Winners and Losers in the Commodity Lottery: The Impact of Terms of Trade Growth and Volatility in the Periphery, 1870-1939

Most countries in the periphery specialized in the export of just a handful of primary products for most of their history. Some of these commodities have been more price volatile than others, and those with more volatility have grown much more slowly relative to the industrial leaders and to other primary product exporters. This fact helps explain the growth puzzle noted by Easterly, Kremer, Pritchett and Summers more than a decade ago: that the contending fundamental determinants of growth—institutions, geography and culture—exhibit far more persistence than do the growth rates they are supposed to explain. Using a new panel database for 35 countries, this paper estimates the impact of terms of trade volatility and secular change on country performance between 1870 and 1939. Volatility was much more important for growth than was secular change and accounts for a substantial degree of the divergence in incomes within the sample of small, commodity-dependent ‘Periphery’ nations as well as under-performance of the Periphery as a whole relative to such nations as the US and Western Europe, or ‘Core’. One channel of impact seems to be the adverse effect of volatility on foreign investment. It appears that the terms of trade effects were asymmetric between Core and Periphery.