COMMODITY EXPORT BOOMS IN DEVELOPING COUNTRIES

Abstract

This article surveys the experiences of commodity-exporting countries faced with resource discoveries and widely fluctuating world prices. Favorable developments of the commodity export market often prove to be a mixed blessing, as poor boom management leads to major internal and external economic imbalances. Many developing countries overconsume during boom periods. More often than not, the unsustainable increases in spending are initiated by the public sector. When the boom ends, tardiness in decreasing government spending and in increasing revenues from nonbooming sectors creates fiscal deficits and monetary control problems. In the 1970s many booming economies allowed regulated price structures, and particularly exchange rates, to deviate substantially from free market levels, discouraging efficient resource allocation and greatly compounding the problems of adjustment to subsequent drops in export prices. Countries that managed booms well were typically those that (a) did not allow fiscal variables, exchange rates, agricultural producer prices, and wages to get badly out of line, (b) avoided indulging in wasteful and inefficient investment or investment that involved burdensome recurrent costs, (c) limited increases in government spending to levels consistent with long–term trends in revenue collection, and (d) maintained prudent external borrowing and foreign exchange reserve policies.

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