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Prospects Weekly: Prices of internationally traded commodities have been much more stable

Global Macroeconomics Team's picture

Measured in real local-currency terms, prices of internationally traded commodities (including food) have been much more stable than prices measured in nominal US-dollar terms, both because of dollar volatility and inflation. Domestic prices, which are the most relevant for the poor, depend mainly on domestic rather than international factors and have been very variable. Renewed debt-sustainability concerns in high-income Europe led to weakened capital flows to developing countries in the past month. Markets appear to have stabilized this week after details on how future bailouts will be handled were made public and the ECB announced that it will continue purchasing bonds and supporting bank liquidity. European and U.S. job losses are very concentrated sectorally. Increasingly, policies to facilitate the reallocation of resources away from structurally uncompetitive sectors may be more effective than demand stimulus in reducing joblessness.
Real local-currency prices of internationally-traded commodities have been more stable than nominal US-dollar prices, partly because of dollar depreciation and accumulated inflation. For example, although the dollar price of internationally traded foods rose 17.2% between June 2010 and September 2010, the euro price rose only 9.4%. And, although dollar food prices are now 83% higher than in 2005, they are only 62% higher in real dollar-terms. Because of dollar depreciation and high inflation in developing countries, the real local currency price of internationally-traded food commodities in developing countries rose even less. Domestic food is mainly comprised of locally produced foods and their prices mainly depend on local crop conditions, subsidies, taxes and transport costs rather than international prices. Thus, even as world grain-prices jumped in mid-2010, in many poor African countries local food prices fell on improved crop conditions. 
Renewed debt-sustainability concerns in high-income Europe have weakened capital flows to developing countries in the past month. Events leading to and following the bailout of Ireland by the IMF and the EU caused CDS spreads in several high-income European countries to rise once again. They now match or surpass their May 2010 levels. Partly reflecting the uncertainty generated by this situation, international capital flows to developing countries slowed in November, as they did in May. In November, equities in developing countries lost between 1.2% and 8.9% of their value, and bond issuance fell to $15bn from an average of $20bn between July and October 2010. This has helped ease the upward pressure on currencies that has been evident in many developing countries. 

Job losses in Europe and the United States have been concentrated sectorally, constraining economic recovery.  For example, between August 2008 and September 2010 U.S. employment in construction and manufacturing fell 23% and 14%, respectively (together accounting for 46% of total U.S. job losses), much more than the 3% decline in the rest of the economy. Among high-income European countries, job losses range between 7% and 40% in construction and between 5% and 19% in manufacturing—accounting for more than all of the net job losses in the EU in 2009. A similar pattern is evident in developing Europe and Central Asia. In Russia, nearly 30% of the jobs lost in 2009 were in manufacturing and construction. In these circumstances, structural policies that facilitate labor-market adjustment and new job-creation are likely to be more effective than demand stimulus in combating unemployment.

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