Commodity price fluctuations and development: perspective from emerging economies

This paper aims to examine the impact of commodity price changes (crude oil, cocoa, coffee, cotton and gold) on the international market on development (development proxied by the human development index) (HDI) among emerging economies in Sub-Saharan Africa (SSA).

Empirical estimates verifying theorized relationships in question were performed using the two-step system generalized method of moments framework.

Results from the empirical estimates suggest that a percentage increase in the prices of crude oil, cocoa and gold in the world market have a significant positive influence on development among economies in the sub-region all things being equal; however, similar price changes in cotton and coffee showed a negative effect on development. Further empirical estimates suggest that the extent to which prices of key commodities such as crude oil, influence development in the sub-region benefit less from institutional variables such as government effectiveness, corruption control and political stability. The same institutional variables, however, were found to augment how changes in cocoa prices influence development among economies in the sub-region.

This study specifically examines the extent to which commodity price fluctuations impact a holistic measure of development, (HDI which inherently captures economic growth) among emerging economies such as those in the SSA region, and how such relationship may be moderated by conditions such as corruption control and government effectiveness. The review suggests that such a study is rare, did not find any specific empirical inquiry focusing on what this study is designed to accomplish. A major gap or deficit identified among most reviewed studies is the failure to verify how the surmised relationship between movements in prices of commodities traded on the international market and development is moderated by institutional factors such as corruption control, government effectiveness and political stability. This study specifically examines such interaction effects in its empirical analysis.