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Consequences of the rise of raw materials on the economy of the poor countries

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According to the President of the European Central Bank (ECB), Jean-Claude Trichet, "the recent surge in commodity prices reminds us that globalization can also create inflationary risks". At first, the rise in prices mainly affected energy (crude oil), metals and minerals (copper, nickel, gold, aluminum, etc). However, since 2002, this upward trend has expanded to include many agricultural products such as wheat, maize, rubber and rice. Soaring commodity prices now have a broader base and cover both raw and processed products.

This is the result of an imbalance between limited supply and increasing demand. The different factors that can explain this situation should be distinguished. On the supply side, there is a downward revision of forecasts of global cropland. This is mainly due to the implementation of policies to reduce the productive capacity of United States and Europe, due to the previous situation of depressed prices worldwide. Moreover, bad weather also restricts the availability of commodities.

Meanwhile, on the demand side, there are the increased needs of the economically dynamic countries such as Brazil, India and China to be fulfilled. China has been the biggest consumer of iron ore, zinc, copper, coal, as well as wheat, soybeans, cotton and rubber since 2001, and is the second largest consumer of aluminum, lead and oil. The strong global demand for oil has resulted in an amplification of needs for agricultural products.

An alternative to oil is the use of bio-fuels from agricultural materials, such as corn or wheat. This general rise in commodity prices impacts the economies of rich countries and poor countries alike, but the impact is greater in the South, because the economies there are more volatile than those of the North.

However, it must be noted that poor countries are mostly the richest in respect to raw material resources. Thus, according to Ricardo's theory of comparative advantage (theory that each country has an interest in specializing in the production line which has the lowest comparative cost), poor countries specialize in the export of raw-materials, while rich countries specialize in manufactured, and value added goods.

The last few decades have been marked by weak commodity prices and are often regarded ipso facto as a brake on economic development. However, over a long period, prices of raw materials decreased while those of manufactured goods tended to rise, leading to deteriorating terms of trade against developing countries.

The rise in commodity prices had an impact in different ways with respect to the economies of poor countries. The first observation was to assume that higher prices have a negative impact on the economies of poor countries and their populations. Second, the medium / long term, poor countries suffered even more with the increase, and to see their situation deteriorate further. Finally, on the other hand, rising prices can be an opportunity for poor countries, provided they can adapt to this new economic situation, and make the necessary readjustments.

Tags: European Central Bank, globalization, commodity prices, increasing demand, economic situation, Ricardo's theory, value added goods

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