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World Commodities Prices: Still a Problem for Developing Countries?

Date
Time (GMT +00) 00:00 23:59

Speakers:

Sheila Page - ODI

Adrian Hewitt - ODI

Chair:

Paul Ladd - Christian Aid

  1. Paul Ladd introduced the meeting as one which intended to explore the nature and extent of the problem with world commodities prices, and their effectiveness, nationally and internationally.
  2. Sheila Page
outlined the argument set out in detail in the ODI Special Report she co-wrote with Adrian Hewitt, entitled, 'World Commodity Prices: still a problem for developing countries?'. Adrian Hewitt began by remarking that large exports of coffee from new entrants such as Vietnam tend to depress prices of world markets. He commented that while it has been known for 50 years (the Singer-Prebisch thesis) that economies dependent on commodity export will face price declines, the IMF have only conceded this fact in the last ten years. Citing Enron as an example of a commodity trader, Adrian Hewitt highlighted the tendency of capitalism to pit small competitors against a few enormous corporations. Paradoxically, he said, most of the solutions are targeted at poor farmers with an increasing emphasis on international co-operation. So what are the measures, he asked?:

Stabex had one bonus: it shifted billions of EC public money in its 25-year history. It was based on the export earnings on these countries, made calculations for compensation on a commodity by commodity basis and only dealt with the EC and ACP. The EU increasingly tried to tighten it up, forcing governments to invest in more production of the commodities which were already weakening. DfID's predecessor, ODA, was very hostile to Stabex and it doesn't appear at all in the Cotonou Convention. The IMF scheme, (CFF, later CCFF) set up as a contingency plan for export shocks was based on the balance of payments but became more conditional towards the end of the 1980s and into the 1990s, and too expensive for developing countries given the high interest rates charged. Only countries like Russia and South Africa used it in the end. Despite the success of smart countries like Mauritius which can benefit as long as they diversify, the EC’s commodity agreements, especially with sugar (a very large commodity) have a danger of locking a country into old colonial trade patterns. When agreements such as the Cotonou Agreement are abandoned, withdrawal symptoms are very severe, especially in countries like Fiji. Commodity risk management schemes which are now reoriented to benefit the poor, and be market friendly at the same time (using financial derivatives) – more below. Fair trade systems run by NGOs still face monopsony power at supermarket level, and with the traders who are controlling it. While brand development and marketing have enormous influence, once you get beyond raw commodities, fair trade still represents a fraction of the market, though growing.

Adrian Hewitt wondered if 'the big new hope' was the international taskforce with its commodity risk management scheme that attempts to bring in the trading houses as well as governments, the World Bank, the EC and other markets. The taskforce was set up with much EC support; six pilot studies are in place, including Ghana and Uganda. Trying to sustain the livelihoods of poor farmers and give them more confidence in the markets, they are establishing a minimum-income pledge and a put option on the markets to guarantee a return. But the real premiums needed to insure the operation are still quite costly. Adrian Hewitt asked a few questions. Were the above-mentioned taskforce initiative, and other interventions, worth exploring? Or should we just accept the inevitability of globalisation? It was only when the World Bank became conscious of the blindingly obvious (that indebted countries were hopelessly dependent on commodity exports) that they began to support risk management intervention for HIPC countries (who now have more than 80% of the exports in commodities). The World Bank, a lender, was often optimistic in its commodity price forecasts. What, Adrian Hewitt therefore asked, are these schemes really addressing? Why do they not, instead of simply putting money into the hands of small farmers, look at which commodities really need marketing? If the problem is agricultural exports, why don't they revise the CAP? Why do debt settlements still rely on impossible commodity price forecasts? We can predict that there will be external shocks. In conclusion, Adrian Hewitt favours diversification and any moves away from dependency on commodities. There is a key role for government intervention in this, and African governments should have stronger roles with strengthened planning systems. The Common Fund for Commodities, established in the 1980s has resources and, despite the fact that the USA is not a member and that France has recently left is due a second wind. Ultimately, he said, the solution is in some form of supply management. But is this possible in such a legalistic market where even OPEC struggled? A number of points were raised in the discussion:

ITF schemes are encouraging because they provide farmers and co-ops with some kind of current knowledge and credit. Also, having some idea of what their income will be, however low, will provide them with more security and also sends an important price signal to farmers. However, with prices being so much lower than the price of production, farmers will not be impressed at having to pay a premium approaching 10% of a price that is so derisory in the first place. Sheila Page noted that giving people a temporary guarantee is not really a safe option. Adrian Hewitt added that ITF schemes should not just be used as a pilot, but should be spread across the world. It is not up to the donors - it will work if it is self-financing and shows encouraging signs. Any ideas that support farmers are good, but will never be as effective as CAP reform, for example; Some suspicion was directed at moving into manufacturing where similar problems were sited down the line, for example in China. Perhaps locally-oriented markets were the answer, not diversification? Sheila Page argued that it is still easier to diversify than to continue in the old ways; The idea of limiting exports, based on quality, as a new kind of supply management tool was suggested for coffee-producing countries, though the system may prove vulnerable to cheats. How can we ensure that any of the benefits of these schemes are passed on to the small farmers? The role of national-level price regulation, policies and financial provision was called into question; Though in many cases disbanded by the World Bank and criticised for merely being state revenue devices, marketing boards can provide a way of harnessing international funds and provide a useful interface with farmers; The question was raised as to who should diversify out of commodities? Very poor countries might find it very difficult as the costs of adjustment are huge and involve the majority of the populations. The overall development of these countries therefore needs to be taken into account; Sheila Page agreed that the costs of adjustment must be met. However, one should concentrate on meeting the costs of transition but under no circumstances support the price of commodities, and note that these former are considerably smaller costs (big, but not huge); A warning was sounded for the farmers encouraged (or pushed) into diversification from, say tobacco to poppies or sugar to marijuana. Great care needs to be taken as to the choice of direction.

Description

This meeting intended to explore the nature and extent of the problem with world commodities prices, and their effectiveness, nationally and internationally.