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World Commodity Prices: Still a Problem for Developing Countries

Book/book chapter

Written by Adrian Hewitt, Sheila Page

Book/book chapter

Commodity prices have fallen relative to manufactures and services and are likely to continue to do so. There is little scope for increasing the volume of sales sufficiently to counterbalance this. Therefore the long-term strategy for development for most countries must be to reduce dependence on commodities and move into production of manufactures or services.

This cannot happen overnight, and the difficulties of adjusting to low and falling commodity prices have been increased by the withdrawal of official support (national and international) for commodities. Financial instruments exist in developed countries for some commodities which allow producers to transfer some of the price risk to the market.

Appropriate assistance to developing countries can help create the conditions for a successful diversification: good physical, social, and institutional structure: transport, communications, health, education, laws, banking system. Developed countries can ensure that their trade policy offers the same treatment to all developing country exports to avoid favouring traditional commodities or discouraging new products and services. There are structural problems of monopoly in commodity markets which require multilateral regulation.

Good institutional infrastructure will also ease the introduction of financial instruments. But using financial instruments has a financial cost, which may be high for poor producers, training and information costs, and institutional requirements. Assistance from countries with financial resources and experience can speed the development of national markets or ease the use of international markets. Any such assistance needs to be linked to a plan for diversification and time-limited to avoid offering a wrong incentive by reducing the expected costs of remaining specialised in commodities.

Some commodities and some types of medium-term fluctuations are not suitable for market-based stabilisation. Some countries and some producers within them are too poor (or small) to enter the markets, even if they exist (or can be created). The countries which remain dependent on commodities are in general among the poorest. Even those countries which can change their structure will continue to face the problems caused by the trend fall in commodity prices until they have made substantial progress in diversification. Assistance to reduce current poverty must be undertaken alongside assistance to create the economic structure which will reduce poverty more permanently.

Sheila Page and Adrian Hewitt