The Impact of Commodity Terms of Trade in Africa

Abstract

The sharp increase in commodity prices that began in the early 2000s resulted in a marked improvement in terms of trade for Africa. Since then, commodity exporters’ terms of trade have declined despite a very moderate recovery in mid-2016. Terms of trade still remain higher than they were at the turn of the century, giving the false impression that conditions still favor Africa. The evidence, however, suggests that the commodity-driven prosperity has ended or, at best, has been interrupted for a long time to come. Some of these losses have not been realized fully because of unsustainable macroeconomic and foreign borrowing policies. These policies cannot be sustained, and the actual losses will catch up even if terms of trade do not deteriorate further. The complacency engendered by the relatively high gross domestic product (GDP) growth rates is misplaced, given the very rapid rate of population growth in Africa both in absolute terms and as compared to most other regions of the world. On the basis of the analysis presented in this article, a further decline or even stable terms of trade can be expected to have a significant negative effect on African economies. Many policymakers believe they are choosing between continued growth on the basis of present policies, or painful adjustment, usually imposed from outside. However, adjustment is inevitable. The real choice is between orderly and internationally supported correction and disorderly and disruptive crisis if current policies continue. It is imperative for the African countries, both highly concentrated exporters and more diversified economies, to focus on macroeconomic sustainability. In today’s adverse circumstances, and particularly given the fragile fiscal positions and mounting debts of many African countries, these policies are only possible if the economy adjusts to a sustainable path. Time is of the essence, and a conscious break with a policy of short-sighted comfort is required.