Do we need a shock-fund for developing countries?

Ray Fisman writing in Slate asks whether falling commodities prices cause civil wars in commodity-rich countries:

To reduce violence in Colombia and other commodities-rich countries, care has to be taken to recognize how fluctuating prices actually affect the situation on the ground. If lower coffee prices drive poor farmers to desperation, we need to do something to cushion the blow to their incomes. One recent suggestion from University of California, Berkeley, economist Edward Miguel and myself is to shift some amount of international development assistance away from long-term investment and toward short-term emergency aid for countries hard-hit by a collapse in prices of labor-intensive commodities. (Countries would similarly get aid if pummeled by weather shocks like drought.) This aid would kick in as soon as prices headed south, before famine or war broke out. So we’d channel aid to Colombia’s farmers when coffee prices fell (or if the Colombian rain gods failed to nurture their crops). These emergency funds would be scaled back when prices stabilized—as they did in 2001—or the rains returned.

I must say, I’m now a bit confused about whether we think the main problem facing developing countries is rising commodity prices or falling commodity prices. Of course part of the answer is that both rising and falling commodity prices can hit people in poor countries hard (namely different people in different countries), and either way, these are people least able to cushion the effect through savings, insurance, borrowing or changing jobs.

As Fisman and Miguel say in Economic Gangsters, we need a more flexible channel of large scale development assistance which can be deployed quickly to smooth the impact of the financial crisis on developing countries. Preventing the outbreak of conflict or famine will be much cheaper than coping with the consequences, quite aside from the human tragedy that will follow from failure to act quickly.

Leave a Reply

Your email address will not be published. Required fields are marked *