Ana Paula Vescovi: On cicadas and ants: commodity cycles

Since the second half of 2020, during the pandemic, a new cycle of high international prices for food, metals and energy, as well as oil prices, began. Such goods are known as commodities, as they form the basis of world production chains. Periods of high prices tend, supposedly, to benefit Brazil, as it is a producer and exporter of these goods. However, this is not an advantage that translates into automatic benefits for the population. It is necessary to create the conditions capable of converting commodity cycles into new bases for sustained growth in the country.

The current commodity cycle has unusual components.

In Brazil, for the first time since the introduction of the Real, the rise in commodities was combined with the devaluation of our currency against the dollar, something counterintuitive. Usually, the increase in the price of exports and the positive perspectives that are opening up for the country contribute to expanding trade balances and the inflow of foreign exchange and, thus, increasing the value of the local currency.

Even more recently, after the beginning of the war between Russia and Ukraine, the reinforcement in the valuation of commodities was also associated with losses in Brazilian international trade, as the prices of the main Brazilian imports (fertilizers, fuels, industrial products) rose more than the prices of the goods we export. Thus, contradictorily, it is also associated with the increase in interest rates and the cost of financing the economy, despite temporarily helping to improve the public accounts framework.

Another observation: since we have statistics, Brazil has increased its dependence on commodities. In 2021, these products were among the top ten items on our export agenda, accounting for 52% of total exports. In 1997, these same products accounted for only a quarter of the tariff. Furthermore, we did not export oil and this now accounts for 11% of exports. This is not a problem in itself, but only brings us to points of attention on the country’s long-term growth.

Global evidence suggests that the abundance of natural resources can be a development challenge. This is either because they are finite or because they are found in sectors with lower productivity per worker.

There are countries that have been able, over the years, to reduce dependence on these goods and promote relatively rapid processes of increasing average income, diversifying their economies into higher productivity sectors, such as industry or services. Others maintained or increased this dependence over time and were not able to revert these benefits to an increase in the average income of the population.

Commodity dependence is associated, in addition to low levels of labor productivity, to slow growth and the high frequency of negative productivity shocks. The central problem is the high fluctuation of international prices that, as a rule, leads to more severe exchange rate and macroeconomic fluctuations in these countries. The alternation of moments with high inflow of external resources, and consequent appreciation of local currencies, can expel other sectors that produce tradable goods, with lower relative remuneration, but with more qualified work and greater productivity.

Similarly, in times of scarcity of resources (in the low phase of the cycle), it increases public indebtedness, raises the cost of capital and reduces economic activity, making it difficult to expand activities in other sectors.

Building the capacity to smooth the cycles becomes as fundamental as allowing these resources to be used to improve public governance, foster increased schooling, innovation and the overall productivity of the economy. The problem is when the easy money of periods of expansion leads to increased rent-seeking (pressure from interest groups) and corruption, in addition to discouraging education and innovation, which are well-known cases in the economic literature.

For example, the most recent past commodity cycle brought initial benefits to Brazil, with signs of enrichment (GDP per capita grew by an average of 3% per year between 2005 and 2014, with poverty reduction), but also led to worst economic crisis in its history at the end, with a significant loss of income.

It was a lasting cycle, with the index that measures international prices leaving values ​​close to 180 points in 2003 and returning to this same level in 2015. This after having reached more than 300 points between 2007 and 2014. In other words, prices practically doubled in the period, although interspersed with the international financial crisis of 2008/2009. The return of the cycle was very sudden, between 2014 and 2015.

As in Aesop’s Fable, the way a country defends itself from the pitfalls of commodity cycles is by saving in boom times to compensate for tight times. This is crucial to transform the abundance of natural resources into development. In addition to learning to elucidate cycles, soften their effects, and thus allow greater stability and predictability, it is equally important to mitigate dependence on commodities and develop institutions capable of consolidating a transparent, uncomplicated business environment, promoting persistent gains in productivity and competitiveness. of companies.

In the current global situation, Brazil is very well positioned, as it has a diversified and clean energy matrix, important environmental assets with the capacity to capture carbon and produce food, in addition to mineral and metallic reserves. It is up to us Brazilians to transform this natural legacy into more preservation, education, technology, knowledge, equity, cohesion and stability.