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World Commodity Prices and their Impact on Developing Countries

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 globalisation of the world economy and increased liberalisation of commodity markets have led to profound changes that seriously affect the weaker economies of the developing world. Commodity price instability has a negative impact on economic growth, countries' financial resources, and income distribution, and may lead to increased poverty instead of poverty alleviation. Many countries, especially in Africa, derive more than 90% of their export earnings from commodities.

The commodity protocols annexed to the Lomé Convention, which expired the 29 February 2000, granted ACP countries important trade preferences as traditional suppliers to the EU market of bananas, beef, sugar and rum, through quota systems and customs duty preferences. These protocols, by providing up to certain limits, guaranteed volumes and prices for the ACP producers' exports of these products, helped to minimise the risks arising from fluctuations in the world market prices of the commodities concerned. With the Lomé framework gone, the parties recognised the need to review the protocols in the context of new trading arrangements, in particular with regard to WTO compatibility, with a view to safeguarding the benfits derived therefrom.

Stabex and Sysmin were instruments in the Lomé Convention designed to help ACP countries dependent on commodity exports to palliate the negative effects of price instability. These do not figure in the new Partnership Agreement and are replaced by a rather vague undertaking to provide 'a system of additional support in order to mitigate the adverse effects of any instability in export earnings, including in the agricultural and mining sectors, within the financial envelope for support to long-term development' (Article 68 new ACP-EU Partnership Agreement).

World commodity prices being notoriously volatile, driven by changes in global demand and supply, developing countries are particularly affected by external shocks that can result in increased poverty and reduced public funding for health and education.

Early attempts to deal with commodity price volatility relied on stabilisation schemes set up in the context of international commodity agreements. These arrangements were largely unsuccessful. Globalisation of commodity markets and the lowering of trade barriers, along with priorities focused on sustainable development and poverty alleviation, call for a more innovative approach to commodity risk management. The concerns of all interested parties (traders, governments, producers, farmers) should be taken into account.

Hardship resulting from falling commodity prices should be, as far as possible, alleviated in a balanced way, without farmers and the poorer segment of the population in developing countries paying the price.

Contents of the study

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 illustrated trends in market prices for major commodities, including minerals and agricultural products, with reference to the supply, processing and export capacity of the producing countries. It looked at the changes taking place in international commodity markets and how developing countries can be better equipped to deal with new developments.

The study helped identify major constraints faced by developing countries in responding to the global evolution of world commodity markets. It clarified the appropriate instruments, which assists commodity-dependent developing countries to cope with the difficulties resulting from commodity dependence. It proposed workable policies and strategies to reduce the negative effects of price fluctuations, to enhance price stability, economic growth and sustainable development and analysed in this context the impact of the new ACP-EU partnership agreement.