Impact of commodity markets on economic development in Sub-Saharan Africa

Ocran, Matthew Kofi (2007-12)

Dissertation (PhD)--University of Stellenbosch, 2007.

Thesis

ENGLISH ABSTRACT: Commodity issues have assumed renewed importance in debates about the attainment of the United Nation’s Millennium Development Goals for Sub-Saharan Africa and objectives of the New Partnership for Africa’s Development. For instance thirty-four countries in Africa depend on up to three commodities for more than half of their foreign exchange earnings. Despite the importance of commodity markets to economic development on the continent commodity-related research has not attracted the needed attention. The study considered eighteen primary commodities exported by most countries in Sub-Saharan Africa. The commodities were drawn from metals, agricultural raw materials, food and energy sub-groups. This dissertation presents results of research work underlying six stand-alone essays focusing on the relationship between commodities and various aspects of economic performance in Sub-Saharan Africa. Whilst three of the six essays dwelt on issues affecting commodities of interest to most African countries the others considered particular commodity markets in a selected number of countries. First the relationship between commodity markets and economic growth is studied. The second essay examined trends and volatility in Sub-Saharan Africa’s key commodity prices over the past four decades. Role of commodity prices in macroeconomic policy in South Africa is also investigated using a new research approach. The fourth essay estimated the supply response of a number of tradable and non-tradable agricultural commodities in Ghana. In the fifth essay a range of volatility forecasting models were evaluated using eighteen commodity spot prices. The last essay examined the interaction between changes in commodity prices, money supply, inflation and the real exchange rate in Ghana, Nigeria and South Africa. The findings of the study indicate that a negative relationship exist between extent of primary commodity dependence and economic growth. The study also revealed that volatility levels have not changed for nine out of the eighteen commodities studied however, changes were observed in the other nine. Another key finding of the study was that there is merit in using gold and metal prices as variables in forming monetary policy in South Africa. It was also observed that random walk and autoregressive models consistently outperform more complex models in forecasting volatility in commodity spot prices. Results of the supply response study suggest that even though producers usually respond to price incentives, structural features of domestic agricultural commodity markets in Ghana may have hindered the conversion of improved incentives to higher agricultural growth. Results of the last paper indicate that in Ghana commodity price increases impact money supply growth and inflation whilst in Nigeria the effects of crude oil price increases produces higher inflation and appreciation of the real exchange. In the case of South Africa effects of gold export booms were transmitted through changes in money supply, inflation and real appreciation of the domestic currency. The results of the study have implications for both decision makers in business and government.

AFRIKAANSE OPSOMMING: Kommoditeits-aangeleenthede het vernuwe belangrikheid in die debat rakende die vervulling van die Verenigde Nasises se Millennium Onwikkelings Doelwitte vir Sub-Sahara Afrika en die doelwitte van die Nuwe Vennootskap vir Afrika se Ontwikkeling aangeneem. By voorbeeld, vier-en-dertig Afrika lande is afhanklik van tussen een en drie kommoditeite vir meer as die helte van hul buitelandse valuta inkomste. Ten spyte van die belangrikheid van kommoditeits-markte vir ekonomiese ontwikkeling op die kontinent het kommoditeits-verwante navorsing nog nie die nodige aandag gekry nie. Die studie het agtien primêre uitvoer-kommoditeite wat deur die meeste Sub-Sahara Afrika lande uitgevoer word oorweeg. Die kommoditeite is afkomstig van metale, onverwerkte landbou produkte, voedsel en energie sub-groepe. Hierdie tesis bied die resultate van navorsing wat gedoen is op ses afsonderlike opstelle wat fokus op die verhouding tussen kommoditeite en verskeie aspekte wat die ekonomiese vertoning in Sub-Sahara Afrika beïnvloed. Drie van die ses opstelle fokus op faktore wat kommoditeite van belang vir meeste Afrika lande affekteer, terwyl die ander geselekteerde lande se unieke kommoditeits-markte oorweeg word. Die eerste opstel bestudeer die verhouding tussen kommoditeits-markte en ekonomiese groei. Die tweede opstel oorweeg tendense en volitaliteit in Sub-Sahara Afrika se belangrikste kommoditeits-pryse oor die afgelope vier dekades. Die rol van kommoditeits-pryse in Suid-Afrika se makro-ekonomiese beleid word ook ondersoek met behulp van 'n nuwe navorsings benadering. Die vierde opstel maak 'n skatting van Ghana se aanbod van verskeie verhandelbare en nie-verhandelbare landbou kommoditeite. In die vyfde opstel word 'n reeks volitaliteitsvoorspellings-modelle ge-evalueer deur agtien lokopryse te gebruik. Die laaste opstel bestudeer die interaksie tussen veranderinge in kommoditeits-pryse, geld aanbod, inflasie en die reële wisselkoers in Ghana, Nigerië en Suid-Afrika. Bevindinge van die studie dui daarop dat 'n negatiewe verhouding tussen die graad van primêre kommoditeits-afhanklikheid en ekonomiese groei voorkom. Die studie het ook bevind dat volitaliteits–vlakke vir nege van die agtien kommoditeite wat bestudeer is nie verander het nie, terwyl veranderinge in die ander nege waargeneem is. 'n Kritiese bevinding was dat daar meriete steek in die gebruik van goud en ander metal pryse as veranderlikes in die formulering van die monetêre beleid in Suid-Afrika. Dit is ook waargeneem dat “random walk” en autoregressiewe modelle deurlopend beter vaar in die voorspelling volitaliteit in kommoditeits lokopryse as komplekse modelle. Resultate van die aanbod respons studie dui daarop dat alhoewel produseerders gewoontlik reageer op prys insentiewe, struktule eienskappe van die binnelandse landbou kommoditeits-mark in Ghana moontlik die effek van verbeterde insentiewe op landbou groei kon beperk het. Resultate van die laaste opstel dui daarop dat kommoditeits-prys verhogings in Ghana die geld-aanbod groei en inflasie beinvloed, terwyl in Nigerië die effekte van ru-olie prys verhogings lei tot hoër inflasie en appresiasie van die reële wisselkoers. In die geval van Suid-Afrika word die effekte van die skielike groot toenames in goud-uitvoere die duidelikste waargeneem deur veranderinge in die geld-aanbod, inflasie en die reële appresiasie van die binnelandse geld-eenheid. Die resultate van die studie het implikasies vir beide besluitnemers in besigheide en die regering.

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