How Much Do Commodity Exporters Share Risk?

Commodity-exporting countries face important challenges in shielding their economies from commodity price volatility. In an ideal world, a country would buy and sell foreign assets to insure itself against volatility caused by the destabilizing economic impact of gross domestic product fluctuations over time. The literature on the topic, which has mainly focused on risk sharing across advanced economies, has found a puzzlingly low amount of risk sharing. Using a sample of 110 countries between 1995 and 2019, this paper finds that commodity exporters share 46 percent of their risk as a group internationally, significantly more so than non-commodity exporters, which share about 33 percent of their risk. The greater the volatility of commodity terms of trade, the more a country shares risk internationally. Consequently, energy and metals exporters share risk more than agricultural exporters. Government saving is the main risk-sharing mechanism in commodity-exporting and non-exporting countries, although it is more important for commodity exporters. Commodity-exporting countries are also more likely to smooth gross domestic product fluctuations through net purchases of assets abroad, while non-commodity exporters tend to self-insure through procyclical domestic investment.