Two thirds of developing countries strongly depend on the production of commodities as a (primary) source of income. Therefore, the information from commodity futures markets is relevant for their long-term fiscal planning and can thus facilitate or hinder their economic development. With globalization, informativeness of the commodity futures markets may have changed. New research shows that this is not the case and global commodity futures markets remain informative about financial markets and real economy for the large number of countries around the world.
Globalization is an ongoing trend, be it for good or for bad. During the 106th Dies Natalis of the EUR an honorary doctorate was awarded to Prof. Dani Rodrik (Harvard University) who advocates different paths to globalization. Think about the path to globalization and its consequences for China who opened for the global economy in a selective manner, as opposed to Mexico that embraced globalization full on. Chinese economy has been steadily growing for the past decades, while Mexico struggles. Dani Rodrik’s research emphasizes that “one-size-fits-all” globalization path may be harmful for some economies, especially the developing ones.
Global commodity futures markets aggregate information about future demand and supply of a wide range of commodities such as, for example, foods, fuel, industrial metals or livestock. This information is relevant to those who produce, store, distribute and use commodities. Two thirds of developing countries strongly depend on the production of commodities as a (primary) source of income. Therefore, the information from commodity futures markets is relevant for their long-term fiscal planning for the investments in, for example, infrastructure, healthcare or education, and can thus facilitate or hinder their economic development.
With globalization, informativeness of the commodity futures markets may have changed. First, the nature of the information has changed. The globalization has made the job of market participants much harder, since now they need to learn about global supply, demand and inventory of commodities. Second, the composition of futures markets participants has changed. The markets experienced an unprecedented increase in speculative capital, which may have hindered informativeness of commodity prices. In fact, this increase in speculative capital fueled political pressure to limit speculative positions in commodity futures markets. There is no consensus among economists, however, whether excessive speculation by the financial traders pushed commodity markets astray or whether these markets remain mainly driven by fundamental changes in demand and supply.
In my new research stream on informativeness of commodity futures markets, coauthored with Romulo Alves we find that global commodity futures markets are able to aggregate dispersed information about inventory, supply and demand of various commodities, and this information is relevant for the large number of economies around the world, both developing and developed. Oil, certainly one of the most important commodity in the global economy, contains a relevant information for many countries, however, we find that many other commodities are also very informative. Moreover, commodity futures markets are not only informative for commodity dependent economies. We find that commodity markets contain information about future changes in macroeconomic fundamentals, such as inflation and industrial production and are thus relevant to a wide range of countries. Our findings open door to researching how information from commodity futures markets can be used for long-term planning to facilitate economic development of commodity dependent developing economies.
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This blogpost is written by Associate Prof. Marta Szymanowska and is the fourth blogpost in a series by the Erasmus Initiative Dynamics of Inclusive Prosperity.
Marta Szymanowska is an Associate Professor of Finance at the Rotterdam School of Management, and the Erasmus Initiative “Dynamics of Inclusive Prosperity”.
Marta is studying the relation between financial markets and the real economy with a particular focus on global commodity markets. Her work within the initiative has two strands. Both focus on the role of finance in fostering inclusive prosperity. In the first strand, she studies how financial markets can deal with macroeconomic shocks. For instance large commodity price swings that could jeopardize sustainable food production or the stability of emerging economies. In the second strand she studies how the epistemic and non-epistemic values (i.e., ethical or environmental) in finance research translate into finance industry that facilitates prosperity (e.g., promotes CSR, financial inclusion). Despite being highly theoretical, academic research in finance has direct and significant practical implications.