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A global commodity shock without parallel

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For nearly 30 years, greater trade, investment and innovation bolstered an unprecedented era of prosperity—and brought the world closer to ending extreme poverty.  It allowed the incomes of the poorest nations to narrow the gap with the wealthiest and reduced the frequency and severity of national economic crises.

Then, in quick succession, two shocks brought progress to a halt. For developing economies, the war in Ukraine erupted before they had a chance to dig out from the COVID-19 recession—and already it’s clear that the economic damage will be both severe and long-lasting. The war has delivered the largest commodity-price shock we’ve experienced since the 1970s. It will likely shave a full percentage point off global growth in 2022.

The war has also shifted global patterns of trade, production, and consumption of commodities in ways that might keep prices high for years.  Many countries are turning away from Russia as a coal and oil supplier and have been finding alternatives in more distant locations. Other major coal importers could undercut this by dropping current suppliers and turning to Russia. The result may be greater transportation distances that make the diversion costly, because coal is bulky and expensive to transport. Similar diversions have begun to occur with oil and gas.

Those developments will be especially hard on the world’s poorest people. Higher food and energy prices consume a larger share of the incomes of poor households than wealthier households. Most poor countries are oil importers—so higher energy prices will strain government budgets that were already depleted by the COVID-19 crisis. At the same time, surging prices of fertilizers—some of which are at levels not seen since 2008—could lead to reduction in their use. The result: lower agricultural yields and further reductions in the availability of food.

Commodity price shocks have the potential to change production and consumption patterns in beneficial ways. In the aftermath of the 1973 shock, for example, fuel-efficiency requirements for U.S. automobiles rose significantly—from 13 miles per gallon to 20 miles per gallon by 1990. U.S. lawmakers also put in place regulations prohibiting the use of crude oil in electricity generation. In both cases, the effect was to reduce demand for high-priced energy while also contributing to a cleaner environment. In general, most countries responded to the 1970s oil shocks by finding ways to reduce demand for oil, boost production, or switch to alternative energy commodities. 

Implementing such options today, however, will be more difficult. First, governments now have less room than they did in the 1970s to switch to cheaper energy alternatives: prices have increased across the board, affecting all types of fuels. Second, oil consumption as a share of global GDP and total consumer spending is smaller than it was in the 1970s—especially in advanced economies. Higher prices, as a result, are less likely to restrain energy demand. Third, governments have reacted so far by reducing fuel taxes or introducing fuel subsidies. Regardless of their temporary benefits, such policies are likely to prolong the crisis by increasing demand for energy.

Persistently high energy prices are also likely to hurt another crucial global development objective: the clean-energy transition necessary to tackle climate change.  Some countries do intend to boost the production of renewable energy and lower carbon-intensive fossil fuels such as gas, but such projects will take time to materialize. In the meantime, several countries have opted instead to ramp up production and use of cheaper fossil fuels. China, for example, plans to increase coal production by 300 million tons—equal to 8 percent of current levels.

Overcoming a global crisis requires global cooperation, of the type that prevailed for the past three decades and from which smaller, poorer countries benefit more. The war may have upended many traditional incentives for such cooperation, but governments everywhere can still minimize harm to their most vulnerable citizens—and to the global economy. Five actions would help greatly :

First, encourage a robust supply response for grains, cooking oils and fertilizers by productivity-increasing policy reforms, rationalizing farm subsidies, and trade facilitation.  The response of markets to higher prices is greater supply; in many cases this takes months, not years.

Second, bolster targeted social-safety-net programs such as cash transfers, school feeding programs, and public works programs.  These can go a long way to shielding poor households from the effects of higher prices—and they’re a better use of resources than subsidies. If subsidies must be used, specify that they will be limited in size and temporary.

Third, resist the temptation to impose import and export restrictions on the movement of food.  We know well from past food crises that they only make the problem worse.

Fourth, seize every opportunity to bolster international cooperation to improve market transparency and coordinate policy responses. 

Finally, ramp up investment in energy efficiency and renewable energy —particularly insulation and weatherization of buildings that protect against both cold and heat. Such policies can help achieve climate objectives and lower costs for households. In the long run, they will also improve energy security.

Over the past two years, a succession of overlapping crises has left governments across the world with little room for maneuver and no margin for error. The choices policymakers make during the next year may well determine the course of the next decade. They should spare no effort to increase economic growth at home—and resist all actions that could harm the global economy.


Indermit Gill

Chief Economist of the World Bank Group and Senior Vice President for Development Economics

M. Ayhan Kose

Deputy Chief Economist of the World Bank Group and Director of the Prospects Group, Development Economics

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