What is Total Factor Productivity (TFP) and why is it so important for emerging economies?

Total Factor Productivity (TFP) is a measure of how efficiently labor and capital are utilized in an economy. It captures the impact of innovation, technology, and organizational improvements on economic output. For emerging economies, boosting TFP is crucial for achieving sustainable growth and catching up with developed nations, as it reflects improvements beyond simply adding more labor or capital.

How do fluctuations in commodity prices affect Total Factor Productivity (TFP) in emerging markets that rely heavily on commodity exports?

When commodity prices rise, these economies often experience increased government revenues, which can lead to greater investment in infrastructure, health, and education. Better financing options become available, allowing companies to invest in research and development and adopt foreign technologies, driving Total Factor Productivity (TFP) upwards. However, declining commodity prices can reduce investment and government spending, contracting economic activity and hindering Total Factor Productivity (TFP) growth. Resource allocation can also become distorted, potentially harming long-term productivity growth, which can lead to the "Dutch Disease."

How did Iván Kataryniuk and Jaime Martínez-Martín approach their study on commodity prices and Total Factor Productivity (TFP)?

Iván Kataryniuk and Jaime Martínez-Martín used sophisticated econometric techniques to disentangle the causal links between commodity prices and Total Factor Productivity (TFP) growth in nine emerging economies. Their study accounted for cyclical trends, structural reforms, and global economic conditions to provide a nuanced understanding of how commodity price shocks can either fuel or hinder economic progress. This approach went beyond simple correlations to establish causality.

What is "Dutch Disease," and how is it related to commodity prices and Total Factor Productivity (TFP) in emerging markets?

"Dutch Disease" is a phenomenon where a boom in the commodity sector attracts resources away from other industries, such as manufacturing. This can lead to a decline in these other sectors, hindering overall economic diversification and long-term Total Factor Productivity (TFP) growth. While the commodity sector may thrive due to high prices, the rest of the economy may suffer, creating an unbalanced and potentially unstable economic structure.

Commodity rollercoaster symbolizing economic volatility in emerging markets.

Decoding Economic Growth: How Commodity Prices Impact Emerging Markets

Q: What policy implications does the research by Iván Kataryniuk and Jaime Martínez-Martín suggest for emerging economies dependent on commodity exports?

The research underscores the importance of diversifying emerging economies away from a heavy reliance on commodity exports. Investing in education, technology, and infrastructure can reduce vulnerability to commodity price shocks and create a more stable foundation for long-term growth. Policymakers should focus on implementing sound macroeconomic policies that mitigate the adverse effects of commodity price volatility, such as building up foreign exchange reserves and managing government spending effectively.

Theo Raines in Business & Economy August 2025 • 4 min read.

"Explore the intricate relationship between commodity prices and total factor productivity in emerging economies, and what it means for their sustainable growth."

For decades, economists have sought to understand the key drivers of economic growth, particularly in emerging markets. While factors like technological advancement and capital accumulation play significant roles, one often overlooked aspect is the influence of commodity prices. Emerging economies, especially those heavily reliant on commodity exports, are particularly vulnerable to price swings in global markets. These fluctuations can trigger a cascade of effects, impacting everything from government revenues and investment decisions to labor allocation and productivity levels.

In a groundbreaking study, Iván Kataryniuk and Jaime Martínez-Martín investigated the intricate relationship between commodity prices and total factor productivity (TFP) growth in a sample of nine emerging economies. Their research, published in Emerging Markets Finance and Trade, challenges traditional methods of assessing economic performance and offers valuable insights for policymakers and investors navigating the complexities of the global economy.

The study goes beyond simple correlations, employing sophisticated econometric techniques to disentangle the causal links between commodity prices and TFP growth. By accounting for factors like cyclical trends, structural reforms, and global economic conditions, the authors provide a nuanced understanding of how commodity price shocks can either fuel or hinder economic progress in emerging markets.

The Unseen Connection: Commodity Prices and Productivity

Commodity rollercoaster symbolizing economic volatility in emerging markets.

Total Factor Productivity (TFP) is a critical measurement that accounts for the efficiency with which labor and capital are utilized in an economy. Traditional growth models often emphasize the importance of capital accumulation and labor force expansion, but TFP captures the elusive element of innovation, technology, and organizational improvements that drive long-term prosperity. For emerging economies, boosting TFP is essential for achieving sustainable growth and closing the gap with developed nations.

Kataryniuk and Martínez-Martín argue that commodity prices exert a significant influence on TFP growth, particularly in economies where commodity exports constitute a substantial portion of their revenue. When commodity prices surge, these economies often experience a boost in government revenues, increased investment, and improved financing conditions. This, in turn, can lead to higher productivity as businesses invest in new technologies, infrastructure, and human capital.

Increased government revenue, facilitating investments in infrastructure, health, and education.
Better financing options, allowing companies to invest in R&D and adopt foreign technologies.
Pro-cyclical TFP dynamics, driven by increased capital and labor utilization in the commodity sector.

However, the relationship is not always straightforward. A decline in commodity prices can have the opposite effect, leading to reduced investment, decreased government spending, and a contraction in economic activity. Moreover, the authors point out that commodity price fluctuations can distort resource allocation, potentially hindering long-term productivity growth. For example, a boom in the commodity sector may attract resources away from manufacturing and other industries, leading to a phenomenon known as the “Dutch Disease,” where other sectors of the economy suffer.

Navigating the Commodity Rollercoaster: Policy Implications

The research by Kataryniuk and Martínez-Martín underscores the importance of diversifying emerging economies away from a heavy reliance on commodity exports. By investing in education, technology, and infrastructure, these countries can reduce their vulnerability to commodity price shocks and create a more stable foundation for long-term growth. Furthermore, policymakers should focus on implementing sound macroeconomic policies that mitigate the negative effects of commodity price volatility, such as building up foreign exchange reserves and managing government spending effectively.