Home 
Publications Catalog Online Publications Document
Asian Development Outlook 2006 Update : III. Developing Asia's imprint on global commodity markets
ConclusionsDeveloping Asia’s imprint on global markets is already visible, and is set to get bigger. In 2005, the region accounted for nearly all the growth in global demand for base metals. Fast growth in Asia, combined with commodity-intensive industrialization and urbanization, will continue to ratchet up demand for primary commodities. Increasingly, countries in developing Asia will have to look outside their own borders for supply—and indeed, outside the region. Predicting the future is perilous. Nevertheless, rough indications of the likely impacts of demand and supply trends on prices are of interest. Underlying drivers are pushing up the real prices of energy and mineral ore prices, and this trend could continue well in to the future. By 2015, developing Asia is likely to be paying more in real terms for its oil and other fossil fuels, metals, forestry products, and selected agricultural crops than it did at the turn of the millennium, or in decades past. But compared with prices prevailing in the first half of 2006—which have jumped significantly above longer-term trends—2015 prices as suggested by the model analysis are less expensive. The short-run factors that have driven prices above trend should eventually dissipate. For most countries in developing Asia, higher commodity prices imply a deterioration in their terms of trade. These global trends are not preordained, though. They can be influenced by conscious policy choices. Of course for small countries, who are price takers in global commodity markets, domestic policy decisions will have their main impacts at home, but for Asia’s titans (the PRC and India) domestic policy decisions could easily ripple through global markets. At least four sets of issues are worth underscoring. First, developing Asia has a big stake in the future of agriculture. Even today, many millions of Asians are malnourished, and pressures on food supply are increasing with an expanding population and shrinking arable land resources. Although real food prices have been falling over an extended period and the model calculations presented in this part (and in the appendix) also suggest a comparatively benign outlook, this outlook depends critically on positive trends for agricultural productivity growth. Some countries are displaying worrying signs that their agricultural productivity growth may be declining. If such a reversal were to take root, this would raise the specter of rising prices for basic foodstuffs consumed by the poor and put at risk achievements on nutrition. It is important, therefore, that policy makers continue to support the agricultural research and the extension services that are the ultimate sources of future productivity gains. The prospect of dwindling self-sufficiency in agriculture and food commodities suggests, too, that developing Asia has an interest in the maintenance of an open trading system. Perhaps the best assurance of supply comes through open trade rather than efforts to achieve self-sufficiency. Second, the “grow now, pay later” philosophy that has generally guided environmental management in developing Asia comes at a heavy cost. The air above many of Asia’s cities is heavily polluted as fossil fuel is burned to provide much-needed power. Asia is devouring its forests, many of which can no longer be regenerated, to feed timber demands in construction and other activities. Agricultural productivity growth is threatened by excessive use of fertilizers, often subsidized, that damage soil structures. Yet fixing these problems need not come at high economic cost. Indeed, there are many investments that would be good for both the environment and for economic efficiency. For example, the recent reduction of fuel subsidies in Indonesia has brought additional spending for important social services that are likely to contribute positively to future growth prospects. In fact, if developing Asia were to take concerted steps to price energy at levels fully reflecting its environmental costs, the results presented here suggest that a significant proportion of these costs would be covered by a reduction in the global prices of energy commodities. Other approaches that encourage the adoption of cleaner and more efficient technologies for energy supply are also needed. Third, the vexed issue of security has become more prominent as supply disruptions, terrorist threats, and rising prices have alerted governments to the risks inherent in being dependent on others for the supply of vital resources. The uneven geographic distribution of commodity resources places some countries at a strategic advantage and presents a notable risk for others. In these circumstances, it makes sense both to diversify the locations from which supply is obtained and, in the case of energy, to diversify the types of energy (though direct equity investments in oil and mineral resources in other countries carry their own risks). For example, developing Asia has barely begun to tap renewable sources of energy. Regional cooperation can play an important role not just in building trust among neighbors, but also in providing the infrastructure and institutions that are needed to facilitate the efficient and safe transit of commodities across borders. For small countries that cannot afford to build up their own strategic inventories of key commodities, regional cooperation could provide a practical way of pooling resources to mitigate risks. Finally, traders and producers in developing Asia are already making good use of futures markets, long-term supply contracts, and other means to lower the risks that are presented by volatile commodity prices. Nevertheless, developing Asia often pays more than it should for commodities. Better financial market infrastructure should help the development of markets and trading within the region. But for commodity markets to work efficiently they need good information. It is important, therefore, that countries in the region regularly provide accurate information to the markets about local conditions. Failure to do so runs the risk of putting domestic producers and consumers at a competitive disadvantage. ReferencesBP. 2006. Statistical Review of World Energy. June. London. Available: www.bp.com*. Energy Information Administration (EIA). 2006. International Energy Outlook. United States Department of Energy. Available: www.eia.doe.gov*. Frankel, Jeffrey. 1986. “Expectations and Commodity Price Dynamics: The Overshooting Model.” American Journal of Agricultural Economics 68(2):344-48. Reprinted in Frankel. 1995. Financial Markets and Monetary Policy. MIT Press. Frankel, Jeffrey. 2006. “Commodity Prices and Monetary Policy.” In John Campbell (ed.) Asset Prices and Monetary Policy. Chicago: University of Chicago Press. International Energy Agency (IEA). 2005. World Energy Outlook 2005. Paris. International Rubber Study Group. 2004. “The Future of the Tyre and Rubber Sector of China and Consequences for the World Rubber Industry.” London. Paltsev, Sergey, John M. Reilly, Henry D. Jacoby, Richard S. Eckaus, James R. McFarland, Marcus C. Sarofim, Malcolm O. Asadoorian, and Mustafa H.M. Babiker. 2005. The MIT Emissions Prediction and Policy Analysis (EPPA) Model: Version 4. MIT Joint Program on the Science and Policy of Global Change. Report No. 125, August. Cambridge, Mass. *The ADB website provides links to external websites that are not under its control. ADB is not responsible for the content of these sites.
|
© 2009 Asian Development Bank Privacy | Terms of Use |
 Top of page |
Back