Commodity Price Volatility, Vulnerability and Development

Abstract

This article examines the meaning and consequences of the developing countries’ vulnerability to the volatility of commodity prices. It first considers how to define and measure a country’s shocks and exposure arising from commodity price volatility in order to identify structural as distinct from policy vulnerability. The main channels through which price vulnerability influences economic growth are then presented. Finally, the policy implications for development aid, its allocation and design, are outlined. It is found that, while structural vulnerability is bad for growth, a policy of openness contributes to resilience. With the right rules, aid could play an important growth‐enhancing and poverty‐reducing role if allocated at least partly on the basis of vulnerability.

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