Commodity Terms of Trade Volatility and Industry Growth

Commodity terms of trade (CTOT) volatility is positively associated with sovereign credit spreads, leading to a higher cost of capital for producers in commodity-dependent countries. In this paper, we examine how volatile CTOT influences industries’ growth performance based on sector-level panel data for countries specializing in commodity exports. We find robust evidence that CTOT volatility causes slow growth in manufacturing sectors more prone to financial vulnerabilities due to tight credit constraints. The adverse growth effects operate through lower total factor productivity in industries heavily reliant on external finance for long-term investments and lower physical capital accumulation in industries requiring external funds to finance their liquidity needs. Our findings offer a complementary explanation for the “resource curse” through the credit constraint channel