – a major resource producer who did not succumb to the 1980s financial crisis – did not accelerate production during the 1980s crisis, and resource production in the U.S. sharply contracted during this period. Our study provides new insights into why the prices of natural resources are so volatile and highlights a previously unexplored reason for financial contagion: one country’s efforts to service its debt can drive down resource prices and revenues to other indebted resource producers.
Keywords: Financial market crises, Debt crises, Government budget constraint, Exhaustible resources, Resource depletion
JEL Classification: F34, Q32
Suggested Citation: Suggested Citation