WHY AND WHAT ARE COMMODITY PRICES A PROBLEM FOR DEVELOPING COUNTRIES

INTRODUCTION: Commodities, raw or partially processed, are often the most significant exports of developing countries, and revenues obtained from them have an important effect on the economies and living standards in these countries. Commodity price fluctuations, along with the globalization of the world economy and increased liberalization of commodity markets have led to profound changes that seriously affect the weaker economies of the developing world. Prices have fallen over time, so countries and producers dependent on them find that their income does not keep pace with the costs of imports or the costs of production. The fluctuations in their prices in response to 'normal' changes in demand or supply are larger than those in other prices. These problems face all countries which produce commodities, developed and developing, but they are more serious for developing. The first potential remedy is obvious, for developing countries to move out of commodities into different types of export: manufactures or services. The fluctuations of individual commodity prices suggest that diversifying into more commodities could reduce the risk of fluctuations in total income. Moving into processing activities related to the commodity may increase income and reduce fluctuations CONTENTS: The study undertook an analysis of the dependence of developing countries on commodity exports, addressing the specific problems of the countries concerned, on a regional basis. The regions considered in particular were sub-Saharan Africa, South Asia, Latin America and the Caribbean. It looked at the changes taking place in international commodity markets and how developing countries can be better equipped to deal with new developments. It clarified the appropriate instruments, which assists commodity-dependent developing countries to cope with the difficulties resulting from commodity dependence. The factors may be is that inflation is more of a problem for developing countries. As a result, central banks are tightening monetary policy while central banks in the developed world are still dithering over whether to do so.

TRENDS IN PRICES: In the late 1950s and early 1960s, real prices of non-fuel commodities were relatively stable (with

the period in which trade has been liberalized and the current structure of markets has been established. the International Sugar Organisation and the International Grains Council. the International Rubber Study Group. the benefits of higher commodity prices are clear. In the 10 years 1988-98 the implied unit values of agricultural exports were almost constant.a.The rise in non-oil prices (which preceded and then accompanied the oil shock) in the early 1970s brought the highest peak so far observed. Prices.7%. In the case of developing countries which are agricultural exporters. Most recently.a peak . in the context of prevailing market fundamentals these prices were not considered “abnormal”.4% in the1980s with a fall in the 1990s. This recent experience thus illustrates both the real decline in commodity prices. the two groups for which the developing countries account for the largest shares in world exports. in 1974. prices were influenced by a number of commodity-specific factors. there has been a slump accompanying the recession in Asia. As the UN notes. (under the impact of the non-oil and then oil booms).Comparing the earliest and most recent troughs. the International Cotton Advisory Committee.a. the rates of rise of all export prices slowed compared to the 1970s. which offer early and exaggerated signals of export unit values. But within this. namely tropical beverages and vegetable oilseeds and oils. especially of tropical products and raw materials. relative to manufactures. show the highest rates of decline in prices. Remunerative prices are needed if production and exports are to be sustained and developed. from 15% p. It was stressed that in addition to over-arching and macroeconomic factors. . 1961 and 1999. for mining products they fell 14%. manufactured unit values rose about 2% p. These were clearly set out in inter alia the statements presented by the International Coffee Organization. The price indices show falls of 4% for food. giving an average rate for the period 1980-98 of 0. 11% for other agricultural goods.5%. gives a fall of about 40%. and 34% for minerals (excluding petroleum: in this period oil prices fell 11%). NATURE OF THE PRICE DEPRESSION: The Consultation noted that although most commodity prices were at historically low levels. to 1. a fall of more than 20% in dollar prices from 1997 to 1999. and for manufactures they rose 7. The results of preliminary econometric analysis on commodity price developments since the 1970s presented by the Commodities and Trade Division of FAO indicated no recent changes in structural market relationships. fell much more. and again provide a platform for broader development.9%. and the larger fluctuations . agricultural rose only 0. and mining products (including oil) fell at a rate of 3. If we take the last 20 years.4%.

products. These are usually commodities where the weather is a major source of shocks. and also the market interactions among various commodity groupings.  Commodities found to have shock persistence periods of less than a year include bananas. It was necessary to take account of the structures of those markets. trade liberalization was expected to lead to higher prices at least in the short term. but were not regarded as a solution to the major imbalances of demand and supply faced by some commodities. mainly temperate. productivity and market growth. technology. Where there are close substitutes for primary commodities produced by developing countries. Fair trade. although the difficulties of international promotional campaigns were noted. the different roles played in various commodities by the public and private sectors. Almost all commodity prices are falling in normal years. and rubber. but also some non-agricultural: aluminium. The Consultation took note of the complexities of commodity markets at the national level. WTO negotiations and commodity market liberalization. lamb. CHARACTERISTICS OF COMMODITIES AND MARKETS: The general trends in commodities suggest some constraints on the policies to deal with fluctuations in their prices. These covered developments in the international monetary system. iron ore. policies and other factors at the national level and various intervention or withholding schemes. any scheme which raises their average price (by stabilising at or above the trend average) will lead to increased demand for the substitute. Attempts to stimulate demand and raise prices in the longer term through promotional activities were regarded as potentially useful. organic and other niche product forms were seen as potentially valuable means of raising returns for some producers. Those with 1-4 year periods include fish meal. . Commodities with short fluctuations may allow more options for dealing with fluctuations than those with prolonged swings. softwood. soybean and soybean meal. and wheat. thus most agricultural products. so simple stabilization schemes are not feasible. and possibly a long run shift away from the developing country product. changing market structures and consumer preferences.FACTORS INFLUENCING PRICES: It assessed the impacts of some of the overarching factors influencing commodity markets and prices on the basis of presentations by high-level participants. hides. and tea. It was noted that these factors often outweighed the effects of international price developments and hence insulated both producers and consumers For certain.

UN 1999) and thus with the possible exception of the oil producers face declining terms of trade  28 of the 68 countries dependent on commodities are among the least developed countries. the most important commodities in total are oil (23% of the total). copper (3%). Gabon.. . Those in this category include minerals and some agricultural commodities like coffee which have longer production cycles. all of which are subject to considerable intervention in world trade so that their fluctuations cannot be attributed to or cured by supply and demand factors. South Africa. They supply about half of sugar and honey and more than a third of frozen fish. Almost all the African countries depend on primary commodities for more than half their export earnings (they account for 45% of sub-Saharan exports. gold. the least developed countries are included in the commodity-dependent. nickel.  Still longer duration goods are some types of coffee. coffee (7%). Zambia. fruits and nuts. diamonds (10%). tobacco. shrimps (3%). 7 of the 13 Caribbean. The effects are greater. when a country is more than averagely dependent on commodity exports. and tobacco. tin and also petroleum. exposing them to two sets of risks.  36 of the 51 African countries (34 of the 42 sub-Saharan). zinc and wool. cobalt. most of the countries in the table are heavily dependent on more than one commodity. and therefore solutions are more needed. Congo. Almost all these are among those with long or permanent shock persistence: those where efforts to smooth fluctuations are most difficult. phosphate. This is principally a problem of African economies and some Caribbean. with permanent responses to shocks for other coffee. Others among their top 20 exports are other types of wood and fish. and tropical wood and aluminum (2% each). lead. and Pacific. Latin American. Sudan. cocoa. 60% of For least developed countries. and maize. Tanzania.  Those with 5-8 years include some agricultural beef. the edible oils. and 13 of the 20 11 of the sub-Saharan African countries face shocks to their terms of trade which are ‘permanent’: Latin American countries are on the list.  Uganda. Nigeria.  Liberia. Mauritania. cotton. and suggesting a high aggregate dependence on a small number of commodities. Cote d’Ivoire. and Congo (Dem Rep) face periods of more than 5 years. cotton (4%). Botswana and Angola. Cameroon. and also some sugar and rice (again both intervened commodities). hardwood. Other long-term shock commodities are copper. iron. In both Africa and Latin America. Beyond this period it is unlikely that fluctuations could be treated with short term measures. Kenya.

wood. are now provided by foreign companies. The interaction of these two trends has meant that some of the services formerly provided by governments. decreasing the share of commodity income remaining in the producing country. These offered predictable (and usually fairly stable) prices. base metals. e. rum and sugar who have benefited from preferential arrangements with the European Union under the successive Lomé Conventions Successful attempts at diversification away from commodities Countries that have succeeded in diversifying away from commodities into higher value-added. iron and steel. A case in point is that of the African. refined oil. Services. Malaysia. and gas. are mainly in Asia (e. It may also be the least likely short-term scenario for most commodity dependent countries. therefore. beef/veal. Instead. larger. and aluminum. Caribbean and Pacific suppliers of bananas. the Compensator Financing Facility (from .g. POLICIES TO HELP COMMODITY-DEPENDENT COUNTRIES Reducing dependence on commodities Reducing dependence on commodities by moving to a different type of export – manufactures. Diversification did not occur as the result of domestic export-targeted measures or external preferential trading schemes. or non-traditional commodities – seems the best solution to shelter developing countries from the negative impact of price instability. COMPENSATION SCHEMES FOR EXPORTERS Here we look at existing or recent compensatory finance schemes which. they may have some market power. like insurance. technical assistance The growing role of integrated companies may also lead to more direct control of what is produced (which technical or quality standards).g. Brazil. and have access to private finance. The EU at its peak had three (STABEX. Indonesia) and Latin America (e. provide finance after a fall in prices. many developing countries had marketing boards or other forms of direct intervention in commodity markets. achieved through high saving and investment rates. the shifting of labour from primary to secondary and tertiary activities stemmed from policies promoting long term economic transformation and the development of supply capacity. fertilizers. more stable income earners such as manufactured products. stockholding. Two closely related changes have occurred in the market structure for most commodities. They are minority suppliers for meat. They are less dependent on commodities. Chile).Animal feeds. finance. SYSMIN and COMPEX) and there is one international scheme administered and funded by the IMF. less poor. Until the 1980s. In many of them.g. for both output and many inputs: seeds.

At least half the EU member states in the end wanted STABEX abolished because they deemed it inefficient.g.1963). COMPEX COMPEX had an even shorter and less effective life. in recent years Russia has been the dominant user.1997) COMPEX had already almost vanished without trace. sugar and rubber in the 1970s. Without a convention or treaty document. in central Africa. it in fact started as an export earnings partial equalization scheme funded by EDF aid (mostly. from the beginning of the 1980s). STABEX STABEX has generated an extensive literature ever since its Lomé I operations (1975-79) were comprehensively evaluated in 1982 (Hewitt). and in more recent years entirely by grants). soft aid funds were not the ideal instrument to deal with either corrupt. but the Facility has not been activated since 1984. means that it is not now deemed appropriate for developing countries. SYSMIN always faced a dilemma: designed simply to maintain the output of certain mineral producing countries.e. mostly on its oil and gas accounts. Promoted by Commissioner Cheysson as an ‘insurance scheme’ where the EU pays the premium. the least-developed countries had no means of pursuing their claims. This was a brief attempt in the late 1980s to extend the benefits of STABEX to non-ACP least developed countries exporting (agricultural) commodities. CONCLUSIONS: . Few have availed themselves of CCFF funds in the 1990s. called since 1988 the Compensatory and Contingency Financing Facility (CCFF). inequitable and counter-productive. indeed. when we attempted an inventory of all EC aid (Cox et al. CCFF The CCFF can be dealt with very briefly because its payments are not commodity-anchored. or the multinational mining corporations elsewhere who were the last to need EU subsidies. The IMF also established a Buffer Stock Financing Facility in 1969. mining concerns e. with some more recent modifications. and resources were used for tin. Moreover the fact that it levies heavy interest charges – higher than for ESAF borrowing or the current Poverty Reduction and Growth Facility – as well as bearing macro-economic conditions. SYSMIN SYSMIN existed from Lomé II onwards (i. recently nationalised.

The form of such assessments and the means of dissemination should be agreed among participating agencies and bodies. technical assistance in new products. but the long term fall in prices makes stabilising impossible through market means and impossibly costly through aid. encouraging failure to diversify through preferences favoring traditional goods or through protecting their own traditional sectors.There is also a potential mismatch between the objectives (to help countries) and the means (market support for particular producers and existing production).The purpose of attempts to improve the position of developing country commodity producers is to increase the countries’ income and to reduce poverty within them. External assistance can provide general support for this: improving general economic and social infrastructure. Other countries can avoid offering ‘negative incentives’. Holding prices above the market price could give further temporary assistance. While recognizing that low international prices for food commodities might be generally beneficial for importing countries. developing the regulatory and financial institutions. and particularly those in developing countries The various international agencies involved in commodities work and the respective international commodity bodies should consider bringing together their complementary expertise to develop an overview of the commodity situation and problems. and good access for new products. or of significant issues. but the strategy has to be national. This overview should be widely disseminated at periodic intervals to improve the allocation of resources to these sectors. into new products (or services). the Consultation stressed that the ongoing widespread price depression was having extremely adverse effects on producers world-wide. The evidence from those countries which have developed successfully is that the long-term strategy must be to diversify. .

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