Commodity price volatility, institutions and economic growth: An empirical investigation

Abstract

This article investigates the role of institutional quality in transmitting effects of commodity price volatility to economic growth. To do so, we collect data on 107 primary commodity exporting countries in both developing and developed ones over the period 1976–2015. Our empirical approach is based on Solow growth model framework (Solow, R. M. (1956). The Quarterly Journal of Economics, 70(1), 65) and consists of estimating a dynamic panel model using the two‐step system GMM estimator. Our results show evidence that commodity price booms are associated with good economic performances that are unfortunately wiped out by the negative effects of price volatility in developing commodity‐dependent countries (CDCs). The main channel through which this volatility affects economic growth turns out to be through factor productivity. Finally, we have formally established that the negative effect of price volatility in CDCs is mainly due to the poor quality of institutions in these countries. These results suggest that it is important for commodity‐exporting economies, especially developing CDCs, to work on building strong economic and political institutions to guard against the risk of commodity price volatility.