A. INTRODUCTION

    International commodity markets represents a major outlet for developing country total sales. Integration into the world economy of these countries, and frequently their growth process, normally start with the development of primary products for which markets are abroad, as it is the foreign richer countries which have sufficient purchasing power, and also, there are those abroad which experience deficiencies of particular resources and must meet them through imports. Since 1950, many developing countries have gone through a significant industrialization drive, and since 1970 a limited but growing number have succeeded in developing considerable and rising exports of manufactures for the world market. Nonetheless, the majority of developing countries have remained dependent on primary products for welfare and growth: African countries depend on primary products to an overwhelming 80 to 90% of their total exports, these products account for more than 65% of Latin American exports, and similar dependency is encountered in many other developing countries.

    Commodity markets are among the most volatile of markets; and poor countries suffer from this volatility most, first because of their heavy reliance on these markets, and secondly, because they are less able, due to shortage of finance and poverty, to adapt their sales to changes in demand and to vicissitudes of prices so as to maximize revenue and minimize losses. Furthermore, long-term demand for primary products expands less fast than the demand for manufactures and services, while supply shows a persistent tendency to over-production because of shortage of alternative employment opportunities in developing countries and in primary production (agriculture) generally, and because of insufficiency of skills for diversified production. Hence there has been a persistent tendency for prices of most primary products to fall in relation to prices of most manufactures, and this adverse movement in the terms of trade was one of the key unfavourable features with which developing countries had to cope both in the inter-war period and since 1950.

    Downward fluctuation and adverse trend are fully at work since 1989, and the developing world is now experiencing another collapse of commodity prices, which has brought them down, in real terms, to the lowest level since 1950, and, according to The Economist and World Bank analysts, over the last 100-150 years. The current situation in commodity prices and finance is discussed in section B. This is followed by an assessment of short and medium-term fluctuations (section C), and long-run trends (section D). The position of developing countries as sellers and buyers is discussed in section E, and the situation in their plantations, farms and mines -- the human factor, wages -- in section F. Commodity price stabilization, alternatives to it, past experience with it, and the ways in which it can be approached in the future are reviewed in section G.
 

B. COMMODITY SLUMP 1990-91

Prices

    Between early 1989 and mid 1991, export commodity prices of developing countries fell about 20%, according to UNCTAD, World Bank and IMF indices, a speed of decline only slightly lower than during the slump in 1980-82, which triggered the international debt crisis and ushered "the decade lost for development." The Economist's index shows a decline of about 30% between 1988 and 1991.49 In any case, prices of primary products in real terms are very much lower now than they were in the early 1980s, and therefore any additional fall is felt with ever greater hardship.
 

Notes: (a) Weighted by 1979-81 developing countries' export values; (b) First half; preliminary. For the entire 1991, the index is 58.2. The World Bank projection for 1992 is 56.1.
Sources: World Bank, Quarterly Review of Commodity Markets, June 1991: and Quarterly Review of CM, April 1992.

Incomes

    In Malaysia, one of the most efficient commodity producers, rubber growers' net monthly income dropped 33% from 1988 to 1990; oil palm farmers were even worse off, with incomes falling 50 percent.58 "Planters testify to how the peaks in the markets' cycles are becoming shorter-lived and the troughs ever longer.  It used to be two years, sometimes three', according to one producer.  Now it is seven or eight, with a brief year in-between.' Malaysia's plantation industry is entering its twilight years."59 Even Australia's rural sector "is facing its worst financial crisis for a century", according to the president of the National Farmers Federation. The Australian Bureau of Agricultural and Resource Economics forecasts that average prices received by farmers would fall by five percent in 1991, following a decline of 13 percent in 1990 Net farm cash incomes would fall by 24 percent following 35 percent in the last financial year. "The rural sector has been hit by weal prices for a range of commodities, including sugar, dairy products, and beef. However, the biggest problems have been caused by competition from subsidized wheat exports an the collapse of the wool market because of over-production and falling demand."60

    Over vast areas of Africa, Latin America and partly Asia, it is the collapse of the coffee and cocoa markets which have caused enormous damage. Coffee export earnings have been cut in half, with a loss estimated at US $ 4 to 7 billion per year. 61 Coffee is the second largest primary export of developing countries after petroleum; and the suspension of the operating provisions of the international coffee agreement in 1989 has affected some of the poorest developing countries and regions with large populations. An excessive investment in cocoa growing, partly financed from external sources and stimulated by currency devaluations, ended in the late 1980s, when the price was driven to below US$ 1,000 per ton, compared to an average of more than US $ 2,000 in 1980-87. (At its peak, in 1977, the price was US$ 5,467). Parts of West Africa have been devastated by the cocoa crisis. Similar economic circumstances in the mid-1960s led to political upheavals in the region, whose effects are still partly felt.
 

Factors at work

    The slow-down in the world economy, with recessionary tendencies in some important parts, and the previous excessive investment in some primary products, have been the dominant factors in causing the downturn. But changes in the USSR have affected commodity markets also, in two directions. First, increased Soviet demand, actual or expected, for foodstuffs, has strengthened or prevented the weakening of the grains and meat markets. Secondly, increased Soviet sales of metals -- aluminium, nickel, copper, platinum and minor metals -- have contributed to the weakness of the metal market during the last two years. These increased sales, induced by the shortage of foreign exchange in the USSR, and therefore the need to sell even at falling prices, have attracted much attention. It is not clear to what extent they can be sustained: this will depend primarily on the state of mining equipment within the former USSR. But it is likely that the pressure to sell will be present for some time, in view of the independence of the states and a growing autonomy of the producers and foreign trade organizations, all with their needs for foreign exchange, unless commodity arrangements can be made with other producers providing for orderly marketing.
 

Withdrawal of commodity finance

    In February 1991, it was reported from London that "international banks, already shaken by mounting bad debts in property, industry and the Third World, are reeling again, this time from multi-million dollar losses on commodity lending. Some banks, aghast at the growing pool of red ink, are expected to quit commodity financing altogether, while others are set to charge higher fees to all but top-notch customers... The recent failure of one of Britain's oldest commodity houses, Woodhouse Drake and Carey, has sent shock waves through banking boardrooms. The 223-year-old trading firm collapsed with debts of US $ 150-200 million. More generally, plunging raw materials prices, squeezed commissions, and soaring costs have caused a flurry of financial problems in world commodity houses. As a result, one bank has already decided to quit commodity lending and others are expected to follow, bankers say. This follows a steady exodus of U.S. banks from commodity financing in recent years."62

    In March 1991, it was reported from Paris that Sucres et Denrees, the leading French commodity trader with a heavy involvement in world trade in cocoa, coffee, rice, sugar and oil, was getting a large loan from French banks to cover losses in its trading activities, on condition that in the future "it will embark on fewer big trades and will put more emphasis on less risky downstream activities" (mainly food processing).63 This firm had bought 400,000 tons of cocoa from Ivory Coast or one-fourth of the world crop, in 1988, and 10% of Iran's entire oil output in 1989.

    In April 1991, it was reported from London that Philip and Lion, one of the last privately-owned international metal-trading groups, ceased trading and would seek voluntary liquidation, because of extreme liquidity shortage. The company trading activities were mainly in non-ferrous metals, both primary and scarp. "Metal traders suggested that there were some signs that many banks were now unwilling to keep a high financial exposure in volatile commodity markets. The physical merchanting business had contracted in recent years and this trend was likely to continue, traders added. Other merchants were believed to be in difficulties."64

    These instances of traders and banks withdrawing from commodity finance because of increased risks associated with price falls and resulting losses on inventory make the position of commodity producers even more vulnerable than so far: as the pool of funds available to finance stocks (inventories) is being reduced, the likelihood of deep price falls would be increasing. The need for public stocks to fill the gap therefore increases also.
 

C. PRICE FLUCTUATIONS

Magnitude and increase over time

    Chart I below shows the range of price instability indices for 34 commodities in the 1980s. Differences in instability among commodities are wide: the index for the least stable (sugar) is more than eleven times that for the most stable (oranges).

    Table II below follows the individual commodity instability indices over time, through four successive decades from the 1950s to the 1980s, for fourteen agricultural commodities. "For bananas, coconut oil, groundnut oil, and palm oil, price instability appears to have increased unambiguously sine the 1960s, and for coffee, copra, cotton, maize, tea and wheat, price instability was higher in the 1970s an 1980s than it was in the 1950s and 1960s. For cocoa, rice, rubber and sugar, evidence is mixed, but regression of ten-year moving coefficients of variation shows that the trend of instability has been positive for all these crops except cotton and rubber."65 For both cotton and rubber, the price trend was consistently downward in real terms in 1950-1990, however, so their producers did not get much comfort from relatively low price variability around generally falling movement.
 

Causes

    Fluctuations result from a number of causes, which, while largely independent from each other, frequently coincide. When they do, fluctuations can take on catastrophic dimensions.

    First, there is the influence of cyclical income fluctuations in consuming countries, corresponding to the broad movement of the general business cycle. "For most commodities, economic activity in the industrial countries continues to be an important -- often the most important -- determinant... Ups and downs in industrial country production have important consequences for commodity exporters, particularly exporters of metals and agricultural raw materials." 66 But they affect exporters of foodstuffs also as changes in industrial country production cause changes in their employment and consumer incomes.

    Secondly, there are short-period fluctuations which are due primarily to good or poor harvests caused by variations in weather conditions. In some commodities there is also a tendency towards a two-year production cycle, a year of good yield followed by a year of poor yield, with corresponding variations in prices in the opposite direction.

    Thirdly, price fluctuations resulting from either the demand or supply shifts can be accentuated by speculative trade -- when one buys things one does not need and sells things one does not have, in the phrase of the Nobel Prize winner professor Maurice Allais. The conventional view holds that speculation is normally of a price stabilizing nature; what it forgets is that the stabilizing function -- buy the commodity when the price is low as well when the price is high -- frequently takes place only after the price has fallen sufficiently low (or risen sufficiently high); the term "sufficiently" reflecting the judgment of the market of the likely bottom and the likely peak of the price. In practice, and based on past experience, commodity speculators frequently expect the price, when it starts falling, to fall a long way; consequently, once the decline starts, they sell; consequently the price decline accelerates. Since much of commodity speculation is carried on borrowed funds against collateral of commodity contracts, the price fall reduces the value of the collateral; and as this reduction takes place, the lenders call their loans. If chances of price improvement in the near future are judged limited, commodity speculators prefer to lose their deposit (cash margin) rather than put up more collateral; they get sold out by the lenders, and the price falls further, perhaps in successive waves as lower and lower commodity contract prices and associated collateral values are reached. Brokerage houses advise selling once the decline starts:

"If you as a speculator have a position at a time when an unfavourable major trend develops, you may postpone liquidating your position until you have a substantial loss. It is easy to defer taking a loss in the hope that prices will recover and the position can be liquidated without any loss at all. But once started, commodity prices frequently move in one direction for some time. If you do not liquidate promptly at a small loss you may be forced to take a sizeable loss"67

"The competitive system abhors the existence of stocks, with as strong a refle as nature abhors a vacuum, because stocks yield a negative return in themselves. It is ready without remorse to tear the structure of output to pieces rather than admit them, and in the effort to rid itself of them."68

    The opposite to cumulative price declines in case of surpluses is the situation of cumulative price increases in case of shortages, again induced by the possibility of destabilizing behaviour of privately-held stocks. When prices are on the upswing, the demand for private stocks may increase as prices increase, because the latter are expected to increase even further.

    A reasonable price stability under circumstances of these destabilizing movements of private stocks calls for, and justifies, operation of publicly-held stocks, under international control or under export control of national authorities, or a combination of both.
 

Commodity cycles in tree crops

    Commodity cycles in tree crops, characterized by alternating phases of high prices, low prices and price recovery, are engendered partly by the fundamental features of the industry and partly by a special constellation of demand and supply price elasticities. Coffee is an outstanding case. It is a tree crop which requires a fairly long gestation period: coffee trees begin to bear within three to five years after planting and come into full bearing only about 7-10 years after planting. The short-run response of supply to an increase in price is weak: high prices lead to some increase in current yields, by more expenditure on pruning, weeding, spraying and fertilizer. Their main effect, however, is on new investment in coffee production (purchase and preparation of land, planting, buildings), i.e. the major thrust is on long-run supply. Investment responds sharply to high and rising prices. However, once a substantial number of young trees begin to come into production, the process reverses itself. The stream of new supplies come to the market and causes a very heavy pressure on prices, as demand responds very weekly to price changes; and the short-run response of supply is also low since variable costs (wages) are relatively low, while shifts into alternatives require cash outflow for new investment. Prices have to fall to a very low level to affect current output. However, depressed prices do affect investment activity in coffee production. New investment ceases, while old trees go out of production. There is a painful readjustment which may last almost two decades, until consumption catches again with output, leads to a new shortage and a new cycle. And intertwined with this multi-year cycles are purely short-term fluctuations. 69
 

    The multi-year cycle, and the associated waste of resources and human misery, can be overcome to a substantial degree through public (government) restraint on new investment during the upswing phase and through systematic diversification and productivity improvements throughout the cycle at a regular pace.
 

Effects on exporting countries

    Some academic writings have questioned whether commodity fluctuations have a negative effect on exporting countries.70 An effective response has been provided by a close observer, Dr. D. C. Rao, Director of the International Economics Department of the World Bank:

"As has been made painfully obvious during the 1980s, the developing countries face great difficulties in raising external finance and in servicing their external debts, due in large part to the sharp fluctuations in the prices received from their primary commodity exports. Their terms of trade are also very susceptible to import price shocks, especially for the most important primary product import for most of them -- petroleum.
In turn, the terms-of-trade shocks from primary commodity price fluctuations are a major problem for the management of firms and, probably most important, for the macro-management of the developing countries themselves. It is probably fair to say that the effort that has had to be devoted to macro management of these economies in the wake of such shocks has detracted seriously from the effort that would have otherwise been given to getting on with the process of development."71

    In coffee, large farms reduce labour force some during the price slump as they cut down on pruning and somewhat on picking.75 In cocoa, it is likely that wages will be cut first, followed by a reduction of inputs such as fertilizers, insecticides, etc.76 In sugar, large companies are likely to maintain their output or even increase it despite price fall, because they have written off the capital investment in the sugar mill -- a reaction which aggravates further price instability; while small-scale outgrowers generally will switch their efforts away from sugar case to other crops more readily.77

    At the level of public finance, "the effects of price fall can be very important, since for many commodity-exporting countries a substantial proportion of government revenue is derived from export taxes and taxes on corporations involved in foreign trade. Consequently, a large and prolonged fall in export prices is likely to cause an immediate budgetary difficulty or even crisis, followed by cuts in spending -- often spending on social services (health, education, etc.)."78

Effects on financial markets in developed countries

    Sharp fluctuations in commodity prices have had adverse influences on financial markets in developed countries in two directions. First, on the level of overall finances, sharp increases in commodity prices have led to the introduction of more restrictive domestic monetary policies in industrialized countries, which in turn has led to slow-downs in their economic activity on several occasions. And conversely, a contraction in real export earnings of developing countries following a fall in their export prices, has resulted in a reduction of exports to them from industrialized countries. Moreover, a prolonged period of depressed commodity prices, as in the 1980s, undermines the ability of commodity exporting countries to service their external debts and thus inevitably has an impact on the profitability of the private banking sector of the developed countries.79

    Secondly, on the level of securities markets, in much of the 1980s share markets have been heavily influenced by interest rates, while the latter, in turn, have been greatly affected by expected movements in commodity prices. The implicit theory has been that commodity futures are a fairly reliable indicator of inflationary expectations which determine the rate of interest (or at least determine the policies of central banks which then influence the rate of interest). The stylized sequence would be: a rise in commodity prices causes an increase in inflationary expectations; the latter lead to an increase in interest rates and yields to offset the expected loss in value of financial assets due to inflation; the counterpart of the interest rate increase is a fall in prices of bonds and other fixed-income securities; the fall in bond prices induces a switch of funds from shares to bonds, and a corresponding fall in the price of shares (stocks). A report on trading in U.S. on 19 May 1988 shows how this works:

"In a large degree, the behaviors of the Dow Jones industrial stocks average mirrored movements in the bond market, which in turn were in line with the Commodity Research Bureau index, a key measure of inflation that tracks commodity figures prices in Chicago. The CRB index rose sharply in the morning, heightening inflation fears, raising yields in the bond market and depressing stock prices as bonds became a more attractive alternative to stocks. The index later retreated when soybeans futures weakened, easing bond yields and helping the stock market rise.  The funny thing is how the market is so tuned to inflation, it turned on the commodity price index, which was turned on and off on soybeans' according to one financier.  This shows how graphically the stock market has become a commodity business."80

    The reported disruptive impact of commodity price fluctuations on interest rates, and via the latter, on share markets raises the question of the need for international commodity stabilization from an unexpected angle. The major interest in stabilization so far has been that of primary producing developing countries. Consuming countries have joined in this quest on rare occasions and mostly for limited periods. Most of them have been apprehensive, it would seem, that benefits from international stabilization would primarily occur to the exporters, while the consumers would pay higher prices on the average. But if the costs of commodity instability in causing financial destabilization in developed countries are factored in, interest of these latter countries in commodity stabilization should be expected to increase at some point, as financial destabilization can be expected to lead to losses in employment and output, additional to those caused by price instability directly.
 

D. LONG-TERM PRICE TRENDS

Statistical findings

    Set forth below are the five-year averages of the price indices in real terms of 33 commodities exported by developing countries for the period 1948-1990.
 

Notes: (a) Weighted by 1979-81 developing country export values; (b) Deflated by using the unit value index in US dollars of manufactures exported by G-5 countries; (c) Three-year average.
Sources: World Bank, Quarterly Review of Commodity Markets, June 1991.

    Chart III shows the indices of real prices computed for the period 1900-86 for 24 non-fuel commodities (GYCPI/MUV line) and for 26 commodities including oil and coal (GYCPI'''/MUV line), by World Bank analysts Enzo R. Grilli and Maw Cheng Yang.82 They have linked to their index the indices for the period 1870-1899 computed earlier by The Economist, London, and Nobel Prize winner professor Arthur Lewis. Downward trend over 120 years is unmistakable, although the two world wars, the Korean war and the events in the Middle East in the 1970s provided what turned out to be temporary reliefs. If the last five years 1987-91 were added to the chart, the picture would be even gloomier.

    The Economist's index "has tumbled to virtually its lowest level in real terms in its 150-year history", according to The Economist of 10 August 1991.
 

Projections

    The World Bank expects that non-oil commodity prices will continue to fall over the next two years, then stabilize in the mid-1990s, and recover about 10% during the subsequent decade. Recovery in oil prices during 1995-2000 is expected to be somewhat stronger.
 

Notes:(a) Excluding energy.
Source: World Bank, Quarterly Review of Commodity Markets, April 1992.

    For export commodity prices of developing countries to stabilize and reverse course, which is badly needed, three conditions need to be met, in my view:
 

    Investment in expansion of primary production for exports must be brought in line
       with realistically estimated world demand. In the past, it has been excessive. It has
       been argued that there has been no coordination among, and perhaps even within the
       international agencies which have financed a considerable part of the investment.83

    A new action is needed to conclude stabilization agreements on key commodities,
       which would operate price bands adjustable over time, supported by international
       stocks, export controls and national stocks, and stand-by production controls as
       required.

    Capacity of exporting developing countries, particularly those at low incomes, to time
       their sales properly must be improved, so that they can deal with international trading
       and finance companies on more equal footing than in the past.

Export sales: insufficiency of market staying power

    As matters now stand, the many financially weak producing countries, mostly low income, have a limited staying power in the international market. Financially unable to carry stocks and in urgent need of foreign exchange, the low-income countries are frequently compelled to sell competitively on a falling market the commodity surpluses which periodically inevitably arise because most commodity production is highly variable and cannot be adjusted quickly to changing demand. These distress sales, usually accompanied by sales from speculative stocks, force event the financially strong developing countries into competitive selling as they become concerned about a loss in market share. The pressure of sales occurs in the face of a limited number financially strong buyers in developed countries who postpone purchase in the expectation of still lower prices, apprehensive of losses on inventory if they buy prematurely. It is these circumstances which frequently lead to extremely sharp price falls and to associated declines in producers' incomes, sometimes disastrous. Even under normal circumstances, when crops are near average, the bunching of competitive sales in the face of a limited number of buyers will lead to erosion of the market price, or to special sales under the market, or both.

    The losses incurred by low-income sellers in falling markets normally cannot be compensated by gains in rising markets. To achieve such gains, the sellers would need financial power to hold supplies off the market for a considerable time while it is rising. The developing countries do not have such financial power, although there are rare and temporary exceptions. If international public funds were available to help absorb temporarily the surpluses and gave the producers the breathing time to adjust their production and deliveries, distress sales would be avoided. More generally, low income countries would be able to time their sales properly and thus improve their bargaining position in relation to buyers in industrialized countries. Smaller quantities would be sold when prices are low, and larger when they are high.
 

Evidence

    Numerous specific cases are known where substantial losses were sustained by low income producers because of inadequate financial power and improper timing of sales.84 On a more general level, a study, carried out in 1978, established that in the fifteen years 1961-75 developing countries were receiving considerably lower prices for their exports than the prevailing world market prices and the prices obtained by developed countries. Export unit values received by developing countries (i.e. the average prices at which their primary products were actually sold) were compared with market quotations. The same comparison was made for developed countries' exports of the same products. A sample of 12-19 products was included. The following findings emerged:
 

    In 1971-75, prices actually received by developing countries averaged 85 percent of world market prices.

    Among the developing countries, it was the African countries, i.e. often the lowest-income producers, which received the lowest prices: 80-82 percent of world market prices in 1971-75.

    In contrast, the prices received by the developed countries were close to, or exceeded, world market prices: 94-101 percent in 1971-75.

    The shortfalls experienced by developing countries widened during the fifteen years 1961-75, from 12 percent in 1961-65 to 15 percent in 1971-75. For the African countries, they widened from 11 percent to 19 percent. The premiums of the exporting developed countries fell, from 4 percent above the market in 1961-65 to 1 percent. It follows that the share of the market price occurring to import trade increased, at the expense of producers, in all exporting countries, both developing and developed, with the worst deal experienced by the African producers.85

Import prices: the African case

    A recent analysis by Dr. A. Yeats, a World Bank economist and formerly on UNCTAD staff, has established that African countries pay more for imports than other countries, developing and developed, on the average. 86 His finding is based on an examination of import prices of iron and steel into Africa from France during 1982-87, showing an average 20-30 percent premium over the price paid by other importers. He also provides additional material, suggesting that Africa pays higher prices for products other than iron and steel, and that it pays higher prices also to suppliers other than France.

Among Dr. Yeat's findings are that:

    the lowest-income countries pay the highest import prices;

    as the quantity purchased increases, the relative import prices decrease;

    as the total value of imports increases, the relative import prices decrease;

    a developed country with countervailing power will normally pay less.
 

    Implicit in these findings is that a poor payments position will lead to higher import prices through lower quantities purchased, lower value of imports, ad hand-to-mouth purchasing pattern.
 

F. SITUATION IN PLANTATIONS, FARMS AND MINES

Wages and living conditions on plantations

    Committee on Work on Plantations of the ILO, in its 1982 report, commenting on the situation in thirteen countries, stated that "wages or incomes are too often below the poverty mark and do not permit the worker to meet the basic needs of his family."87 Included were coffee, sugar-cane, rubber, palm oil, tea, coconuts, tobacco, cocoa and banana plantations -- all export crops.

    In its latest report, in 1989, the Committee, commenting on the situation in seventeen countries, with the same product coverage as in 1982, stated that "The current situation of plantation workers is in many respects similar to that which prevailed 20 years ago."88 It then adds two important points:

"Plantations managers have from the start been obliged to provide accommodation and specific social benefits in view of the remoteness of production sites from urban centres... Despite efforts in a number of countries to renovate existing dwellings or erect new ones, the buildings in which workers and their families are lodged are still too often old and lacking sanitary arrangements. In some countries accommodation conditions have actually deteriorated over the years for lack of upkeep... Moreover, the structure of the workforce on plantations has changed. In many countries there has been an ageing of the workforce, due partly to a lack of interest in the sector on the part of the younger generation.

There is another worrying factor. To make up for difficult working and living conditions, the plantation sector generally used to offer relatively secure employment... Now, the proportion of permanent staff in the total workforce on plantations is diminishing and employers are more and more frequently resorting to temporary or seasonal workers... This practice has extremely serious social implications. Most of the benefits in kind are guaranteed, in practice or by collective agreement, only to permanent workers. Thus, a new social stratification is coming into existence, in which permanent workers, whose number is constantly decreasing in relative terms, form a class of better protected workers, while temporary workers are disadvantaged."89

Notes: (a) Original data were given in local currency. They were converted into US dollars at IMF-quoted market rated (International Financial Statistics). Original data were sometime given on a monthly or hourly basis; they were converted into daily wages using 25 working days per month and 40 to 50 hours per week, depending on the case; (b) Coffee and tea plantation; (c) Rubber plantations.
Source: Jean Paul Sajhau and Jürgen von Muralt, Plantations and plantation workers, International Labour Office, Geneva, 1987, pages 136-37, 141 and 143.

Real wages in agriculture

    Table VI sets forth the readily available knowledge on real wages in agriculture in developing countries. This is a broader concept than wages in export industries; but in view of the importance of exports in most developing country agriculture and the likelihood that wage movements in the export and non-export parts move in parallel to a considerable degree, the data may be taken as indicative of the possible wage trend in the export sector.
 

Source: International Labour Office, World Labour Report 3, 1987, Geneva, pages 71, 81 and 87.

Distribution of gains from productivity growth

    In the judgment of the ILO staff, productivity growth in export industries in developing countries resulted mostly in falling export prices rather than in rising domestic wages during the last several decades. The known exceptions are only Malaysia, where both palm oil and cocoa production booms led to a shortage of labour and rising wages, and Mauritius where growth of diversified industrial exports led to a liquidation of unemployment and shortage of labour in the sugar industry in less than a decade. But in other countries, the main beneficiaries of productivity growth in export industries appear to have been importers abroad. A partial statistical confirmation of this assessment is found in the evidence that labour productivity rose in the agricultural sectors of C™te d'Ivoire, Kenya and Malawi during 1970-84, while their agricultural real wages fell.91 In coffee, "as a general rule, most of the gains from increased productivity have accrued to consumers in periods of low prices, and to state agencies in periods of high prices. They have not resulted in increased wages in real terms to plantation labourers".92 And as periods of low coffee prices have been much longer than the periods of high prices -- please see Chart II, page 31 -- most of the gains have gone to the consumers. In Central America, over the period from the late 1940s to the early 1970s, banana output per hectare more than doubled as the producing countries switched to Panama disease-resistant varieties, capital per worker increased by nearly four times, whilst the number of workers per hectare decreased by around 20%. With wages approximately constant in real terms, the major beneficiaries of this rapid technical change were the producing companies and the consumers, who experienced a fall in the real price of bananas of about 50%."93

    The issue goes beyond agriculture. In its Trade and Development Report 1990, UNCTAD has argued that "higher productivity is a major factor behind expanding output, which is the main cause of lower export prices for several export commodities of developing countries. Palm oil and cocoa are good examples in this respect in the agricultural field, where productivity has increased because of cloning and hybrids. In the case of metals, lower production costs have likewise exerted a downward pressure on market prices. For example, substantial cost reductions have been achieved for copper and tin in recent years, basically through a reduction in employment, profit-related wage rates, new technologies, closure of high cost mines and the coming on stream of more efficient installations."94
 

G. STABILIZATION

Alternatives to stabilization

    Compensatory financing. It has been argued that compensatory financing provided to developing countries experiencing export shortfalls is a generally superior substitute for commodity price stabilization. It will be readily agreed that such financing is an indispensable device for commodities where price stabilization is not technically feasible or cannot be agreed upon on other grounds: the number of commodities on which stabilization agreements can be concluded will be limited, and also, price stabilization will not help where the reason for an individual country's export shortfall is a decline in its own commodity supply, e.g. a crop disaster. But the difficulties with compensatory financing as a general remedy are three-fold: it lead to additional indebtedness of already indebted developing countries, it requires very large resources to be effective, and it does not prevent or moderate the multi-year production cycles. Moreover, in practice compensatory financing has become entangled in loan conditionality which has adversely affected its original purpose.95 Two recent international report have stated:

"There has been a general recognition by the world community in the postwar period of the need for contingency provisions, by way of mechanisms for compensatory and supplementary financing, to be built into the operations of international financial institutions to cushion developing countries against a sudden reversal of their economic prospects. The establishment by the IMF in 1963 of a Compensatory Financing Facility (CFF) to provide assistance to developing countries facing unexpected shortfalls in exports was a limited response to this need. In the 1970s, the scope of this facility was expanded to include the financing of contributions to international buffer stocks of primary commodities and to cover unexpected increases in the cost of cereal imports.

The increased uncertainty and fluctuations in the world economy in the 1980s -- and the continuing vulnerability of developing countries -- amply justify a further widening and deepening of the Compensatory Financing Facility. Unfortunately, the trend has been in the reverse direction. The CFF was originally designed to provide quasi-automatic support for developing countries whose export revenue fell sharply. Its initial conditionality was very low. Until the 1970s, the access limits which govern how much a country may borrow were also gradually increased. However, in the 1980s, under the ideological pressure of some developed countries, the IMF substantially tightened the conditions associated with support under this facility.

In 1988, the IMF merged the CFF in a new Compensatory and Contingency Facility (CCFF). This has the merit of covering a wider range of external shocks than falls in export earnings and increases in cereal import bills. For example, it can also assist countries to meet unexpected increases in interest payments on external debt. But the new facility lowered the limit on drawings from 83 to 65 per cent of a country's IMF quota, and also made the conditionality more severe. Under the earlier CFF, countries could draw up to 50 per cent of quota without having to subject themselves to adjustment programmes prescribed by the Fund. By contrast, under the new facility almost all support is conditional upon the Fund's approval of adjustment policies. Compensatory drawings have been further tightened by the introduction of phasing. All these features involve a far more restrictive approach than the semi-automaticity originally associated with compensatory financing. The facility as it now stands is extremely complex and does not provide a reasonable assurance of support when a country is driven by external shocks to turn to the IMF."96

"Compensatory finance is one way of providing bridging finance to tide a country over a temporary, self-reversing shortfall in foreign exchange earnings. While it should provide a relatively quick disbursement of foreign exchange, some difficulties have been experienced in its operations -- in its timeliness, the amount obtainable, the conditionalities which were progressively introduced and very tight repayment conditions. A new facility, providing short-term contingency financing, has recently been integrated into that of compensatory finance but because of the complications it introduced, this short-term contingency mechanism has not been used by African countries.

A United Nations Secretary General's Advisory Group on Financial Flows for Africa97 agreed in 1988 that the lack of an effective compensatory financing mechanism has contributed to the long-term financing problems of many African countries since it forced them to the less satisfactory ways to cope with the unpredictable changes in the export earnings of commodity producers. The [Fraser's] Group endorses this conclusion."98

    Concerning futures contracts, the prospects of their widespread use and usefulness for developing countries appear limited. According to a recent study of the Venezuelan oil situation:

"[In principle], it may be optimal to transfer the risk to some other agent using contingent claims such as futures and options. If such markets exist, it is possible to calculate a hedge ration that would optimally reduce the uncertainty in the income stream, given the costs involved and the benefits from risk reduction. By either selling the oil forward, selling futures or selling calls to buy put it is possible to look into a known oil price for a given period of time, thus eliminating any price uncertainty for that term.

There is a problem with this solution: even though markets exist, and have been growing very fast in recent years, they still do not go far enough in time nor are they liquid enough to deal with a relevant fraction of Venezuela's oil uncertainty... Most oil-related futures contracts negotiated in open exchange markets go out for less than a year...Moreover, the markets are small compared to the volume of Venezuelan exports, while their liquidity drops dramatically with the time to maturity. For example, the total number of contracts outstanding on 9 April 1991...was 158.7 million barrels for one month deliveries (May), 23.4 million for six-months delivery market. The market for futures options has similar problems. These only go out for three months and the volume of contracts negotiated are of the order of 120 to 150 million barrels for all maturities. This number must be contrasted to the 180 million barrels that Venezuela would export in that period of time. The lack of liquidity in these markets implies that if Venezuela really attempted to hedge a sizeable fraction of its risk, it could not take prices as given. Knowing this, other market participants would take into account the possibility that Venezuela may include this aspect in their assessment of the risk associated with the traded securities, making hedging very expensive." 100

    Concerning commodity swaps (medium-term contracts involving exchange of specified cash flows at specified intervals, which can be used to effectively fix a commodity price in advance), the World Bank notes that "markets for commodity swaps are not yet as active as the currency and interest swap markets, and have been largely confined to metals and energy." 102

    Commodity-linked bonds provide for variation of interest rate or principal or both in relation to the international price of the commodity. Alternatively, they can be issued as convertible to claims on specific quantities of the commodity at specific option prices. The opportunity for increased profit, if the commodity price rose, might make creditors willing to accept a lower interest rate, while any increased obligation at a higher commodity price would be more than offset from the country's standpoint by the increased capacity to service the instrument.103 In practice, complex and paradoxal situations may arise. In 1990, Algeria managed to borrow from a bank consortium against an oil-delivery contract stretching over several years. An interest rate margin above the London Inter-Bank Offer Rate (LIBOR) was fixed at a specific level for as long as the price of oil stayed within an agreed specific range. If the price fell below the range, Algeria was to pay an additional interest margin, because it now presented a greater credit risk. If the price went up above the range, Algeria again was obliged to pay extra interest, now because its capacity to pay was increased. It can, of course, be argued that without these provisions Algeria might not have been able to borrow at all, or would have had to pay much wider margin above LIBOR taking the transaction as a whole. But the fact that it had to accept an asymmetrical treatment -- to pay more both when the price of oil went up and when it fell -- raises doubts as to the fairness in the sharing of benefits and risks in this type of transaction: the international capital market will take some risk, but the debtor country will have to pay for it, and the crucial question is how much.

    A broader problem concerns the overall commodity price effect of the use of commodity-linked bonds. If it is massive, it will stimulate more investment in primary production for exports on a world scale and thus contribute to a further pressure on primary product prices which are already in deep depression. If the use of commodity-linked bonds is only sporadic, it will be of help to the individual country concerned -- provided it is able to conclude a favourable deal with its lenders and buyers -- but it will not make a serious dent to the commodity problem as a whole.

    As practical steps, the World Bank proposes to continue with its technical assistance programme to individual countries in economics and finance of commodity risk management, and Meller and Engel recommend that the Latin American countries-exporters of natural resources (energy and minerals) begin to operate in financial instruments, but in modest volume in order to acquire know-how and avoid any sharp increases in insurance premia and trading margins. It is probable that advances in this field will be slow in coming and of limited significance. In any case, existence of commodity-linked financial instruments and markets in developed countries has not eliminated the need for a widespread use of government programmes to support primary product prices and incomes. How can this be expected in the case of developing countries?
 

Criticisms of international commodity agreements
 
 

    Professor Gilbert, Oxford, Dr. Maizels, Oxford and formerly with UNCTAD, and the World Bank staff have made six criticisms of postwar international commodity agreements (ICAs):

    ICAs can only be successful provided that they command a consensus in their
      industries. This is particularly important in export control agreements, since otherwise
      there can be no agreement on quota allocation. 104 Inability to reconcile the different
      interests of the countries involved leads to erosion of the rules, smuggling, and
      free-riding.105

    The agreements have not been endowed with financial resources adequate for
      achieving their specific stabilization objectives. Future ICAs should consider much
      more carefully than hitherto the probable call on their finances which would arise from
      alternative price range targets. 106 Dr. Maizels calls the role of finance crucial.

    Prices or price bands have not been adjusted to ensure long-run equilibrium in demand
      and supply. It has proved difficult to set appropriate prices and to adjust them
      regularly to changing market conditions. 107

    A commodity agreement normally runs for five years and the question arises whether
      any international authority can be expected to deal satisfactorily with the long-term
      problems which may dominate the dynamics of a particular commodity market. In
      sugar, for example, the major problem has been persistent over-supply, the difficulties
      of stabilization being greatly increased by the residual nature of the world market given
      the heavily protectionist policy of major consuming countries. An agreement which
      sets out merely to even out short-term fluctuations cannot be expected to achieve even
      this limited aim if the underlying longer-term forces in the market continue to put
      downward pressure on the price.108 In tree crops, the multi-year cycles call also for a
      longer-term approach.

    The agreements were poorly drafted, at least in some cases. This was
      demonstrated by the controversy following the tin collapse (1985) as to whether the
      buffer stock manager was acting within the terms of the agreement, and more
      especially, by doubts as to whether member governments were legally responsible for
      debts incurred on their behalf by the international authority.109 The collateral
      arrangements with banks through pledging tin did not prove satisfactory. As the price
      fell, the value of the collateral fell in proportion; in this "meltdown", either additional
      collateral or cash had to be put up; as neither was available, the brokers' and banks'
      loans partly failed. This would have been avoided if the agreement's borrowings, in
      addition to collateral's cover had guarantees of member governments.

    The agreements were not robust with regard to exchange rate changes. A major factor
      behind the collapse of the tin agreement was that, as a consequence of the appreciation
      of the U.S. dollar, the market was being supported at too high a level. The fluctuating
      rates of major currencies led to "currency scissors" for tin stock assets, liabilities,
      purchases, sales and valuation of the debt service.
 

Burden of export and production controls

    In the case of export quotas and supply management, there are two adjustments: first, the burden is allocated internationally among countries through international quota allocation, and secondly, it is then allocated internally within each country amongst its various producers. Even where formal export quotas do not exist but it is government support purchases which are used to maintain export prices, there is still the problem of within country allocation.

    International quota allocation is known; it is normally based on past exports, with some privileged position given to small producing countries. Much less is known about internal quota (or government purchase) allocation. Available information is set out in Table VII.
 

Sources: Malaysia: interviews with professor Meyanathan and Dr. David Eliiot, UNCTAD; William Fox, Tin -- the Working of a Commodity Agreement, London, 1974; Redzman Sumun, Status of the Tin Industry, Kuala Lumpur, April 1986 (mimeo.); Mauritius: work on the Commission of Inquiry into the Sugar Industry, 1983; Kenya, Colombia and Brazil: interview with Dr. J.A.N. Wallis; Brazil: communication from Dr. A.F. Beltrao and interview with Dr. J.O. Santos.

A possible road ahead

    Out of five international commodity agreements -- coffee, cocoa, sugar, tin and rubber -- only that on rubber is in operation. The other four need to be revived. Another four products -- tea, cotton, jute and copper -- were also in the list of "core" commodities of UNCTAD's Integrated Programme.110 In addition, there is petroleum. This is the scope of the task of stabilization with which developing countries need to cope initially.

    The hard core of the commodity problem is in products of agricultural origin. In most developing countries, the agricultural sector occupies a key place in the economic structure. This is the sector in which most of the population works, and in which a high proportion of underemployed resources are to be found. This is the sector where most of the income is generated and where incomes are lowest. A sustained and broadly based growth process cannot occur if the agricultural sector stagnates. Agricultural incomes and productivity have to increase if there is to be effective and increasing demand for the goods and services which can be produced by those who cannot be effectively absorbed in agricultural production; and agricultural production, surplus to the requirements in the rural areas, has to provide for the growing needs of those employed in nonagricultural production. In three prosperous areas of the world economy -- North America, Western Europe and Japan -- vast programmes of support of agriculture are in operation, including price stabilization and support, income support, farm credit, government technical assistance, storage facilities, etc., which, for all their blemishes and even harm inflicted on the outside world, have shown two fundamental achievements: first, an enormous improvement of agricultural productivity and standard of living in agriculture, and secondly, a continuing generation of purchasing power which has supported the demand for manufactured goods and assisted a sustained economic growth over the last fifty years.

    It is now clear that developing countries will have to rely essentially on themselves for building up and modernizing their agricultural support systems. With respect to crops for their own use, they can do this each on its own to the extent that resources permit. With respect to commodities that are exported, this lone approach can be taken only at a great cost because of falling export prices. Hence a collective developing country approach is necessary. Attempts to revive international commodity agreements and create new ones, covering both producing and consuming countries, should not be dropped; but for such attempts at universal arrangements to be successful, it is necessary that the developing countries reach a full understanding among themselves first as to the essentials of the specific schemes they want to pursue and be ready to implement on their own if necessary, to the extent possible.

    The second crucial issue is that of finance for commodity stocks. A part of this finance would have to be supplied by the participating producing countries in the form of building national stocks, but under collective supervision of all participants. The other part, international stocks, can be financed to some extent by borrowing from commercial banks against commodity collateral: it was reported recently they might be prepared to provide as much as 50 percent of the money needed for a coffee retention scheme.111 But the hard core of finance for international stocks would have to come from international financing agencies. The recently established Common Fund for Commodities is an obvious source; but it is reported that for the time being it focuses on preparatory work to support research and investment projects (Second Window) rather than on stabilization and stock financing (First Window). Their work programme and prospects for financing need to be explored with the Common Fund further. Possibilities of drawing on the IMF buffer stock financing, the amounts which might be available in competition with other claims on the IMF, and its current conditionality requirements should also be explored. But perhaps the main support for international stock financing can come from regional development banks. The President of the African Development Bank, at its annual meeting in Cairo in June 1987, stressed the need for efforts to achieve the critically required effective stabilization of export commodity prices, and urged an exploration of concepts and steps for this purpose.112 There is a long tradition of close relations between the Inter-American Development Bank and the UN Economic Commission for Latin America and the Caribbean which had pioneered the analytical and policy work in this area. The Asian Development Bank's views probably will be sensitive to the thinking of India, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Bangladesh and Thailand, all major primary product exporters among its members. Regional development banks have been engaged recently in exploring the areas for their cooperation: a coordinated and imaginative action on the commodity problem would seem to be both most useful and most urgent. Of course, no international financial institution can act without agreement of key developed country members; but perhaps progress can be achieved in getting this agreement for creating international financial consortia for support of stabilization of specific commodity proposals, put forward by interested countries, contain:

        (a)    a convincing economic justification in terms of economic benefits, costs, and risks;

        (b)    a realistic and sound financing plan;

        (c)    a credible statement of the likely financial outcome of its operations for the medium term;

        (d)    an assessment of supporting measures, such as diversification and productivity
                increase, needed to  make stabilization a long-run success; and

        (e)    a scheme of cooperation with other agencies, national and international.
 

Footnotes:

49: The Economist, 13 April 1991.

50: Financial Times, 23 October 1991.

51: Financial Times, 2 August 1991.

52: The Economist, 19 October 1991.

53: The Economist, 24 August 1991.

54: Financial Times, 27 February 1991.

55: World Bank, Price Projections 1990-2005, Volume I; World Bank News, 10 October 1991.

56: Ibid.

57: Price on 23 October 1991.

58: Financial Times, 29 August 1991.

59: Ibid.

60: Financial Times, 27 September 1991.

61: Estimates by the World Bank and by Mr. J.O. Santos, former Executive Director of the International Coffee Organization, respectively.

62: Reuters, as reported in International Herald Tribune, 25 February 1991.

63: Financial Times, 4 March 1991.

64: Financial Times, 25 April 1991.

65: World Bank, Global Economic Prospects, op.cit., pages 22-23.

66: Ibid. , page 22.

67: Merrill Lynch, Pierce, Fenner & Smith, Inc., Handbook for Commodity Speculators, 1967, page 5.

68: J.M. Keynes, The Policy of Government Storage of Foodstuffs and Raw Materials, Economic Journal 1938, page 449.

69: Dragoslav Avramovic, The Coffee Papers, An Inquiry into the Economics of Commodity Markets, February 1969, Volume I, pages 15-17 (mimeo.).

70: See, Primary Commodities in the World Economy: Problems and Policies, World Development, Special Issue, May 1987.

71: D.C. Rao, Foreword, in Teophilos Priovolos and Ronald C. Duncan eds. Commodity Risk Management and Finance, World Bank and Oxford University Press, 1991.

72: World Bank, Price Projections, op.cit., Volume I, page 7.

73: Interview with ILO staff, Geneva, August 1991.

74: Interview with professor Sanathavan Meyanathan, Malaysia, now at the Economic Development Institute of the World Bank, October 1991.

75: Communication from Dr. Marcial Plehn Mejia, UNCTAD, of 23 September 1991, and interview with Dr. J.A.N. Wallis, formerly with the International Coffee Organization and now at the Economic Development Institute of the World Bank.

76: Interview with Dr. A. Ashiabor, former Governor of the Central Bank of Ghana, now at UNCTAD, Geneva.

77: Interview with Dr. J.A.N. Wallis, please see footnote 5 above.

78: Communication from Dr. Alfred Maizels, London, of 24 September 1991.

79: Alfred Maizels, Commodities in Crisis, WIDER, Helsinki, forthcoming, page 105 (mimeo.).

80: Associated Press, as reported in The Washington Post, 20 May 1988.

81: The Wall Street Journal, 19 August 1991.

82: Enzo R. Grilli and Maw Cheng Yang, Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows, The World Bank Economic Review, January 1988.

83: Stephen C. Smith, Industrial Policy in Developing Countries: Reconsidering the Real Sources of Export-led Growth, Economic Policy Institute, Washington, D.C., 1991.

84: See, Dragoslav Avramovic, Common Fund: Why and What Kind?, Journal of World Trade Law, Geneva-London, September-October 1978.

85: Ibid., pages 378 and 405-406.

86: Alexander J. Yeats, Do African countries pay more for imports? World Bank, Working paper 265, September 1989.

87: General report 1982, page 128.

88: General report 1989, pages 58-59.

89: Ibid., page 59.

90: U.S., Canada, Japan, Belgium, France, Germany, Italy, Netherlands, Norway, Sweden, U.K., and Switzerland. (U.S. Department of labour, Bureau of Labour Statistics, International comparisons of compensation: costs of production workers in manufacturing 1989, page 8.)

91: International Labour Office, World Labour Report 3, 1987, pages 70 and 71.

92: Communication from Dr. Alexandre F. Beltrao, Executive Director of the International Coffee Organization, of 6 November 1991.

93: David Evans, The Long-run Determinants of North-South Terms of Trade and Some Recent Empirical Evidence, World Development, May 1987, page 668, quoting a study by F. Ellis, submitted as PhD Thesis at the University of Sussex, 1978.

94: UNCTAD, Trade and Development Report 1990, page 13.

95: For a detailed treatment of compensatory financing, please see A. Maizels, Commodities in Crisis, op.cit.

96: The Report of the South Commission: The Challenge to the South, 1990, pages 239-40.

97:United Nations, Financing African's Recovery: Report and Recommendations of the Advisory Group on Financial Flows for Africa, New York 1988 (Wass Report).

98: United Nations, Africa's Commodity Problems: Towards a Solution, A Report by United Nations Secretary General's Expert Group on Africa's Commodity Problems, Geneva 1990, pages 90-91 (Fraser Report).

99: The World Bank, The Management of Commodity Price Risk and the Bank's Role, paper prepared by the International Economics Department, 16 September 1991.

100: Ricardo Hausmann, Andrew Powell and Roberto Rigobon, Facing Oil Uncertainty in Venezuela: An Optimal spending Rule with Liquidity Constraints and Adjustments Costs, Inter-American Development Bank, Working Paper Series 114, 1992, pages 19-22.

101: Eduardo Engel and Patricio Meller, Revision de Mecanismos de Estabilizacion para Shocks de Precios Internatcionales de Recursos Naturales, Cieplan, Chile, March 1992. page 22.

102: The World Bank, The Management of Commodity Risk, op.cit. page 31.

103: William R. Cline, Nobilizing Bank Lending to Debtor Countries, June 1987, pages 17-18, Institue for International Eonomics, Washington D.C.

104: Christopher L. Gilbert, International Commodity Agreements: Design and Performance, World Development, May 1987, page 613.

105: World Bank, Global Economic Prospects, op.cit., page 23.

106: A. Maizels, Commodities in Crisis: An Overview of the Main Issues, World Development, op.cit., page 541.

107: World Bank, ibid,

108: Maizels, ibid.

109: Gilbert, ibid.

110: For the underlying theory, background, formulation and negotiation of the Integrated Programme for Commodities, please see the forthcoming book by Dr. Gamani Corea, former Secretary-General of UNCTAD (working title Commodities in UNCTAD)

111: Financial Times, 28 August 1991.

112: Statement by Mr. Babacar N'Diaye.