Countries crash when their export prices crash
Few countries are able to save the money they earn from exports when commodity prices are high. Then, when the prices fall, they are in economic trouble. This problem has been observed for several decades.
Zambia has been hit hard by declining copper prices. The Globe and Mail reported
today Zambia is a lesson in the perils of over-dependence on a single commodity and a handful of multinational mining companies. The copper boom is over, Glencore has fallen into a cost-cutting crisis, Zambian mines are being shuttered and Zambia’s currency has been the worst-performing in the world this year. Its euro bond interest rates have soared to nearly 12 per cent in recent weeks.
Nigeria is suffering from low oil prices. The Financial Times reported:
Nigeria’s economy grew about 2.8 per cent last year, its slowest rate since 1999, as lower crude prices took their toll. Nigeria has traditionally earned 70 per cent of its revenue from crude exports and has few other sources of foreign exchange earnings.
The situation is similar in Latin America. An op-ed in the New York Times states:
From roughly 2003 through 2012, Latin America enjoyed one of the greatest commodity booms in its modern history. Exporting everything from oil to soybeans, Latin American governments received windfalls, which they spent on social programs, which were often well designed and affordable. The problem is that no one saved up for the inevitable rainy day. When prices began to plummet, both new sovereign wealth funds and traditional tactics, like fiscal stimulus, proved inadequate. Country after country saw growth rates fall, social spending shrink and citizens get angry.
The United Nations had proposed an international effort to stabilize commodity prices. But, it was a flawed concept, and was not implemented.
The economic solution is obvious: the governments should not spend all their money when there is a boom. But, politics comes in the way. It seems that in most countries the politicians are unwilling to learn from past debacles.
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