Natural Resources and Violent Conflict - WaterWiki.net

dampening price shocks 355in lower average profitability (Guillaumont, Guillaumont Jeanneney,and Brun 1999).Finally, the instability of export earnings, through the various effectsreferred to above and relative price instability in particular, is afactor in political instability, owing largely to the sudden changes itinduces in absolute and relative incomes. Through this key channel, itundermines the sustainability of growth.Recognizing the harmful nature of commodity price instability on theeconomies of exporting countries contributes toward justifying externalassistance for such countries. Such aid is all the more justified in that,specifically in vulnerable countries (those subject to highly unstableworld prices), aid has proven to be more effective in terms of growththan it has been in countries that are less vulnerable economically. Asmuch as sound policy, vulnerability makes aid more effective, or, whatamounts to the same thing, aid attenuates the negative consequences ofthe vulnerability (Chauvet and Guillaumont 2002; Guillaumont andChauvet 2001). In particular, aid is marginally more effective when it isprovided during periods of declining commodity prices (Collier andDehn 2001). The various studies referred to here show both the negativeeffect of instability or price declines (an additive variable in econometricestimates) and the attenuation of this effect thanks to aid (multiplicativevariable).A rapid review of the various channels whereby international priceinstability affects development clearly reveals that dampening priceshocks has both microeconomic implications (for economic agents inthe sector affected by the international price change) and macroeconomicimplications (through the central government budget, the realexchange rate, and political stability).The expression “dampening price shocks” most often refers to dampeningprice drops. However, price shocks may be positive as well asnegative. One clear lesson from the past 30 years is that rapid rises ininternational prices have drawn economies into situations that wereparticularly difficult to manage when prices later fell. Hence the occurrenceof positive and negative shocks in succession—in other words,price instability—is at the root of the problem. It is illogical to devise apolicy for dampening price drops that fails simultaneously to improvethe management of export earnings booms.An international commodity price shock calls for different responsesdepending on whether it is temporary or permanent. Only if theshock is permanent does it justify a reallocation of production factors,in other words, a change in the structure of production—that is, inspecialization. The same does not hold in the case of temporary shocks,