A meta-verdict on commodity speculation

A new OECD meta-study has concluded that financial investors (a.k.a. the dreaded "speculators") were not largely responsible for commodity price run-ups in 2008. The two main arguments will be familiar to regular readers.

Higher futures prices could have sent a signal to commodity producers, who then decided to hoard their stocks rather than sell them in the cash market. The shortage might then have pushed spot prices higher. The evidence, however, is that inventories were falling, not rising.

An even more telling argument is that commodities without futures markets (apples, edible beans) or futures markets where index funds did not get involved (milk, rice) also saw price rises during 2006-08. Nor was there any correlation between the size of index funds in particular commodities and the price rise for those raw materials.

The study also draws the intuitive conclusion that larger financial participation probably lowered volatility, rather than raising it.

From the Economist (subscription required).

P.S. The same issue has a number of good pieces (all subscription required) on topics like Zimbabwe's Marange diamond field (prior to latest Kimberley ruling), the success of environmental activists in influencing the palm oil supply chain, and how chimps go to war over land rather than females.

The undiversified economy

... is vulnerable, even if historically successful:

Botswana’s economy contracted by 6.7 percent last year as revenue from diamonds plummeted, Central Bank Governor Linah Moholo said.

“Mining was hard-hit, with its share of gross domestic product dropping from 41.2 percent to 24 percent,” she said.

This succinctly summarizes the problem for Botswana. Although its growth record for decades has been impressive, it remains too undiversified. Diamonds and cattle remain large sectors of the economy. When diamond revenues plummet, the economic consequences are severe. Add in the HIV/AIDS situation with a contracting economy can quickly turn an African success story into another African Growth Tragedy.

Now, a 7% downturn amidst the greatest economic crisis in generations is not the end of the world, especially if you managed to average 9% annual GDP growth for over three decades. On the other hand, even the staunchest efficient market skeptics and industrial policy promoters would have to concede that "happen to have and focus your economy on a small basket of commodities that will outperform over the coming decades" is not a viable (or at least generalizable) economic development strategy to start with.

From the Stationary Bandit, via the Roving Bandit.

Blood coltan (or not)

Chris Blattman writes:

Blood what? On the heels of the successful (and much needed) blood diamond advocacy, the activist industry has now set its sights on minerals coming out of eastern Congo, including the coltan that fuels your mobile phones. Its sale by unsavoury characters is feared to be fueling war, murder and mass rape.

The problem with the campaign? That pesky little thing called evidence.

Texas in Africa has the full take-down. The moral of the story is don't believe everything 60 Minutes tells you.

Is Africa resource-rich?

Via Chris Blattman, an intriguing answer to this question:

OECD nations have $123,000 worth of wealth under the average square kilometer of soil, in spite of the fact that they’ve been pulling wealth out of the ground for 200 years.

The average wealth per square kilometer in Africa: closer to $23,000.

As Collier pointed out, we weren’t completely in error. The $23,000 figure comes from known resource wealth. This suggests that another $100,000 is probably lying under the average square kilometer in Africa.

That’s right. Think the ‘resource curse’ is bad now? Wait until known resources multiply by six.

He relates a conversation with the Sierra Leone government last week, days after the sudden discovery of oil. “Now you have diamonds and oil,” he said. “You can be like Angola!”

Indeed.

The post also includes a link to the Natural Resources Charter, which I had not seen before but seems to have the right spirit. Unfortunately it appears to be mostly academics and have no industry backers. The Extractive Industries Transparency Initiative has more sway, although I have heard it criticized as well. In any case, I think the move toward formalizing the social compact between resource-extracting foreign companies and the citizens of their host nations is a positive step, even if they don't come out perfect the first time.

The Kimberley Process works!!

Diamond aficionados or watchers of Blood Diamond are probably familiar with the Kimberley Process, which was established in 2003 to certify that rough diamonds do not originate from sources where diamond production fuels conflict. Turns out it is making an impact in Zimbabwe:

Zimbabwe has promised to withdraw its soldiers from diamond fields in the east, an official newspaper reported Sunday — a week after a rights group alleged the military was committing killings and abuses in the area.

The move appeared to be an attempt to diffuse criticism over the military's takeover of the Marange diamond fields and ensure that Zimbabwe's precious stones won't be tainted with the "blood diamond" label by activists, which would reduce their value.

...

Officials of the Kimberley Process Certification Scheme — the world's diamond control body — recently visited the fields following allegations that security chiefs and loyalists of President Robert Mugabe were either perpetrating or tolerating rights abuses and illegal diamond exports.

"There cannot be effective security where diamonds are concerned with the involvement of the military," the Kimberley delegation said in a report to the Zimbabwean government, quoted by the state-run Sunday Mail.

I doubt the Kimberley Process is completely airtight, but it's a great example of governments, companies and consumers coming together to formalize a structure which helps stem some of the violence and corruption that valuable resources inevitably engender. The case of Zimbabwe is particularly impressive since its rule of law is weak in so many other ways.

Hat tip to FP Passport.