Abstract
The terms of trade have an especially marked impact on the economies of developing countries. Someresearchers suggest that terms of trade fluctuations are twice as large in developing countries as in developedcountries. This movement in their terms of trade is a key determinant of macroeconomic performance and has animportant impact on real national income resulting in terms of trade shocks. But African countries have notresponded appropriately to these shocks hence this study was carried out to compare the impacts of theapplication of policy adjustments to terms of trade shocks among selected African countries, and to assess theextent to which these countries respond to the shocks. The study decomposed and estimated critical performancemeasures of the economic impacts of these adjustments to terms of trade shocks in these countries for the period1970-2009 into quantifiable economic indicators namely: changes in import intensity, economic compression,export promotion and external debts. The application of the McCathy, Neary and Zanalda (1994) methodconfirms that adverse terms of trade shocks are not only high in Africa but that policy indicators refuse to adjustappropriately in the face of steep fall in export prices as clearly seen in the 1980 to 1984 period for Gabon andNigeria. Secondly, the application of a Wilcoxon Matched-Pairs test reveals that the impact of policy responsesto terms of trade shocks in oil exporting countries and agricultural commodity exporting countries of Africa aremarkedly different. The study, therefore, advocates that African countries should, henceforth, take practical stepsto ameliorate the adverse effects of terms of trade shocks by carefully selecting and engaging policy thrusts thatsuit their particular economic problems and environments.
Highlights
Introduction“All that Glitters May Not Be Gold” is the title of the Inter-American Development Bank 2007 Annual Report, partly in reference to the fiscal positions of Latin American countries during the latest boom in commodity prices
The terms of trade have an especially marked impact on the economies of developing countries
In the policy debate on the causes of the steady deterioration in the Sub-Saharan Africa’s export performance since the early 1970’s, it has been argued that African governments have handled terms of trade shocks extremely badly and that inability to cope with external shocks has contributed to Africa’s debt problems and very low rate of economic growth (Cashin and Pattillo, 2000)
Summary
“All that Glitters May Not Be Gold” is the title of the Inter-American Development Bank 2007 Annual Report, partly in reference to the fiscal positions of Latin American countries during the latest boom in commodity prices. A characteristic common to the commodity-exporting developing countries of Africa is that movement in their terms of trade is a key determinant of macroeconomic performance and has an important impact on real national incomes (Cashin and Pattillo, 2000). The relationship between terms of trade shocks and economic development in Africa is an important issue because of its implications on the resources accruing from commodity exports The impacts of such shocks have been extensively documented. In the policy debate on the causes of the steady deterioration in the Sub-Saharan Africa’s export performance since the early 1970’s, it has been argued that African governments have handled terms of trade shocks extremely badly and that inability to cope with external shocks has contributed to Africa’s debt problems and very low rate of economic growth (Cashin and Pattillo, 2000). How effective are policy responses to terms of trade shocks in Africa? Are the impacts of policy responses to terms of trade shocks in oil exporting countries and agricultural commodity exporting countries of Africa the same? To effectively proffer answers to these questions, this study will attempt quantitative estimation of the impact of the responses to terms of trade shocks on the macroeconomic variables highlighted earlier in the selected African countries
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