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Commodity terms of trade volatility and industry growth

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  • Dongwon Lee

    (Department of Economics, University of California Riverside)

Abstract

Commodity terms of trade (CTOT) volatility is positively associated with sovereign credit spreads, leading to a higher cost of capital for producers in commodity-dependent countries. In this paper, we examine how volatile CTOT influences industries’ growth performance based on sector-level panel data for countries specializing in commodity exports. We find robust evidence that CTOT volatility causes slow growth in manufacturing sectors more prone to financial vulnerabilities due to tight credit constraints. The adverse growth effects operate through lower total factor productivity in industries heavily reliant on external finance for long-term investments and lower physical capital accumulation in industries requiring external funds to finance their liquidity needs. Our findings offer a complementary explanation for the “resource curse†through the credit constraint channel.

Suggested Citation

  • Dongwon Lee, 2022. "Commodity terms of trade volatility and industry growth," Working Papers 202216, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:202216
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    More about this item

    Keywords

    Commodity terms of trade volatility; Cost of capital; Credit constraints; Industry growth;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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