Commodity price shock – a setback to poverty eradication

Are we on track to end poverty worldwide by the year 2030? That depends. If we look at global poverty rates measured as the proportion of people living on less than $1.90 per day, we will see impressive progress. According to The Sustainable Development Goals Report 2019, 8.6 per cent of the world’s population was living in extreme poverty in 2018, down from about 28 per cent in 2000.

But if we dive deeper into these numbers, we will see that most of the progress has come from East and South Asia while more than two in five people in sub‑Saharan Africa continue to live in extreme poverty. The total number of people suffering extreme poverty in that region is higher today than it was two decades ago.

What is even more worrying, the pace of progress has slowed down notably in recent years. In several countries in Latin America and sub-Saharan Africa, the number of people experiencing extreme poverty has, in fact, risen since 2014. What is pushing those countries behind?

For many of them, it is weak macroeconomic performance. To better understand it, we have to go back to the years 2014-2016. As the global economy was slowly recovering from years of financial crises and recession, a sharp downturn in commodity prices spelled trouble for developing countries, many of whom highly depend on commodities for income.

What initially appeared to be a temporary terms of trade shock for the commodity exporters, has in many cases morphed into a fundamental and longer lasting economic slump. Often, countries have not only failed to recover the output losses but have also experienced a marked downward shift in trend growth. In almost one third of commodity-dependent countries, average real per capita incomes are lower today than they were in 2014.

What was it about the commodity price downturn that caused such profound and lasting economic slumps? While the specific dynamics varied between countries, there was a common thread. Rather than simply causing a deterioration of the terms of the trade, the commodity price decline exposed major weaknesses in the economic structures of countries.

Excessive reliance on commodity revenues has forced dramatic fiscal adjustments. Sharp declines in investment is weighing on current growth, while constraining future productivity. In many cases, these economic challenges have been exacerbated by political factors.

These weaknesses can only be remediated with difficult structural reforms, which are even harder to enact in today’s increasingly uncertain global environment. However, without reforms, the growing economic woes of some developing countries might not only cloud their growth outlook, but also hamper progress on the Sustainable Development Goals (SDGs), especially poverty eradication.

For more details, read the October Monthly Briefing on the World Economic Situation and Prospects

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