An analysis of the transmission channels of commodity terms of trade shocks
Cross-country interdependencies have been identified in the FAO’s report “The future of food and agriculture – Drivers and triggers for transformation” as one of eighteen key drivers of agrifood systems. These interdependencies, and particularly commodity dependence and rising debt levels, have also been considered in regional and subregional strategic foresight exercises conducted in preparation for FAO’s regional strategic foresight reports. As part of deepening the research on this driver, the present study examines how shocks to commodity terms of trade (CTOT) affect macroeconomic and financial stability in commodity-dependent low-income and lower-middle-income countries from 1988 to 2022. Using panel local projections, it finds that negative CTOT shocks have caused sustained contractions in gross domestic product, investment and expenditure, while worsening trade balances, debt ratios and financial conditions. These effects are more severe under high-debt regimes, revealing strong non-linearities. The findings provide greater detail on the structural vulnerability of commodity-dependent low-income and lower-middle-income countries to external shocks and underscore the importance of debt management, macro-financial resilience and economic diversification to move countries towards sustainable and resilient development models, and to safeguard the transformation of agrifood systems.
