For Immediate Release: May 21, 2014
Contact: Dan Beeton, (202) 239-1460, Beeton@cepr.net
Terms of Trade Increase Can Improve Current Account Balances, However...
Washington, D.C. - A new paper from the Center for Economic and Policy Research finds that Latin America’s economic growth rebound in the 2000s does not appear to have resulted from a “commodities boom” as is often suggested, as there is no statistically significant relationship between the increase in the terms of trade for Latin American countries and their GDP growth. The paper “Latin American Growth in the 21st Century: The ‘Commodities Boom’ That Wasn't” by economists David Rosnick and Mark Weisbrot does find, however, a positive relationship between the terms-of-trade increase and an improvement in the current account balance, which may have allowed some countries to avoid balance of payments crises or constraints as their economies grew more rapidly.
“This paper indicates that the oft-cited ‘commodities boom’ explanation for Latin American growth in recent years is not what happened,” CEPR Co-Director and the paper’s co-author Mark Weisbrot said.
Following a two decade (1980 – 2000) period of an economic growth collapse that was unprecedented in the modern history, Latin America experienced an economic growth rebound. From 1980 – 2000 the region’s per capita GDP grew by just 7.7 percent, or 0.4 percent annually, as compared to 91.5 percent growth, or an average annual rate of 3.3 percent, for the prior twenty years (1960-1980). In the 2000s, growth picked up to an average annual rate of 1.9 percent – not close to its pre-1980 average, but a huge improvement over the prior 20 years. A “commodities boom” explanation for this increase -- frequently described in the media and by some in the economics profession -- implies that the region’s growth was stimulated by sizeable increases in the price of commodity exports.
The paper finds that though several large Latin American and Caribbean (LAC) countries have experienced sizeable improvements in their terms of trade, there is little evidence to suggest that these trade windfalls generally contributed to increased GDP growth. Terms-of-Trade windfalls can also be spent on increased imports that replace domestic demand. Also, improvements in LAC terms of trade are associated with improvements in current account balances.
“Improved terms of trade can help countries avoid current account imbalances, but their direct impact on economic growth has often been overstated,” Weisbrot said. “Other factors, such as macro-economic policy choices, may have been more important.”