Commodities, Governance and Economic Development Under Globalization

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Commodities, Governance and Economic Development under Globalization

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Commodities, Governance and Economic Development under Globalization Edited by

Machiko Nissanke and

George Mavrotas

Selection and editorial matter © Machiko Nissanke and George Mavrotas 2010 Chapters © contributors 2010 Foreword © Richard Jolly 2010 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identiﬁed as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2010 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave®and Macmillan®are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978–0–230–20334–1 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 14 13 12 11 10 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

In memory of Alfred Maizels


Contents List of Tables and Figures

xi

Foreword by Richard Jolly

xv

Acknowledgements

xvii

Notes on the Contributors

xviii

List of Abbreviations

xxi

Preface and Introduction by Machiko Nissanke

xxiv

A Current Contextual Setting for Development Finance by George Mavrotas

xxxi

PART 1 COMMODITIES, TRADE AND GOVERNANCE: REFLECTIONS ON ALFRED MAIZELS’ LIFE, WORK AND LEGACY 1

2

Commodities, Cooperation and World Economic Development: The Mission of Alfred Maizels, 1917–2006 John Toye Early life and education At the Board of Trade Research at the National Institute Alf Maizels at UNCTAD 1966–1980 Subsequent academic contributions Conclusion Poverty, Power and Global Economic Governance Gerry Helleiner Alf Maizels and global economic governance Global economic governance and the role of developing countries ‘Voice’ and the problems of the poorest and weakest Preferential treatment for the poorest? Reforming G8 summitry for global governance Elements of governance reform in international financial institutions Elements of governance reform in the trade arena: the WTO Conclusion vii

3 3 4 5 6 12 14 19 19 21 23 26 28 31 33 36

viii Contents

PART 2 COMMODITIES AND THE GLOBAL ECONOMY IN THE TWENTY-FIRST CENTURY 3

4

5

6

7

Issues and Challenges for Commodity Markets in the Global Economy: An Overview Machiko Nissanke Introduction Commodity prices and economic development: a debate in a historical retrospect The recent commodity price movements in a historical context The impact of the global financial crisis on commodity prices Commodity Market Structures, Evolving Governance and Policy Issues Machiko Nissanke Introduction Changing landscapes of primary commodity markets and production Managing resource based economies over commodity price cycles Conclusion: policy implications and challenges Commodities Still In Crisis? David Sapsford, Stephan Pfaffenzeller and Harry Bloch Introduction Alf Maizels: commodity economist Primary commodity prices post-1980s: commodities still in crisis? Conclusion Asian Drivers, Commodities and the Terms of Trade Raphael Kaplinsky Introduction The Asian Drivers are a disruptive force in the global political economy Asian Drivers and the rise in commodity prices What has happened to the prices of traded manufactures? Terms of trade reversal? Will the terms of trade reversal be sustained? Uncertain Prospects of Commodity-Dependent Developing Countries Alice Sindzingre Introduction: a structural change in commodity markets? The central issue: the volatility of commodity prices Detrimental effects of commodity price volatility

39 39 43 49 60

65 65 67 80 90 99 99 99 102 106 117 117 118 121 128 130 132

139 139 142 146

Contents

The limited impact of China on price volatility and existing commodity based export structures Beyond commodity prices levels: commodity-dependence and poverty traps Conclusion: the difficulty of regulating volatility at the international and domestic levels PART 3 8

9

ix

149 152 157

CASE STUDIES OF COTTON AND COPPER

Cotton in Crises of Francophone Africa: Fatality or Challenge for Multidimensional Cooperation? Michel Fok Introduction Cotton in continuous crisis Multiple cotton crisis amplification factors Moving beyond the cotton crisis Conclusion Exchange Rate Management for Commodity-Dependent Countries: A Zambian Case Study Elva Bova Introduction Theoretical background What would pegging the export price do for Zambia? What would do a counter-cyclical band do for Zambia? Conclusion

165 165 166 176 197 208

221 221 223 226 235 240

PART 4 FINANCE AND GOVERNANCE UNDER GLOBALIZATION 10

11

A Role for Compensatory Finance in the 21st Century after the 2008 Global Financial Crisis Adrian Hewitt Introduction The bubble economy and the global financial crisis The whys and wherefores of compensatory finance mechanisms The IMF Compensatory Financing Facility STABEX and parallel and successor schemes Assessment for compatibility with current commodity trade issues New thinking on compensatory finance ‘The Bottom Billion’: A Critique and Alternative View Charles Gore Collier’s argument and its conceptual underpinnings Weaknesses of the conceptual framework

249 249 251 252 253 256 260 264 269 270 273

x

Contents

Elements of an alternative approach Implications of the 2003–2008 commodity boom and the global financial crisis Conclusion 12

Global Rules and Markets: Constraints on Policy Autonomy in Developing Countries Yilmaz Akyüz Introduction Global economic integration and policy space Multilateral disciplines and development policy Finance and macroeconomic policy Conclusion

Index

278 293 295

301 301 302 306 312 327 337

List of Tables and Figures Tables 3.1 Monthly average world primary commodity prices, 2002–2007, 2008 3.2 Instability of prices of main commodity groups, 1968–2007 5.1 Trend estimates for individual commodity price series 5.2 Trend estimates for commodity price indices 5.3 Trend estimates for selected series 5.4 Trend estimates for beverage prices 5.5 Trend estimates for individual commodity price series 5.6 Trend estimates for commodity price indices 5.7 Trend estimates for selected series 5.8 Trend estimates for beverage prices 5.9 Trend estimates for selected series 6.1 Scope for China’s increased consumption of basic metals, 1955–2003 6.2 Coal and oil imports, 1984–2006: China, India, the USA and the EU25 6.3 Distribution of global MVA 6.4 Developing countries in global R&D: 1970, 1990 and 2000 7.1 Principal characteristics of major commodity booms 7.2 Commodity dependence by geographical region, 1995–1998 and 2003–2006 7.3 Distribution of terms of trade shocks, 1970–2006 8.1 Cotton exportation incomes in six FACs 8.2 Cotton export earnings in national economies 8.3 Cotton fibre importation patterns into the European community (15 countries) before its recent enlargement 8.4 Variations in income elasticities of demand in selected countries 8.5 Textile fibre end-use consumption patterns, kg/capita 8.6 Diverging values in the estimation of price increases resulting from the abolition of cotton subsidies 8.7 Market share of quality demanding destinations (EU15, Taiwan, Japan) in the total exportations of cotton by some FACs 8.8 Average prices of cotton fibre imported into the EU15 according the origin (in US cents/pounds)

xi

51 56 108 109 109 110 111 112 112 113 113 123 127 128 134 144 154 155 175 177 179 181 181 185

190 191

xii List of Tables and Figures

8.9 8.10 8.11 9.1A 9.2A 9.3A 9.4A 11.1

Companies trading more than 200,000 tonnes of cotton fibre Traders’ price advantage patterns in country X Cotton exportation distribution in country X Testing for heteroscedasticity for LNE and LCPI Unit root test for LCPI and LNE Cointegration test Testing for Granger causality between LCPI and LNE Boom and bust in world commodity prices, 2004–2009

192 194 195 241 242 242 243 294

Figures 3.1 Average monthly price indices for non-fuel commodities (2000 = 100) 3.2 Log of real price of industrial commodities 3.3 Non-fuel commodity price indices for different groups 3.4 Monthly average commodity price indices (January 2002–October 2008) 3.5 Price dynamics for individual commodities (January 2001–October 2008) 3.6 Stocks of selected mineral commodities 3.7 Price–stock relationships for selected mineral commodities 3.8 Price trends and volatility of non-fuel commodities and crude petroleum in relation to manufacture 3.9 Non-fuel commodity price indices 4.1 Ratio of non-commercial open interest to total open interest in coffee C contracts on the New York Coffee Exchange 4.2 Nominal cotton prices in US$ per kg 4.3 Nominal coffee prices in US$ per kg 4.4 Real effective exchange rate 5.1 Real commodity prices 1900–2007 5.2 Real commodity prices 1970–2007 6.1 Surging commodity prices 6.2 Growth of GDP and exports from onset of rapid growth: China, India, Japan and Korea 6.3 China’s share of growth in global demand of selected metals 6.4 Monthly average spot price of six key metals at the London Metal Exchange (January 1998 – June 2008) 6.5 Per capita consumption of base metals 6.6 China’s share of growth in global demand of selected agricultural products 6.7 Index of oil and coal prices, 1980–2008 6.8 World manufacturing export price, 1986–2000

40 46 50 50 53 55 55 57 58 69 80 81 89 102 103 117 119 122 123 124 126 127 128

List of Tables and Figures xiii

6.9 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9

Percentage of sectors with negative price trends, 1988/89–2000/01 by country groupings The secular decline of commodity prices since 1845 Quantity of commodities used per unit of GDP, 1971–2001 Real commodity price indices, 1980s and 2000s The volatility of real oil and non-oil commodity prices Volatility of real price of industrial commodities, 1862–1999 Macroeconomic volatility and economic growth Volatility of terms of trade growth (regional medians) Sub-Saharan African oil-producing countries: oil production, 1965–2006 GDP growth in sub-Saharan Africa driven by oil prices, 2000s Contributions of selected regions to annual consumption increase (period average) African exports of natural resources to China over time Africa’s trade with China, the USA and the EU-15, 2006 Two centuries of cotton price fluctuations and crises Support expenditures to US cotton growers’ income, 2001 Cotton crises and linkage to production and consumption gaps Production of cotton fibre in China and impact on the price Index A Cotton production and export in FACs, 3-year moving averages Price decline on the cotton market Three decades of world exports and price index for cotton fibre Cotton share in the textile fibre market Comparison of FAC cotton productivity patterns Cotton yield patterns in major francophone African cottonproducing countries Comparison between FAC cotton quotations and the A Index Nominal exchange rate and copper prices, 1997–2008 Pegging the export price, in US$s, 2000–2007 Pegging the export price, in ZKws, 1997–2008 Weights of different commodities, 2000 Prices of main Zambian exports, 2000–2008 Peg the export price index, in US$, 2000–2008 Peg the export price index, in ZKw and the Zambian Kwacha, 2000–2008 Standard deviation of the different arrangements: PEP, PEPI and actual rate Export net of real exchange rate movements, 2000–2008

129 140 141 141 142 143 147 147 148 149 150 151 152 167 168 169 169 171 171 172 180 186 187 191 228 228 229 229 230 230 231 231 232

xiv

9.10 9.11 9.12 9.13 9.14 9.15 9.16 9.1A 11.1

11.2 11.3 11.4 11.5

List of Tables and Figures

Export performance under the PEP, 2000–2008 Export performance under the PEPI, 2000–2008 Inflation net of real exchange rate movements, 2000–2008 CPI under the PEP, 2000–2008 CPI under PEPI, 2000–2008 The US$–Rand basket The counter-cyclical adjustment of the band Log of CPI and of the nominal exchange rate, 1997–2008 The incidence of $1-per-day poverty in LDCs grouped according to export specialization, 1981–1983, 1987–1989 and 1997–1999 Trends in the income gap between the world’s 20 richest countries and LDCs, 1960–1999 The international poverty trap of commodity-dependent LDCs Trends in commodity prices for agriculture, metals and oil, 1948–2008 Increase of agricultural and non-agricultural labour force in LDCs for the decades 1980–1990, 1990–2000 and 2000–2010

232 233 233 234 234 238 239 241

280 280 283 289

290

Foreword Alfred Maizels (1917–2006) It is the job and joy of historians to rehabilitate forgotten reputations. In the case of Alf Maizels, his reputation needs no rehabilitation – but it does deserve wider recognition and some underlining. Maizels’s work on commodity trade and prices, extending over fifty years, documented trends in a major area of international economic relations. Maizels followed the trail blazoned by Hans Singer and Raul Prebisch, but extended the data trail and deepened the analysis in a series of careful research articles and books, which continued almost to the time he died. His book Industrial Growth and World Trade became a much reprinted classic and his subsequent studies continued this pioneering work, particularly, Exports and Economic Growth of Developing Countries and Commodities in Crisis. The chapters in this book elaborate on ideas in the tradition of Maizels’ contributions, discuss them in relation to current problems and, in some cases, carry his work forward. John Toye’s chapter brilliantly sets Maizels’ contributions in the context of other work on trade. But Toye also shows how his lifetime contributions were the product of an individual with a firstclass mind, a distinguished academic record and a diversity of interesting early research experiences, covering national accounting, war-time rationing and post-war work in the British Board of Trade. But it is Maizels’ international work for several parts of the UN that deserves to be singled out. This international work involved a brief period in the early 1950s when Alf was seconded to the UN’s Economic Commission for Europe, during its heyday when it was headed by the Nobel Laureate Gunnar Myrdal and had included such economic luminaries as James Meade, Nicholas Kaldor and Walt W. Rostow. A decade or so later, Alf began a long involvement with the UN’s new institution, UNCTAD. Initially, he was one of the experts invited to produce ideas for the 1964 conference. Two years after the conference, he was recruited to UNCTAD where, as Toye explains, he became the effective – if not titular – director of the Commodities Division. Maizels identified the key challenge for global policy as achieving a reasonable degree of stability in the main commodity markets and, where possible, achieving that stability at a reasonably remunerative price for the producing countries. In 1974, Maizels was transferred to the Office of the Secretary General of UNCTAD, as the Director of the Economic Policy Evaluation and Coordination Unit. This was the time when UNCTAD was pursuing the idea of a Common Fund for support of a range of commodities, and he was closely involved both in formulating the ideas and in struggling to gain support xv

xvi Foreword

for them. But eventually, the Common Fund emerged as little more than a mouse after a mountain of labour – and Maizels left UNCTAD in 1980 to return to England, continuing his research on international trade from bases in Oxford, IDS and the UCL, though with a period as a Senior Fellow in UNU-WIDER where he produced the volume, Commodities in Crisis. One of his works during this period was with Machiko Nissanke when he produced two seminal papers on the distribution of aid and on the determinants of military spending in developing countries. Alf Maizels was a person of modest and quiet demeanour but held deep and unwavering commitments to humanity and to a more equitable world. He made many creative and highly professional contributions – to international understanding, international policy and to the UN itself, as well as to economics and development studies. In the UN Intellectual History Project, we identified ideas as being one of the most important and significant contributions of the UN – and Alfred Maizels was a key player in contributing to them. We also quoted Lourdes Arizpe, a distinguished sociologist, saying that the UN has become a dream managed by bureaucrats. Alfred Maizels was one of the UN’s distinguished professionals, neither a woolly dreamer nor a bureaucrat but, rather, a highly professional economist-statistician, using his skills to explore issues at the root of current problems and his ingenuity to devise realistic policies to deal with them. He dreamt of a better world, but worked with tough realism to move towards it. His research has left a legacy of the highest quality and professionalism. PROFESSOR SIR RICHARD JOLLY Institute of Development Studies University of Sussex

Acknowledgements I am very grateful to all the participants in the Workshop on Challenges and Prospects for Commodity Markets in the Global Economy held in Memory of Alfred Maizels at SOAS, University of London, on 19–20 September 2008. They contributed greatly to the success of the workshop, where we had very productive discussions. Upon receiving their helpful comments and suggestions at the workshop, the papers included in this volume have been revised and updated. In addition to the chapter authors in this volume, my deep appreciation goes to those who presented papers, or acted as discussants or session chairs at the workshop. They are Hannah Bargawi, Henry Bernstein, Andrew Dorward, Peter Gibbon, Christian Häberli, Jane Harrigan, Richard Jolly, Deborah Johnston, Terry McKinley, Susan Newman, Colin Poulton, Jeff Waage and John Weeks. We are especially grateful to Richard Jolly for his opening remarks of appreciation of Alf’s contributions and legacy from the perspective of the UN as an institution that embodies rich knowledge for promoting international development. His Foreword has made this book very special. With their presence at the workshop and by sharing their memories about Alfred Maizels’ life, several members of Alf’s family – namely, John, Judith, Beryl, Rick and Jack – made a lasting memorable contribution to the occasion. My particular thanks go to Hannah Bargawi who organized the workshop so efficiently and beautifully. Regarding this book project, I owe my gratitude to Paul Rayment for his helpful advice throughout. Paul worked with Alf at the UN for many years, but could not contribute to the volume because of ill health. My book co-editor, George Mavrotas, was instrumental in initiating this book project. Though at different times, we shared valuable experiences in working for Alf. We both felt that it would be important to commemorate Alf’s dedication to academic research with a book in his memory. Taiba Batool, a commission editor in Economics at Palgrave/Macmillan Press, has been an enthusiastic supporter and facilitator of this book project, displaying understanding and patience. A very special person who was constantly in my mind throughout was Joan, Alf’s widow. She would have been delighted to witness the occasion and to be a part of this book project but, unfortunately, poor health prevented her from doing so. Both Joan and Alf have been most generous and supportive to me and to my family on numerous occasions. Similarly, Laurence Harris’ support as a colleague has been invaluable. They were always there for me, giving me moral strength and courage to stand up on academic principle and integrity. The same applies to my own family, Nimal, Samaya and Hikaru. Without their unconditional love and understanding as my emotional bedrock, this volume would not have been possible. MACHIKO NISSANKE xvii

Notes on the Contributors Yilmaz Akyüz was formerly the Director of the Division on Globalization and Development Strategies at UNCTAD. He taught previously at various universities in Turkey and Europe before joining UNCTAD. He published extensively in macroeconomics, finance, growth and development. He is the second holder of the Tun Ismail Ali International Chair in Monetary and Financial Economics at the University of Malaya, established by Bank Negara. After retirement from UNCTAD, he is now Special Economic Adviser to the South Centre in Geneva, an Intergovernmental Think Tank of the Developing Countries. Harry Bloch is Professor of Economics and Director of the Centre for Research in Applied Economics in the School of Economics and Finance at Curtin University in Perth, Western Australia. Elva Bova is a PhD candidate in the Economics Department at the School of Oriental and African Studies (SOAS), University of London. Her interests focus on the macroeconomic management for commodity- dependent countries, with particular reference to exchange rate policy. Her research has been mainly on Zambia, Botswana and Chile and more recently on the GCC countries. Michel Fok has spent ten years as an agronomist to promote food crop production within a cotton company in Mali, in a privileged position to watch what cotton production means from sowing to exportation and what cotton market crisis implied in mid-1980s. Since his conversion to economics in 1997, he favours historically based analyses of cotton production and market. Charles Gore is Special Coordinator for Cross-Sectoral Issues in the Division for Africa, Least Developed Countries and Special Programmes in UNCTAD. He was the team leader and principal author of UNCTAD’s Least Developed Countries Report from 2000 to 2008. He is also Honorary Professor of Economics at the University of Glasgow. Gerry Helleiner is Professor Emeritus, Economics, and Distinguished Research Fellow, Munk Centre for International Studies, University of Toronto, Canada. Adrian Hewitt is Head of the ODI Fellowship Scheme, an independent programme aimed at reinforcing economic analysis and forcasting capacity within the civil service of 25 developing countries (mostly commodity xviii


xix

exporters) through direct but demand-led intervention, and a Research Fellow at the Overseas Development Institute, London, where among his publications he has edited (with Machiko Nissanke) an earlier Festschrift for Alfred Maizels, Economic Crisis in Developing Countries. Raphael Kaplinsky is Professor of International Development at the Open University, UK. His current research interest is on the significance for the developing world of the rapid growth of the two major Asian driver economies, China and India. This includes the impact on the terms of trade and the growing significance of innovation in China and India for low-income consumers. Richard Jolly is at the Institute of Development Studies, University of Sussex, UK, where he was Director from 1972 to 1981. From 1982 to 2000 he was Assistant Secretary General of the United Nations, as Deputy Executive Director of UNICEF for 14 years and then as Principal Coordinator of UNDP’s Human Development Report. He is a co-writer of UN Ideas That Changed the World. George Mavrotas is the Chief Economist of the Global Development Network (GDN), formerly a Senior Fellow and Project Director at UNU-WIDER, and, prior to that taught in the Economics Faculties of the Universities of Oxford and Manchester, UK. He is also a Visiting Professor at CERDI, University of Auvergne, in Clermont-Ferrand, France. He has published many books and more than 100 papers on a broad range of development issues. He holds a PhD in Economics (DPhil) from Oxford University, UK. Machiko Nissanke is Professor of Economics at School of Oriental and African Studies (SOAS), University of London, UK. She worked previously at University of Oxford, Birkbeck College, and University College London (UCL). She was Research Fellow of Nuffield College, Oxford, and Overseas Development Institute, London, UK. She has published numerous books and journal articles on financial economics and international economics, and has served many international organizations as adviser and coordinator of research programmes. Stephan Pfaffenzeller obtained his PhD at the University of Nottingham in 2002 and is Lecturer in Economics at the University of Liverpool Management School, UK. He specializes in long-run commodity price behaviour and economic development. Within the commodity price topic, Dr Pfaffenzeller has concentrated on the trend and volatility characteristics of the commodity terms of trade. David Sapsford is Sir Edward Gonner Professor of Applied Economics and Head of the Economics and Economic Development Group at the University of Liverpool, UK. He was formerly Professor and Head of Economics at

xx


Lancaster University and has held a range of other appointments, including Research Economist at the International Monetary Fund in Washington, DC. He has served as consultant to numerous bodies, including the World Bank, the International Labour Organization and UNCTAD. Alice Sindzingre is Research Fellow at the French agency for research, the National Centre for Scientific Research (CNRS, Paris) and affiliated to the University Paris-West. She is also Visiting Lecturer at the School of Oriental and African Studies (SOAS, Department of Economics, University of London), and associate researcher at the Centre d’Etude d’Afrique Noire (CNRS, Bordeaux). John Toye is a former Director of the Institute of Development Studies, University of Sussex, UK, and a former Director of the Globalization and Development Strategies Division of UNCTAD, Geneva, Switzerland. He is the author, with his son Richard Toye, of The UN and Global Political Economy.

List of Abbreviations ACA ACP ADM AIC AMS APROCA ARCH ARIMA ARMA BBCs BIS BRICs BWIs CCFF CDF CDFT

African Cotton Association African, Caribbean and Pacific Group of States Archer Daniels Midland Akaike Information Criterion aggregate measure of support Association des Producteurs de Coton Africains Autoregressive Conditional Heteroscedasticity Autoregressive Integrated Moving Average Autoregressive Moving Average bottom billion countries Bank for International Settlements Brazil, Russia, India and China Bretton Woods Institutions Compensatory and Contingency Financing Facility Cotton Development Fund Confédération Française Démocratique du Travail (French Democratic Confederation of Labour) CDO collateralized debt obligation CFA franc a currency used by fourteen African countries CFC Common Fund for Commodities CFF Compensatory Financing Facility CFTC US Commodity Futures Trading Commission CIF a sales contract term indicating that price includes cost, insurance and freight COMPEX Compensation for Extracts/Export Earnings (EU Scheme) CPI commodity price index CRB Commodity Research Bureau (Reuters/Jefferies) DAC Development Assistance Committee (of the OECD) DC developing country EDF European Development Fund EGARCH Exponential General Autoregressive Conditional Heteroscedasticity EPA Economic Partnership Agreement ESF Exogenous Shocks Facility FAC francophone African cotton producing country FAO Food and Agriculture Organization of the United Nations FDI foreign direct investment FEER Fundamental Equilibrium Exchange Rate Flex Fluctuations in Export Earnings programme xxi

xxii


FOB GARCH GATS GATT GCC GDN GDP GM GVC HIPC ICA ICAC ICO ICT IDA IDS IFF IFI IFPRI ILO IMF IMF-IFS IMU INRA IPRs IT ITFCRM ITO KNCU LDCs LSE MDGs MDRI MFN MNC MUV NIE NIEO NIESR NYBOT ODA OECD PEP PEPI

free on board General Autoregressive Conditional Heteroscedasticity General Agreement on Trade in Services General Agreement on Tariffs and Trade Gulf Cooperation Council Global Development Network gross domestic product genetically modified global value chain heavily indebted poor country international commodity agreement International Cotton Advisory Committee International Coffee Organization information and communications technology International Development Association International Development Studies, University of Sussex International Finance Facility international financial institution International Food Policy Research Institute International Labour Organization International Monetary Fund IMF International Financial Statistics international monetary unit International Natural Rubber Agreement intellectual property rights inflation targeting International Task Force on Commodity Risk Management International Trade Organization Kilimanjaro Native Cooperative Union least developed countries London School of Economics millennium development goals Multilateral Debt Relief Initiative most-favoured nation multi-national corporation manufacturing unit value newly industrializing economies New International Economic Order National Institute of Economic and Social Research New York Board of Trade official development assistance Organisation for Economic Co-operation and Development peg the export price peg the export price index


PRGF PRS RHG SACU SAP SBC SCM SDRs SDRM SDT SITC SNIM SSA STABEX STE SYSMIN

IMF Poverty Reduction and Growth Facility private regulation system Réglement Général du Havre Southern Africa Custom Union structural adjustment plan Schwarz Bayesian Criterion Subsidies and Countervailing Measures special drawing rights Sovereign Debt Restructuring Mechanism special and differential treatment Standard International Trade Classification Société Nationale Industrielle et Minière (Mauritania) sub-Saharan Africa EU System for Export Earnings Stabilization for the ACP state trading enterprises System of Stabilization of Export Earnings from Mining Products TACRI Tanzania Coffee Research Institute TIM IMF Trade Integration Mechanism TNC trans-national corporation TRIMs trade related investment measures TRIPs trade related aspects of intellectual property rights TWN Third World Network UCDA Ugandan Coffee Development Authority UN United Nations UNCTAD UN Conference on Trade and Development UNECE UN Economic Commission for Europe UNIDO United Nations Industrial Development Organization VAR Vector Autoregressive WTO World Trade Organization ZCCM Zambia Consolidated Copper Mine

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Preface and Introduction Over the last three decades, economic globalization and integration have largely proceeded with increasing intensity, relying on the belief in the selfregulatory capacity of markets without adequate structures and systems in place to govern the process. In addition to environmental challenges posed by the climate changes, by mid-2007 this led to the appearance of large cracks that threatened the stability of the world economy on two fronts: the sharp hike of primary commodity prices and the global financial crisis. For a year or so, since mid-summer 2007, the financial turmoil with severe liquidity and credit crunch was seen to be confined, more or less, to financial markets and institutions based in the US and Western Europe. On the whole, the world economy managed to maintain its momentum on the back of the buoyant economic growth posted by emerging market economies, as well as resource-rich developing economies that enjoyed a commodity boom. However, a series of events that hit the major financial markets and institutions in Wall Street in mid-September 2008 shocked the world and radically altered the fate and the course of the globalized economies. The fear of accelerating inflation and fuel and food shortages worldwide was completely overtaken by a greater fear of worldwide recession and depression engulfing all economies in the developing world, including emerging market economies in Eastern Europe, Latin America and Asia, as well as low-income developing countries in Africa, Asia and the ECLAC region with limited financial market linkages. No country has been any longer in a position to remain a mere bystander in the fast evolving financial crisis. The world economy has quickly entered a phase of global recession that is unprecedented in its depth and breadth since the Great Depression of the 1930s. The global financial crisis turned into a global economic crisis at a pace inconceivable hitherto as world trade has rapidly descended into collapse. One of the main transmission mechanisms of the current global financial crisis to the developing world has been the commodity market linkage, which has manifested in a precipitous fall in commodity prices across the board, severely affecting the growth prospect of commodity-dependent low-income developing countries. Their current experience is indeed a stark reminder of the equally devastating experience endured by them in the early 1980s, when commodity prices collapsed amidst the sharp recession of the world economy following contractionary macroeconomic adjustments to major industrial economies. In his seminal work, Commodities in Crisis, Alfred Maizels drew a parallel between the depth of the crisis faced by a large number of commoditydependent low-income countries in the 1980s and that in the Great xxiv

Preface and Introduction

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Depression of the 1930s (Maizels 1992). Demonstrating the severity of the ‘commodity’ crisis then, he convincingly exposed how the beginning of the debt crisis of commodity-dependent poor countries in the late 1970s happened to coincide exactly with that of the ‘conveniently forgotten’ commodity crisis. Unfortunately, his in-depth and comprehensive analysis of commodity issues and his call for formulating correct international policy responses to the debt crisis, which would have led to an early resolution of the protracted debt overhang condition in low-income countries, has been largely ignored by mainstream academics and policy-makers, reflecting the gathering ascendancy of the dominant faith in self-regulatory market mechanisms to guide the development process. All debt relief mechanisms employed since the outbreak of the debt crisis, including the HIPC initiatives, failed to pay sufficient attention to the plight of many commodity-dependent low-income developing countries as a consequence of huge losses of their purchasing power in international economic transactions, as well as that of the fiscal capacity to implement development oriented policies domestically. The resolution had to wait for a comprehensive debt cancellation embedded in the MDRI in 2005 to shakeoff the overhang of the prolonged debt crisis. The persistent reluctance – or even refusal – to acknowledge commodity related developmental issues, and the resultant failure to deal with them effectively in a timely fashion on the part of international development community in the 1980s and 1990s, have entailed a heavy cost in terms of forgone development opportunities of primary commodity-dependent low-income developing countries, mostly in sub-Saharan Africa. Amidst the current economic crisis, the plight of low-income countries appears to have been receiving much-needed attention from policy-makers around the world, as witnessed in the Communiqué issued at the London Summit in April 2009. This time, these countries are rightly recognized as innocent victims of the large-scale gambles taken by financial institutions in the West for the last several years. Given the scale of financial turmoil and the depth of its recessionary effects, felt worldwide, and backed up by overwhelming popular sentiments prevailing globally, there appear to be more open academic debates and policy discussions taking place on how to reform the global financial system and create a new international architecture for governing financial globalization. However, in order to avoid repetition of the catastrophic transmissions of the financial crises spilling over into world trade and real economic activities, reforms are also required, beyond the system of financial regulation and supervision, to governance structures over the globalization process as a whole, including world commodity markets and trade. Such reforms would demand a deeper understanding of interfaces between the recent developments in commodity markets and trade, and their implications for international trade, finance and economic development.

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We hope this book – a collection of essays assembled in memory of Alfred Maizels – will be an important, timely contribution to meet these pressing needs for in-depth academic studies in the field. Alf had long been a mentor and role model in academic research for many of the contributors to this volume, as well as a dear friend and colleague. We learnt from him not only technical skills, but also the devotion required to strive for a just and fair world through academic research. Though he was characteristically modest and unassuming, his lifetime contribution to development economics – in particular, in the fields of commodities, international trade and finance and their implications for economic development of low-income countries – is of immense importance. The high quality of his academic work has earned him a reputation that only a true scholar such as he would deserve. This volume is the outcome of our collective wish to celebrate his legacy and contribution to development economics, and a mark of our deep appreciation of his pioneering and monumental research into trade, commodities and development issues. It is dedicated to his lifetime achievements, covering his work from an analytical perspective and placing his research, at this very critical juncture, in the context of contemporary policy debates, and exploring the validity of his findings in the light of new empirical evidences. This book is also the successor to our earlier volume, which was dedicated to Alfred Maizels on the occasion of his 75th birthday (Nissanke and Hewitt 1993). As with our first volume, this book is therefore a tribute to his consistent exposure of the weaknesses of neoclassical paradigm as applied to the North–South relationships. Throughout his professional life, he made very effective use of his masterful skills in the statistical analysis of historical and empirical data, his outstanding intellectual capacity to clarify many of the unrealistic assumptions in neoclassical theory and profound insights to offer practical solutions to issues related to problems facing low-income countries in the international economic arena. Following George Mavrotas’ piece, placing the relevance of this volume in the current contextual setting for development aid and finance, the rest of the volume is divided into four parts. Part 1, by John Toye and Gerry Helleiner, presents reflections of Alf’s life and work in commodities, trade and governance. The authors worked along with Alf over many years as prominent development economists, sharing convictions similar to Alf’s in the need to build a fair international economic system for developing countries. Chapter 1 by John Toye traces Alf’s lifetime work and academic contribution to our understanding in the fields of commodities, international trade and economic development, spanning from the pre-war period to the first decade of this century. Gerry Helleiner focuses his discussion in Chapter 2 on Alf’s years working at the UNCTAD as an international civil servant. Following Alf’s position

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as a sophisticated pragmatic analyst and a political realist, he also emphasises how much Alf anticipated the growing need for reforming global economic governance structures so that the voices of poor countries were legitimately accommodated. Hence, while John Toye’s contribution provides Alf’s research with detailed historical narratives over the past three quarters of a century, Gerry Helleiner addresses contemporary, pressing questions on how to improve global governance systems – their processes as well as in their institutional architecture – in the light of fast changing global economic and political realities. Part 2 is devoted to a discussion of the recent development in world commodity markets, its effects on trends and volatilities of commodity prices and market structures, and its implications for economic development of commodity-dependent developing countries. All five chapters can be seen as efforts on the part of each contributor to update Alf’s analysis in his classic volume Commodities in Crisis by incorporating trends and structural changes observed during the 1990s and 2000s. Chapters 3 and 4, by Machiko Nissanke, examine the recent trends and the newly emerging governance structures affecting commodity markets and production, and discuss new challenges, opportunities and development policy issues in the light of these structural changes. Chapter 3 aims at providing a road map to the subsequent chapters of the book. It presents an overview of the development by examining the recent changes in price trends and volatility across a number of primary commodities and evolving international commodity policies in the context of historical ‘commodity’ debates. Chapter 4, by Machiko Nissanke, examines the evolving governance structures over commodity markets, trade and production at both global and national levels, based on the recently conducted country case studies. In particular, it discusses the effects of rapidly expanding derivatives markets on the price formation and volatility in coffee markets, and examines how processes of price formation and mechanisms of distribution of price changes have been affected by the changing landscape of commodity markets and production at different nodes of the commodity chain. This is followed by an examination of the changing pattern of distribution of price changes in commodity trade along the vertical chain, and how the withdrawal of state support has created new institutional environments for producers, affecting their productivity and livelihoods, and hence the export performances of the coffee and cotton sectors in Tanzania. It further discusses domestic policy issues related to macroeconomic management of resource-based over commodity price cycles, drawing on a case study on the Zambian copper boom. The chapter concludes with discussions of new challenges facing policy-makers of the global community and national governments in order to address commodity related developmental issues.

xxviii Preface and Introduction

Chapter 5, by David Sapsford, Stephan Pfaffenzeller and Harry Bloch, explores the behaviour of commodity prices with a view to assessing the extent to which the problems of the 1980s, highlighted by Alf, persisted throughout the 1990s into the current decade. Their structural stability analyses show that exclusion of the years 2006 and 2007 from the sample removes all evidence of significant upward movements in trend and, therefore, trend reversal of the real commodity price index calculated using the manufacturing unit-value (MUV) index as deflator. Their results provide evidence of a negative long-run trend in real prices accompanied by a significant downward level shift post-1991, suggesting that the commodity crisis of the 1980s was propagated throughout the 1990s into the first decade of the twenty-first century. In Chapter 6, Raphael Kaplinsky attributes the recent increases in commodity prices to the rise of the two major Asian driver economies – China and India – and predicts that the trend might be sustained in the near- and medium-term, if not the long-term, notwithstanding the sharp and very rapid fall across the board in commodity prices in late 2008. He argues that the post-2000 boom represents a structural shift in the global driver of demand, with China and India exhibiting high, growing commodity– GDP elasticities. Furthermore, he argues that the Asian drivers are also the key factor behind the recent terms of trade reversal, reflecting a shift from Schumpeterian-rent-intensive manufacturing sectors to Ricardian rentintensive commodity sectors with the consequent impact on price formation. Alice Sindzingre, in Chapter 7, focuses her analysis on the continued high volatility of commodity prices and the market failures characteristic to commodity trade and production, both at the global and local levels. She discusses negative effects of price volatility on commodity-dependent developing countries, and argues that the growth of China and other emerging countries is not likely to modify price volatility in the medium term or commodity-exporting countries’ dependence. She suggests that the high commodity dependence could lead to poverty traps for these economies that might be compounded by other processes, such as fragile institutional arrangements. Part 3 of the book contains two case studies of the cotton and copper sectors. In Chapter 8, Michel Fok examines the recent changes in cotton trade and production – namely, the increasing importance of Far Eastern markets and the adoption of biotechnology in several larger producing countries. Foreseeing a larger productivity gap between these countries and poorer cotton producing developing countries, he suggests the latter group of countries could suffer more from the continuing deterioration of the terms of trade of cotton along with greater world price fluctuation. Focusing on the francophone African cotton producing countries (FACs), he argues that the factors underlying the cotton crisis since the mid-1980s still prevail, and


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have been exacerbated by recent trends in demand, supply, price formation and currency exchange movements, and identifies crucial challenges in the international cotton-policy arena and in cotton-dependent countries. Chapter 9, by Elva Bova, presents an empirical examination of the macroeconomic effects of the adoption of the PEP proposal of pegging the exchange rate prices of exported commodities for Zambia, which is heavily dependent on copper exports. Her simulation analysis shows that, under a PEP, exports and domestic prices will move pro-cyclically with respect to the commodity price cycle, and that the exchange rate will be more volatile than the one currently adopted by the economy. In the light of the limitations of the PEP, she advances an alternative arrangement that consists of a band whose width changes according to the phases of the copper price, in which the margins are larger under low copper prices to allow for adjustment through depreciations, while they are narrower when commodity prices increase, so as to avoid excessive overvaluations that would jeopardize non-traditional exports. Part 4 of the volume presents discussions on financial mechanisms for dealing with commodity price instability and governance issues raised by Gerry Helleiner in Part 1. In Chapter 10, Adrian Hewitt traces the history of international and interregional compensatory finance instituted in the 1970s and 1980s in dealing with economic problems facing commodity-dependent low-income countries. He argues that, instead of becoming established as a settled adjustment mechanism with some permanence, endowed either with adequate funding or modelled as a self-financing mechanism in a post-Keynesian world, the schemes (STABEX, the Compensatory Financing Facility (CFF), SYSMIN, COMPEX, FLEX and the CCFF) were used by industrialized countries as a calming mechanism and an antidote to the Common Fund. The Common Fund was seen, at that time, as threatening over-regulation of commodity markets and, eventually, rigid supply management. He suggests that, under the rapidly changing conditions facing the global economy, with a shift of economic power more to emerging market economies and some resource rich countries in the twenty-first century, the global community is presently more ready for fresh thinking towards a new scheme of international compensatory finance, this time one that could play an important role as an instrument of stabilization properly designed and adequately endowed to operate counter-cyclically. In Chapter 11, Charles Gore presents a critical assessment of the recent influential publication by Paul Collier, The Bottom Billion, focusing on the conceptual underpinnings of Collier’s analysis and, in particular, the relationship between globalization, commodity dependence and poverty. The chapter puts forward an alternative view of the problem of the poorest countries that is rooted in three concepts: the international poverty trap, blocked structural transition; and the interrelationship between polarization

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and marginalization in the global economy. He suggests that countries can get caught in a poverty trap, of which commodity dependence is a pivotal feature, since it is related to the build up of problems of external indebtedness, as well as aid ineffectiveness. He argues that escaping the international poverty trap will require new instruments, including some new kind of international commodity policy, as well as international measures to break the links between commodity dependence, unsustainable external debt and aid ineffectiveness. In Chapter 12, Yilmaz Akyüz argues that liberalization and greater integration have caused dislocations in the developing world, particularly among the poor and underprivileged, yet many of the traditional development and macroeconomic policies have become ineffective – or, simply, unavailable – because of the proliferation of international rules, obligations and practices. The chapter examines the sources of the constraints, the rationale for multilateral rules, the nature of existing multilateral disciplines and their impact on policy space in developing countries. He argues for a need to restructure multilateral disciplines to bring greater coherence and to widen boundaries of policy intervention for development. MACHIKO NISSANKE

References Maizels, Alfred (1992) Commodities in Crisis: The Commodity Crisis of the 1980s and the Political Economy of International Commodity Policies (Oxford: Clarendon Press). Nissanke, Machiko and Adrian Hewitt (eds) (2003) Economic Crisis in Developing Countries: New Perspectives on Commodities, Trade and Finance (London: Pinter).

A Current Contextual Setting for Development Finance The current deep financial and economic crisis and its implications for the developing world are currently dominating the research and policy agenda. Although there is no consensus on how far the financial crisis will affect the poor economies of the South and the channels and mechanisms through which the crisis affects the poor, everyone agrees that it is time for action on the policy front to avoid the collapse of the world economy and the disastrous effects, inter alia, for the world’s poor. About two years ago, it looked more likely that the next shock to the global economy would come from the South – specifically, a rapid slowdown in China’s growth or some big blow up in emerging markets (Addison 2007). As is now clear, the shock has come from the North, first. This clearly demonstrates an iron rule of the globalization process – expect the unexpected. It has been rightly stressed that the current economic and financial crisis and vulnerabilities are not unrelated to forces driving the overall globalization process. Indeed, as a result of continued deregulation of financial markets and further opening of national borders to international capital flows, economic activity in both developed and developing countries has come to be increasingly shaped by financial factors. And the pro-cyclical behaviour of financial markets tends to reinforce expansionary and contractionary forces, thus amplifying the swings in investment, output and employment (see Akyüz (2008a) and the financial instability hypothesis developed by Minsky (1978) more than thirty years ago). In this context, risks are often underestimated at times of expansion, giving rise to a rapid credit growth, asset price inflation, over indebtedness and excessive spending, and adding to growth momentum. At the same time, these also produce financial fragility, which is exposed with a cyclical downturn in economic activity and/or increased cost of borrowing when incomes can no longer service the debt incurred, thus leading to defaults, credit crunch, asset price deflation and economic contraction (Akyüz, 2008a, 2008b). In this context, it is not surprising that the global financial ‘architecture’ is currently (again) under scrutiny, and the whole development finance ‘system’ is being re-examined. Indeed, recent work in the broad area of development finance, and also in the area of international aid flows, has stressed the growing complexity of the multilateral development finance system and, more importantly, that the current multilateral development finance ‘system’ is, rather, a non-system, in the sense that, unlike some of its elements (such as xxxi

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A Current Contextual Setting for Development Finance

the Bretton Woods sister organizations), it has not been planned and it is not the result of coherent design. The increasing complexity of the development finance system – with too many donors, often with conflicting and unclear objectives – also imposes extra constraints on development finance recipients anxious to secure more finance to achieve development targets that are often ambitious. With multilateral complexity rather than aid levels being scaled up, the capacity of the aid system to deliver is thrown into question. Maxwell (2006: 8) has summarized the problem very well: Our main concern has been with the ‘architecture’ of the aid system, especially the proliferation of bilateral agencies, international bodies and special-purpose ‘vertical’ funds. There are too many in total and too many in each country, with overlapping mandates, complex funding arrangements, and conflicting requirements for accounting and reporting. In addition, duplication, overlap and fragmentation are creating substantial transaction costs for donors and recipient governments (see Burall and Maxwell 2006; Roodman 2006; Knack and Rahman 2007; Mavrotas and Reisen 2007; World Bank 2007; Mavrotas 2009a, 2009b). In 2007 alone, 49 countries received roughly 14,000 donor missions. Donor fragmentation runs counter to the needs of developing countries and has a direct impact on how aid is delivered. In Tanzania, 600 projects are valued at less than US$1 million in implementation, and Uganda has to deal with more than 600 aid instruments (Report of the 2008 Development Cooperation Forum). The UN Doha Conference, on the other hand, clearly stressed that the international context of aid has changed profoundly since Monterrey. In particular, the 2008 Doha Declaration on Financing for Development emphasized that the international community is now challenged by the severe impact on development of multiple, interrelated global crises and challenges, which include food insecurity, volatile energy and commodity prices, climate change and, above all, the global financial crisis. Indeed, the financial crisis changes the aid landscape in view of the implications that a global financial meltdown might have for aid budgets. At the same time, the recent wave of regionalization in the world revealed, inter alia, new challenges for development aid in particular, and development finance in general. Regionalization has implications for both donors and aid recipients. A first implication is related to the need for more coordination among donors, on the one hand, and among aid recipients, on the other. A second implication is related to the fact that the whole development aid machinery will have to be adapted to an emerging architecture in which region-to-region relationships will be more important, at the cost of postcolonial ties. For individual aid recipients, this represents both challenges and opportunities. A third set of implications represent opportunities for

A Current Contextual Setting for Development Finance xxxiii

aid policies to reduce volatility, tackle development issues with a regional scale and/or cross-border characteristics, and contribute to the provision of RPGs. Finally, the institutional preparedness of the recipient regions and the possible adverse fiscal responses at the national level should be carefully assessed (De Lombaerde and Mavrotas 2009). During these difficult times for aid budgets, honouring aid commitments remains a big challenge. At their 2005 summit in Gleneagles, Scotland, the G8 committed to raise aid by US$50 billion, but they are still US$31.4 billion short. Aid fell by 8.4 per cent in 2007, after a 4.7 per cent fall in 2006. Debt relief under the Heavily Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI) has dominated aid over the last two years. It is questionable whether this debt relief should even count as official development assistance (ODA), since the debts are unlikely to have been repaid. At the Hokkaido summit in 2008, the G8 committed to raising ODA to US$130 billion by 2010. Again, it remains to be seen whether such a commitment will be materialized (Addison and Mavrotas 2008a, 2008b). Finally, the optimism emanating from the recent G20 Summit in London – which was held to deal with the global financial crisis and with the promises of another increase in financial flows to protect the developing countries from the severe implications of the crisis – will be tested over the next few months, when action rather words is what is needed to focus on the world’s poor. How might the current financial crisis affect the aid budgets? Looking back on the impact of past economic crises on the scale of aid disbursements, Mold et al. (2008) found that while gross domestic product (GDP) and aid flows tend to move together over long periods, there are instances in which aid disbursements have become ‘decoupled’ from economic growth in the OECD countries. They argue that what will most certainly happen as a result of the global financial crisis is a notable shift in the composition of resource flows towards multilateral contributions (as more funds are channelled through the International Monetary Fund (IMF) and the World Bank). In this context, there is a danger that much of the new resources will bypass the poorer and more vulnerable countries and, instead, be destined almost exclusively for the emerging markets and middle-income countries, to reduce systemic risks. Also of relevance here is the issue of public support for development aid. Recent polling data suggest that voters continue strongly to support aid to developing countries, despite the financial crisis. It is also notable that public support for development aid has been consistently high across OECD countries over the past twenty years – it has never dropped below 70 per cent (Zimmerman 2008). What remains certain, however, is that the global financial crisis will seriously undermine the progress made so far on the MDGs. It is, therefore, absolutely crucial to increase ODA to poor countries (and improve its quality), since the focus should be on the number of poor people in this world, what should be done for them, and finding where development

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aid fits into this bigger poverty picture (in view of the recent revised estimate of global poverty by the World Bank to 1.4 billion people). Add to the above the recent collapse of commodity prices, and we can fully understand how timely and relevant Alf Maizels’ conclusions still remain after so many years. In particular, Alf’s suggestions on the need to take action and create safety nets and compensatory schemes to protect the poor from abrupt fluctuations in commodity prices (Maizels 1992, Maizels et al. 1997) and external shocks are so relevant to the current discussion and debate on ‘vulnerability funds’, ‘food security issues’ and ‘global financial regulation’. After all, ‘we are all Keynesians now’! Against this background, this volume is a tribute and celebration of Alf’s various important contributions to development economics, with invited contributions by leading experts in the areas of commodity markets and development finance. It is also an effort to remind all of us that those great thinkers and scholars such as Alf will always remain relevant to the quest for a better and fairer world. GEORGE MAVROTAS Chief Economist, Global Development Network (GDN), New Delhi

References Addison, T. (2007) ‘International Finance and the Developing World: The Next Twenty Years’, in G. Mavrotas and A. Shorrocks (eds), Advancing Development: Core Themes in Global Economics (Basingstoke: Palgrave Macmillan for UNU-WIDER). Addison, T. and G. Mavrotas (eds) (2008a) Development Finance in the Global Economy: The Road Ahead (Basingstoke: Palgrave Macmillan for UNU-WIDER). Addison, T. and G. Mavrotas (2008b) ‘Development Finance: New Opportunities for Doha’, WIDER Angle, November. Akyüz, Y. (2008a) ‘The Current Global Financial Turmoil and Asian Developing Countries’, UN-ESCAP series for Inclusive and Sustainable Development, 2, Bangkok. Akyüz, Y. (2008b), ‘Managing Financial Instability in Emerging Markets: A Keynesian Perspective’, METU Studies in Development. Burall, S. and S. Maxwell (2006) ‘Reforming the International Aid Architecture: Options and Way Forward’, Overseas Development Institute, ODI Working Paper, 278, October. De Lombaerde, P. and G. Mavrotas (2009) ‘Aid for Trade, Aid Effectiveness and Regional Absorption Capacity’, in Philippe De Lombaerde and Lakshmi Puri (eds), Aid for Trade. Global and Regional Perspectives (New York: Dordrecht). Springer. A. Development Cooperation Forum (2008) Report of the First Development Forum, Economic and Social Council (New York: United Nations). Knack, S. and A. Rahman (2007) ‘Donor Fragmentation and Bureaucratic Quality in Aid Recipients’, Journal of Development Economics, 83, 176–97. Maizels, A. (1992) Commodities in Crisis: The Commodity Crisis of the 1980s and the Political Economy of International Commodity Policies, UNU-WIDER Studies in Development Economics (Oxford: Oxford University Press).

A Current Contextual Setting for Development Finance xxxv Maizels, A., R. Bacon and G. Mavrotas (1997) Commodity Supply Management by Producing Countries: A Case-Study of the Tropical Beverage Crops, UNU-WIDER Studies in Development Economics (Oxford: Oxford University Press). Mavrotas, G. (2009a) ‘Foreign Aid: Theory, Policies and Performance’, Review of Development Economics, 13(3), WIDER Special Issue, forthcoming, August. Mavrotas, G. (ed.) (2009b) Foreign Aid for Development: Issues, Challenges and the New Agenda (Oxford: Oxford University Press), forthcoming. Mavrotas, G. and H. Reisen (2007) ‘The Multilateral Development Finance “NonSystem”’, Paper presented at the Experts’ Workshop on ‘Performance and Coherence in Multilateral Development Finance’, Berlin, 29–30 January 2007. Maxwell, S. (2006) ‘Aid Architecture: A Blueprint for the Future’, ODI Annual Report 2006 (London: ODI). Minsky, H.P. (1978) ‘The Financial Instability Hypothesis: A Restatement’, Thames Papers in Political Economy, North East London Polytechnic. Reprinted in H.P. Minsky, ‘Can “It” Happen Again?’, Essays on Instability and Finance (Armonk, New York: M.E. Sharpe, 1984). Mold, A., D. Olcer and A. Prizzon (2008) ‘The Fallout from the Financial Crisis: Will Aid Budgets Fall Victim to the Credit Crisis?’, Policy Insights, 85, December (Paris: OECD Development Centre). Roodman, D. (2006) ‘Aid Project Proliferation and Absorptive Capacity’, UNU-WIDER Research Paper, 2006/04. World Bank (2007) Aid Architecture: An Overview of the Main Trends in Official Development Assistance Flows (New York: World Bank). Zimmerman, R. (2008) ‘The Fallout from the Financial Crisis: The End of Public Support for Development Aid?’, Policy Insights, 87, December (Paris: OECD Development Centre).


Part 1 Commodities, Trade and Governance: Reflections on Alfred Maizels’ Life, Work and Legacy

Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-05-13


10.1057/9780230274020 - Commodities, Governance and Economic Development under Globalization, Edited by Machiko Nissanke and George Mavrotas

Commodities, Cooperation and World Economic Development: The Mission of Alfred Maizels (1917–2006) John Toye

For trade and development economists, the name of Alfred Maizels is synonymous with the analysis of the primary commodity sector, particularly its trade prospects and its influence on economic development. Originally trained as a statistician, he made his reputation as a research economist at the National Institute for Economic and Social Research. Recruited by Raúl Prebisch to the Commodity Division of the new UN Conference on Trade and Development, he became the designer of its integrated programme for a comprehensive range of commodities, including a Common Fund. On retirement, he continued to produce valuable studies of the problem of commodity dependence from a number of academic bases, including University College, London; WIDER and Queen Elizabeth House, Oxford.

Early life and education Alfred Maizels was born in 1917 to a Jewish family in Whitechapel, East London. His father was a tailor who had arrived from Poland in 1905, and his mother was a seamstress who helped with bookkeeping and administration. Alf went to a Church of England school – Raine’s Foundation School – where he began to learn economics in the sixth form. After school, he entered the London School of Economics (LSE), where he studied statistics. In 1937, he graduated with a first class degree, and won the Farr Medal and Prize in statistics. The LSE immediately hired him as a research assistant. At this time, the LSE was under the direction of Lionel Robbins, who, together with Friedrich Hayek, was in the process of making the Economics Department the outstanding centre of Austrian-style economic liberalism in Britain. However, its members were not all of one political persuasion, and a minority of committed socialist economists still remained on the departmental staff (Cockett 1994: 25–32). As a research assistant, Maizels had the opportunity of working for those on each side of the LSE’s ideological divide. He began working for Hayek himself, but then was placed with the


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The Mission of Alfred Maizels, 1917–2006

democratic socialist Evan Durbin – two economists at opposite ends of the individualism versus collectivism debate. This was one way to learn broadmindedness in the face of divergent ideologies, but Maizels himself was more inclined to Durbin’s political values than to those of Hayek.

When Maizels graduated, war with Germany was looming. Once war had broken out, he went to Whitehall as one of the numerous academics who became temporary civil servants for the duration of the war. Alf was allocated to the Board of Trade. The Board’s immediate objective was to reduce less essential civilian consumption and so release resources for the war effort. Alf’s first academic publication was, in fact, an attempt to estimate aggregate national consumption, investment and expenditure, using methods that had been developed by Colin Clark (Maizels 1941). As civilian textile supplies were reduced, it became evident that a rationing scheme for clothes would be required. Ironically, the key idea for the scheme, the use of ‘points’, was a German invention. The German scheme had been described by Hans Singer (1941: 29–31), and this description was picked up Richard Kahn (Marcuzzo 1990). However, the detailed application of the points principle in the British context still had to be worked out, and Alf assisted Evan Durbin and Brian Reddaway in this task. The official war historians’ verdict on the scheme was that ‘to have launched such a new and complicated plan in so short a time . . . was indeed a remarkable feat of administration’ (Hancock and Gowing 1949: 333). The conduct of the Second World War, as with the war of 1914–1918, raised expectations about the degree of international cooperation that could be achieved after an Allied victory. The organization ‘Political and Economic Planning’ circulated ideas about strengthening controls over the production and use of commodities through an International Raw Materials Union. Maynard Keynes wrote two papers proposing some form of commodity control. The socialist scientist J.D. Bernal spoke to the British Association for the Advancement of Science on the need for an International Resources Office that would collect statistics, undertake research and advise on the efficient conservation and utilization of natural resources. Efforts to control commodity trade and use were not seen as the makeshift arrangements dictated by war, but an experience to be deployed in peace time ‘in the building up of an organization for the economical use of all natural resources for the benefit of mankind in general’ (Crowther et al. 1942: 68–72). War put commodity control into the post-war intellectual ether. After the war, Alf stayed on at the Board of Trade, moving from the Statistics Division to Commercial Relations and Exports. His made his debut on the international scene when he was seconded in 1950/51 to the United Nations Economic Commission for Europe, based in Geneva. At this time,


At the Board of Trade


the Research and Planning Division at the UN Economic Commission for Europe (UNECE), and its flagship publication Economic Survey of Europe, was enjoying the prestige and influence that it achieved under the directorship of Nicholas Kaldor, although Kaldor had by this time moved on to Cambridge and been succeeded by Hal B. Lary. On arrival in Geneva, Maizels took over from Walt W. Rostow a study of the European timber and wood products industry. With a clear empirical framework and diligent empirical research, its recommendations laid the basis of future cooperation among European timber producers.

Research at the National Institute Once he returned from Geneva, he and his colleagues at the Board of Trade became interested in the question of how the industrialization of the developing countries was likely to affect post-war Britain’s future trade. They were successful in attracting funding from the Leverhulme Foundation, which allowed Maizels to transfer to the National Institute for Economic and Social Research in 1955, as a Senior Research Officer. There, with a small team, he began a research project that gradually became increasingly ambitious. It examined how the spread of industrialization would affect, not only British trade, but also world trade flows more generally. Alf had realized that the effect of overseas industrialization on Britain was simply one aspect of the changing economic relations between the industrial countries as a group and the countries whose economies were dominated by producing primary commodities. Eugene Staley had addressed this bigger question – foreshadowing the current debate about the effects of globalization – in an International Labour Organization (ILO) study at the end of the Second World War. He had concluded that: [E]conomic development of new areas brings both opportunities and dangers to existing industrial areas, but it is definitely possible, by policies of mutual cooperation and intelligent adaptation, to make the advantages far outweigh the disadvantages. (Staley 1945: 22) Alf started his research by re-visiting Folke Hilgerdt’s study of the effect of spreading industrialization on international trade in the period 1870–1930 (Hilgerdt 1945). Hilgerdt had also argued that the net effect had been positive during that earlier era, since the greater availability of manufactured goods had stimulated primary production for export, which then financed a larger volume of imports. However, since 1930, depression and war had intervened, raising doubts about whether this virtuous circle could be re-established. In Industrial Growth and World Trade (1963), Maizels published a new set of statistics on the network of world trade for the period 1899–1959, and used regression methods to link changes in trade with economic growth. On the


John Toye 5



basis of these newly constructed statistics, it was concluded that, ‘in many less developed countries – probably the majority – industrialization is the key to economic progress’ (ibid: 8). It was shown further that economic growth is accompanied by change in the composition of industrial output, away from food and textiles and towards metals and engineering, and towards chemicals. A concluding chapter made a projection of trade patterns for 1970–1975, and derived policy implications regarding the need for industrial countries to reduce their barriers to trade, and to increase the volume and improve the terms on which capital flowed from industrial to developing countries. Industrial Growth and World Trade was rapidly recognized as a classic. The solidity of its statistical base, its judicious application of the regression techniques of its day and its relevance to contemporary concerns about international trade policy soon put it at the forefront of debate and policy-making. It was reprinted in 1965, reprinted again in 1969 with some statistical revisions, and then appeared in an abridged student paperback edition in 1970. Its trade projections for 1970–1975 (which actually proved to be too low) were, in turn, the stimulus for further research work in the National Institute (Batchelor et al. 1980). Alf Maizels himself moved closer to the topic of primary commodities in his next research project, funded by the Rockefeller Foundation. The statistical base of Exports and Economic Growth of Developing Countries (Maizels 1968a) was a detailed study of the market prospects for a number of individual primary commodities of special interest to developing countries in the Sterling Area. From this, the export prospects of individual countries were estimated. Assuming a binding balance of payments constraint, he and his associates then projected their rates of economic growth. The picture that emerged was a bleak one, including insufficient export diversification, stagnant export revenues, the ineffectiveness of economic planning and the limited potential of capital inflows to accelerate growth. From this analysis, a number of policy recommendations were drawn. Improved competitiveness in individual commodities could not be a general solution to the growth problems of less developed countries, although it could benefit one country at the expense of another. This was the origin of the idea of a fallacy of composition in the expansion of commodity exports. Export diversification, by contrast, was a more hopeful strategy. Greater South–South commodity trade was also recommended, although not in those terms. Alf also returned to his old bugbear, the network of trade restrictions maintained by the industrial countries – that these had to be drastically relaxed was a recurring theme in all his books.


6

Alf Maizels at UNCTAD 1966–1980 The international trade scene at this time was clouded by the failure to bring into existence the planned International Trade Organization (ITO), once the


USA became embroiled in the Korean War. This left the ‘interim’ General Agreement on Tariffs and Trade (GATT) as the sole institutional machinery for the regulation of international trade. Throughout the 1950s, discussions and debates about international trade centred on the limited remit of the GATT, largely confined to organizing negotiations to liberalize trade in industrial products, and whether it was adequate for the task of promoting trade that would assist the development of developing countries. These concerns eventually led to the setting up of the UN Conference on Trade and Development (UNCTAD), with Raúl Prebisch as its first Secretary General. In the run-up to the first UNCTAD Conference in 1964, Prebisch’s righthand man, Sidney Dell, was aware that little had been done in the way of advance planning for the new institution, and it was much less than had preceded the Bretton Woods conference of 1944. With money from the Carnegie Endowment, he organized, with Andrew Schonfield of Chatham House, a conference at Bellagio in September 1963 to consider policy proposals that could form the basis of UNCTAD’s action programme. Alf was one of the fifteen economic experts who were invited to participate at Bellagio. He submitted a paper based on the research done for Industrial Growth and World Trade. The paper’s main conclusion was the existence, on then current trends and unchanged policies, of a substantial balance of payments financing gap for the developing countries in the decade ahead (Maizels 1964: 23–50). One of the tasks of the Bellagio meeting was to consider whether policy interventions in world commodity markets would be desirable and feasible. As Andrew Schonfield recognized, the meeting did not make much progress in finding a consensus on this issue. [O]ur attempt to reach a common position on the problem of world commodity prices proved to be much more disappointing [than on other problems]. We advanced some distance on the basis of elaborate preparatory work done by . . . Dr [Gerda] Blau and Mr Maizels. But, in the end, after many hours of argument, which was at times frankly fierce, we were still faced with deep divisions on issues of principle. The ultimate difference was . . . about the role of independent market forces in deciding the fate of the primary producing countries. (Schonfield 1964: 3) Various considerations fuelled scepticism about commodity agreements that aimed to raise prices above those set by the market. Some experts held that price support by means of export restrictions would only stimulate higher production by other producers outside the scheme, or induce innovations in synthetic substitutes. Others who were not opposed to such schemes in principle noted that all commodity agreements required joint decisions and equal voting rights for producing and consuming countries, and that cooperation by consumer countries was highly unusual. Further, if consumers were willing to cooperate, it would be more efficient for them to raise an import levy, and return the proceeds to the producer countries.


John Toye 7



Despite the scepticism of most of the economic experts at Bellagio, developing countries retained their enthusiasm for international commodity agreements. They were buoyed up by three perceptions, none of them wholly accurate. One was that several commodity regulation schemes had succeeded during the inter-war period – for tea, rubber and tin. This was true enough, but they had been maintained by collusion between the British, French and Belgian colonial powers, and by 1964 colonialism was in its dying throes. Another perception was that the terms negotiated for the abortive ITO had legitimized international commodity regulation. In fact, what it had done was to establish highly restrictive criteria for international commodity agreements – criteria so stringent that, had they been in existence then, they would have outlawed the tea, rubber and timber agreements of the inter-war years. The last flawed perception was that the International Coffee Agreement of 1963 served as a useful herald of the future, when it was no more than a short-lived US expedient to mollify hostile Latin American public opinion. The fact that coffee was the sole commodity to enter a regulation scheme in the twenty years after 1945 did not seem to register in the minds of enthusiasts for commodity regulation in developing countries. Thus, commodity regulation remained very much on the future agenda of UNCTAD after the Geneva Conference of 1964. Once UNCTAD began recruiting a secretariat, Alf Maizels’ track record in relevant research, his previous UN experience and his prominent participation in the Bellagio conference made him the obvious candidate to approach. David Pollock, Prebisch’s personal assistant, was involved in his recruitment (Dosman 2008: 50), but Lal Jayawardena claims that he conveyed the formal offer of appointment to him at the National Institute of Economic and Social Research (NIESR) in 1965 (Jayawardena 1993: 10). Alf joined UNCTAD in 1966, and the position he accepted was that of deputy to Percy Judd, an Australian, who was the Director of the Commodities Division. Percy Judd was due to retire shortly after Alf arrived in Geneva. Prebisch had to worry about the geographical balance in recruiting his successor, as complaints had surfaced that Africans were being overlooked in favour of other nationalities. Prebisch reacted to them by seeking out an African – Bernard Chidzero of Southern Rhodesia (now Zimbabwe) – to succeed Judd when the latter retired as head of the Commodities Division. When Chidzero candidly admitted to Prebisch that he knew little about commodities, Prebisch brushed his objection aside. With Maizels already installed as an exceptionally technically competent Deputy Director, Prebisch foresaw no problems for Chidzero as Director. What this change meant was that Alf rapidly became the effective, if not the titular, director of the Commodities Division. Maizels’ first task was to hire Jan Tinbergen as a consultant, to undertake a simulation of a buffer stock commodity scheme for cocoa. This was to facilitate negotiations on an international commodity agreement for cocoa. These negotiations collapsed, much to Prebisch’s discomfort, in mid-1966.


8


Nevertheless, Prebisch, with the help of Alf and David Pollock, produced a new UNCTAD strategy for commodities in October 1966. It underpinned the negotiations at UNCTAD II, held in New Delhi in 1968 and set the policy trajectory of UNCTAD for the next fourteen years – indeed, until Maizels retired from the UN in 1980. The secretariat’s position paper on the development of international commodity policy envisaged a comprehensive programme of inter-linked measures to tackle the commodity problem. Alf’s initial (1965) formulation of UNCTAD’s commodities objective was that of ‘achieving a reasonable degree of stability in the main commodity markets, and, where possible and appropriate, of achieving that stability at a reasonably remunerative price for the producing countries’. The developed countries had criticized the phrase ‘reasonably remunerative prices’ as impossible to define, unless it meant the long-run market equilibrium price. A key element of the revised strategy was to separate out commodity schemes designed merely to stabilize prices around market-determined trends from those aimed at raising prices. The device of the buffer stock would be reserved for the former objective, while other methods (such as production quotas) would be dedicated to the latter aim. In this revision, one may detect two influences. One is Tinbergen’s theory of economic policy, assigning each policy objective an independent policy instrument. The other is the political calculation, of which Maizels persuaded Prebisch, that the stability objective would be the more attractive one for the purpose of gathering the support of consuming countries for commodity regulation. Despite the collapse of the cocoa negotiations, the new strategy paper envisaged the number of international commodity agreements (ICAs) being significantly increased. It was considered that the establishment of a new source of finance, a Common Fund, was likely to make this increase easier, since one of the unresolved issues in the cocoa negotiations has been the source of funding for the acquisition of the initial buffer stock. This was to be one of the main uses of the proposed new Fund. It could also finance a range of other interventions in commodity production and trade, such as commodity marketing and export diversification schemes. Alf’s tactic of emphasizing the aim of moderating the fluctuations in commodity prices, rather than of raising them above market levels, presupposed that commodity price volatility was an undesirable phenomenon that the international community should attempt to cure. This assumption was challenged by the publication in 1966 of Alasdair MacBean’s book Export Instability and Economic Development. MacBean argued that, contrary to the received view, developing countries were not more subject to commodity price volatility than other countries, and that while certain developing countries had suffered from extreme instability of export earnings, the source of instability was quantity variation or intermittent supply side problems. This finding implied that price stabilization might actually aggravate export


John Toye 9



earnings instability. This research was taken up by others sceptical about UNCTAD’s commodities approach; for example, Harry G. Johnson (1967: 142–4). Johnson’s view was that any developing countries that wanted to stabilize commodity prices could do so by appropriate domestic policies, and that international schemes for the purpose were costly as well as redundant. In the face of this critical onslaught, Alf tried to reinforce the traditional view by launching a powerful counterblast aimed at undermining the intellectual credibility of MacBean’s results, and his conclusion that volatility of commodity prices did not retard economic growth. He pursued two lines of criticism. One was that neither the cross-country comparative nor the times series statistical approach had been deployed convincingly, and the other was that, in places, MacBean had misinterpreted his own results. Alf concluded this demolition job: It is admittedly difficult to make any valid generalization from such limited data, but, so far as it goes, the data … would seem to support the view that short term variations in national income in many, probably the majority of developing countries are associated with variations in those countries’ export proceeds. (Maizels 1968b: 577) Against this background of academic controversy, UNCTAD’s campaign for a more comprehensive approach to the commodity question ran into difficulties. The industrial countries were quite resistant to it, preferring to follow an unadorned commodity-by-commodity approach to the establishment of new ICAs. They harboured suspicions that UNCTAD would pursue a much more radical agenda, if empowered to do so by the creation of a Common Fund to finance a comprehensive and integrated set of measures. This fear of losing financial control hardened the obstructive attitudes of industrial countries. Their insistence on following a commodity-by-commodity approach produced only two new international commodity agreements, one for sugar in 1968 that was notable mainly for its loopholes and one for cocoa (finally) in 1972 that was, in fact, never activated. By this time, Alf had given the UNCTAD Commodities Division a soberly realistic and practical programme of work. He saw that commodity agreements were mainly desirable and feasible for tropical foods and beverages; agricultural raw materials that faced competition from synthetics were best helped by expanded programmes of research and development; agricultural products that competed with temperate sources of production were best helped by the removal of developed country protection; and metal and minerals on the whole could look after themselves (Maizels 1973: 42–53). Shortly after Alf was transferred to the post of Adviser on Economic Policy and Research, the international scenery shifted dramatically. The international oil price crisis of 1973 seemed to promise a radical redistribution of


10


global economic power. On 1 May 1974, the General Assembly voted unanimously in favour of the establishment of a New International Economic Order (NIEO). Gamini Corea, who became the third Secretary General of UNCTAD in April 1974, saw the opportunity to make UNCTAD the central forum for negotiating the NIEO, with the Integrated Programme on Commodities and the Common Fund proposal becoming the centrepiece of that negotiation. Corea therefore transferred Maizels again, this time into his own Office, with the title of Director of the Economic Policy Evaluation and Coordination Unit. This move seemed to recognize that commodities policy had become the UNCTAD policy. Maizels was thus drawn into the NIEO project, but had an awkward, even contradictory role to try to discharge. From within the Secretary General’s Office, he became the Secretary General’s speech writer and the principal editor or draughtsman of all major UNCTAD documents. He was therefore involved in the design and defence of the negotiating positions that UNCTAD adopted, using the best arguments and evidence at his command. Yet, though his appointment might formally be a technical one, he was operating in an essentially political role. In order to understand this situation, two peculiarities of it have to be grasped. The first is that, in the UN system, there is no intervening political executive that stands between the General Assembly and the Secretariat. The Secretary General of UNCTAD and, indeed, the Secretary General of the UN, are international public servants, not politicians, but their only source of political direction is the resolutions of the General Assembly of all the 192 UN member countries. Inevitably, they end up acting as if they were politicians. The second peculiarity attaches to UNCTAD alone: its secretariat regards itself as ‘impartial, but not neutral’. It is impartial in the sense that that it does not discriminate between the different countries that are members of the UN, but it is not neutral because it has a mandate to promote development, which some member countries need to a greater extent than others. Given these two peculiarities, the line separating technical and political roles is much harder to draw than it is in the British civil service, in which Alf had served previously. This contradiction in Alf’s position surfaced over the question of the cost of the Common Fund. The basic principle of having a Common Fund had finally been agreed at UNCTAD IV in Nairobi in 1976, where much of the political driving force of the negotiation came from Dragoslav Avramovic, who had been loaned to UNCTAD by the World Bank. Now the details of implementing the Common Fund remained to be negotiated, with a deadline of two years in which to do so. Corea soon determined to take a political approach to further negotiation, rather than a research-based approach of examining alternative options and their cost. This meant defending the original price tag (related to ten core commodities) of US$6 billion that the UNCTAD Secretariat had estimated in


John Toye 11



November 1976. The developed countries demanded to know how this estimate had been made, which was not an unreasonable request, given that they were going to have to find the money to pay the bill. Their demand was met with numbers that always added up to US$6 billion. This brought down on UNCTAD the professional condemnation of Alf’s old nemesis, Harry Johnson (1976). The official UNCTAD position was defended against the alternative of an export earnings compensation scheme by John Cuddy, but the price tag stayed at US$6 billion. When internal estimates were made for the buffer stock cost of individual commodities, they were sent back to be worked on further until they added up to the magic number. This troubled some of the UNCTAD junior research staff (for example, Brown 1980: 109–19, 163–5). There were moments in the late 1970s when it seemed that some sort of bargain might be attainable between the industrial and developing countries around the new financing for the reduction of commodity price volatility by means of buffer stocks plus a new facility, a second window of the Common Fund, for financing commodity diversification. In the end, however, this package of policies was insufficiently attractive to those representing the consumers in industrial countries. At the same time, the developing countries were ambivalent about the original Common Fund proposals and too divided among themselves to be able to apply serious economic pressure on the West. The Common Fund that finally emerged was the proverbial mouse that emerged from the mountains in labour (Toye and Toye 2004: 242–53). Alf acknowledged what had happened. He did regard it as a landmark that UNCTAD had succeeded in establishing the first international non-aid financial institution that was not dominated by the developed countries. At the same time, he acknowledged as a fact the emasculation of the original Group of 77 proposals: However, it now seems unlikely that the Common Fund will in fact be able to play the dynamic and catalyst role in strengthening world commodity markets that was originally envisaged, not only because it lacks its own substantial capital, but also because the developed market-economies have a ‘blocking vote’ which they can exercise in discussions with ‘significant financial implications’ and in ‘other important’ decisions. (Maizels 1984c: 21)


12

Subsequent academic contributions At this point, Alf took a well-merited retirement from the UN and returned to London and fresh academic endeavours. At first, he worked at University College, London on two research projects that were not directly connected to commodity policy. With Machiko Nissanke as his assistant, he produced an excellent paper for World Development (Maizels 1984b), which used quantitative methods to link the geographical distribution of bilateral aid funds


to specific kinds of donor interest – geopolitical strategy (USA), maintenance of colonial links (France) and trade (UK). Alf followed that, in 1986, with a second pioneering article with Machiko Nissanke, using cross-section data, exploring a variety of determinants of military expenditures in developing countries. Both of these were seminal papers that developed a large follow-up literature by others. University life also gave Alf the opportunity to think through the reasons for the failure of the North–South dialogue of the 1970s. In the first place, he saw a clash of ideologies. The arguments of the North were couched in terms of neo-classical economics. Alf regarded traditional neo-classical economics as a self-contained logical system, whose assumptions were far removed from reality. Its most important departure from the real world was, for him, its assumption of atomistic competition between producers and between consumers, when the reality was usually the dominance of oligopoly and oligopsony. In that context, prices were determined not by free market forces, but by relative bargaining power. He therefore argued for a re-specification of the institutional framework of economic theory, to include explicit recognition of the role of multi-national corporations and governments in the setting of commodity prices. Here, he came close to a dependency style of analysis (1984a). In the Common Fund negotiations, the constant refrain of the Western diplomats was that interference with free market forces would result in a mis-allocation of resources. Given his views on neo-classical economics, he did not find this a credible proposition in its own right. What especially annoyed him, however, was that this refrain emanated from countries that were, at the same time, prepared to use different and contradictory arguments to justify their domestic agricultural price support schemes! As a person of intellectual integrity, he found the blatantly two-faced nature of Western economic diplomacy reprehensible. In the second place, he saw a clash of interests between North and South. And yet he remained ambivalent about how fundamental the clash of interests was. At some times, he acknowledged that there was a fundamental conflict on the issue of control of the world economic system, arguing that the developed countries would oppose any reform of global institutions that would shift the balance of control in favour of the developing countries. Potentially bridgeable conflicts also existed, on the reduction of trade protectionism and the size of financial transfers (Maizels 1982: 183–4). At other times, he spoke as if he thought that the Western countries were simply mistaken about where their true interests lay, and that more and better arguments, if put to them, might succeed in recruiting them into ‘a genuine global strategy for development’ (Maizels 1984c: 23). He would probably have preferred the latter to be true. In any case, the direction of his academic effort after the two seminal papers on the geography of aid and developing countries’ military spending seems to reveal a preference for that interpretation.


John Toye 13



In 1986, Lal Jayawardena, now Director of UN WIDER in Helsinki, invited Alf to join the Institute as a Senior Fellow. Here, he returned to the subject of international commodity policy, to re-energize the debate and re-formulate the agenda. The result was Commodities in Crisis (Maizels 1992). This book combined three elements. The first was a detailed explanation of the ways in which the behaviour of commodity markets in the 1980s had damaged the development prospects of the less developed countries. The second was his account of what had been attempted in the NIEO negotiation and the obstacles that had prevented success – the turn to anti-inflation policies in the West and the adoption of modes of aid that were conditional on the adoption of neo-liberal policies. The third examined some of the longer-term problems of the commodities sector – the control of trade by large transnational companies, the challenge of synthetics, industrial country trade barriers (still there!) and the obstacles to South–South trade. At the end of the book, suggestions are made for a minimum bargain that might still be negotiated on commodities issues. Alf reiterated these suggestions in a paper that he presented at UNCTAD X in Bangkok in 2001 (Maizels 2003). Unfortunately, nothing much in recent years has been conducive to reviving international cooperation on commodities, envisaged in terms of negotiating new ICAs. The most hopeful signs have been the growth of South–South trade and the World Trade Organization’s efforts to make the reduction of agricultural protection a subject for trade negotiations. That might still happen, and it would be the fulfilment of one of Alf Maizels’s most long-standing dreams for a better world. From 1991 to 2004, Alf was also a Senior Research Associate of Queen Elizabeth House, Oxford. Working as a member of the Finance and Trade Centre, he was held in great esteem and affection at Queen Elizabeth House. Here, he wrote his final book, with Robert Bacon and George Mavrotas. It was an investigation into the potential of strategies to manage the excess supply of tropical beverage crops (Maizels 1997). For the last few years of his life, he continued his research at the School of Oriental and African Studies, University of London, where the title of Honorary Professorial Research Fellow was conferred on him in 2003.

Conclusion


14

Alfred Maizels was one of several economic statisticians who made important contributions to development studies, and who played important parts on the international public stage in the third quarter of the twentieth century. Others were Colin Clark and Dudley Seers, and one might also include Hans Singer, who completed his doctorate under Clark’s supervision. I do not suggest that they all viewed economic statistics in the same way. At times Clark, who was originally trained as a natural scientist, seemed to hold a pseudo-scientific belief in the mystique of numbers, while Seers and


Singer were as concerned about what numbers do not tell one as with what they do. Nevertheless, this group had important similarities. One was their indifference – if not outright aversion – to neo-classical economic theory, based on its perceived divorce from economic reality. The same indifference applied to Marxism, and for the same reason. Their open-minded, commonsensical and strongly empirical style of economics was highly appreciated in Britain at the time. If there was a value that they all held, it was something akin to equitable distribution, or fair shares. I think that they would all have assented to Richard Tawney’s argument that extreme inequalities of wealth and income serve no economic function. On the international scene, this argument was transposed from people to countries, and a better world was envisaged as one where inter-country differentials were diminished. They were thus technically and temperamentally well suited for service in national and international agencies committed to pursuing this reforming goal. Alf Maizels saw economic dependence on primary commodities as the reason why poor countries stayed poor. He saw commodity price stabilization, export diversification and the removal of restrictions on agricultural trade as a package of policy measures that would level the playing field and accelerate the development of the less developed. Alas, his vision of how developing countries could escape from commodity dependence could not be made to square with the intractable realities of the high-level Western diplomacy of his day. Yet, he never became embittered or cynical; neither did he try to put behind him the bruising experience of public engagement on these issues. He remained faithful to his vision of world economic development by policies of mutual cooperation, and ever articulate and reasonable in his defence of it. Manmohan Singh, Prime Minister of India, himself a renowned trade economist, paid Alf Maizels a fitting final tribute when he referred to him as ‘a brilliant economist who devoted his life to promoting the development of poor countries’. It is possible that international public opinion might once again come round to the view that some form of commodity control is desirable. The 2007 financial and economic crisis of capitalism has now borne out my earlier analysis of the current global economic predicament, so I am emboldened to reprint it here.


John Toye 15

While we have observed a movement of informed opinion towards the policies of economic liberalism, simultaneously we have witnessed a surprisingly frank acknowledgement in official quarters of the key unsolved problems of the capitalist economic order. These are its proneness to financial crisis, its failure to find remedies for the economic problems of peasant production and its recurring tendency to neglect the problem of poverty. In Hegelian terms, it is as if world society had to wait for the inadequate policies of state socialism to be finally discredited before it could permit


16


The name of Maizels might yet, as that of Keynes, be spoken again in the world’s corridors of power.

Note I am grateful to Paul Rayment, who kindly shared with me his own appreciation of Alf Maizels.

References Batchelor, R.A., R.L. Major, and A.D. Morgan (1980) Industrialisation and the Basis for Trade (Cambridge: Cambridge University Press for NIESR). Brown, C.P. (1980) The Social and Political Economy of Commodity Control (London: Macmillan). Cockett, R. (1994) Thinking the Unthinkable: Think-tanks and the Economic CounterRevolution 1931–1983 (London: Harper Collins). Crowther, J.G., O.J.R. Howarth and D.P. Riley (1942) Science and World Order (Harmondsworth: Penguin Books). Dosman, E.J. (2008) The Life and Times of Raul Prebisch 1901–1986 (Montreal: McGillQueens University Press). Hancock, W.K. and M.M. Gowing (1949) The British War Economy (London: HMSO). Hilgerdt, F. (1945) Industrialization and Foreign Trade (Geneva: League of Nations). Jayawardena, L. (1993) ‘Alfred Maizels: An Appreciation’, in M.K. Nissanke and A. Hewitt (eds), Economic Crisis in Developing Countries (London: Pinter). Johnson, H.G. (1967) Economic Policies Towards Less Developed Countries (London: George Allen & Unwin). Johnson, H.G. (1976) ‘World Inflation, the Developing Countries and the Integrated Programme for Commodities’, Banca Nazionale del Lavoro Quarterly Review, XXXIX, 119: 309–35. MacBean, A.I. (1966) Export Instability and Economic Development (London: George Allen & Unwin). Maizels, A. (1941) ‘Consumption, Investment and National Expenditure in Wartime’, Economica, VIII: 30. Maizels, A. (1963) Industrial Growth and World Trade (Cambridge: Cambridge University Press for NIESR). Maizels, A. (1964) ‘Import Trends in the Industrial Countries’, New Directions for World Trade (London: Oxford University Press for the Royal Institute for International Affairs).


itself to rediscover the enduring problems of capitalism that state socialism claimed to be capable of solving, but could not. All of these problems especially affect developing countries, and their resolution will not come about naturally, but only with selective and intelligent government action. As experience shows us the limits of independent national action in the economic field, so the problem of constructing an improved global economic order impresses itself more powerfully. (Toye 2003: 11–12)


Maizels, A. (1968a) (with L.F. Campbell-Boross and P.B.W. Rayment) Exports and Economic Growth of Developing Countries (Cambridge: Cambridge University Press for NIESR). Maizels, A. (1968b) ‘Review of A.I. MacBean, Export Instability and Economic Development’, American Economic Review, 58(4): 575–80. Maizels, A. (1973) ‘UNCTAD and the Commodity Problems of Developing Countries’, IDS Bulletin, 5(1): 42–53. Maizels, A. (1982) ‘Towards a Political Economy of the New International Economic Order’, in Gerald K. Helleiner (ed.), For Good or Evil: Economic Theory and North–South Negotiations (Oslo: Universitetsforlaget): 167–86. Maizels, A. (1984a) ‘A Conceptual Framework for Analysis of Primary Commodity Markets’, World Development, 12(1): 25–41. Maizels, A. (1984b) (with M.K. Nissanke) ‘Motivations for Aid to Developing Countries’, World Development, 12: 9. Maizels, A. (1984c) ‘A Clash of Ideologies’, IDS Bulletin, 15(3): 18–23. Maizels, A. (1986) (with M.K. Nissanke) ‘The Determinants of Military Expenditure in Developing Countries’, World Development, 14(9): 1125–41. Maizels, A. (1992) Commodities in Crisis (Oxford: Clarendon Press for UN-WIDER). Maizels, A. (1997) (with Robert Bacon and George Mavrotas) Commodity Supply Management by Producing Countries: A Case Study of the Tropical Beverage Crops (Oxford: Clarendon Press). Maizels, A. (2003) ‘Economic Dependence on Commodities’, in J. Toye (ed.), Trade and Development. Directions for the 21st Century (Cheltenham: Edward Elgar). Marcuzzo, M.C. (1990) ‘R.F. Kahn: A Disciple of Keynes’, Cambridge Review, 111(2308): 22–27. Schonfield, A. (1964) ‘Introduction’, New Directions for World Trade (London: Oxford University Press for the Royal Institute for International Affairs). Singer, H.W. (1941) ‘The German War Economy in the Light of Economic Periodicals’, Economic Journal, 51(201): 19–35. Staley, E. (1945) World Economic Development (Montreal: ILO). Toye, J. (2003) ‘Introduction’, in J. Toye (ed.), Trade and Development: Directions for the 21st Century (Cheltenham: Edward Elgar). Toye J. and R. Toye (2004) The UN and Global Political Economy (Bloomington: Indiana University Press).


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2 Poverty, Power and Global Economic Governance

Alf Maizels and global economic governance Alf Maizels was not only a very good economist; he was also a sophisticated analyst of politics and power. In his view, in the early 1980s, ‘scope for reform [in global economic governance] is severely constrained by … the existing power structure in the international economy’ (Maizels 1982: 184). Twentyfive years later, the rise of China, India, Brazil and others has elicited new discussion of such global institutional reforms. But constraints and dilemmas remain. This chapter devotes particular attention to the means of achieving effective representation and voice for the poorest and smallest countries in evolving global economic governance arrangements. During the turbulent 1970s, Alf Maizels was the leading analyst at UNCTAD (at the elbow of the then Secretary-General, Gamani Corea) as it led the intellectual arm of the ultimately unsuccessful developing country charge toward a New International Economic Order (NIEO). With his knowledge of the functioning (and malfunctioning) of international commodity markets, he was able not only to participate in the fashioning of UNCTAD’s ‘flagship’ NIEO project of a Common Fund for Commodities, but also to guide broader research and discussion in related areas. Alf was a quiet, careful and pragmatic analyst. He was not an ideologue. And he was a political realist. Among the tasks he was called on to perform at the time was the effective ‘reining in’ of some of the more simplistic instincts of would-be commodity market ‘reformers’. Although not averse to the exercise of commodity market power in those instances where it might be possible, in the Common Fund discussions he consistently emphasized instead its price stabilization objectives, in the hope that they were the ones on which there could be producer–consumer agreement. He worked carefully and quietly (at this time he hardly published anything under his own name) at the estimation of the costs of the UNCTAD commodity price stabilization proposals, and sought to address alternative analyses with careful rebuttals. He was responsible for the intellectual defence of the whole idea of international commodity


Gerry Helleiner


Poverty, Power and Global Economic Governance

price stabilization agreements, and hence of the proposed Common Fund. At the same time, he actively promoted greater research on underlying commodity market structures and the Common Fund’s proposed ‘second window’, which was intended to support improvements in productivity, marketing and diversification in commodity exporting developing countries. Less well known was Alf’s broader role at UNCTAD. He was not simply the UNCTAD ‘commodities man’. Alf was also an active promoter of sound economic research, both within UNCTAD and elsewhere, on the whole range of problems surrounding the developing countries’ participation in the world economy. He regularly encouraged outsiders (myself included) to criticize UNCTAD research and to suggest new and alternative approaches. He sought to bring developing country economic research institutions together, both to trade experiences with one another and to enrich UNCTAD’s own work. His insistence on solid argument and empirical evidence influenced every division at UNCTAD during his period of leadership. He was also the principal draftsman for virtually all significant UNCTAD reports and Secretary-General speeches at the time. Although a person of extremely modest demeanour, Alf Maizels carried (because he had earned) enormous respect among his professional colleagues. Alf had few illusions about how the NIEO and Common Fund proposals would eventually all turn out. I can vividly recall his telling me his view that, in the end, the objections that the OECD countries offered to the NIEO proposals (and UNCTAD analyses) were not really intellectual ones; rather, they reflected their deep fear of the loss of their power over events in the global economy, something they would never relinquish. His instincts in this regard proved accurate. Later, writing more reflectively, he concluded his analysis of the political economy of the failed effort to build a NIEO as follows: In sum, while … proposals for structural and institutional reform imply the existence of mutual interests, the scope for such reform is severely constrained by the fact that the present institutional framework reflects the existing power structure in the international economy, changes in which tend to be strongly resisted by the dominant economic interests of developed market-economy countries. … proposals for institutional change which involve a significant reduction in the present degree of control by the developed market-economy countries over the working of the international economic system engender a fear by these countries that such change would reduce their share of the benefits derived therefrom. For this reason, above all, the developed market-economy countries have tended to relegate consideration of … [such] issues to a low position in their policy priorities, a tendency … accentuated with the … focus of policy on short-term economic problems. (Maizels 1982: 184–5)


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Global economic governance and the role of developing countries The emergence of a global economy implies the need for some form of global economic governance. The same functions that governments perform at the national level will somehow have to be performed at the global level – the supply of ‘public goods’ that markets do not supply (for example, macroeconomic management for global economic stability – now imperfectly performed by the (IMF), Bank for International Settlements (BIS) and G7 Finance Ministers); the formulation and policing of rules for economic exchange – both internationally and, to some degree, domestically (now imperfectly performed in the WTO and regional agreements), and the setting of a floor below which levels of human living must not sink (now imperfectly sought in the various agencies of the United Nations and less universally membered aid institutions). Whatever might be positions on the role of government at national levels, there is now virtually universal agreement that the global economy is under-governed; more and better governance is required, not less. Institutions, customs, rules systems and dispute settlement systems to perform these functions for the global economy have begun to appear; but satisfactory global economic governance arrangements are still only a distant prospect. There is widespread recognition that the need for improved global governance is becoming urgent. Climate change and the threat of pandemics have both acquired serious ‘political legs’ in the North. In the sphere of economics, the speed with which financial hiccups in the USA in 2007–2008 created serious global problems was a ‘wake-up call’ for many national monetary authorities. In December 2007, the IMF’s semi-popular periodical, Finance and Development, devoted an entire special issue to the need for better global governance. In its lead article, Boughton and Bradford described it as follows:


Twenty-five years later, with ‘globalization’ now a cliché in popular discourse, there is widespread interest in what is now known not as the appropriate ‘international economic order’ but, rather, as the problem of ‘global economic governance’. The principal formal institutions of such governance – notably the International Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO) – are being challenged as insufficiently effective, unrepresentative or worse.

The ideal of global governance is a process of cooperative leadership that brings together national governments, multilateral public agencies, and civil society to achieve commonly accepted goals. It provides strategic direction and then marshals collective energies to address global challenges. To be effective, it must be inclusive, dynamic, and able to span national and sectoral boundaries and interests. It should operate through


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soft rather than hard power. It should be more democratic than authoritarian, more openly political than bureaucratic, and more integrated than specialized. (Boughton and Bradford 2007: 11)

It is no longer possible to argue that the current oversight of international relations is adequate for the 21st century … [There is] need for a new governance mechanism at the apex of the global system. They go on to recommend an expansion of the G8 summits ‘to include countries from other major regions and cultures as equal members’, an ‘updating’ of the current system of multilateral institutions and a ‘new mandate’ from leaders to develop an improved system (ibid.: 13–14). These definitions and suggestions are helpful. But they do not go far enough in acknowledging the particular problems of the developing countries and, in particular, the poorest countries, those now popularly described as ‘the bottom billion’ (Collier 2007). Global governance should not necessarily be thought of in terms of the reform of global institutions or the creation of new ones; above all, it should be seen as a communicative and consultative process – a process through which genuine (not forced) consensus is gradually built, rules and customs are mutually understood (and often even agreed), and performance is continually reviewed. The key existing multilateral economic institutions, it is now widely agreed, will eventually have to move towards greater transparency, increased democracy and accountability to the global citizenry, increased provision for independent evaluation, and effective ombudsman-like and/or legal aid mechanisms to protect the weak against the strong. Many, including Boughton and Bradford, also emphasize the desirability of greater efficiency and coherence in the existing multilateral machinery of quasi-governance. But the objectives of ‘efficiency’ and ‘coherence’ can be overemphasized; often, there might be increased productivity from a degree of constructive overlap. It is increasingly recognized that the developing countries’ progress and stability are critically important to the welfare of the global economy and, hence, that of its more developed members. Developing countries already account for over 85 per cent of global population and half of global income, and these shares continue to rise. Fresh Northern concerns over such issues as global warming and other environmental challenges, terrorism, pandemics and financial stability have provided a powerful fillip to previous Brandt-style


The ‘dominance model’ we have had, they argue, ‘in which the few countries that sat at the apex of the world economic pyramid invited others to participate without ceding much control … was a reasonable and practical model for much of the 20th century’ (ibid.). They conclude, however:


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arguments that there are powerful mutual interests in North–South cooperation for development. There is much discussion of the new roles of the ‘emerging’ economies, most notably the so-called BRICs – Brazil, Russia, India and China. With renewed increases in oil prices in the last few years, there is once more concern over the enormous power they create for the governments of oil-exporting countries. Huge sovereign-wealth funds managed by non-OECD countries – not all of them oil exporters – are now a source of significant anxiety in Northern financial circles. The IMF, until recently, bypassed by more and more of its major potential clients, has been searching for a new role; for much the same reason, so is the World Bank (or at least its International Bank for Reconstruction and Development). In the WTO, with its one-country one-vote system, the ‘Quad’ (the USA, the EU, Japan and Canada) that used to dominate its predecessor, the GATT, can no longer do so; also, negotiations within the current Doha Round are at an impasse. The last sustained effort to restructure global economic governance so as to take greater account of developing countries’ interests took place in the 1970s. Despite argument from the Brandt Commission and others that there were mutual interests to be served through significant governance reform, that effort – towards the creation of a ‘New International Economic Order’ – foundered on the realities of global politics and power. There should be no illusion as to where the real power in decision-making relating to the global economy will, for the present, continue to rest – that is, with the economically strongest countries, firms and organizations. Money still talks. Even within ‘democracies’, power and interest usually prevails over social objectives. For the past many years, the most powerful country of all, the USA, has not appeared very interested either in strengthened multilateral organizations or in developmental objectives in the poorest corners of the globe (unless they can be shown to threaten US security).

‘Voice’ and the problems of the poorest and weakest Anti-poverty and developmental objectives ought to be essential components of any ethically and politically sustainable approach to a globalized economy. Unlike such objectives as universal market liberalization or the harmonization of global market rules, global poverty eradication and development for the poorest countries are already universally accepted global objectives, accepted at the highest political levels. There is agreement, at the level of official rhetoric – as found at the Millennium Summit, the Children’s Summit, the Monterrey Declaration, G7/8 pronouncements and the like – on humanitarian and developmental objectives that are often quite detailed in their specifics. When one asks ‘What are international organizations for?’, the answer is, in large part, then, to pursue the latter objectives. Yet, the concrete reality of national and international policies does not square well with these ostensibly agreed, but still only rhetorical, objectives. There remains a


Gerry Helleiner



huge gap between political rhetoric and policy practice. Even as much of the developing world makes unprecedented progress, the problem of the ‘bottom billion’ remains. Still, most of the world now recognizes democratic principles and the universal validity of certain basic human rights – again, at least at the level of political rhetoric. One must therefore begin, through appropriately democratic and universalistic processes, to build global economic (and other) global governance arrangements that are not so fundamentally at odds with agreed democratic principles as those currently practised in the key international financial institutions (the IMF and the World Bank) and, to some degree, in the relatively young WTO. If new processes and governance arrangements for the global economy are to carry worldwide credibility and legitimacy, they must provide greater voice, collective influence and power for the developing countries and their peoples. (For an earlier elaboration of this argument, see Helleiner 2002.) Financial crises in ‘emerging market economies’ have forced some (still fairly marginal) rethinking and rearrangement (in the interest of systemic stability) of the role of crisis prone and potentially systemically significant developing countries in international financial governance. The poorest (and smallest) countries remain, however, on the margins of all global governance arrangements, without much prospect of significant voice or influence. Their situation is particularly stark in the WTO, where many are not yet members and even more have zero or extremely limited representation in Geneva, where this supposedly member-driven and consensus based organization does its work. Not so long ago, many of us agonized over the difficulty of presenting relevant information to the weakest of Southern economic decision-makers, or presenting it to them in time to be useful. Information about international markets and institutions was typically fairly tightly held, hard for ‘outsiders’ to come by and only very imperfectly transmitted to many parts of the developing world. We all, therefore, advocated greater transparency and better access to information. Happily, there is now greatly increased acceptance of the efficacy of greater governmental and international institutional transparency (and even of independent evaluations). There is increased dispersion of information from well-informed advocacy NGOs. Above all, there is now the Internet. There has truly been something of an information revolution. Those in the South, even in its weakest parts, can now much more easily obtain relevant and timely information … even allowing for periodic power outages. Sheer information is obviously not enough. What about the analytical and experiential capacities of Southern economic analysts and decision-makers? We used to decry the relative weakness of many developing country administrations, particularly in the poorest and smallest of the newly independent countries. Both in domestic economic policy formation and in international economic deliberations, they frequently lacked relevant experience and were


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poorly prepared, in analytical terms, for decision-making in their countries’ interests. In many cases, foreign advisors substituted as best they could. The prescription: capacity-building. In many places relevant capacity-building – both individual and institutional – still has a long way to go. But, over the past few decades, there can be no question that, speaking generally, there has been great progress in all Southern countries’ analytical and experiential capacities to defend and promote their economic interests in the global arena. Localization of key posts has been extensive and is now virtually complete. Stronger academic preparation, greater experience and plenty of ‘learning by doing’ have all been important to a process of sustained and effective Southern capacity-building, even in its weakest sections. But what difference have these changes made to international economic policy outcomes? Policy papers are probably now better prepared in the poorest and smallest countries, as well as elsewhere in the South. The quality of domestic Southern policy debate is also probably higher everywhere. Constructive and independent ideas now emerge from even the weakest of Southern sources more frequently than before, not least within the multilateral development banks and the UN system. There is almost certainly greater self-confidence among Southern policy analysts and decision-makers, even in the poorest and smallest countries. But, even as their domestic policies improve, there are serious constraints on the growth prospects of the poorest countries. At the same time, power relationships at the international level remain fundamentally unchanged. Can the poorest and weakest countries participate realistically and effectively in global economic governance? Should they aspire to do so? Can and should a reformed governance system provide a place for them? If it did, would it necessarily assist in addressing global poverty? For those who are concerned with global poverty, there are two broad avenues of approach to global economic policy questions. The first is to focus attention and support on the countries (or other political or geographic units) that have the greatest (average) incidence of poverty. By focusing gains in the sphere of trade and finance on the poorest countries wherever possible, there is a greater likelihood that they will impact favourably on poverty than would a more ‘neutral’ approach. Such conscious focusing draws preferential policy attention to the problems of such country categories as the ‘least developed’, ‘low-income’ and ‘IDA-only’ (and sometimes small, island, landlocked or otherwise ‘vulnerable’ countries). If greater per capita income and more rapid economic growth can be achieved for these countries, the eventual result should be reductions in global poverty. But such an approach, while providing a degree of allocative simplification, remains fairly crude; by itself, it is for various reasons unsatisfactory. The second approach is to work harder to understand the constraints on growth and address them; and improve the poverty impact of trade, financial


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and development policies in individual developing countries, particularly the poorest. Perhaps improving the growth consequences and the povertysensitivity of trade, financial and development measures can do more for poverty reduction (within individual poor countries) than preferential aid, trade and other supportive international arrangements for countries that are, on average, the poorest. Certainly, the provision of extra aid, trade preferences or, more generally, better terms of trade will do little for poverty if the countries that receive these squander their opportunities with imperfect policies, or are so constrained by supply-side and other problems that they do not benefit from them to any appreciable extent. This second approach might be considerably more difficult to prescribe accurately, let alone implement successfully. But the attempt must be made, and many are already engaged in it. It is not yet clear whether they have been very successful. (That is, of course, a much longer story.) There is obviously no reason why these two avenues of approach should be mutually exclusive. Ideally, one should both direct special attention and more resources to the problems of the poorest countries and, at the same time, improve the growth and poverty impact of policies within these countries. My focus in this chapter is on the former approach and the global governance issues related thereto.

Preferential treatment for the poorest? It has been relatively easy to provide the poorest developing countries with more favourable financial terms for official finance – grants and soft loans. The scope for assisting them with further private finance, or consciously altering the terms of international trade in their favour, is typically much more difficult. (Of course, other developments in global markets for goods and services – booms and recessions, technical changes, international investments and so on – have usually, in any case, been of far greater significance to poor countries than conscious Northern policy changes.) Ostensibly, mutually beneficial trade and ‘partnership’ deals are somehow bargained in the tugging and pulling of international negotiation. But threats, bullying, specious analyses and bribery have often been deployed against ministers from economically weaker countries, and outcomes have not always been clearly so beneficial to all. Despite the potential advantages of multilateral negotiations for weaker countries without much bargaining leverage, this has been as true of negotiations within the GATT and the WTO as with bilateral or regional negotiations. In any case, poverty and development effects have not normally been, by themselves, at issue in such negotiations. Those who negotiate within the WTO on behalf of the major powers, and the trade analysts on whom they rely for advice, have been singularly uncomfortable with the idea of introducing poverty reduction and development as primary objectives within the organization. Even the so-called


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Doha Development Agenda originated as no more than a public relations sop to the developing countries, rather than a signal of serious trade policy intent. Under the existing multilateral rules, very poor and small countries that are damaged by the trade practices of more powerful countries receive no compensation for their losses, and, for obvious reasons (above all, heavy direct costs and fear of retribution) have difficulty mounting rules-based legal challenges to them. Still, as the cotton case has demonstrated, it is possible – with careful preparation, good advice and the support of the media and civil society – to make some headway through aggressive rules-based approaches. As the WTO settles down to a system of rules administration and enforcement, rather than a succession of trade liberalizing ‘Rounds’, and as previous ‘peace clauses’ expire, such aggressive and lawyer-intensive approaches are likely to become potentially more important. Analytical and legal assistance directed towards the legitimate grievances of the poorest and smallest developing countries might therefore become more productive. At the same time, these countries’ domestic trade and trade related policies and practices (including exercise of their rights under international agreements) must now be pursued within an increasingly intrusive and complex set of international rules and precedents, which must be fully understood by those developing their own policy approaches. Trade and trade related policy-makers therefore need a firm grasp not only of the domestic economic (and political) implications of alternative policies – notably their likely consequences for development and poverty – but also the specific legalities of their translation into acceptable international practice. Given the limited political and economic clout of the poorest countries, even if successfully exercised collectively (and that would be no mean achievement), significant Northern policy change in the direction of improved external conditions for poor countries’ progress depends primarily on the North’s own more serious adoption of global anti-poverty objectives in practice rather than simply on rhetoric. Such further reform is possible but, on current evidence, it is not likely to appear soon or make a huge difference, relative to other factors, if it does come. Neither can too much realistically be expected, in general, from more aggressive challenges by the poorest countries: hence the emphasis frequently placed by international development agencies on poor countries’ own trade policies and practices. It is not, then, that focusing internationally on the problems of the poorest countries could not be very helpful. It might be. But attempts to do so are unlikely, on current evidence, to get nearly as far as is needed. It is a distressing fact that even the much-discussed expansion of ‘aid for trade’ shows little prospect of adding net resource flows to the poorest countries. In the meantime, can one find opportunities for real reform in current global economic governance arrangements that could, at least, move the system in the appropriate direction? I will consider some of the problems and


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opportunities in summitry, finance and trade. Unfortunately, it is difficult to be optimistic about likely outcomes in the foreseeable future.

What about the place and ‘voice’ of the poorest (the bottom billion) in overall global governance arrangements? Consider the G7/8 summits – at present, widely seen as the pinnacle of global governance arrangements. Of course, while these summits might serve some useful purposes for their participants, they are certainly not models for future global governance. For the purposes of global governance, they are, above all, unrepresentative. (Many would want to add that they are also overly ritualized, inadequately focused and probably too frequent.) But a more ‘representative’ summitry could become more socially valuable – a productive and legitimate element in global governance – if its participation and modus operandi were improved. The G20 summit (sometimes called the L20) – building on the G20 model – could be a step in that direction. What really is effective global governance? As already noted, it is at least as much a matter of process as it is of institutional machinery. But, so far as the institutions are concerned, it is not simply a matter of the most globally powerful and influential devising some optimal-looking institutions, arranging compromises among themselves, putting the institutions in place through whatever means they have available, and then setting them in motion. That might be an accurate description of how oligarchy functions. And that might also be an accurate depiction of how today’s principal ‘global’ institutions, including the G7/G8 summits, were created. But the whole rationale for current discussions of the need for more and better global governance is that, over the past half-century or more, the world has greatly changed. Among these changes, democratic principles are now much more widely understood and increasingly put into some form of practice. The need for protection of minorities is also more widely accepted. Oligarchic processes, and oligarchic rule, or even the appearance of such processes and rule, are much more difficult to practice successfully today than they once were. In the end, such approaches lack legitimacy in terms of the principles and values that are increasingly (though, sadly, not universally) globally shared. When it comes to their effectiveness as instruments of global governance, at least as important as substantive summit agreements is the overall legitimacy, within the global community, of the summit processes that generate the agreements. The degree of legitimacy and acceptability of the processes through which global disputes are resolved, global consensus is built, global knowledge is shared and global performance is reviewed are all bound to be major elements in the success or failure of all global governance arrangements. Such legitimacy is particularly required of summit meetings that aspire


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to, or appear to be at, the very summit of global governance. Whatever global summits might actually achieve, such meetings have enormous symbolic importance. They will always be significant political events, if not always technically impressive. Needless to say, the vast majority of the world’s countries and peoples at present feel no sense of participation in the G7/G8 global summits. Hence the proposals for a continuing L20 – and the Boughton–Bradford proposals noted earlier. The need for full representation is obviously not merely a matter of legitimacy. Decisions made by G7/8 or L20 summits carry implications for non-members. Such spillovers, negative or positive, might seem inconsequential for the insiders but, nevertheless, be of enormous consequence for poorer or smaller outsiders. Such damage to the unrepresented and voiceless, wherever found, is not usually the product of malevolence so much as the product of thoughtlessness and ignorance, themselves the product of the absence of the relevant voices. Non-members’ interests and views are unlikely to be taken into account seriously if they are not, in some sense, there. At the same time, while the policies and practices of the poorer and smaller might not impact greatly on the world, their external effects can never be zero. Expanded global summits, such as the L20, will therefore have to find ways to provide, and be seen to provide, representation for the poorer and smaller of the world’s countries. Such broad representation already exists in many current global institutions. In the sphere of finance, the Bretton Woods institutions, with all of the governance problems (discussed below), at least offer some (albeit minimal) representation and voice to the poorest and smallest in their Boards of Governors and Executive Boards. The WTO, for all its current governance and other difficulties, has also recognized the need for, and the legitimacy of, the voices of the poorest and smallest in its decision-making. In the current Doha Round of negotiations, a final deal will not be struck without their concurrence in it. At the UN, smaller and poorer countries have often played highly significant roles, not least in the provision of individual leadership at the highest levels. (There is, indeed, much to be said for keeping the chair of future global summits out of the hands of major players.) Most of those who have advocated an L20, on the model of the Finance Ministers’ G20, are quite straightforward about the continuing exclusion of those they consider ‘systemically insignificant’. Those who engineered the first ever G20 summit, in November 2008, focusing still on financial issues, accepted this exclusionary approach. In this, they make a serious mistake. There might have been an efficiency case for the exclusion of the ‘insignificant’ from focused discussions of financial crises and contagion issues. There is no such case, however, when it comes to global governance in general. Both for their substantive inputs and for the building and retention of legitimacy, future global summits, as with all other global


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governance arrangements, must somehow keep the poorest, smallest and weakest in. The mere provision of a seat or two for the poorer and smaller at summit meetings obviously does not resolve all of the problems relating to the effective expression of their interests. In the Bretton Woods institutions and the WTO, representation from the poorest and smallest, for a variety of reasons, has not always proven very robust. Moreover, ways will have to be found to ensure appropriate sharing, among members of this broad ‘constituency’, of summit duties and responsibilities. Many of these complexities – and they are not inconsequential – might best be left to members of such a constituency (or constituencies) to work out for themselves (although ideas from whatever quarter would undoubtedly be welcome). I have now explicitly used the word ‘constituency’. I have argued that, both for ultimate legitimacy and immediate efficacy, an expanded (G8+ or L20) summit system must have some form of representation and ‘voice’ for all of the world’s countries, including the poorer and smaller. I see no way of achieving this necessary component of summitry without some kind of constituency system. It would be a profound mistake if, as the G7/G8 (and the financial G20) consider the future role of summitry in global governance, they do not directly involve and listen to – and be seen to involve and listen to – nonmembers of their groups. No one should, by now, need further reminding of the potential problems for the better off and seemingly more secure, when some remain voiceless, potentially aggrieved and embittered, or see themselves as excluded from or threatened by a system in which they hold no stake. In any eventual expansion towards an L20+, it would be an apparently small step, but one of potentially very great significance, to provide for representation for all members of the world’s community, including the poorest and smallest. If this cannot be done, from the standpoint of progress toward eventually legitimate and effective future global governance arrangements, it might be best to leave the G7/G8 summit, for the present, as it is, with its unrepresentativeness, illegitimacy and inadequacy plain for all to see. Summits are, of course, only the tip of the governance iceberg. Ways must be found to engage the effective participation of all of the countries of the world, not merely the more powerful – now including the BRICs – in all of the intergovernmental institutions and machinery of global governance systems. As in the case of the summits, this is likely to require constituency arrangements, perhaps varying with topics and institutions. There is much to be said for ‘variable geometry’ in global governance arrangements. There must be both voice for all and ombudsman-like protection of the weakest from abuse by the strong. Even more difficult, there must, at least, as already argued, be much more serious global effort to address the scourge of global poverty.


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One would think that by now there would have been more urgent moves toward significantly reformed instruments of global economic governance. But the traditionally dominant players in the global economic arena have been extremely reluctant to alter their governance practices. Such change as has taken place so far has only been of marginal consequence. Perhaps the most significant has been the formation of the G20 Finance Ministers’ Group, and its recent upgrading to the leadership level. Unilaterally created by the G7 in September 1999 by their Finance Ministers, it provided for an expanded forum for discussion (but not decision-making) relating to future potential systemic financial crises following the shocks of the Mexican, Asian and Russian crises of the 1990s. In addition to members of the G8 (G7 plus Russia) and two institutional representatives (of the EU and the Bretton Woods institutions), the G20 Finance Ministers’ Group included Argentina, Australia, Brazil, China, India, Korea, Mexico, Saudi Arabia, South Africa and Turkey. This group was formed without any reference to the previous representations in this sphere from the G24 (the fully representative developing country group in the Bretton Woods institutions) from 1994 onwards. G20 members have presumably benefited from the freer exchange of views possible within the Group than has been typical of formal meetings in such locales as the IMF, where set-piece speeches predominate. But it is noteworthy that a recent careful study of G20 communiqués indicates that they consistently and overwhelmingly reflect G7 positions; they reveal no discernible impact of the broader country participation in these discussions on the expressed positions of the G7 or the enlarged Group of 20 (Martinez-Diaz 2007). Neither was their influence evident in the communiqué of the single G20 leaders’ meeting. Within the Bretton Woods institutions, there has been some increase in transparency. The IMF has also benefited from the important introduction, at last, of an independent evaluation office. (The World Bank already had one.) But more important reforms of their governance have not made significant progress. The IMF has strained mightily to attempt to re-jig its quotas and voting rights to reflect changing global realities, but has given birth to a ‘mouse’ – very minor changes that do not significantly alter the distribution of power within the IMF At the same time, provided with golden opportunities in 2007 to abandon, at last, the anachronistic arrangements for the appointment of the chief executive officers of the Bank and Fund, both the USA (the President of which ‘appoints’ the President of the World Bank) and the Europeans (who select the IMF’s Managing Director) opted, instead, to snub the broader membership by retaining their outdated traditions and powers. Before caving in to the renewal of these peculiar practices and processes, the Executive Boards this time at least managed to state some


Elements of governance reform in international financial institutions



admirable selection principles. The IMF even managed to field more than one candidate for its post; but the election remained farcically predictable. There are plenty of perfectly practicable and sensible reforms that have been proposed for the governance of the IMF and World Bank. At an absolute minimum, their future legitimacy would seem to require a further significant increase in members’ basic quotas in the IMF (those that are equal for all countries), reform of the composition and functioning of the Executive Boards (including reduced European presence and increased staff support for the Chairs with the largest constituencies), introduction of a double majority voting system in these Boards, and introduction, at last, of a merit based system for the appointment of the chief executives. The inevitable consequence of the Bretton Woods institutions’ limited responses to the changing global economic and political realities is diminution of their influence. Countries that have options are unlikely to be willing to be beholden to institutions in which they have such limited influence, and they have already been ‘voting with their feet’. With their ‘voice’ remaining limited and their loyalty unearned, ‘emerging’ countries are opting to exit. Building their own foreign exchange reserves and sovereignwealth funds, relying on private money and capital markets for financing, strengthening regional financial institutions, and obtaining other services wherever they are available, many no longer have much need for the Bretton Woods institutions (at least, not as they currently function). In this respect, their degree of reliance on the institutions increasingly resembles that of the industrialized countries that, until Iceland’s debacle in late 2008, had not seriously sought their advice or finance for decades. These supposedly global financial institutions are increasingly left with only the poorest and most vulnerable countries as their primary clients. These countries still have so little economic power that they typically cannot use the ‘exit’ option. Yet, these primary clients have very limited influence over any of these institutions’ policies or practices, with which they frequently find considerable fault. Although they might still be net beneficiaries of the institutions’ activities, these countries cannot be expected to be very enthusiastic supporters of these previous ‘pillars’ of the global economic governance system, at least as at present constituted. They, too, will search out alternatives wherever they can be found; in Africa, China has provided one alternative. In the end, there is no escape from the fact that global poverty eradication and developmental objectives will require more finance. This would be most reliably provided through multilaterally agreed global fiscal arrangements, for which many proposals have long existed. These include global taxes on foreign exchange transactions, airline travel, carbon emissions, multinational corporations and the like. (These potential revenue sources are usually discussed in the context of the financing needs of a range of global public goods, not merely in addressing global poverty.) But such proposals carry little Northern political support. Neither, despite impressive rhetorical


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commitments, do aid flows show any sign of increase – multilateral or bilateral. In recent years, real aid flows have actually declined, and real aid flows per capita at even greater rates of decline. At present, some of the major powers (notably the USA, the EU and Japan) appear to lack the political will to increase their official development assistance significantly, except to those countries in which they have a security interest. For the present, more ‘progressive’ thinking and better models for the future in the struggles for global poverty eradication and development objectives, or sufficiently improved global governance, seem therefore unlikely to originate from the G7/G8. Leadership, if it comes, will have to emanate from other sources – forums, clubs and cooperative arrangements other than those of the G7/G8. Eventually, however, governance reform and effective action in these and other spheres will obviously require these traditional powers’ full involvement. Among the reasons why the UN Conference on Finance for Development (March 2002 in Monterrey, and its follow-up in Doha in 2008) might, after all and despite first appearances, have been significant was that, for the first time, the more representative procedures of the UN were permitted to ‘intrude on’ the procedures and practices of the premier international financial institutions in which the USA and other industrial countries remain firmly in control. Because of US pressure and that of others, this ‘intrusion’ was not permitted to travel very far. Some would even argue that the UN secretariat has since, to some degree, been ‘co-opted’ into the world of the Bretton Woods institutions. Yet, finance ministers were forced, by this event and its follow-up, to talk about major financial issues with their ‘more political’ counterparts in ministries of foreign affairs, not only in international circles but also at home. Despite the best efforts of the IMF, the World Bank and G7/G8 officials to keep such matters off its agenda, global governance issues cannot help but continue to surface in the UN context. Beyond more rhetorical declarations, little else of significance seemed achieved at these UN conferences, either on international financial policies or international financial governance, or even on development finance. These events nevertheless marked small steps towards more appropriate and legitimate (because slightly more representative) processes for the discussion of global economic governance. However small these steps might appear, their longer-run significance, as precedents, might prove to have been profound.


Gerry Helleiner

Elements of governance reform in the trade arena: the WTO There are also serious governance problems in the global trade arena. Existing WTO decision-making processes are severely flawed, especially in terms of the limits on effective participation on the part of the smaller and poorer developing countries. Developing countries are deeply disaffected with the WTO, and



the legitimacy of its decision-making is being subjected to serious question. At Doha, although these countries were better prepared for the Ministerial meetings than ever before, they eventually had only marginal impact on their outcome. ‘Consensus’ was achieved, as before, through bilateral behind-thescenes pressure, dealing and bullying. The WTO simply must find a more credible and effective decision-making system than the impossibly awkward, and abuse-prone, 140-country ‘consensus’ based system it now employs; and the need for such reform of its internal governance is urgent. Far from constituting an excuse for inaction, as some would have it, the WTO’s youth should be seen as an opportunity for change before the encrustations of age set in, as they have done in the international financial institutions. In such internal governance reform, the GATT’s ‘bicycle theory’ – that continual rounds are necessary to keep the enterprise upright – should be recognized as dead and irrelevant in the new world of the WTO. With a new organization, while it is bound to have its ups and downs (in the same way as the IMF and the World Bank) there is no reason to assume that progress is best achieved therein through feverish bursts (‘rounds’) of mercantilist, lobby driven negotiations. It is time for these urgent and breathless rounds to be replaced by careful, steady, step-by-step efforts, aimed at agreed long-run global objectives, to bring purpose, order and credibility to the global trade regime and poverty eradication around the world. As long as there is deep political and professional disagreement as to how national policies are best deployed in pursuit of anti-poverty and developmental objectives, there is only one sustainable approach to global rule-making in the WTO and elsewhere: an approach that is flexible and pragmatic. Efforts at harmonization should not be pushed too far. In particular, those pursuing development from the most disadvantageous starting conditions must have the freedom to develop their own policies in their own interest in their own ways. They must be free to learn through trial and error, as others have done, what works best in their own unique and ever-changing circumstances. Universal rules systems, totally harmonized laws, completely ‘level playing fields’ and irreversible ‘undertakings’ are inconsistent with the need for local ownership of development policies and the learning-by-doing that is the essence of development. Neither is a tightly time-limited provision for ‘special and differential treatment’ for the poorest countries sufficient for the purpose. Locally owned policies are likely to include variations from ‘standard’ Northern-model and Northern-pushed approaches to investment policies, trade policies and intellectual property policies, among others. Within broad limits, the global rules system should permit the poorer developing countries greater latitude for innovation and experimentation in the development of laws, institutions and other development-friendly arrangements that their own understanding of their own situations leads them to believe might encourage sustainable growth and poverty reduction. If there is to


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35

the WTO would serve no longer as an instrument for the harmonisation of economic policies and practices across countries, but as an organization that manages the interface between different national practices and institutions … The trade regime has to accept institutional diversity, rather than seek to eliminate it, and … it must accept the right of countries to ‘protect’ their institutional arrangements. (Rodrik 2007: 215–16) This is the pragmatic and constructive way of the WTO’s future. In the meantime traditional procedures for multilateral trade bargaining have already undergone serious revision. Gone are the definitive consultations within the ‘Quad’ (the USA, the EU, Japan and Canada). Now, at least Brazil and India are included in all such small-group consultations (and Canada has gone); and they no longer seem able to arrive at decisions that will be accepted by all of the other members. The slightly wider consensusbuilding ‘Green Room’ meetings of previous (GATT) multilateral rounds are no longer so possible, their legitimacy predictably challenged by some of those not invited. At a purely pragmatic level, the WTO in its current form is unlikely to be able to reach overall multilateral agreement in the current Doha (or subsequent) Round unless there is such accommodation not only for the ‘emerging’ larger developing countries, but also for the poorest countries. This is what some informed analysts of WTO processes and prospects have, nervously, described as ‘the stark reality’ (Mattoo and Subramanian 2004). What Rodrik and many others see as desirable in WTO functioning might, by now, also be described as politically necessary. But there is, as yet, little evidence that this necessity has been internalized within Northern trade policy-making circles. So far, Northern policy-makers appear to prefer the abandonment of hopes for the WTO in favour of more limited bilateral and regional arrangements in which they find it easier to have their own way. There is still little sign that development or anti-poverty objectives will soon become a primary consideration either in the WTO or in bilateral trade, investment or ‘partnership’ agreements. At best, such objectives are still pursued only through temporary and limited exceptions to the general rules that are negotiated, in the main, among the more powerful actors on the world economic stage.


be expanded trade-related technical assistance for these countries, it should not, as now, consist primarily of instruction as to how to translate Northern interpretations of existing WTO rules into reformed local legislation, or how to liberalize markets more quickly. Rather, it should comprise sensitive response, with legal and economic expertise, to requests for help from countries struggling to develop their own institutional arrangements and systems, in their own way, for ‘dealing with’ or ‘integrating into’ the global economy. In this vision, as Dani Rodrik puts it:


36


There is increasing recognition of the need for more effective and representative institutions and processes for the governance of today’s global economy. If global economic governance arrangements are to be effective and to carry legitimacy, they must address the needs and concerns of the world’s poorest countries and peoples, as well as those with economic clout. This requires that better ways be found to engage their participation and to hear their ‘voice’ in the processes of global decision-making that affect their interests. The poorest must be represented in reformed global summitry, and special new arrangements promoting their interests will be required in the Bretton Woods institutions (or their successors in regional bodies, the UN and elsewhere) and the WTO. Current preferential schemes purporting to assist them fall far short of their requirements and offer them little opportunity for voice. Unfortunately, as yet there are few signs in current discussions of improved global economic governance arrangements that these requirements are being recognized, let alone addressed.

References Boughton, J. and C. Bradford (2007) ‘Global Governance: New Players, New Rules’, Finance and Development, 44(4): 10–14. Collier, P. (2007) The Bottom Billion (Oxford: Oxford University Press). Helleiner, G.K. (2002) ‘Developing Countries in Global Economic Governance and Negotiation Processes’, in D. Nayyar (ed.), Governing Globalization, Issues and Institutions (Oxford: Oxford University Press, UNU-WIDER Studies in Development Economics). Maizels, A. (1982) ‘Towards a Political Economy of the New International Economic Order’, in G.K. Helleiner (ed.), For Good or Evil, Economic Theory and North–South Negotiations (Oslo and Toronto: Universitetsforlaget Oslo and University of Toronto Press). Martinez-Diaz, L. (2007) ‘The G20 After Eight Years’, Global Economy and Development Working Paper 12 (Washington, DC: Brookings Institution). Mattoo, A. and A. Subramanian (2004) ‘The WTO and the Poorest Countries: The Stark Reality’, IMF Working Paper 04/81 (Washington, DC: IMF). Rodrik, D. (2007) One Economics, Many Recipes (Princeton: Princeton University Press).


Conclusion



Part 2 Commodities and the Global Economy in the Twenty-First Century





3 Machiko Nissanke

Introduction By mid-2007, the over-dependence on market forces and mechanisms, without proper and workable regulatory mechanisms and systems in place to govern the globalization process, had led to the appearance of large cracks threatening the stability of the world economy on two fronts: the sharp hike of primary commodity prices and the global financial crisis.1 After two decades of low, and at times dwindling, prices in the 1980s and 1990s, many primary commodities had registered a steep price increase since 2002, reaching an all time high in the spring and summer of 2008 with extremely high volatility (Figure 3.1). The soaring key commodity prices hit the world economy at a time when most western economies were struggling with efforts to eschew a sharp economic downturn and recession, triggered by the subprime mortgage crisis in the USA in the background of global macroeconomic imbalances, and the subsequent credit crunch spreading to major industrial economies through poorly regulated global financial transactions and systems. The fear of a build-up of inflationary pressure that could jeopardize macroeconomic stability in western economies had placed central banks and the monetary authorities of these economies in a serious dilemma. The belief that any inflationary expectations could be dispelled successfully and in a timely manner by adopting an institutional framework of inflation targeting was put to a severe test. Inflation targeting with a single policy instrument of the fine-tuning of interest rates is ill equipped to deal with cost–push inflation associated with a sudden hike of imported commodity prices, involving structural shifts in relative prices. In particular, the rapidly increasing prices of basic consumer goods such as fuel and food, the prices of which are exogenously determined on world commodity markets, had sparked off social and political disquiet and unrest across the globe. It is not surprising that policy-makers in developing countries, particularly those with a high degree of dependence on imported oil and foods, have become acutely concerned


Issues and Challenges for Commodity Markets in the Global Economy: An Overview


40

Issues and Challenges for Commodity Markets

350 Price index - all groups (in terms of current dollars) Price index - all groups (in terms of SDRs)

300 250

150 100 50

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Figure 3.1 Average monthly price indices for non-fuel commodities (2000 = 100) Source: UNCTAD (2008c): fig. 1.

since the mid-2007s with the detrimental effects of rising fuel costs and food shortages, not only on internal and external macroeconomic balances, but also on the livelihood of the urban and rural poor. For a year or so following mid-summer 2007, the financial turmoil, with its severe liquidity and credit crunch problems, was seen to be more or less confined to financial markets and institutions based in the USA and Western Europe. On the whole, the world economy managed to maintain its momentum going on the back of the buoyant economic growth posted by emerging market economies, as well as resource-rich developing economies that enjoyed a commodity boom with a longer duration than those of recent times. However, the series of events that hit the major financial institutions in Wall Street in mid-September 2008 had shocked the world and radically altered the fate and the course of our globalized economies altogether. The fear of accelerating inflation and shortages of fuel and food worldwide was overtaken by a greater fear; that of global recession and depression engulfing all economies in the developing world, including emerging market economies in Eastern Europe, Latin America and Asia, as well as low-income developing countries in Africa, Asia and the ECLAC region with limited financial market linkages. By the close of 2008, the world economy had rapidly entered a phase of ‘globally synchronized slowdown’, and then it was heading towards a ‘global recession’ in the first quarter of 2009. A fear had grown,


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day by day, that the ongoing financial crisis could well turn into a ‘global depression’ of the twenty-first century (Nissanke 2009a). For low-income developing countries, which were sheltered from the immediate impact of the global turmoil and distress through financial market linkages, one of the most direct effects of the global financial crisis was filtered through price movements in commodity markets. After summer 2008, most commodity prices plummeted sharply as the unprecedented turmoil and meltdown in financial centres across the globe hit the news headlines, and the pessimism about the prospects of the world economy began to dominate. In early December 2008, the World Bank noted (World Bank 2009) that commodity prices had, in a matter of two months in the last quarter of 2008, given up most of the increase of the previous 24 months. These spectacular movements of a number of commodity prices of strategic importance during the 2000s have finally placed commodity issues once more at the forefront of the key economic agenda in the international policy arena facing the global economy and community. It is, indeed, ironic to observe that commodity issues only resurface centre-stage in international economic policy debate at times when they might hurt the economic interests of major industrialized countries, or can no longer be ignored for global strategic reasons, as was the case in the 1970s and also now in the first decade of the twenty-first century. The persistent reluctance – or, even, refusal – to acknowledge commodity-related developmental issues, and the resultant failure to deal with them effectively in a timely fashion on the part of international development community in the 1980s and 1990s, has entailed a heavy cost in terms of forgone development opportunities of primary commoditydependent low-income developing countries, mostly in sub-Saharan Africa (SSA). Demonstrating the depth of the ‘commodity’ crisis in the 1980s, Maizels (1987, 1992, 1994) convincingly exposed how the beginning of the debt crisis of commodity-dependent poor countries in the late 1970s happened to coincide exactly with that of the ‘conveniently forgotten’ commodity crisis. His in-depth and comprehensive analysis of commodity issues and his call for formulating correct international policy responses to the debt crisis, which would have led to an early resolution of the protracted debt overhang condition in low-income countries, has been largely ignored by mainstream academics and policy-makers. All debt relief mechanisms employed since the outbreak of the debt crisis, including the HIPC initiatives, failed to pay sufficient attention to the plight of many commodity-dependent low-income developing countries as a consequence of huge losses of their purchasing power in international economic transactions, as well as that of the fiscal capacity to implement development-oriented policies domestically. The resolution had to wait for a comprehensive debt cancellation embedded in the MDRI in 2005 to shake off the overhang of the prolonged debt crisis.


Machiko Nissanke



Economic policies recommended by the international financial institutions (IFIs), in the semblance of both Washington and Post-Washington consensuses, have not succeeded in facilitating the process of structural transformation and diversification of their economies through rigorous productive and social investment to reach that critical take-off stage. At the macroeconomic stabilization front, the demand management of commoditydependent economies governed by external shocks should be counter-cyclical to commodity price movements. Yet, at times of externally induced balanceof-payment crises accompanied by a sharp drop in domestic demand and in the absence of alternative financial facilities, these countries have been forced to adopt the IMF sponsored stabilization programme that aims at a further contraction in aggregate domestic demand.2 Today, primary commodity exports still remain a key conduit linking those economies that are classified as ‘least developed countries’ (LDCs) and ‘heavily indebted poor countries’ (HIPCs) to the global economy. According to UNCTAD (2007, 2008a), 95 out of 141 countries were dependent on primary commodities for more than 50 per cent of total export revenues in 2003–06. In Africa, 34 countries were dependent on three or less primary commodities, and 23 countries were dependent on a single commodity for more than 50 per cent of total export earnings. The corresponding figures for LDCs were 31 and 20, whereas those for HIPCs were 28 and 15. Most African countries classified as LDCs and HIPCs have a higher dependency ratio of 80 per cent for their export earnings.3 With the debt crisis more or less stalling the development progress in these economies over two complete decades, many low-income countries dependent on primary commodity exports and a natural resources based structure have failed to diversify their production and trade structures so far. Instead, they locked into an international poverty trap through a commodity-dependent integration into the global economy in the 1980s and 1990s (UNCTAD 2002). Thus, these countries have been ensnared in a commodity-dependence trap in their economic relationships with the rest of the world, the mechanism of which is examined in detail by Charles Gore in Chapter 11 of this volume.4 As result, the majority of these commodity-dependent economies have so far failed to reach the critical thresholds for triggering structural transformation of their economies to accelerate the development process. As argued in Nissanke and Thorbecke (2006, 2008), their experiences point to the importance of reaching the take-off stage before these countries can benefit from the dynamic forces associated with the ongoing process of globalization. The position and development experiences of highly commodity-dependent economies in the globalizing world economy since the early 1980s are in sharp contrast to those of newly industrializing developing economies in the South. The latter group of countries have managed to integrate into the global economy through diversifying their exports into manufactured goods with potential for exploiting economies of scale, and


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have experienced a dynamic growth process through gradually climbing technology- and skill-ladders in their integration process. It is these dynamic emerging economies that account largely for a rapidly increased share of developing countries in global GDP and world trade in goods and services.5 In this sense, it is important to note that what countries export does really matter to the development process (Hausmann et al. 2005). With the aim of providing background discussion, as well as a road map to the subsequent chapters of the book, this chapter examines the recent changes in price trends and volatility across a number of primary commodities and evolving international commodity policies in the context of historical commodity debates. The next section presents a summary of the historical debates on commodity prices and empirical evidences as well as an evolution of international commodity policies. This is followed by an examination of the trends and volatilities of primary commodity prices over the five years up to the spring and summer of 2008, which was interpreted by many as the beginning of a super commodity price cycle. The final section presents the impact of the global financial crisis on commodity prices, and this serves as a precursor to Chapter 4.

Commodity prices and economic development: a debate in a historical retrospect Historical debate on commodity prices and empirical evidence Historically two questions have dominated the discussions on primary commodity prices in economic literature: • The declining terms of trade in commodity export prices relative to

imports of manufactured goods from developed countries (the Prebisch– Singer hypothesis) • The high price volatility and instability. The early debate on trade and development and the North–South economic relations in the post-war period was largely shaped by these two questions, as they have had a profound effect on the course of economic development and management for commodity-dependent low-income developing countries. The long-term declining terms of trade of primary exports were explained by Prebisch (1950) and Singer (1950) in terms of the fundamental differences both on the demand and supply sides between primary commodities and manufactured goods. The Prebisch–Singer hypothesis, as it is known in the literature, is built on conditions such as:


Machiko Nissanke

• The low price and income elasticities of demand for commodities as

compared with manufactures • The technological superiority of developed countries over developing

countries


44


• The dominance in economic power relationships of the former, which

allows transnational corporations to capture excess profits • The asymmetric impact of labour union power in developed countries and

Turning to these fundamental factors affecting commodity prices, Maizels (1987, 1992, 1994) explains the sharp decline of terms of trade for primary commodities in the 1980s in terms of the structural shifts in the demand and supply relationships in primary commodities. These structural shifts were not only due to the nature of technological changes, but also a consequence of the two oil shocks and the commodity booms in the 1970s, together with the subsequent deep recessions following contractionary macroeconomic adjustments to major industrial economies and the ensuing debt crisis that gripped the developing world. In a similar fashion, Maizels (1987, 1992 and 1994) explains large fluctuations characteristic to commodity prices in terms of frequent shocks to the fundamental demand–supply relationship of physical commodities. He states: because of the low short-term price elasticities of both supply and demand for the great majority of primary commodities, any given disturbance in economic activity in the developed countries, or in commodity supply, results in a greater than proportionate change in commodity prices and in the export earnings of commodity-dependent economies. (Maizels: 1994: 1692) Typically, for example, exogenous shocks on the supply-side set-off a price cycle over the medium term, if the size of shock is such that it cannot be absorbed through inventory adjustments. The duration and amplitude of the price cycle is, in turn, determined by the way supply would respond to the initial shock, as well as the speed of adjustments on both the demand and supply sides. This type of medium-term price cycle can be illustrated by referring to the price dynamics in world coffee markets in the 1970s and 1980s. Large fluctuations in coffee prices during this period were repeatedly triggered by severe frosts in Brazil. As more coffee trees were planted outside Brazil in response to the price hike in world markets induced by these supply shocks, five years later, as the new trees matured, the world markets were flooded with coffee beans, resulting in a significant fall in world coffee prices (Akiyama and Duncan 1982). However, shifts in the supply–demand relationships such as those described above has become less effective on their own in explaining the everincreasing volatilities in price movements, observed systematically across a large number of commodities – in particular, large fluctuations found in highfrequency price data. In referring to these emerging observations, already by the early 1990s Maizels (1994) had noted that high price volatility could


labour surplus in developing countries on the division of the benefits of increased productivity.


45

result from the intensifying two-way interactions between the commodity and financial markets. He observed that there were, on the one hand, marked shifts of speculative funds into, and out of, those commodity markets in dealing in futures contracts, such as markets in coffee, cocoa, sugar, copper, lead, tin and zinc. On the other hand, the inventory adjustments to commodity stocks held had become increasingly influenced by volatilities in financial variables such as interest rates, whilst commodity prices also affected not only macroeconomic variables such as inflation and growth rates, but also prices in financial assets traded in bond and stock markets. Thus, whilst speculative activities in the commodity markets exacerbate price volatilities, key financial variables can also influence the volume of commodity stocks held and, hence, price dynamics over the short run. He observed, ‘instability in the commodity markets and in the financial markets feed on each other, and constitute an inbuilt mechanism of short-term destabilization and uncertainty in the world economy’ (Maizels 1994: 1692). The relevance of his analysis to today’s condition cannot be overstated, as will be discussed. There have been numerous empirical studies carried out to examine the historical trends embedded in the Prebisch–Singer hypothesis, as well as price instability (for example, Spraos 1983; Sapsford 1985; Sarker 1986; Deaton and Laroque 1992, 2003; Deaton 1999; Bloch and Sapsford 2000; Cashin and McDermott 2002). Among more recent studies, for example, Deaton and Laroque (2003) test the Prebisch–Singer hypothesis on the basis of unlimited supplies of labour in developing countries, while Bloch and Sapsford (2000) test the hypothesis on the differentiation between perfectly competitive commodity markets and imperfect competition characterizing the markets for manufactures, emphasized by Kaldor (1976). Exploiting the longest dataset publicly available,6 Cashin and McDermott (2002) analyze the behaviour of real commodity prices over the period 1862– 1999. They emphasise several points, such as: • The importance of understanding the cyclical behaviour of commodity

prices – in particular, the duration and amplitude of commodity-price cycles for designing domestic counter-cyclical policies • Examining the need for external borrowing to counteract a temporary adverse shock • Deciding the efficacy of both national commodity stabilization funds and international commodity agreements.


Machiko Nissanke

They find that large price volatility dominates the relatively small secular decline in real commodity prices, conforming to the findings by earlier studies (for example, Deaton 1999). Nonetheless, they also show that the real commodity index fell by four fifths between 1900 and 1999, ending the century at a record low, with an increasing annual volatility and much


46


5.5

5.0

4.0

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3.0 1862 1872 1882 1892 1902 1912 1922 1932 1942 1952 1962 1972 1982 1992 Figure 3.2 Log of real price of industrial commodities Source: Cashin and McDermott (2002): fig. 6. Reproduced with the permission of the International Monetary Fund.

shorter price cycles under the flexible exchange rate regime of 1972–1999 (Figure 3.2). On the basis of their time-series analysis, they observe: • A downward trend in real commodity prices of about 1 per cent per year

over the past 140 years, with little support for a structural break • Evidence of a ‘ratcheting up’ in the variability of price movements, the

amplitude of which increased in the early 1990s, while the frequency of large price movements increased after the collapse of the Bretton Woods regime. While these empirical studies, as a result of being confined to a statistical investigation of time-series data, do not examine in-depth the economic factors behind significant structural changes in price dynamics historically observed, these studies consistently confirm that large commodity price cycles have become more frequent with shortened duration and increased amplitude over recent decades.


4.5

International commodity policies As Maizels (1992, 1994) noted, the focus of attention in the academic and policy discussion of the ‘commodity problem’ has increasingly become mainly on short-term price instability and its effects on export earnings and income of low-income developing countries. Hence, the intergovernmental


47

intervention in past decades was also centred around measures to reduce excessive instability or offset its effects on the income of producers and producing countries. Indeed, with a deep understanding of destabilizing forces stemming from the close links between commodity price dynamics, on one hand, and, on the other hand, financial and macro performance in the world economy, Keynes elaborated, in his writings, with reference to the Great Depression of the 1930s and, in his wartime proposals, the critical importance of establishing a series of buffer stocks for the main traded commodities that could act as counter-cyclical mechanism as part of a world income-stabilization scheme (Keynes 1938, 1942). Though his proposal in its original form did not materialize, given strong opposition from the US administration at the time, the international commodity agreements (ICAs) were established in a much less ambitious form than envisaged in his original proposal, as result of negotiations over many years, which culminated in the Integrated Programme for Commodities adopted in the Nairobi Resolution of UNCTAD in 1976. Consequently, the ICAs were negotiated for a number of commodities (cocoa, coffee, rubber, sugar and tin). The objectives of these ICAs were invariably to stabilize excessively high price fluctuations and export earnings by defending floor and ceiling prices within a band through financing centrally held buffer stocks or export controls on a basis of predetermined quota assigned to each producing country (Maizels 1992). However, by the end of the 1980s, with the exception of the International Natural Rubber Agreement (INRA), all the ICAs had broken down, lapsed or been suspended. The INRA operated through buffer stocks was also finally abandoned in 1999. As Maizels (1992, 1994) noted, one of the major difficulties facing the ICAs was undoubtedly a fundamental disagreement and divergence of interests between developing exporting countries and developed importing countries over the objective of price stabilization agreements. Thus, apart from typical problems associated with collective action involved in international corporation agreements, there was not much political or financial support from the international community for sustaining the agreements. In addition, the ICAs suffered from a number of serious technical problems associated with their implementation. For example, a major difficulty in implementing and maintaining a buffer stock stabilization scheme arises in setting an appropriate price around which stabilization should take place (Deaton and Laroque 1992; Maizels 1992, 1994). For many commodities, it was not easy to establish such a price band uniformly due to heterogeneity and qualitative differences of commodities traded (for example, in different grades of coffee and cocoa) across different locations of exchange markets (Gilbert 1987). Difficulty also arose in agreeing over the level and the bandwidth around which prices are supposed to be stabilized. While the main interests of developing producing countries lay in defending ICA ‘floor


Machiko Nissanke



prices’ at times of price decline, developed consuming countries insisted that ICA price ranges should be reduced in line with market trends, reflecting changes in the structure and cost of production and distribution, or changes in consumer tastes. The latter argued for the need for appropriate flexible adjustment to the level and the width of floor and ceiling prices over time along market trends. Further, even if the stabilization range is appropriately defined, the resource requirements to maintain such a buffer stock scheme are high owing to the nature of commodity price cycles (Gilbert 1996). Deaton and Laroque (1992) suggest, for example, that commodity prices exhibit long flat bottoms punctuated by occasional sharp peaks. This means that stocks have to be held for long periods in order to deal with low prices while, at times of price peaks, stocks are likely to be depleted quickly unless supply capacities can be quickly increased. Similarly, a system of export quotas – the other mechanism popularly used in the ICAs – has a set of technical problems in managing and policing agreed quota. According to Gilbert (1987), the problems stem from the use of historically determined quotas. In particular, the predetermined allocation of export quotas across producing countries tends to freeze the existing distribution of production and, hence, it fails to allow for future relative positions of exporting countries in their production capacity and competitiveness. Consequently, countries with rapidly expanding production have a disincentive to membership, while member countries would have also an incentive for rent-seeking activities and/or illegal or quasi-legal evasion. In addition, the system encourages countries to over-export in non-control periods in order to establish larger quota entitlements. In short, the ICAs operated in the past were obviously not well designed to deal with these collective action problems, as well as underlying longterm forces such as persistent oversupply or the effects of the ‘residual’ free market operations. To overcome these difficulties, Maizels (1994) discussed possible alternatives measures, and their advantages and disadvantages compared with traditional schemes involving buffer stock management or export quota. Given the difficulty in reaching agreement with developed consumer countries, for example, producer-only supply management can be considered. However, because of the substitution effect from competing synthetics or other substitutes, this is feasible only for a limited number of commodities, such as tropical beverages (coffee, cocoa and tea) or natural rubber (Maizels et al. 1997). He also suggested a uniform ad valorem export tax in place of export quota for eschewing difficult negotiations on market share. However, he foresaw that the export tax required to have a necessary effect on prices might be too high for commodities for which the short-term price elasticity of demand and/or supply is low. Hence, in his view, supply management does not constitute a viable option for a large number of commodities. He was also well aware of strong opposition from the IFIs and developed consuming


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countries to any intervention in world commodity markets on the ground of market efficiency arguments. Apart from the ICAs, there were also a number of compensatory facilities to offset shortfalls of commodity export earnings, such as the Compensatory and Contingency Financing Facility (CCFF) by the IMF and the STABEX by the European Community (EC) (Maizels 1994), as discussed further by Adrian Hewitt in Chapter 10. While the original IMF Compensatory Financing Facility (CFF) was established in 1963 as a low-conditionality semiautomatic mechanism for temporary balance-of-payments support but on a non-concessional basis, the CCFF – a new non-concessional facility established in 1988 to replace the CCF – became so highly conditional on accepting pro-cyclical demand management that very few countries have turned to it for assistance since its inception.7 Similarly, the STABEX has met rather limited success because of its pro-cyclical disbursements due to the long time lags from income shocks for the delivery of compensation. Further, since the compensation under the STABEX was delivered in the form of grants only to agricultural sectors affected by income shocks, it has been argued that there was a diversion from other forms of official development assistance (ODA) and the STABEX tends to discourage efforts towards diversification.8 FLEX (Fluctuations in Export Earnings programme), which replaced STABEX and SYSMIN under the Cotonou Agreement of 2000, has so far been under criticism for slowness of disbursements and resource constraints. With the collapse of the ICAs, the use of market mechanisms for managing commodity price risks has been advocated by the international donor community for dealing with risks stemming from large price volatility and accompanying income shocks. IFIs have actively encouraged primary commodity producers to use market based commodity linked financial risk-hedging instruments by participating in futures and derivative markets.

The recent commodity price movements in a historical context Figure 3.3 shows a plot of time-series data of nominal price indices for different non-fuel commodity groups in a long-term historical perspective over the period 1957–2008, while Figures 3.4 and 3.5(a-d) highlight nominal price movements for the most recent commodity price cycle (January 2002–October 2008) for different commodity groups and selected individual commodities. Further, Table 3.1 shows a summary of statistics on the scale of the recent price boom and bust experienced by different commodity groups.


Machiko Nissanke

The commodity boom for the period of 2002–2008 Figures 3.1 and 3.3, which together place the recent boom in a long-term historical perspective, show that all non-fuel commodity groups experienced a synchronized commodity boom since 2002. The boom lasted for nearly


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Beverages

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0

Figure 3.3 Non-fuel commodity price indices for different groups Source: Compiled from IMF data on primary commodity prices.

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Unit: Index number

350

Figure 3.4 Monthly average commodity price indices (January 2002–October 2008) Source: UNCTAD (2008c): fig. 3.

six years up to the spring and summer of 2008. The price increases were rapid over the period for all the groups, pushing the general non-fuel commodity price index in US$s from 100 in 2000, when price increases were at a historically low level, to 300 in mid-2008, though the increase in special drawing rights (SDR) was less due to the steep depreciation of the US$ for that


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Commodity group

All commodities (excluding crude petroleum) Food Tropical beverages Vegetable oilseeds and seeds Agricultural raw materials Minerals, ores and metals Crude petroleum

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−31 −15 −48 −25 −41 −50

Note: 1 Price in current dollars. 2 a = Percentage change between 2002 and 2007 3 b = Average monthly prices for half of 2008 compared 2007 monthly average 4 c = Percentage change from the peak monthly price recorded in 2008 in comparison with the November 2008 monthly price Sources: UNCTAD secretarial calculations based on UNCTAD (2008d: table 1) and UNCTAD commodity price statistics.

period (Figure 3.1). According to the World Bank (2009), this recent boom was longer and stronger than any other boom in the twentieth century. Figure 3.4 shows that price increases began to gather pace in 2006 for all the groups. For the five-year period 2002–2007, the nominal price index of non-fuel commodities increased 113 per cent; that of the crude petroleum price, 185 per cent (Table 3.1). The prices of minerals, ores and metals experienced the steepest rise of all, 261 per cent over the period. Among agricultural commodities, prices of vegetable oilseeds and oils had a steeper increase of 93 per cent, followed by agricultural raw materials (80 per cent), tropical beverages (67 per cent) and food (65 per cent) for this period. The commodity price increases further accelerated in the first half of 2008. The non-fuel commodity prices, as a group, registered an average monthly price rise of 34 per cent over the monthly average in 2007. The steepest increase in the first half of 2008 was for crude petroleum (52 per cent) and food (51 per cent). This price hike gave rise to a genuine fear of food and fuel crises across the globe. They are basic and politically sensitive consumer goods items, affecting the poor most adversely. Prices of other agricultural commodities also increased by around 25 per cent over the monthly average in 2007, though prices of minerals and metals had already begun to ease off in the last six months of the commodity boom, registering an average monthly price increase of 18 per cent over the price level in 2007. The generally synchronized price boom indicates that common factors were responsible for the price escalation across primary commodities at large.


Table 3.1 Monthly average world primary commodity prices, 2002–2007, 2008 (percentage change over previous year monthly average)



Certainly, changes in fundamental demand–supply relationships simultaneously affecting many primary commodities must be a key factor for price dynamics over the medium term. It is widely known that the sharp increase for minerals and metals is driven by an upsurge in demand for these commodities from newly industrializing emerging economies. This applies, in particular, to minerals and metals from the two most rapidly growing economies in the South: China and India; this is due to an intensive use of these raw materials for their industrialization drive, physical infrastructure building and urbanization trends, as examined in detail by Raphael Kaplinsky in Chapter 6. Minerals, metals and oils are also known to hit supply constraints in meeting the fast growing demand, as investment in these sectors was subdued for some time due to the historically low commodity prices in the previous decades, as previously discussed. There are also close interlinks between oil prices, on one hand, and agricultural and other commodity prices in world markets, on the other, through higher transport costs and other input costs for their production and marketing. Figure 3.5 shows detailed price dynamics for individual commodities, indicating that several commodity specific factors were also behind their price increases. For example, the dramatic price increase in food prices, which doubled between January 2006 and May 2008, as shown in Figure 3.5(a), is known to be associated with the abrupt shift in arable land use from food crops towards bio-fuel crops – such as vegetable oilseeds and oils in a number of major agricultural surplus developed economies – in the face of soaring fuel prices. Vegetable oilseeds and oils had seen an equally dramatic increase as food crops, if not more so. Climate changes intensified by soaring global fuel consumption also had an adverse affect on agricultural production in many countries. In addition, there has been a steady increase in demand for many agricultural products in growing emerging market economies, pushing their prices to rise. Many low-income developing countries have been hit hard by these rising trends in world food prices, as they have long neglected agricultural sectors, resulting in low investment in agricultural technology and supporting infrastructures (World Bank 2007). Also, agricultural production in many poor countries suffered from institutional vacuums created by economic reform programmes (see Chapter 4 for further discussion). However, as in the case of minerals and metals discussed later, the sharp price increases in main food crops may not be solely explained in shifts in demand and supply factors alone. As UNCTAD (2008b) notes, world stocks for major crops such as wheat, maize and rice have been worryingly low when these prices shot up in 2007/8. However, within tropical beverages and agricultural materials (Figure 3.5(b) and (c)), there are some variations. The coffee price increase was the steepest among tropical beverages, while the price of rubber increased more than cotton prices, which fluctuated widely without so far showing a definite trend in the 2000s.


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53

(a) Agricultural food crops Rice, palm oil

Wheat, maize

1200

1400

1000

1200 1000 800

600 600 400 400 200

200

Wheat

Rice

Maize

02/2009

09/2008

04/2008

11/2007

06/2007

01/2007

08/2006

03/2006

10/2005

05/2005

12/2004

07/2004

02/2004

09/2003

04/2003

11/2002

06/2002

0 01/2002

0

Palm oil

(b) Tropical beverages Coffee, cocoa

Tea

160

350.0 Coffee

140

Cocoa beans

Tea 300.0

120

250.0

100 200.0 80 150.0 60 100.0

40

02/2009

09/2008

04/2008

11/2007

06/2007

01/2007

08/2006

03/2006

10/2005

05/2005

12/2004

07/2004

02/2004

09/2003

04/2003

0.0 11/2002

0 06/2002

50.0

01/2002

20


800

Figure 3.5 Price dynamics for individual commodities (January 2001–October 2008) Sources: (a) UNCTAD (2008c): fig. 7; (b) UNCTAD (2008c): fig. 8; (c) UNCTAD (2008c): fig. 9; (d) UNCTAD (2008c): fig. 5. 10.1057/9780230274020 - Commodities, Governance and Economic Development under Globalization, Edited by Machiko Nissanke and George Mavrotas

54


(c) Agricultural raw materials, cotton and rubber Rubber

Cotton

4,000 3,500

90 80

3,000

70 60

2,500 1,500 1,000 500

Rubber

Cotton

40 30 20 10 0

02/2009

09/2008

04/2008

11/2007

06/2007

01/2007

08/2006

03/2006

10/2005

05/2005

12/2004

07/2004

02/2004

09/2003

04/2003

11/2002

06/2002

01/2002

0

(d) Minerals, ores and metals Copper, Tin

60,000 50,000 40,000

10,000 Nickel Tin Copper

8,000 6,000

30,000 4,000

20,000

2,000

10,000

01.02 07.02 01.03 07.03 01.04 07.04 01.05 07.05 01.06 07.06 01.07 07.07 01.08 07.08

Aluminium, lead, zinc 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500

Iron ore

Lead Zinc Aluminium Iron ore

160 140 120 100 80 60 40 20 0

01.02 07.02 01.03 07.03 01.04 07.04 01.05 07.05 01.06 07.06 01.07 07.07 01.08 07.08

Nickel

Figure 3.5 Continued

Among the minerals, ores and metals registered, copper, nickel, iron ore, zinc and lead experienced a surge over this period (Figure 3.5(d)). The level of inventories was also running low when a price surge was initiated for a number of minerals (Figure 3.6). Figure 3.7 shows the relationships between stocks and prices for lead, nickel, tin and copper. These indicate an asymmetry in the relationship between stock and price that is typical of metals. When stocks go down, the price increases; yet, when stocks increase, the price is kept stable.9 Figure 3.7 certainly confirms that the recent sharp rise of metal prices for 2005–2007 took place at a time when their inventory stocks were low. There is also a high correlation between metal prices and energy prices, as mineral production/extraction is very energy intensive, and the costs for producing metals have increased partly due to high oil prices.


50

2,000


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Figure 3.6 Stocks of selected mineral commodities Source: Compiled from IMF data on primary commodity prices. (b)

Lead: price-stock

160000

4000

140000

300

3500

100

1000

40000

50

500

20000

0

Stock

(d)

Tin: price-stock

30/3/2007

08/12/2005

26/12/2003

22/9/2000

05/10/2002

02/05/1999

20/6/1997

11/03/1995

18/3/1994

31/7/1992

28/4/1989

14/12/1990

24/1/1986

09/11/1987

06/08/1984

Price

45000

Price

Copper: price-stock 5000

1200

20000

US $/Mt

10000

0

0

20/7/1979

23/8/2007

13/9/2006

10/04/2005

25/10/2004

14/11/2003

12/05/2002

26/12/2001

20000

4500 1000

35000

4000

10000

20000 15000

US $/Mt

25000

Thousands MT

15000

30000

3500

800

3000 2500

600

2000 400

1500

5000

10000

1000

200

5000 0 06/01/1989 18/6/1990 07/03/1991 17/7/1992 08/03/1993 18/8/1994 09/04/1995 18/9/1996 10/03/1997 20/10/1998 11/04/1999 20/11/2000 12/05/2001 20/12/2002 01/06/2004 20/1/2005 02/06/2006 21/2/2007

0

Stock

UK £/MT

40000

500 0

0 08/01/1979 02/03/1981 08/09/1982 02/10/1984 15/8/1985 18/2/1987 23/8/1988 26/2/1990 30/8/1991 03/04/1993 09/07/1994 03/12/1996 15/9/1997 19/3/1999 21/9/2000 27/3/2002 30/9/2003 04/04/2005 10/06/2006

(c)

16/1/2001

26/2/1999

02/07/2000

19/3/1998

30/4/1996

22/5/1995

04/09/1997

06/10/1994

07/01/1993

Stock

30000

60000

1500

22/10/1982

150

40000

80000

03/06/1981

2000

50000

100000 Mt

2500 200

60000

120000

3000

250

0

Mt

Nickel: price-stock

4500

350

US $/MT

MT thousands

(a) 400

Price

Stock


29/6/2006

02/11/2008

16/11/2004

04/04/2003

22/8/2001

01/10/2000

28/5/1998

15/10/1996

21/7/1993

03/03/1995

26/4/1990

12/09/1991

13/9/1988

30/1/1987

Lead Copper

19/6/1985

11/07/1983

25/3/1982

08/12/1980

Tin Nickel

29/12/1978

Thousands MT

Stocks (volume) 1000 900 800 700 600 500 400 300 200 100 0

Price

Figure 3.7 Price–stock relationships for selected mineral commodities Source: Compiled from IMF data on primary commodity prices.

Taking into account all the various factors influencing fundamental demand and supply relationships, many observers concluded that most commodities – such as minerals, metals and oils – had entered into a superprice cycle in the early 2000s, and the boom would last until supply capacities


56


Table 3.2 Instability of prices of main commodity groups, 1968–2007

Food Vegetable oilseeds and oils Tropical beverages Agricultural raw materials Minerals, ores and metals Crude petroleum ALL COMMODITIES

1968–1977

1978–1987

1988–1997

1998–2007

24.2 20.2 23.5 14.1 13.3 26.9 16.8

14.8 16.6 12.1 9.1 10.8 29.4 10.4

6.7 10.1 22.0 6.7 10.5 11.7 6.8

9.7 19.0 18.8 8.8 20.8 15.6 13.3

Note: Instability index (%) calculated as average percentage deviation from exponential trend (2000 = 100). Source: UNCTAD (2008d).

catch up sufficiently with rising investment in their extraction/production, induced by the recent commodity boom. It was also predicted that while food crisis could ease off slightly insofar as rapid adjustment could be made to increase annual food crop production, excess demand could persist over the medium term as some of the supply-side factors were found to be not necessarily of a temporary nature. Real price trends and continued high price volatilities It is important to place the recent observed increase in commodity nominal prices in a longer historical context. As shown in the upper chart in Figure 3.8, the nominal sharp price increases in recent years have produced a mild upward trend in the nominal non-fuel commodity price index since 1970, but the slope of that trend is flatter than those observed in the petroleum price index or the prices of manufactured goods. Further, the lower chart of Figure 3.8 confirms the continuing high volatility of commodity prices compared with prices of manufactured goods. Table 3.2 shows the instability of prices of main commodity groups by sub-periods for 1968–2007. All commodity groups show historically very high volatility and the annual instability index for most commodity groups, except for tropical beverages, has increased significantly over the recent decade, as emphasized by Alice Sindzingre in Chapter 7. On the whole, despite the sharp price increase in the recent boom period, real prices indices of non-fuel commodities still followed a downward trend for a longer historical perspective for the period of 1960–2007, as shown in Figure 3.9. Commodity prices, except petroleum oil prices, did not register a record high level in real terms in the recent commodity boom of 2002–2008,


Instability index (%)


Machiko Nissanke

57

A. Evolution of price indices around their trend (Index numbers, 2000 100, quarterly) 350 Non-fuel commodities

Crude petroleum

Manufactures

300

250

150

100

50

0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 B. Quarterly changes in price indices 60 50

Non-fuel commodities

Crude petroleum

Manufactures

40 30 20 10 0 10 20 30 40 50 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Figure 3.8 Price trends and volatility of non-fuel commodities and crude petroleum in relation to manufacture Note: The dotted lines represent the trend of the relevant price indices. Source: UNCTAD (2008b): fig. 2.4.


200

as confirmed by David Sapsford, Stephan Pfaffenzeller and Harry Bloch in Chapter 5. The very high volatility observed in the high-frequency data of many primary commodities has been increasingly linked to the rapid growth of commodity derivatives markets. As noted in our introduction, the fast expansion of derivatives markets took place after the severe downturn in equity


58 Tropical beverages

All commodities 350

600

300

500

250

400

200 300 150

100

50 0 1960

1970

1980

1990

0 1960

2000 2007

1970

1980

1990

2000 2007

Vegetable oilseeds and oils

Food

500

450 400

400

350 300

300

250 200

200

150 100

100

50 0 1960

1970

1980

1990

0 1960

2000 2007

1970

1980

1990

2000 2007

Minerals, ores and metats

Agricultural raw materials 300

250

250

200

200 150 150 100

100

50 0 1960

50 1970

1980

1990

0 1960

2000 2007

Nominal

Real price

1970

1980

1990

Real price trend

2000 2007


200

100

Figure 3.9 Non-fuel commodity price indices Note: 2000 = 100. Source: UNCTAD (2008a).


59

markets of 2000–2002 as global institutional and private investors began to target many commodity markets – including copper, coffee, cotton, along with oil and gold – as part of their asset portfolio diversification strategy. This trend accelerated in 2007–2008 as the crisis unfolded in global financial markets, as a flight from equities and bond markets had taken place on a massive scale. UNCTAD (2008b) presents various estimates indicating the significant jump in trading. For example, according to the Bank for International Settlements’ (BIS) estimate, outstanding amounts of over-the-counter commodity derivatives increased by 160 per cent between June 2005 and June 2007. Others estimate that the growth of agricultural futures and option trading was 32 per cent up in 2007, whereas the corresponding growth of energy and industrial metals was in the range of 29–30 per cent. Further, derivatives trading activities in petroleum oil were reported to have increased 30 to 35 times more than physical petroleum trading between 2000 and 2006. UNCTAD (2008b) reports that the investment in commodity indices surged from fewer than US$13 billion at the end of 2003 to US$260 billion in 2008. New actors in commodity markets – such as investment, pension and hedge funds, and sovereign wealth funds – have become significant players in commodity markets of futures and options (UNCTAD 2008b). As major currencies were experiencing wild swings, many commodities appeared to have provided investors with a vehicle for inflation hedging. Further, prices of various commodities have become highly correlated because much of the derivatives trading is done in index trading of a bundle of commodities. It is known that index trading does not inject efficiency enhancing, extra liquidity to markets. Combined, these factors have, in turn, contributed to price volatility and driven many commodity prices to historic highs. Thus, trading activities in world commodity markets have undergone some fundamental changes, as the links between activities in commodity and financial markets, already noted by Maizels in the early 1990s, have further intensified since that time. More complex financial derivatives products are, all the time, launched in response to heterogeneous demand by portfolio investors. They act as noise traders in derivatives markets, as they have little interest in physical commodity trading. The increased presence of noise traders is known to make prices excessively more volatile than warranted by fundamentals in all asset markets (Nissanke 2005, Kaltenbrunner and Nissanke 2009). With it, commodity price dynamics might have been altered significantly over the short run, if not in the medium term. At least over the short term, prices have become, in some cases, less reflective of the supply and demand dynamics of physical commodities. Commodity prices may be no longer determined merely by fundamentals such as the supply–demand relationships of physical commodities, they are now also determined by the desire on the part of investors to hold commodities in their portfolio.


Machiko Nissanke


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As noted, many observers began to wonder whether primary commodities were in a super-price cycle by virtue of strong demand–supply fundamentals, and whether the commodity boom started in 2002 would run for some time. Hence, they were caught by surprise when commodity prices experienced a precipitous fall, as discussed in the introduction (Figures 3.3, 3.4 and 3.5). The sharp decline was the result of a swift revision of expectations on the part of investors and traders on commodity exchanges with regard to the growth prospect of the world economy in response to the financial meltdown in the summer of 2008. By then, it was clear that the slowdown of economic growth in the USA and Europe would inevitably spread globally, and that the growth of emerging market economies in Asia that were behind the commodity boom could not be sustained. Consequently, there was a massive liquidation of long positions in commodity futures markets, leading to a precipitous fall of commodities across the board (UNCTAD 2008c). Given the global economy entering into a severe recession in 2009, the demand for commodities would remain weak. Hence, commodity prices might stay at subdued levels for some time until the world economy could eventually emerge from the deep recessionary phase. Table 3.1 shows that, by early December 2008, non-fuel commodity prices had fallen 35 per cent compared with the peak level reached in April 2008, while the average monthly petroleum oil price and food price fell by over 50 per cent and 30 per cent from their peak level, respectively. Vegetable oilseeds and seeds, the prices of which had shadowed petroleum prices in the recent past, declined by 48 per cent. Minerals, ores and metals experienced a price decline of 41 per cent, while prices of agricultural raw materials and tropical beverages fell by 25 per cent and 15 per cent, respectively, for the second half of 2008. The recent boom–bust cycle of commodities cannot be explained entirely by shifts in demand–supply fundamentals governing individual commodities. In addition to constantly evolving economic conditions under globalization, the unprecedented magnitude of swings observed in commodity prices over the medium term, as well as the excessive volatility characterizing high-frequency price data, are likely to be a reflection of the ever increasing linkages between activities in commodity markets and financial markets in the 2000s. In the next chapter, we shall take up these issues, together with other conditions affecting structural changes in the landscape of commodity markets, trade and production.


The impact of the global financial crisis on commodity prices

Notes 1. Climate changes induced by ‘greenhouse effects’ present another great challenge facing the global community in the twenty-first century, requiring urgent collective coordinated action.


61

2. This issue will be discussed further in Chapter 4. 3. See, for a map showing countries with high commodity dependence, UNCTAD (2008a). 4. See Nissanke (2009b) for the mechanism by which commodity-dependent lowincome countries have been entrapped in the debt crisis and aid dependence in the 1980s and 1990s. 5. UNCTAD (2007) reports that, in 2005, developing countries’ share of global GDP at purchasing power parity surpassed that of developed countries for the first time, climbing rapidly from 44 per cent to 53 per cent over the decade from 1995 to 2007. 6. The Economist’s index of industrial commodity prices, which covers textiles, metals and non-food industrial commodities. The real index is calculated by deflating the nominal industrial commodity price index (dollar based, with base 1984–50 = 100, weighted by the value of developed country imports) by the GDP deflator of the USA. 7. Both CCFF and the recently established Exogenous Shock Facility – a concessional loan facility for countries under the IMF’s Poverty Reduction and Growth Programme – have hardly been used since 2000. 8. Compensation for mineral products was administered under a separate facility – SYSMIN. 9. This role of stocks can be also detected by ARCH and GARCH analysis, through the EGARCH coefficient, which shows these asymmetrical effects.

References Akiyama, T. and R.C. Duncan (1982) ‘Analysis of the World Coffee Market’, World Bank Staff Commodity Working Papers, 7 (Washington, DC: World Bank). Bank for International Settlements (2007) ‘Semiannual OTC Derivatives Statistics at End-June 2007’ (Basel: BIS). Bleaney, M. and D. Greenaway (1993) ‘Long-Run Trends in the Relative Price of Primary Commodities and in the Terms of Trade of Developing Countries’, Oxford Economic Papers, New Series, 45(3). Bloch, H. and D. Sapsford (2000) ‘Whither the Terms of Trade? An Elaboration of the Prebisch–Singer Hypothesis’, Cambridge Journal of Economics, 24(4): 461–81. Cashin, P. and J. McDermott (2002) ‘The Long-Run Behaviour of Commodity Prices: Small Trends and Big Variability’, IMF Staff Papers, 49(2): 175–99. Deaton A. (1999) ‘Commodity Prices and Growth in Africa’, Journal of Economic Perspectives, Vl(13): 23–40. Deaton, A. and G. Laroque (1992) ‘On the Behaviour of Commodity Prices’, Review of Economic Studies, 59(198): 1. Deaton, A. and G. Laroque (2003) ‘A Model of Commodity Prices after Sir Arthur Lewis’, Journal of Development Economics, 71(2): 289–310. Deaton, A. and R.I. Miller (1996) ‘International Commodity Prices, Macroeconomic Performance, and Politics in Sub-Saharan Africa’, Journal of African Economies, 5, AERC Supplement: 99–191. Gilbert, C.L. (1987) ‘International Commodity Agreements: Design and Performance’, World Development, 15(5): 591–616. Gilbert, C.L. (1996) ‘International Commodity Agreements: An Obituary Notice’, World Development, 24(1): 1–19.


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Hausemann, R., J. Hwang and D. Rodrik (2005) ‘What You Export Matters’, NBER Working Paper 11905 (Cambridge, MA: NBER). Kaldor, N. (1976) ‘Inflation and Recessions in the World Economy’, Economic Journal, 86, December. Kaltenbrunner, A. and M. Nissanke (2009) ‘The Case for an Intermediate Exchange Rate Regime with Endogenising Market Structures and Capital Mobility: An Empirical Study of Brazil’, UNU-WIDER Research Paper, 2009/29, May. Keynes J.M. (1938) ‘The Policy of Government Storage of Food-stuffs and Raw Materials’, Economic Journal, 48 (September 1938): 449–60. Keynes, J.M. (1942) ‘The International Regulation of Primary Products (1942)’, in D. Moggridge (ed.), Collected Writings of John Maynard Keynes, 27 (London: Macmillan/Cambridge University Press, 1980): 135–66. Maizels, A. (1984) ‘A Conceptual Framework for Analysis of Primary Commodity Markets’, World Development, 12(1): 25–41. Maizels, A. (1987) ‘Commodities in Crisis: An Overview of the Main Issues’, World Development, 15(5): 537–49. Maizels, A. (1992) Commodities in Crisis: The Commodity Crisis of the 1980s and the Political Economy of International Commodity Policies (Oxford: Clarendon Press). Maizels, A. (1994) ‘The Continuing Commodity Crisis of Developing Countries’, World Development, 22(11): 1685–95. Maizels, A., R. Bacon and G. Mavrotas (1997) Commodity Supply Management by Producing Countries: A Case Study of the Tropical Beverage Crops (Oxford: Clarendon Press). Nissanke, M. (2005) ‘Revenue Potential of the Tobin Tax for Development Finance: A Critical Appraisal’, in A.B. Atkinson (ed.), New Sources of Development Finance, UNUWIDER Study (Oxford: Oxford University Press). Nissanke M. (2009a) ‘The Global Financial Crisis and the Developing World: Transmission Channels and Fall-Outs on Industrial Development’, Paper commissioned by UNIDO. Nissanke M. (2009b) ‘Reconstructing the Aid Effectiveness Debate’, in G. Mavrotas (ed.), Foreign Aid for Development: Issues, Challenges, and the New Agenda (Oxford: Oxford University Press). Nissanke, M. and E. Thorbecke (2006) ‘Channels and Policy Debate in the Globalization–Inequality–Poverty Nexus’, in M. Nissanke and E. Thorbeckec (eds), ‘The Impact of Globalization on the World’s Poor’, World Development, Special issue, 34(8). Nissanke, M. and E. Thorbecke (2008) ‘Comparative Analysis of the Globalization– Poverty Nexus in Asia, Africa and Latin America’, UNU-WIDER, Mimeo, February. Pindyke, R.S. (2004) ‘Volatility and Commodity Price Dynamics’, Journal of Futures Markets, 24(11): 1029–47. Prebisch, R. (1950) The Economic Development of Latin America and Its Principal Problem (Santiago: UNECLA). Sapsford, D. (1985) ‘The Statistical Debate on the Net Barter Terms of Trade between Primary Commodities and Manufactures: A Comment and Some Additional Evidence’, Economic Journal, 95: 781–8. Sarker, P. (1986) ‘The Singer–Prebisch Hypothesis: A Statistical Evaluation,’ Cambridge Journal of Economics, 10: 355–71. Singer, H.W. (1950) ‘The Distribution of Gains between Investing and Borrowing Countries’, American Economic Review, Papers and Proceedings, 40: 473–85.


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Spraos, J. (1983) Inequalizing Trade? (Oxford: Clarendon Press). UNCTAD (2002) The Least Developed Countries Report 2002 (Geneva: UNCTAD). UNCTAD (2007) Commodities and Trade, Commission on Trade in Goods and Services and Commodities, 19–23 March, Geneva. UNCTAD (2008a) Development and Globalization: Fact and Figures 2008 (Geneva: UNCTAD). UNCTAD (2008b) Trade and Development Report 2008, September 2008 (Geneva: UNCTAD). UNCTAD (2008c) ‘Recent Commodity Market Developments: Trends and Challenges’, 23 December, TD/B/C.1/MEM.2/2 (Geneva: UNCTAD). UNCTAD (2008d) Handbook of Statistics (Geneva: UNCTAD). World Bank (2007) World Development Report 2008 (Washington, DC: World Bank). World Bank (2009) ‘Global Economic Prospect 2009: Commodities at Crossroads’ (Washington, DC: World Bank).


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4 Machiko Nissanke

Introduction The intensified process of globalization has not left commodity-dependent low-income economies untouched. The landscape of world commodity markets and production has undergone substantial structural changes over recent decades, at both the global and national levels. At the global level, heightened price volatility over time has led to a rapid expansion of derivatives markets across commodities, as demand for riskhedging instruments has intensified. The rapid growth of derivatives markets has subsequently attracted new players to the trading floors, resulting in a radical change in the structures of trading on commodity markets. In particular, 2002 saw a huge increase in trading in commodity derivatives associated with the launch of numerous new commodity hedge funds and increasing interest from global institutional and private investors, who have increasingly sought to hold a number of primary commodities as part of their asset portfolio holdings. The rise in trading activities in derivatives markets by private agents not engaged in the trade of physical commodities has resulted in a loosening of the relationship between derivatives markets and physical markets. The growing interlinked activities between commodity and financial markets by portfolio investors could manifest itself in important changes in commodity price dynamics over the short term, or even the medium term. At least over the short term, prices have become, in some cases, less reflective of the actual supply and demand dynamics of physical commodities. Furthermore, over recent decades the fundamental demand–supply relationships in commodity markets have experienced significant changes due to intensifying demand for commodities (for example, oil and metals, as well as agricultural commodities) from fast growing emerging economies such as China and India. While demand for many mineral commodities increased in response to the needs for raw materials in their drive for industrialization and physical infrastructure building, the rapid rise in per capita income in


Commodity Market Structures, Evolving Governance and Policy Issues



these emerging market economies has also transformed their consumption patterns. Given this, many argued, before the precipitous fall in commodity prices after summer 2008 primary commodities, as a whole, were in a super-price cycle of longer duration. This had inevitably raised issues related to economic management of the commodity boom by means of fine-tuning macroeconomic policies, including exchange rate policies over commodity price cycles. The impact of climate change has also started to filter through into commodity markets. The relative composition between cash crops and food crops might change considerably in years to come, as already witnessed in the significant shift in crops to bio-fuel crops at the expense of food crops. This has led to the recent worldwide increases in prices of staple foods, which has given rise to increasing fear over food security for the poor. In addition, the process of market consolidation has been intensifying along commodity supply chains over recent decades. Today, trans-national corporations (TNCs) are able to dictate the patterns of international trade to a significant degree by way of intra-firm trade under their globally integrated production and marketing strategies. TNCs’ activities are strategically organized and integrated, either horizontally or vertically. This is reflected in their dominance in commodity value chains. In agricultural commodity production and marketing, there are considerable asymmetries in market power and access to information, technology and marketing know-how between TNCs, on the one hand, and local entrepreneurs, farmers and traders in developing countries, on the other. This has often resulted in a hugely skewed distribution of gains from trade. Under this condition, the benefits of improvements in productivity are often largely appropriated by the TNCs and global supermarket chains, instead of going to fragmented producers and farmers. In mineral commodities, many mineral concerns in developing countries were privatized in the 1990s under the auspices of the World Bank and the International Monetary Fund (IMF) (for example, copper mines in Zambia). Depending on how privatization was negotiated and implemented, a large portion of the mineral rents from the recent commodity boom might not be guaranteed to be used for the economic development of producer countries. Finally, significant changes have taken place in institutional environments facing commodity producers in developing countries. At the national level, the waves of domestic market and trade liberalization/deregulation implemented through structural adjustment programmes since the mid-1980s transformed arrangements in the production and marketing of agricultural commodities, including cash crops such as cotton and coffee. Most state run marketing boards and income stabilization schemes for producers were dismantled, meaning that stable and guaranteed access to provision of necessary inputs such as seeds or fertiliser and new technology is no longer available to farmers. The institutional vacuum thus created is supposed to be filled by


66


Machiko Nissanke

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private agents and traders. While producers have been increasingly exposed to the vagaries of the international market (that is, price volatility transmitted from international markets), they are not adequately equipped to deal with price risks and other marketing risks. Hedging instruments are costly and imperfect for poor farmers in developing countries for their risk management. The objectives of this chapter are twofold:

production • To discuss new challenges, opportunities and development policy issues

in the light of these changes. Towards these objectives, the next section presents the new landscape of commodity markets and production, both at the global and domestic levels. This section presents a synthesis of the recently conducted case studies on cotton and coffee markets and production in Uganda and Tanzania. The subsequent section discusses domestic policy issues related to the macroeconomic management of resource based low-income economies over commodity price cycles, drawing on a case study on the Zambian copper boom. The closing section offers concluding remarks by presenting the summary findings, and discussing the policy implications and new challenges facing policy-makers of the global community and national governments in order to address commodity related developmental issues.

Changing landscapes of primary commodity markets and production Changes in world market structures for commodities Viewed as perfectly competitive markets where trade takes place for homogenous goods, commodity prices are seen to be determined simply by the supply–demand relationships with inventory adjustments in conventional economic analysis. Challenging such an approach to the analysis of commodity markets, Maizels (1984) emphasized the need to analyze the market structure in depth – that is, the institutional organization of markets. He proposed an alternative institutional approach to commodity market analysis, by showing how differences in market structure influence the process of price formation and the distribution of price changes – and, hence, the division of benefit. Contrary to the common belief of perfectly competitive commodity markets, he showed that oligopsonistic and oligopolistic market structures are fairly typical in a number of commodities and, consequently, the relative bargaining power of actors in markets has been shifting in favour of TNCs. Hence, he argued that an analysis of commodity markets should not be confined simply to that of the supply–demand relationships and their effect


• To examine the emerging landscape of commodity markets and



on prices, but should embrace a detailed analysis of underlying relationships characterizing commodity production, trade and marketing of a given commodity. He called for a thorough analysis into how changing market structures ‘influence the price outcome, and the division of benefit between developed and developing countries’ (Maizels 1984: 36). In what follows in this sub-section, as a case study we discuss how the processes of price formation and mechanisms of distribution of price changes have been affected by the changing landscape of commodity markets and production in different nodes of the commodity chain in relation to coffee markets. It discusses: • The effects of rapidly expanding derivatives markets on price formation

and volatility • The changing pattern of distribution of price changes in commodity trade

along the vertical chain • The effects that price changes have – filtering through institutional

changes at the domestic level – (drawing on case studies of coffee and cotton) on smallholder producers of agricultural commodities. The effects of derivatives markets on commodity price dynamics Futures markets with sufficient liquidity are indispensable for hedging price risks for those involved in physical commodity trading in the presence of great uncertainty over market conditions – in particular, if prices in futures markets can correctly reflect collective expectations among physical traders with regard to future fundamentals and market conditions. In turn, changes in futures prices can impact on spot prices and demand and supply, as well as on the level of stock held. In this context of two-way causality, however, a question arises as to whether futures markets operate as an efficient mechanism for price information and discovery in the presence of powerful trading conglomerate TNCs who are in a position to influence market prices through their operations in both on the spot and futures markets (Maizels 1994). The issue of the influence of futures markets has become more acute over the last few decades. Derivatives markets have grown rapidly with the entry of a large number of portfolio investors who have little interest in physical trading, who use increasingly opaque contracts and sophisticated instruments, and who ride on price volatility in order to make short-term profits. Indeed, serious concerns have been raised over whether the enormous expansion of derivatives markets in relation to physical trading might have exacerbated price instability in organized commodity markets, far beyond the point that could be justified by shifts in fundamental demand–supply relationships. As Pindyke (2004) warns, price volatility might be exacerbated by the entry and presence of speculative noise trading or the prevalence herd behaviour in futures markets more than warranted by market fundamentals in physical trading.


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0.7 0.6 0.5 0.4 0.3 0.2 0.1

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Figure 4.1 Ratio of non-commercial open interest to total open interest in Coffee C contracts on the New York Coffee Exchange Source: Newman (2008a), compiled from data made available by US Commodity Futures Trading Commission (CFTC).

Newman (2008a) tests this hypothesis empirically in the case of the coffee markets on the New York Board of Trade (NYBOT).1 Exploiting the availability of high-frequency (daily) data on NYBOT coffee futures exchanges, reported separately for commercial traders (who are engaged in physical commodity trade) and non-commercial traders (who do not participate in physical trade),2 she shows that the ratio of non-commercial open interest to total open interest in Coffee C on the NYBOT shows a very high volatility, with an upward trend for the last two decades since 1986. The ratio increased from the calibrating range of 10–30 per cent on average in the 1980s to 40–70 per cent, on average, in the present decade (Figure 4.1). The very large variations in the ratio confirm that non-commercial traders do enter and leave the NYBOT exchanges as their preferred composition of portfolio asset holding shifts. Newman (2008b) further reports the wide use of ‘price-to-be-fixed contracts’ by international traders and roasters, which shows the very close relationship between futures prices and the price at which physical coffee is exchanged at the international trader level.3 Newman conducts a number of quantitative analyses (Newman 2008a) to see how the increases in activities by non-commercial trades in futures markets on the NYBOT coffee exchanges could affect prices in such a way as to loosen the relationship between prices and actual physical supply and demand for Arabica coffee.


Ratio of non-commercial OI to total OI

0.8



Her first test on the time-series data on the total volume of trading on the NYBOT exchange for 1973–2006 reveals structural breaks in 1994 and 2000.4 The earlier break in 1994 is identified as the beginning of a sizeable influx of money into the commodity markets from large hedge funds that started allocating a part of their portfolio to commodities (World Bank 1997). The second break, in early 2000, is associated with the dot.com bubble burst (when investors suffered poor returns from both equity and bond markets) and the start of the great Bull Run on commodities markets in 2002, which was sustained into 2008. This is the period of the launch and growth in commodity index funds. Her second test is to examine structural breaks in the relationship between coffee prices and world supply and demand, with use of the annual data of average International Coffee Organization composite indicator prices for green coffee for the period 1978–2006. After identifying a structural break in the data in 1994, separate regressions were run to see whether the coefficients of the price model are significantly different for the sub-periods 1978–1994 and 1994–2006. They indicate a loosening in the relationship between prices and stocks – hence, physical supply and demand – for 1994–2006. Her third test is to examine the relationship between the monthly volatility index of futures prices and the trading activities in futures markets of the NYBOT for the period 1972–2006.5 Her statistical test finds two breaks, in April 1994 and October 2002. The first break led to the period of heightened price volatility induced by the increased volume on futures markets as a result of the massive inflow of funds from hedge funds in 1993/4 discussed previously. These hedge funds were typically engaged in selling short by betting on price falls in the market and, thus, profited from the price trends prevailing for that sub-period. They were after higher-than-marketfollowing returns (alpha) over the short term, moving quickly into and out of the market, leading to increases in price volatility. However, the second break has not led to a higher volatility on the monthly basis – at least, up to the end of 2006. After experiencing falling returns on equity and bond markets since the burst of the dot.com bubble, many investors sought out alternative investment vehicles in commodity markets. The character of commodity markets (with prices that move in the opposite direction to equities and bonds, and in line with inflation) led to an inflow of funds seeking an inflation hedge, as well as looking for alternatives to bonds and equities. In particular, institutional investors with a longer-term horizon, such as pension funds, moved into commodity markets, pursuing a collateralized long futures position with a view to profiting from long-run price increases rather than trading on short-run volatility on commodity exchanges (Newman 2008a). Therefore, the difference between the two sub-periods – found in the relationship between the price volatility and the trading volume on futures markets – appears to be explained by the


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underlying price trends, as well as the associated changes in trading strategies pursued by financial investors on commodity exchanges.

As Maizels (1984) noted, how the highly volatile prices are eventually transmitted to the producers and economies of producing countries depends critically on evolving market structures. He had already suggested in the early 1980s that many actors in commodity producing countries had become marginalized and isolated with the withdrawal of institutional support from governments and the subsequent loss of their bargaining power, as vertically integrated TNCs had consolidated their positions over many operations (production, processing and marketing) in a commodity chain. He noted: where markets for commodities exported by developing countries are dominated by TNC oligopsony structures, there tend to be two separate, though interrelated, sub-markets. There is, first, the market in developing producing countries, where a few large TNCs – often the large trading conglomerates – can exercise their market dominance by reducing the producer price to little more than production costs. Then, second, there is the final market in developed countries, where the same TNCs can often act as oligopolists. (Maizels 1984: 31) Indeed, over the last two decades the process of market consolidation has been intensifying along commodity supply chains. As globalization has proceeded at an accelerated pace, the dominance of TNCs has continued to grow, enhancing their bargaining power over other actors. Today, TNCs are able to dictate, to a significant degree, the patterns of international trade through intra-firm trade under their globally integrated production and marketing strategies. In agricultural commodity production and marketing, there are considerable asymmetries in market power and access to information, technology and marketing know-how between TNCs, on the one hand, and local entrepreneurs, farmers and traders in developing countries, on the other. Ironically, for small-scale producers and their governments, commodity markets have become fragmented as TNCs have hastened the integration process of their operation globally. This parallel process of fragmentation and integration has often resulted in a hugely skewed distribution of gains from commodity trade. Under the prevailing market structures TNCs and global supermarket chains can largely appropriate the potential benefits of productivity improvement, instead of these benefits going to fragmented producers and farmers. Global value chain (GVC) analysis can provide a useful framework for examining these changing governance and market structures, institutional mechanisms for price transmission and the political economy of distribution of surplus, rents and other benefits along commodity supply chains.


Evolving global commodity chains and the price transmission process



In particular, tracing each node in commodity trade vertically, the framework could show how traders and actors manage price risks arising from high volatility with asymmetric access to information and technology at different points in a supply chain, and also identify winners and losers under evolving market structures (see, for example, Kaplinsky 2000; Kaplinsky and Fitter 2001; Gibbon 2003; Gibbon and Ponte 2005; Kaplinsky and Kimmis 2006, among others). According to these recent GVC studies, the governance structures of primary commodity value chains have become increasingly buyer driven, with a shift in the distribution of value skewed in favour of consuming countries (Humphrey and Schmitz 2000; Kaplinsky 2000; Gibbon and Ponte 2005; Kaplinsky and Kimmis 2006). The widening gap between producer and retail prices for a composite bundle of commodities found by Morisset (1998) can indicate how much rents can be created and how skewed rents distribution is in many commodity chains. Further, given the increased price volatility with the collapse of ICAs discussed earlier, actors in commodity chains are also exposed to greater price risk, if their interests as buyer or seller are not effectively hedged through futures markets or forward contracts. Hence, their market positions in international commodity trade depend critically on their ability to use riskhedging instruments or other market based mechanisms. However, market based hedging instruments do not provide them with a perfect risk management tool. Players in derivatives markets are heterogeneous, including portfolio investors who could act as destabilizing noise traders as previously discussed. Hence, prices on futures markets cannot often reflect the fundamental demand–supply conditions and, hence, act as a predictor of future spot prices, which ensures the basis (that is, the difference between future and spot prices) would narrow as contracts reach maturity.6 The greater divergence between spot prices and futures prices makes it harder to use for hedging the risk of stockholding, as losses in one market cannot be effectively offset by gains in the other. Furthermore, the use of hedging instruments is not costless, involving large resources to cover high transaction costs in accessing up-to-date market information and keeping close contact with the development of financial and other commodity markets. It demands keeping high levels of liquidity in order to be able to respond to sudden margin calls. The effective hedging periods also tend to be short, while organized derivatives markets such as futures and options only cater for standardized commodities without taking into account differences in quality in the commodities traded. Against this background, Newman (2008b) examines the price transmission mechanisms along coffee supply chains, and how different actors are engaged in price risk management under changing market structures within a broad framework of the GVC analysis. Her fieldwork confirms significant restructuring of the international coffee system over the last two decades,


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noted by Daviron and Ponte (2006). Market consolidation by very large multinational commodity trading conglomerates has intensified in coffee trade globally. In 2006, two top companies controlled over 30 per cent of world trade in green coffee, while the top five companies accounted for a market share of over 55 per cent. The final processing stage of coffee – roasting and blending – was also dominated by the top five coffee roasting and/or manufacturing companies, which together accounted for just under 50 per cent of the world market. For price risk management, the two largest green coffee trading houses have their own in-house options and futures brokerages, as well as large coffee research departments. Their size and financial resources, together with their diversification across a number of commodities, have allowed them not only to protect their risk exposure in an increasingly volatile market environment, but also to derive profit from speculating on daily price movements. In deciding on their market placements, they are in a position to take into account portfolio investors’ activities on derivatives markets, in addition to their specialized knowledge of physical supply and demand fundamentals affecting coffee prices. Smaller single-commodity trading firms have either been forced out of the market or have entered into niche markets, trading in speciality coffees that can be sold with some premiums or in targeted markets.7 Such a strategy allows them to survive without being affected too much by daily volatile price movements on the New York or London markets (Newman 2008b). Developmental impacts of changing market structures on producers and producing countries Significant changes have taken place in institutional environments not only in the international trading places, but also at the national level, greatly affecting the livelihoods of smallholder producers. The waves of domestic market and trade liberalization implemented since the mid-1980s transformed arrangements in the production and marketing of agricultural commodities, including cash crops such as cotton and coffee. Most of the state run marketing boards were dismantled or downsized, and price stabilization funds or mechanisms ceased to exist. Domestic commodity traders and producers are now exposed to greater price risks as highly volatile prices are transmitted from the downstream commodity chain through the international marketing system to small traders and producers operating in the upstream chain.8 Facing this reality, the use of hedging instruments such as futures and options has been encouraged as an effective price risk management mechanism for traders and farmers in producing countries by international financial institutions and other organizations. The World Bank, together with other UN agencies, set up the International Task Force on Commodity Risk Management (ITFCRM) to promote a wide application of market based risk-hedging management by actors


Machiko Nissanke



in upstream commodity chains in establishing local commodity exchanges in producing countries. However, issues such as the prohibitive financial cost, skewed access to information and high technical barriers for small actors, as well as creating an adequate regulatory oversight agency required for liquid functioning markets, would make it hard to popularize these risk-hedging mechanisms as universally applicable instruments. Besides, as previously discussed, these market based instruments are not perfect in reducing and hedging price risks. In addition, with the withdrawal of institutional support from governments, stable and guaranteed access to the provision of necessary inputs such as seeds, fertiliser and new technology are no longer available to farmers. The institutional vacuum thus created is supposed to be filled by private agents and traders. It has often resulted in geographical fragmentation of marketing activities, and placed smallholders in a weaker position in relation to private traders in both inputs provisions and the marketing of their produce in upstream commodity chains. In what follows in this sub-section, I first examine how traders and agents operating in producing countries cope with volatile commodity prices transmitted down to upstream coffee chain actors in Uganda and Tanzania. I then discuss how the withdrawal of state support has created new institutional environments for producers, affecting their productivity and livelihoods and, hence, the export performance of the coffee and cotton sectors in Tanzania.

Evolving market structures and price risk management in the upstream coffee chain in Uganda and Tanzania Coffee production in Uganda and Tanzania is dominated by smallholder production, with a small estate sector present in Tanzania. Drawing on Ponte (2001), Newman (2008b) describes the evolution of domestic coffee marketing systems over the last two decades in Uganda and Tanzania. In the pre-liberalization period, Uganda operated a dual marketing system with both private and cooperative channels, but controlled all exports under the Coffee Marketing Board. Under this system, both cooperatives and private local traders purchased at fixed producer prices and fixed margins. Hence, price risks were borne by the central marketing board. In Tanzania, marketing was conducted through the cooperative marketing system, and all exports went through the state run coffee auction. Thus, price risk was essentially borne by cooperatives but shared out amongst members through the payment system to smooth out farmers’ income.9 Furthermore, it should be recalled that, prior to 1989, the International Coffee Agreement was in operation, with the objective of ensuring relatively stable export prices; this allowed relatively stable farm-gate prices in both Uganda and Tanzania. After the sweeping liberalization of the coffee market system in 1990/1, Uganda has become the most fully liberalized coffee market in East Africa,


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while the Ugandan Coffee Development Authority (UCDA) replaced the marketing board with a mandate to promote and oversee the development of the coffee industry through research, quality assurance and improved marketing. The UCDA provides price information to market actors, as well as an indicative price for dry cherry. After the initial spurt in the number of export companies registered, the export sector has increasingly concentrated on the top five companies (all subsidiaries of large MNC trading houses), which have taken over 70 per cent of the market share in recent years. In contrast, Tanzania has retained the auction system following liberalization in 1994/5, with the cooperative sector remaining relatively strong in the Northern coffee growing regions of Kilimanjaro and Kagera. Further, licensing legislation was enacted in 2003 to eliminate captive coffee by preventing any single market actor from purchasing coffee locally and at the auction simultaneously.10 However, the cooperative union’s share in total coffee exports fell from 83 per cent in 1994/5 to 8–9 per cent in 2006/7, with the total collapse of cooperative unions in the Southern coffee growing region. While the market shares of the top five exporters recorded a smaller increase from 60 per cent in 1994/5 to 68 per cent in 2006/7, the top five coffee exporters are all subsidiaries of large MNC trading houses today. Against this background of market evolution, Newman (2008b) shows how heterogeneous market actors in Ugandan and Tanzania coffee chains differ in their ability to manage price risks.11 In Uganda, international exporters with a vertically integrated operation in coffee hedge their risks by conducting all transactions on a ‘price-to-be-fixed’ contract with the use of hedging instruments in New York and London, leading to an opportunity to derive profits from speculation, as discussed earlier. Hence, they are in a position to maintain purchasing prices throughout a day and for longer periods, if world price fluctuations are not too severe to shield local traders from intraday price fluctuations. However, buying and selling coffee on the spot, local traders are still exposed to inter-day or weekly swings in the purchasing price of exporters in Kampala. To protect their interests, local traders, in turn, purchase coffee beans at stable but low prices from producers in order to ensure a large margin. In this way, producers are not exposed to short-run price volatilities but are, however, offered consistently very low farm-gate prices instead.12 Thus, coffee production in Uganda has been falling since 1997, despite increasing world coffee prices. In Tanzania, in the regions where a cooperative marketing chain remains strong, smallholder producers organize themselves into primary societies at the village level, which are, in turn, organized into a regional cooperative union. Information on prices and production is collated at the union level and disseminated to farmers through the primary societies. In the regions where the cooperative unions were dismantled, some of producers formed farmers’ group alliances. The payment system of the pre-liberalization cooperative system remains as before, allowing individual farmers to smooth


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income within the season. The majority of coffee exports go through the auction house in Moshi, where exporters purchase graded and bagged green coffee. Less than 20 per cent of green coffee is exported directly by farmers’ groups or estates, though cooperative unions or other farmers and farmers’ groups can also act as exporters, purchasing the coffee from the auction for export. The coffee market at the auction level is highly differentiated according to the grades and quality of the coffee. Thus, licensed buyers at the coffee auction include private export companies (dominated by subsidiaries of MNC trading companies) and cooperative unions. The larger export companies deal in the bulk trade, securing large volumes of standard qualities of mild arabicas and robustas. They purchase coffee in order to fulfil their forward contracts, made at a differential on a price-to-be-fixed contract. Hence, the New York and London prices determine the price at which the exporter will purchase bulk grades at the auction. The smaller export companies tend to deal in smaller volumes of speciality grade coffees. None of the three cooperative unions operating in the coffee auction use hedging instruments but, instead, prefer to secure stable prices at premiums through participation in niche and speciality markets, most notably the Fair Trade scheme. As exporters, they sell on forward contracts and some ‘back to back sales’ in order to limit their exposure to price fluctuations. Kilicafe is currently the only farmers’ organization that has used options in the past as a risk management strategy, but only a portion of coffee transactions are hedged in this way (Newman 2008b). Newman (2008b) also notes that, while world coffee prices are transmitted through the auction to local marketing actors, very short-term movements are mitigated by the fact that the auction takes place once a week during the selling season. Weekly price fluctuations are nonetheless shared out amongst individuals belonging to a primary society and farmers. However, as observed in Uganda, coffee production in Tanzania has also been falling during the period of increasing world prices. This indicates the considerably weakened coffee sector in Tanzania with a declining production capacity over the past two decades, to which we now turn our analysis.

Changing institutional environments for coffee and cotton farmers, and their consequences in Tanzania


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Bargawi (2008a) examines how some critical institutional gaps have emerged following liberalization of cotton and coffee sectors, and how the current ad hoc and piecemeal institutional responses to these gaps left by the state in supporting smallholders have contributed to the poor performance of production and exports of these two important cash crops in Tanzania.13 Indeed, many poor cotton and coffee growers are left with very little institutional support in all vital areas of service provisions; these include marketing and processing arrangements, input provisions, information and extension


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services, and access to new technology and dissemination of R&D activities by local institutions.14 Drawing on her own recent fieldwork in six villages in the cotton growing Mwanza and Shinyanga regions and coffee growing Kilimanjaro regions, she discusses the critical institutional vacuum engendered in each of these areas by the complex and uneven process of replacing and transforming existing institutions in a historical context of social and economic dynamics in cash-crop growing villages. With regard to input provisions, prior to liberalization in the early 1990s cooperative unions were in charge of subsidized input provision through village primary societies as an integrated marketing system of input provision and output purchase. With liberalization, fertilizer subsidies were gradually lowered from 70 per cent in 1990/1 to zero in 1994/5 and producers in the mid-1990s were, for the first time, at the mercy of local open-market input prices for fertilizers and pesticides. Since then, the collapse of cooperative unions in cotton growing or the weakened cooperatives surviving in coffee growing has left smallholders with little reliable supply at reasonable costs of vital inputs such as seeds, fertilizer or pesticides on a sustainable basis. This has probably had the most devastating effect in sustaining the production of both cotton and coffee. The establishment of the Cotton Development Fund (CDF) in 2000 and the coffee voucher system were attempts at addressing this critical issue on the basis of a passbook system for cotton or a voucher system for coffee, with entitlement accorded to producers deriving from the amount of cotton or coffee sold in the previous season. However, the CDF faces many operational problems in reaching out to poor farmers. The fieldwork carried out by Bargawi reveals that access to subsidized inputs administered by CDF is highly uneven, both within and between villages. As a tri-partite provision system – involving farmers, ginners and government – it is subject to the potential exploitation of poor farmers by ginners with an incorrect recording in the passbooks. Producers are also not properly informed about the distribution mechanisms used, as well as benefits. The coffee voucher scheme collapsed soon after its introduction as a result of the extortionate cost of inputs for most producers, as well as very few shops stocking coffee related inputs. Consequently, producers in the case study villages have been forced to access inputs on the free markets, and most of them stopped applying any inputs due to the large increase in input costs. In purchasing and processing arrangements, cooperative unions lost their monopsony purchasing power at the village level after the liberalization measures came into force in the early 1990s. Under the liberalized system, producers were initially able to obtain subsidized inputs from the cooperatives, but then sold their crop to private buyers who offered higher cotton and coffee prices. This desertion by producers at the point of crop purchase left many cooperative societies with vast debts, and hindered their ability to provide an input service.


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Faced with the resulting financial crisis, cooperative unions in the cotton sector ceased to function in purchasing from producers, as well as ginning and exporting cotton. The vacuum has been left to be filled entirely by private traders and ginners. The village case studies show that no thriving markets have emerged, with private traders and ginners competing against each other. In reality, producers have become spatially fragmented and isolated, both between and within villages. The poorest producers in some areas have found it increasingly difficult to access any market or ginners for their crop, either relying, instead, on illegal marketing channels or abandoning cotton production altogether and turning to alternative crops. In contrast, several coffee cooperative unions have survived to date in the Kilimanjaro region, though with many fewer resources. Hence, coffee growers have a choice as to whether they sell to these cooperative unions or to private traders. Further, as previously discussed, coffee exports are channelled mainly through the centralized auction system, except speciality coffee. This has ensured that most producers have a buyer of last (or, in this case, often first) resort within their villages. However, again, markets are far from competitive as market access is uneven among producers. Smallholders’ decisions are frequently driven by necessity rather than choice. There have been equally radical changes in dissemination of information on marketing, access to new technology, and extension services. Before liberalization, technical upgrading through improved varieties of cotton seeds or more resistant strains of coffee trees were assisted by crop-specific research institutes that conducted research and development both centrally and at regional and district levels. These institutions also provided short training courses on crop management. Producers could rely on the cooperative and primary society structures for information regarding prices and markets for cotton and coffee. With the advent of liberalization, this system for information and technical knowledge provision has not survived. Research institutions were overhauled and downsized. Coffee research was initially privatized, and later, in 2000, transformed into a non-profit, donor funded research institute, the Tanzania Coffee Research Institute (TACRI), while cotton research was retained in public hands and transformed into a regional research institute, Ukiriguru. Both institutions are under-funded, with a dwindling portion of the national budgets allocated to agricultural research. The coffee cooperative unions, operating with fragile financial resources, are less able to provide producers systematically with timely market information, while, in the case of cotton, cooperative unions ceased to exist altogether. Bargawi (2008a, 2008b) further examines the implications of these gaps in marketing and market supporting institutions for smallholders on prices they receive for cotton and coffee and their distributional consequences. Prior to liberalization, the respective marketing boards set the prices, and producers were guaranteed a fixed pan-territorial and pan-seasonal price through


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the functioning of cooperative unions. With the advent of liberalization, these fixed producer prices for coffee and cotton were removed. For cotton, floor prices were gradually eliminated. While the Tanzania Cotton Board initially tried to maintain an indicative floor price to producers, this was finally abandoned in 2004, when world prices suddenly declined over the season and private ginners refused to pay producers even the basic floor price. For coffee, the continued economic viability and functioning of the cooperative unions, despite competition from private traders, has allowed them to provide producers with a more stable producer price, and their payment system has helped coffee growers to smooth out the income stream, as discussed earlier. Figure 4.2 and Figure 4.3, respectively show the development of cotton prices and coffee prices since liberalization in US$s. The graphs in these figures highlight the general erratic nature of cotton prices in contrast to the steady decline and more recent rise of coffee prices, but they also show that official producer prices have tended to follow export and world prices relatively closely for both crops. According to these data at the national level, price fluctuations in US$s are transmitted from the world markets to producers, and producers tend to receive about 40–50 per cent of export prices. However, since the pan-territorial or pan-seasonal price setting, marketing systems have been totally dismantled for cotton. In her fieldwork, Bargawi (2008b) observed the uneven pricing of cotton in different geographical areas and between producers depending on the degree of competition among ginners in a particular location. Furthermore, poorer farmers are disadvantaged in price fluctuations within the season. On the other hand, for the coffee sector, because the payment system administered by the cooperative union in Kilimanjaro remained this has allowed some harmonization of prices across the region, though there are some differences in prices depending on the degree of competition between the cooperative union and private traders. Within the villages, however, for both cotton and coffee, the wealthiest producers with access to storage, transport, niche markets, information and close links to the village elite are able to garner the highest prices and promptest payment compared with the poorest, cash-deprived producers. Hence, Bargawi (2008a) concludes that the most crucial lacunas were the exposure of producers to their weak bargaining positions in relation to ginners, leading to their receipt of depressed prices, and erratic and geographically skewed purchasing markets and limited extension services for cotton. For coffee, the main problems are related to input provision, distribution failures and a lack of systematic extension service provision, as well as deterioration in the quality of coffee purchased by private traders, which has had a detrimental effect on the reputation of coffee exported from Tanzania.


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World price in US$ per kg Export price in US$ per kg Producer price (lint equivalent) in US$ per kg -ginning outturn 0.334 Figure 4.2 Nominal cotton prices in US$ per kg Note: *Bargawi used the following sources: 1 World prices were taken from Cotlook, www.cotlook.com (1990/91-2006/07) A Index price (the A index is an average of the cheapest five types of cotton offered on the European market and is the most frequently quoted international indicator price used by ginners, traders and government agencies in Tanzania); 2 Producer prices are taken from Government of Tanzania, Economic Survey, 2006 (1990/912005/06) and our own survey (2006/07); 3 Export prices are derived from Tanzania Cotton Board (1990/91-2006/07); 4 Exchange rate: international financial statistics, official rate at end of period – national currency per US$. Source: Bargawi (2009): fig. 5.1.*

Managing resource based economies over commodity price cycles


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The economic cycles of natural resource based commodity-dependent developing countries have been dominated by the price movements of their major primary export commodities. The large scale of price movements observed in short-run fluctuations, as well as over medium-term cycles, as discussed in Chapter 3, has naturally had serious policy implications for managing mineral based, commodity-dependent low-income developing countries. External shocks transmitted to the domestic economies through changes in


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4.5 KNCU producer price US$ per kg Auction price US$ per kg Export price US$ per kg

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Figure 4.3 Nominal coffee prices in US$ per kg Note: *Bargawi used the following sources: 1 ICO indicator price for mild Arabica taken from www.ico.org (1990/91-2006/07); 2 Export and auction prices were obtained from the Tanzania Coffee Board; 3 KNCU producer prices were taken from the basic KNCU price offered to producers prior to receipt of final payment; 4 Exchange rate: international financial statistics, official rate at end of period – national currency per US$. Source: Bargawi (2009): fig. 5.2.*

the terms of trade or export demand conditions have been a predominant force in determining the level of domestic aggregate demand and in forming market perceptions. A deterioration in external market conditions for their main export products leads to the slackening of domestic demand, and recession. Improvement in external market conditions induces an upturn in economic activity, both in the private and public sectors, and a boom. Thus, the external balance of these economies is frequently exogenously driven, whereas the internal balance is subordinated to the external one (Nissanke 1993). As Maizels (1992) noted, the business cycle in developed countries is transmitted on an amplified scale to the developing world through the sharp fluctuations in commodity prices and pro-cyclical character of private financial flows. The hypersensitivity to externally originated instability is one of the critical weaknesses of natural resource rich economies, though all economies under globalization, whether manufacture based or service based, cannot escape their exposure to increasingly synchronized global economic cycles, as we witness today. An eventual transformation into more diversified economic


US$

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structures is the real solution to the problems associated with the ‘commodity trap’, which can be overcome only through effective use of natural resource rents in the transition period. Thus, successful economic management over the commodity price cycles, which can reduce the amplitude of oscillations in market forces, are indispensable for the critical intervening period. Yet, the demand management of these economies is very complex, since an externally induced balance of payments crisis, by its own force, leads to a sharp drop in domestic demand. The stabilization policies, adopted primarily to restore external equilibrium in such circumstances, can move the economy further away from internal equilibrium – at least, in the short run. In the light of domestic aggregate demand, these policies can well be pro-cyclical to the direction of both internal and external market forces rather than countercyclical, as they should be (Nissanke 1993). In this context, this section first examines issues related to macroeconomic management of resource based economies over commodity price cycles, with focus on management of the boom phase. It then moves on to examine empirical evidence on the basis of our case study of Zambia’s copper boom. Macroeconomic management of resource based economies over commodity price cycles Commodity boom and Dutch disease While the political economy of rent creation and distribution associated with a natural resource boom – in particular, unproductive rent seeking behaviour by economic agents and permeating corruptions induced by the boom – is extensively discussed in the ‘resource curse’ literature,15 the adverse macroeconomic effects of positive commodity price shocks are deliberated in the Dutch disease literature. The Dutch disease model examines boom induced structural changes that affect the long-term development pattern and potential of resource-dependent economies in terms of the ‘spending’ effects, the ‘resource transfer’ effect, and the ‘monetary effects’.16 The model predicts that the three effects combined, reinforcing each other, can lead to an appreciation of real exchange rates and de-industrialization/de-agriculturalization of the economies experiencing a boom. Thus, it claims that the commodity boom can be a curse.17 However, as argued earlier (Nissanke 1993), the Dutch disease is by no means inevitable; its symptoms are commonly observed because economies tend to run into short-term absorptive capacity bottlenecks at a time of boom induced ‘euphoria’ or when there is a sudden influx of foreign exchange. Intelligent execution of macroeconomic adjustment policies through pertinent fiscal and monetary policies, coupled with effective management of international financial flows and exchange rates over the price cycle, can abate shocks and attenuate market forces, thus limiting overshooting and Dutch disease effects. The policy of ‘time-phasing’ is one key to creating


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a mechanism whereby a sudden increase of income in terms of foreign exchange can be absorbed into the domestic economy gradually, and then utilized effectively over an extended period commensurate with growing absorptive capacity. In short, a policy of de-synchronization of the path of absorption from that of income should be central to macroeconomic adjustments in response to commodity price fluctuations. Hence, the question over inter-temporal optimal allocation of resources becomes an issue of intelligent portfolio management of a whole range of assets (domestic and foreign) and debt instruments in the light of the current and the expected return-risk structure over the commodity price cycle. A country’s net lending position in relation to the rest of the world essentially accounts for the difference between its income and expenditure (absorption) at the time. Mishandling these policies, on the other hand, entails a heavy cost to the economy. It could amplify the effects of external shocks and market forces, thus aggravating Dutch disease and resulting in policy induced overshooting during the boom period. Moreover, such mismanagement in the upward phase of the cycle would require, in turn, an adoption of austere stabilization policies during the contraction period, containing much harsher measures than otherwise. These are known to have deleterious effects on the social fabric. Thus, the cost to the economy of imprudent spending during the boom period could be unexpectedly high if the cost is calculated over one complete price cycle, since the downward adjustment costs could more than offset any benefit derived from the windfalls. Hence, as I argued in Nissanke (1993), it is of vital importance to adopt a strategic approach to the fiscal and financial management of mineral rents over a medium-term price cycle of commodities. This should involve decisions on the inter-temporal portfolio allocation of rents in order to smooth an absorption path, and also on the spending and expenditure patterns of the government as well as private agents – that is, the sectoral allocation between tradables versus non-tradables or domestically produced goods versus imported goods – with a view to avoiding the aggravation of various critical supply bottlenecks. Such a strategic approach is necessary in order to allow sufficient time to build the supply capacity of various sectors, so that an economy’s production possibility frontier could shift outwards along a desired development path for the purpose of transformation into mature and diversified economic structures.


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Exchange rate and monetary policy framework Alongside trade, financial, industrial and other sectoral policies, exchange rate policy has a crucial role to play in this strategic effort. The intra-cycle movement of the real exchange rate should be instrumental in ensuring the competitiveness of a country’s emerging non-traditional economic activities. Exchange rate movements, pro-cyclical to main export product prices – an



appreciation in the upturn and depreciation in the downturn of the cycle – can be detrimental to efforts to diversify. It is in this context that the main findings of the Dutch disease literature bear a critical relevance to policy formation, demonstrating that there is a strong tendency for market forces to give rise to real appreciation and subsequent sectoral shifts during a boom. Economic policies in this period should then be formulated and assessed in the light of this possible effect. Hence, the centrality of the need for a coordinated policy framework to work out appropriate exchange rate management and monetary policy regimes is unquestionable, not only for the purpose of short-run stabilization, but also for avoiding the detrimental long-term effects of a commodity boom on resource-dependent economies (Nissanke 1993). In particular, while flexibility in exchange rates is necessary for the management of economies prone to external shocks, it has to be managed with a view to controlling and reducing volatility and instability in a counter-cyclical manner in order to mitigate pressures of market forces on the exchange rate. In this context, it is pertinent to evaluate the recent proposals for either the inflation target framework for monetary policy under a floating regime or the commodity currency (peg the export price, PEP) regimes for exchange rate management. Globally, the inflation targeting (IT) monetary regime has become very popular for ensuring monetary stability in developed and emerging countries alike. It is supposed to operate under a pure floating, as a nominal anchor is assumed to be provided by a credible institutional commitment to the IT regime, thus supershading the argument for a fixed regime as a nominal anchor (Bernanke and Mishkin 1999; Svensson 1999). Its popularity comes from the position that monetary stability is one of the most important ‘public goods’ to be provided by the state. In principle, it also allows opting for a floating exchange rate regime in the context of the ‘impossible trinity’ hypothesis in a world of free capital mobility. With the full independence of central banks and monetary authorities, the credibility of commitment to the IT regime is to be assured by the institutional arrangements for ensuring transparency, accountability and monetary stability. Given the ‘success’ of the IT regime in many emerging market economies – such as Chile and Colombia – many argue for adoption of the IT regime in low-income countries, including a number of SSA countries – such as Uganda, Zambia and Nigeria. However, fear of floating prevails in those emerging economies with the IT regime. Many of them have an ‘escape clause’ in the IT regime to allow some interventions in foreign exchange markets with a view to preventing disequilibrium from developing in the current account balance. This shows that the real target approach to the exchange rate regime is embedded, to a limited degree, in the IT framework adopted in these countries.18 Further, as Adam et al. (2004) argue, the fear of floating in low-income countries originates from fear of macroeconomic instability on current account shocks. This is in contrast to fear of floating prevailing


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in emerging market economies, stemming from the high pass-through from exchange rate volatility to domestic prices, as well as in the high degree of dollarization in the balance sheets of financial institutions and corporations (Calvo and Reinhart 2002). Many success stories of economic development – such as those found in Korea, Botswana and Chile – are often due to the active use of ‘exchange rate protectionism’, wherein exchange rate policy is regarded as a development tool for attaining a desirable current account position on a sustainable basis by keeping exchange rates at competitive levels to pursue export led growth. Thus, Eichengreen (2006) concludes that the choice of the exchange rate regime should be a function of a country’s economic development strategy, and that the IT regime might subject economies to large swings and shifts in the real exchange rate. Botswana provides a success story of a mineral based commodity-dependent economy, where exchange rates are adjusted over commodity cycles so as to promote the competitiveness of its non-traditional exports and import substitution activities (Masalila and Motshidisi 2003). As an explicit alternative to the IT framework, Frankel (2003, 2006) presents a PEP proposal as an appropriate exchange rate regime for commoditydependent countries, whereby their currencies are pegged to the real price of their main export commodity (hence, it is also referred to as commodity currencies). This means ‘to fix the price of that commodity in terms of domestic currency, or equivalently, set the value of domestic currency in terms of that commodity’ (2006:21), or to stabilize ‘the price of local currency in terms of commodity’ (2006: 22). He suggests that PEP simultaneously delivers a nominal anchor (as promised under a fixed exchange rate regime) and automatic adjustment in the face of commodity price fluctuations on world markets (as promised under a floating regime). This implies adjusting the currency value daily to commodity prices posted on the London or New York market to accommodate terms of trade shocks. Thus, the PEP proposal is equivalent to export price targeting, instead of inflation targeting based on the Consumer Price Index (CPI). He argues the former is better than the latter for avoiding swings in the trade balance and output. However, the PEP might exacerbate domestic inflation when shocks are to import prices – such as oil price increases – rather than to export commodity prices, hence it might aggravate the classic inflation–appreciation trade-off. Thus, a question as to the appropriate index to target might remain unresolved unless a daily movement in terms of trade is feasible to target operationally. However, for many commodity-dependent low-income countries the need for daily intervention might be daunting, in terms of reserve holdings sufficient to make intervention possible in relation to the frequent large price fluctuations observed on many commodity exchanges. The absence of developed liquid money markets might also hamper the effectiveness of intervention in foreign exchange markets. Furthermore, as discussed earlier, commodity prices are much more volatile and exhibit larger fluctuations


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than other goods prices. As a requirement of any pegged system, the index to which the domestic currency is pegged should be stable in order to produce stability in the domestic currency price. To overcome this problem, Frankel (2006) actually proposes to set a target band of commodity prices on a monthly or weekly basis. In any event, future simulation studies are necessary to construct an appropriate composite trade index to be used for targeting for each country before we can gain a deeper understanding of how PEP could work for commoditydependent economies.19 In fact, the PEP proposal in its original form could imply a pro-cyclical exchange rate movement, which is opposite to what is required from a point of view of managing resource based economies over medium-term commodity price cycles. While these questions require future research, the PEP proposal certainly highlights one of the major weaknesses of the currently dominant IT regime in dealing with terms of trade shocks or other supply shocks. When negative shocks to terms of trade originate from import price shocks, the IT regime would tighten monetary policy, leading to a further contraction of the economy, implying pro-cyclical demand management.

The changing landscape of the mining sector and macroeconomic environments and its impact on the outcome of the boom: a case study of Zambia Bova (2008a, 2008b) examines empirically macroeconomic policy issues confronting commodity-dependent economies, using her case study of the recent copper boom in Zambia. She first notes the important changes in the landscape of the mining sector and macroeconomic environment, which have significantly affected the outcome of the copper boom in Zambia. Zambia’s copper industry, which was dominated by the state owned enterprise Zambia Consolidated Copper Mine (ZCCM), went through a sweeping privatization process in the 1990s. It has been split into a number of mining companies owned by TNCs, with the government retaining a small share. So far, up until 2008, these TNCs have been benefiting from very low royalties, export tax and tax on profits. Given this, the contribution of the mining sector to the fiscal budget has been marginal, and foreign exchanges out of export earnings have accrued directly to the market, leaving small scope for intervention for fiscal and monetary policy. Furthermore, as part of the liberalization process of the early 1990s, the country moved from a highly managed exchange rate to a market determined regime, with small interventions only aimed at smoothing high-frequency volatility. It adopted an aggregate monetary target (M3) approach through an intervention in open market operations, exclusively focusing on price stability. Together with a cash-balance rule operated in the 2000s, the strengthening macroeconomic fundamentals have tamed inflation considerably.


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These favourable macroeconomic environments allowed Zambia to receive debt relief of US$3.9 billion under the MDRI and HIPC initiatives in 2005. Foreign capital started flowing back into Zambia again, attracted by the positive macroeconomic environment and the prospects of the copper boom, as well as by high interest rates and the appreciating Kwacha. The combination of increasing exports, debt relief and private capital flows led to a sharp appreciation of the Zambian Kwacha in 2005. Under this new environment, the consequences of the copper boom in Zambia were expected to be different from the standard predictions discussed in the Dutch disease literature. First, the ‘resource transfer’ effect is limited due to the fact that the mining industry is highly factor specific and is located in remote areas. Similarly, the spending effect – which might not be significant because of a non-fully-employed economy – is insignificant, since the privatized mining industry is largely owned by TNCs and most of their profits, rather than being spent domestically, are repatriated because of the way the contracts with them were negotiated. Hence, Bova expects that, in the Zambian copper boom, dynamics on the real exchange rate are ambiguous and difficult to detect in a short run, requiring longer time-series data. Instead, nominal changes are, at present, playing a more relevant role and are definitely more visible. For these reasons, Bova (2008b) focuses her empirical analysis on the monetary phenomenon that has originated from nominal rate appreciation since 2005. In particular, she examines the extent and patterns of the inflation– appreciation trade-off in the management of the Zambian copper boom. She notes that the actual trade-off a country faces in choosing an appropriate exchange rate regime depends on its CPI composition, which can reveal consumers’ spending patterns and consumers’ preferences with respect to imported goods and non-tradable (domestically produced) goods. On the one hand, if food is the main component in the CPI, then the monetary transmission mechanism is rather weak, as the inflation rate measured in CPI is not influenced so much by money supply. It is more determined by food prices, which are in turn driven by supply shocks rather than demand factors. Thus, the inflationary effect under the fixed regime is weaker than the Dutch disease model implies. On the other hand, if the CPI has a large import component, then appreciation will have a stronger deflationary effect since imported goods become cheaper, provided that local retailers of imported goods pass gains in domestic currency from appreciation to consumers. Then, the link between nominal and real appreciation might become weaker.20 To illustrate the trade-off, Bova examines, first, the consequences of the current exchange rate framework on the performance of Zambia’s nontraditional exports. She shows the detrimental effects of the appreciation of the Kwacha in 2005 on the production of Zambia’s key agricultural export commodities – such as cotton, tobacco, coffee and horticultural products, which plummeted in the crop-year 2006. This could have had a major effect


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on agricultural employment, including the exacerbation of rural poverty, as these sectors are the largest sectors in terms of employment, with more than 400,000 workers (as opposed to 60,000 in the mining sector). Bova further analyzes the impact of the appreciation of the Kwacha on inflation, in both the short run and the long run under alternative exchange rate regimes, by means of simulation exercises using a cointegrated VAR estimation technique. She estimates the impact on food and non-food inflation separately. She reports the estimation of non-food inflation, which detects the existence of a monetary transmission mechanism in both the short run and the long run. Bova’s analysis of food inflation, however, indicates a larger exchange rate transmission mechanism, suggesting that a 1 per cent appreciation in the Kwacha might reduce food prices by 8 per cent, resulting from large food imports as well as the high dependence of food production on imported fertilizers and chemicals. She suggests the need for long-term policy to achieve food self-sufficiency and compensatory schemes for the availability of cheaper input prices for agricultural production by way of more refined and differentiated exchange rates being applied to these specific bottlenecks. Generally, Bova (2008a) suggests more intensive intervention and management of exchange rates, oriented towards strategic development objectives, including competitiveness and profitability of non-traditional exports, allowing for required long-term changes in economic structures and fundamentals. In order to place the Zambian experience in a comparative perspective, Bova (2009) examines the experiences and effects of the copper boom in Chile. She detects significant differences in the policy environments as well as the effects of the boom between the two countries. First, Chile adopted a structural budget mechanism in 2001: according to this rule-based mechanism, every year the Ministry of Finance calculates a potential (structural) budget with regard to the output gap and to the medium-term forecast of copper prices. Then, expenditure is calculated with respect to this structural budget so as to leave a 1 per cent surplus every year. As a result, since 2001 the country has accumulated large surpluses. The surplus is then channelled to the Economic and Social Fund and to the Pension Reserve Fund, which are placed in a sovereign fund offshore. The Central Bank can then recapitalize the assets every five years (Bova 2009). This measure allows for the saving of revenues for future downturns in the copper price. Thus, in order to overcome the short-term constraints on absorptive capacity with repercussions on the extent of appreciation, Chile deliberately opted to save the windfall accrued to the public sector and delay spending for the future. Second, on exchange rate management and monetary policy, while Chile abandoned the band regime and opted for the inflation target framework, it incorporates an escape clause for possible intervention in the light of development in the current account balance.


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200 180

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80 60 40 20 2000m01 2000m05 2000m09 2001m01 2001m05 2001m09 2002m01 2002m05 2002m09 2003m01 2003m05 2003m09 2004m01 2004m05 2004m09 2005m01 2005m05 2005m09 2006m01 2006m05 2006m09 2007m01 2007m05 2007m09 2008m01

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Figure 4.4 Real effective exchange rate Note: Real rate is calculated so that that an upward movement means an appreciation. Source: Bova (2009a), compiled from IMF, International Financial Statistics.

Critically, there are a number of important implications for the future economic prospects of the two countries stemming from how mineral rents are distributed between domestic stakeholders and TNC conglomerates, and how they are used and managed for economic development. In this context, Bova (2009a) notes that, in contrast to the Zambian privatization experiences of ZCCM, through the privatization process Chile negotiated to retain the government’s share of 40 per cent of the assets of its previously state owned copper mining company, Codelco, as well as to tax the remaining share at a fair rate. Further, a new taxation regime for the mines was approved and enacted in 2005. This has largely contributed to the accumulation of fiscal surpluses, both in absolute terms and as a percentage of GDP, since beginning of the copper boom in 2003. The key policy difference noted above has had a major implication for exchange rate movements. In the movements of the nominal rate, the Peso started appreciating in 2003 with a somewhat steady trend, while the Kwacha appreciated sharply in 2005 and then depreciated again in 2006. As shown in (Figure 4.4), in real effective rates, while the Chilean index was steadily depreciating during the boom years, shielding the economy from the shock, the Zambian Kwacha sharply appreciated, without any major intervention by the Bank of Zambia, in line with the monetary framework under adoption.


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The Chilean experience shows how state ownership can, in fact, allow saving responses to fluctuations in the commodity price. When export receipts are saved, the country can avoid wasting the inflow in unproductive investments; also, it can avoid the possible negative impact on the country’s competitiveness that can result from the spending effect, as well as a currency appreciation. Moreover, saving the inflow can avoid inflation under a managed exchange rate regime, since the accumulation of reserves will not need to be monetized. Furthermore, for long-term stabilization issues, saving in funds has proven to be a crucial tool for de-linking the economies from the commodity price cycle.

Conclusion: policy implications and challenges Noting the intensified price volatility across a number of commodities, we suggested in Chapter 3 that this might be closely linked to the rapid growth of commodity derivatives markets. Indeed, trading activities in world commodity markets have undergone some fundamental changes as the links between activities in commodity and financial markets have been further intensified over the last two decades. In this context, I examined how processes of price formation and mechanisms of distribution of price changes have been affected by the changing landscape of commodity markets and production at different nodes of the commodity chain, taking the coffee markets as a case study. First, we discussed the effects of rapidly expanding derivatives markets on price formation and volatility in coffee markets. This was followed by an examination of the changing pattern of distribution of price changes in commodity trade along the vertical chain. In particular, I presented our empirical analysis to show how traders and agents operating in producing countries cope with volatile commodity prices transmitted to upstream coffee chain actors in Uganda and Tanzania. Finally, I discussed how the withdrawal of state support has created new institutional environments for producers, affecting their productivity and livelihoods and, hence, the export performance of the coffee and cotton sectors in Tanzania. I showed how the institutional vacuum thus created, which was supposed to be filled by private agents and traders, has often resulted in geographical fragmentation of marketing activities, and has placed smallholders in a weaker position in regard to dealing with private traders in both inputs provisions and marketing of their produce in upstream commodity chains. I then turned our attention to issues related to macroeconomic management of resource based economies over commodity price cycles, focusing on management of the boom phase in light of the recent phase of price cycles for many commodities. After introducing the Dutch disease model, I argued that the Dutch disease symptoms are commonly observed because economies tend to run into short-term absorptive capacity bottlenecks at times of boom


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induced ‘euphoria’, or in the event of a sudden influx of foreign exchange. We suggested that the intelligent execution of counter-cyclical macroeconomic adjustment policies through pertinent fiscal and monetary policies, coupled with effective management of international financial flows and exchange rates over the price cycles, can abate shocks and attenuate market forces, thus limiting overshooting and Dutch disease effects. Given the centrality of the need for a coordinated policy framework to work out the appropriate exchange rate management and monetary policy regimes, I evaluated the recent proposals for the inflation target framework for monetary policy under a floating regime and the commodity currency (peg the export price, PEP) regimes for exchange rate management. Finally, I examined the changing landscape of the mining sector and macroeconomic environments, and the impact on the outcome of the copper boom in Zambia. I focused our analysis on the extent and patterns of the inflation–appreciation trade-off in the management of the Zambian copper boom through simulation exercises. However, I noted that under the ownership structure of mineral concerns dominated by TNCs, the policy space for autonomous fiscal and monetary management economies in bringing about short-run stabilization, as well as long-run economic development, is substantially reduced. Therefore, with reference to our comparative analysis of the copper sector and key policy differences observed in Zambia and Chile, I showed how the ownership of mining companies – in particular, their diverse privatization experiences – has affected the distribution of mineral rents between TNCs and governments in producer countries, and how this has influenced the effects of mineral booms on both the efficacy of macroeconomic management and the long-term prospects for their economic development. There is no doubt that the hypersensitivity to externally originated instability is one of the critical weaknesses of commodity-dependent low-income countries. An eventual transformation into more diversified economic structures is the real solution to the problems associated with the ‘commoditydependency trap’, which can be overcome only through effective use of natural resource rents in the transition period. Thus, the developmental problems of these countries could be overcome only through rigorous investment in production capacity and physical and social infrastructures, leading to transformation of their trade and production structures. To this end, we have to develop strong production capacity in the commodity sector, where the process of active learning-by-doing experiences and accumulation is facilitated. Yet, in many respects, the new landscape of commodity marketing and production under globalization tends to discourage the process of learning and accumulation, which is of critical importance for economic development. On the contrary, I have shown that the institutional environments facing commodity producers both at the global and domestic levels have considerably weakened the capacity and resilience of smallholders


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and mining industries in producing countries. As we discussed, many state run mineral concerns in developing countries were privatized in the 1990s. Depending on how privatization was negotiated and implemented, mineral rents accruing from the recent commodity boom are largely channelled to newly privatized mineral companies owned by TNCs at the expense of smaller shares being channelled to governments. These emerging conditions call for a new international framework to improve the share of benefits accruing to producers and producing countries from the integration of their commodity sector with the rest of the world. We should create an environment for strengthening international and domestic institutions governing commodity trade and production throughout commodity chains. This might include various forms of joint actions and cooperation with TNCs in various activities – such as processing, information, and marketing and distribution – in order to accelerate the learning process. Further, our analysis and discussion point to the urgent need for the renegotiation of mineral contacts towards a more equitable distribution of rents, either through increased corporate taxes as part of efforts aimed at enhancing the social corporate responsibility, or by the increased participation in equity by governments of producing countries. Finally, in view of the very high and ever-increasing price volatility on world commodity markets, there should be considerable scope for enhanced regulations over activities of derivatives markets, on which commodity-linked instruments are traded. This could be part of concerted efforts to establish a better international regulatory framework over financial transactions to avoid repeated financial crises of global dimensions. Many policy measures discussed in this chapter are short- to medium-term expedients bearing in mind the recent commodity price cycles. Yet, we should not forget the recent history of the protracted debt crisis that stalled the process of economic development in many commodity-dependent low-income countries in the 1980s and 1990s. Undoubtedly, the high vulnerability to negative commodity price shocks represents a major factor behind the lowincome country debt crisis and the likelihood of future accumulation of unsustainable external debt stocks (Maizels 1992). This calls for an establishment of more innovative compensating financing facilities, such as state contingent debt contracts as an ex ante debt relief mechanism to deal with the debt crises facing commodity-dependent low-income countries (Nissanke 2009b).


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Notes 1. Newman (2008b) notes that the importance of prices on the NYBOT futures exchanges has increased significantly for all traders in the arabica coffee commodity chain, while, for robusta coffee, futures prices on the London exchanges are key to pricing decisions along its chain.


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2. The majority of commercial traders operating both in physical and futures exchanges are international coffee traders and roasters – including the top five trading companies, whose market share accounts for a market of over 55 per cent in total. 3. A price-to-be-fixed contract refers to a contractual arrangement whereby the volume, delivery date and differential price are specified but the final price at which the commodity is exchanged will depend on the futures price on the date at which the price is fixed up to the delivery date. 4. A similar test was also carried out on the annual ratio of non-commercial to total open interest for Coffee C contracts (1986–2006), revealing a structural break in the early 2000s. 5. For the price volatility (instability) index, a monthly volatility index is calculated as the normalized standard deviation of daily closing futures prices. For relative trading activities on futures markets, she uses the ratio of the volume equivalent of Coffee C contracts traded and total exports of green coffee from International Coffee Organization member countries. 6. Newman (2009) shows that her cointegration analysis of futures and cash prices on coffee exchanges does not provide supporting evidence for an efficient price discovery role on futures markets, but, rather, points to the possibility that financial investment activities on futures markets might drive prices on cash markets. 7. There are growing demands for speciality coffees – such as Fair Trade and organic coffees – or other product differentiation in a process of de-commodification (Kaplinsky and Fitter 2001). 8. See Baffes and Ajwad (2001) and Fafchamps et al. (2003) for empirical evidence on greater price transmission. 9. The payment system operated by cooperatives in Tanzania entailed an initial fixed payment for coffee deposited with the village level primary societies, with second payments of the difference from the auction price following export. Hence, it allowed members to smooth out income streams. 10. Only owners of speciality coffees that can fetch premium prices could apply for direct export licences. 11. Newman (2008b) notes that there are a number of different risk management strategies potentially conceivable, ranging from the use of hedging instruments to that of fixed price forward contracts, back to back selling, entering niche markets, and diversification. 12. Larger, wealthier farmers or those organized into producer groups under the Uganda Coffee Farmers Association can obtain better prices by their ability to retain ownership of the coffee until it is milled (Newman 2009). 13. Cotton yields are amongst the lowest in Africa. Production has been erratic and input use has declined dramatically. Cotton production in Tanzania remains rainfed, labour-intensive and low in quality (Baffes 2004). Similarly Tanzanian coffee has been suffering from declining yields and quality and low input use, even compared to other coffee producers in SSA countries (Ponte 2002). 14. Many existing studies identify several critical problems found in institutional environments in the cotton and coffee sectors in Tanzania during the postliberalization period – such as poor coordination and cooperation between agents in the production and marketing chain, increased transaction costs, and subsequent declining quality in both cotton and coffee sectors following liberalization. See the problems in the cotton sector (Gibbon 1999; Maro and Poulton 2004; Poulton et al. 2004; Tschirley et al. 2006) and those


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15. 16.

17. 18. 19. 20.

Commodity Market Structures, Evolving Governance and Policy Issues in the coffee sector (Ponte 2001, 2004; Winter-Nelson and Temu 2002; Itika 2005). See, for example, Sachs and Warner (1997), Auty (2001), Collier (2007). For the classical literature on the three main mechanisms of engendering a Dutch disease syndrome, see Corden and Neary (1982), Corden (1984), Neary and van Wijnbergen (1986) and Edwards (1989). See Bevan et al. (1999) and Collier and Gunning (1999) for the related ‘construction boom’ literature, which makes a sharper distinction between permanent and temporary trade shocks and examines the differential effects of the two types of shock on the formation of agents’ expectations and, hence, their saving behaviour. See Gelb (1988) for the detailed empirical examination of the effects of windfalls on a number of oil exporting developing economies. See Chang and Velasco (2000), Soto (2003), and Masson and Pattillo (2005) for these escape clauses in Israel, Chile and South Africa. See Chapter 9 by Bova in this volume. Furthermore, the spending effect itself is likely to create an inflationary pressure through aggregate demand effects irrespective of the exchange rate regime opted. If spending is directed towards imported goods, this might weaken the effect of appreciation under a floating regime as a greater amount of foreign exchange is used to purchase imported goods.

References Adam, C., E. Buffie, S. O’Connell and C. Pattillo (2004) ‘Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa’, IMF Staff Paper, 51, Special issue. Auty, R. (2001) Resource Abundance and Economic Development (Oxford: Oxford University Press). Baffes, J. (2004) ‘Tanzania’s Cotton Sector: Reforms, Constraints and Challenges’, Development Policy Review, 22(1): 72–99. Baffes, J. and M. Ihsan Ajwad (2001) ‘Identifying Price Linkages: A Review of the Literature and an Application to the World Market of Cotton’, Applied Economics, 33: 15. Bargawi, H. (2008a) ‘Tanzania’s Agricultural Institutions in Flux: Lessons from Coffee and Cotton Producing Villages’, Paper presented at the International Workshop ‘Challenges and Prospects for Commodity Markets in the Global Economy’ at SOAS, University of London, 19–20 September. Bargawi, H. (2008b) ‘Cotton Price Fluctuations at the Ground-level: Assessing the Difference in Impact in Rural Tanzania’, Paper presented at ISSCRI, CIRAD Conference on Cotton, Montpellier, France, May. Bargawi, H. (2009) ‘Commodity Prices and Producers in Tanzania’s Post-liberalisation Coffee and Cotton Sectors’, PhD thesis, Department of Economics, SOAS, University of London. Bernanke, B.S. and F.S. Mishkin (1999) ‘Inflation Targeting: A New Framework For Monetary Policy?’, Journal of Economic Perspectives, 11(2): 97–116. Bevan, D., P. Collier and J.W. Gunning (1999) ‘Anatomy of a Temporary Trade Shock: The Kenyan Coffee Boom of 1976–79’, in P. Collier and J.W. Gunning, Trade Shocks in Developing Countries (Oxford: Oxford University Press).


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Bova, Elva (2008a) ‘A Proposal for an Exchange Rate Arrangement for Commodity Dependent Countries: An Application to Zambia’, Paper presented at the International Workshop ‘Challenges and Prospects for Commodity Markets in the Global Economy’ at SOAS, University of London, 19–20 September. Bova, Elva (2008b) ‘The Inflation–Appreciation Trade-off Revisited: The Monetary Management of the Zambia Copper Boom’, Paper presented at the International Workshop ‘Challenges and Prospects for Commodity Markets in the Global Economy’ at SOAS, University of London, 19–20 September. Bova, Elva (2009) ‘The Implications of Mine Ownership for the Resource Curse: The Management of the Copper Boom in Zambia and Chile’, Mimeo, SOAS, University of London. Calvo, G.A. and C.M. Reinhart (2002) ‘Fear of Floating’, Quarterly Journal of Economics, 117(2): 379–408. Chang, R. and A. Velasco (2000) ‘Exchange-Rate Policy in Developing Countries’, American Economic Review, 90(2): 71–5. Chen Yu-Chin and K. Rogoff (2002) ‘Commodity Currencies and Empirical Exchange Rate Puzzles’, IMF Working Paper, WP/02/27. Collier, P. (2007) ‘Managing Commodity Booms: Lessons of International Experience’, CSAE Working Paper, Department of Economics University of Oxford, Paper prepared for the AERC conference. Collier, P. and J.W. Gunning (1999) ‘Trade Shocks: Theory and Evidence’, in P. Collier and J. W. Gunning, Trade Shocks in Developing Countries (Oxford: Oxford University Press). Corden, M. (1984) ‘Booming Sector and Dutch Disease Economics: Survey and Consolidation’, Oxford Economic Papers, 36: 359–80. Corden, M. and P. Neary (1982) ‘Booming Sector and De-Industrialisation in a Small Open Economy’, Economic Journal, 92(368). Daviron, B. and S. Ponte (2006) The Coffee Paradox (London and New York: Zed Books). Edwards, S. (1989) ‘Commodity Export Boom and the Real Exchange Rate: The Money Inflation Link’, NBER Working Paper, 1741 (Cambridge, MA: NBER). Eichengreen, B. (2006) ‘The Role of the Exchange Rate in Inflation Targeting: A Case Study of Korea’, in N. Batini (ed.), Monetary Policy in Emerging Markets and Other Developing Countries (New York: Nova Science). Fafchamps, M., R.V. Hill, A. Kaudha and R. Waggwa Nsibirwa (2003) ‘The Transmission of International Commodity Prices to Domestic Producers’, Centre for the Study of African Economies Working Paper Series (197). Frankel, J. (2003) ‘A Proposed Monetary Regime for Small Commodity-exporters: Peg the Export Price (‘PEP’)’, International Finance, 6(1), spring: 61–88. Frankel, J. (2006) ‘Commodity Prices and Monetary Policy’, Mimeo, Kennedy School of Government, Harvard University. Gelb, Alan (with Patrick Conway, Jorge Marshall-Silva, Bruce Glassburner, Henry Bienen, Richard Auty and François Bourguignon) (1988) Oil Windfalls: Blessing or Curse? (New York: Oxford University Press for the World Bank). Gibbon, P. (1999) ‘Free Competition Without Sustainable Development: Tanzanian Cotton Sector Liberalisation’, 1994/95 to 1997/98, Journal of Development Studies, 36: 128–50. Gibbon, P. (2003) ‘Value-chain Governance, Public Regulation and Entry Barriers in the Global Fresh Fruit and Vegetable Chain into the EU’, Development Policy Review, 21(5–6): 615–25.


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Gibbon, P. and S. Ponte (2005) Trading Down: Africa, Value Chains, and the Global Economy (Philadelphia, PA: Temple University Press Combined Academic). Humphrey, J. and H. Schmitz (2000) ‘Governance and Upgrading: Linking Industrial Cluster and Global Value Chain Research’, IDS Working Paper (120). Hausemann R., J. Hwang and D. Rodrik (2005) ‘What You Export Matters’, NBER Working Paper 11905 (Cambridge, MA: NBER). Itika, J.S. (2005) ‘Institutional Constraints as “Rules of the Game”: Reflections on Coffee Production and Marketing in Moshi Rural District’, Eastern Africa Social Science Research Review, 21: 39–56. Kaplinsky, R. (2000) ‘Globalisation and Unequalisation: What Can Be Learnt from Global Value Chain Analysis?’, Journal of Development Studies, 37(2): 117–46. Kaplinsky, R. and R. Fitter (2001) ‘Who Gains from Product Rents as the Coffee Market Becomes More Differentiated? A Value Chain Analysis’, IDS Bulletin Paper, May. Kaplinsky, R. and J. Kimmis (2006) ‘Competitions Policy and the Global Coffee and Cocoa Value Chains’, Institute of Development Studies, University of Sussex, and Centre for Research in Innovation Management, University of Brighton. Maizels, A. (1984) ‘A Conceptual Framework for Analysis of Primary Commodity Markets’, World Development, 12(1): 25–41. Maizels, A. (1992) Commodities in Crisis: The Commodity Crisis of the 1980s and the Political Economy of International Commodity Policies (Oxford: Clarendon Press). Maizels, A. (1994) ‘The Continuing Commodity Crisis of Developing Countries’, World Development, 22(11): 1685–95. Masalila, K. and O. Motshidisi (2003) ‘Botswana’s Exchange Rate Policy’, BIS Paper, 17, May (Basel: BIS). Maro, W.E. and C. Poulton (2004) ‘Tanzania Country Report: 2001/2002 Production Season’, in DFID, Competition and Coordination in Cotton Market Systems in Southern and Eastern Africa (London: DFID). Masson, P.R. and C. Pattillo (2005) The Monetary Geography of Africa (Washington, DC: Brookings Institution Press). Morisset, J. (1998) ‘Unfair Trade? The Increasing Gap between World and Domestic Prices in Commodity Markets during the Past 25 Years’, World Bank Economic Review, 12(3): 503–26. Neary, P. and S. Van Wijnbergen (1984) ‘Can an Oil Discovery Lead to a Recession? A Comment on Eastwood and Venables’, Economic Journal, 94(374): 390–5. Neary, J. Peter and Sweder van Wijnbergen (1986) ‘Natural Resources and the Macroeconomy: A Theoretical Framework’, in J.P. Neary and S. van Wijnbergen (eds), Natural Resources and the Macroeconomy (Oxford: Basil Blackwell). Newman, S. (2008a) ‘The New Price Makers: An Investigation into the Impact of Portfolio Investment on Coffee Price Behaviour’, Paper presented at the International Workshop ‘Challenges and Prospects for Commodity Markets in the Global Economy’ at SOAS, University of London, 19–20 September. Newman, S. (2008b) ‘The Role of International Commodity Exchanges on Prices and Price Risk Management along Coffee Chains’, Paper presented at the International Workshop ‘Challenges and Prospects for Commodity Markets in the Global Economy’ at SOAS, University of London, 19–20 September. Newman, S. (2009) ‘Futures Markets and Coffee Prices’, PhD thesis, Department of Economics, SOAS, University of London, June.


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Nissanke, M. (1993) ‘Stabilization-cum-Adjustment over the Commodity Price Cycle’, in Nissanke M. and A. Hewitt (eds), Economic Crisis in Developing Countries: New Perspectives on Commodities, Trade and Finance (London: Pinter): 56–78. Nissanke M. (2009b) ‘Reconstructing the Aid Effectiveness Debate’, in G. Mavrotas (ed.), Foreign Aid for Development: Issues, Challenges, and the New Agenda (Oxford: Oxford University Press). Pindyke, R.S. (2004) ‘Volatility and Commodity Price Dynamics’, Journal of Futures Markets, 24(11): 1029–47. Ponte, S. (2001) ‘Coffee Markets in East Africa: Local Responses to Global Challenges or Global Responses to Local Challenges’, Centre for Development Research Working Paper, 1.5. Ponte, S. (2004) ‘The Politics of Ownership: Tanzanian Coffee Policy in the Age of Liberal Reformism’, African Affairs, 103: 615–33. Poulton, C., P. Gibbon, B. Hanyani-Mlambo, J. Kydd, W. Maro, M. Nylandsted Larlen, A. Osoliio, D. Tshirley and B. Zulu (2004) ‘Competition and Coordination in Liberalized African Cotton Market Systems’, World Development, 32: 519–36. Sachs, J. and A. Warner (1997) ‘Natural Resource Abundance and Economic Growth,’ CID Working Paper, Harvard University. Soto, C. (2003) ‘Monetary Policy, Real Exchange Rate, and the Current Account in a Small Open Economy’, Central Bank of Chile Working Paper, 253. Svensson, L.E.O. (1999) ‘Inflation Targeting as a Monetary Policy Rule’, Journal of Monetary Economics, 43(3): 607–54. Tschirley, D., C. Paulton and D. Boughton (2006) ‘The Many Paths of Cotton Sector Reform in Eastern and Southern Africa: Lessons from a Decade of Experience’, MSU International Development Working Paper, 88. Winter-Nelson, A. and A. Temu (2002) ‘Institutional Adjustment and Transaction Costs: Product and Inputs Markets in the Tanzanian Coffee System’, World Development, 30: 561–74. World Bank (1997) ‘Do Hedge Funds and Commodity Funds Affect Commodity Prices?’, DEC Notes: Research Findings, 29, Development Economics Vice Presidency of the World Bank.


Machiko Nissanke





5 Commodities Still In Crisis?

Introduction Alfred Maizels was a quiet and unassuming person – a true gentle-man. He possessed a formidable intellect, accompanied by the belief and commitment that, properly used, the skills of the economist can make significant improvements in the everyday lives and well-being of real people. There was no time within his economic world for ‘angels on a pinhead’ debates or other forms of unproductive economic musings. Instead, his career was spent utilizing the best and most appropriate techniques then available from within the economist’s tool-chest in order to tackle the problem in hand.1 As the contents of the essays making up this volume clearly illustrate, Alf, over a long and distinguished career, worked on a wide range of contemporary issues primarily – although not exclusively – concerned with problems relating to international trade and economic development. One area in which Alf made a series of major and enduring contributions concerns the economics of primary commodity markets and it is this aspect of his work that we focus on in the current chapter.

Alf Maizels: commodity economist Alf’s longstanding interest in primary commodity markets in general, and the influence of their behaviour (and, more correctly, their misbehaviour) on the economic fortunes of developing countries, can be traced back to papers he published in the late 1940s and early 1950s. Throughout the second half of the twentieth century, an impressive trail of papers, monographs and books addressing various dimensions of the ‘commodity problem’ emanated from Alf’s desk. This trail of academic analysis and economic insight led us to what might be conveniently termed Maizels’ ‘Commodities in Crisis’ hypothesis, set out with admirable clarity in his 1992 monograph bearing the same name. Although this monograph is widely and rightly recognized as a seminal contribution to the field, the genesis and development of the ideas


David Sapsford, Stephan Pfaffenzeller and Harry Bloch


Commodities Still In Crisis?

and analysis contained therein can be clearly seen in many of Alf’s previous publications, including Maizels (1968), (1984) and (1987). However, the story did not end there: Alf went on in a series of subsequent publications to further refine his approach and, most importantly, to explore its implications for the rapidly changing world that emerged during the ‘globalization decades’ of the 1990s and the 2000s. See, for example, Maizels (1994a), (1994b); Maizels et al. (1997) and Maizels et al. (1998). It is no easy matter to summarize, within the confines of a single chapter, the rich legacy of analytical contributions and insights, both theoretical and empirical, bequeathed to commodity economics by Alf’s six decades of research in the field. However, a clear statement of Alf’s analytical framework can be found in his 1984 paper ‘A Conceptual Framework for Analysis of Primary Commodity Markets’, while his insightful – and, as it turns out, highly prophetic – analysis of the commodity price collapse of the 1980s and its impact upon developing countries can be found in Part 1 of Commodities in Crisis (1992: 1–39). We consider each of these in turn. Maizels’ conceptual framework The conceptual framework for the analysis of primary commodity markets advocated by Alf in his paper ‘A Conceptual Framework for Analysis of Primary Commodity Markets’ (1984) provides a clear illustration of his acute awareness of the realities of the world we actually live in, as distinct from that portrayed in the pages of (too) many economics textbooks and journals. The framework that he advocated might be summarized under the following bullet points: • Rejection of traditional neo-classical theory as a useful tool for the analysis

of commodity markets • Advocacy of a more useful and relevant alternative: a ‘viable’ theory that

places central emphasis on market power. Specifically, recognition of the central role of bargaining strengths of trans-national corporations active in the commodity production and trade of developing countries relative to host country governments and firms. In addition, he argued persuasively that: • The design and implementation of viable policies (aimed at improving the


100

share of benefits from developing country commodity exports accruing to the developing countries themselves) should be always be placed firmly centre-stage and, most importantly, that • Commodity market analysts should always see theory as a servant of

reality rather than vice versa.


David Sapsford, Stephan Pfaffenzeller and Harry Bloch 101

As already noted, it was very much Alf’s style to deploy the most appropriate currently available analytical technique in his research.2 Revisiting Alf’s (1992) analysis3 of the commodity price crash of the 1980s reveals an incisive statistical and econometric appraisal of this particular historical episode and its contrast with the earlier commodity price recession of the 1930s. At the risk of over-simplification, Alf’s analysis of the 1980s real commodity price crash demonstrated his impressive awareness of a wide range of statistical issues. His analysis had several analytical ingredients of the time-series sort. These are as follows: • Explicit recognition of the distinction between long-term real commodity

price trends and short-term price instabilities • Recognition of variations in the wavelength of different real commodity

price cycles • Recognition of the distinction between long and short waves • Explicit recognition of aggregation issues arising from the analysis of

composite indices, including those relating to particular commodity sub-groups. Armed with this arsenal of statistical techniques, Alf demonstrated that the 1980s were, beyond reasonable doubt, a decade where commodities were truly in crisis. He showed that the principal difference between the decade of the 1980s and the earlier decades of the post-war period was that the 1980s saw the gentle downward trend in real commodity prices evident in the earlier decades replaced by a corresponding trend that was ‘drastically, even catastrophically, downward’ (1992: 9). Comparing the experience of the 1980s and the 1970s, Alf went on to show that while the 1970s (as the 1950s) were chiefly characterized by extremely large short-term fluctuations in price, the 1980s exhibited only relatively minor short-run fluctuations, albeit about that decade’s ‘catastrophic’ downward trend. Another characteristic of real commodity price behaviour during the 1980s highlighted by Alf’s analysis was that the price decline affected all of the main commodity groups, being especially severe for foods (1992: 12–13). Alf’s comparison of the commodity price collapse of the 1980s with the deep slump in commodity prices experienced during the Great Depression of the 1930s is particularly insightful. His analysis demonstrated that the commodity price recession of the 1980s was both more severe and prolonged than that experienced during the Great Depression of the 1930s. While conventional indices of real commodity prices during the Great Depression reveal a fall in real prices between 1929 and 1932 that was to the order of one third, they also reveal that, by 1937, prices had effectively climbed back to their 1929 level. However, as Alf pointed out, the experience of the 1980s was altogether more catastrophic from the viewpoint of commodity-dependent


The commodity price collapse of the 1980s: commodities in crisis



2002

1996

1990

1984

1978

1972

1966

1960

1954

1948

1942

1936

1930

1924

1918

1912

1906

1900

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

Figure 5.1 Real commodity prices 1900–2007

developing countries. As he demonstrated, the proportionate fall in real prices over the period 1980 to 1983 (at around 30 per cent) roughly mirrored that experienced over the first three years of the Great Depression. However, thereafter the two price paths took diametrically opposing routes for the remainder of the price cycle. Within four years, the pre-war cycle saw real prices climb back to virtual equality with their 1929 level, while the corresponding period during the 1980s cycle (1984–87) saw real prices fall still further – to somewhere between only 50 and 60 per cent of their 1980 level. Alf’s study period ended in 1988/9 and, despite the short-lived price plateau of 1983/4 (a result of sharp increases in the price of vegetable oils) and a minor recovery in 1988/89 (reflecting increases in the prices of cereal and metals), the close of his period saw real prices standing somewhere between 25 and 50 per cent below their 1980 level, depending on the precise price index considered.4 Clearly, the decade of the 1980s was one during which commodities were truly in crisis!

Primary commodity prices post-1980s: commodities still in crisis? So much for the 1980s: the remainder of this chapter explores the behaviour of commodity prices over subsequent years with a view to assessing the extent to which the problems of the 1980s, highlighted by Alf, persisted through the 1990s and into the twenty-first century. Following Alf, and other subsequent analysts, we concentrate in what follows on the real commodity price index constructed by Grilli and Yang (1988). This series covered the period 1900– 1986, and has recently been extended by Pfaffenzeller et al. (2007) to cover the period up to and including 2007, at both the aggregate level and for the 24 individual constituent commodity series. Figure 5.1 provides a plot of this series over the complete sample period 1900–2007, while Figure 5.2


102



1.6 1.4 1.2 1 0.8 0.6 0.4

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

0

Figure 5.2 Real commodity prices 1970–2007

provides a similar plot but for the restricted period 1970–2007, the left-hand side of which provides a useful visual summary of the contrasts drawn by Alf between commodity price behaviour in the decades of the 1970s and 1980s. Crisis hypothesis reconsidered: analytical approach The analysis that follows proceeds in two steps. First, we revisit Alf’s analysis in the context of the extended Grilli–Yang data set and, second, we explore the extent to which the crisis highlighted by Alf’s investigations appears to have been propagated through the 1990s into the first decade of the twentyfirst century. As already noted, Alf was acutely aware of the dangers inherent in concentrating exclusively on aggregate price data. Accordingly, we select three of Alf’s major studies and perform our analysis on the particular commodity group analyses therein. These are as follows: • Maizels (1992) – all commodities • Maizels (1994a) – food, tropical beverages, vegetable oilseeds and oil,

minerals ores and metals • Maizels et al. (1997) – cocoa, coffee and tea.

Following Alf’s work, we concentrate in our statistical analysis on isolating both long-term trends and short-term instabilities, initially within the relevant original sample period analyzed by Alf and collaborators, and subsequently during the post-sample period thus delineated. For the purpose of the current analysis, we adopt the admittedly arbitrary, but nevertheless simple, ‘year (n-1)’ assumption, according to which each of the three studies mentioned above used data ending in the year of manuscript completion and that each publication was subject to a one-year publication lag! For the purpose of estimation, we follow the regression approach developed by Newbold et al. (2005), who advocate basing inference on the significance


0.2


104


Commodity price trends: 1900 to year (n-1) Tables 5.1 to 5.4 summarize our estimates of commodity price trends for various relevant individual commodities and commodity groupings over the period commencing in 1900 and terminating in year (n-1).6 Despite the fact that this analysis considers something approaching a century’s worth of data (without differentiating between the different sub-periods contained therein),7 its results nevertheless provide plenty of concern to commoditydependent developing countries. For example, the individual commodity results reported in Table 5.1 indicate that seven commodities appear to have been subject to significant downward trend over some nine decades; with trends ranging from −0.8 per cent per annum (wheat) to −2.9 per cent for rubber, implying extremely severe consequences over the period for countries dependent on the production and export of these particular commodities.8 The overall character of these results is clearly also evident in the sub-group results reported in Table 5.2. The results reported in Table 5.3 indicate the presence of a particularly strong downward trend in the case of metals and, interestingly, also suggest the presence of especially strong short-term/ cyclical fluctuations (as measured by standard error (SE)) in the real price of palm oil. Table 5.4 (covering the period ending in 1996) reports a somewhat more mixed bag of results. Notable here are the cases of cocoa and coffee: while neither displays a significant real-price trend when considered in the context of this extensive period as a whole, they both nevertheless display extremely large cyclical fluctuations about the estimated regression plane. Post-sample evidence Tables 5.5 to 5.8 report the results that were obtained when the various models reported in Tables 5.1 to 5.4, respectively, were re-estimated for the period ending in 2007. In order to capture possible structural shifts that emerged after the closing date of Alf’s own analyses, we augmented each model by the inclusion of an intercept dummy (D1 ) specified to capture a level shift in the series and a slope dummy (D2 ) designed to capture a change in the magnitude of the trend term. In all cases, both dummy variables are specified so as to become operational in year n and to remain in operation each year thereafter. A number of findings are worthy of mention. As can be seen from Table 5.5, the only commodity of the seven highlighted in Table 5.4 as subject to significant downward long-run trends that experienced significant structural


of trend estimates on consistent results derived across alternative stationarity scenarios, assuming difference stationarity by default unless there is strong evidence in favour of a stationary model.5 Tables 5.1 to 5.9, set out in the Appendix to this chapter, present our detailed estimates of price trends, and associated instability about such trends, based on the Grilli and Yang (1988) data set, updated as in Pfaffenzeller et al. (2007). Data for all price-series and indices are in real terms, using the manufacturing unit-value (MUV) index as deflator, and in natural logarithms.


shifts post-1991 is aluminium, which is estimated to have experienced a significant up-shift in its long-run negative trend of a magnitude sufficient to render its trend positive over the period 1992–2007. Interestingly, real wool prices experienced a significant downward level shift post-1992, accompanied by an upward movement in trend of a magnitude sufficient to reverse its previous negative trend. Similar shifts are evident for the cases of both lead and zinc. We return to these apparent trend reversals later. Table 5.6 reveals the occurrence of a similar trend reversal for the metals group, while Table 5.7 indicates that, after 1993, the observed trend reversal for the metals group was actually accompanied by a significant level reduction of a magnitude roughly 4.5 times greater than the estimated increase in trend. Table 5.8 finds no evidence of either level or trend shifts for real beverage prices. China Disregarding the obvious statistical dangers of drawing over-strong conclusions from evidence of instabilities relating to relatively short post-sample periods, one might, at first glance, take the results of our post-sample structural stability analysis as indicating that the price behaviour of the 1980s that led Alf to see it as a decade of crisis was not propagated beyond that particular decade. However, we would argue that such a conclusion would be seriously misleading, because it ignores probably the most important characteristics of the world economy during the early part of the twenty-first century; namely, the spectacular growth performance of the Chinese and Indian economies, and the consequent effects upon the markets for primary commodities as raw materials. This strength of these derived-demand effects, and the speed at which they took hold, took the macro- (including the commodity market) economics profession (Alf included) by surprise. It is, therefore, instructive to replicate our structural stability analyses for the somewhat shorter period ending not in 2007 but, rather, in 2005 as the year after which, arguably, the Chinese/Indian derived-demand wave caught us all unawares. Table 5.9 provides a convenient summary of the effects of this truncation on the principal results reported in the preceding sub-section. Basically, exclusion of the years 2006 and 2007 from the sample removes all evidence of significant upward movements in trend and, therefore, trend reversal. As can be seen, our results indicate the presence of a negative and highly significant long-run trend in aluminium prices, a finding echoed in the results for the metals subgroup. Notice also that our results provide evidence of a negative long-run trend in real-wool prices accompanied by a significant downward level shift post-1991.



Postscript: global credit crunch One of the things that worried Alf was the sheer speed at which short-term upward fluctuations in real commodity prices could switch into downward



fluctuations, with all of the consequences that follow for commodity producing developing countries. In September 2008, when the first draft of the paper on which this chapter is based was presented at the SOAS Workshop, the most recent updated Grilli–Yang data available to us referred to the end of 2007. As can be seen from Figures 5.1 and 5.2, the preceding two to three years saw the rapid real commodity price rises, apparently associated with the truly exceptional growth performance of the Chinese and Indian economies, that led us to consider the somewhat restricted sample period terminating in 2005. However, between then and the time of writing (January 2009) the world economy has changed almost beyond recognition, with the revelation of the sub-prime loans crisis and the subsequent onset of the global credit crisis. This extremely rapid turnaround in global economic fortunes has made its presence felt in the markets for primary commodities in an equally spectacular manner. Primary commodity prices fell with alarming rapidity during 2008. The most recently available International Monetary Fund data9 refer to the period ending November 2008 and indicate that commodity prices peaked in March 2008. These data indicate a 32 per cent fall in the commodity non-fuel price index over the eight-month period between March and November 2008, with the corresponding falls in the commodity indices of industrial inputs, and food and beverages equalling 35 per cent and 28 per cent, respectively.

Conclusion Over a long and productive career, Alf Maizels made many contributions that greatly advanced our understanding of the workings of primary commodity markets, and the implications of commodity price behaviour for economic growth and welfare in primary commodity producing developing countries. In this chapter, we have revisited Alf’s ‘Commodities in Crisis’ hypothesis. Although this hypothesis was framed in the context of what he saw as the ‘catastrophic’ downward trend in real commodity prices of the 1980s, Alf was clearly also concerned about shorter-term instabilities and cycles in real commodity price behaviour. Replicating Alf’s basic analytical approach and applying this, with the aid of structural stability analysis, we found evidence to suggest that many of the features that led Alf to conclude that the 1980s was a decade of crisis were propagated forward through the 1990s into the first decade of the twenty-first century. In commodity markets, as in life, things can – and sometimes do – change very swiftly. As we have seen, commodity prices rose rapidly between 2006 and 2007 (under pressures generated by exceptionally rapid growth in both China and India) and, after peaking in the third quarter of 2008, fell back by around one third during the following eight months! This is a truly breathtaking rate of decline: in just two thirds of a single year, prices fell by an amount equal to that experienced during the complete downswing in prices


106



Appendix Econometric evidence Data The data underlying the trend estimates reported in the tables in this Appendix are the constituent commodity price-series of the Grilli and Yang Commodity Price index (GYCPI) and its sub-indices, as discussed in Grilli and Yang (1988) and the Manufacturing Unit Value Index (MUV-G5). Both series were updated as appropriate using the data sources and methods presented in Pfaffenzeller et al. (2007). Estimation methodology Trend estimates were obtained from univariate time-series models for real price or composite index series in natural logarithms. The preferred model is shown in equation A5.1: (1 − L)pt = β + vt , φ(L)vt = θ(L)εt

(A5.1)

where L is the lag operator, pt the price or index series in natural logarithms, β a constant representing the stochastic trend term and vt the ARMA (p, q) residual process with p autoregressive and q moving average terms. Alternatively, a trend stationary model was considered as in (A5.2): pt = α + βt + ut ,

φ(L)ut = θ(L)εt

(A5.2)

Where α is a constant, t a linear trend and ut the ARMA residual process for the model in levels. AR(I)MA models were selected using the Schwarz Bayesian Criterion (SBC). A difference stationary representation was generally preferred, although trend stationary models were selected in some cases where stationarity in levels was indicated by a rejection of the unit root null hypothesis in an augmented Dickey–Fuller-type unit root test, as well as by the presence of a unit moving average root in the minimum Akaike Information Criterion (AIC) or SBC selection of the difference stationary model alternative. Care was taken throughout to ensure that significant stochastic or deterministic trend estimates could be inferred across alternative stationarity scenarios where a statistically significant trend estimate was reported (see Newbold et al. (2005), for details of this approach).


(1929–32) of the Great Depression. Stated differentially, it took the first five years of the catastrophic decade of the 1980s for prices to fall by the amount that they have fallen over the last eight months! It remains to be seen whether the current collapse of primary commodity prices will turn out to be a shortterm instability/cyclical downswing or the beginning of a truly catastrophic trend. Either way, it seems abundantly clear that Commodities are Still in Crisis.


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Table 5.1 reports trend coefficient estimates for the constituent real price series of the GYCPI. Equivalent estimates for the overall GYCPI and five sub-indices are reported in Table 5.2. The sub-indices, discussed in Grilli and Yang (1988), are the food index (GYCPIF), the non-food index (GYCPINF), metals index (GYCPIM), the tropical beverages index (GYCPIBEV) and the cereals index (GYCPICE). In the context of the discussion in Maizels (1994a), the sub-period 1900–1993, allowing for a one-year publication lag, is of interest. Trend coefficient estimates for this period are presented in Table 5.3. Table 5.1 Trend estimates for individual commodity price series Series

Coffee t-ratio Cocoa t-ratio Tea t-ratio Rice t-ratio Wheat t-ratio Maize t-ratio Sugar t-ratio Beef t-ratio Lamb t-ratio Banana t-ratio Palm oil t-ratio Cotton t-ratio

Trend

SE

ARIMA (p,d,q)

−0.002 −0.076 −0.012 −0.546 −0.008 −0.856 −0.009 −4.336 −0.008 −5.139 −0.009 −1.236 −0.010 −3.294 0.017 0.703 0.016 0.620 0.003 0.284 −0.013 −0.751 −0.008 −0.585

0.24

0,1,0

0.25

2,1,0

0.16

0,1,2

0.160

1,0,1

0.150

0,0,3

0.21

0,1,2

0.321

1,0,1

0.23

0,1,0

0.24

0,1,0

0.09

0,1,0

0.21

2,1,0

0.15

2,1,0

Series

Jute t-ratio Wool t-ratio Hides t-ratio Tobacco t-ratio Rubber t-ratio Timber t-ratio Copper t-ratio Aluminum t-ratio Tin t-ratio Silver t-ratio Lead t-ratio Zinc t-ratio

Trend

SE (p,d,q)

ARIMA

−0.003 −0.252 −0.014 −1.750 −0.009 −3.063 0.013 1.161 −0.029 −5.315 0.011 5.629 −0.006 −0.331 −0.018 −6.077 −0.002 −0.100 −0.006 −0.299 −0.007 −0.406 0.001 0.511

0.21

0,1,2

0.18

0,1,2

0.24

1,1,1

0.11

0,1,0

0.277

1,1,2

0.128

1,0,0

0.16

0,1,0

0.154

1,0,1

0.19

0,1,0

0.19

0,1,0

0.17

0,1,0

0.180

1,0,0


Commodity price trends, 1900–2007

Notes: 1 Estimates for all series are in natural logarithms and in real terms for the sample period 1900–1991; 2 Statistically significant trend coefficient estimates are in bold type; 3 SE = standard error; 4 ARIMA = parameterization of the residual process with p = the number of autoregressive terms, d = [0,1] the order of integration and q = the number of moving average terms in the estimated model.


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Series

GYCPI t-ratio GYCPIF t-ratio GYCPINF t-ratio GYCPIM t-ratio GYCPIBEV t-ratio GYCPICE t-ratio

Trend estimates for commodity price indices Trend

SE

ARIMA (p,d,q)

−0.007 −4.602 −0.007 −0.842 −0.008 −5.027 −0.008 −3.776 −0.006 −0.284 −0.009 −1.134

0.106

1,0,0

0.14

0,1,2

0.123

1,0,0

0.122

1,0,1

0.19

0,1,0

0.15

0,1,2


Table 5.3 Trend estimates for selected series Series

GYCPIF t-ratio GYCPIBEV t-ratio GYCPIM t-ratio Palm oil t-ratio

Trend

SE

ARIMA (p,d,q)

−0.008 −0.888 −0.013 −0.788 −0.009 −4.035 −0.012 −0.736

0.135

0,1,2

0.187

0,1,0

0.122

1,0,1

0.209

2,1,0


Table 5.2



110


Series

Coffee t-ratio Cocoa t-ratio Tea t-ratio GYCPIBEV t-ratio

Trend

SE

ARIMA (p,d,q)

0.002 0.070 −0.010 −0.468 −0.009 −0.978 −0.003 −0.134

0.251

0,1,0

0.249

2,1,0

0.154

0,1,2

0.192

0,1,0

Notes: 1 Estimates for all series are in natural logarithms and in real terms for the sample period 1900–1996. 2 Statistically significant trend coefficient estimates are in bold type; 3 SE = standard error; 4 ARIMA = parameterization of the residual process with p = the number of autoregressive terms, d = [0,1] the order of integration and q: the number of moving average terms in the estimated model.

Maizels et al. (1997) concentrate on the evolution of beverage prices. Table 5.4 summarizes trend estimates obtained for the three tropical beverage series in the Grilli and Yang data set (coffee, cocoa and tea), as well as their composite index (GYCPIBEV). The above estimates rely on in-sample estimates for the period under consideration. In the following, equivalent estimates are reported for the full available sample period 1900–2007 allowing for dummy variables allowing for an indication of structural change after the original sample period. Two dummy variables are included in the estimating equations: one to allow for an unusual price movement (levels shift) in the time period leading to the potential break year, one to allow for a change in the magnitude of the trend coefficient from the break year onwards. Table 5.5 shows the results for the individual constituent price series of the Grilli and Yang index. Estimates for composite commodity price indices are shown in Table 5.6; those allowing for a change after 1993 and 1996 are listed in Tables 5.7 and 5.8. Among the composite indices, the metals sub-index shows strong trend stationary characteristics with a consistently negative trend estimate. Among its constituent series, this is true for aluminium only. The metal sub-index (GYCPIM) – as well as the series for wool, aluminium and zinc – provides evidence of a positive trend for the sub-period 1991–2007 (as well as for the sub-period 1993–2007 among the results reported for the GYCPIM). These positive sub-period trend estimates seem to be driven by the recent commodity price surge, and none of them is robust to truncating the sample period to 2005 (see Table 5.9).


Table 5.4 Trend estimates for beverage prices


Coffee t-ratio Cocoa t-ratio Tea t-ratio Rice t-ratio Wheat t-ratio Maize t-ratio Sugar t-ratio Beef t-ratio Lamb t-ratio Banana t-ratio Palmoil t-ratio Cotton t-ratio

Trend

D1

D2

SE

ARIMA

−0.001 −0.055 −0.011 −0.544 −0.007 −0.818 −0.010 −4.444 −0.008 −5.377 −0.009 −1.341 −0.009 −3.322 0.017 0.726 0.017 0.715 0.001 0.155 −0.011 −1.465 −0.008 −0.642

−0.060 −0.232 −0.118 −0.496 −0.159 −1.103 0.059 0.382 −0.197 −1.454 −0.137 −0.746 −0.220 −0.782 0.055 0.240 −0.152 −0.637 0.063 0.601 −0.035 −0.171 0.051 0.343

0.017 0.246 0.033 0.602 0.009 0.374 −0.029 −1.500 0.012 0.843 0.011 0.517 −0.003 −0.114 −0.026 −0.441 0.010 0.161 0.003 0.149 0.020 0.724 −0.012 −0.340

0.252

0,1,0

0.245

2,1,0

0.150

0,1,2

0.157

1,0,1

0.145

0,0,3

0.201

0,1,2

0.305

1,0,1

0.221

0,1,0

0.231

0,1,0

0.106

2,1,0

0.207

0,1,3

0.151

2,1,0

Jute t-ratio Wool t-ratio Hides t-ratio Tobacco t-ratio Rubber t-ratio Timber t-ratio Copper t-ratio Aluminum t-ratio Tin t-ratio Silver t-ratio Lead t-ratio Zinc t-ratio

Trend

D1

D2

SE

ARIMA

−0.003 −0.316 −0.013 −1.748 −0.009 −3.161 0.012 1.659 −0.030 −5.719 0.011 5.769 −0.004 −0.235 −0.017 −6.515 −0.001 −0.058 −0.004 −0.205 −0.003 −0.162 0.001 0.504

−0.090 −0.471 −0.403 −2.358 0.100 0.439 0.001 0.014 −0.032 −0.114 −0.092 −0.717 −0.184 −1.019 −0.217 −1.412 −0.129 −0.653 −0.251 −1.322 −0.455 −2.489 −0.346 −1.905

−0.009 −0.311 0.046 2.009 0.010 0.389 −0.021 −1.061 0.057 1.364 −0.002 −0.161 0.066 1.384 0.049 2.311 0.053 1.013 0.071 1.421 0.091 1.884 0.037 2.016

0.204

0,1,2

0.184

0,1,2

0.230

1,1,1

0.097

4,1,0

0.266

2,1,1

0.124

1,0,0

0.175

0,1,0

0.150

1,0,1

0.192

0,1,0

0.184

0,1,0

0.177

0,1,0

0.187

2,0,0

Notes: 1 2 3 4


111

Estimates for all series are in natural logarithms and in real terms for the sample period 1900–2007; Statistically significant trend coefficient estimates are in bold type; SE = standard error ARIMA = parameterization of the residual process with p = the number of autoregressive terms, d = [0,1] the order of integration and q = the number of moving average terms in the estimated model; 5 D1 = dummy variable allowing for a level shift in the series; 6 D2 = dummy variable allowing for a change in the size of the trend term; 7 The break year considered for D1 and D2 is 1991.


Table 5.5 Trend estimates for individual commodity price series

112 Table 5.6 Trend estimates for commodity price indices D1

D2

SE

−0.007 −4.461 −0.007 −0.494 −0.008 −5.236 −0.009 −3.670 −0.005 −0.232 −0.009 −1.133

−0.187 −1.729 −0.080 −0.573 −0.091 −0.753 −0.231 −1.722 −0.096 −0.483 −0.060 −0.431

0.015 1.196 0.024 0.662 0.015 1.115 0.046 2.395 0.019 0.360 0.019 0.847

0.104

1,0,0

0.135

0,1,0

0.119

1,0,0

0.130

1,0,1

0.193

0,1,0

0.149

0,1,2

ARIMA (p,d,q)

Notes: 1 Estimates for all series are in natural logarithms and in real terms for the sample period 1900–2007; 2 Statistically significant trend coefficient estimates are in bold type; 3 SE = standard error; 4 ARIMA = parameterization of the residual process with p = the number of autoregressive terms, d = [0,1] the order of integration and q = the number of moving average terms in the estimated model; 5 D1 = dummy variable allowing for a level shift in the series; 6 D2 = dummy variable allowing for a change in the size of the trend term; 7 The break year considered for D1 and D2 is 1991.

Table 5.7 Trend estimates for selected series

GYCPIF t-ratio GYCPIBEV t-ratio GYCPIM t-ratio Palmoil t-ratio

Trend

D1

D2

SE

−0.01 −0.560 −0.008 −0.402 −0.009 −3.858 −0.011 −1.586

0.030 0.214 0.047 0.235 −0.273 −2.042 −0.161 −0.801

0.026 0.677 0.036 0.644 0.060 2.806 0.028 0.959

0.135

0,1,0

0.193

0,1,0

0.129

1,0,1

0.206

0,1,3

ARIMA (p,d,q)


GYCPI t-ratio GYCPIF t-ratio GYCPINF t-ratio GYCPIM t-ratio GYCPIBEV t-ratio GYCPICE t-ratio

Trend

Notes: 1 Estimates for all series are in natural logarithms and in real terms for the sample period 1900–2007; 2 Statistically significant trend coefficient estimates are in bold type; 3 SE = standard error; 4 ARIMA = parameterization of the residual process with p = the number of autoregressive terms, d = [0,1] the order of integration and q = the number of moving average terms in the estimated model; 5 D1 = dummy variable allowing for a level shift in the series; 6 D2 = dummy variable allowing for a change in the size of the trend term; 7 The break year considered for D1 and D2 is 1993. 10.1057/9780230274020 - Commodities, Governance and Economic Development under Globalization, Edited by Machiko Nissanke and George Mavrotas

113

Coffee t-ratio Cocoa t-ratio Tea t-ratio GYCPIBEV t-ratio

Trend estimates for beverage prices Trend

D1

D2

SE

0.004 0.148 −0.011 −0.520 −0.009 −1.029 −0.001 −0.072

−0.181 −0.689 0.092 0.380 0.109 0.734 −0.114 −0.565

−0.013 −0.164 0.022 0.338 0.007 0.214 −0.001 −0.020

0.252

0,1,0

0.245

2,1,0

0.150

0,1,2

0.193

0,1,0

ARIMA (p,d,q)

Notes: 1 Estimates for all series are in natural logarithms and in real terms for the sample period 1900–2007; 2 Statistically significant trend coefficient estimates are in bold type; 3 SE = standard error; 4 ARIMA = parameterization of the residual process with p = the number of autoregressive terms, d = [0,1] the order of integration and q = the number of moving average terms in the estimated model; 5 D1 = dummy variable allowing for a level shift in the series; 6 D2 = dummy variable allowing for a change in the size of the trend term; 7 The break year considered for D1 and D2 is 1996.

Table 5.9 Trend estimates for selected series

Wool t-ratio Aluminum t-ratio Zinc t-ratio GYCPIM t-ratio GYCPIM* t-ratio

Trend

D1

D2

SE

ARIMA (p,d,q)

−0.013 −1.754 −0.017 −6.429 0.001 0.726 −0.008 −3.955 −0.008 −4.088

−0.380 −2.196 −0.200 −1.296 −0.239 −1.392 −0.186 −1.473 −0.226 −1.776

0.038 1.517 0.040 1.647 0.006 0.317 0.021 1.070 0.032 1.407

0.184

0,1,2

0.150

1,0,1

0.175

1,0,0

0.123

1,0,1

0.122

1,0,1


Table 5.8

Notes: 1 Estimates for all series are in natural logarithms and in real terms for the sample period 1900–2005; 2 Statistically significant trend coefficient estimates are in bold type; 3 SE = standard error; 4 ARIMA = parameterization of the residual process with p = the number of autoregressive terms, d =[0,1] the order of integration and q = the number of moving average terms in the estimated model; 5 D1 = dummy variable allowing for a level shift in the series 6 D2 = dummy variable allowing for a change in the size of the trend term; 7 The break year considered for D1 and D2 is 1991 (1993 for GYCPIM*). 10.1057/9780230274020 - Commodities, Governance and Economic Development under Globalization, Edited by Machiko Nissanke and George Mavrotas

114


1. The phrase chosen by Alf’s son John in his opening presentation to the workshop in order to describe his father’s approach to his life’s work was that it demonstrated ‘the power of humbleness’. For those of us who had the privilege to know Alf, this phrase seems especially apposite. 2. One example seems worthy of particular mention. In his widely cited article ‘Review of A. MacBean Export Instability and Economic Development’ in the American Economic Review (1968), Alf employed what amounted to a rather sophisticated statistical (what we would nowadays refer to as ‘econometric’) argument – especially notable because this article pre-dated what we would now recognize as econometrics. 3. As it happens, two of the three authors of this chapter served as reviewers of Alf’s Commodities in Crisis when it was first published in 1992: Sapsford (1993) for The World Economy and Bloch (1993) for The Economic Record. 4. Alf’s analysis of the 1980s experience also includes an incisive review of the then extant econometric models of primary commodity price fluctuations, concluding that these models were essentially unable to account in any convincing way for the commodity price collapse of the 1980s, in the sense that, even after inclusion of the usual sorts of control variables (to allow for fluctuations in the growth rates of commodity demand and supply, and monetary influences, including the exchange value of the US$), these models still displayed a strongly dominant timetrend. As always, the dominance of statistically significant time-trends in such models is not to be interpreted as a statement of the modeller’s understanding of the phenomenon under study but, to the contrary, it represents a clear statement of his/her lack of such understanding! Acutely aware of this limitation of the econometric models, Alf concluded that the trend-term is most probably capturing the effect on commodity prices of demand-side effects not already subsumed within the industrial production growth variable – including falling consumption of natural materials per unit of industrial output (commodity-saving technical progress) and the influence of rising real interest rates. For an extension of this line of reasoning, see Bloch and Sapsford (2000). 5. Evidence of a unit moving average root in the differenced model alternative, in addition to a rejection of the unit root null hypothesis in a Dickey–Fuller type unit root test, can provide such evidence. 6. In each table, SE refers to the standard error of the estimated regression, the measure that is widely interpreted in the commodity price literature as a measure of cyclical instability about the implied trend-path. 7. Recall Alf’s comparisons between the experience of the 1970s (a modest downward trend accompanied by large short-term fluctuations) and the 1980s (a catastrophic downward trend, with little in the way of short-term fluctuations), and between the depth and duration of the 1980s cycle compared with that of the Great Depression of the 1930s. 8. There is perhaps some suggestion from the results reported in Table 5.1 that volatilities (as measured by SE) are greatest in cases where trends are lowest in absolute terms. See Singer and Lutz (1994) and Sapsford (2002) for some country specific evidence consistent with such an inverse relation. 9. http://www.imf.org/external/np/res/commod/index.asp (accessed 5 January 2009).


Notes



Bloch, H. (1993) ‘Review of A. Maizels Commodities in Crisis’, Economic Record, 16 (March): 91–3. Bloch, H. and D. Sapsford (2000) ‘Whither the Terms of Trade?: An Elaboration of the Prebisch–Singer Hypothesis’, Cambridge Journal of Economics, 24(4): 461–81. Grilli, E. and M.C. Yang (1988) ‘Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows’, World Bank Economic Review, 2: 1–47. Maizels, A. (1968) ‘Review of A. MacBean Export Instability and Economic Development’, American Economic Review, 58(3) (Part 1): 575–80. Maizels, A. (1984) ‘A Conceptual Framework for Analysis of Primary Commodity Markets’, World Development, 12(1): 25–41. Maizels, A. (1987) ‘Commodities in Crisis: An Overview of the Main Issues’, World Development, 15(5): 537–49. Maizels, A. (1992) Commodities in Crisis (Oxford: Clarendon Press). Maizels, A. (1994a) ‘The Continuing Commodity Crisis of Developing Countries’, World Development, 22(11): 1685–95. Maizels, A. (1994b) ‘Commodities in Crisis’, in D. Sapsford and W. Morgan (eds), The Economics of Primary Commodity Prices (Aldershot: Edward Elgar): 9–21. Maizels, A., R. Bacon and G. Mavrotas (1997) Commodity Supply Management by Producing Countries: A Case Study of Tropical Beverage Crops (Oxford: Clarendon Press). Maizels, A., T. Palaskas and T. Crowe (1998) ‘The Prebisch–Singer Hypothesis Revisited’, in D. Sapsford and J. Chen (eds), Development Economics and Policy (London: Macmillan): 63–85. Newbold P., S. Pfaffenzeller and A. Rayner (2005) ‘How Well Are Long-Run Commodity Price Series Characterized by Trend Components?’, Journal of International Development, 17: 479–94. Pfaffenzeller S., P. Newbold and A. Rayner (2007) ‘A Short Note on Updating the Grilli and Yang Commodity Price Index’, World Bank Economic Review, 21: 151–63. Sapsford, D (1993) ‘Review of A. Maizels Commodities in Crisis’, World Economy, 16(2): 264–5. Sapsford, D. (2002) ‘Terms of Trade: Trend, Volatility and the Role of Financial Crises in Late Industrialising Countries’, Report prepared for the United Nations Conference of Trade and Development. (The main findings that emerged from this study were reported in depth in a feature in the Least Developed Countries Report 2002: Escaping the Poverty Trap (New York and Geneva): ch. 4). Singer, H.W. and M. Lutz (1994), ‘Trend and Volatility in the Terms of Trade: Consequences for Growth’, in D. Sapsford and W. Morgan (eds), The Economics of Primary Commodity Prices (Aldershot: Edward Elgar): 91–121.


References





6 Asian Drivers, Commodities and the Terms of Trade

Introduction Notwithstanding characteristic volatility and variance between individual commodities, it is clear that after 2002 (and before the last quarter of 2008) commodity prices rose beyond their historic trend (Figure 6.1). This is, of course, not the first time that there have been spikes in commodity prices. However, the duration of the current price surge has already exceeded that of previous rises in commodity prices in the 1950s and 1970s. I will argue that there are persuasive reasons to believe that they will be sustained in the near and medium term, if not the long term, notwithstanding the sharp and very rapid fall across the board in commodity prices in late 2008.

300

All commodities 250

Metals

Fuels

Agricultural and metals (exc. oils and fuel)

200

150

100


Raphael Kaplinsky

50

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 6.1 Surging commodity prices Source: IMF primary commodity prices (accessed 18 July 2008).


Asian Drivers, Commodities and the Terms of Trade

The rise of the two major Asian Driver economies – China and India – represents a disruptive force in the global political economy (Section 2). This, I argue, is the key factor in explaining both the current and projected rise in commodity prices (Section 3). However, rising commodity prices in themselves do not constitute a change in the terms of trade, which reflects the relative prices of commodities and manufactured goods. For this reason it is also necessary to examine the price performance of traded manufactures (Section 4). Only by considering the price trends in both of these traded products can we make a sensible judgement on the terms of trade (Section 5), and their future evolution (Section 6). This discussion is confined to the barter terms of trade, and will not consider either the income or the factorial terms of trade (which are considered in Kaplinsky (2009 – forthcoming). Towards the end of his working life, Alf Maizels made a series of prescient and important contributions to an analysis of the evolution of the price of manufactures. He was not the first to argue that many manufactures would experience falling relative prices. That distinction (at least, in recent times) belongs to Hans Singer (1971, 1986) and Sarkar and Singer (1991). But Maizels was the first to systematically evidence this hypothesis and, thus, to provide the underpinnings for an analysis of terms of trade reversal since the late 1990s.

The Asian Drivers are a disruptive force in the global political economy On current trends, China will be the second biggest economy in the world by 2016, and India the third largest by 2035. A cluster of other countries in the Asian region, such as Thailand and Vietnam, are also growing rapidly. These newly dynamic Asian economies can collectively be characterized as the ‘Asian Drivers’ of global change. The two key Asian Driver economies are China and India. They disrupt the strategic and policy environment, and pose major and distinct challenges for the global and developing economies, for five major reasons (see www.asiandrivers.open.ac.uk/ and the 2008 World Development Special issue on Asian drivers, 36(2)). The first major reason comes as a consequence of their size. As Figure 6.2 shows, from the beginning of their growth spurts (1979 and 1992, respectively), neither GDP or export growth in the two largest Asian Driver economies were unique. In recent years, other Asian economies (for example, Japan and Korea) have experienced similarly rapid growth paths. However, whilst China accounted for 20 per cent of the world’s population and India for 17 per cent in 2002, at no time did the combined population of Japan and Korea exceed 4 per cent of the global total. So, unlike the case of Korea and Japan, who could grow without severe disruption to the global economy, we have to suspend the ‘small-country assumption’ in the case of the Asian Drivers. The very high trade intensity of China’s growth makes its big-country


118


Raphael Kaplinsky Growth of exports (constant US $)

GDP (constant US $ 2000)

6

3.5

5

3

4

2.5

Log GDP

3 2 1

2 1.5 1 0.5 0

0 1

6

11

16

21

26

31

36

41

Elapsed years from onset of boom China (1979–2005) Japan (1960–2004)

India (1979–2005) Korea (1963–2006)

1

6

11

16

21

26

31

36

41

Elapsed years from onset of boom China (1979–2005) Japan (1960–2004)

India (1979–2005) Korea (1963–2006)

Figure 6.2 Growth of GDP and Exports from onset of rapid growth: China, India, Japan and Korea Source: Calculated from World Bank, World Development Indicators (accessed 9 May 2008).

effect particularly prominent. Between 1985 and 2006, China’s exports rose from US$50 billion to US$969 billion, transforming China into the world’s third largest trading nation. Its trade–GDP ratio rose between 1985 and 2006 from 24 to 72 per cent, and that of India from 13 per cent to 49 per cent. Second, the rise of the Asian Drivers has been associated with very significant, and growing, imbalances in the global economy. China’s current account surplus has grown from a mere £1.6 billion in 1996 (0.3 per cent of GDP) to US$239 billion in 2006 (9.1 per cent of GDP) (International Monetary Fund (IMF) Balance of Payments Statistics, accessed 24 June 2008). A related imbalance is in financial stocks. By mid-2007, China held foreign exchange reserves in excess of US$1.8 trillion, with India holding in excess of US$200 billion. These reserves compare with the total value of FDI stock in the USA of US$1.7 trillion. Depending on how these reserves are utilized (for example, ‘sovereign wealth funds’, government owned entities, acquiring assets of large Western firms), there is potential for substantial conflict and the possible impositions of controls over foreign ownership in the large previously dominant industrialized economies, undermining the mobility of global financial flows. The third reason why the Asian Drivers might disrupt the global economy is that China (especially) and India embody markedly different combinations of state and capitalist development compared with the industrialized world. Chinese enterprises have their roots in state ownership, usually arising from very large, and often regionally based, firms (Nolan 2004; Shenkar 2005). They reflect a complex and dynamic amalgam of property rights. With access to cheap (and often subsidized) long-term capital, these firms operate with distinctive time-horizons and are less risk-averse than their Western counterparts (Tull 2006). Associated with these complex forms of ownership and links to regional and central state bodies, Chinese firms often operate abroad


Log exports

119



as a component of a broader strategic thrust. This is particularly prominent in China’s advance in sub-Saharan Africa (SSA) in its search for the energy and commodities required to fuel its industrial advance (Kaplinsky et al. 2008). What this means is that Asian Driver firms tend to invest with much longer time-horizons, are less averse to risk than their Western counterparts and are able to call on active state assistance when this is required. Moreover, their base in low-income economies means that they are not subject to the same pressures regarding corporate and environmental social responsibility as the previously dominant Western firms. The fourth reason why the Asian Drivers present a new and significant challenge to the global and developing economies is that they combine low incomes and low wages with significant innovative potential. This means that they are able to compete across the range of factor prices. The oft-stated belief (and hope?) that China will run out of unskilled labour is belied by the size of its reserve army of unemployed, estimated at around 100 million compared with the 83 million people employed in formal sector manufacturing in 2002 (Kaplinsky 2005). Moreover, by 2030, India, also with a large reserve army of underemployed, is likely to have a larger – and younger – population than China. But China and India are not content to operate in this world of cheap labour and mature technologies, and are investing heavily in the building of technological capabilities. China, for example, overtook Japan to become the world’s second largest investor in R&D in 2006 (Keeley and Wilsdon 2007). A fifth disruptive consequence of the rise of the Asian Drivers is their quest for secure supplies of raw materials and energy. In the period 2005–2007, this was an agenda largely played out in SSA, and largely in relation to access to energy. China became an active investor in the Sudan, Angola and Somalia in the search for secure oil supplies, running against established policy agendas of the hitherto dominant Western powers, and displacing Western energy firms. In Sudan, this led to an easing of the pressure over Darfur; in Angola, it allowed the government to escape pressure exerted by the Paris Club on transparency in government; and, in Somalia, there is conflict within the state apparatus itself as to the legitimacy of the concession granted to Chinese companies. China and India competed directly in Angola for access to the fuel deposits; in other cases (as in West Africa), they concentrated on different countries. But it is not only oil that the Asian Drivers have targeted in SSA. China has become a heavy investor in the Zambian copper fields, and in various mineral sectors in South and West Africa. Similarly, it is not only in SSA or in oil that their resource hunger is likely to be felt as a disruptive factor. A shortage of softwood in the global building industry in 2007 was a direct consequence of China’s demand for timber, and water, too, has begun to loom on the horizon as a potential source of conflict. Although China’s growth spurt began in the late 1970s and India’s in the early 1990s, their presence in global markets and their global environmental


120


Raphael Kaplinsky

121

impacts only really began to be felt at the turn of the millennium. Indeed, India’s impact is much more latent than real at present, although it is likely to become more significant in the future.

In the context of this multi-layered impact of the Asian Drivers on the global economy, it is their growing participation in global trade that concerns us in this discussion on terms of trade. We begin with the impact of rising Asian Driver demand (particularly China) and its impact on the prices of commodities. Asian Driver demand and the prices of hard commodities China’s demand for imports of hard commodities, such as minerals, has been fuelled by three factors. The first has been the rapid growth of domestic demand for household consumer goods and automobiles (where production has grown at a dramatic pace). Second, there has been very substantial investment in infrastructure, both in the public and private sectors, and this has been particularly basic-metal intensive. And, third, many of China’s exports have been of metal based products. Consequently, China’s share of global demand for the main base metals (aluminium, copper, iron ore, nickel, steel and zinc) grew from 7–10 per cent of global demand in 1993 to 25–40 per cent in 2007 (Kaplinsky 2005; Lennon 2008). In the case of steel, its share has grown from less than 10 per cent in 1990 to more than 32 per cent in 2007, equivalent to three times that of Japan, and more than either the EU or the USA (around 20 per cent each) (Kaplinsky 2005; Lennon 2008). Figure 6.3 shows the significance of China in the growth of global demand for key minerals and oil – particularly after 2002, when it began to run short of these key inputs. This expansion in Chinese commodity imports was associated with – and, arguably, was a primary cause of – the increased price of these hard commodities (Figure 6.4). We begin with the supply side of this pattern of price formation. First, the marginal costs of extracting primary metals can often be very high, given the short-run inelasticity of supply. The IMF estimated that, for a range of metals, the marginal costs of production rose by between 20 to 50 per cent during 2002–2006 and that this was one of the factors affecting global commodity prices (IMF 2006). Second, in response to this price shock, there have been substantial recent investments in new capacity (most, interestingly, not in the lowest-income economies but, rather, in Australia, Canada, Chile and the USA), and these generally have a gestation period of at least three to five years. However, many of these investments have underperformed with respect to delivery for a combination of reasons, including equipment breakdowns due to intensive use, poor quality inputs due to supply chain problems (for example, with regard to tyres for earthmoving equipment), a severe shortage of


Asian Drivers and the rise in commodity prices


122


120 100 80 60 40

D P G

il O

c Zi n

Ti n

l St ee

N ic ke l

ad Le

r pe C op

Al

um in

iu

m

0

1993–2002

2002–2005

Figure 6.3 China’s share of growth in global demand of selected metals Source: IMF World Economic Outlook Database (September 2006).

skills and a concentration on high grade ores (Lennon 2008). On the other hand, in many mining sectors there have been significant improvements in productivity. For example, in copper, labour productivity in Chile doubled during the 1990s and, in the USA, it doubled between 1980 and 1986 (Davis and Tilton 2005). Nevertheless, despite these technological advances, the IMF believes that the price shock in hard commodities will only dissipate some time after 2010 and, even then, that the prices of metals will remain higher than before the price shock of the early 2000s. However, it is instructive to go back to a survey of past shocks. Cashin, Liang and McDermott conclude that ‘those commodities where shocks have a greater possibility of originating from the demand side of the market could result in long periods of excess supply or demand’ (Cashin et al. 2000: 197). Here, the distinctive feature of China’s (and, prospectively, India’s) growth should be kept in mind. As Table 6.1 and Figure 6.5 make clear, China is only at an early stage in its metal intensive growth path. Its growing demand for these hard commodities is not a temporary spurt, such as those that affected global demand in past hard commodity price shocks. Between now and 2030, around 350 million people will be urbanized, there will be more than 200 Chinese cities with more than 1 million inhabitants, it is projected that 50,000 new skyscrapers will be built (equivalent to building ten New Yorks), and there will be up to 170 mass transit systems (Europe currently has 70) (McKinsey 2008, cited in Lennon 2008). Moreover, if anything, Table 6.1 underestimates the growth elasticity of demand for primary commodities in the global economy. This is because the fragmentation of global value chains has meant that the commodities


20


Raphael Kaplinsky

123

1000 900 800

600 500 400 300 200 100 0 1998

1999

2000

Aluminum

2001

2002

2003

Copper

2004

2005

Lead

2006

2007

Nickel

2008 Tin

Figure 6.4 Monthly average spot price of six key metals at the London Metal Exchange (January 1998 – June 2008) Source: IMF primary commodity prices (accessed 18 July 2008).

Table 6.1 The scope for China’s increased consumption of basic metals, 1955–2003 Kgs/capita

Japan 1955 1975 Korea 1975 1995 China 1990 1999 2002 2003

Aluminium

Copper

Steel

GDP per capita (US$1995)

0.6 10.5

1.2 7.4

80 599

5,559 21,869

1.0 15.0

1.3 8.1

84 827

2,891 10,841

0.7 2.3 3.3 4.0

0.6 1.2 2.0 2.4

59 108 160 200

342 756 933 1,103


1998 = 100

700

Source: Macquarie Metals and Mining, personal communication (2004).

intensive components of GDP in the high-income countries has been shipped out to low-cost producers in developing economies. Thus, the demand for commodities in the Asian Drivers will reflect not only meeting their own consumer needs, but also those of consumers in other countries.


124

Aluminum

20 Korea

United States

Japan

10

China

5

EUR-12 Brazil 0

5

15

10

15

20

25

30

35

0 40

Real GDP per capita (thousands of PPP-adjusted U.S. dollars) Copper Korea

20 15

Japan

10 EUR-12

5

Brazil

China 0

United States

5

10

15

20

25

30

35

Consumption per capita (kgs)

25

0 40

Real GDP per capita (thousands of PPP-adjusted U.S. dollars)

Korea 800 600 Japan 400

EUR-12 United States

200 China 0

Brazil 5

10

15

20

25

30

35


1000

Steel


25


30

0 40

Real GDP per capita (thousands of PPP-adjusted U.S. dollars) Figure 6.5 Per capita consumption of base metals Source: IMF World Economic Outlook Database (September 2006).


Raphael Kaplinsky

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Asian Driver demand and the prices of agricultural products Three disruptive factors are likely to affect the prices of agricultural commodities in the early decades of the twenty-first century. The first are the effects of climate change. We do not know at present how significant these will be, or at what pace they will emerge – or, indeed, what impact they are likely to have on the supply of agricultural products. Yet, at least in 2008, the portents are of significant disruption in the volume and geographical pattern of supply. Here, China’s role has historically been small, but the very rapid growth of its energy consumption has led it to become the world’s second largest consumer of energy, with consequent impacts on global warming, climate change and, hence, potentially, on the price of agricultural products. The second factor disrupting global supplies and prices of food crops arises from the growing imperative in the North to develop bioethanol as a substitute for hydrocarbon energy. Although often rationalized as an attempt to address the challenge of global warming, the environmental impact of substituting bioethanol for oil is either slight or negative since, in many cases, the net energy balance is negative. The real reason for the drive to bioethanol production in the North is around energy security. Here, China plays a role in the competition for secure supplies of oil (as reflected, for example, in its investments in SSA’s oil sector), but the major drivers for this energy insecurity are primarily internal to oil producing economies rather than as a consequence of China’s very rapid growth of oil imports. A third factor potentially disrupting agricultural commodity prices is associated with rising demand, particularly from China. Figure 6.6 shows the variability of this impact. In some sectors, such as beef and cotton, China has accounted for almost all increased global demand in recent years. In others, such as corn and bananas, its role is relatively muted and has declined. Analysis by the Food and Agriculture Organization of the United Nations (FAO) suggests that, although China has an emerging comparative advantage in some food sectors such as garlic, it is likely that its demand for food and industrial agricultural imports will expand, particularly if incomes grow and demand switches from grains to meat and fish products (FAO 2007). This conclusion is corroborated by the Chairman of Nestlé, in whose judgement the increase in demand for food imports from China ‘will have a long-lasting impact on [raising] food prices’ (Financial Times 6 July 2007). The application


The recent forays of China into the risky terrain of SSA in recent years is widely acknowledged to reflect China’s growing demand for these inputs over the long-term (Kaplinsky et al. 2008). This China related demand based factor might help to sustain hard commodity prices for some time after the 2011 date suggested by the IMF Survey. India is also embarking on a similar infrastructure intensive and industrial growth path, and is rapidly entering global commodity markets as domestic sources of supply fail to respond to growing demand.


126


120 1993–2001

100

2002–2005

%

80 60

20 0 Bananas

Beef

Corn

Cotton

Sugar

GDP

Figure 6.6 China’s share of growth in global demand of selected agricultural products Source: IMF World Economic Outlook Database (September 2006).

of increasingly sophisticated scientific techniques to the modification of plant varieties (genetic modification) has the capacity, perhaps, to enhance land productivity, but there is some uncertainty in this regard (Blas 2008). Again, as in the case of minerals, India’s growth path lags some way behind that of China but, nevertheless, follows a similar trajectory. As Indian middleclass incomes grow, so it is likely that its demand for imported agricultural products will expand, adding further pressure on global demand. Asian Driver demand and the prices of fuel products Rapid industrialization and, especially, rapid urbanization and associated investments in infrastructure have led to a burgeoning demand for energy in the Asian Drivers, and particularly in China. Each year, for example, China installs more additional capacity than the total generating capacity of South Africa, one of the more industrialized and particularly energy intensive developing economies. There is considerable, although inelastic, substitutability between various forms of energy, including not only between various forms of hydrocarbons, but also with renewables and energy conservation. Focusing on oil and coal – two primary sources of energy – it is evident from Table 6.2 that neither China nor India currently accounts for significant imports. What is significant is the rate of growth of their demand since 2000, and the associated decline in the share of global imports by both the USA and the EU25. More importantly, it is the projected share of China and India in global demand for both coal and oil that is fuelling important strategic shifts in geopolitics, especially in SSA, as well as expectations of future energy prices. Figure 6.7 shows the climb in the price of both oil and coal after 2000. In real terms, oil prices have still not exceeded those of the late 1970s, but most


40


Raphael Kaplinsky Coal and oil imports, 1984–2006 – China, India, USA and EU25 Coal

1984 1990 2000 2001 2004 2006

Oil

China

India

USA

EU 25

China

India

USA

EU 25

0.4 0.3 0.3 0.3 1.6 2.4

0.2 1.9 4.6 4.1 5.1 6.8

1.0 1.5 3.8 4.1 4.9 4.4

45.1 42.5 32.7 36.2 34.4 33.4

0.0 0.4 3.5 3.3 5.4 6.0

1.5 2.0 2.9 2.9 3.6 3.8

19.0 21.5 22.3 21.7 22.5 21.6

40.9 37.4 30.6 30.8 30.5 30.6

06

04

02

08 20

20

20

20

00 20

98 19

94

92

96 19

19

88

90 19

86

84

Oil

19

19

19

82 19

19

Coal

19

900 800 700 600 500 400 300 200 100 0

80

2000 = 100

Source: COMTRADE (accessed via WITS on 5 September 2008).

Figure 6.7 Index of oil and coal prices, 1980–2008 (2000 = 100) Note: Average of three major oil and coal spot prices (2000 = 100). Source: IMF World Economic Outlook Database (accessed via ESDS on 5 September 2008).

observers predict that prices will continue to remain high. In large part, this is due to geopolitical conflict, risk and uncertainty in the main producing regions – in the Middle East, in SSA and in Central Asia. Together with the prospects of achieving peak oil in the next decade, this suggests that the price of oil – and of substitutable energy sources such as coal – will remain strong for at least the coming decade, if not longer. In might be argued that this has little to do with the rise of the Asian Driver economies and is more to do with the growing global political resistance to US hegemony. However, the rise of demand, and especially the projected rise in demand for energy by China and India, together with their rocking of the US–EU hegemonic boat in key regions (for example, the Sudan) is arguably the major changing force that is leading to the sustained rising prices of energy.


Table 6.2

127


128


20 15 10 5 0 5

99

00 20

97

96

95

98

19

19

19

19

93

94

19

19

92

19

90

91

19

19

88

89

19

19

87

19

19

19

86

10

Figure 6.8 World manufacturing export price, 1986–2000 Source: IMF, World Economic Outlook Database (September 2003).

Table 6.3 Distribution of Global MVA Share of the World By income S. and E. Asia of which: China Latin America Sub-Saharan Africa

Share of developing countries

1985

1995

2005

1985

1995

2005

4.1 1.4 6.7 1.0

12.9 5.1 6.9 0.3

19.7 9.8 6.4 0.3

29.2 10.2 46.9 7.1

59.5 23.6 31.5 1.3

69.4 34.7 22.6 1.0

Source: Data provided by Statistics Office, UNIDO (June 2008).

What has happened to the prices of traded manufactures? Much of the second half of the twentieth century was a period of inflation in the global economy. By the 1990s, most economies had begun to get on top of high rates of inflation and for the OECD economies as a whole the rate of inflation at the turn of the millennium was less than 3 per cent. To a large extent, this reflected a period of price deflation in manufactures, beginning with a slowdown in the rate of price increases for manufactures in the late 1980s, and then after 1998 in absolute nominal prices (Figure 6.8). China has played a key role in this pattern of falling prices of manufactures. This is consistent with its rapidly growing and increasingly outward oriented industrial sector (accounting for more than 40 per cent of its GDP). Between 1985 and 2005, its share of global manufacturing value added (MVA) rose from 1.4 to 9.8 per cent, and from 10.2 to 34.7 per cent of developing country manufacturing value added (Table 6.3). Much of this growth in MVA was accounted for by exports to the global economy. Merchandise exports, which are overwhelmingly of manufactures, grew at 17 per cent per annum between 1990 and 1997, and at 21.4 per cent per annum between 1998 and 2004.


Annual price change (%)

25


Raphael Kaplinsky

35

% of sectors

30

129

29.7 25.6

25 18.3

20

17.2

15 8.5

10

0 Low income

China

Lower-middle income

Uppermiddleincome

High income

Figure 6.9 Percentage of sectors with negative price trends, 1988/9–2000/2001 by country groupings Note: Based on an analysis of 151 eight-digit products, selected on the basis of their contribution to LDC exports to the EU. Source: Kaplinsky (2005).

Chinas impact on the price of manufactures emerges from a detailed disaggregation of trade data (Kaplinsky 2005; Kaplinsky and Santos-Paulino 2005, 2006).1 Here, the EU provides a unique data-set on international trade that is large enough to use as a surrogate for the behaviour of global product prices. Figure 6.9 presents the results of this analysis. It focuses on the 151 major product groupings (classified at the eight-digit level) imported into the EU where developing country exporters were prominent. It reports the proportion of the sectors for which the unit price of imports from different income groups (and China) fell between 1988 and 2001. It can be seen from this that in almost one third of these sectors, the price of products of Chinese origin fell. In the case of products emanating from low-income economies, the proportion of product groups in which unit prices fell was around one quarter. As a general rule, the higher the per capita income group of the exporter, the less likely unit prices were to fall. Thus, within a large number of product groups, the prices of products exported into the EU by China and low-income economies was more likely to decline than the prices of the same products groupings sourced from other high income economies. A focus on the garments and textile sector is particularly illuminating on the role played by China with regard to the manufactured export prices received by other low-income exporters. When the Multifibre Agreement quota restrictions were lifted on China’s clothing exports to the USA at the end of 2004, this had a particularly adverse affect on SSA clothing exporters, notwithstanding the fact that they continued to benefit from preferential tariffs into the US market (Kaplinsky and Morris 2008). In the first two years after quota removal, the SSA economies exporting clothing to the USA experienced


5



a 26 per cent fall in the value of these exports. In the same product lines, China’s exports to the USA increased by 85 per cent in value. This outcome arose from fierce price competition from China, and in the product lines that the SSA exported to the USA, the unit values of China’s clothing exports declined by 46 per cent in the first year after quota removal.2 We draw two conclusions from this price analysis. First, the greater China’s participation in global product markets for manufactures, the more likely prices will fall. And, second, this seems to have a disproportionate impact on the low-income country groups who face intense competition from Chinese producers. Although only one side of the terms of trade price ratio, these data are suggestive of impacts on both the product- and country-terms of trade. India is, at present, only a minor exporter of manufactures, although in some sectors, such as apparel and textiles, exports have grown rapidly. Will China’s impact on these falling prices of manufactures endure? Labour costs are an important component of product prices and, here, China (and, to a lesser extent, India) appears to have a significant number of underemployed workers. China’s formal sector manufacturing employment (83 million in 2002) is already larger than that of the 14 largest high-income economies combined (79 million) (Kaplinsky 2005). Yet, a variety of observers concur that there are something like 100–150 million people in China currently working at very low levels of productivity who are waiting to be absorbed into the global economy. This surplus labour force is no longer composed of low-skilled people with only a basic education, and increasingly also includes high school and university graduates.3 Third, although labour costs are an important component of total costs, they are only a partial element. Chinese investments in infrastructure, logistics and energy efficiency suggest that, notwithstanding the external diseconomies of rapid industrial growth (such as congestion), these costs will also be kept low. Indeed, despite high rates of investment, total factor productivity growth in China has been significant (Jefferson et al. 2000). In summary, therefore, there are strong grounds for believing that China’s exports of manufactures will continue to place pressure on the prices of manufactures, initially on those of low technology products, but increasingly also in higher technology sectors such as computers and automobiles.

Terms of trade reversal?


130

Putting together these two sets of price data – for commodities and for manufactures – it is reasonable to conclude that we are experiencing a period of terms of trade reversal. However, this is a complex statement, perhaps hiding more than it reveals, since it ignores sub-sectoral and country differences. In the best of all worlds, it is necessary to refine these terms of trade to reflect the character of particular types of trading parties. Here, it is possible to make some broad-brush conclusions. First, not all agricultural – or, indeed,


131

commodity – prices have experienced sustained rising prices (coffee, tobacco, cotton). But, second, not all manufactures have experienced falling prices. It is helpful at this point to go back to the original contributions made by Singer and Prebisch in the 1950s. Singer’s original 1950 formulation addressed the importance of labour markets in price formation. He argued that the industrialized economies were characterized by near-full employment and well-organized labour, which led to cost-plus pricing (predominantly of manufactures). In contrast, the lowincome economies were characterized by surplus labour, with a tendency for wages (predominantly in commodity production) to be set at or near subsistence levels. For Singer, then, a primary characteristic of terms of trade was the inter-country determinant of price changes, with labour surplus economies experiencing declining terms of trade. Since the data available to him did not allow these calculations, he used the commodities-manufactures terms of trade as a surrogate for the inter-country terms of trade. Prebisch followed a similar line of argument. Scarcity and monopoly power (skills and organized labour) were pitted against surplus labour – an argument inherently around rent. Then, in 1971, and subsequently in 1986,4 Singer augmented this explanation for price formation, which this time recognized the fact that low-income economies were also beginning to export manufactures. He developed a point made in his 1950 contribution that was essentially Schumpeterian in nature: traditionally, manufactures in general were characterized by innovation rents, whereas the technological barriers to entry in primary commodities (particularly food based products) were low. But, in the case of many of the manufactures being exported by low-income economies as outward oriented industrialization took off after the early 1970s, innovation rents were small and price competition was consequently very high. Some years later, together with Sarkar, Singer began to evidence the differential price performance of manufactured exports from high- and lowincome economies. New data enabled a better measure of price trends, to ‘provide some support to the hypothesis of terms of trade deterioration extended to the field of trade in manufactures between the periphery and the centre, as in the country (rather than the commodity) version [of Singer’s initial terms of trade work]’ (Sarkar and Singer 1991: 334). Sarkar and Singer computed a fall in prices of developing country exports of manufactures relative to those of developed countries of 1 per cent per annum, providing a cumulative decline of 20 per cent between 1970–1987 (Sarkar and Singer 1991).5 It is here that the prescience and importance of Alf Maizels’ detailed calculations on terms of trade can be seen. Together with colleagues, Maizels undertook a series of detailed analyses of developing country trade-weighted terms of trade in manufactures. In the case of the EC/EU in the period 1979– 1994, developing countries witnessed a sharp deterioration in their relative


Raphael Kaplinsky



barter terms of trade (Maizels et al. 1998); this was despite an increase in overall unit prices of imports into the EU of 2 per cent per annum (outweighed by an increase in EU unit export prices of 4.2 per cent per annum). With regard to the USA, he analyzed the period 1981–1997 and observed a fall in the relative barter terms of trade of developing countries during the first half of the 1980s; thereafter, no trends emerged (Maizels 1999). Finally, with regard to Japan, and for the period 1981–2000, there was once again a disparity between the more rapidly falling barter terms of trade of developing country exporters compared with developed country exporters to Japan (Maizels 2003).6 In each case, the terms of trade of the East Asian newly industrializing economies (NIEs) fell more slowly than those of other developing countries. Maizels observes that this latter result ‘provides support for Singer’s [1971] thesis …that the degree of terms of trade deterioration for developing countries in their exchange of manufactures with developed countries reflects the level of technology embodied in their manufactured exports’ (Maizels 2003: 8). What can we conclude from this evidence, at least in the period up to the millennium? First, the fragmentation of global value chains and the expansion of export processing zones with thin layers of value added in manufactures has meant that barriers to entry in many parts of manufacturing have been lowered. This has led to increasing price competition in these areas (such as in fabrication and assembly) but less so in the service components of manufacturing (such as design, logistics, branding and marketing).7 Second, these rent rich activities are generally concentrated in the high-income countries, increasingly in services rather than in the physical transformation of inputs into outputs (manufacturing). Thus, in the last decade of the 1990s, the predominant trend with regard to terms of trade was within manufacturing and services, rather than between manufacturing and commodities. Moreover, in general, it reflected the Prebisch–Singer intuition of the early 1950s that the terms of trade were best seen as country determinants rather than product determinants. However, since the millennium, we appear to have entered a new period. In addition to sustaining the intra-manufactures and manufactures-services trends in the terms of trade that emerged in the 1990s, we are now experiencing a sustained rise in the price of commodities. This has added a twist to trend changes in the terms of trade, adding a layer of Ricardian rents (arising from absolute scarcity of commodities) to the altering patterns of Schumpeterian rents in manufactures and services subject to the fragmentation of global value chains.


132

Will the terms of trade reversal be sustained? What of the future? In late 2008, the prices of most commodities plummeted. This might suggest a case of plus la change, a return to previous eras in which


133

short-run price spikes rapidly burst. Although the recent price rises have been longer than those in either the 1950s or the 1970s, the speed of price decline has also been much steeper. I believe that the extent and speed of this price decline in late 2008, with prices expected to remain low for the duration of the global recession, should not be confused with these earlier eras of ‘busted booms’. This is because of the distinctive nature of the factors driving the recent commodities boom. Unlike previous eras, when rising prices were a consequence of post-war reconstruction (1950s), oligopolistic power (as in the 1970s) and climatic variation (periodically, in food and beverage crops), the post-2000 boom represents a structural shift in the global driver of demand. The countries (China, in particular, and soon India) fuelling this most recent boom have high – and, indeed, growing – commodity–GDP elasticities. As their growth and urbanization is sustained, their degree of usage of commodities is likely to expand rather than, as in the case of high-income economies in the 1950s and 1970s, decline. For this reason, I work on the presumption that the 2002–2008 super-cycle will be sustained for some time into the future; in other words, that we are witnessing a structural shift in the terms of trade in favour of most commodities. In turning to this medium-term scenario, we need, first, to observe a historically significant recent trend in the global economy, reflecting the global distribution of innovation and Schumpeterian rents. The widely cited and influential Sussex Manifesto of 1968 had concluded that only 2 per cent of global R&D took place in the developing world (Singer et al. 1970). Since then, heavy investments in innovation inputs in low-income economies – particularly in Asia, and in some parts of Latin America – have altered this picture quite considerably. Martin Bell has observed an important change in this global dispersion of R&D (Table 6.4). He found that the share of developing economies had risen from 2 per cent in the late 1960s to more than 21 per cent in 2000. Even though he (and others, including this author) is personally sceptical of the extent to which R&D accurately reflects innovation capabilities, the historical significance of this shift should not be underestimated. What this means is that Schumpeterian rents are less unevenly distributed globally than they were when Singer and Prebisch made their early contributions, and even for the period in the 1990s in which Alf Maizels computed a general decline in developing country terms of trade in manufactures. More controversially, and unevidenced, I would argue that it is not only the locational dispersion of Schumpeterian rents in manufacturing that has altered, but also that the degree of concentration of these rents in manufacturing has fallen. In other words, in general, manufacturing has fewer barriers to entry than in previous decades, and the capacity of producers of manufactures to sustain the prices of their output has declined. The rise of the Asian Driver economies in general – and China, in particular – has been crucial in this regard. On the other side of the coin –the production of commodities over the medium term – we are witnessing a rise in what could be termed Ricardian


Raphael Kaplinsky


134


Share of gross global R&D ($US PPP) (%) Coverage

C 1970

1990

2000

2.0

10.2

21.0

Excluding centrally planned economies

Including formerly centrally planned economies

Source: R.M. Bell, based on Sussex Manifesto (Singer et al. 1970) and USIS Bulletin on Science and Technology Statistics, 1 April 2004, personal communication.

rents; that is, the absolute scarcity of high yielding deposits of resources. The very rapid and sustained demand for primary commodities by the two large Asian Driver economies has placed major demands on the resources sector. The demand for metals has placed pressure on the mining sector, which is confronted by a variety of supply inelasticities. Although, in general, deposits of most minerals remain untapped, the gestation period for new investments is substantial. This has been compounded by a number of factors, including the burned fingers of resource firms who invested heavily in the early 1980s in the then false expectation of sustained price rises, the shortage of suitable skills, and the fact that many deposits are in failed states, particularly those in SSA and are, thus, very risky. Although there is a debate about the imminence of peak oil, supplies of low-cost oil, and geo-political instability in oil-producing regions, suggests that energy prices will be sustained for some time. In the agricultural sector, there is some debate about the sustainability of rapid productivity growth. But a combination of factors – including the likely disruption of production by climate change, rising demand for land intensive meat products, and the growing shortage of water – suggest that agricultural prices will remain robust for some years to come. However, commodity prices remain volatile – more volatile than manufactures. This is for a combination of reasons. First, supplies are often lumpy, and a natural/political disaster can have a major impact on global supplies. Second, agricultural commodities remain subject to the vagaries of weather. And, third, (although the evidence on this is still contested – Weiner 2002; Antoshin and Samiei 2006; Malliaris and Stein 2006; Reitz and Westerhoff 2007) commodities have now become a realm for speculation by the financial community, with flows of hot money heating up and cooling down commodity prices. The undifferentiated nature of many commodities makes them much more prone to speculation than manufactures. This will mean that there will be periods – including during August 2008 – when commodity prices will fall back. The speed and extent of this breakdown reflects a global liquidity squeeze, with many financial hedge funds having to unload large acquisitions of commodities futures in order to cover their wider and very urgent financial obligations. This will undoubtedly lead some to conclude


Table 6.4 Developing countries in Global R&D: 1970, 1990 and 2000


135

that the current rise in commodity prices is only a short-term and temporary phenomenon, little different to that of the 1970s. We also need to bear in mind that the conclusion that falling commodity prices returns the terms of trade to their historic trend neglects to recognize what is happening on the manufactures side of the terms of trade calculation. Here, we are witnessing structural over-capacity and intense competition in many product areas. Thus, even if global economic growth slows down and even, perhaps, becomes negative, and declining demand leads to a fall in the nominal price of commodities, at the same time this will lead to an intensifying fall in the price of manufactures. The likely outcome of this scenario is one of global price deflation rather than the reassertion of the terms of trade in favour of manufactures. Does all of this portend a shift from a Schumpeterian-rent intensive world to a Ricardian-rent intensive world, with its consequent impact on price formation? My own belief is that, at least in the short run, and for the coming decade, this will be the case. The OECD and FAO predict robust food prices until at least 2017, and most commodity specialists concur that commodity prices will remain bullish until at least 2012 (ten years after the boom began). Most observers see oil prices of more than US$100 barrel for the foreseeable future, once the global recession of 2008–2009 works its way through. This does not mean that innovation rents are unimportant, since the effective supply of commodities naturally draws on technological capabilities and many sectors of manufacturing remain innovation intensive. Neither does it mean that all commodities will remain in short supply. In conclusion, I am painting with a broad brush to draw two conclusions. First, we are currently witnessing a terms of trade reversal, which is of considerably more significance than the price spikes of the 1950s and 1970s. Second, the rise of the Asian Driver economies – particularly China – is a crucial factor in this reversal of terms of trade.

Notes I am grateful to Masuma Farooki for assistance with the compilation and computation of much of the data in the paper on which this chapter is based.


Raphael Kaplinsky

1. The terms of trade literature is almost entirely based on the use of aggregated data, mostly using SITC 3, and very occasionally SITC 4, digit classifications. This is not adequate for a detailed examination of prices, since it masks price changes with variations in the composition of products. The harmonized system (HS) trade classification system introduced in the late 1980s has a much finer degree of disaggregation and provides greater scope for the detailed tracking of product prices. At the eight-digit level, there are 10,000 different HS product categories. 2. It is not surprising that this resulted in significant employment loss in the clothing sectors of these SSA economies. For example, in the first year after


136


The officially released low (formal) unemployment figures, however, do not reflect the severity of the actual high unemployment …[which] takes place in urban China not in the form of open unemployment, but rather in the form of lay-offs. Laid-off workers, according to an official definition, are those who loose [sic] jobs as their employing units encounter economic difficulties, while still maintaining their nominal employment relationship with their employees. (Gu 2003: 2) 4.

… the explanations for a deteriorating trend in terms of trade of developing countries relate as much or more to the characteristics of different types of countries …as to the characteristics of different commodities. This indicates a general shift in the terms of trade discussion away from primary commodities versus manufactures and more towards exports of developing countries …versus the exports of industrial economies …[T]he initial hypothesis was formulated at a time when there was relatively little export of manufactures from developing countries. However, the fact that some of the explanation for deteriorating terms of trade now relates to the characteristics of countries rather than commodities means that even export substituting industrialization, a shift away from primary commodities to manufactures in the exports of developing countries has not disposed of the problem. (Singer 1986: 628)

5. However, this fall in the barter terms of trade was outweighed by a massive expansion of developing country exports, such that the income terms of trade in the same period rose at 10 per cent per annum. 6. In each of these three cases, rapidly growing imports from developing countries meant that the falling barter terms of trade were outweighed by rising income terms of trade. 7. Wood made an important contribution to this debate in 1994 in his rough estimation of declining developing country terms of trade, where he calculated price changes in developing country manufactured exports with a bundle of high-income economy exports of goods and knowledge intensive services (Wood 1994).

References Anotoshin, S. and H. Samiei (2006) ‘Has Speculation Contributed to Higher Commodity Prices?’, World Economic Outlook, September (Washington, DC: IMF). Blas, J. (2008) ‘The End of Abundance’, Financial Times, 2 June. Cashin, P., Hong Liang and C.J. McDermott (2000) ‘How Persistent are Shocks to World Commodity Prices?’, IMF Staff Papers, 47(2): 177–217. COMTRADE Accessed via WITS on 5 September 2008. Davis, G.A. and J.E. Tilton (2005) ‘The Resource Curse’, Natural Resources Forum, 2005: 233–42. FAO (2007) ‘Implications for World Agricultural Commodity Markets and Trade of Rapid Economic Growth in China and India’, Committee of Commodity Problems, Sixty-Sixth Session (Rome: FAO). Gu, E. (2003) Labour Market Insecurities in China, SES Papers, 33 (Geneva: ILO).


quota removal employment fell by 26 per cent in Lesotho and by 43 per cent in Swaziland. 3. This labour surplus does not show up in Chinese labour statistics:


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IMF (2006) World Economic Outlook. IMF, IMF Balance of Payments Statistics, available at www.imf.org Jefferson, G.H., T.G. Rawski, Li Wang and Yuxin Zheng (2000) ‘Ownership, Productivity Change, and Financial Performance in Chinese Industry’, Journal of Comparative Economics, 28(4): 786–813. Kaplinsky, R. (2005) Globalization, Poverty and Inequality: Between a Rock and a Hard Place (Cambridge: Polity Press). Kaplinsky, R. (2006) ‘Revisiting the Terms of Trade Revisited: Will China Make a Difference?’, World Development, 34(6): 981–95. Kaplinsky, R. (2009, forthcoming) ‘China, Commodities and the Terms of Trade’, in D. Greenaway, C. Milner and Shujie Yao (eds), China and the World Economy: Consequences and Challenges (London: Palgrave Macmillan). Kaplinsky, R., D. McCormick and M. Morris (2008) ‘The Impact of China on SSA’, Agenda-setting Paper prepared for DFID, Discussion Paper 291 (Brighton: Institute of Development Studies). Kaplinsky, R. and M. Morris (2008) ‘Do the Asian Drivers Undermine Export-Oriented Industrialisation in SSA’, World Development, Special Issue on Asian Drivers and their Impact on Developing Countries, 36(2): 254–73. Kaplinsky, R. and A. Santos-Paulino (2005) ‘Innovation and Competitiveness: Trends in Unit Prices in Global Trade’, Oxford Development Studies, 33(3–4): 333–55. Kaplinsky, R. and A. Santos-Paulino (2006) ‘A Disaggregated Analysis of EU Imports: Implications for the Study of Patterns of Trade and Technology’, Cambridge Journal of Economics, 30(4): 587–612. Keeley, J. and J. Wilsdon (2007) China: The Next Science Superpower (London: Demos). Lennon, J. (2008) Overview of Commodities Outlook with Focus on Copper, Zinc and Coking Coal (London: Macquarie Commodities Research Macquarie Capital Securities). Maizels, A. (1999) ‘The Manufactures Terms of Trade of Developing Countries with the United States, 1981–97’, Working Paper, 36 (Oxford: Finance and Trade Policy Centre, Queen Elizabeth House). Maizels, A. (2003) ‘The Manufactures Terms of Trade of Developing and Developed Countries with Japan, 1981–2000’, Mimeo (Oxford: Queen Elizabeth House). Maizels, A., K. Berge, T. Crowe and T.B. Palaskas (1998) ‘Trends in the Manufactures Terms of Trade of Developing Countries’, Mimeo (Oxford: Finance and Trade Policy Centre, Queen Elizabeth House). Malliaris, A.G. and J.L. Stein (2000) ‘Microanalytics of Price Volatility in Future Markets’, in B. Goss (ed.), Models of Futures Markets (London: Routledge). Nolan, P. (2004) China at the Crossroads (Oxford: Polity). Prebisch, R. (1950) ‘The Economic Development of Latin America and Its Principal Problems’, Economic Bulletin for Latin America, 7 (New York: United Nations). Reitz, S. and F. Westerhoff (2007) ‘Commodity Price Cycles and Heterogeneous Speculators: A STAR–GARCH Model’, Empirical Economics, 33(2): 231–44. Sarkar, P. and H.W. Singer (1991) ‘Manufactured Exports of Developing Countries and Their Terms of Trade’, World Development, 19(4): 333–40. Shenkar, O. (2005) The Chinese Century: The Rising Chinese Economy and its Impact on the Global Economy, The Balance of Power and Your Job (Upper Saddle, NJ: Pearson Education). Singer, H.W. (1950) ‘The Distribution of Gains between Investing and Borrowing Countries’, American Economic Review, 15: 473–85. Singer, H. (1971) ‘The Distribution of Gains Revisited’, repr. in A. Cairncross and M. Puri (eds), (1975), The Strategy of International Development (London: Macmillan).


Raphael Kaplinsky



Singer, H.W. (1986) ‘Terms of Trade and Economic Development’, in J. Eatwell, M. Milgate and P. Newman, (eds), The New Palgrave: A Dictionary of Economics (London: Macmillan): 626–8. Singer, H., C. Cooper, R.C. Desai, C. Freeman, O. Gish, S. Hall and G. Oldham (1970) ‘The Sussex Manifesto: Science and Technology for Developing Countries during the Second Development Decade’, IDS Reprints, 101 (Brighton: Institute of Development Studies). Tull, D.M. (2006) ‘China’s Engagement in Africa: Scope, Significance and Consequences’, Journal of Modern African Studies, 44(3): 459–79. UNIDO (2008) Statistics Office data, June. USIS (2004) ‘Bulletin on Science and Technology Statistics’, 1 April. Weiner, R. (2002) ‘Sheep in Wolves’ Clothing? Speculators and Price Volatility in Petroleum Futures’, Quarterly Review of Economics and Finance, 42: 391–400. Wood A. (1994) North–South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World (Oxford: Clarendon Press). Wood, A. (1997) ‘Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom’, World Bank Economic Review, 11(1): 33–57. World Development (2008) Special Issue on Asian Drivers and their Impact on Developing Countries, 36(2): 274–92.


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7 Alice Sindzingre

Introduction: a structural change in commodity markets?1 In the first decade of the twenty-first century, commodity markets appear to have undergone deep changes. In view of the rise in commodity prices over the period 2003–2008, the impact of China on global commodity prices and terms of trade has been considered as a factor that could lift prices beyond their historic trend. As argued by Raphael Kaplinsky in Chapter 6 of this volume, the two ‘Asian drivers’ – China and India – might be seen as disruptive forces in the global political economy. Their growth has underlain a rise in demand that is likely to push up the prices of ‘hard commodities’, agricultural products and fuels. Indeed, the years 2007–2008 witnessed spectacular increases – in particular, for oil prices. In the summer of 2008, energy prices were 80 per cent higher in dollar terms than in 2007, and non-energy prices were 35 per cent higher; there is no doubt that these increased prices were caused, among other things, by emerging countries’ growth, Chinese demand for metals and the surge in the demand for certain food crops for biofuels (World Bank 2009). Several observers considered that the high commodity prices of 2003–2008 would last for a long time and that this phenomenon was inaugurating a new period characterized by high prices at a global level, which would even represent a structural shift calling into question previous evidence and theories. In particular, this rise in commodity prices has seemed to question the theses on the secular deterioration of the terms of trade elaborated by Raul Prebisch and Hans Singer in the 1950s, and later by Alfred Maizels. As is well known, these theses provide the theoretical arguments demonstrating the intrinsic instability of commodity markets and the long-term decline in the terms of trade of commodities in relation to manufactures. Among others, the key


Uncertain Prospects of Commodity-Dependent Developing Countries


140

Uncertain Prospects of Developing Countries

Falling to earth The Economist industrial commodity-price index, in real* $ terms 18451850 100

140 120 100

60 40 20 0 1845 50

60

70

80

90

1900

10

20

30

40

50

60 70 80 90 99 *Adjusted by US GDP deflator

Figure 7.1 The secular decline of commodity prices since 1845 Source: The Economist (15 April 1999).

reasons are the low price-and-income elasticities of demand for commodities as compared with manufactures, and the technological superiority of developed countries, which allows these countries to capture excess profits in their trade with developing countries (Maizels 1987). The generalized price slump that started in the last quarter of 2008 made it very unlikely that the increase in commodity prices was signalling a genuine reversal of this secular trend, however, which would have contradicted the Prebisch–Singer–Maizels theses on the deterioration of the commodity terms of trade. Evidence shows that the long-term decline is difficult to refute, as illustrated by the Economist industrial commodity price index devised in the mid-nineteenth century (Figure 7.1). David Sapsford and Stephan Pfaffenzeller, in Chapter 5 of this volume, have also highlighted the resilience of the commodity crisis over the long term and the negative slope of price trends. The World Bank (2009) has also underscored that the global economy does not seem to be moving into a new era of relative shortage and permanently higher commodity prices that would be pushed by global demand – in particular, that of China. Over the past fifty years, several factors (technological change, changes in the structure of global GDP, services being less commodity intensive than manufactured goods) have reduced the quantity of metals and energy required to produce a unit of GDP (Figure 7.2). Indeed, as argued by Streifel (2006), in the mid-2000s, in real terms, agricultural prices were below former peak levels. Oil and metal prices have risen to record nominal highs but, in real terms, most remain below the peaks of the 1980s (Figure 7.3).


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Commodity intensity of demand index (1971 = 1.00) 1.10 1.05 1.00 0.95 0.90

0.80 0.75 0.70 1971

1977

1983

1989

1995

2001

Energy

Metals

Metals (excluding China)

Food

Figure 7.2 Quantity of commodities used per unit of GDP, 1971-2001 Source: World Bank (2009).

Real commodity price indices (constant 2005$ - US GDP deflator)

Commodity price indices (1990 100) 350

350 300 250

Oil Metals Agriculture

250

200

200

150

150

100

100

50

50

0 Jan-70

Oil Metals Agriculture

300

0 Jan-80

Jan-90

Jan-00

1970 1975 1980 1985 1990 1995 2000 2005 *2006 avg first rour months

Figure 7.3 Real commodity price indices, 1980s and 2000s Source: Streifel (2006).

Arguments centred on high prices and their positive prospects have overlooked the crucial feature of commodities and the macroeconomics of commodity exporting countries – that is, price volatility, as well as the fact that commodity prices are determined by factors other than demand, in particular international financial markets. These arguments also overlooked the market failures operating both at the global and local levels – for example, affecting the organization of local markets in developing countries – that make it difficult for commodity exporting countries’ policies to cope with volatility.


0.85


142


350 Crude oil

Non-oil

250 200 150 100 50 0 1900

1915

1930

1945

1960

1975

1990

2005

Figure 7.4 The volatility of real oil and non-oil commodity prices Source: Streifel (2006).

The chapter is structured as follows. It first underscores that the predictions of higher prices and structural shift that would have made the Prebisch– Singer–Maizels theories obsolete overlooked a central feature of commodities and their macroeconomics, which is that of price volatility and the plurality of its determinants. The chapter then emphasizes the negative effects of volatility. Volatility is not likely to be modified by China’s demand, the structure of which changes according to China’s cycle of development and converges towards the structure of industrialized countries. These negative effects are particularly detrimental in developing countries, as many of them are excessively dependent on commodities for their exports, a dependence that is not likely to be changed by the demand from emerging countries in the medium term. The chapter finally confirms the pessimistic findings demonstrated by Alfred Maizels long ago regarding the contribution of commodity dependence to poverty traps: these traps might be compounded by other processes, in particular institutional arrangements.

The central issue: the volatility of commodity prices The second half of the 2000s – the period 2003–2008 – caught observers’ attention, as it was a long period of high commodity prices. The second half of the 1970s also witnessed high commodity prices, however, which, as during any boom period, was followed by a slump. The financial crisis of 2008 and the concomitant sharp drop in oil prices showed that the prevailing views on high prices in 2003–2008 lacked historical perspective and neglected a key characteristic of commodity prices, which was their intrinsic volatility. This volatility is a long-term characteristic that affects real oil commodity prices, but also, though to a lesser extent, non-oil commodity prices (Figure 7.4).


Constant 1990 US$s

300


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50 40

Upper bound of 95 per cent confidence band

30 20

0 10 20 30

Lower bound of 95 per cent confidence band

40 1862 1872 1882 1892 1902 1912 1922 1932 1942 1952 1962 1972 1982 1992 Figure 7.5 Volatility of real price of industrial commodities, 1862–1999 Note: Log difference of real price of industrial commodities Source: Cashin and McDermott (2002).

This volatility is sometimes even considered as a feature of real commodity prices over the long term that is more irrefutable than the downward trend: for example, for Cashin and McDermott (2002, using the Economist’s commodity price index), the downward trend is small and ‘completely dominated by the variability of prices’ (Figure 7.5). The financial crisis that began in September 2008 has, indeed, been associated with extreme commodity price volatility. Therefore, the high commodity prices of 2003–2008 could not hide the fact that price volatility was still the central issue. The 2003–2008 increase could have been viewed from its inception as another cycle in the history of commodity price cycles and another in a long series of booms followed by busts, the most recent being the boom of the second half of the 1970s. The 2003–2008 boom could be compared to similar booms, the 1973–1974 oil shock and in 1950–1957 after the Second World War. Both booms turned to bust, and this was the case of the 2003–2008 boom (Table 7.1). The 2003–2008 boom, however, had a number of distinctive features, as it was unprecedented in terms of strength, length and scope, and characterized by the rapidity of the subsequent price fall. According to the Reuters–Jefferies CRB index, which includes oil and other commodities (copper, cotton and so on), October 2008 brought the largest monthly drop since the index started in 1956 (Blas 2008). Oil prices witnessed a very steep decline, with a division by a factor of more than four in a few months (from about US$150 per barrel in July 2008 to less than US$35 by the end of 2008).


10


144


Table 7.1 Principal characteristics of major commodity booms 1915–17

1950–57

1973–74

2003–08

4.8

4.0

3.5

Rapid global real growth (average annual %)

N/a

Major conflict and geopolitical uncertainty

First World War

Inflation

Widespread Limited

Korean War

Yom Kippur War, Iraq conflict Vietnam War Widespread

Limited second round effects

Period of significant First infrastructure World War investment

Post-war rebuilding in Europe and Japan

Not a period of significant investment

Rapid building of infrastructure in China

Centred in which major commodity groups

Metals, agriculture

Metals, agriculture

Oil, agriculture

Oil, metals, agriculture

Initial rise observed in prices of

Metals, agriculture

Metals

Oil

Oil

Preceded by extended period of low prices or investment

No

Second World Low prices War destroyed and a supply much capacity shock

Extended period of low prices

Percentage increase in prices (previous through to peak)

34.0

47.0

59.0

131.0

Years of rising prices prior to peak

4.0

3.0

2.0

5.0

Years of declining prices prior to through

4.0

11.0

19.0

N/a

Note: N/a = not available Source: World Bank (2009): table 2.1.

Volatility is compounded by the fact that non-fuel commodity prices have a strong business cycle component; metals, in particular – for example, steel and copper, the prices of which have been influenced by China’s growth cycle (World Bank 2009). Demand for commodities varies depending on the different stages of growth of emerging countries (for example, oil, copper, steel and so on), which contributes to the formation of cycles and the instability of global demand. The International Monetary Fund (IMF) (IMF 2006) emphasizes that the correlation between world growth and annual changes in real metals prices is about 50 per cent, while periods of large upward


Common features


145

movement in metal prices tend to be associated with world growth. Prices of agricultural commodities also tend to rise during cyclical upturns, but with a more limited response due to more flexible supply and the low-income elasticity of demand. In addition, commodity markets are linked and prices might be transmitted across markets (though price co-movements remain debated, since methodologies matter; see Cashin et al. 1999). Baffes (2007), for example, for 1960–2005, has calculated the transmission of oil prices to non-energy commodity prices (metals, agriculture and fertilizers) – the elasticity of non-energy prices to oil prices being 0.16. The formation of commodity prices is, moreover, not only driven by global demand – in particular, the demand of large emerging countries such as China and India – but also by several other factors, especially financial markets. Commodity prices are determined by financial variables such as exchange rates, not only by the US$ but also the exchange rates of a number of small commodity exporters (Chen et al. 2008, on the cases of Australia, Canada, Chile, New Zealand and South Africa). Commodity prices are also determined by interest rates, and the effect of interest rates on commodity prices can come through three channels: the level of inventories, production, and financial speculation (Frankel 2008). The 2000s have witnessed a ‘financialization’ of commodity markets, with some commodities (for example, gold, oil, copper, wheat) more heavily traded in the financial markets than others (IMF 2008b: ch. 3). Commodities have increasingly become alternative financial assets, as shown by the spectacular increase of open futures positions of crude oil and derivative instruments. The debate is ongoing as to whether high investor activity has increased price volatility and pushed prices above levels corresponding to fundamentals, thus increasing instability in commodity markets: for the IMF, speculative activity responds to price movements (rather than the other way around), the causality running from prices to changes in speculative positions (Helbling et al. 2008). By June 2008, investors’ commodities assets under management had risen from about US$10 billion in 2000 to US$270 billion (Blas 2008). Oil prices started to decline in August 2008, when the global spread of financial crisis caused by the sub-prime loans in 2007 became increasingly manifest and the linkages between markets increasingly visible. Global financial and commodity markets are integrated, which was overlooked by studies that explained price formation by a sole determinant such as global demand for commodities (or supply constraints, or low inventories) that would be linearly driven by China. Commodity and financial markets are linked, as well as commodity markets between themselves, which contributes to commodity price volatility, and the determinants of commodity prices boom are more macroeconomic than market specific. Growth in China contributed to the 2003–2008


Alice Sindzingre



commodity boom, but the amplitude of the boom is explained by financial considerations and trade-offs across markets. This had been analyzed long ago by Maizels (1994), who demonstrated that commodities constitute an asset class which underlies price movements that spread across markets. For Maizels, speculative funds shift into, and out of, the commodity markets that deal in futures contracts. In periods of uncertainty, large amounts of funds might switch, either for hedging or for speculation, from other asset markets into commodities, and vice versa, which intensifies commodity price cycles. Maizels had underscored as early as 1994 that the volume of speculative funds had grown hugely in the 1980s.

Detrimental effects of commodity price volatility Much more than the short-term profiles of the trends of commodity prices, volatility is thus a crucial feature of commodity prices. Volatility is a problem because it has negative economic effects, especially on low-income countries such as in sub-Saharan Africa (SSA). The negative effects of terms of trade volatility have been assessed over the long run. Williamson (2008) has shown that terms of trade volatility was much greater in the ‘poor periphery’ than the ‘core’ during the nineteenth century – between 1820 and 1870 – in some cases, six or seven times greater. Moreover, econometric evidence from 1870–1939 and 1960–2000 reveals that terms of trade volatility lowered longterm growth in the poor periphery: this helps explain the ‘Great Divergence’ between the two parts of the world. As emphasized by Loayza et al. (2007), macroeconomic volatility – here, defined by output volatility – is both a factor and a reflection of a low level of development (Figure 7.6). Many countries affected by macroeconomic volatility are predominantly commodity exporters (Ecuador and Nigeria). Small economies are among the most volatile; for example, the Dominican Republic and Togo. Large economies might suffer from volatility as well, such as China and Argentina. The principal negative effect of macroeconomic volatility in developing countries is the large welfare costs it entails, which come, first, from the direct welfare loss of deviating from a smooth path of consumption (optimal for most people, who are risk averse) and, second, from its negative impact on output growth – and, thus, on future consumption (Figure 7.6). For Loayza et al., among other transmission channels, volatility has negative effects in that it creates uncertainty (economic, political and policy related) and intensifies the constraints on investment. The negative impact of volatility on growth is amplified in poor countries. Macroeconomic volatility has much higher welfare costs for poor countries than for rich countries, and is more frequent in developing countries than rich countries, the question of the directions of causality still being debated (Figure 7.7).


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147

6

4

2

0 0

1

2

3

4

5

6

2

7

8

9

y 0.3355x 3.1695 t 3.23 R2 0.119

4

Standard deviation of per capita GDP growth Figure 7.6 Macroeconomic volatility and economic growth Source: Loayza et al. (2007).

20 18 16

Per cent

14

1960s 1970s 1980s 1990s

12 10 8 6 4 2 0

Industrialized economies

East Asia and Pacific 7

Other East Asia and Pacific

Latin America and the Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa


Average per capita GDP growth

8

Figure 7.7 Volatility of terms of trade growth (regional medians) Source: Loayza et al. (2007).

Moreover, volatility is detrimental due to the asymmetry of shocks: growth accelerations and collapses appear to be asymmetric phenomena (Jones and Olken 2005) and, in commodity price cycles, price slumps seem to last longer than booms (Cashin et al. 2002). The impacts of price shocks are asymmetric


2.0

8

1.5

6 SSA oil production as share of total oil production (right-hand scale)

1.0

4

0.5

2

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

Oil production (left-hand scale)

0.0

0

Figure 7.8 Sub-Saharan African oil-producing countries: oil production, 1965–2006 Source: Olters (2007), based on British Petroleum (BP) Statistical Review of World Energy, June 2006, and IMF staff estimates.

also, as in the case of energy prices: energy price increases seem to cause recessions, but decreases do not seem to cause expansions (Kilian 2008). In addition, the negative effects of volatility are compounded by the current context of global trade openness. In their analysis of the structural determinants of external vulnerability, Loayza and Raddatz (2007) emphasize that greater trade openness magnifies the output impact of terms of trade shocks, particularly negative ones. As the price of oil is characterized by a high level of volatility, the negative impact of volatility is likely to be even worse for oil exporting countries. Indeed, as underlined by Kaplinsky, agricultural commodities must be distinguished from fuels. Here, countries in SSA might be particularly affected: from almost nothing in the 1960s, the share of fuels has risen to over half of the total exports of SSA (IMF 2007a) (driven by Angola, Cameroon, Chad, the Republic of the Congo, Côte d’Ivoire, Equatorial Guinea, Gabon and Nigeria) (Figure 7.8). The recent growth episodes in oil exporting countries in SSA over the period 2004–2008 have been almost entirely driven by oil prices. As emphasized by the IMF (2007b), terms of trade have improved in SSA – above all, for oil exporters (Figure 7.9). This model of growth is obviously very vulnerable to price decreases. Volatility is not only particularly important and detrimental to growth in oil exporting countries, but also fiscal management is notoriously very difficult



In per cent of world production

In billion barrels per year

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18

(Per cent)

16 14 12

149

Sub-Saharan Africa Oil-exporting countries Middle-income countries Low-income countries Fragile countries

10

6 4 2 0 –2 –4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Figure 7.9 GDP growth in sub-Saharan Africa driven by oil prices, 2000s Source: IMF (2008c): fig. 1.8.

in these countries: the high volatility of oil prices is a permanent threat to the fiscal balance (Olters 2007). The international financial institutions (the IMF and the World Bank) acknowledge that countries in SSA are excessively reliant on commodity exports, and that it is the region most vulnerable to any decline in energy and mineral prices, with oil and mineral exporters being the most vulnerable to commodity price volatility (World Bank 2007a). Both recognize that the structural characteristic of primary commodity prices remains high volatility: the question of the robustness of growth in SSA has been raised at the World Bank (Saba Arbache and Page 2008).

The limited impact of China on price volatility and existing commodity based export structures The rise in commodity prices in 2003–2008, then viewed as offering better prospects for commodity exporting low-income countries, has been explained by the growth and the subsequent demand of China and other large emerging countries (Figure 7.10). A key point is that, if the focus had been on volatility, lesser changes could have been attributed to China’s growth, as global commodity price volatility is not likely to be modified by China’s demand in the medium term. The structure of China’s demand changes according to China’s cycle of development, and converges towards the structure of industrialized countries.


8


150


30,000 26,000

Metals1 (aluminum and copper)

Oil1

Major food crops1, 2

22,000

14,000

Other emerging and developing economies OECD China

10,000 6,000 2,000 19 85 –9 0 19 91 –2 00 0 20 01 –0 6 19 80 –9 0 19 91 –2 00 0 20 01 –0 7 19 80 –9 0 19 91 –2 00 0 20 01 –0 7

2,000

Figure 7.10 average)

Contributions of selected regions to annual consumption increase (period

Notes: 1 Metals are in hundreds of thousands of metric tons. Major food crops – corn, rice, soybeans, and wheat – and oil are in thousands of metric tons; 2 Major food crops are corn, rice, soybeans and wheat. Source: Helbling et al. (2008) based on US Department of Agriculture, World Bureau of Metal Statistics, British Petroleum and IMF staff.

The increase in trade between China and other developing countries, especially SSA, is undoubtedly spectacular – not only trade, but also investment and aid. Between 2001 and 2006, SSA exports to and imports from China rose on average by 40 per cent and 35 per cent, respectively – higher than the growth rate of world trade (14 per cent) or commodities prices (18 per cent) (Wang and Bio-Tchané 2008). China has become the third largest trading partner of SSA, after the USA and the EU. China has been often said to trade with SSA only for the purpose of extracting its natural resources and securing the inputs necessary to China’s growth. There is no doubt that trade between SSA and China heavily involves primary commodities (Figure 7.11). The composition of goods traded between SSA and China, however, is similar to that between SSA and its other major trading partners. In 2006, oil and gas represented 60 per cent of SSA exports to China; non-petroleum minerals and metals, 13 per cent. Africa’s imports from China consist of manufactured products, machinery and transport equipment (three quarters of total imports) (Wang and Bio-Tchané 2008) (see Figure 7.12). In highlighting the similarity in composition of goods traded between SSA and its main trading partners, Wang and Bio-Tchané make a key point: the recent surge in trade between China and countries in SSA reflects partners’


18,000


151

0.2 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

1984

1988

1992

1996

2000

2004

Year /TotNRExp

/TotChnTrade

Figure 7.11 African exports of natural resources to China over time Source: Meyersson et al. (2008)

comparative advantages, given their stage of economic development and not China’s unilateral quest for natural resources. China is reproducing the longstanding pattern of countries in SSA – export of primary commodities – rather than modifying it. The IMF significantly recognizes that, even if the rise of China might change long-term price trends, prices might continue to decline in real terms (as they did during the last century), and the prices of most non-fuel commodities remain below their historical peaks in real terms compared with the prices of manufactures (IMF 2006). The real impact of China on the growth of other developing countries – in particular, commodity exporting low-income countries – as well as on commodity price behaviour, is uncertain at the economic and political levels. The integration of China into the world economy, its growth and, hence, increasing demand for products exported by low-income countries, is a positive process as it increases prices and exports. As argued by Kaplinsky (2006), in the 2000s price changes have reversed the decline in the terms of trade of commodity producers in SSA due to the entry of China into the global market, which has augmented the demand for commodities. China’s demand for natural resources has contributed to a rise in prices (for oil and metals), and boosted real GDP in SSA (Zafar 2007).


Total exports of NR to China from Africa (fraction of total NR export of total China trade)

Alice Sindzingre


152


Exports

Imports

00 24

15 1

80

24 39

36

32

11

22

6

45

84

40 63

55

20

53

46

31

0 China

United States

EU-15

China

United States

EU-15

Other Crude material (excludes fuel)

Other Manufactured goods

Fuel

Machinery and transport equipment

Figure 7.12 Africa’s trade with China, the USA and the EU-15, 2006 Note: In US$s (billion) Source: Wang and Bio-Tchané (2008), based on UN-COMTRADE.

There are factors of pessimism, however, that have been underscored by Kaplinsky. Trade with China has a negative impact on SSA’s manufacturing sectors, which cannot compete with the low production costs, technology and cheap goods imported from China. In particular, the end of the MultiFibre Agreement in 2005 and the subsequent removal of quotas had a devastating impact on SSA textile sectors (Kaplinsky et al. 2007). In following the same pattern as the other main trading partners (the USA and the EU), China’s demand reinforces the specialization of SSA countries in the export of commodities and their dependence on natural resources, which reduces incentives for diversification. In addition, due to its development strategy, which is based on the assembling and exporting of manufactured products, China’s growth is vulnerable to the global instability of the demand for these products, as shown by its sensitivity to the 2008 economic crisis. In the words of Bardhan (2005): ‘China, India, superpower? Not so fast!’


13 60

Beyond commodity prices levels: commodity-dependence and poverty traps Even if commodity prices had remained high after 2008, this could have entailed negative effects in a series of developing countries. This might


153

maintain distorted market structures and the excessive dependence on commodities for their exports that characterize many developing countries. The 2003–2008 high prices have even increased this dependence in the case of SSA: primary commodities, as a percentage of total exports, increased as prices surged over the period 2003–2008 (World Bank 2009: fig. 1.20). Sub-Saharan Africa is indeed a particularly clear example of commodity dependence. Exports have been composed of primary commodities since the colonial period: in 1980, 95.3 per cent of SSA exports were primary commodities (oil and non-oil). The World Bank estimates that, in 2005, food represented 15 per cent of merchandise exports; agricultural raw materials, 5 per cent; fuels, 36 per cent; ores and metals, 10 per cent; and manufactures, 33 per cent (World Bank 2007b). Countries in SSA did not diversify their export structure despite more than two decades of stabilization and adjustment programmes, which achieved little structural change. For example, in 1990, fuels represented 97 per cent of Nigerian exports and, in 2005, 98 per cent. In Benin, agricultural raw materials represented 56 per cent of exports in 1990, and 64 per cent in 2006 (World Bank 2008). A problem linked to commodity dependence is export concentration (Table 7.2). Countries in SSA often export a very small number of agricultural products: for example, Mauritania exports 13 products, Angola 13 products, Republic of Congo 30 products, to be compared with, for example, 221 for Ireland or 214 for Portugal (Jansen 2004, based on the UNCTAD Handbook of Statistics 2002). UNCTAD (2008b) defines the ‘dependency rate’ as the average share of the value of the four main commodity exports as compared with the total exports value for 2003–2005: 30 least developed countries (LDCs) show a dependency rate above 50 per cent. The highest dependent countries (a dependency rate above 80 per cent) are West African and Western Asian countries, due to their exports of petroleum. Agricultural products such as cotton, cocoa and coffee also created high dependence; for example, in Benin and Burkina Faso (a dependency rate above 65 per cent). Examining 78 countries, UNCTAD finds that a small number of commodities are associated with dependence: oil and oil products appear in 41 countries, fish in 35 countries, natural gas in 15, forestry products in 13, cotton in 11, sugar in 10, and cocoa and coffee in 8. Such unbalanced export structures have many detrimental consequences; they are obviously very vulnerable to price volatility. Dependence contributes to the vulnerability of countries as it reduces their capacity to sustain shocks (a well-known example being the Dutch disease effects): dependence increases vulnerability and diminishes resilience (UNCTAD 2008b). In commodity-dependent developing countries, price volatility generates fiscal crises, budget deficits and revenues that are very difficult to manage, which in fine has a negative effect on growth. For example, it was the boom in the price of agricultural commodities such as coffee and cocoa in 1976–1979, immediately followed by a sharp


Alice Sindzingre


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Table 7.2 Commodity dependence by geographical region, 1995–1998 and 2003–2006 (number of countries for which exports of commodities account for more than 50 per cent of total exports)

Developing and transition economies Developing economies Africa Latin America East and South Asia West Asia Oceania Transition economies Memo items Least developed countries Heavily indebted poor countries

Three or less commodities

One commodity

1995– 1998

2003– 2006

1995– 1998

2003– 2006

1995– 1998

2003– 2006

118

113

82

84

47

50

108 46 30 7 9 16 10

103 45 27 8 9 14 10

78 37 15 4 9 13 4

78 34 17 6 9 12 6

45 21 6 1 8 9 2

46 23 7 2 6 8 4

38

38

31

31

19

20

38

36

30

28

15

15

Note: a = primary commodities: SITC Rev. 2: 1 to 4 plus 68, 667 and 971. Sources: UNCTAD (2008a), table 2.4; UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics database.

decline, that was the cause of major fiscal crises in low-income countries in the 1980s, their need for financial help from the IMF and the World Bank, and the launch of the first stabilization and adjustment programmes (Ghanem 1999). In their analysis of terms of trade shocks over the period 1970–2006, Funke et al. (2008) thus consider that it is because of limited diversification, dependence on a few natural resources and a lower manufacturing base that SSA and the Middle East have been affected to a greater degree than other regions. Countries in SSA averaged more than two persistent terms of trade shocks during that period (Table 7.3). Another detrimental consequence of commodity based export structures is that they reduce incentives for diversification and industrialization, and might even be an obstacle to these. As mentioned by the UNIDO Report for 2005, SSA represented 0.79 per cent of world industrial output in 1990, and 0.74 per cent in 2002. If South Africa is excluded, in 1990, SSA represented 0.24 per cent of world industrial output, and 0.25 per cent in 2002. The export earnings of commodity-dependent countries are vulnerable to the risks of fallacy of composition: when the export volume of commodities with low price and income elasticities increases at the global level, the


Total primary commoditiesa


Alice Sindzingre

155

Table 7.3 Distribution of terms of trade shocks, 1970–2006 Size and type of shocks 10%

All Advanced Emerging marketsdeveloping countries of which: Middle-East Sub-Saharan Africa Asia Western Hemisphere Europe Transition economies

30%

Overall

Positive

Negative

Overall

Positive

Negative

159 28 131

228 19 209

110 9 101

118 10 108

79 2 77

46 1 45

33 1 32

17 23 12 21 29 57

32 47 13 35 21 80

14 16 6 19 12 43

18 31 7 16 9 37

13 19 3 9 1 34

7 7 3 6 1 22

6 12 0 3 0 12

Note: Funke et al. (2008) define a terms of trade shock as ‘persistent if the five-year mean of the terms of trade for the period t − 4 to t compared to period t + 1 and t + 5 differs by a predetermined threshold, where t is the period of the shock. Initially, the threshold is set to minus 10 per cent for negative shocks’. As a sensitivity test, they increase the threshold to −30 per cent. Source: Funke et al. (2008).

aggregate export revenues of these countries decline. The fallacy of composition and its negative consequences, however, also apply to manufactured products (Razmi and Blecker 2008). Commodity dependence might generate traps – in particular, poverty traps – as argued by UNCTAD in many reports (for example, UNCTAD 2002b; 2008a). Fast-growing manufactures are technology intensive and in sectors with high productivity growth. In low-income countries, the following elements are likely to build a poverty trap: dependence on commodities, low productivity, low value added, competition from other countries in the main exports, and concentration of exports in a few products. High commodity prices might have detrimental effects on political regimes as they might reinforce autocracies and rents, and fuel civil conflict. For UNCTAD, volatility is a key factor of poverty traps, with oil producing countries being particularly exposed. In turn, dependence might increase volatility at the domestic level: the model devised by Hausmann and Rigobon (2002) thus shows that the smaller the non-resource tradable sector, the greater the volatility of relative prices, and an increase in resource income that leads to specialization might cause a decline in welfare. Growth that is driven by global demand for commodities has an ambiguous impact here: while growth is undoubtedly a positive process, this model might include ‘lock-in’ effects in a market structure based on commodity export, might make diversification more costly, and could build a ‘primary products trap’. The IMF acknowledges that, since the mid-2000s, the high


Number of countries



growth rate and improvement in the terms of trade in SSA (a real GDP of 6.5 per cent in 2007), was almost entirely driven by global growth and demand for commodities (especially exports to China), and the high prices of oil, minerals and metals (IMF 2008a). It can be noted here that the removal by industrialized countries of subsidies on certain of the primary commodities they export (for example, cotton) might have ambiguous effects on developing countries. This might increase international prices and therefore provide developing countries with incentives to continue to export these commodities, maintaining their unbalanced export structure (Sindzingre 2007a). In addition, developing countries are typically characterized by important market failures. As underlined by Tschirley and Poulton (2008) in the case of cotton in West and Central Africa, at the local level commodity sectors are affected by many problems – in particular, low productivity and tension between stakeholders (that is, maintaining input credit versus enhancing efficiency). Failures in input and credit markets call for more coordination, but the objective of efficiency calls for more competition. These market and export structures involve political dimensions that explain resistance to reform in some countries; for example, in West Africa. Resistance is also explained by the mixed impact of reforms (liberalization, privatization) on sector performance, especially on small farmers. Developing countries are also often affected by ‘state failures’: relevant state intervention, effective public policies and institutions, therefore play a crucial role in the enhancing of the efficiency and allocative functions of the commodity sectors (in this case, the cotton sector). This shows that exporting primary products per se and commodity dependence are not the only cause of poverty traps. The composition of exports might be viewed as both a cause and effect of underlying structural features and endowments – for example, in labour, in human and physical capital – linked to demographic and geographical characteristics. There are strong complementarities between factors, which imposes constraints on the opportunities to change production and export structures. The relative endowments in two factors – skill (or human capital) and land (or natural resources) – determine whether a country has a comparative advantage in manufactures or in primary products: developing countries with low skill/land ratios and low levels of skills per worker, as in most low-income countries, have limited industrial prospects (Owens and Wood 1997). As emphasized by Alfred Maizels, domestic public policies and institutions – and, hence, the domestic political economy – have the capacity to change these initial constraints (or not), hence the differential performances and reactions to reform of the cotton sectors across countries. These processes had been analyzed by the ‘founding fathers’ of development economics; for example, Paul Rosenstein-Rodan (1943), who demonstrated that coordination failures were crucial factors of


156


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underdevelopment: coordination is necessary in the early stages of development, which are characterized by subsistence agriculture and lack of capital, as it reduces costly competition. Rosenstein-Rodan highlighted the key role of spillovers between sectors in triggering the process of development, because spillovers induce increasing returns to an activity proportional to the number of other individuals who undertake the same or complementary activities. In contrast, lack of spillovers between sectors lead to multiple equilibria, some of them being ‘low equilibria’ and ‘underdevelopment traps’. These coordination failures constitute the argument for the role of the state at the early stages of development that is the most powerful at the theoretical level: at early stages, and in the presence of coordination failures, the state is the only entity able to reallocate factors and resources across markets (Adelman 2000). Many low-income countries’ market structures might be characterized fifty years later as highly exposed to ‘traps’ where different processes reinforce themselves: high-risk export structures such as commodity-dependence, but also low technology and innovation capacities, and inefficient institutions (Hoff 2000; Sindzingre 2007b). Indeed, institutions constitute crucial causes of traps, as revealed by Bowles (2006) with the concept of ‘institutional poverty traps’. For Bowles, such a concept explains the coalescence of market and institutional structures, and why institutions that implement highly unequal divisions of the social product persist, even if they are inefficient.

Conclusion: the difficulty of regulating volatility at the international and domestic levels Commodities thus include a series of inherent features over the long term, confirmed by the boom of the 2000s, and entail uncertain prospects for exporting countries. Alfred Maizels therefore underscored the necessity of regulating commodity prices and reducing their volatility (be it for energy or agricultural commodities). This notoriously difficult task is even more daunting in a context of global trade openness and financial integration. The good news, however, is that the financial crisis of 2008–2009 might mark the end of the paradigm of ‘markets against states’ and the ‘counterrevolution’ that reshaped economics from the 1980s onwards (Toye 1987), with the evidence of the inefficiency and danger of leaving markets to their own dynamics, which has triggered state rescue in all countries concerned (whatever the variations, for example, strengthening regulation, owning assets or guaranteeing them). Confirming the accuracy of Rosenstein-Rodan’s findings, only public policies operating within the framework of the nationstate appeared able to alleviate the detrimental impacts of international markets, even in the richest countries. The necessary role of the state, as well as supra-state institutions, for the correction of the detrimental effects of unregulated markets had precisely


Alice Sindzingre



been one of Alfred Maizels’ central arguments – though, at his time, the very concept of market regulation was rejected by those economists and policymakers who put this forward after the 2008 financial crisis. Whether or not they face high or low prices, developing countries relying on the export of commodities remain vulnerable on two sides. From the international perspective, their vulnerability to the volatility of world prices for their fiscal balance, coupled with geopolitical weakness in the case of low-income countries, highlights the need for meta-institutions to be able to coordinate policies and pool resources. From the domestic perspective, their vulnerability highlights the need for efficient institutions and taxation systems that smooth exports earnings volatility – an example of this vulnerability being the SSA textile sectors affected by Chinese imports, as analyzed by Kaplinsky. The necessity for the state (‘big government’), in the context of open economies, has been emphasized, for example by Rodrik (1996): that is, a state that has redistributive capacities and the ability to overcome the negative impacts of trade openness. The other good news here is that commodities do not per se hinder growth or erode institutions, as shown by Blomström and Kokko (2003) in the example of Scandinavian countries. It is the nature of economic and political institutions that in fine determine the impact of commodities on an economy; for example, the way in which institutions can cope with resources windfalls, or the way these windfalls modify previous political equilibria (Englebert and Ron 2004, on the Congo). There is no ‘curse’, and natural resources are not ‘fate’. Political economy problems, however, affect many developing countries: states are weak, public policies not credible, and rulers are often driven by predatory motives. Commodities might foster corruption, capital flight and inequality, as is shown not only by oil countries, but also by other commodities (for example, cocoa might have the same effects). Global demand for commodities might have negative effects on political institutions, which in turn perpetuate low diversification, vulnerability and ‘institutional traps’. Earnings from natural resources (oil, minerals) accrue to governments (by means of royalties, or the resources might be nationalized): this provides authoritarian regimes with leeway with regard to the conditional financing of international financial institutions, in addition to investment and aid (which often take the form of barter for natural resources) from large emerging countries such as China or India. These countries do not belong to the ‘cartel’ of usual donors (Easterly 2003) and do not hide the fact that they are driven by trade interests and the need to secure a supply in energy. Here, a difficult question relates to the assessment of the relevant causalities. Does commodity export and dependence weaken further state capacity, or are weak states more prone to be locked into market structures of an extractive type? These ingredients of a ‘political economy–commodity trap’


158


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underlie theories regarding the so-called ‘resource curse’ and its impact on civil conflicts. Countries with weak political economies might be less able to form coalitions in order to reduce their vulnerabilities, the importance of which has been underscored by Alfred Maizels. The external political economy might impede the ability of low-income countries to make the appropriate deals – due, for example, to the geopolitical power of players (Russia with oil and gas; China with oil and so on). The internal political economy might be unable to foster coalitions (as did the Asian ‘developmental states’ in the 1970s), with governments providing private firms, banks or investors with incentives oriented towards domestic growth, be it for political motives. Indeed, these authoritarian governments used export led growth as an instrument to enhance legitimacy (Kang 2002, on Korea). These conditions are rarely met in low-income countries, due to the endogeneity between low growth fragmented (‘weak’) institutions, and the existence of threshold effects maintaining countries in ‘traps’. Sokoloff and Engerman (2000) explained, for example, the diverging paths in North and South America by the impact of factor endowments on institutions (especially inequality) that, in turn, triggered different growth trajectories. When export structures are based on the extraction of primary resources (often in enclaves), there is no necessity to foster spillovers. ‘Low equilibria’ and institutional traps are likely to stabilize in this context. In sum, low-income commodity exporting countries continue to be confronted with a very difficult alternative: being locked into economic and political low equilibria, specializing in the production of commodities, from which it is difficult to escape, or implementing policies aimed at achieving higher equilibria, spillover effects and industrialization.

Note 1. The paper on which this chapter is based was presented at the International Workshop ‘Challenges and Prospects for Commodity Markets in the Global Economy’, in memory of Alfred Maizels, 19–20 September 2008, School of Oriental and African Studies (SOAS), University of London. The author is very grateful to Machiko Nissanke for innumerable stimulating discussions and invaluable comments. The author, editors and publishers are grateful to the International Monetary Fund for permission to use the figures from the March 2008 issue of Finance and Development.


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in London at the School of Oriental and African Studies Workshop ‘Challenges and Prospects for Commodity Markets in the Global Economy’, in memory of Alfred Maizels, 19–20 September (Washington, DC: World Bank). Toye, J. (1987) Dilemmas of Development (Oxford: Blackwell). UNCTAD (2002a) UNCTAD Handbook of Statistics (Geneva: UNCTAD). UNCTAD (2002b) Trade and Development Report 2002: Developing Countries in World Trade (Geneva: UNCTAD). UNCTAD (2008a) Trade and Development Report 2008: Commodity Prices, Capital Flows and the Financing of Investment (Geneva: UNCTAD). UNCTAD (2008b) Development and Globalization: Fact and Figures (Geneva: UNCTAD). Wang, J.-Y. and A. Bio-Tchané (2008) ‘Africa’s Burgeoning Ties with China’, Finance and Development, 45(1), March: 44–7. Williamson, J.G. (2008) ‘Globalization and the Great Divergence: Terms of Trade Booms and Volatility in the Poor Periphery 1782–1913’, NBER Working Paper, 13841 (Cambridge MA: NBER). World Bank (2007a) Global Economic Prospects (Washington, DC: World Bank). World Bank (2007b) World Development Indicators 2007 (Washington, DC: World Bank). World Bank (2008) World Development Indicators 2008 (Washington, DC: World Bank). World Bank (2009) Global Economic Prospects: Commodities at the Crossroads (Washington, DC: World Bank). Zafar, A. (2007) ‘The Growing Relationship Between China and Sub-Saharan Africa: Macroeconomic, Trade, Investment, and Aid Links’, World Bank Research Observer, 22(1), spring: 103–30.


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Part 3 Case Studies of Cotton and Copper





8 Michel Fok

Introduction Cotton was not substantially dealt with in Alfred Maizels’ analysis Commodities in Crisis, in which the impact of commodity market operations on development is carefully examined. Cotton was mentioned only to illustrate the commodity crisis in terms of competition from synthetics, in terms of reduced consumption in industrialized countries and the decrease in export earnings. However, the relation between cotton and industrial development has been well documented in many countries since the nineteenth century (Bairoch 1995), either in connection with cotton production (the USA, Turkey, Brazil, China) or without (England, Hong Kong, Taiwan, Mauritius). Cotton has served as an illustrative commodity in support of the Standard Theory of Trade and Development (Anderson 1987), notably in China (Anderson and Park 1989; Anderson 1990) and in other Asian countries (Park and Anderson 1988; Anderson 1994). More globally, by assessing the development of cotton production and use worldwide, Fok (1997) emphasized the crucial role of policy, closely in line with Maizels’ conviction. Ironically, the debate on cotton in the international arena has contributed to rehabilitating a few of Maizels’ ideas. In September 2003, at the World Trade Organization (WTO) Ministerial Meeting in Cancún (Mexico), four francophone African cotton producing countries (FACs) stood up to protest against the very negative socioeconomic impacts of subsidies provided by a small number of countries/regions (namely, the USA, the EU and China). Compensation was demanded during the period of phasing out of subsidy. This protest, called the C4 Cotton Initiative, confirmed the need for international intervention to preserve the fate of commodity-dependent countries. It also represents adoption of the compensation approach that Maizels had somehow elaborated, as he was not very optimistic about the abolition of subsidy by the North.


Cotton Crises in Francophone Africa: Fatality or Challenge for Multidimensional Cooperation?


Cotton Crises in Francophone Africa

Maizels’ analysis is still worth consideration today, even though the world has changed. The cotton situation has evolved dramatically. Since January 2008, the cotton price reference was set with regard to delivery to the Far East – no longer to northern Europe, as was the case for more than half a century. Cotton productivity has been increasing substantially, notably in connection with the adoption of biotechnology outputs through the wide dissemination of numerous genetically modified (GM) varieties. In terms of international cooperation, or international solidarity, the debt forgiveness that Maizels advocated has taken place in most African cotton producing countries. This could lead us to believe that the international setting has become more inclined to consider Maizels’ recommendations underlying the cotton crisis, enabling us to confirm the importance of the factors identified by Maizels and to supplement them. The first objective of this chapter is to deal with these factors in the specific case of the cotton crisis. Another is to discuss and update the recommendations to help overcome the crisis. As a tribute to the FACs, which were the first developing countries (DCs) to speak out internationally and formally on commodities, this chapter is based on evidence derived from these countries, although I think that they are valid examples for many other cotton producing DCs. This chapter is organized as follows: the next section provides a description of the cotton crisis. Following this, the cotton crisis factors are examined by grouping them according to their effects on demand, supply and price formation. The subsequent section is dedicated to assessing how to move beyond the cotton crisis process. It will underline how unfortunate it was that Maizels’ ideas were overlooked, and suggestions will be made to re-launch and adjust Maizels’ ideas.

Cotton in continuous crisis Historic crisis underlying the cotton adventure in Africa Cotton fibre trade was boosted in the late 18th century by the vibrant demand in England immediately after the Industrial Revolution, noted particularly in the textile industry. There were many cotton crises throughout the more than two centuries’ history of the cotton trade that followed. All of these crises were linked to over-supply, except those related to wars that induced great price increases. The first crisis resulted from the War of Secession in the American British colonies (Figure 8.1). The fear of a supply shortage to fuel the textile industry with raw material – that is, cotton fibre – led most European powers to seek alternative supply sources. This was the beginning, before the end of the War of Secession, of the ‘cotton adventures’ in the African colonies of European nations. This was a source of human strife on the African continent, where the fear of a ‘cotton famine’ pushed the colonialist administrations to irrigate cotton production with the tears and blood of local populations (Schreyger 1984; Bordage 1991; Isaacman and Chilundo


166


Michel Fok

120,00

167

US cents 1863

100,00

1980 1994

80,00 60,00 40,00

2001 1942

20,00 1931

1790 1796 1802 1808 1814 1820 1826 1832 1838 1844 1850 1856 1862 1868 1874 1880 1886 1892 1898 1904 1910 1916 1922 1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006

0,00

1985

Figure 8.1 Two centuries of cotton price fluctuations and crises Note: Price of cotton lint in US cents/pound. Sources: Fok (1997) and ICAC.

1995; Isaacman and Roberts 1995; Isaacman 1996), displacing and forcing them to commit themselves to cotton production to the detriment of food production. In spite of the strength and violence of the colonialist nations, no substantial increase in cotton production was obtained, notably in the African French colonies (Fok 1993). It was certainly impossible to imagine how successful cotton production would become a few decades later, and how proudly the African nations involved would speak about their cotton achievement. Cotton crises and subsidy programme set up in USA There were no major cotton crises until the twentieth century. The crises associated with the First and Second World Wars were also linked to the reduction in the supply from the USA, mainly due to difficulties in conveying the requested fibre to Europe. As the demand was also constrained by wartime, the price increase was far lower than during the War of Secession. Meanwhile, in the inter-war periods and subsequently, after the Second World War ended, cotton production was subjected to regular over-supply crises that led to a downturn in prices and to the bankruptcy of many US producers. This phenomenon prompted the setting up, in 1933, of the Cotton Program in the USA in order to bolster cotton growers’ incomes. This policy to support cotton production has been implemented continuously until now. The budgets involved reached their peak values in the 1960s and 1970s (Figure 8.2), at levels higher than those more recently criticized by African countries, but benefiting far many more numerous producers than today.


1992 1951

1919


168


7 000 6 000 5 000

3 000 2 000 1 000 0 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 Figure 8.2 2001)

Support expenditures to US cotton growers’ income (constant millions US$

Note: In constant millions US$s. Source: Derived from USDA data.

The cyclical cotton crises resulted from the lack of coordination between producers, who reacted individually to price peaks or slumps without noticing that they were all reacting the same way and that their behaviour, hence, fed the crisis phenomenon itself. This has been clearly depicted by a few novelists, including the famous John Grisham.1 This is the specific, if not dramatic, feature of agriculture that prompts some academics to consider agriculture as being different from other production activities, consequently warranting some state regulation (Boussard et al. 2005). Cotton crises in the 1980s: implications in FACs and worldwide From the FAC standpoint, the first cotton crisis after their independence broke out in the mid-1980s – hence, a little later than for other commodities, as reported by Maizels. This crisis resulted from the wide gap between production and consumption in 1984–1985 (Figure 8.3), mainly linked to the huge jump in cotton production in China. The antagonism between the progress in Chinese production and the A index remained clear until the end of the 1990s. This relationship is even clearer when considering the Chinese stock, as underlined by the International Cotton Advisory Committee (ICAC), but has nevertheless become less clear over the last decade. The extent to which this relationship change is connected to the larger share of US cotton in Chinese imports (47–60 per cent during the period 2002–2005) has yet to be analyzed.


4 000


Michel Fok

169

28000 1000 tons 26000 24000 22000

18000 16000 14000 12000 10000 1965

1970

1975

1980

1985

Production

1990

1995

2000

2005

2010

Consumption

Figure 8.3 Cotton crises and linkage to production and consumption gaps Source: Derived from ICAC statistics.

6500

95 US cents/pound

1000 tonnes 6000

85

5500 5000

75

4500 4000

65

3500 55

3000 2500

45


20000

2000 35

1500 1971

1976

1981

1986

1991

1996

2001

China production, moving average,3 years A index, moving average, 3 years Figure 8.4 Production of cotton fibre in China and impact on the price Index A Source: Derived from ICAC statistics.



The case of cotton demonstrates that a crisis could result from the influence of a single country; that is, the price-maker. The increase in Chinese cotton production resulted from the agricultural reform implemented in 1978, which provided farmers with far more incentives to boost productivity. The Chinese case confirms Maizels’ idea that commodity policies that integrate remunerative prices for producers are effective in increasing production, thus underlining the paradox of effective policy to increase production, which could imply lower price – a paradox well known as the King’s Law. This means that national policies without international cooperation could have adverse effects. The advent of this first cotton crisis in the mid-1980s led international development agencies, which were then assisting FACs, to question the organization of their cotton sector and the policies implemented, from the perspective of the dominant mindset guiding the implementation of structural adjustment plans (SAPs) throughout Africa. This was the starting point for revising pricing mechanisms in purchasing seed cotton and in supplying inputs to producers (Fok 2006a). This crisis led to another major change, the consequences of which affected the whole cotton sector worldwide. The USA decided to make radical modifications of its cotton policy. It abandoned the policy that kept world prices from declining (by storing surplus supplies) and, instead, adopted measures to offset income losses consecutive to price falls. For US producers, the policy shift did not generally modify the income support they received or the incentives to produce more. At the international level, this policy change contributed to pushing world prices downwards. The former US policy supported the development of cotton production in FACs (Figure 8.5) through steady increases in the nominal price (Figure 8.1), in spite of the high subsidy level (Figure 8.2). This is an indication that the impacts of subsidy policies are more dependent on the implementation conditions than on the principle of the subsidy. The policy set up in USA after the cotton crisis in the mid-1980s, which still prevails, is one of the price fluctuation factors, the negative impacts of which in FACs were even more harmful as a consequence of their cotton sector reform.


170

Cotton crises prevailing since the 1990s and sectoral consequences The case of cotton demonstrates both the short-term price fluctuations and the long-term price decline depicted by Maizels. From the end of the 1970s onwards, cotton prices have fluctuated more frequently and to a greater extent than previously, even more than during the uncertain times of war (Figure 8.1). These fluctuations are indicative of structural changes in the functioning of the world market the factors of which have yet to be examined (cf. infra).


Michel Fok

171

16 15 1000 14 Production, cotton lint 13 % World production 12 800 % World exportations 11 10 9 600 8 7 6 400 5 4 3 200 2 1 0 0 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 % World

Figure 8.5 Cotton production and export in FACs, 3-year moving averages Source: Derived from ICAC statistics.

250

US cents/pound

200

150

100

50

0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010


1000 tons

Figure 8.6 Price decline on the cotton market Note: World price (A Index), in constant US cents, 1990 basis. Source: Derived from ICAC statistics.

Prices in constant US$s have clearly declined over the last half century (Figure 8.6): the reasons for the process of decline were comprehensively examined by Maizels, including the episode of the price increase around 1973. After this episode, world cotton market prices have steadily decreased until now. World transactions have substantially increased for more than a


9 000


US cents/pound

1000

100 90

8 000

80

7 500

70

7 000

60

6 500

50

6 000

40

5 500

30

5 000

20

4 500

10

4 000

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

8 500

World exports

A index

Figure 8.7 Three decades of world exports and price index for cotton fibre Note: 3-year moving averages. Source: Derived from ICAC statistics.

decade but, amazingly, the prices showed the opposite trend (Figure 8.7). This phenomenon indicates either some issue in the price formation or in the capacity of supply to respond immediately to increasing demand. This capacity, from the standpoint of producers who eventually get lower prices, is still somewhat tragic. The relatively frequent re-emergence of cotton crises in the 1990s prompted the Bretton Woods institutions to continue reorganizing cotton sectors according to liberalization and privatization orientations. Gradually, all initiatives set up to promote rural development in cotton production zones (Fok 2008) were phased out of national cotton companies, since these latter companies should only focus on cotton production and other organizations would take them over, an assumption that it transpires was erroneous. The outcomes of the implemented reforms were, at best, mitigated (Goreux and Macrae 2003; Bourdet 2004). Production became unstable (Figure 8.5), dissension between cotton sector stakeholders was frequent while, among many other dysfunctions, farmers were no longer assured of obtaining timely production inputs at affordable prices (Kpadé 2005; Vautier et al. 2005; Djouara et al. 2006; Djondang et al. 2008; Enam et al. 2008; Folefack et al. 2008). Globally, overall production in FACs has fluctuated quite substantially in recent years, with a dramatic reduction in the share of world exports (Figure 8.5). An analysis of social and microeconomic impacts of commodity crises is beyond the scope of this chapter. Their dramatic feature, which could still


172


173

hinder the revival of commodity sector for some time yet, should still be underlined. It is also worth noting that the implementation of policies that are not tailored to commodity crises could further worsen their impacts. More ironically, unsuitable policies have resulted in the cotton crisis – likely, also, in crises in other commodities when considering Africa within the framework of international cooperation led by the Bretton Woods institutions. It is meagre consolation that these institutions have recently recognized the failure of their policies and the relevance of the state’s role in agricultural development (World Bank 2008). The issue of compensation for the effects of externally imposed incorrect policies is still seldom raised. Macroeconomic consequences of persisting cotton crises From the FAC standpoint, cotton crises are perceived with respect to their international and national dimensions. The international dimension is related to the fluctuation and decline of the world market price. After the upswing in May 1995, the world price downswing was fed by the Asian financial crisis and it prevailed until the 2006–2007 cotton crop season. The national dimension is linked to the instability created by the cotton sector reform in most countries, except in Burkina Faso. There was, indeed, no uniformity in the recent history of FAC cotton sectors. In Burkina Faso, the cotton sector was close to implosion in 1995 because of the crisis in the associative process. International intervention to solve this crisis2 helped to revitalize the associative process, which has ultimately pulled the whole cotton sector forward and ensured its internal stability. It also helped farmers reach a new stage of empowerment – the most prominent figure of the African cotton producers’ movement, who actively took part in the protest before the WTO, was and still is the leader of the cotton growers’ syndicate in Burkina Faso. Conversely, the situation has become destabilized in other countries within the francophone African region, with a concomitant decline in production. It is not easy to gain access to figures relating to the income derived from the export of cotton as cotton companies in FACs are not accustomed to disclosing their economic indicators, and since the sector is being privatized in some countries. The sole source of public access is the Banque de France Annual Report, which devotes a special section to the CFA Franc zone, but this part is published after a delay of about two years. Even in Banque de France reports, figures on cotton export revenue are only mentioned for countries where cotton has a relatively important economic role; namely, Mali, Burkina Faso, Benin, Togo, Cameroon and Chad. Besides, by using reports accessible online, figures can only be recovered for the period up to 1998. For the period 1998–2006, in current CFA Francs, cotton has generated a total of FCFA 4,591 billion for the six countries mentioned above (Table 8.1). Globally, for these countries, there was only a slight currency decline from 1998 to 2006 (from FCFA 551 billion to FCFA 509 billion) because the slump was offset by the increase experienced in Burkina Faso. Apart from Burkina Faso, there was a decrease of about 30 per cent (from FCFA 430 billion to FCFA


Michel Fok



308 billion). Both in absolute and relative terms, the reduction in revenue was quite high in Benin and Togo, where the cotton sector organizations were most upset by the privatization/liberalization process. Export revenue also dropped by almost half in Chad, but for different reasons, as this country has not yet really launched into the privatization/liberalization process. The reduction in export revenue resulting from the steady world market price decline, apart from some price rebounds in 2002–2003, was more meaningful. This reduction was calculated based on the assumption that the price had remained unchanged since 1998. Globally, this reduction is estimated at FCFA 724 billion for the whole period and for the six countries, or 15.8 per cent of the revenue actually obtained. Ironically, this loss has been higher for Burkina Faso, which has substantially increased its cotton production. There has generally been less of a reduction in export revenue due to an unfavourable currency exchange rate because of two successive phases. There was no loss until 2002–2003. Later on, and until now, the overvaluation of the CFA Franc – or, more precisely, the undervaluation of the US$ – has been responsible for the serious financial crises of all cotton sectors in FACs. This phenomenon coincided with the FAC protest before the WTO against the price decline, which they linked to the subsidies provided to a few countries/regions. They might better have also protested against the vagaries of the US currency, since the world price has returned to a more acceptable level while the currency exchange rate issue still prevails. The implications of the reduction in revenue from cotton exports, except for Burkina Faso, are not homogeneous between FACs. Even in nominal terms, no countries have experienced a reduction in total export earnings because of diversification in favour of gold (Mali and Burkina Faso) and petroleum production (Chad, Cameroon), which began or was re-launched during the last decade. These commodities are less subject to the crises analyzed by Maizels, and they have contributed to boosting export earnings (Chad) or to somehow preserving their levels in nominal terms (Mali, Burkina Faso). Togo and Benin have demonstrated some artificial earning increases thanks to re-export volumes through their harbours, to the detriment of Abidjan due to the civil turmoil in the Côte d’Ivoire since 2002. In relative terms, cotton has lost its importance in the balance of trade, except in Burkina Faso. Until 1998, cotton export earnings accounted for more than 40 per cent of total exports in all FACs, except Togo. In 2006, cotton still accounted for 65 per cent of total export earnings in Burkina Faso. This share has fallen to less than 20 per cent in Mali and Benin, and less than 5 per cent in Togo, Cameroon and Chad. This fall is the combined effect of the reduction in cotton revenue and the increased income from petroleum and gold. From a macroeconomic viewpoint, the prevailing cotton crises did not markedly involve serious treasury shortages because of the fortunate concomitant production of particular commodities that are less subject to the crises addressed by Maizels. However, treasury shortages are far more crucial


174


175 Table 8.1

Cotton exportation incomes in six FACs Cotton export income

Income loss due to price decline referred to 1998

Income loss due to currency exchange variation, referred to 1998

Mali 1998 1999 2000 2001 2002 2003 2004 2005 2006

159.7 153.0 112.2 83.2 138.2 143.4 184.9 139.7 141.6

0.0 19.9 7.2 40.6 19.3 −9.2 44.3 33.7 29.9

0.0 11.7 −6.7 −10.8 −25.0 −2.2 31.4 31.9 17.3

Total

1 255.9

185.8

47.7

120.9 83.6 72.4 96.0 97.4 119.9 163.2 148.3 200.6

0.0 10.9 4.7 46.9 13.6 −7.7 39.1 35.8 42.4

0.0 6.4 −4.3 −12.5 −17.6 −1.8 27.7 33.9 24.6

1 102.3

185.6

56.3

Burkina Faso 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total Cameroon 1998 1999 2000 2001 2002 2003 2004 2005 2006

40.9 51.3 65.4 74.6 66.6 63.6 76.7 70.1 54.2

0.0 6.7 4.2 36.4 9.3 −4.1 18.4 16.9 11.4

0.0 3.9 −3.9 −9.7 −12.1 −1.0 13.0 16.0 6.6

Total

563.4

99.3

13.0

Benin 1998 1999 2000 2001 2002 2003

108.0 103.8 94.3 89.8 93.4 110.9

0.0 13.5 6.1 43.9 13.1 −7.1


Current FCFA (billion)

0.0 8.0 −5.7 −11.7 −16.9 −1.7 (Continued)


176


Table 8.1 (Continued) Cotton export income

Income loss due to price decline referred to 1998

Income loss due to currency exchange variation, referred to 1998

2004 2005 2006

110.2 90.3 49.4

26.4 21.8 10.4

18.7 20.6 6.1

Total

850.1

128.0

17.4

Togo 1998 1999 2000 2001 2002 2003 2004 2005 2006

43.6 64.4 40.6 45.9 40.6 47.8 41.6 15.9 19.0

0.0 8.4 2.6 22.4 5.7 −3.1 10.0 3.8 4.0

0.0 4.9 −2.4 −6.0 −7.3 −0.7 7.1 3.6 2.3

Total

359.4

53.8

1.5

Chad 1998 1999 2000 2001 2002 2003 2004 2005 2006

77.7 60.1 50.6 56.9 38.9 45.0 44.7 42.2 43.8

0.0 7.8 3.3 27.8 5.4 −2.9 10.7 10.2 9.3

0.0 4.6 −3.0 −7.4 −7.0 −0.7 7.6 9.6 5.4

Total

459.9

71.6

9.1

Source: Calculation from Franc Zone Annual Reports, Banque de France (various dates).

in Burkina Faso, where cotton is still a relatively important commodity. The reduction in cotton export earnings has not led to a higher service debt ratio because FACs have benefited from debt forgiveness, as advocated by Maizels, which is the only one of his recommendations actually to be put into practice.


Current FCFA (billion)

Multiple cotton crisis amplification factors Maizels has comprehensively analyzed various factors underlying commodity crises. These factors can be grouped according to their effects on demand,


Total Exports (billion) FCFA

Cotton Export (billion) FCFA

Cotton share in exports %

Long-term debt (million) $

Debt service over exports %

2 692 2 827 2 799 2 671 2 642 2 518 2 910 3 136 2 843

11,4 11,0 13,7 14,6 9,2 9,4 6,7 8,2 6,4

1139 1234 1298 1 212 1 312 1 409 1 598 1 905 1 920

13,5 10,9 15,5 21,5 16,2 15,0 12,5 9,1 8,5

7 927 8 368 7 970 7 763 7 200 7 735 8 987 8 124 6 113

21,9 22,7 24,3 21,7 15,3 15,2 15,1 18,9 20,8

Total Exports (billion) FCFA

Cotton Export (billion) FCFA

Cotton share in exports %

108 103.8 94.3 89.8 93.4 110.9 110.2 90.3 49.4

44.2 40.0 33.8 32.8 29.9 35.3 36.7 29.6 16.6

43.6 64.4 40.6 45.9 40.6 47.8 41.6 15.9 19

17.6 26.7 15.8 17.5 13.7 13.8 13.1 4.6 4.7

77.7 60.1 50.6 56.9 38.9 45 44.7 42.2 43.8

50.4 42.9 38.9 41.1 30.2 12.9 3.9 2.5 2.5

Long-term debt (million) $

Debt service over exports %

Benin

Mali 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

328.1 351.6 388.1 531.6 609.9 539.3 515.8 580.7 807.5

Burkina Faso 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

48.7 43.5 28.9 15.7 22.7 26.6 35.8 24.1 17.5

244.4 259.5 279.3 273.9 312.1 314.3 300.4 305.0 297.0

1396 1471 1472 1 505 1 689 1 726 1 827 1 762

8,7 9,0 10,0 9,6 9,6 8,0 7,9 7,3

1215 1329 1290 1 230 1 203 1 323 1 485 1 609 1 469

10,1 7,5 8,9 7,1 7,5 2,5 2,4 2,8 2,0

939 1005 1045 1 012 995 1 191 1 462 1 582 1 537

10,2 9,2 11,0 11,1 9,2 10,3 7,0 2,0 1,9

Togo 190.4 156.2 146.4 163.8 170.8 186.3 253.2 247.1 307.6

120.9 83.6 72.4 96 97.4 119.9 163.2 148.3 200.6

63.5 53.5 49.5 58.6 57.0 64.4 64.5 60.0 65.2

247.9 241 257.6 261.9 295.7 347.4 317.5 348.2 400.9 Chad

1 037.4 1 366.4 1 540.2 1 312.6 1 260.0 1 406.1 1 469.8 1 670.9 1 937.8

40.9 51.3 65.4 74.6 66.6 63.6 76.7 70.1 54.2

3.9 3.8 4.2 5.7 5.3 4.5 5.2 4.2 2.8

154.3 140.2 130.2 138.3 128.8 349.3 1157.7 1661.2 1782.2

Source: Calculation from Franc Zone Annual Reports, Banque de France (various dates).


177

Cameroon 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

159.7 153.0 112.2 83.2 138.2 143.4 184.9 139.7 141.6


Table 8.2 Cotton export earnings in national economies

178


supply and price formation in connection with the price value linked to currency exchange rates. This section is devoted to assessing the extent to which the factors examined by Maizels remain valid with regard to cotton.

Maizels mainly identified factors that were thought to contribute to reducing demand, either through the economic slowdown in industrialized countries or due to competition from synthetic materials. Nevertheless, he did not deal with the impacts on demand of highly populated countries reaching higher living standards, or of changes in technologies and textile industry management. Less demand from developed countries More than the economic slowdown in industrialized countries, the demise of the textile industry in Western countries clearly reduced the demand for cotton fibre. This is the case in Europe and the USA. Europe is no longer a substantial outlet of cotton fibre. In less than ten years, imports fell threefold, from 660 000 tonnes in 1999 to 223 000 tonnes in 2006 (Table 8.3). FACs remain the main supplier, with a market share of around 26 per cent, slightly ahead of Spain and Greece, the two EU cotton producing countries (around 23 per cent). Eastern European countries have a lower market share in spite of the apparent advantage of the shorter distances involved in order to supply Europe. More importantly, the US share has been growing steadily. In the USA, the textile industry has been declining since the mid-1980s. However, as cotton production has not decreased, more is poured into the world market, thus potentially pulling the prices down. The USA currently uses less than one third of what it produces and has therefore adopted an aggressive cotton selling strategy – especially in Europe and also in China, which absorbs up to 60 per cent of US exported cotton. Uncertain fate of the competition from synthetics Concerning competition from synthetics, cotton demand has suffered from the increasing market share of artificial fibres (cellulosic and synthetic fibres) since the end of the Second World War. The decrease in the cotton market share has, nevertheless, not been continuous. The decline plateaued in the mid-1970s as an upshot of the US promotion of the natural advantage of cotton fibre, which has benefited all cotton producing countries. The USA is the only industrialized country where the proportion of cotton in final garment goods still exceeds 65 per cent. The plateau lasted until the beginning of the 1990s, followed by a decade of decline. It seems that the decline has once more levelled off. It transpires that the competition from synthetics is not as detrimental as one might expect. The case of cotton confirms Maizels’ advocacy for active defence of natural commodity outlets.


Demand factors


1999 2000 2001 2002 2003 2004 2005 2006 2007

tons % total tons % total tons % total tons % total tons % total tons % total tons % total tons % total tons % total

FACs

Asia

149 796 22.7 173 873 23.0 147 270 24.6 154 716 25.9 125 050 26.9 101 489 26.9 89 745 26.2 58 782 23.3 61 056 27.4

10 850 1.6 29 977 4.0 18 369 3.1 14 508 2.4 7 042 1.5 5 357 1.4 7 722 2.3 6 245 2.5 12 760 5.7

E&S Africa

E_Europe

EU15

45 036 6.8 53 419 7.1 43 961 7.3 33 029 5.5 29 322 6.3 27 336 7.2 22 490 6.6 16 285 6.4 13 551 6.1

181 351 27.5 181 002 24.0 137 313 22.9 126 090 21.1 74 583 16.1 47 360 12.6 48 554 14.2 35 458 14.0 38 833 17.4

129 243 19.6 145 827 19.3 105 778 17.7 87 980 14.7 87 445 18.8 98 627 26.1 84 653 24.8 74 622 29.5 49 682 22.3

Mid-East

N. Africa

Oceania

N. America

48 584 7.4 66 262 8.8 49 077 8.2 73 556 12.3 35 130 7.6 28 317 7.5 28 167 8.2 20 133 8.0 2 417 1.1

45 489 6.9 45 577 6.0 39 750 6.6 47 527 8.0 53 122 11.4 26 039 6.9 27 185 7.9 17 637 7.0 17 616 7.9

28 938 4.4 31 373 4.2 31 140 5.2 24 799 4.2 15 080 3.2 11 707 3.1 8 559 2.5 5 895 2.3 1 996 0.9

19 531 3.0 27 321 3.6 26 189 4.4 34 424 5.8 37 353 8.0 31 004 8.2 24 921 7.3 17 504 6.9 25 224 11.3

Total 658 818 100.0 754 631 100.0 598 845 100.0 596 627 100.0 464 126 100.0 377 235 100.0 341 996 100.0 252 559 100.0 223 133 100.0


179

Note: The total pertains to countries that are considered as structural exporters: FACs: Senegal, Mali, Benin, Cameroon, Burkina Faso, Togo, Chad, Côte d’Ivoire); Asia: India and Pakistan; E&S Africa: Tanzania, Zambia, Zimbabwe, Mozambique; Eastern Europe: Azerbaijan and Uzbekistan; EU15: Spain and Greece; Mid-East: Syria; North Africa: Egypt and Sudan; Oceania: Australia; North America: USA. The total figures only slightly underestimate the total EU imports. The Eurostat tool does not provide the global figures of all importations into Europe. Source: Derived from EUROSTAT statistics.


Table 8.3 Cotton fibre importation patterns into the European community (15 countries) before its recent enlargement

180


75,0% 70,0% 65,0% 60,0%

50,0% 45,0% 40,0% 35,0% 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Figure 8.8 Cotton share in the textile fibre market Source: Derived from ICAC statistics.

The possibility of defending cotton outlets is, nevertheless, mitigated good news. The promotion campaign requires funding that DCs cannot afford and that is definitely beyond the reach of FACs. For about ten years, an international initiative has been under way to sustain coordinated international initiatives to promote cotton, but so far with very little impact. Coordinated international initiatives are hard to implement, and it has been concluded that only national actions can be considered realistically. Furthermore, at the same time, major cotton exporting countries (the USA, Australia and, to some extent, Brazil) have been very active in promoting the image of their own cotton. So, the increase in global cotton demand seems to count less than the increase of the demand addressed to one’s cotton. Clearly, FACs would suffer more if the competition from artificial fibres became more severe. Fortunately, this competition might drop because of the economic development of highly populated countries (China, India, Brazil), where cotton clothing might feel more comfortable in the hot temperatures that prevail. Besides, it has long been noted that the preference for textile fibres is connected to the person’s income level. In industrialized countries, the preference for cotton fibre in garments clearly emerged in the 1970s in connection with the increase in income. The elasticity of the demand for cotton fibre garments was far higher than that for all fibres (Table 8.4). This elasticity was negative in DCs over the same period, indicating a form of rejection of cotton, as with the trend noted in industrialized countries after the Second World War. Along with increase in their incomes, DC populations increase their garment consumption, with higher figures noted in Asian DCs as compared with African DCs (Table 8.5) due to their much higher development


55,0%


Michel Fok

181

Table 8.4 Variations in income elasticities of demand in selected countries

France United Kingdom USA Mexico Egypt Pakistan

Demand elasticity to income

Period

Cotton

All fibre

Period

Cotton

All fibre

1949–71 1949–80

−0.56 −0.56

0.57 0.64

1972—92 1981—92

1.98 1.98

0.57 0.64

1949–80 1949–64 1950–81 1949–74

−0.61 0.47 0.57 1.80

0.64 0.61 0.59 1.98

1981—92 1965—89 1982—89 1975—89

2.08 −1.06 −2.51 −0.92

0.64 0.61 −0.94 −0.57

Source: Fok (1997).

Table 8.5 Textile fibre end-use consumption patterns, kg/capita All-fibre World

1960 1972 1980 1990 1997 2001 2005

5.02 5.88 6.65 7.16 7.30 8.19 9.57

Cotton Indus. All DCs Africa DCs Aisa DCs World Indus. All DCs countries countries 12.14 15.19 17.16 21.38 23.79 24.62 29.41

1.91 2.59 3.41 3.80 4.43 5.36 6.26

1.36 2.82 2.96 1.98 2.02 2.11 2.15

2.16 2.24 2.99 3.81 4.51 5.68 6.94

3.46

3.80 3.85 3.82 4.00

4.80 5.00 5.40 8.20 10.70 10.60 11.50

2.01 2.22 2.13 2.16 2.52

Source: Derived from ICAC annual reports on World Textile Demand.

rate. There are still very large gaps in cotton and artificial fibre (cellulosic and synthetic) consumption figures between industrialized countries and DCs. Nevertheless, the gap between Asian and African DCs is broadening because of the influence of the emerging countries mentioned. In short, the continuation of vibrant economic development in the emerging countries mentioned could mean new opportunities for cotton, to the detriment of synthetic fibres. Yet, in China, the supply of fine all-cotton shirts in department stores is quite abundant and attractive.


Demand elasticity to income

Technology and management change in the textile industry The textile industry used to be the key element in the industrialization process in many countries. For a while, this industry seemed to have relatively low capital requirements and did not require qualified staff. Countries with



low wages have succeeded in entering the industry to compete against countries with an established reputation in this sector. These latter countries – in Europe (Table 8.3) and also in Asia (Taiwan, Hong Kong) – have seen their textile industries seriously reduced, as reflected by the decrease in their cotton requirements. To maintain the remaining textile industry, these countries have had to boost their productivity and competitiveness by adjusting their technology and management to manufacture higher-value products. To offset the handicap of higher wages, productivity has been boosted through technological changes with greater equipment capacities. High quality raw material is necessary to ensure the success of this shift, notably in terms of uniformity and lower foreign matter contamination. To overcome competition from low-wage countries, all textile industries in industrialized countries have shifted to manufacturing finer products by using finer cotton fibre. In short, cotton crises also lead to a shift towards higher cotton fibre quality requirements. In other words, cotton crises have a more serious impact on countries that fail to meet the quality requirements of an evolving market. The concern about boosting competitiveness has also led to the modification of some management practices. In connection with the just-in-time practice in all industries in developed countries, textile industries seldom keep their own stock of cotton fibre; neither do they order directly from producing countries. To an increasing extent, they rely on cotton traders who have organized themselves to ensure cotton fibre storage and thereby gain power over price formation. As long as producing countries do not organize themselves in a similar way in order to meet the demand of textile industries, they will have no influence on price formation. This kind of organization is part of the recommendations that Maizels put forward to enhance producing countries’ marketing. Nevertheless, he did not correlate the increasing power of trans-national companies (TNCs) in the trade of commodities with changes in the management of processing industries in developed countries. Supply factors Maizels identified factors that either contribute to increasing supply or preclude reducing it, thus generally maintaining the risk of over-supply. He pointed out that the implementation of subsidies and technology change are driving forces for increasing the supply, while the pressure (by Bretton Woods institutions) to increase commodity production and the lack of diversification hamper supply reduction in times of commodity crisis. These factors are still valid.


182

Supplies enhanced by a few subsidy modalities It is felt that subsidy policies are at the basis of over-supply, which implies crises through declines in price. In the case of cotton, this feeling triggered


183

the protest in the WTO arena in 2003. Although this appears to be common sense, the issue is not so simple. In their protest, African countries have particularly fingered the subsidy policies of the USA, the EU and China, since their policies have negatively impacted the world market. It is worth noting that only about ten countries have been earmarked for the application of subsidy measures since the ICAC was mandated to follow up governmental measures at the end of the 1990s. Globally, the number of countries and the subsidy budgets engaged are inversely correlated with the world price, commonly referred to as the A Index, established by Cotton Outlook, a renowned company based in Liverpool. In the ICAC reports, the countries/regions that actually count the most are the three indicated in the African protest. Of course, the three countries/regions reacted quickly, either by rejecting the accusation of applying subsidies (China) or by minimizing the impacts of their subsidy policies (EU and USA). China had actually phased out all subsidy provisions to their cotton growers before their entrance into the WTO: this was clearly one of the US conditions that had to be fulfilled to ensure that the Chinese application would not be blocked. China has maintained the import quota that forced its textile industries to buy domestic cotton at higher prices, but this is passed on to the final products and, hence, ultimately paid by consumers. China’s claim of an absence of subsidy implementation is therefore conceivable3 since its support is, at most, indirect. Amazingly, ICAC integrates China into the subsidizing country group although direct subsidy measures should only be considered. Clearly, the EU provides the highest subsidy for each kilogramme of cotton produced. The concern of keeping the agricultural budget in control has led to blocking of the budget allocated to cotton since the subsidy policy was implemented after the entrance of Greece and Spain. So, the subsidy is implemented with some concern for controlling the production volume. The European cotton volume nevertheless represents a small portion of world production, with little potential effect on world price (Araujo Bonjean et al. 2007). Cotton subsidies in the USA have been globally massive, although the subsidy per unit is far lower than in the EU. The subsidy modalities are also connected to the market price, so a substantial part of the subsidies is disbursed only when the world price is low. This feature enables the US government to claim that their subsidy policy has little impact on the world market. It also contributes to fuelling the debate as to whether subsidies create oversupplies or the opposite, as contended by a few academics (Wise 2004). In the case of the USA, and in many countries that had implemented some subsidies, it was the over-supply and resulting price fall that generated subsidies to cotton farmers. In countries where compensation payments for price falls are determined by pluri-annual policies with a relevant voted budget, as is the case in the USA, this argument does not stand. In this situation, there


Michel Fok



is no financial risk in the event of over-supply and price falls, so no cotton growers would refrain from producing and, hence, would be encouraged to generate oversupplies. It transpires that subsidy modalities are more to blame for inducing oversupplies and cotton crises, far more than the budget volume engaged. As pointed out in Figure 8.2, the very high US subsidy programme before the 1980s was not at all harmful to FACs or to other cotton producing countries. Conversely, the USA has unconsciously contributed to the success of cotton in FACs. Maizels was correct when being pessimistic about the phasing out of subsidies by developed countries. The issue of agricultural subsidies was the main sticking point during the current Doha Round of the WTO negotiations. It is even debatable whether such phasing out makes sense when agriculture lacks competitiveness in the economic structure of countries that have achieved some level of development. As long as no country accepts the total disappearance of its agriculture – which seems relatively unacceptable considering recent increases in agricultural commodity demand, as well as the dependence this situation creates – support to agriculture will be unavoidable. In his book (Maizels 1992), Maizels did not criticize subsidies from a theoretical viewpoint. He stressed the feature of low demand elasticity with regard to commodity prices, as encountered in agriculture, but his book did not specifically address agriculture. From the same standpoint – along with the reality of decentralized production in agriculture, which makes coordination difficult to meet demand properly – other academics have underlined the tragedy of over-supply in agriculture, which calls upon state intervention (Boussard et al. 2005). This indicates that the abolition of subsidies would, at best, have a short-term price effect, with diverging values following estimation methods that are far from perfect (FAO 2004). The strategy of African countries in fighting cotton subsidies is quite strange: it is actually the first time that DCs have played the role of radical defenders of liberalism. The real challenge is to achieve fair subsidy modalities while having few negative impacts on third countries, whose cost is mainly, if not exclusively, supported by the concerned country (Fok 2006b). Shifting the orientation of the debate on cotton subsidies would be more fruitful for preventing cotton crises than radically fighting the principle of subsidy. Technology change in production as a permanent over-supply factor?


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Technology change has been, and remains, an important factor in cotton crises. To some extent, it could be regarded as the main factor of these crises. Cotton production has always been a pioneer in adopting new technologies. Since the early 1990s, many technical achievements have enabled more efficient irrigation, and the implementation of precision agriculture so as to be able to provide nutrients to cotton crops at the required dosages precisely where and when they are needed. This concept of precision agriculture is already a reality in the USA and is gaining momentum in Brazil.


Michel Fok

185

Authors

Estimation models

Concerned sectors

Sources of the data used

Campaign

Price change (%)

ICAC ICAC Sumner IFPRI

ICAC/FAO ICAC/FAO IFPRI IFPRI

21.0 72.4 12.6 11.4

Tokarick

2000/01

2.8

FAO Reeves et al.

UNCTAD/FAO Reeves et al.

ICAC ICAC ICAC ICAC + IFPRI ICAC + others WTO ICAC

2000/01 2001/02 2000/01 2000/01

Tokarick

2000/01 2000/01

2.3–5.0 10.7

Gillson et al. Goreux

ODI Variante ICAC/FAO

cotton cotton cotton all agri. products all agri. products cotton Cotton/ textile/ garments cotton cotton

ICAC ICAC

2000/01 2000/01

18.0–28.0 2.9–13.4

Source: Fok (2006b).

Of course, when talking today about technological progress, the application of biotechnology outputs comes to mind. GM cotton varieties are being adopted in most producing countries at substantial volumes (the USA, China, India, Australia, Brazil and Argentina) and also in minor producing countries (Mexico, South Africa, Indonesia and so on); Burkina was to be the first among FACs to release GM varieties commercially (2009). The adoption of GM cotton in China dates back to 1997 and was being grown on more than 65 per cent of the total Chinese cotton area within a few years. Since 2005, the extent and rate of GM cotton adoption in India has been similar, thus contributing to ranking this country second to China in cotton production due to the substantial gains in yield resulting from various factors. Pakistan should follow the pace opened by India. Illegal use of GM cotton varieties has already begun. India and Pakistan are the two countries with the largest areas devoted to cotton. The substantial yield increases achieved by these two countries will inevitably have a great impact on global cotton supplies. Of course, the increase in supplies from a few countries could be offset by a decrease in, if not the disappearance of, the cotton supply in other countries or in some producing zones of a few countries. While cotton production has become highly vibrant in central western Brazil within less than twenty years, it has vanished in the south of the country where it is no longer profitable. There is, nevertheless, a time lag in the compensation process – when opportunities for alternative production do not perform, it takes a greater time to exit cotton production. Besides, the rate of compensation is far less


Table 8.6 Diverging values in the estimation of price increases resulting from the abolition of cotton subsidies


186


Cotton lint yield, world and major francophone African cotton-producing countries (moving 3-year average, except for two extreme years) 800

kg/ha

700

500 400 300 Note: countries considered are Benin, Burkina Faso, Cameroon, Chad, Côte d'Ivoire, Mali, Senegal and Togo

200 1966

1971

1976

1981 World

1986

1991

1996

2001

2006

Francophone Africa

Figure 8.9 Comparison of FAC cotton productivity patterns Source: From ICAC data.

than the total loss as the extent of eliminated production volume is much lower than in regions with vibrant production. This gives rise to over-supply because the shift in the demand trend does not keep step with the adoption of new production technologies. This highlights the tricky aspect of technology change. While this kind of change is commonly advocated to adapt to commodity crises, one might wonder whether it contributes to fuelling the crisis process by creating oversupplies that pull prices down. This critical vision of technology change certainly deserves further analysis. From the FAC standpoint, there has been no real technology change for more than two decades. Furthermore, it is likely that this setback in technology is the result of applying SAPs. This situation of stagnation in productivity – a kind of euphemism – is revealed by the widening gap with the average world yield in spite of the catch-up phase (Figure 8.9). The global average cotton yield trend is again increasing, while yields in FACs are declining. When zooming in on cotton yield patterns in the major FACs (Benin, Burkina Faso, Cameroon, Chad, the Côte d’Ivoire, Mali, Senegal and Togo), it is clearly revealed that the slump dates back to the mid-1980s (Figure 8.10), when support for input use was gradually phased out and along with the application of SAPs. The process worsened as a result of the devaluation of the CFA Franc in 1994, which induced a substantial increase in input prices.


600


Michel Fok

470

187

kg/ha

450 430

390 370 350 1980 Figure 8.10 countries

1985

1990

1995

2000

2005

2010

Cotton yield patterns in major francophone African cotton-producing

Notes: 1 3-year moving average, kg/ha 2 Countries considered are Benin, Burkina Faso, Cameroon, Chad, Côte d’Ivoire, Mali, Senegal and Togo. Source: From ICAC data.

The use of inputs was somehow encouraged once more by the increase in seed cotton prices in around 2000, but this was only a short-term change. Although the move towards technology change could be tricky, since it would not necessarily prevent the decline in prices from continuing, it is nevertheless needed in FACs, since this move is under way in other major producing countries. The issue is to clarify which type of technology change makes the greatest economic sense. Owing to the prospect of a price decline, a technology gain should not be sought with higher financial risk. Where GM cotton is adopted and integrated into an intensive production mode, it adds little to the overall financial risk. It is a completely different situation when applied in a relatively non-intensive production system, as is common in Africa. Other technology prospects must also be considered. More benefit could be achieved by taking advantage of biological processes in controlling pests and diseases, as these processes are totally free. In other words, intensification must be in line with the preservation of natural biological processes instead of inhibiting or destroying them. This might be achieved without excluding the use of chemical inputs, provided that they are used at reasonable dosages and frequencies. A change in production mode must be contemplated, its materialization and success needs to ask for further research with adequate competences and means, contrary to what is observed today.


410


188


Maizels mainly highlighted that Bretton Woods institutions were applying pressure to increase export commodities in order to repay loans. This view might have been relevant, but it is doubtful that this pressure has persisted to any appreciable degree with regard to cotton. Cotton production is decentralized and no government has direct command over it. The failure of cotton production in colonial times is illustrative of the limited powers of any administration to force production. Even though international organizations have tried to push cotton production, this would not have succeeded if the economic signals were unattractive to cotton growers and if they were facing monetary needs. Farmers’ monetary needs increased after the economic liberalization process took place in their countries. Farmers keep on producing cotton, not necessarily because of its profitability but because of the guaranteed monetary income that it provides. This phenomenon is linked to the lack of alternative cash crops or diversification. All FACs have failed in achieving substantial diversification in their cotton production zones. This is mainly because diversification requires long-term state commitment, as we pointed out in our contribution to the World Bank Development report (Sautier et al. 2006). Processing of raw materials in producing countries is a good way to add value and reduce the supply to the world market. In this area, FACs were processing less than 1 per cent of their cotton production in 2004, although the ratio was far higher in a few countries, notably in the Côte d’Ivoire (Fok and Bachelier 2004). It is another regrettable outcome of SAPs that the recent position of Bretton Woods institutions has not yet been reversed. There is passionate debate about the relevance of willingly promoting local processing of cotton fibre in the textile industry. International agencies are currently reluctant. Their opposition is based on the disadvantage of costly energy and the high level of investment in competitive spinning and weaving industries while the profitability ratio is low. Price formation and price value factors UNCTAD was the first international institution to take the market structure into account in its analyses of international trade. By dealing with TNCs, UNCTAD actually dealt with the price formation issue that has been totally ignored by the neoclassical approach. For almost thirty years, UNCTAD has been coordinating a working group in charge of setting up a guide of good conduct for TNCs, but there has been no agreement on the first draft proposal due to opposition from TNCs’ countries of origin (Maizels 1992). UNCTAD remains unique in calling for more transparency from TNCs, an issue that is totally ignored by other international organizations such as the Bretton Woods institutions and the WTO. Conversely, the WTO organization has addressed the case of state trading enterprises (STEs): the Uruguay Round of


Supply sustained for socioeconomic reasons


Michel Fok

189

In the sphere of international trade, there is a general presumption that trading enterprises will act on the basis of commercial considerations, and that based on the theories of comparative advantage, they will expand their international trade in order to reap the benefits. However, a private firm, if it has significant power in a given market, may exercise this power in a way that distorts trade and thus causes economic detriment, rather than benefit. (WTO, available at http://www.wto.org/ english/tratop_E/statra_e/statra_info_e.htm) The call for transparency from TNCs is now also being put forward by a few academics (Murphy 1999, 2002a, 2002b; Heffernan 1999) that observed that these companies are becoming less transparent, and are issuing less and less publicly accessible information (Wise 2004). Maizels is also among the few who have considered the implications for third world countries of the status of the US$ as an international transaction currency. This observation underlies the call for setting up a new Third World currency, which has appeared unrealistic to most people. In short, Maizels’ analysis is very striking in the sense that the price can be manipulated by those who have market power and is labelled in a currency (usually that of the country of origin of the TNCs) whose exchange rate could become quite unfavourable for DCs. This analysis underlines that commodity crises could be amplified by the reality of market power and that their economic impacts for DCs might be accentuated by unfair exchange rates. In his book (1992), Maizels mentioned the oligopolistic role of TNCs in the cotton trade. His analysis is complemented hereafter, and the transaction currency issue will be briefly addressed. Increasing concentration of cotton trade Owing to the lack of published information, it is quite difficult to assess the market power of TNCs – only a few clues are available. The marked increase in cotton exports over the last decade (Figure 8.7), without any real increase in the world price index, is quite amazing. In contrast, a decline has been noted in this index. This might indicate the tragedy of cotton production in too rapidly responding to demand at the expense of cotton growers; it might indicate that the international reference of world price might be flawed; or it might signal manipulation of the international prices by those who possess market power. In the case of cotton, such price manipulation is relatively easy owing to the construction of the A Index. This index is calculated from a basket of


the GATT adopted guidelines for transparency immediately before the WTO took over in 1995. More amazingly, the WTO has not initiated any move towards achieving more transparency from TNCs, while still acknowledging that market power could be economically detrimental through trade distortion:


190


Table 8.7 Market share of quality demanding destinations (EU15, Taiwan, Japan) in the total exportations of cotton by some FACs 1996 % 37

1997 %

1998 %

1999 %

2000 %

2001 %

2002 %

2003 %

38

28

30

24

32

15

39

19 cotton origins with a specific grade of appearance grade (‘middling’) and lint length (1 and 3/32 inches). The A Index is the mean value of quotations from the five lowest priced cotton origins. For more than fifteen years, cotton growth in FACs has been regularly included in the A Index calculation. The A Index construction is not based on real transactions but, rather, on declarations of intention provided through telephone calls or faxes. In reality, only traders declare their selling intentions. It turns out that the A Index is completely ‘virtual’, managed without any transparency and, more importantly, is vulnerable to manipulation.4 It could, indeed, be suspected that such price manipulation takes place against FAC interests. Cotton originating from these countries is acknowledged as being of better quality than that which serves for determination of the A Index. This quality is confirmed by the relatively high number of textile countries that have invested in the niche market of fine cotton products requiring quality cotton fibre (Table 8.7). In spite of this acknowledged quality, according to the quotations published by Cotlook Ltd cotton from FACs obtains no market premium (Figure 8.11). An analysis of customs data to assess imports of cotton fibre into the European Union, before its recent enlargement, shows that the average price of cotton originating from FACs has been systematically lower than that of cotton from alternative origins (Table 8.8), the qualities of which are not acknowledged to be better. This price gap indicates that something abnormal is taking place to the detriment of the export value of FAC cotton. We lack information to go deeper in this analysis, but the abnormality possibly pertains to undervaluation in the framework of intra-firm transactions that Maizels discussed in his book (1992). Attempts to manipulate the price index have a greater impact when the market is dominated by a few trading companies that thereby enjoy oligopolistic power. Maizels mentioned that 85–90 per cent of the cotton trade was controlled by an oligopoly of TNCs in 1983, but this figure was probably overestimated for a period when STEs and cooperatives were active in the cotton trade. The reality of the oligopolistic control of the cotton trade was ambiguously considered by the ICAC. This organization has periodically conducted


Source: Derived from ICAC statistics.


100 US cents/pound 95 90 85 80 75 70 65 60 55 50 45 A Index 40 35 1980 1985

191

Cotton West Africa 1990

1995

2000

2005

2010

Figure 8.11 Comparison between FAC cotton quotations and the A Index Table 8.8 Average prices of cotton fibre imported into the EU15 according the origin (in US cents/pound)

1999 2000 2001 2002 2003 2004 2005 2006 2007

A index

FACs

East and South Africa

Greece and Spain

Australia

52.80 57.20 41.80 55.70 69.25 53.50 55.21 58.48 73.00

69.73 61.16 60.74 44.85 51.38 68.40 58.38 54.55 61.27

71.88 67.78 63.60 54.38 57.34 67.66 63.47 61.18 64.76

61.22 54.16 57.34 41.77 52.59 68.93 59.23 57.01 66.67

80.27 71.76 68.50 59.16 62.71 74.59 73.08 64.13 67.31

Source: Calculated from Eurostat data.

surveys of organizations involved in the cotton trade. Although the ICAC observed that half the world production in the early 1990s was traded by the largest trading companies (ICAC 1994), more recently it rejected the possibility that a few companies control the market, based on the observation that more than a hundred companies remain involved (ICAC 2005). This position is naïve: it transpires that there are only a very few large cotton trading companies (trading more than 200,000 tonnes annually). Besides, not all of these companies are involved in the international cotton trade and have a TNC status. Conticotton, recorded as being a major trading company in 1994, is not very well known in the international trade community; this


Michel Fok


192


Table 8.9 Companies trading more than 200,000 tonnes of cotton fibre Areas of origin

1994

2004

USA

Allenberg Cotton Co. (US) Conticotton (CH) Dunavant Enterprises Inc. (US) Hohenberg Bros. Co. (US)

Allenberg Cotton Co. (US)

L. Dreyfus Cotton International (BE) COPACO (FR) Paul Reinhard AG (CH) Stahel Hardmeyer AG (CH) Ralli Brothers & Coney (UK)

Asia-Pacific

ECOM USA Inc. (US) Cargill Cotton (US) Weil Brothers & Rountree (US) L. Dreyfus Cotton International (BE) COPACO (FR) Paul Reinhard AG (CH)

Aiglon Dublin Ltd (CH) Plexus (UK) Toyo Cotton (JP) Queensland Cotton Corp. (AU)

Key: AU = Australia BE = Belgium FR = France JP = Japan CH = Switzerland UK = United Kingdom US = United States of America. Source: ICAC surveys on cotton trading.

also applied to ECOM USA Inc. in 2004. Merger and takeover operations also make it hard to follow actual market structure changes. The Queensland Cotton Corporation was taken over recently by Louis Dreyfus, who won the bid at the expense of Olam International, a cotton trader that entered the arena in the early 2000s and is now part of the restricted club of top cotton traders, especially in Africa. Meanwhile, Aiglon Dublin Ltd, a company set up by a Malian operator, has been having financial troubles and will probably be ousted from the business of cotton trading.


Europe

Dunavant Enterprises Inc. (US)

TNC domination facilitated by the reform of FAC cotton sectors In all FACs, state control applied to cotton production and trade prior to the liberalization process in the first half of the 1990s. Until this process, most national cotton companies in FACs sold their cotton through COPACO,5 their marketing agent. Unlike a trader, a marketing agent never takes possession of the cotton. This agent only plays an intermediary role, representing the seller in case of conflicts with buyers and receiving a commission based on the contract value. All sales prices were inclusive of insurance and freight


193

costs (cif), with high organizational requirements for proper and timely shipping. Clearly, until the beginning of 1990s most FACs had no relations with international traders. The option of selling through a commissioner sheltered these countries from cotton trading TNCs. Implementation of the liberalization process in FAC cotton sectors has enabled cotton trade TNCs to enter a sheltered market and become dominant within less than a decade. In FACs, liberalization was contended to enable cotton sectors to adapt better to world market fluctuations to the benefit of farmers (Varangis et al. 1995; Banque mondiale 1998). Harsh and passionate debate resulted. Some observers saw opposition between the World Bank and French interests, while the overall advocacy of the liberalization of agricultural sectors provoked sceptical and critical analyses on various horizons (Hibou 1998; Bayliss 2001). Amazingly, there was a change in the cotton lint trade scheme, but this shift gave rise to no, or very little, discussion. It seems that the acceptance of diversification in the cotton marketing scheme was a gesture of concession from the CFDT,6 if not from the French government, as a sign of goodwill towards the reformation in cotton sectors. Questionable outcomes resulted. At the time of writing, it is acknowledged that in every FAC cotton is mainly exported by sale to traders, all of which are TNCs. This is the result of a gradual process. In one country (called ‘Country X’ here, for obvious reasons of confidentiality) for which we have obtained cotton transaction data covering the period 1991–2001, we observed that traders caught up with COPACO in 2000 in procuring the cotton of Country X (Table 8.11). This resulted from a traders’ strategy consisting, first, of proposing higher prices (nevertheless, on lower volumes) than COPACO (the commissioner) so as to complete the probation period successfully. Once this period was over, there was no longer a gain in price from passing the cotton through traders (Table 8.10). Liberalization of the cotton trade enabled cotton trade TNCs to conquer the FAC cotton market. The privatization of cotton companies that followed enabled them to consolidate their position through an upstream integration process. Cotton trading companies such as Reinhard, Dreyfus and Aiglon, are running cotton companies in the Côte d’Ivoire, Burkina Faso and Benin. Dunavant tried, also. Olam succeeded in the Côte d’Ivoire in 2008. In short, a substantial share of the transactions of all FAC cotton actually involves intra-firm exchanges, the economic disadvantages of which for commodity producing countries were analyzed by Maizels. This suggests a phenomenon of price capture by trading TNCs at the expense of FACs (cf. supra). In the cotton trade liberalization process in FACs, the conversion to exclusive FOB sales came abruptly, in 2002. It also led to detrimental changes in the transaction rules. All cotton transactions refer to specific sets of rules and by-laws defended by professional cotton associations. These rules are the basis for dealing with any conflict in the implementation of a contract; they can be called private


Michel Fok


Traders’ price advantage patterns in country X Sales at FOB position Amounts, tonnes COPACO Traders

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

24,931 29,960 7,890 7,900 16,300 3,740 900 1,867 600 2,060 115,145

300 3,727 1,273 11,866 10,105 3,000 7,500 11,945 35,830 17,725 5,053 112,980

Sales at CIF position

Average price, FF/tonne COPACO Traders 8,526 7,806 6,156 8,327 8,024 8,700 8,474 8,228 7,490 6,514 6,421

9,550 6,412 6,498 9,291 10,317 9,022 9,147 8,182 7,233 5,623 5,462 6,220

Amounts, tonnes COPACO Traders 78,620 80,573 119,640 79,460 101,692 161,897 181,345 199,486 182,294 141,697 63,253 3,590

500 2,400 950 850 150 8,300 35,010 36,040 2,750

Average price, FF/tonne COPACO Traders 9,254 7,286 6,443 7,525 9,291 9,311 8,792 9,327 7,838 6,962 8,319 8,368

10,360 6,721 10,226 10,218

Source: Fok (2006c).


9,480 9,762 7,813 8,137 8,445


194

Table 8.10

Michel Fok Cotton exportation distribution in country X Sales via or to

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Sales position

COPACO %

Traders %

others %

CIF %

FOB %

93.8 95.7 93.6 86.9 91.5 98.0 95.5 90.5 83.5 73.2 60.6 50.6

0.7 3.2 2.7 12.7 8.5 1.8 4.0 9.1 16.4 26.8 39.4 49.4

5.4 1.1 3.7 0.4 0.0 0.2 0.5 0.4 0.1 0.0 0.0 0.0

71.7 70.0 89.6 80.1 79.5 95.8 95.2 93.4 83.3 89.9 95.2 2.7

28.3 30.0 10.4 19.9 20.5 4.2 4.8 6.6 16.7 10.1 4.8 97.3

Source: Fok (2006c).

regulation systems (PRSs). In the second half of the nineteenth century, various PRSs were given the names of the towns from which they originated (Liverpool, Le Havre, New York, Memphis and so on) (Bernstein 2001). FACs refer exclusively to the Réglement Général du Havre (RHG). PRSs are basically sets of general cotton transaction contract conditions. They specify quality criteria that can be contracted and the penalties that will apply should the quality supplied be below that agreed. The real agreement signed by contracting parties corresponds to specific conditions (that is, quantities, quality criteria, price, destination, date of delivery and so on) that occupy fewer than two pages. It should be stressed that PRS rules deal explicitly with contradictory control modalities at delivery (in terms of quantities and quality). They acknowledge the natural feature of cotton, with some degree of heterogeneity, through the notions of franchise and a tolerance threshold, which means that a part of the contracted amount can be provided below the agreed quality (Fok 2004). Following liberalization of the cotton lint trade, transaction contracts still refer to RGH rules, which are, nevertheless, unilaterally reinterpreted. Many signs indicate that traders organize themselves to implement control before shipment. This control enables traders to reject cotton bales with which they are not satisfied for reasons they do not necessarily specify. The real fact is that the contradictory control principle – implemented in the presence of representatives of selling and buying parties – is over. The unilateral revocation of a sacrosanct principle of contradictory control goes along with abolition of


Table 8.11

195



the franchise and tolerance thresholds. No tolerance is now applied, certainly not at the expense of the selling parties. The delay in removing or delivering contracted cotton bales might also not be respected. This was a complaint from several cotton companies when market was bearish: the contracted cotton is left with the cotton companies, which have to manage its storage without sufficient infrastructures. This trader behaviour leads cotton companies to lose fourfold, without compensation: delayed payment, storage costs, deterioration-linked penalty and discredit on the image of their cotton. This phenomenon recently hurt several FACs when the price fell to around US cents 50 per lb in December 2008, after having reached around US cents 80 per lb in August 2008. Countries that had succeeded in dealing exclusively with the most renowned international trading companies suffered less. However, the number of historic international trading companies is decreasing: Reinhard has declared its withdrawal from the cotton business from March 2008, while it has been announced that Dunavant Enterprises Inc. and Allenberg Cotton Co., the two largest cotton merchants, will merge. This is a continuation of the concentration process in the cotton trading business, starting with Cargill, which took over Hohenberg in 1976, then Ralli Brothers & Coney in 1981, leading to Cargill Cotton Limited in 2002. Maizels called on international cooperation to improve the fate of DCs facing commodity crises. In the case of cotton, it has been noted that international organizations actually intervened, advocating policy changes that have eventually favoured TNCs involved in cotton trading, to the detriment of FACs (Fok 2006c). Bretton Woods institutions probably did not intend this outcome, but they were, nevertheless, still guilty for their ignorance of the reality of the cotton trade and for overlooking the issue of TNCs. Currency exchange rates amplify crises Most commodity transactions involve hard currencies with the almost exclusive dominance of the US$. Prices of almost all commodities are labelled exclusively in US$s, while commodity export revenues are collected in local currencies, notably at the producers’ level. In FACs, the international market crisis in 1984–85 was not felt until a year later – the price decline in US$s was not transferred directly into CFA Francs because the US$ had reached a historical high against the French Franc (and, consequently, the CFA Franc). The situation has totally reversed since 2004. The US$ has been depreciating against the Euro, to which the CFA Franc is linked through a fixed exchange rate, and cotton export revenues in CFA Francs have diminished to a similar extent. Revenue losses due to depreciation of the US$ have been estimated at up to 20 per cent (Table 8.1). The issue of the correct currency exchange rate is not specific to cotton or to DCs, although Maizels recommended the creation of a Third World currency to help shield these countries from the consequences of exchange


196


197

rate fluctuations. In 2007, the non-anticipation or the incorrect anticipation of the US$ depreciation pushed many Brazilian farms close to bankruptcy because they had sold forward (in US$s) at a rate that turned out to have been overestimated. This phenomenon prompted the Brazilian federal government to allocate a special subsidy to compensate for currency exchange losses. Export revenue loss patterns have indicated that either the currencies of commodity-dependent countries were over-appreciated or the US$ was under-depreciated. In FACs, there is recurrent debate on the overvaluation of the CFA Franc that is not in line with the economic wealth of FACs. Could the valuation of all currencies be wrong, except for that of the US$? This feeling seems to prevail – at least, from the US perspective. In its trade with China, the USA has been criticizing the undervaluation of the Chinese currency, pressuring China to adjust its exchange rate policy. Clearly, there is no incentive to mimic the role of the US$ in international trade, or to question its exchange rate towards other currencies. The WTO has totally overlooked this issue, considering that any monetary or currency topics fall within the scope of the IMF. FACs also overlooked this point in their 2003 protest, but they are still suffering severely from this problem. As long as this situation persists, the imbalanced currency exchange will keep on amplifying the effects of commodity crises at the expense of producing countries.

Moving beyond the cotton crisis Maizels provided numerous ideas to help prevent commodity crises, or to alleviate their effects when they occur. Unfortunately, very few of his ideas have actually been adopted. In this section, the relevance of his ideas is discussed by putting forward suggestions for their implementation in the special case of cotton in FACs. These suggestions are grouped according to the geographic dimensions of the scope of their implementation. International cooperation initiatives From the debate on subsidy abolition to more efficient and fair subsidy policies As recalled, Maizels was pessimistic – or, more precisely, realistic – about phasing out agricultural subsidies. WTO negotiations in the framework of the Doha Round got bogged down in July 2008 mainly because of divergence regarding this specific issue. It is very unlikely that this situation will change in the coming months, or even years. Calling for the total phasing out of subsidies is not realistic. It is also doubtful that it would lead to better outcomes for DCs – countries with large-scale farming and land availability will probably benefit, nothing is less certain for small-scale farming as that in Africa. It would be far more effective to shift the debate so as to achieve a fairer subsidy policy, which implies that subsidy


Michel Fok



budgets must be reduced (one of the objectives of the Doha Round) and that subsidy implementation should have the least possible negative impacts on third countries. It might seem logical that it is the sovereign right of a country to decide on whether or not to subsidize its agriculture; however, third countries should not have to bear the brunt of the cost. Further academic studies are required to delineate effective measures in this mindset. Combining the subsidy reduction mechanism with setting up new mechanisms to promote productivity gains and improve marketing in DCs is seldom discussed. The Doha Round, with its claim of being development oriented, provides an opportunity to explore these mechanisms. Excessive and unfair subsidies have hurt many commodity-dependent countries. The mere reduction of the subsidies will in no way overcome the harm that has been inflicted for decades. The reduction of subsidies will save money for countries that have long been involved in the provision of subsidies. Instead of letting this saved money go back into the national budgets of the countries concerned, it would be more beneficial to allocate it to a fund geared towards assisting commodity-dependent countries. This would not be sufficient to offset the harm done to these countries, but it would still be a good start. Price preference in the framework of long-term supply contracts Maizels defended the principle of price preference for commodities exported by DCs and particularly least developed countries (LDCs). His recommendation was, unfortunately, out of line with the radically liberal perception of trade. The publication of his book shortly preceded the protest against the European regime in favour of bananas exported from former colonies of European nations. The WTO expert panel eventually condemned this regime. Cotton did not benefit from a preferential price – not even in Europe, where the zero-import tax rule was the only benefit that FACs could reap for the export of their cotton. There are no prospects for the price preference implementation. No price preference principle was retained within the framework of negotiations for the Specific Economic Partnership. Even so, owing to the reduction in European cotton fibre requirements, the price preference resulting impact on FACs would be of limited extent. Price preference must be sought with countries that have a high cotton demand. Maizels advocated negotiation of long-term contracts involving governments. This recommendation could apply particularly to African cotton. In China, which is the world’s main cotton importer, the state still plays major role in the procurement of raw materials for its industries. Finally, China is very active in Africa and has announced it would triple its development aid to this continent. All these conditions are quite favourable for the potential implementation of long-term supply contracts integrating price preference. It is worth noting that private initiatives have been under way to foster the price preference principle; for instance, initiatives under the Fair Trade


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concept, which is concerned about paying more to those most in need of being helped. In FACs, these initiatives were launched in the early 2000s. The scale of these commendable initiatives is still quite limited, and they involve very limited cotton production volumes. It is doubtful that they would suffice to ensure better prices for the entire production in the countries concerned.

With regard to commodity crisis, Maizels clearly distinguished between shortterm price fluctuations and long-term price declines. For him, only control of the supply can curb price declines. This is the basis of his advocacy in favour of commodity agreements, but its feasibility is questionable considering the negative experience with regard to coffee production. The supply control issue did not have any momentum until the protest against cotton subsidies in 2003. Thereafter, a few observers who thought the request for the abolition of subsidies was unrealistic promoted the idea of supply control through quota allocations, implicitly under the auspices of the WTO. This approach is somewhat close to Maizels’ idea of achieving intergovernmental agreements, with prices tailored to market fluctuations, although he did not clearly specify any role for GATT. FACs have not appropriated the strategy of controlling supply by means of quota allocation until the time of writing. There is room to integrate the supply control approach into the subsidy reduction process. As mentioned, the EU provides an example of subsidy allocation by means of a mechanism that actually involves production volume control. It would be interesting to assess further the feasibility of combining the acceptation of subsidy provisions by a few countries, but at a reduced level, with a commitment to set a ceiling for cotton production volumes. Setting up a fund to assist and compensate FACs More than ten years before the African cotton sector initiative in 2003 before the WTO, Maizels recommended setting up a compensation fund to alleviate the impacts of subsidies provided by industrialized countries. He did not believe that subsidies would be phased out, so he placed emphasis on the creation of a compensation fund, but he did not suggest any practical measures for creating such a fund. Earlier, we suggested a mechanism to nurture a fund destined to alleviate the impacts of the pursuance of subsidization by a few countries. The allocation of funds saved through subsidy reduction to a compensation fund would seem to be an effective mechanism. However, this fund might not be sufficient to assist DCs in various areas (cf. infra), and it might not last sufficiently long. Alternative ways to generate funds over a longer term are needed.


Integrating supply control into a subsidy reduction programme



Another mechanism could be inspired from that which has been under way in the USA since the 1970s. Cotton Incorporated is an inter-professional organization involving various stakeholders in the cotton and textile sectors. Its budget derives from two sources: one is a levy on each cotton bale produced in the USA; the other is a levy applied to imports of garments containing cotton fibre. The rate levied is the same after conversion of garment import volumes into cotton equivalent volumes. Given the fact that the value of cotton fibre only accounts for a small share of the value of the final product, application of the suggested levy would not be prejudicial for consumers. Maizels mentioned a value share of around 4–8 per cent (Maizels 1992: 164), while a more recent study revealed that it could be less than 1 per cent of 100% of men’s cotton Banana Republic dress shirts (Hall 2006). The application of a levy on cotton textiles would certainly generate substantial funding resources in favour of DCs producing commodities. The practical modalities remain to be devised in detail; in particular, they might have to comply with the WTO rule of non-discrimination between textile producing countries. Nevertheless, the non-discrimination rule was drawn up before the concept of positive discrimination gained momentum, as is now the case in a number of areas in many countries. The fact that the Doha Round has integrated the concept of special differentiated measures also opens the door to revisiting the WTO’s principle of non-discrimination.

Evolving towards a new transaction monetary unit based on existing hard currencies The exchange currency issue has already been addressed. The current situation of dependence on the fluctuating US$ is detrimental to the stability and correct anticipation of commodity export revenues. It seems relatively unrealistic to expect that the US$ exchange rate could be managed by taking commodity crisis concerns into account. The crisis amplifying effect of exchange rate instability will persist. Maizels advocated the creation of a new Third World currency: nevertheless, this generous idea sounds unrealistic. DCs are too economically poor to have any bargaining power with regard to imposing a new currency in international transactions. It is also doubtful that DCs have sufficient converging interests to back the launching of a new currency. Instead of creating a new currency, a more worthy challenge would be to establish a new international monetary unit (IMU) based on a basket of existing currencies, involving the USA, the EU, Japan and emerging countries such as China and Brazil. India could also be included. The basket of currencies must be kept open to integrate new currencies after fulfilment of pre-established conditions. The alternative of creating an IMU would be more feasible, since it better takes the economic reality of the current world into account. It could


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Obliging TNCs to provide information access and control abusive trading practices The position of international organizations is very curious with regard to the issue of TNCs and their market power. As already noted, it is not clear whether the WTO acknowledges the fact that private firms exercise market power: However, a private firm, if it has significant power in a given market, may exercise this power in a way that distorts trade and thus cause economic detriment, rather than benefit. (available at http://www.wto. org/english/tratop_E/statra_e/statra_info_e.htm) WTO documents dealing with TNCs are hard to come by; it seems that this issue is totally overlooked, unless the WTO is actually serving as an instrument of TNCs (Vander Stichele 1997). A similar doubt has also been raised regarding the World Bank (Vallette 2002). TNCs’ power with regard to price formation in the specific case of cotton has already been discussed. The process of horizontal and vertical integration of TNCs is far from finished. Most TNCs have already consolidated their position upstream in production input provision and downstream in animal production and processing. In Brazil, Cargill and ADM (two of the four TNCs with oligopolistic control over the grain trade) have become the main fertilizer suppliers. This suggests that the next stage of integration will concern the retail sector, whereby TNCs would clinch full control of price formation along the value chains. Along with the economic power they have achieved, TNCs have strong political power that has led to the adoption of incredible measures that are in line with their economic interests. In Brazil, shortly after the official authorization of GM soybeans tolerant to glyphosate herbicides, the federal government imposed an anti-dumping tax against glyphosate imported from China, so as to protect the two companies producing glyphosate in Brazil, one of which is Monsanto, which, according to Robin (2008) has the world’s worst TNC image. Dumping impacts negatively on competitors of the same product, but it benefits buyers. Brazil is, therefore, the sole case of a country penalizing itself when buying a product it needs. This measure is hard to understand without considering the interactions between business and politics.


benefit from the support of the concerned countries by its creation, the economic power of which countries, jointly, can sustain – if not overtake – that of the USA. Ironically, the current context of financial and economic crisis appears to be most favourable for contemplation of embarking on the suggested change.



The initiative of imposing a code of good conduct on TNCs has been bogged down for many years. It is doubtful that this initiative will bear fruit under the auspices of UNCTAD. Since the WTO has adopted rules to compel STEs to provide information, similar rules must be adopted to achieve minimum control of TNCs. In practice, TNCs must commit themselves to declaring and updating the subsidiaries they control worldwide. This information must be available for public access, in a format that facilitates academic studies. There is no means by which to distinguish intra-firm transactions under the current customs declaration recording procedures. This could be easily corrected and should be done, by requiring that the intra- or inter-firm nature of transactions be declared and by crosschecking with the subsidiary composition of the firms involved. Consequently, the databases of DC customs services must be modernized, with computerized records. It is even more important to require that there is public access to the information recorded – at least, for some level of aggregation. In FACs, cotton stakeholders pay customs services at export, but there is no feedback. The sharing of customs information would surely contribute to improving governance of cotton sectors in these countries. Several professional associations7 connected with cotton production and export should consider demanding better use of customs information. Considering how important TNCs have become, nominal monitoring of their transaction operations might make sense, so as to prevent abusive behaviour. The role of international organizations should be enhanced Maizels believed that an international organization must be devoted to dealing with commodity trade issues. He placed expectations on the creation of the new Common Fund for Commodities (CFC), notably to coordinate R&D programmes to promote productivity and to improve DC marketing of commodities. He also expected that the CFC would become a kind of thinktank to devise out measures to prevent commodity crises and their negative impacts on DCs. The CFC was established in 1980, but agreement on this establishment only came into force about ten years later, in 1989. It has been active in financing around 200 projects covering 37 commodities, mainly in the agricultural sector. Cotton has been the target commodity of 16 projects of variable economic importance, six of which were related to pest and disease control, three to marketing, two to the utilization of cotton by-products, and the remainder to production prospects. FACs have only recently started to benefit from a new CFC project dealing with instrumental testing of cotton fibre. So far, the CFC operation has had little impact on the perception of the global issue of commodity trade and the threat of commodity crises. This can probably be explained by the limitations in its funding, thus resulting in


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understaffing. Setting up funding mechanisms, as mentioned, could provide an opportunity to broaden the scope of its activities. The various mechanisms suggested above, including the follow-up on TNC practices, could fall within the enlarged scope. Initiatives at the FAC level Maizels advocated that the South become more active in facing commodity market structures that are less favourable to them. He suggested setting up trading companies, as already established in several DCs, while contemplating common use of export infrastructures, and also discussing the potential benefits of marketing under a common brand name. He was, nevertheless, sufficiently realistic to call for political commitment to materialize his recommendations. There was probably a complete lack of that necessary political will, and none of his recommendations have been put into practice – even everything that existed in line with his recommendations has vanished. This is particularly the case with cotton in FACs. As discussed, by dealing through a marketing agent (COPACO, based in Paris), most FACs have managed to somehow market their cotton through a common ‘brand’ called West African Cotton, which was quoted in Liverpool. Most national cotton companies in FACs have been holding shares in COPACO since the mid-1980s. The liberalization of cotton fibre marketing has demolished the system that had been carefully constructed by decades of joint efforts. At the time of writing, West African Cotton is no longer quoted – at least, not for delivery in the Far East. It is quite paradoxical that African cotton stakeholders are now advocating promotion of an African cotton label that had already existed and then vanished, especially at a time when FACs have completely lost connection with the final users of their cotton fibre.8 Even worse, FACs have been competing amongst themselves, and they have no common strategy. When marketing, they are not using the names of the common standard they have retained for their cotton fibres. The idea of exploiting this common standard was suggested in a recent study (Fok and Bachelier 2004) but was not appropriated, notably by international development agencies. The lack of progress in marketing FAC cotton is clear, probably due to the lack of understanding by international development agencies of the intricacies of the cotton trade. While FACs seem completely passive with regard to improving their cotton marketing, many private initiatives have been under way. In FACs, in addition to the Fair Trade initiatives already indicated, and prior organic cotton initiatives, a German trader launched the Cotton Africa initiative. Elsewhere, TNCs in the chemical and biotech sectors have committed themselves to trading quality cotton. For instance, Bayer’s FiberMax approach involves ensuring fibre quality in line with technical requirements at the


Is marketing coordination still possible?


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spinning stage. Syngenta has also recently adopted the same approach. FACs are lagging so far behind that it is very unlikely they are still capable of reacting in order to defend their own interests. They could, nevertheless, play an active role in existing initiatives in which they decide to trust. Another initiative takes advantage of governmental long-term contracts, as mentioned, to launch their cotton label as being associated with reliable quality features.

Maizels stressed the importance of price stabilization, although he was well aware of the shortfalls of the stabilization funds that were notably implemented in Africa. Based on an analysis of these shortfalls, all stabilization funds were dismantled in the framework of SAPs in Africa. In cotton producing countries, there is not a single stabilization fund still being implemented in Africa. Recently, there was a move towards setting up new funds destined to ‘smooth’ prices paid to farmers inter-annually (notably in Burkina Faso). The word ‘stabilization’ has become so taboo that international agencies behind the initiative adopted new wording that refers roughly to the same objective of controlling fluctuations in prices paid to cotton producers. It is likely that the initiative will lead to disappointing outcomes, since the economic approach remains unchanged as compared with the SAP period. There is the same strong implicit assumption that what matters to producers is price stability. Producers in DCs, because of their risk aversion and liquidity constraints, favour stability, which is more important than the price level (Boussard and Gérard 1992). However, when listening to producers, it is clear that income stability matters more than stability with regard to prices, which is only one of the elements that determine income. In FACs, cotton producers complain a great deal about the increase in input prices that followed the reform of the cotton sectors there. This reform, indeed, separated two mechanisms that were usually combined: the mechanism that sets the purchase price of seed cotton, and that which sets input prices (Fok 2006a), while the combination was quite well adapted to the risk aversion behaviour of smallholders (Fontaine and Sindzingre 1991). This separation was responsible for the move to reduce intensification – which has, in turn, reduced yields and, consequently, income. Where cotton sectors remain administered, it would be far better to try to achieve income stabilization through various pricing mechanisms rather than singling out the purchase price of seed cotton alone.


From price stabilization to income stabilization

More R&D to promote sustainable productivity gain Maizels was obviously very attached to the promotion of effective R&D to help commodity-dependent countries to gain productivity. Implicitly, a productivity gain should make it easier to tolerate price declines linked to commodity crises. This causality has a tricky aspect; one might fear that, to the contrary, the productivity race contributes to triggering a price decline, as has already been mentioned.


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With regard to the cotton situation in FACs, no meaningful R&D achievements have been obtained. R&D programmes have been reduced, their funding has become more erratic and research organizations also remain understaffed and lacking skill enhancement. The only CFC project that finally concerns FACs involves quality testing, not productivity gains at the producers’ level. FACs have not yet succeeded in setting up a mechanism for sustainable R&D funding; research organizations are still submitted to annual discretionary funding by cotton companies or sectors. The implication is that research funding is generally sacrificed when the financial situation of the whole cotton sector goes badly. FACs have yet to design permanent funding mechanisms based on the patterns in the USA or Australia. The research has also been implemented by personnel with a low degree of competence; the correction of this situation could hardly be achieved overnight. Combining existing research forces would make sense in the framework of implementing sub-regional research programmes. This recommendation is a challenge for FACs with regard to overcoming their nationalism and adjusting their requirements for specific local experiments. Scientists will also have to become more capable of inferring knowledge and transmitting it to extension agents and producers so as to enable them to adapt it to their own settings. In terms of research content, with the prospect that cotton crises will keep on emerging for some while, productivity gains must be sought while limiting the financial risk. Sound use of cash and chemical inputs is essential. Maizels showed great concern regarding the potential negative environmental impacts of commodity production. He assumed that the integration of environmental concerns could lead to higher production costs in the short term, but that long-term profits should be generated. Making production techniques more environmentally friendly would not necessarily imply higher costs. As explained, there are natural pests and disease control processes that are free. Sound exploitation of these natural processes would not add any expenditure, but would require more research and a greater number of scientists (whose expertise must be improved), along with more investment to capitalize on knowledge and transmit it to producers. Sustainable long-term funding, as well as real regional and international cooperation, would be key to fulfilling such ambitions.


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Claim the public good nature of productivity gain to achieve it The availability of technical novelties and the use of extension services to pass on technical messages to producers are insufficient to ensure technical adoption and generate productivity gains. Furthermore, farmers are in a position to stop implementing intensification techniques when economic conditions are no longer profitable at a specific intensification level. This has been observed in FACs, as previously mentioned. It transpires that merely introducing more R&D will be insufficient to ensure productivity gains.



The economic conditions for the application of the available production techniques are also important. In this area, conditions have deteriorated in FACs since the publication of Maizels’ book (1992) as a consequence of the implementation of SAPs in most DCs, notably in FACs. As a result of the liberal orientation of these SAPs, resource-poor smallholders alone have to pay the full cost of the productivity gain that is sought by all cotton sector stakeholders. This highlights the specific feature of productivity gain that was overlooked until now. Although farmers are players who use production inputs in the process of gaining productivity, the positive effects of this process give it a public goods feature. First, the discussion on public goods deals with the reality of positive externalities – that is, the existence of positive effects – in addition to the fact that the beneficiaries of these effects are not totally or partially paying the related costs. Compliance with the definition of public goods should also be assessed – that is, the standard definition used since the mid-1950s (Samuelson 1954), or that proposed more recently which much more falls in line with the actual situation (Kaul and Mendoza 2003). A comprehensive demonstration of the public goods feature was proposed on the basis of the Malian situation (Fok 2009) by examining the experience of cotton cropping intensification that took place in the period 1950–1980s, concerning which only positive externalities are reported. Until now, cotton cropping techniques in Mali have been based on oxdrawn agriculture (which also involves using animal manure as fertilizer) and the use of quality seeds, as well as chemical fertilization and cotton pest control. The whole set of techniques was gradually transmitted to cotton growers. The first technical challenge to overcome was the production and distribution of quality seeds of improved varieties. Initiatives were engaged in the early 1950s. Farmers with animal-drawn devices and oxen began to be equipped in the mid-1950s. This provision was the rationale for setting up a network of extension agents to provide training in the use of equipment and management of sowing techniques. African cotton growers had the opportunity to use chemical pesticides to control cotton pests shortly after the USA in the 1960s. This shortly preceded the use of chemical fertilizers. Organic manure began being applied in the late 1960s, when carts were added to ox-drawn machinery, hence reducing transportation costs by preparing and using manure in the cotton fields. All inputs and equipment were supplied on credit, which was repaid at the time of marketing seed cotton. The adoption of mechanical agriculture has raised the problem of maintenance, which was resolved by means of assistance being given to village blacksmiths. In the mid-1970s, input supply, management of the related credit, and marketing of seed cotton were passed on to village associations that were set up following the proper training of farmers, notably through the literacy programmes conducted in local languages. This training programme led to the


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emergence of the farmer leaders who spoke out in 2003. The resulting success has encouraged international agencies to fund more development initiatives encompassing (not exhaustively) R&D and input supplies for food crop production, specific equipment credits to the worst-off farmers, water supply, and specific technical assistance to village women and so on. The positive externalities of initiatives conducted during the process of intensification of cotton production in Mali are summarized in the Appendix, where the positive effects are indicated along with the partial payment of associated costs by the beneficiaries (cf. Appendix). The public goods feature of productivity gain implies that funding thereof should no longer be borne by farmers alone but, rather, should be shared by various cotton sector stakeholders. For this shared funding, the national players must ensure in-country cooperation. Owing to the limited financial resources of FACs, international cooperation is also essential, which is what occurred in the 1970s and 1980s. Diversification to ensure national control of supply To some extent, the diversification process also has a public goods feature. Positive externalities are clear, far beyond the players directly involved in the supply of new products or services. As a common public good, it requires a fairly high level of long-term investment with an uncertain fate. It could not really be expected that private operators alone would, or could, successfully commit themselves: the efforts and required costs must be shared, notably by the DCs concerned and their international development partners. Diversification is, in other words, a matter of the political will of these states and organizations concerned about world development. Diversification, by definition, is a process by which something new emerges from an existing product. In FACs, diversification means that, first, cotton production must be preserved: unfortunately, this is far from being the case. Second, diversification is commonly observed in the industry sector, to the extent that the firms concerned might finally set aside their original activities in the process of change. Lessons can be learned. One major lesson pertains to a cross-subsidy mechanism whereby the cost of the supply of new products can be shared with the production of existing products. In FACs, the diversification process should take place by making effective use of the resources and infrastructures already set up for cotton production. This was what happened in cotton areas in the 1970s and 1980s (Fok 2008). This is the complete opposite to what is implemented today: cotton companies in FACs are forced to concentrate exclusively on cotton. In practice, what should be promoted in the diversification process remains open. Ensuring vertical diversification in the textile industry would not be easy for the reasons already discussed. It would surely not be possible if no adequate state support were provided. Since the textile and garment markets are already very crowded, state support, albeit necessary, would not be


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sufficient to guarantee success. More ideas must be explored, while taking the comparative advantages of FACs into account, to conceive new diversification products and implement them sufficiently early. One of these advantages is the high availability of land. FACs could consider launching development through better exploitation of their land. This could be through operations such as planting trees of economic interest while achieving sustainable land management, along with the generation of revenue by committing to the carbon sequestration programme in order to contribute to controlling climate change. It would be beyond the scope of this chapter to delineate precisely what could be done.

Conclusion Concerning commodities, Maizels’ book (1992) mainly focused on the economic fate of commodity-dependent DCs, assuming that the production of commodities could be conducive to economic development. When commodity production is in poor shape, economic development stalls: this is currently demonstrated by the circumstances of cotton production in FACs. When less money is distributed in cotton zones, the supply of goods and services is threatened, food production becomes less secure, a greater number of conflicts are triggered with regard to the exploitation of natural resources, which are managed with less concern about sustainability. Maizels clearly outlined that the prevention of commodity crises or the alleviation of crisis effects requires international cooperation between the North and South. He was realistic about the selfishness of the North and, thus, only proposed a minimal programme of North–South cooperation based on re-launching discussions on commodity agreements, providing more funding for R&D, implementing new mechanisms to achieve price stabilization, and providing price preference to LDCs. None of these programme items have been materialized. Subsidies allocated by the North are ongoing, and there are no signs that the reduction of subsidies in agriculture will be achieved within the framework of the stalled Doha Round of the WTO. In the specific case of FACs with regard to the cotton dossier, there has been no real enhancement of EU assistance despite its commitment in 2004. From the perspective of the commodity crisis, non-conclusion of the Doha Round is somewhat good news, as this Round has not dealt at all with the crucial issue of international cooperation related to commodity supply and trade. The WTO keeps on dealing with subsidies exclusively from the neoclassical approach, totally ignoring the reality of the oligopolistic control of commodity markets and, hence, overlooking the market power of TNCs. Maizels was pessimistic about the abolition of subsidies. We suggest further promoting this realism – accepting the continuance of subsidies by industrialized countries, but at a reduced level, while also implementing some supply


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control and, finally, allocating funds derived from the reduction in subsidies to fuel a compensation fund. Maizels pragmatically put emphasis on the actions that DCs could control and implement by themselves, irrespective of the extent of success of international cooperation negotiations. Through an analysis of cotton, it turns out that these national actions should be guided by the principle that productivity gain is a public good, the cost of which must be shared by all stakeholders, starting from the state itself. The same principle applies to the diversification process. From this standpoint, the stabilization of commodity producers’ income matters to a greater degree, and is much more efficient than commodity price stabilization. Focusing on commodity prices rather than on commodity production, income has been the major shortcoming in the implementation of SAPs over the last two decades. Maizels’ recommendation of improving the control of commodity marketing by the South remains valid, although this would be harder to implement under the current conditions. From the cotton standpoint, regional cooperation in marketing must be considered to overcome the current situation of competition between FACs. A regional strategy to plan and implement R&D with reduced financial and human resources is also needed in order to reverse the current virtual R&D trend. The situation with regard to cotton underlines that the negotiation of governmental long-term contracts with China could be an opportunity to seize, so as to benefit from better prices and sidestep TNCs’ market power. This is probably valid for other African commodities that China needs. The scope of these contracts could be national or regional. As Maizels stressed, international cooperation remains crucial in overcoming the fatality of commodity crises. New discussions and analyses must be promoted to deal with the issue of subsidies in connection with supply control and the setting up of a compensation fund destined for DCs. International trade should no longer be labelled against the currency of a single country but, rather, against a new international monetary unit based on a basket of currencies of industrialized and emerging countries. The market power of TNCs should no longer be overlooked: minimum information and control could be imposed under the auspices of the WTO. The human conditions must, nevertheless, be right in order to implement recommendations aimed at improving the issue of the commodity crisis. Great changes have taken place because of the emergence of important men and women at the right time – people with a strong and charismatic character who are capable of building a vision of a sought-after future, of convincing everyone that such a future is attainable. This is essential both in the South and North. Coming back to the more specific case of cotton, it is up to FAC communities to express the kind of development they want for their cotton zone. It is now time for them to move affirmatively and highlight what they want, after already expressing what they did not want in Cancún in 2003.


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Appendix

Positive externalities related to the process of cotton cropping intensification in Mali

Action related to productivity enhancement

Nature of positive externality

Spheres of gain

Is the gain associated with payment of cost? No payment whatsoever

Prophylaxis Better health of Production service on drawn-agriculture + drawn-agriculture animals Farmers’ income animals

Better health of all Production Non-targeted producers’ cattle + collectivity Farmers’ income National collectivity Regional collectivity

Phenomenon/mechanism of ‘No’ or ‘Partial’ cost payment

Partially paid Individual targeted producers Targeted producers collectivity

Individual targeted producers Targeted producers collectivity

Production Non-targeted producers’ Individual targeted + collectivity producers Farmers’ income Targeted producers collectivity

Ph1: No specific payment for vaccination programme but the related cost was partially deducted when fixing the purchasing price of seed cotton Ph1 phenomenon + Public good nature of disease pressure whose reduction benefits freely those farmers who do not involve themselves in the vaccination programme Ph1 phenomenon + Public good nature of knowledge



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Appendix

Better Production implementation of + cultivation Farmers’ income practices on cotton crop

Individual targeted producers Targeted producers collectivity Non-targeted producers collectivity

Better Production implementation of + cultivation Farmers’ income practices on food crops

Individual targeted producers Targeted producers collectivity Non-targeted producers collectivity Individual targeted Ph3: Externally funded blacksmiths subsidy programme targeted at the modernization of village smithies

Upgrading of the Farmers’ income skills of the village blacksmiths through the maintenance of the animal-drawn devices

Ph2: Equipment devices were not invoiced at real prices, either because of an externally funded specific subsidy programme, or, because of a cross pricing mechanism through which the prices of equipment, chemical inputs and seed cotton were fixed leading to a subsidy process between farmers Ph2-A: Extension of the equipment use to non-owners through various ways not necessarily requiring a cost payment Ph2 and Ph2-A phenomena


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Continued


Equipment for animal-drawn cultivation devices

Continued Spheres of gain

Is the gain associated with payment of cost?


Preservation of the social role of village blacksmiths Diversification of the services provided by village blacksmiths Equipment for Better fertilization animal-drawn of cotton crops carts

Communities’ welfare Village collectivity and capabilities

Ph3 phenomenon


Ph4: Externally funded subsidy programme targeted at experimenting with motorized grinders

No payment whatsoever Partially paid

Production

Better fertilization Production of food crops (maize)

Preservation of Environment soil fertility through the implementation of manuring Better connection Farmers’ income to markets through the availability of a means of transportation

Village collectivity National collectivity

Individual targeted Ph2 phenomenon in favour of producers ox-drawn carts to facilitate the Targeted producers production and use of animal collectivity manure Non-targeted producers collectivity Individual targeted Ph2 phenomenon producers Targeted producers collectivity Non-targeted producers collectivity Targeted producers’ Ph2 phenomenon collectivity + Containment of land pressure through some control of the soil depletion Targeted producers’ Ph2 phenomenon collectivity


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Action related to Nature of positive productivity externality enhancement


Appendix

Better fertilization of food crops

Production

Supply of Better and more Production chemical efficient protection pesticides against cotton pests

Ph2 phenomenon

Ph5: Phenomenon close to Ph2, with some subsidy between farmers in favour of those who use more because they grow more cotton Ph5-A: transaction on chemical fertilizers between farmers in favour of those who have more cash, or who have been excluded from formal access to input credit Ph5-B: Social connections between farmers impeding them do not help those farmers barred from formal access to input credit Ph5, Ph5-A and Ph5-B phenomena

National collectivity Individual targeted producers Targeted producers collectivity Non-targeted producers collectivity Targeted producers’ Ph5, Ph5-A and Ph5-B phenomena collectivity


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Continued


Development of Communities’ welfare Village collectivity National collectivity the activities in the and capabilities rural daily or weekly markets Supply of Better Production Individual targeted producers chemical fertilization Targeted producers fertilizers of cotton collectivity crops Non-targeted producers collectivity

Continued Spheres of gain

Is the gain associated with payment of cost? No payment whatsoever Partially paid

Better knowledge Production on cotton pests, + their dynamics and Farmers’ income their control techniques Coordination of Communities’ welfare and capabilities cotton pest control at village level Reduced use Environment of pesticides through reasoned control

Better protection of some food crops against their pests

Global process High and steadily of productivity increasing enhancement production of cotton


Production National collectivity + Farmers’ income

Production

Village collectivity

Targeted producers’ collectivity

Ph5, Ph5-A and Ph5-B phenomena

Targeted producers’ collectivity Village collectivity Targeted producers’ collectivity Village collectivity

Ph5 phenomenon + Public good nature of knowledge Ph5 phenomenon + Public good nature of knowledge + Externally funded programme to address reasoned chemical control of cotton pests. Individual targeted Ph6: Diversion of cotton producers chemical pesticides to food Targeted producers crops, even out of the cotton collectivity zones Non-targeted producers + collectivity Public good nature of the pest pressure whose control impacts on all Targeted producers’ Ph2 and Ph5 collectivity Cotton company National collectivity


214

Action related to Nature of positive productivity externality enhancement


Appendix

Communities’ welfare Village collectivity Producers’ collectivity Ph7 : Externally funded programme to improve the and capabilities transportation network Production Village collectivity Ph2 and Ph7 + Farmers’ income

Empowerment of farmers’ organizations

Communities’ welfare and capabilities and capabilities

Farmers’ income

Targeted producers’ collectivity

Ph8: Externally subsidized capacity-building programme


Ph8 phenomenon

Communities’ welfare Targeted producers and capabilities

Ph9: Empowerment process resulting from the Ph8 phenomenon Ph9 phenomenon

Village collectivity National collectivity

Continued 215



Improvement of the transportation network Incentive to produce more types of products thanks to better connection to market economy Competence acquisition to implement marketing at village level on behalf of the cotton company Set up of associative process based on cotton production and marketing Training of farmers’ leaders

Positive externalities related to the process of cotton cropping intensification in Mali

Action related to productivity enhancement

Nature of positive externality

Spheres of gain

Is the gain associated with payment of cost? No payment whatsoever

Involvement of farmers’ organizations to the diversification of production activities Involvement of farmers’ organizations in the supply of welfare services Involvement of farmers’ organizations in the implementation of actions to preserve natural resources


Partially paid

Production

Village collectivity National collectivity Funders’ collectivity

Ph10: Process of capabilities improvement resulting from Ph8

Communities’ welfare and capabilities



Environment





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Appendix

Michel Fok

217

1. John Grisham, the author of many novels related to courtroom dramas (The Firm, The Pelican Brief, The Client, The Last Juror, and so on), has dealt with cotton production and the indebtness it implied in Arkansas in 1952 (A Painted House, published in 2001, its French title being La dernière récolte (2002) meaning ‘The last harvest’). 2. Most village associations in the cotton zone were close to bankruptcy because their members were reneging on the repayment of the production input credits they had obtained. This process began with the association leaders, who abused their power. The international intervention consisted of writing off the debts and setting up new rules for safer functioning. 3. China resumed provision of some direct subsidy to cotton growers in 2007 by allocating payments to encourage farmers to use quality seeds. 4. An African commercial director observed that the A Index had plunged severely several times without reason, immediately before a large trader made him a proposal for a contract for a great deal of cotton. 5. COPACO, or Compagnie Cotonnière, is a French company dating back to 1863. 6. Compagnie Française de Développement des Textiles. It was set up in 1949, became DAGRIS in 2001 until its privatization in 2008, and is now called GEOCOTON. 7. Membership to the African Cotton Association (ACA) is open to all categories of cotton stakeholders. The Association des Producteurs de Coton Africains (APROCA) is exclusively reserved for cotton growers. 8. FOB selling to traders does not enable FACs to know who their final clients are in the destination countries.

References Anderson, K. (1987) ‘On Why Agriculture Declines with Economic Growth’, Agricultural Economics, 1: 195–207. Anderson, K. (1990) Evolution des avantages comparatifs en Chine. Effets sur le marchés de l’alimentation humaine et animale et des fibres (Paris: OCDE [OECD]). Anderson, K. (1994) ‘Textiles and Clothing in Global Economic Development: East Asia’s Dynamic Role’, in S.D. Meyanathan (ed.), Managing Restructuring in the Textile and Garment Subsector: Examples from Asia (Washington, DC: World Bank): 83–108. Anderson, K. and Y.I. Park (1989) ‘China and the International Relocation of World Textile and Clothing Activity’, Welwirtschaftliches Archiv, 125(1): 129–48. Araujo Bonjean, C., S. Calipel, and F. Traoré (2007) L’impact des aides américaines et européennes sur le marché du coton: résultats d’un modèle d’équilibre partiel dynamique, Notes et études économiques, 27: 57–89. Bairoch, P. (1995) Mythes et paradoxes de l’histoire économique Paris : La Découverte). Banque de France (n.d.) Franc Zone Annual Reports (Paris: Banque de France). Banque mondiale (1998) Politiques cotonnières en Afrique francophone, problématiques (version préliminaire) (Washington, DC: World Bank). Bayliss, K. (2001) ‘The World Bank and Privatisation: A Flawed Development Tool’, Public Services International Research Unit, University of Greenwich, London. Bernstein, L. (2001) ‘Private Commercial Law in the Cotton Industry: Creating Cooperation through Rules, Norms and Institutions’, Michigan Law Review, 99: 1724–90.


Notes



Bordage, J.M. (1991) De la terre, de l’eau et des hommes. Colons et techniciens de l’Office du Niger 1932–1985, Thèse de Doctorat de sociologie du développement, Tours, Université François Rabelais. Bourdet, Y. (2004) A Tale of Three Countries – Structure, Reform and Performance of the Cotton Sector in Mali, Burkina Faso and Benin (Stockholm: Swedish International Development Authority). Boussard, J.-M. and F. Gérard (1992) Stabilisation des prix et offre agricole (Paris: CIRAD). Boussard, J.-M., F. Gérard and M.G. Piketty (2005) Libéraliser l’agriculture mondiale? Théories, modèles et réalités (Montpellier, France: CIRAD). Djondang, K., A.C.M. Fok, B. Wampfler and N. Tordina (2008) ‘Au Tchad, le processus de réforme de la filière cotonnière se trouve dans une impasse, ISSCI International Conference ‘Rationales and Evolution of Cotton Policies’, Montpellier, France, 13–17 May 2008. Djoura, H., J.F. Bélières and D. Kébé (2006) ‘Les exploitations agricoles familiales de la zone cotonnière du Mali face à la baisse des prix du coton-graine’, Cahiers Agricultures, 15(3): 64–71. Enam, J., C. Klassou, D. Folefack, C. Kouebou and A.C.M. Fok (2008) ‘Processus associatif chancelant au Cameroun: dégât collatéral des ajustements de politique cotonnière?’, ISSCI International Conference: ‘Rationales and Evolution of Cotton Policies’, Montpellier, France, 13–17 May 2008. FAO (2004) Coton: impact des mesures de soutien sur les pays en développement – guide des analyses actuelles (Rome: FAO). Fok, A.C.M. (1993) Le développement du coton au Mali par analyse des contradictions: Les acteurs et les crises de 1895 à 1993, Document de travail de l’UR Economie des Filières (Montpellier, France: CIRAD). Fok, A.C.M. (1997) ‘Etat, production et exportation cotonnières, industrie textile et développement économique. Une histoire économique du coton/Textile dans le monde’, Doctorat en Economie. Faculté des Sciences Economiques, Université Montpellier I, Montpellier, France. Fok, A.C.M. (2004) ‘Les facteurs d’efficacité des Systèmes de règlements privés comme institutions de régulation des transactions marchandes’, Premier Colloque de l’Association Française de Sociologie, 24–27 February, 2004, Villetaneuse, France. Fok, A.C.M. (2006a) ‘Ajustements nationaux de mécanismes prix face aux fluctuations du prix mondial: les lec˛ons du coton en Afrique Zone Franc’, in J.-M.B. Hélène Delorme (ed.), La régulation des marchés agricoles internationaux: un enjeu décisif pour le développement (Paris: Khartala): 91–112. Fok, A.C.M. (2006b) ‘Crises cotonnières en Afrique et problématique du soutien’, Biotechnologie, Agronomie, Société et Environnement, 10(4): 311–23. Fok, A.C.M. (2006c) ‘Liberalization and Globalization: Trojan Horse for the Cotton Traders’ Domination in Francophone Africa’, 26th IAAE Conference, Gold Coast, Queensland, Australia, 11–18 August 2006. Fok, A.C.M. (2008) ‘Learning from the Economics of Networks to Enhance Poverty Alleviation in African Cotton Zones’, Cotton Beltwide Conferences, Nashville, Tennessee, 8–11 January 2008. Fok, M. (2009) Bien public de l’intensification agricole: concept pour une relance du développement des zones cotonnières en Afrique, presented to Savanes africaines en développement: innover pour durer, Garoua (Cameroun), 21-24/04/2009. Fok, A.C.M. and B. Bachelier (2004) Identification d’un plan d’action d’amélioration de la qualité et de la valorisation de la qualité du coton dans les pays de l’UEMOA (Montpellier, France: CIRAD).


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Folefack, D., C. Klassou and J. Enam (2008) ‘Ajustements des prix à la crise cotonnière au Cameroun: Facteurs et conséquences des adaptations des paysans’, ISSCI International Conference ‘Rationales and evolution of cotton policies’, Montpellier, France, 13–17 May 2008. Fontaine, J.-M. and A. Sindzingre (1991) Macro-Micro Linkages: Structural Adjustment and Fertilizer Policy in Sub-Saharan Africa (Paris: OECD Development Centre). Gillson, I. et al. (2004) Understanding the Impact of Agricultural and Trade Policies on Developing Countries and Poor People in those Countries: Piloting an Approach with Cotton (London: ODI) 70. Goreux, L. (2003). ‘Prejudice Caused by Industrialised Countries Subsidies to Cotton Sectors in Western and Central Africa’, Background Document to the Submission Made by Benin, Burkina Faso, Chad and Mali to the WTO. TN/AG/GEN/4, World Trade Organization, Geneva, June. Goreux, L. and J. Macrae (2003) Reforming the Cotton Sector in Sub-Saharan Africa (Washington, DC: World Bank). Hall, K. (2006) ‘By the numbers: Rewoven Research’, Cotton Grower Magazine, 42(3). Heffernan, W.D. (1999) ‘The Influence of the Big Three – ADM, CARGILL and ConAgra’, Paper presented at the Conference ‘ Farmer Coperatives in the 21st Century;, Ses Moines, Iowa, USA, 9–11 June 1999. Hibou, B. (1998) ‘Economie politique du discours de la Banque mondiale en Afrique sub-saharienne. Du catéchisme économique au fait (et méfait) missionnaire’, Les études du CERI, 39: 1–44. ICAC (Various years) Annual Reports: ‘World Textile Demand’. ICAC (1994) ‘Largest Organizations Merchandize One Half of World Production’, ICAC Recorder: 11–16. ICAC (2005) The Structure of World Trade (Washington, DC: ICAC). Isaacman, A. (1996) Cotton is the Mother of Poverty: Peasants, Work, and Rural Struggle in Colonial Mozambique, 1938–1961 (Portsmouth: Heinemann; London: James Currey; Cape Town: David Philip). Isaacman, A. and A. Chilundo (1995) ‘Peasants at Work: Forced Cotton Cultivation in Northern Mozambique’, in A. Isaacman and R. Roberts (eds), Cotton, Colonialism, and Social History in Sub-Saharan Africa (Portsmouth: Heineman; London: James Currey): 147–79. Isaacman, A. and R. Roberts (eds) (1995) Cotton, Colonialism, and Social History in SubSaharan Africa (Portsmouth: Heineman; London: James Currey). Kaul, I. and R.U. Mendoza (2003) ‘Advancing the Concept of Public Goods’, Providing Global Public Goods, Oxford Scholarship Online Monographs: 78–111. Kpadé, P.C. (2005) Mutations institutionnelles dans la filière cotonnière au Bénin: Une vision néo-institutionnelle, Mémoire de Master Recherche 2, Faculté de Sciences économiques, Université Montpellier 1, Montpellier, France. Maizels, A. (1992) Commodities in Crisis (Oxford/New York: Clarendon Press). Murphy, S. (1999) Market Power in Agricultural Markets: Some Issues for Developing Countries (Minneapolis: Institute for Agriculture and Trade Policy). Murphy, S. (2002a) Managing the Invisible Hand. Markets, Farmers and International Trade. An Executive Summary (Minneapolis: Institute for Agriculture and Trade Policy). Murphy, S. (2002b) ‘The Role of Transnational Corporations’, in Trade Reforms and Food Security (Rome: FAO): 6. Park, Y.I. and K. Anderson (1988) ‘The Rise and Demise of Textiles and Clothing in Economic Development: The Case of Japan’, University of Adelaide, Adelaide, Australia.


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Reeves, G, Vincent, D, Quirke, D and Wyatt, S (2001) Trade distortions and cotton markets: implications for global cotton producers, Canberra, Australia, Cotton Research and Development Corporation, Centre for International Economics. Available at www.crdc.com.au/documents/Tradereport_april2001.pdf (access date June 2004). Robin, M.-M. (2008) Le monde selon Monsanto. De la dioxine aux OGM, une multinoationale qui vous veut du bien (Paris: La Découverte – Arte Editions). Samuelson, P. (1954) ‘The Pure Theory of Public Expenditure’, Review of Economics and Statistics, 36: 387–9. Sautier, D., H. Vermeulen, A.C.M. Fok and E. Biénabé (2006) ‘Case Studies of AgriProcessing and Contract Agriculture in Africa’, Background paper to the World Bank 2008 World Development Report ‘Agriculture for Development’. Schreyger, E. (1984) L’Office du Niger au Mali 1932–1982 (Geneva: Steiner). Sumner, D. (2003) ‘A quantitative simulation analysis of the impacts of U.S. cotton subsidies on cotton prices and quantities’, Available at www.mre.gov.br/portugues/ ministerio/sitios_secretaria/cgc/analisequantitativa.pdf (access date June 2004). Tockarick, S. (2003), ‘Measuring the impact of distortions in agricultural trade in partial and general equilibrium models’, IMF WP/03/110, Washington. World Bank (2008) The World Development Report: Agriculture for Development (Washington, DC: World Bank). Vallette, J. (2002) ‘Transnational Corporate Beneficiaries of World Bank Group Fossil Fuel Projects’, 1992–August 2002. Vallette, J. Available at http://www.tni.org/detail_page.phtml?page=reports_seen_ tncben (accessed 22 August 2008). Vander Stichele, M. (1997) ‘Globalisation, Marginalisation and the WTO’, available at http://www.tni.org/detail_page.phtml?page=reports_wto_wto2 (accessed 22 August 2008). Varangis, P., D. Larson and E. Thigpen (1995) What Does Experiences in Other Cotton Producing Countries Suggest for Policy Reforms in Francophone Africa, Commodity Policy and Analysis Unit (Washington, DC: World Bank). Vautier, G., M. Imorou Karimou and A.S. Afouda (2005) Etude de faisabilité d’un programme sectoriel d’appui aux dynamiques productives en zone cotonnière au Bénin (PADYP) (Paris: Sofreco). Wise, T.A. (2004) ‘The Paradox of Agricultural Subsidies: Measurement Issues, Agricultural Dumping, and Policy Reform’, Global Development and Environment Institute, Working Paper, 04-02, Tufts University, USA, Mefford. WTO ‘The Regulation of State Trading under the WTO System’, available at http://www.wto.org/english/tratop_e/statra_e/statrad.htm (accessed on 21 August 2008). WTO ‘Technical Information on State Trading Enterprises’, available at http://www.wto. org/english/tratop_e/statra_e/statra_info_e.htm (accessed on 21 August 2008).


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9 Elva Bova

Introduction Historical evidence illustrates how the interplay between fiscal, monetary and exchange rate policy has proved essential in overcoming the commodity trap. Commodity-dependent countries that successfully managed to move on a sustained long-term development path – such as Malaysia, Thailand, Indonesia, Chile and Botswana – carried out counter-cyclical macroeconomic policies.1 Yet, at present, further to the implementation of liberalization and privatization reforms in the 1990s, it transpires that the scope for macroeconomic management in the developing world is narrower than in the past. The privatization of the commodity sector has limited the scope for fiscal policy inasmuch as it has cut down the amount of revenue from the commodity sector directly accruing to the budget. The new consensus on price stability has led to the adoption of inflation-focused monetary arrangements that largely overlook the implications of exchange rate and interest rate movements on the real side of the economy. Consistent with these monetary policy arrangements is a no-management of the exchange rate, on the grounds that the market would get the price right. A market-determined exchange rate – a float – is also advocated for commodity-dependent countries to the extent that this can deliver an automatic adjustment to shocks to the balance of payments. On these grounds, many developing countries that are dependent on primary commodities have recently been moving to floating arrangements with price stability as the overriding objective for monetary policy (Batini 2007, Gudmudson 2003). Arguably, the choice of a float for commodity-dependent countries presents some serious drawbacks. Given the high frequency and large magnitude of commodity shocks, a float will hardly stabilize the balance of payments, which is, thus, inherently unstable. On the other hand, it will transmit commodity price fluctuations to the rest of the economy at a very rapid pace, due


Exchange Rate Management for Commodity-Dependent Countries: A Zambian Case Study


Exchange Rate Management for Commodity-Dependent Countries

to the high degree of exchange rate pass-through on the price of imported goods, a characteristic feature of low-income countries. A float might be similarly undesirable in the incidence of a commodity boom, as it will induce an appreciation of the currency that could harm the country’s competitiveness through the so-called Dutch disease effects. If a float is not a viable option for commodity-dependent countries, the choice of an exchange rate arrangement that can buffer the economy from commodity price shocks without undermining long-term development goals is extremely difficult. Recently, Frankel (2002, 2003, 2006) and Frankel and Saiki (2002) have put forward a proposal whereby countries dependent on one or only few commodities should peg their currency to the price of the exported commodity or to an index of prices of the exported commodities. The arrangement, defined as PEP (peg the export price) or PEPI (peg the export price index) should deliver the better of two worlds: the automatic adjustment to shocks, usually delivered by floats, and the firmness of a commitment, usually provided by fixed exchange rate regimes. Although not applied to any economy, the proposal has been recently considered for the Gulf Cooperation Council (GCC) countries (see Setser 2007; Khan 2009), yet the empirical application remains very limited to date. In this chapter, I directly test the suitability of such arrangements to the Zambian economy. An empirical application of the PEP allows the detection of the challenges and constraints posed on the exchange rate management by commodity-dependence. The underlying hypothesis of this study is that a PEP fails to account for the repercussions that commodity price volatility might have in low-income countries due to the high pass-through. Also, the arrangement underestimates the asymmetric impact that positive and negative shocks might have on the country’s economic growth. This is because, while an automatic adjustment of the exchange rate might be desirable under a commodity bust, since it determines a depreciation that boosts exports, the inverse mechanism is not desirable under a commodity boom, where the appreciation might cause a deterioration of the export performance. In light of the points emerging from the PEP’s empirical application, this study suggests and formulates an alternative arrangement for commoditydependent countries. The arrangement consists of a crawling band with margins adjustable to the phases of the commodity price. When the commodity price is going up or goes beyond a benchmark value in the commodity price, then the margins of the band would come closer to parity in order to avoid excessive appreciation. Conversely, during low commodity prices, or when commodity prices go below the benchmark price, the margin of the band would expand to allow for automatic adjustment. The band is not empirically tested, but several issues surrounding its rationale and applicability are discussed.


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Theoretical background The literature on exchange rate regimes has not yet found a consensus on the kind of arrangement that best suits commodity-dependent countries. Evidence on exchange regimes for commodity-dependent countries is, indeed, mixed. Advanced commodity-exporting countries – such as Australia, Canada, New Zealand and Norway – have floating regimes that appear rather successful in the management of commodity shocks. Conversely, most oilexporting countries peg to the dollar – such as the countries of the Gulf Cooperation Council, Ecuador, Venezuela and Libya. Some others, however – Russia, Algeria, Kazakhstan and Iran – have adopted a managed float and, in some cases, this has been formulated within a target zone (Setser 2007). In sub-Saharan Africa patterns are somewhat different: many economies have moved towards floating exchange rate regimes with inflation stabilizing monetary policy frameworks in the form of inflation targeting or monetary targeting (Batini 2007). The argument for floats The conventional view on exchange rate regimes is that countries subject to terms of trade shocks should adopt more flexibility in the rate, since this will more easily warrant macroeconomic stability. The argument maintains that, when prices adjust slowly to shocks, it will be less costly to have an adjustment through the nominal exchange rate. Otherwise, the alternative would be to wait until excess demand pushes nominal prices to adjust (Friedman 1953, in Chang and Velasco 2000). The argument finds a further extension in the Mundell–Fleming model of the balance of payments, which illustrates how, consequent to a term-of-trade shock, a floating exchange rate will automatically move in a way so as to restore external balance. Given a fall in the export price, for instance, the exchange rate will automatically depreciate, boosting the country’s external competitiveness, and will render exported goods cheaper in the international market. More recently, the relevant literature has claimed that, besides being a property of automatic stabilization, flexibility in the exchange rate is desirable as it provides scope for monetary policy discretion when the economy has open capital markets. In this respect, a float would allow solving the so-called trilemma or ‘impossible trinity’, which indicates the existence of


The chapter is organized as follows: the next section provides a review of the literature on exchange rates for developing countries and countries subject to shocks. We then go on to examine Frankel’s proposal in its dual specification: as pegging the export price and pegging the export price index. The subsequent section puts forward the proposal for a counter-cyclical band and the chapter closes with concluding remarks.



a mutual inconsistency between a fixed exchange rate regime, free capital mobility and independent monetary policy.2 Arguably, the trilemma is not simply overcome by the adoption of a float. As maintained in Obstfeld and Taylor (2002), when foreign capital asset flows are ‘more about hedging and risk sharing than about long term finance and the mediation of saving supply and investment demand between countries’ (2002: 58), a float might be extremely unstable. It might, in fact, expose the economy to a series of other trade-offs during upturn and downturn that could require a more intense exchange rate management (Nissanke 1993). When it comes to the choice of the degree of flexibility to confer to the arrangement, the recent tendency has been to move towards marketdetermined rates, abandoning any form of management of the rate. The practice is consistent with the idea that sees exchange rate management as a source of instability in view of the fact that any central bank’s intervention needs to be credible; otherwise it will attract speculative attacks. Given the difficulties of conferring credibility to monetary authorities, especially in developing countries, a no-management of the exchange rate is perceived as the easiest option. By the same token, intermediate regimes or the middleof-the-road regimes (Masson et al. 1997) should be avoided, as postulated by the hollowing out hypothesis, since these might incur the risk of speculative attacks, as has been the case during the currency crises of the 1990s.3 Within the new consensus on price stability, an additional reason emerges as to why a float appears preferable to any other arrangement, notwithstanding the country’s specific characteristics. This is because, when the economy adopts an inflation target, exchange rate management would imply the existence of an additional target – the exchange rate, which will be in conflict with the inflation target. In this respect, foreign exchange interventions are exclusively allowed in order to smooth volatility of the exchange rate but not to set its level. The counter-argument There are reasons, however, to believe that a float might under-perform in the context of commodity-dependence, especially when countries are also lowincome economies. The first reason is that these economies tend to move procyclically with regard to the commodity price cycle, complicating monetary policy and budgetary planning (Dehn 2000). A commodity crash will, in fact, cause a balance of payments deficit and, most probably, a budget deficit;4 while, under a commodity boom, the balance of payments and the budget will be in surplus. As expressed in Nissanke (1993), a float would simply exacerbate this pro-cyclicality. Although it would maintain equilibrium in the balance of payments, sudden shifts in the nominal exchange rate could be heavily destabilizing. Another reason for rejecting floats in the context of commoditydependence lies in the fact that the automatic adjustment they provide is


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not always desirable along the phases of the commodity cycle. While the adjustment is desirable during a price crash, since it boosts exports through a depreciation, during a boom, it will dampen exports through a currency appreciation. As acknowledged by the literature on the ‘commodity trap’,5 one of the reasons for the interconnection between poverty and commodity-dependence is, indeed, the adverse short-term effects of a commodity boom. While representing a crucial opportunity for the economy, commodity booms have historically been a missed opportunity and have not translated into sustained increase in income (Collier 2002, Dehn 2000). According to the Dutch disease literature (Corden and Neary 1982; Corden 1984; Van Wijnbergen 1984), a commodity boom or resource discovery might trigger a real appreciation with negative impacts on the non-traditional exports, and this usually occurs through two effects: a resource switching and a spending effect. Both effects will result in a shift of resources from the non-traditional exports to the booming sector of the economy and, in some cases, also to the nontradable sectors, such as construction. A further specification of the Dutch disease model, the money–inflation link as formulated by Edwards (1989) for the Colombian coffee boom, indicates how a real appreciation might also result from a nominal appreciation out of the increase in foreign exchange.6 Thus, exchange rate management during a boom should be conducted with an eye on non-traditional exports which, for small open economies, represent a steppingstone for the long-term development path. The importance of management for exports With respect to export performance, the literature of exchange rate economics (Eichengreen 2007, Rodrik 2007, Williamson 2008) has often reinstated the importance of exchange rate management as opposed to market-determined rates for developing countries. As expressed in Williamson, ‘a country that is still developing within an export-oriented strategy and needs, thus, to safeguard the incentive to invest in the tradable sector the management of the exchange rate is key’ (1994: 4). Accordingly, the literature agrees that, when the objective is maintaining export competitiveness, exchange rate management should aim at avoiding appreciations and, when feasible, sustaining depreciations.7 Empirical evidence does, in fact, illustrate the existence of a positive relationship between exchange rate devaluations and growth in some developing countries – such as South Korea, Taiwan and Botswana (Hill 1991; Rodrik 1993); conversely it shows a negative relationship between overvalued exchange rates and growth performance (Hausmann et al. 2004, Johnson et al. 2007). In addition, a recent study by Levy-Yeyati and Sturzeneger (2007) indicates how fear of floating for developing countries does not indicate fear of devaluations as in Calvo and Reinhart (2002) but, on the contrary, fear of overvaluations.


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From this perspective, then, intermediate regimes that allow for more exchange rate management might be considered a viable option in commodity-dependent countries, since they might allow the avoidance of excessive appreciations during a commodity boom. Yet, additional characteristics of the country should be taken into account in the design of an exchange rate arrangement, besides commodity-dependence as such, since they might define the feasibility and appropriateness of a specific arrangement. In developing countries, one of these characteristics refers to the weakness of the monetary transmission mechanism, due to the fact that domestic prices are largely dominated by food prices and these are, generally, inelastic to the money supply. Also, a large component of these countries’ CPI is imported and, consequently, the exchange rate pass-through tends to be very high.8 With these considerations in mind, this study will proceed with an assessment of the feasibility and of the ‘pros and cons’ of two exchange rate arrangements for Zambia.

What would pegging the export price do for Zambia? The recent commodity boom has reinvigorated the debate on the possibility of pegging the currency to the price of the main exported commodities. Instead of targeting the domestic CPI or core inflation, which excludes energy and food prices, these studies suggest pegging the currency to the price of the exported commodity or to a basket of prices of exported commodities (Frankel and Saiki 2002, Frankel 2003, Frankel 2006). While the idea of pegging to commodity prices is not new, a commodity currency for developing countries that depends on primary commodities is somewhat pioneering in the literature.9 Frankel suggests that commodity-dependent countries peg their currency to the price of the exported commodity (the PEP). Accordingly, the South African Rand should be fixed to the price of gold, the Nigerian Naira to the price of oil and the Zambian Kwacha (ZMK) to the price of copper. In a later paper (Frankel et al. 2006), the arrangement is specified with regard to prices of different commodities (the PEPI), to be applied whenever the country has a more differentiated export base. The arrangement in its different specifications should deliver the better of two worlds: the automatic accommodation to terms of trade shocks, which is usually provided by floats, and the credibility of a firm commitment, usually delivered by a fixed exchange rate regime. Simulations demonstrate that a PEP (and PEPI) would enhance exports more than other currency pegs since, when the commodity prices went down, it would avoid recession through automatic depreciation. While the arrangement has not been applied yet, there have been some theoretical investigations on the feasibility and on the pros and cons of the arrangement for some commodity-dependent countries, not least the GCC (see Khan 2009 and Setser 2007).


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In this study, we verify how the PEP and PEPI perform in Zambia, gauging the arrangements in terms of stability, export and the performance of domestic prices. The two arrangements are compared to the performance of the exchange rate under the current regime in Zambia, which is a float with a monetary target. The comparison is, then, different from that done by Frankel, since he considered the PEP and PEPI with regard to other fixed exchange rate regimes. Besides the empirical convenience of a comparison with Zambia, considering a float might be appropriate in an environment where floating arrangements are becoming more popular, especially in developing countries. To assess the level of stability provided by the PEP and PEPI to the exchange rate, this study calculates and compares the standard deviations of the different arrangements. In order to simulate the export performance, we draw on Frankel’s main assumption that a 1 per cent devaluation induces a 1 per cent improvement in the exports. The assumption is quite strong and Frankel justifies it on the basis of two preliminary conditions. The first is that the price of tradable goods is set in the international market, thus it is not too sensitive to domestic factors; the second is that the elasticity of supply is 1 per cent, a condition that might be less likely under absorptive capacity constraints, but can be accepted if considered within a certain time lag. In this study, we rely on the same assumption since, due to the limited time frame of the analysis, any empirical estimation of the export elasticity to the exchange rate would be biased by the impact of the copper boom.10 Also, we believe that the two preliminary conditions might apply to the case of Zambia – at least, as far as the non-traditional exports are concerned. Prices of tobacco, sugar, cotton and other agricultural exports are, indeed, set in the international market, which makes the exchange rate a crucial variable in the determination of local prices. As for the elasticity of supply, evidence is scarce and there are clearly issues of seasonality to be considered, but supply elasticity of agricultural products is higher than that for mineral products. Thus, the condition is more likely to apply to non-traditional exports. The procedure adopted for the simulation consists, first, of obtaining a series of exports net of the impact of the exchange rate. This implies assessing the monthly change in exports that has been induced by the monthly change of the exchange rate under the current arrangement, given an elasticity of 1 per cent. Then, to the series of exports net of the change caused by the exchange rate, we add the monthly change in exports that would have occurred under the PEP and under the PEPI. For the simulation on the implications of the arrangements on domestic prices, we directly calculate domestic prices’ elasticity to the exchange rate through a cointegration analysis reported in the Appendix. From the analysis, the series of the ZMK and the Zambian CPI appear to be cointegrated within four months and with a long-run elasticity coefficient equal to 0.32 per cent. The coefficient is used to simulate the impact under a PEP,


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US$ per MT

8000 6000 4000 2000

19

97 19 m0 97 1 19 m1 98 1 19 m0 99 9 20 m0 00 7 20 m0 01 5 20 m0 02 3 20 m0 02 1 20 m1 03 1 20 m0 0 9 20 4m0 05 7 20 m0 06 5 20 m0 07 3 20 m0 07 1 m 11

0

Copper price

Zambian Kwacha

Figure 9.1 Figure 9.1 Nominal exchange rate and copper prices, 1997–2008 Sources: IMF-IFS and Bank of Zambia data.

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US$ per Kwacha (under PEP) right-scale US$ per Kwacha (current) left-scale Figure 9.2 Pegging the export price, in US$s, 2000–2007 Sources: IMF-IFS and Bank of Zambia data.

and the way the simulation is conducted is very similar to that used for exports. The arrangements


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The analysis is carried out for the time period January 2000–April 2008, which allows for the consideration of a time of low copper prices, 2000–2003, as well as the time of the copper boom of 2003–to mid-2008. To construct the PEP, we use the nominal copper price11 expressed in terms of US$s per metric tonne as reported in Figure 9.1. The series are displayed in Figures 9.2 and 9.3, first in terms of US$s and then in terms of ZMKs. As shown in Figure 9.2, the exchange rate under the PEP is exactly the same as the copper price.


Elva Bova 229 0.0008 0.0007

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Figure 9.3 Pegging the export price, in ZKws, 1997–2008 Sources: IMF-IFS and Bank of Zambia data.

Weights 2000 Copper Sugar

Tobacco

Cotton

Other

57.7%

1.1%

4.8%

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Figure 9.4 Weights of different commodities, 2000 Source: Bank of Zambia data.

The PEPI is, instead, calculated as a trade-weighted average of the prices of copper, tobacco, cotton and sugar, which constitutes the country’s major exports.12 We use the trade shares of the year 2000, as reported in Figures 9.4 and 9.5, and multiply them to the prices of the four commodities expressed in unit value, as given by the IMF International Financial Statistics (IFS). As shown in Figure 9.5, in absolute terms cotton is the most volatile commodity, even more so than copper. Yet, given that cotton and sugar are in US cents while tobacco is in US$s, tobacco has the largest share in the index after copper, and is the second largest contributor to foreign exchange in the Zambian economy. Given the relevance of copper in the weights, the behaviour displayed by the PEPI closely mirrors that of the PEP. The way the PEP and PEPI have been constructed implies that the arrangements tend to be pro-cyclical with regard to the copper price, as it is evident from Figures 9.3 and 9.7. During low commodity prices – that is, in the period up to 2003 – the currency under the PEP and PEPI tends to depreciate (it increases in Figures 9.3 and 9.7) more than under the actual exchange rate regime, and this is because the arrangement is more sensitive to changes in the copper price. Conversely, during the copper boom, the currency tends to appreciate more than under a float, given the extent of the copper boom.


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Figure 9.5 Prices of main Zambian exports, 2000–2008 Sources: IMF-IFS and Bank of Zambia data.

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Figure 9.6 Peg the export price index, in US$, 2000–2008 Sources: IMF-IFS and Bank of Zambia data.

Another aspect to consider in the choice of an exchange rate regime is whether the new arrangement can provide more stability than the previous one. Frankel considers the issue of stability, yet it is not empirically tested. In this study, the issue is tackled by means of a comparison of the standard deviations of the three series: the PEP, PEPI and the nominal rate of the ZMK under the Zambian exchange rate regime. To calculate the standard deviations we calculate the index for each series, with 2000 as the base year for the index. The measure of the standard deviations is reported in Figure 9.8. Figure 9.8 indicates that, in the period considered, the variability of the exchange rate under a PEP and a PEPI is higher than that displayed by the


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Actual NE right scale

Figure 9.7 Peg the export price index, in ZKw and the Zambian Kwacha, 2000–2008 Sources: IMF-IFS and Bank of Zambia data. NE = nominal exchange rate.

PEP 56.71

PEPI 55.75

Actual rate 17.35

Figure 9.8 Standard deviation of the different arrangements: PEP, PEPI and actual rate Sources: IMF-IFS and Bank of Zambia data.

actual exchange rate. Also, the fact that the standard deviation of the PEPI is larger than that of the PEP implies that adding other commodity prices does not necessarily smooth the volatility of the rate. Export performance For the simulation of export performance, we first obtain the series net of changes induced by the exchange rate. As illustrated in Figure 9.9, the series net of exchange rate changes is not too different from the actual series, given the assumption of 1 per cent elasticity.13 Only in the last years of the sample, exports net of the exchange rate effect are higher than actual exports, since the appreciation has not played any role. From the series net of the exchange rate impact, we calculate the monthly change of exports, which implies looking at changes in exports induced by other factors than the exchange rate. Then, to the first element of the export series we add the monthly change not induced by the exchange rate and the change in exports that would have occurred under a PEP and under a PEPI. Figures 9.10 and 9.11 clearly indicate how exports would be more stable under the two arrangements. They would be higher than those under the


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Elva Bova 231



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Exports net of NE effect

Actual exports

Figure 9.9 Export net of real exchange rate movements, 2000–2008 Sources: IMF-IFS and Bank of Zambia data. NE = nominal exchange rate.

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Figure 9.10 Export performance under the PEP, 2000–2008 Sources: IMF-IFS and Bank of Zambia data.

current exchange rate arrangement during low copper prices, and lower during the copper boom. This illustrates how the PEP and PEPI would deliver the automatic accommodation to terms of trade shocks as envisaged by Frankel. When the balance of payment is in deficit with low copper prices, the exchange rate would depreciate to boost exports; when the balance of payments is in surplus, further to a copper boom, exports would go down due to a sharp appreciation. This entails that, while the arrangements provide stability to the current account in the long run, they might hamper growth through a dampening of exports during commodity booms.


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Figure 9.11 Export performance under the PEPI, 2000–2008

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Sources: IMF-IFS and Bank of Zambia data.

CPI net of NE effects

Figure 9.12 Inflation net of real exchange rate movements, 2000–2008 Sources: IMF-IFS and Bank of Zambia data.

Simulations for domestic prices As far as domestic prices are concerned, their level net of exchange rate movements appears to be more volatile than the actual rate. This is clearly because foreign exchange management in Zambia is conducted with an eye on price stability rather than on other objectives. Given the 0.32 per cent elasticity coefficient obtained in the cointegration analysis, the behaviour of the CPI under a PEP and PEPI tends to be more volatile than is the actual case, clearly in the view that the latter has a focus on price stability. Under the two simulated arrangements, the Zambian CPI would be higher than the actual one when prices of copper are low, while it


100


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Figure 9.13 CPI under the PEP, 2000–2008 Sources: IMF-IFS and Bank of Zambia data.

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Figure 9.14 CPI under the PEPI, 2000–2008 Sources: IMF-IFS and Bank of Zambia data.


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will be lower when copper prices increase, due to the deflationary impact of the appreciation. From this analysis, we conclude that, while the main benefit of the PEP and PEPI proposal is to have brought commodity prices to the forefront of monetary policy, the proposal fails to grasp the intrinsic weaknesses to which commodity-dependent countries are exposed. First, the arrangements would increase the volatility of the currency, as indicated by higher values of the rates’ standard deviation – a result that is consistent with previous


studies (Setser 2007; Khan 2009). This undermines Frankel’s argument on the PEP as inherently stabilizing. Also, the arrangement would, in turn, have serious repercussions since volatility is easily passed on to the rest of the economy through the exchange rate, especially on domestic prices. This is shown in the simulation of the CPI, which tends to move pro-cyclically to the copper price and is, thus, intrinsically tied to the phases of the copper price. Finally, instead of being export promoting as desired for low-income countries, exports would decline during a commodity boom even more than under the current exchange rate regime, with serious problems for long-term development prospects. All in all, the arrangements would transpire to be pro-cyclical and not export enhancing. If an exchange rate arrangement should then take into consideration commodity prices, this should ideally be undertaken in a counter-cyclical way, with more interventions during a boom and more flexibility during a bust.

What would do a counter-cyclical band do for Zambia? While the PEP and PEPI tie the economy directly to the copper price, another way to consider the copper price in an exchange rate arrangement could be through a counter-cyclical band that incorporates information on commodity prices. Differently from a managed float, which does not have a pre-set target for the exchange rate, a band or target zone allows for a margin of fluctuation around a central parity and the parity, the width of the band being established ex ante. Accordingly, the choice between the two regimes should be made counterbalancing the pros and cons of a rule with regard to pure discretion (see also Taylor 1993). While a rule can confer transparency and accountability to a monetary and exchange rate arrangement, whenever such commitment to the rule lacks credibility, then it would be better to resort to pure discretion. Yet, if an economy had some way to regulate central bank’s interventions with regard to an objective and a target, this would bestow consistency and credibility. For commodity-dependent countries, the link of the exchange rate to the commodity price might, indeed, offer a way to regulate foreign exchange interventions. The reason for this is that, while commodity prices are unpredictable and extremely volatile, the impacts they have on the exporting economies are predictable and occur within a certain lag. If one could incorporate information on the commodity price in an exchange rate arrangement, then this might be an advantage for the economy and could ideally bestow stability. On these grounds, and given the opposite impact commodity shocks have on exports, one can contemplate a band with margins adjusting to the phases of the commodity price cycle. By this token, during low copper prices the margins become larger so as to allow for an automatic adjustment of the exchange rate through depreciations. Conversely, during a copper boom the


Elva Bova 235



margins would be closer to parity so as to prevent large appreciations in the exchange rate, which could be detrimental for non-traditional exports. The idea of an adjustable band might be also accepted on the basis that, as demonstrated by Cashin et al. (1999), negative commodity shocks last much longer and exhibit longer persistence than positive shocks. Hence, the periods with a narrow band, corresponding to increasing commodity prices, would generally be the exception rather than the rule. This makes the arrangement preferable even on practical grounds, since a more flexible arrangement poses fewer problems in terms of exit strategy than a more regulated mechanism. In 1991, Krugman presented the first conceptualization of exchange rate dynamics in a target zone, where a target zone was defined as a mechanism in which the currency is set free to float within two margins around a parity. Whenever the currency touches the weaker margin, the central bank will intervene through a tight monetary policy to avoid excessive appreciation, usually through foreign exchange intervention (thus, selling foreign exchange and buying domestic currency). When the currency touches the stronger edge, the central bank will have to intervene by providing more liquidity to the market. The main benefit of these arrangements is that, if credible, they are inherently stabilizing. Another advantage of having a band, as opposed to a peg, is that when the fundamentals of an exchange rate are unknown, as is often the case, leaving a large margin around the currency avoids the mistake of intervening in the market when the exchange rate is in line with its fundamentals (Williamson 1994). This property appears to be particularly useful when the economy is in a developmental process, and its fundamentals change and adjust all the time. Not surprisingly, the most successful cases of bands have been applied during developmental processes that were characterized by expansion of the capital account and stabilization of inflation, as in Chile and Israel (Williamson 1994). Empirical evidence on the success of target zones is mixed. On the one hand, target zones proved to be extremely useful in stabilizing inflation and promoting growth in Chile and Israel (Williamson 1994). They are also used in Algeria, Kazakhstan and Russia, yet there is still little evidence on the benefits. On the other hand, the failure of the European Monetary System warns of the risks and complexities of managing a target zone. This is largely illustrated in Obstfeld (1996), who pointed out the difficulties of maintaining credibility even when the exchange rate is in line with the fundamentals (the so-called ‘self-fulfilling currency crises’). Yet, in the case of the Zambian economy the risks of speculative attacks on the ZMK are not so high at this stage of financial development, when the capital account is still very small and the balance of payments is, indeed, heavily dominated by the trade balance. As indicated in Williamson (1994), to design a target zone a central bank should first decide on the parity; then, on the width of the band, and on whether and how to allow for an adjustment or a crawl mechanism.


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The arrangement can consider a parity with regard to a currency or a basket of currencies, depending on whether it has mainly one trading partner or whether the direction of trade is diversified. Botswana pegged to a basket of currencies the composition of which was not revealed to the public. Chile and Israel also pegged to a basket, but the composition was visible; Russia pegs to a a–$ basket, while Ecuador and Colombia pegged to the US$ (Williamson 2000).14 Yet, an advantage of having only one currency is in the clarity of the arrangement. For Zambia, the best option would probably be to peg to a basket of two currencies: the US$ and the South African Rand. Although Zambian exports are not directed to the USA but, rather to Europe, they are mostly invoiced in dollars. Conversely, imports come mainly from South Africa or countries with currencies pegged to the Rand. To construct the parity, then, we weigh the Rand by 28 per cent corresponding to the South African share in imports and the remaining 62 per cent is used to weigh the US$. Including only two currencies, the arrangement can still be clear and transparent. Figure 9.15(a) shows the behaviour of the US$ and of the SA Rand with regard to special drawing rights (SDRs), which allows considering the two currencies with regard to the same unit value. In fact, Figure 9.15(a) shows that the performance of the two currencies has been somewhat different in the sample period. Figure 9.15(a) also includes the behaviour in SDRs of a rate given by the weighted average of the US$ and SA Rand. As shown, the new currency will smooth the 2001 peak in the Rand and will flatten out the US$ depreciation in 1997–2000 and the Rand appreciation in 2005–2007. Figure 9.15(b) illustrates the same rate expressed in terms of the ZMK with regard, in that situation, to the US$–Rand basket. The rate closely mirrors the behaviour of the ZMK–US$ rate, given its predominance in the weights. This is not, however, how the currency would move within a band, since expectations would be sensitive to the existence of the margins, but the rate provides a rough indication of how the currency could move. Another issue at stake, when designing an arrangement, is the level of the parity. The issue fits into the broader one of the exchange rate fundamentals, which for Zambia we associate mainly to the current account. Yet, in considering the current account, one could ask whether copper production should be calculated on the basis of the current copper price, which is extremely volatile, or rather on the basis of a medium-term price forecast which would allow smoothing the short-term volatility. The latter formulation coincides, to an extent, with Williamson’s definition of the Fundamental Equilibrium Exchange Rate (FEER) (1994). The FEER indicates an exchange rate that guarantees an internal balance and allows short-run external imbalances to be used as shock absorbers. When the parity is calculated in this way, a nominal currency appreciation would only occur when the boom is permanent or highly persistent. Arguably, the distinction between temporary and


The parity



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ZMK to US$ left-scale ZMK to Rand right-scale ZKW to US$-Rand right-scale

Figure 9.15 The US$-Rand basket Source: IMF-IFS, UN-COMTRADE data.

permanent shocks is somewhat blurred for commodity prices, also because some of the temporary shocks might have a high persistence (Cashin et al. 1999). In this case, forecast for a period longer than one year would be extremely imprecise. Furthermore, no matter the duration of the shock, the impact might still have permanent repercussions on the economy, which might not be desirable, especially when non-traditional exports are involved. Thus, while we consider a parity with regard to the medium-term copper price forecast, we try to compensate for the negative effects of shocks by means of a counter-cyclical mechanism. The third element to be decided is the width of the band. In this regard, Williamson indicates that a band should be large enough (he suggests a margin of 10 per cent from parity) to allow cyclical variations in monetary policy and to contain speculative pressures. In the case of Zambia, while the risk of speculative attacks is not very high, it is probable that the cost of having a narrow band associated with the costs of abandoning a floating exchange rate would be large. Therefore, a margin of 10 per cent could be a viable solution. Given the different requirements during commodity booms and busts, the band is designed to change width with regard to the copper price cycle. The margins would increase width under a commodity bust and they would, instead, move closer to the parity during a copper boom. Figure 9.16 illustrates a hypothetical band, whose parity has not, however, been specified and where the exchange rate movements are those historically experienced by the ZMK, although expressed with regard to the US$–Rand basket. We draw the margins around a hypothetical parity that we obtain as the mean of the fluctuations around the trend up to 2005. The choice of the margins is,


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ZKW to US$-Rand right-scale Copper price left-scale Figure 9.16 The counter-cyclical adjustment of the band Sources: IMF, International Financial Institutes and Bank of Zambia data.

in this case, discretionary but the change in the width is not, and illustrates the counter-cyclical adjustment. In fact, Figure 9.16 shows the adjustment of the band with regard to the copper price. Prior to 2003, the ZMK is free to float within a band that ranges from ZMK50–200 to US$/SA Rand in 1997, and between ZMK270–420 to US$/SA Rand in the last months of 2003. Yet, after the boom the width shrinks from 150 points to 100, and the ZMK floats between margins of ZMK300–400 to the basket. If this were the case, the economy would have avoided the sharp appreciations in 2005 and 2007 that dramatically undermined the non-traditional exports (Fynn and Haggblade 2006; Cali and te Velde 2007; Weeks et al. 2007; Weeks 2008). As indicated by Figure 9.16, the mechanism does not exclude the possibility of a crawling mechanism, which allows for periodical and pre-announced adjustment in view of the long-term development of the economy, as well as the short-term inflation differentials with the USA and South Africa. The existence of a crawl mechanism appears to be quite necessary in a developing economy where fundamentals are changing and where the balance of payments would probably move in the direction of expanding the capital account. Also, with the development of the economy, the adjustable mechanism should be abandoned, because a mechanism that, in fact, favours a depreciation would not be ideal in an economy with an expanding financial sector. The arrangement does present itself as having some drawbacks – related to the fact that it should be perceived as a temporary arrangement. This entails that any band should be formulated together with an exit strategy to be implemented when the objectives of the band itself have been achieved. Moreover, since the band is structured around the copper price, one could ask


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Conclusion This study examined possible exchange rate regimes for commoditydependent countries in the light of their structural constraints and long-term developmental objectives. While I share the conventional view on the unsuitability of fixed exchange rates for these countries, I disagree on the argument in support of floats, especially when the latter are within a monetary framework with the objective of stabilizing inflation. The reasons for this are that floats exacerbate the pro-cyclicality of the economy with regard to the price cycle, and they might endanger the current account during commodity booms through excessive appreciation of the real exchange rate. In this context, we examined alternative arrangements that take into consideration information on the commodity price. First, I constructed a PEP arrangement, as proposed by Frankel, and also a PEPI. Applications to Zambia illustrated that the nominal exchange rate would be more volatile under these arrangements and that, although exports would be more stable along the commodity price cycle, these arrangements would not promote exports, as exports would dramatically contract during a boom. Furthermore, inflation would be highly pro-cyclical, with very high domestic prices during low copper prices and low domestic prices during a copper boom. The study concluded, then, that the PEP and the PEPI are not viable arrangements for commodity-dependent low-income countries. The second arrangement examined was a counter-cyclical band whose margins change with regard to the phase of the commodity price cycle. Such arrangement would increase flexibility under a bust through an enlargement of the band so as to promote an automatic adjustment by means of depreciation. Then, it would require more foreign exchange intervention during booms, with a contraction of the width of the band. In this case, a certain degree of flexibility is allowed which also reduces the exit costs from a float. Furthermore, the rate is allowed to move around a parity fixed to a US$– Rand basket, which should enhance the current account performance more than a simple US$ peg; the possibility of a rate of crawl is also contemplated. Although I share Frankel’s point that no exchange rate regime is suitable for all countries and, at all times, every exchange rate arrangement has to be country-specific, I still believe that arrangements of this type can be applied to other commodity-dependent low-income countries.


how the exchange rate would react under a shock from imports, especially if the latter occurs simultaneously to a shock from exports. This event is not unusual and, very recently, the copper boom was associated with a boom in oil and food prices, which Zambia imports. Thus, more empirical research is needed in this area, given that the co-movement of commodity prices is not rare in economic history.


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To test for cointegration I first analyse the time series properties of the Zambian CPI and of the nominal exchange rate in Zambia. From Figure 9.1A, an intercept is assumed for both series, while a linear trend is only considered for the CPI. To test for a unit root, we first check whether the series exhibits heteroscedasticity. As illustrated in Table 9.1A, the Breusch–Pagan–Godfrey test indicates the existence of heteroscedasticity in both series. Thus, I use the Phillips–Perron test and obtain that the hypothesis of a unit root is not rejected at the 5 per cent confidence level for both series (Table 9.A1). Testing for cointegration with the Johansen trace test, I obtain that the two series are cointegrated at the 5 per cent significance level, when a lag of four months is included. In performing the Johansen test, I adopt the third kind of model, as exposited in Juselius (2006). This includes an unrestricted constant, with no linear trends in the VAR (Vector Autoregressive model), but linear trend in the variables, in this case in LCPI. Thus, we assume that (a)

(b)

LNE

LCPI 8.8 8.6 8.4 8.2 8.0 7.8 7.6 7.4 7.2 7.0

6.0 5.6 5.2 4.8 4.4 4.0 3.6 97 98 99 00 01 02 03 04 05 06 07 08

97 98 99 00 01 02 03 04 05 06 07 08

Figure 9.1A Log of CPI and of the nominal exchange rate, 1997–2008 Source: EViews6 estimation from IMF-IFS and Bank of Zambia data.

Table 9.1A Testing for heteroscedasticity for LNE and LCPI Heteroscedasticity test: Breusch–Pagan–Godfrey for LNE F-statistic 3.574039 Prob. F(1,143) Obs*R-squared 3.535658 Prob. Chi-Square(1) Scaled explained SS 13.25852 Prob. Chi-Square(1)

0.0607 0.0601 0.0003

Heteroscedasticity test: Breusch–Pagan–Godfrey for LCPI F-statistic 11.04269 Prob. F(1,143) Obs*R-squared 10.39446 Prob. Chi-Square(1) Scaled explained SS 16.43176 Prob. Chi-Square(1)

0.0011 0.0013 0.0001


Appendix: Testing for cointegration between Zambian inflation and the real exchange rate


242


Table 9.2A Unit root test for LCPI and LNE Null hypothesis: LCPI has a unit root Exogenous: Constant, Linear Trend Bandwidth: 5 (Newey–West using Bartlett kernel) Adj. t-Stat Prob.* 5% level

−0.673730 −3.441111

0.9726

Null hypothesis: LNE has a unit root Exogenous: Constant, Lag Length: 0 (Automatic based on SIC, MAXLAG = 12) t-Statistic Prob.* Phillips–Perron test statistic −2.071923 0.2564 Test critical values: 5% level −2.881400 Source: EViews6 estimation from IMF-IFS and BoZ data.

Table 9.3A Cointegration test Series: LCPI LNE Sample (adjusted): 1997M06 2008M04 Trend assumption: Linear deterministic trend Included observations: 131 after adjustments Lags interval (in first differences): 1 to 4 Unrestricted Cointegration Rank Test (Trace) Hypothesized No. of CE(s) None * At most 1

Eigenvalue 0.091841 0.022983

Trace Statistic 15.66589 3.045925

0.05 Critical Value 15.49471 3.841466

Prob.** 0.0471 0.0809

Trace test indicates 1 cointegrating eqn(s) at the 0.05 level ∗ denotes rejection of the hypothesis at the 0.05 level ∗∗ MacKinnon–Haug–Michelis (1999) p-values Normalized cointegrating coefficients (standard error in parentheses) LCPI LNE 1.000000 −0.323118 (0.31342) Adjustment coefficients (standard error in parentheses) D(LCPI) −0.004848 (0.00190) D(LNE) −0.026650 (0.00998)


Phillips–Perron test statistic Test critical values:

the trend does not appear in the cointegrating relationship. Normalizing for the commodity price index, we obtain a coefficient of −0.32, which suggests that whenever the exchange rate depreciates by 1 per cent (thus, it increases), the domestic price level increases by 0.32 per cent15 within four months.


Elva Bova 243 Table 9.4A Testing for Granger causality between LCPI and LNE

Obs 144

F-Statistic 0.36901 2.70832

Prob. 0.6921 0.0702

The existence of a cointegrating relationship between the series is also confirmed by the Granger pair wise causality test, which also indicates the direction of Granger causality being from the exchange rate to the CPI as illustrated in Table 9.4A.

Notes 1. See Collier and Gunning (1999), Mikesell (1997), Saraff and Jiwanji (2001), Usui (1996). 2. Intuitively, under free capical mobility and under a fixed peg the central bank cannot modify the interest rate because if the domestic interest rate increases with respect to the international one there will be an inflow of capitals into the country which will restore the previous level of the interest rate. 3. The idea emerged out of the theoretical debate in the aftermath of the currency crises of the 1990s. As expressed in McKinnon and Schnabl (2004) the countries hit by the crises had intermediate arrangements which were believed not to be consistent with the fundamentals and this triggered speculative attacks to the currency. As expressed in Frankel (1999: 10–11) intermediate regimes are ‘not sustainable in a world of large-scale financial flows, and that countries are being pushed to the corners of either firm fixing or free floating’. 4. However, the extent the fiscal budget is related to the commodity cycle depends on the kind of ownership of the commodity sector and on the taxation regime. In the mineral industry, the presence of large private companies, usually marginally taxed, reduces the amount of income accruing to the government budget. 5. The literature on the commodity trap and on the resource curse (Sachs and Warner 1997; Collier and Gunning 1999) mentions other additional factors for the interconnection between commodity dependence and poverty, like governance and corruption. 6. Clearly this channel takes place under two main conditions: the country has a floating exchange rate, otherwise in a fixed the rate obviously would not change; the export receipts from the boom are spent and not saved. 7. As expressed in Eichengreen (2007), devaluations cannot be pursued indefinitely since the cost/benefit ratio of adopting an undervalued exchange rate will tend to rise with the general level of economic and financial development.


Pairwise Granger Causality Tests Date: 04/20/09 Time: 11:29 Sample: 1997M01 2009M02 Lags: 2 Null hypothesis: LCPI does not Granger Cause LNE LNE does not Granger Cause LCPI



8. Saxegaard (2006) on this also indicates that in a largely cash economy the impact on domestic prices of changes of the money supply through the banking system is not very high. 9. A commodity currency for the dollar and also for other commodities was advanced first by Benjamin and Frank Graham, respectively in 1933 and 1941 and subsequently by Keynes in 1938 and 1943, and by Hall, Kaldor and Tinbergen in the 1960. 10. The extent of the boom makes the exchange rate sensitive to changes in exports and not the other way round, hi this respect, one should probably look at the elasticity of non-traditional exports and take out copper from the analysis but this kind of analysis proved not to be statistically significant. 11. In Frankel’s papers (2002, 2006) it is not clear whether to use the nominal commodity price or the real one as deflated by the country’s CPI. In the proposal he refers to the real one but then the calculation uses the nominal rate, relying on the assumption that the CPI of the countries under study have not changed substantially. Yet, for the case of Zambia, this assumption does not hold since the consumer price index has changed quite consistently in the period of analysis. 12. Floricultural and horticultural exports also account as a large share in the nontraditional exports. Yet, not having a homogeneous price, they have not been included in the index. 13. In the simulation of the PEP and the PEPI the discrepancy between actual and simulated exports would be much larger since we calculate, the cumulated, change, on exports, i.e. each month we add the change induced by the exchange rate to the value of the series to which we have already added the change determined by the exchange rate of the previous month. 14. A study on the Gulf Countries GCC by Abed et al. (2003) compares the dollar peg to a dollar-euro basket peg and finds out mat the basket peg dominates fee dollar peg in improving stability. 15. The coefficient indicates a positive relationship between the two when there is a negative sign on it. This is because the two variables in the normalized equation are supposed to be both on the right side of the equation.

References Abed, G.T., S. Nuri Erbas and B. Guerami (2003) ‘The GCC Monetary Union: Some Considerations for the Exchange Rate Regime’, International Monetary Fund Working Paper, 60 (Washington, DC: IMF). Batini, N. (ed.) (2007) Monetary Policy in Emerging Markets and Other Developing Countries (New York: Nova-Science). Cali, M. and D.W. Te Velde (2007) ‘Is Zambia Contracting Dutch Disease?’, Overseas Development Institute Working Paper, 279 (London: Overseas Development Institute). Calvo, G. and C.M. Reinhart (2002) ‘Fear of Floating’, NBER Working Paper, 7993, Cambridge (Cambridge, MA: NBER). Cashin, P., H. Liang and C.J. McDermott (1999) ‘How Persistent are Shocks to World Commodity Prices?, IMF Working Paper, 99/80 (Washington, DC: IMF). Chang, R. and A. Velasco (2000) ‘Exchange-Rate Policy in Developing Countries’, American Economic Review, 90(2): 71–5. Collier, P. (2002) ‘Primary Commodity Dependence and Africa’s Future’, Mimeo (Washington, DC: World Bank).


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Collier, P. and J.W. Gunning (1999) ‘Trade Shocks: Theory and Evidence’, in P. Collier and J.W. Gunning (eds), Trade Shocks in Developing Countries (Oxford: Oxford University Press). Corden, M. (1984) ‘Booming Sector and Dutch Disease Economics: Survey and Consolidation’, Oxford Economic Papers, 36: 359–80. Corden, M. and P. Neary (1982) ‘Booming Sector and De-Industrialization in a Small Open Economy’, Economic Journal, 92(368). Dehn, J. (2000) ‘The Effects on Growth of Commodity Uncertainty and Shocks’, World Bank Working Paper, 2455 (Washington, DC: World Bank). Edwards, S. (1989) ‘Commodity Export Boom and the Real Exchange Rate: The Money– Inflation Link’, NBER Working Paper, 1741 (Cambridge, MA: NBER). Eichengreen, B. (2007) ‘The Real Exchange Rate and Economic Growth’, Paper prepared for the Growth Commission, sponsored by the World Bank in association with the William and Flora Hewlett Foundation and the governments of the Netherlands, Sweden and the United Kingdom. Frankel, J. (1999) ‘No Single Currency Regime is Right for All Countries’, Graham Lecture, Essays on International Finance, Princeton University. Frankel, J. (2002) ‘Should Gold Exporters Peg their Currency to Gold?’, World Gold Council Research Study, 29. Frankel, J. (2003) ‘A Proposed Monetary Regime for Small Commodity Exporters: Peg the Export Price (“PEP”)’, International Finance, 6(1), Spring: 61–88. Frankel, J. (2006) ‘Commodity Prices and Monetary Policy’, NBER Working Paper, C0011 (Cambridge, MA: NBER). Frankel, Jeffrey and Ayako Saiki (2002) ‘A Proposal to Anchor Monetary Policy by the Price of the Export Commodity’, Journal of Economic Integration, 17(3), September: 417–48. Fynn, J. and S. Haggblade (2006) ‘Potential Impact of the Kwacha Appreciation and Proposed Tax Provision of the 2006 Budget Act on Zambian Agriculture’, Food Security Project Working Paper, 16, Zambia, National Farmers Union. Gudmundsson, M. (2003). ‘The Choice and Design of Exchange Rate Regimes’, BIS Paper 17 (May) (Basel: BIS). Hausmann, R., L. Pritchett and D. Rodrik (2004) ‘Growth Accelerations’, NBER Working Paper 10566 (Cambridge, MA: NBER). Hill, C. (1991) ‘Managing Commodity Booms in Botswana’, World Development, 19(9). IMF (2006) ‘Inflation Targeting and the IMF’, Paper prepared by Monetary and Financial Systems Department, Policy and Development Review Department and Research Department (Washington, DC: IMF). IMF (2008) ‘The GCC Monetary Union-Choice of Exchange Rate Regime’, Paper prepared by the Middle East and Central Asia Department (Washington, DC: IMF). Johnson, S., J. Ostry and A. Subramanian (2007) ‘The Prospects for Sustained Growth in Africa: Benchmarking the Constraints’, IMF Working Paper, 52, (Washington, DC: IMF). Juselius, K. (2006) The Cointegrated VAR Model. Methodology and Applications (Oxford: Oxford University Press). Khan, M.S. (2009) ‘The GCC Monetary Union: Choice of the Exchange Rate Regime’, Peterson Institute for International Economics, Working Paper, 1. Krugman, P.R. (1991) ‘Target Zones and Exchange Rate Dynamics’, Quarterly Journal of Economics, 106(3): 669–82. Levy-Yeyati, E. and F. Sturzenegger (2007) ‘Fear of Floating in Reverse: Exchange Rate Policy in the 2000s’, (unpublished thesis), Buenos Aires, Universidad Torcuato Di Tella.


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Masson, P.R., M.A. Savastano and S. Sharma (1997) ‘The Scope for Inflation Targeting in Developing Countries’ IMF Working Paper, 97(130) (Washington, DC: IMF). MacKinnon, J.G., A. Haugh, and L. Michelis (1999) ‘Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration’, Journal of Applied Econometrics, 14(5): 563–77. McKinnon R. and G. Schnabl (2004) ‘The East Asian Dollar Standard, Fear of Floating and Original Sin’, Working Paper, 03001, Stanford University. Mikesell, R.F (1997) ‘Explaining the Resource Curse, with Special Reference to MineralExporting Countries’, Resources Policy, 23(4): 191–9. Nissanke, M. (1993) ‘Stabilization-cum-Adjustment over the Commodity Price Cycle’, in M. Nissanke and A. Hewitt (eds), Economic Crisis in Developing Countries: New Perspectives on Commodities, Trade and Finance (London: Pinter): 56–78. Obstfeld, M. (1996) ‘Models of Currency Crises with Self-Fulfilling Features’, European Economic Review, 40: 1037–47. Obstfeld, M. and A. Taylor (2003) ‘Globalization and Capital Markets’, in M.D. Bordo, A.M. Taylor and J.G. Williamson (eds), Globalization in Historical Perspective (Chicago: University of Chicago Press). Rodrik, D. (1993) ‘Getting Interventions Right: How South Korea and Taiwan Grew Rich’, NBER Working Paper, 4964 (Cambridge, MA: NBER). Rodrik, D. (2007) ‘The Real Exchange Rate and Economic Growth: Theory and Evidence’, Mimeo, Harvard University. Sachs, J. and A. Warner (1997) ‘Natural Resource Abundance and Economic Growth’, CID Working Paper, Harvard University. Saraff, M. and M. Jiwanji (2001) ‘Beating the Resource Curse: The Case of Botswana’, Environmental Economics Series Paper, 83, World Bank Environment Department (Washington, DC: World Bank). Saxegaard, M. (2006) ‘Excess Liquidity and Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa’, IMF Working Paper, 115 (Washington, DC: IMF). Setser, B. (2007) ‘The Case for Exchange Rate Flexibility in Oil-Exporting Economics’, Peterson Institute for International Economics, Policy Brief, PB07-8. Taylor, J.B. (1993) ‘Discretion versus Policy Rules in Practice’, Carnegie-Rochester Conference Series on Public Policy, 39, December: 195–214. Usui, N. (1996) ‘Policy Adjustments to the Oil Boom and Their Evaluation: The Dutch Disease in Indonesia’, World Development, 24(5): 887–900. Van Wijnbergen, S. (1984) ‘The “Dutch Disease”: A Disease After All?’, Economic Journal, 94(373): 41–55. Weeks, J. (2008) ‘Economic Effects of Copper Prices on the Zambian Economy: Exchange Rate Regime and Kwacha Appreciation’, Paper presented at the SOAS International Workshop ‘Challenges and Prospects for Commodity Markets in the Global Economy’, Workshop in Memory of Alfred Maizels, 19–20 September. Weeks, J., V. Seshaman, A.C.K. Mukungu and S. Patel (2007) ‘Kwacha Appreciation 2005–2006: Implications for the Zambian Economy’, Report prepared for the United Nations Development Programme (Lusaka, Zambia: UNDP). Williamson, J. (1993) ‘Exchange Rate Management’, Economic Journal, 103(416): 188–97. Williamson, J. (1994) Estimating Equilibrium Exchange Rates (Washington, DC: Institute for International Economics). Williamson, J. (2000) ‘Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option’, Policy Analyses in International Economics, September. Williamson, J. (2008) ‘Exchange Rate Economics’, Working Paper Series (Washington, DC: Peterson Institute for International Economics).


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Part 4 Finance and Governance under Globalization





10 Adrian Hewitt

Introduction International or inter-regional compensatory finance was briefly a fashionable instrument in the relationship between developed and developing countries in the 1970s and 1980s, during the previous surge in commodity power. But, instead of becoming established as a settled adjustment mechanism with some permanence, either endowed with adequate funding or modelled as a self-financing mechanism in a post-Keynesian world, the schemes (STABEX, the Compensatory Financing Facility (CFF), SYSMIN, COMPEX, FLEX and the CCFF) were used by industrialized countries as a calming mechanism and an antidote to the Common Fund which, at the time, was seen as threatening over-regulation of commodity markets and, eventually, rigid supply management. This was essentially a political riposte at a time of burgeoning globalization rather than an operational stabilization instrument – moreover, the main schemes petered out in the 1990s. Having been dominated by donor interests (and their counterpart, aid-dependency), they were missed only for their aid allocation elements, not as a means of addressing production or income volatility, or guarding against external shocks (moreover, most of the schemes were shown, ex-post, to have tended to be pro- rather than counter-cyclical). Even the IMF’s own almost eponymous Exogenous Shocks Facility (ESF), available to the poorest indebted developing countries as an adjunct to the Poverty Reduction and Growth Facility, lay largely unused. Efforts to globalize or update the schemes have not proceeded – at least, not until the 2009 London Summit of the G20 and other leaders showed renewed interest in addressing global liquidity and macroeconomic imbalances – because the donors and creditors who ran them preferred interventions such as direct budget support to subsidize governments (more in the social than productive sectors), or the use of information and communications technology (ICT) to improve access to market intelligence – if they are going to


A Role for Compensatory Finance in the 21st Century after the 2008 Global Financial Crisis


A Role for Compensatory Finance in the 21st Century

intervene at all. Reform and reactivation of the regional version of compensatory finance between the African, Caribbean and Pacific Group of States (ACP) and the EU was hardly raised in years of discussions over Economic Partnership Agreements, a few of which have now been initialled or provisionally concluded for some partners (the C, rather than the A and the P). Yet, when the Washington Institutions pressed ahead with heavily indebted poor country (HIPC) debt relief, they found that export earnings instability from commodities was one of the main reasons for their HIPC developing country clients missing their targets. However, they remained reluctant to draw on existing stabilization instruments or to reduce the conditionalities that were conventionally applied to loans or to drawing from other instruments. It can be argued that conditions changed in the early twenty-first century. World commodity prices once again enjoyed a boom – initially minerals, metals and petroleum, followed by food and other soft commodities, although rather briefly in some cases. Some suggest that the new source of the demand (China now and India soon, rather than Japan, Korea and Hong Kong as in the 1970s and 1980s) means we have entered a commodity ‘supercycle’, and that there was a permanent redistribution of income away from net commodity importers who have had it easy (and been virtually inflation proofed) over the past thirty years. However, the fragility of the demand and its large speculative element probably meant that the wheels will shortly come off the supercycle. A price decline set in from the peaks for some hard commodity prices, and even for food since May 2008. Some commodities, such as crude petroleum, described an almost perfect price pyramid in 2008. Stimulated by the MDGs and commitments at Monterrey, official aid volume (at least, from some donors) recovered from its post-Cold War slump, especially official aid to Africa, raising the possibility of more aid availabilities for commodity export dependent countries if new or refreshed instruments were to be funded (though even the aid volume recovery now looks difficult to sustain in some of the donor countries worst affected by the global financial crisis). International and regional institutions are now belatedly looking for new or refreshed instruments with which to address global financial instability, just as national governments, sensing their new vulnerabilities, are now a little more open to international cooperative solutions, and might consider that calming commodity markets and limiting producers’ vulnerability, especially in the more deprived countries, is one way to advance. The IMF was authorized, at the London summit, not only to issue a further US$250 billion of SDRs (which will have the effect of strengthening the reserves of mainly the rich countries), but also to treble its resources to US$750 billion. If this is executed, it will mean the Fund then holds the equivalent of 12 per cent of its members’ foreign exchange reserves, and could more easily restart a


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scheme offering counter-cyclical official liquidity to low-income communities in some form, perhaps based on commodity prices, earnings or trend performance. Additionally, although the age of the multinational corporation and international conglomerates, especially in mining, is far from over, there is a trend towards reassertion of sovereign ownership of many resources: without good economic management or mitigating measures, Dutch disease could result. With the recent shift of some commodity production into state hands, and with the trend in investment and ownership moving somewhat from traditional trans-national production and marketing corporations to sovereign wealth funds; with new economies of the BRICs challenging the traditional users of commodities in the OECD, and given the current global security and sustainability concerns, it can be argued that this is an appropriate time for new thinking towards a new scheme of international compensatory finance – this time, an instrument designed and adequately endowed to operate counter-cyclically as a stabilization measure.

The bubble economy and the global financial crisis We are, once again, familiar with the bubble economy. Long ago there was was ‘tulipmania’, but other more notorious bubbles occurred through less tangible instruments such as South American stocks or, more recently, Japanese residential property, arcane derivatives, sub-prime mortgages and collateralized debt obligations (CDOs). Commodities, in contrast, merely go up and down in price, though their prices and earnings, too, can be manipulated by speculators and other interested traders, not only through the means of supply management for which the late Alfred Maizels retained his attraction. Alfred Maizels was rather more sceptical of international cooperation instruments such as compensatory finance systems working efficiently enough to justify their existence (and well aware that, through the Law of Unintended Consequences, they might not only make things worse, they could even serve an ulterior, and possibly contrary, purpose) and, on this, he was right during his lifetime. Though I do not hold out excessive hope that such instruments can be revived and restructured now, it could be conceded that, as there have been such unusual terms of trade shocks adding to the credit crisis over the past years, we might be entering a new era when sovereign governments have less confidence in international markets and might swing towards more interventionism, and where there will be new players rather than just the OECD governments working through the Washington Institutions. If well designed and tested, compensatory finance could offer instruments that, if upgraded and updated to suit current market trading conditions, might give support to developing countries that still suffer from vulnerability over commodity based earnings fluctuations.


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Instability in commodity export earnings revenue – even, or particularly, during a commodity price boom – can still be seen as a pressing issue for developing countries, especially the poorest and least developed among them, causing them external shocks that increase their vulnerability and might even jeopardize their economic viability. International compensatory finance can supply a means of addressing the problem. Existing, defunct and potential new innovative mechanisms of compensatory finance could be developed into a system that adds to global stability, providing a half-way house between direct intervention in commodity markets and the sort of supply management that is no longer politically acceptable, and the laissez-faire system of allowing markets to do their work unfettered in establishing prices, with all the unforeseen fluctuations that that entails. By smoothing out revenue flows over a shorter term, possibly nearinstantaneous – and, ideally, in anticipation of actual fluctuations – compensatory finance can assist both producers and governments dependent on allied revenues. This smoothing can be applied at the level of countries’ balance of payments, through state accounts, or it could, in more sophisticated or interventionist mechanisms, be directed at smoothing out the revenues of producers themselves. As with any intervention, it can also create rents, reward failure and sustain the defunct. This is, of course, to be guarded against, and its avoidance must be a feature of any new scheme. However, the existing systems of compensatory finance at the international or regional level have fallen seriously out of fashion in the twenty-first century. They had their heyday in the 1970s and 1980s – paradoxically in an era when commodity power was concentrated in the hands of a relatively tight group of what were then poor developing countries. When these countries achieved a secular shift, creating what was to be a permanent change of income – at least, for petroleum exporters – compensatory finance development was one of the more prominent responses on the part of rich countries, and it could become so again. From the 1970s onwards, however, it was deployed as much to deflect and to defuse the crisis and to wield donor power, as to put in place permanent stabilizers against income fluctuations of the poor. The compensatory finance mechanisms that operated then, far from having been refined, have largely fallen into disuse now. Yet, commodity dependence is still a serious impediment to development in countries that have not developed a manufacturing sector and that still lag behind on services, particularly in Africa. This is because, as price-takers, they do not influence global markets, and suffer unforeseen fluctuations in revenues with limited means of adjustment at their disposal. Industrialization was the common aim of development, not only because this was deemed to increase opportunities for incremental growth in both


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domestic and export markets, but also because the more differentiated forms of manufactured products offered the prospect of more stable and less fluctuating world prices, together with price increases and better returns in comparison with those of raw commodities (the Prebisch–Singer hypothesis). For many decades, developing countries without an industrial sector suffered from the earnings fluctuations of their commodity export sectors. With the commodification of many basic manufactures, on the one hand, and developments in branding, labelling and product differentiation in tropical beverages and food commodities, on the other, plus the currently fashionable crossover from agricultural food crops into biofuels, it might soon be time to revise this theory – or, even, ‘turn this theory on its head’. But so far, and certainly in the 1970s’ and 1980s’ heyday of compensatory finance, developing countries were felt to suffer from their (largely inherited) dependence on a narrow range of commodities and the income fluctuations that resulted from their exports. Their failure to adjust adequately helped cause the debt crisis of the late 1980s and early 1990s, and led to the recourse to larger international measures than mrely international compensatory finance: the Highly Indebted Poor Country (HIPC) and Enhanced HIPC debt relief arrangements. Asian countries that industrialized rapidly, and Latin American countries that strengthened their existing industrial bases, mostly avoided HIPC, though they, too, confronted financial crises in the 1990s (especially 1997), while their precursor, Japan, saw almost no growth in almost two decades since the end of the Bubble Economy in 1991. This chapter argues that compensatory finance can still be a useful stabilization mechanism in a post-HIPC world. It may not yet be said, however, to be in high demand politically, since it rarely figures prominently in trade or economic cooperation negotiations nowadays, even though the donor supplied facilities to activate it (Aid-for-Trade funding or Direct Budget Support) are much more readily available than in the past. Nevertheless, dependence on commodity production and exports, and uncertainties arising from the fluctuating revenues that occur from these for both governments and producers, remain a problem for many African and Pacific countries and a few other least-developed countries elsewhere. To consider which sort of compensatory finance mechanism would be appropriate to today’s needs, we review the track record of those that have already performed.


Adrian Hewitt

The IMF Compensatory Financing Facility The International Monetary Fund (IMF) devised the first formal system of compensatory finance in 1963. It was intended as a counter-cyclical, marketfriendly stabilizer, and so as a means of avoiding interfering in commodity market mechanisms, although the CFF that emerged was originally advocated



by United Nations experts and intergovernmental groups. Its origin preceded the first UNCTAD conference by a year – as well as the era of OPEC commodity power by a decade – but the fact that it was lodged within the Bretton Woods system meant that it would remain, essentially, a financial stabilizer addressed at governments and central banks, and not interfering directly with producers and markets. The IMF had itself noted the adverse effects of the drastic commodity price declines after the Korean War boom, which translated into instability in foreign exchange earnings of developing countries. In those days, this was not deemed primarily an African problem – the shortfalls affected a wide range of developing countries and were deemed to be a threat not only to their rapid economic development, but also to the strength of world demand and the stability of the world financial system. Some resonance for today’s conditions already, then. Some of the original motivation for the CFF seems surprisingly modern, including reference to mutual insurance schemes whereby compensatory payments would be made out of an appropriate fund to governments whose countries were experiencing unjust, unfair and inequitable terms of trade. Even soft-hearted donors, let alone the Bank and the Fund, do not express themselves in these terms today. However, the CFF was not a donor scheme. Borrowing countries were charged interest (although, in its earlier years, they were not subjected to other conditionalities), as well as having to repay principal: the aim, as in core Fund programmes, was for the scheme to be self-financing. Above all, it was designed to be counter-cyclical. Member states were allowed to draw to draw on the facility so long as three conditions were met: (a) An export shortfall had to be short-term in nature and caused by circumstances largely beyond the country’s control. (b) The member had to establish it had a balance-of-payments need for financial support. (c) The member state had to be willing to cooperate with the Fund in finding, where required, appropriate solutions for its balance-of-payments problems. It is to be noted that nowhere in the criteria are individual commodity production or export performance mentioned. The CFF remained a purely financial (and balance-of-payments) mechanism, even when members were allowed to draw also on the basis of the excess cost of cereals imports (from 1981). In fact, as a straightforward financial mechanism, the CFF operated well for its first twenty years. Access limits to borrowing member countries were enlarged from an initial 25 per cent of quota progressively to 100 per cent by 1979 (the last increase being partly as a response to the second oil shock).


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However, the seeds of its eventual demise are included in condition (c) above. In practice, for twenty years, countries drawing up to 50 per cent of their quota under the CFF were not required to discuss (that is, agree a government letter of intent committing themselves to implementing) specific policies remedying their balance-of-payments problem. The requirement ‘to cooperate’ remained a loose gentlemen’s agreement. Then came the Reagan era. After the cranking-up of all Fund conditionalities in 1983, the CFF was not excluded. From then on, all CFF drawings became conditional on the members being ready to receive a Fund mission and adopt the balance-of-payments remedies deemed appropriate. Even though, in 1988, the CFF was revamped and enlarged in scope into the Compensatory and Contingency Financing Facility (CCFF), in reality it had become a lower-order IMF balance-of-payments support programme, fully integrated into the Fund’s centralized system of conditionality. Because of delays in disbursement that these policies required, it had ceased to operate counter-cyclically (and might, on occasion, have even operated procyclically). When the interest charged increased in the 1990s, developing countries effectively abandoned the scheme. In recent years, neither they nor the Fund have shown any great interest in reviving it until the incoming Managing Director, Dominique Strauss-Kahn, in October 2007 offered a new vision for the Fund to ‘deal with external financial shocks and bring assistance if needed’, as well as giving priority to developing countries in its operations (perhaps, soon, on its board too). The Fund now emphasizes that its Exogenous Shocks Facility (as well as the Food Financing Facility) can be made available to developing countries that do not have a higher-order lending programme in place. The CFF, in its original form, scored well in terms of satisfying the theoretical need for a counter-cyclical support mechanism. It retained features of mutual insurance, at an inter-governmental level. While never entirely selffinancing, it did not require the involvement of bilateral donors, yet, at its peak in 1983, it disbursed US$2.3 billion. The CFF system leaves governments to determine – again, at least in its original form – the extent to which they pass on stabilization funds to the producers that – with other agents – suffer the earnings shortfall, in the same way that they remain empowered to collect additional taxes from positive windfalls. The CFF was never explicitly involved in commodity policy, even over petroleum. Its theoretical strengths, however, were undermined when the developed country members that control the Fund gave priority, in 1981–1991 (the last decade of the Cold War), to imposing the Washington Consensus over maintaining a modest, fairly autonomous facility that could mitigate external shocks. It has hardly been used in the twenty-first century but could be due for a revival, unless displaced by a newer Exogenous Shocks Facility or Trade Integration Mechanism (neither of which has the same theoretical elegance).


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STABEX was devised a decade later in different circumstances, by the EC/EU in 1973–1975 when the African, Caribbean and Pacific Group came into being and the Lomé Convention was being negotiated between them. With its offshoots, modifications and successors (SYSMIN, COMPEX and FLEX), it has lasted for a quarter of a century, and one of the successors still enjoys a half-life, though far removed from the original model. STABEX is not, strictly speaking, an international compensatory finance scheme. However, it is, nominally, a scheme for stabilizing export earnings of some countries, primarily in bilateral trade, and it does embody many of the characteristics of compensatory finance. It was sold politically to the ACP countries by the then European Commissioner for Development, Claude Cheysson, as an insurance scheme guaranteeing them both against falls in world prices of their commodities and against decreases in local production, even if occasioned by the weather and acts of God, for which the EC would pay the premium. It seemed too good to be true (and it was – but the EU got high marks and political kudos for innovation). The circumstances in which STABEX came into being will be of interest today. The years 1973–1975 were the heady years of commodity power. OPEC exercised its muscle as a commodity cartel for the first time and quadrupled petroleum prices. There was to be a revolution in Iran. There were fears from users of intermediate products that a phosphates cartel might follow petroleum and also prove effective, a damaging development for believers in food self-sufficiency and the Common Agricultural Policy: this might then be followed by others – soft as well as hard commodities. Sugar shortages suddenly became so acute that the refined product was not reaching consumers in some key markets, such as the UK. The ‘Limits to Growth’ school (the so-called Club of Rome) argued that raw materials were being used up faster than they could be exploited or discovered, and predicted an end to economic growth (and a need for radical changes in lifestyles, at least in rich countries). Meanwhile, the predecessor of the EU, the European Economic Community (EEC) was embarking for the first time on what was to prove to be its most successful policy – enlargement. The UK acceded in 1973, together with Denmark and the Republic of Ireland, and the EEC grew from six countries to nine member states. (The EEC later becoming the European Community, and then the European Union, underwent successive enlargements to its present 27 member states). Such a historic combination of circumstances is unlikely to repeat itself, although there are bound to be other combinations of circumstances that induce and produce major shocks. Britain arrived in a Europe with substantial baggage in terms of its links with and obligations towards developing countries, especially those of its former colonies that had recently become independent. Those in Asia were


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rather unceremoniously dumped on grounds of being too large, too competitive or too poor for France and the other five original member states to cope with, given their existing association arrangements in the developing world, essentially with Africa under Part IV of the 1957 Treaty of Rome. The excluded countries (in Asia) mostly prospered and either avoided or grew out of aid-dependency, establishing good relations with the EU. The rest, in sub-Saharan Africa, the Caribbean and the Pacific islands were deemed eligible for a regime of special trade preferences with the EU matched by an additional aid programme provided by an off-budget vehicle, the European Development Fund. They joined the former African colonies of France and some other member states to form a new grouping, the ACP group, initially of 46 countries, and were offered a new five-year, renewable, convention with the EU signed in Lomé that no longer imposed trade tariff reciprocity on them: this arrangement endured for 32 years. Additionally, those countries that, from colonial times, had remained economically dependent on cane sugar exports under the Commonwealth Sugar Agreement were offered a special continuation arrangement of unlimited duration obliging them to deliver fixed amounts of sugar to Europe – in practice, to Tate & Lyle – for refining. In exchange for the guaranteed supply of 1.3 million tonnes, they were offered guaranteed prices, which, within months of signature, exceeded world price levels and remained well in excess for the decades to follow. This commodity stabilization arrangement, the Sugar Protocol, which was separate from, though appended to the Lomé Conventions (and the later Cotonou Agreement), was, for its eighteen beneficiaries, by far the most lucrative element in the entire EU–ACP relationship (although it may also be argued that the subsidies fossilized production and export patterns, and hindered development). The EU unilaterally denounced the Sugar Protocol in September 2008 and, when its forced expiry occurred in 2009, it would have lasted 34 years. STABEX, the EU’s System for Export Earnings Stabilization for the ACP states, was devised to serve as a political counter-weight for the francophone west and central African states, which, for historic reasons, did not then export sugar. It was included in the body with its own chapter (not as an attachment or appendix) in the text of the Lomé Convention. Unlike much of the programmed aid, it operated from its very first year of application (1975) and continued disbursing (and, much less consistently, reimbursing) for a quarter of a century, with modifications and derivatives. The initial attractions of STABEX seemed to be manifest: far from even being an insurance scheme where they had to pay the premium, it appeared to be free to the ACP users. It was also Europe’s early projection of ‘soft power’ to counter the threat of commodity cartels and similar. It became convenient to cite STABEX within the United Nations and allied fora as an explicit response to, and deflector of, the drive to create a Common Fund to finance market intervention under commodity agreements, and for an


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integrated programme of commodity regulation, both of which were then gaining momentum. Second, internally within the EU, STABEX was regarded by France and the original six EEC member states with interests in Africa as a quid pro quo for conceding the Sugar Protocol to Britain (and so to the Caribbean ACP states, plus Mauritius and Fiji). It was thus designed in such a way as to ensure that benefits flowed – at least, initially – to francophone non-sugar commodity producers in Africa, necessity being the mother of invention in this case too. Third, unlike the CFF and unlike any self-financing trade stabilization arrangements or commercial insurance schemes, STABEX was funded out of the EU’s aid allocation to the ACP states – the European Development Fund. This meant that, even given the prior earmark, whatever the ACP drew down as STABEX compensation, they did not receive as project or programme aid (or, indeed, as other forms of balance-of-payments support) as there was an agreed EDF aid fund renewed every five years, with fixed limits. This became fully the case when, early on in the history of the scheme, the EU abolished the obligation for the richer STABEX beneficiaries to reimburse if their commodity markets recovered. There was never a self-replenishing STABEX Fund. Instead, STABEX has been a system for transferring aid funds to eligible ACP states that can show they have suffered a loss or a shortfall on their normal pattern of exports to the EU. It has a number of distinctive features. Shortfalls are established on the basis of individual commodities, and claims for STABEX payments made on this basis: they are not cumulative (but neither are they offset by a commodity boom elsewhere). Thus, transfers can be deemed gross, whereas the CFF is paid net. Eligible commodities are only agricultural, making the scheme only slightly redolent of the Common Agricultural Policy, although, for the first five years, iron ore was allowed in as an anomaly – in a concession to the Mauritanian negotiator, and on the strange grounds that the mine was state owned. (The Mauritanian agency Société Nationale Industrielle et Minière (SNIM) has recently been purchased by a hedge fund.) The affected commodity export is – or, at least, was – effectively only the trigger. In the early form of STABEX, it sufficed to establish an arithmetic shortfall in earnings against a previous four-year average to make the claim. Once approved, the amount of the claim was paid direct from the EU to the government without strings. Because the government did not, in the earliest STABEX guise, have to retain the money in the affected sector or compensate the affected producers or traders, it could logically be used for diversification – including out of commodity trade altogether. However, the EU increasingly applied conditions that affected the purity of this approach. This also meant that STABEX payments could no longer be used as balance-ofpayments support (as under the IMF scheme) or, eventually, as direct budget support when this became fashionable among donors in the 1990s. Still, the


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romantic notion that STABEX funds supported small farmers in distress was an important selling point of the scheme, even if the reality was different. Another distinctive feature was that STABEX was a purely regional scheme, operating for the ACP states alone and on their exports to the EU only (except for a few exceptional least developed countries that were permitted to count export earnings fluctuations to ‘all destinations’). When pressed on this, the EU challenged other donors and major traders to set up and fund their own schemes, and UNCTAD conducted numerous studies, some with this author, on how to globalize STABEX, without any firm result. The EU did briefly offer a non-ACP scheme, called COMPEX, to a few residual least-developed countries – for example, Haiti before ACP accession, Nepal and Bangladesh – but this was not a success, was not analogous with STABEX and was quickly discontinued. Similarly, the EU initiated a scheme for ACP mineral exporters called SYSMIN after the 1978 Shaba invasion when the then Zaire’s (now the Democratic Republic of Congo) copper province again threatened to secede. This too was posited on the circumstances of the mining industries of ACP states being state owned (the logic of the EU funding Rio Tinto’s or BHPBilliton’s occasional losses not bearing scrutiny) but SYSMIN, too, collapsed early on under the weight of its own contradictions, and can never really be said to have operated either as commodity or balance-of-payments compensation, or as an export earnings stabilization scheme. It was certainly of no use to Zambia during the boom-and-bust years for copper analyzed in other chapters of this volume. Lastly, apart from the anomalous period at the beginning of the STABEX, when a few of the richer ACP countries were eligible to repay their STABEX transfers if the market recovered (they were very rarely forced to do so, even when the conditions were met and when the requirement was cancelled, their loans outstanding were cancelled, too), STABEX has operated throughout as a grant based aid allocation scheme (not as a revolving fund). As a system of rapid aid allocation and disbursement with, initially, low conditionality (rather than a scheme of counter-cyclical export earnings smoothing), STABEX worked well. The system disbursed aid much faster than any of the other Lomé/Cotonou aid instruments, and was the instrument, with the Sugar Protocol, most valued and sought-after by the ACP states. (Not all ACP states were eligible, though the EU strove to broaden the list of eligible commodities and the number of claiming ACP countries, so as to be politically inclusive). STABEX was also dispersed more swiftly than many of the aid schemes and programmes of other donors, including bilateral donors who were also EU member states, though this engendered less envy than suspicion at the rapid, but sometimes purposeless, disbursements in question and finally hastened the scheme’s demise – for even a fairly rapidly disbursing system with fast-moving mixed commodity markets could still prove unfortunately procyclical. STABEX was succeeded under Cotonou (from 2000) with a system


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called FLEX (the Fluctuations in Export Earnings programme). FLEX was similarly funded, but no longer had individual commodities or commodities as a whole at its heart, and so appeared more as a minor latter-day CFF on easy terms to give balance-of-payments support using, as ever, grant aid. It has basic eligibility criteria related to demonstrated export earnings shortfalls or public revenue deficits, but is not taken seriously as a compensatory finance scheme. Although the UNCTAD 2008 Trade and Development Report focusing on commodities seems confident of a FLEX revival, the export earnings stabilization element itself might not be continued under the Economic Partnership Agreements when they eventually enter into force.

Assessment for compatibility with current commodity trade issues While there is a great deal to learn from studying the history of inception and operations of past schemes, neither the IMF’s CFF Scheme nor the EU’s STABEX operates or has any effect on commodity markets nowadays. They both had quite a long innings, however. STABEX lasted for a quarter of a century. It was the EU’s 1996 Green Paper on reforming the relationship of special, unreciprocated preferences for the ACP, including the commodity protocols on bananas, sugar and beef, and the political will of its member states towards the WTO that pulled the rug from under compensatory finance in its STABEX form, not the availability of funds or the effectiveness of the mechanism itself (which lived on in shadowy form with FLEX). The IMF CFF scheme lasted longer; in practice, over thirty years until the 1990s, until its attractions for developing countries were sidelined by conditionality and alternative sources of relief for debts, often built up during commodity shortfalls and booms. These are durable achievements for mechanisms that started merely as theoretical constructs backed by public funding but, in comparison with donor funds such as the International Development Association (IDA) and the European Development Fund (EDF), they died as mere striplings: last year was the 50th anniversary of the EDF (itself slightly older than the World Bank’s IDA). Formula changes (which were tried) were not as important as the aid conditionality that determined the freedom of operation of compensatory finance schemes in eventually hastening their demise. But, in a better international development climate, new versions of the schemes could still be devised and funded with the newly abundant Aid-forTrade allocations from donors which, as leading trade partners, feel guilty about the lack of progress of the WTO Doha ‘Development’ Round. New donors with commodity interests, such as China, India, Russia and Brazil (all the BRICs) could emerge as patrons of such schemes. Second, Dominique Strauss-Khan, the IMF Managing Director, responded to the global financial crisis by calling, in February 2008, for fiscal measures from oil and commodity


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rich nations enjoying large budget and trade surpluses to support the global economy. It could even be the turn of sovereign wealth funds of countries that have made a success of commodities. Norway’s SWF is worth US$322 billion, Abu Dhabi’s US$625 billion and Kuwait’s US$213 billion. Or, from manufacturing: China’s own SWF appears to be worth over US$200 billion; Singapore’s Temasek fund is valued at US$108 billion and could be more with full disclosure. These are, after, all not mere national pension funds but assets that have accrued to governments as rents, surplus to and beyond their normal investment and reserve needs, as a result of successful export strategy: who would be better to put in charge of an export stabilization fund on a global scale? In contrast, the two old schemes had strengths in delivering aid, especially in their earlier incarnations before they were hedged around with increased conditionalities. The CFF functioned as a form of balance-of-payments support, while STABEX acted more as budget support. Both delivered funds directly to governments and operated on public finances, without intervening in commodity market trade or directly influencing producers. But can they be said to have helped manage volatile commodity revenues as well as even Norway or Colombia’s national commodity funds? The benchmarks here might be, say, on the one hand, the EU’s Sugar Protocol itself, which intervened directly in the world sugar market, and gave a few of the dozen targeted cane-dependent economies enough breathing space to develop out of their commodity dependence, with Mauritius, Barbados and Trinidad and Tobago being the most striking examples; or the diamond cartel run for thirty years by de Beers, so effectively that it was deemed to be an outlaw trust in the USA, yet it helped Botswana to graduate from a basket case on independence to one of Africa’s best managed countries today. (In 2008, Botswana virtually bought out de Beers; in 2009 the world diamond market – and, so, the economy of Botswana and Namibia too – was in crisis.) In fact, if assistance to small farmers producing inter alia export crops were the main target of schemes managing volatile commodity revenues, one might make the Grameen Bank the benchmark for delivering support to producers – in its case, through microcredit to producers. There was no pretence that the CFF was a trade smoothing scheme; in practice, it supplied financial support, at cost, to the balance of payments by targeting movements from a trend in merchandise exports. Later on, this was extended to food imports (excess cereal import costs) and, in 1981, to cover fluctuations in tourism and migrant remittances, both well beyond merchandise exports for some countries and, nowadays, more important flows than development aid itself. The scheme was revised in 2000 but, by then, had become overtly adjustment related (and expensive for developing countries). Its trade and commodity elements were taken over in minor ways by the IMF’s Exogenous Shocks Facility to deal with such contingencies, and then, even more recently, by its Trade Integration Mechanism (TIM), a policy


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lending facility targeting overall revenue losses, on which Bangladesh, the Dominican Republic and Madagascar have drawn in recent years. Experience with STABEX is more mixed. In its first five years of operation, it paid out directly to claiming governments, imposing few obligations on how they used their funds. That it tended to go to West African francophone countries in the CFA Franc zone that needed to bolster their under-performing groundnut sectors (such as Senegal) was a way of buying time – but it did little for groundnut farmers in the longer term. Later on, small countries (such as the Comoro Islands) with a range of STABEX eligible products were able to play the system (especially with bush crops giving variable yields) so that they attracted STABEX payments every year, even as their overall economy declined, without any incentive towards restructuring and diversification. The government of the Solomon Islands even became dependent on STABEX inflows to fund its budget deficits – and the problems became serious when the EU built up a backlog of undisbursed STABEX payments when new conditions on use were imposed. There was, however, never an agreed EU–ACP policy on what STABEX transfers were targeting. ACP governments preferred to maintain their freedom to use public funds to finance diversification. Even when they conceded, under pressure, to reinvest the revenues in the affected sector, they would usually remain at the level of national stabilization funds (and, sometimes, never leave the Central Bank) rather than being spent additionally on farmers to upgrade productivity. As we have already cited, the instances where SYSMIN (primitively, STABEX) funds could only be used by the mining sector if the funds were still in state hands. The figures cited on actual STABEX use are not very reliable, but they might be indicative of orders of magnitude. About one quarter of transfers was said to be channelled to producers of the raw commodity (more so in the later years of STABEX when it became heavily conditioned on being a further form of project aid) and rather less than that for diversification. On the other hand, well over one third was channelled through national commodity boards and Caisses de Stabilization – bodies that have mostly, nowadays, been abolished owing to their inefficiency (though often leaving a vacuum unfilled by private sector operators). So long as the sector is in long-term decline and confronting permanent changes of income rather than merely fluctuations, it would seem unwise to argue against diversification as the main use of the funds after the balance-of-payments effect has been met. This is especially the case if the country’s economy is heavily dependent, as remains the case in subSaharan Africa’s commodity trade with Europe: this is hardly likely to change if EPAs are implemented in primary fashion, unless services develop more rapidly. But, because STABEX failed to distinguish between forms of market intelligence failure – short-term fluctuations in earnings – and fundamental, even secular, decline, the scheme fudged the issue and proceeded (in


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an often very inefficient way) to subsidize or reward failure. It hardly ever achieved the romantic objective of putting resources in the hands of farmers when they were suffering from bad weather or unfavourable world prices: cue for Sarkozy’s Senegal university speech. Modern forms of communication, such as mobile phones, supplying market intelligence do that much more effectively nowadays. Lastly, STABEX never became a self-financing scheme. In fact, it went in the other direction, eliminating its loan element and wiping clean the debt of the few eligible ACP countries early on. This condemned it to being, essentially, an aid allocation mechanism with a trade based trigger. It also meant that when member state governments turned against it, as they did in the 1990s, they would simply turn off the tap. STABEX and its successor no longer feature in the negotiations for Economic Partnership Agreements (EPAs), even though the trade reciprocity element will leave many ACP countries fiscally vulnerable. For instance, tariff income is 75 per cent of government revenue in the case of Guinea; for Lesotho, tariff revenues under the SACU arrangements represent 33 per cent of GDP. This is in strong contrast to the OECD countries that have eliminated their reliance on trade taxes: here, in Europe, they constitute an average 0.37 per cent share of GDP. There could still be scope for smoothing measures to facilitate the transition to lower dependence on trade taxes. The Côte d’Ivoire could be a warning beacon, for it was rapid fiscal restructuring that helped promote the collapse of the country into northern and southern factions. However, the direction of travel is clear. Both European Commissioners (Peter Mandelson and Louis Michel) signed open letters at the end of the EPAs negotiations asserting that their objective for the ACP was to ‘break their dependence on trade preferences and basic commodity trade’. ‘The Economic Partnership Agreements …are designed …[to] take a trading relationship based on dependency and turn it into one based on economic diversification and growing economies.’ There is no obvious opening for commodity revenue management schemes under this scenario; so politically, too, STABEX and its successors seem to have served their time and, perhaps, their purpose. Even in UNCTAD’s own 2007 Trade and Development Report, high commodity prices are given as the main reason for developing countries’ growth last year, and for their differential growth with respect to developed countries, so that they now account for 37 per cent of global trade (with some becoming net exporters of capital as a result). However, pride comes before a fall, especially in commodity market trades, and in the concluding section we attempt to determine whether both the recent high levels of commodity prices and the high pledges of aid (including Aid-for-Trade) from some donors and the renewed involvement of donors that are not members of the Development Assistance Committee (of the OECD) and national wealth funds will create an enabling environment where innovative compensatory finance mechanisms might be revived.


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A time when many commodity market prices have recently fallen from alltime peaks (for grains, as well as minerals and metals) and when the world is confronted by financial instability and recession ought to be a suitable moment to concentrate the mind of consumers and intermediaries on devising stabilization schemes for producers and for markets appropriate for the twenty-first century. Additionally, there are now new funding availabilities arising from increased aid and debt relief, from unfulfilled Aid-for-Trade pledges, and through the fashion for vertical funds. More aid resources are being directed towards Africa and the more narrowly commodity-dependent. A former French Foreign Minister, Phillipe Douste-Blazy, has even been appointed Special Adviser to the UN Secretary-General, Ban Ki-Moon, for Innovatory Sources of Development Finance. However, the obvious pegs for compensatory finance schemes are no longer present. The international commodity agreements that operated through buffer stocks and other direct forms of market intervention (in tropical beverages and in metals such as tin) are now all defunct. The Sugar Protocol has recently been denounced by its consumers. Within the donor perspective, direct budget support for reforming governments whose overall policies are trusted to be market friendly has overtaken the desire to institute schemes paying out according to arithmetic or geometric formulae to all eligible governments. If stability in the incomes of poor farmers, let alone those of poor miners, remains the problem, this can be better addressed, goes the argument, by indirect methods such as better communications providing reliable forecasts and market intelligence, better access to credit, forms of social protection and – though this is also costly – farmers’ insurance schemes. Moreover, the institutions that backed and invented the schemes are themselves undergoing major change. The IMF’s own business model was being questioned in 2007/08: most of its major borrowers had paid down their loans early and its revenues have begun to dry up. At the end of 2007, the incoming managing director agreed attrition affecting 15 per cent of its establishment as a condition for US support; many of its senior people took early retirement. It found itself dealing more with small developing countries and sub-Saharan Africa, as the debts of Latin America, Turkey and the Philippines are paid off in advance, and as rapidly growing countries in Asia and the Middle East developed extensive foreign exchange reserves, and even sovereign wealth funds, that far outstrip the IMF’s own availabilities and power to influence financial markets. They had decided, after the 1997 Asian crisis, that they would not rely on the IMF again. Yet, after the 2009 London Summit, the IMF returned with not merely the promise of trebled resources but new counter-cyclical tasks to perform on the international stage, and this with a management reform (in terms of representation from countries such as China, let alone


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developing countries) that, ignoring the March 2008 recommendations of the Trevor Manuel panel, is still proceeding at a snail’s pace. Its newest scheme, the Trade Integration Mechanism (TIM), is a lending facility with few of the characteristics of compensatory finance of the past though, in providing funding at a time of overall shortfalls, it is a useful underpinning of the Fund’s own Poverty Reduction and Growth Facility (PRGF). The vision of Managing Director Dominique Strauss-Kahn is to concentrate on dealing with external financial shocks and bringing to bear the assistance needed, and he anticipates a bigger role (and voice) for Africa in the Fund in future. However, there is also a sense that Western countries’ need for regular supplies of many commodities is less pressing now, and China has yet to take up its position in the international institutions to make the interventionist case even though, before it became the main user of commodities, China used to side religiously with the G77. It continues to use its financial stabilization funds more overtly to tempt governments that recognize Taiwan (such as Malawi and Costa Rica) back into the majority fold. The World Bank is also inclined to steer clear of dirigiste schemes and seek out market friendly alternatives when dealing with commodity price and earnings risk management. The Bank set up a task force and developed a pilot of a market based international commodity price insurance mechanism, with price floor guarantees for producers and exporters, and price ceiling guarantees for buyers. It has been tried in West African agriculture but the dilemma remains how to fund the costly insurance premiums, especially for poor producers. If it were easy to do then, as with crop insurance in developed countries, it would be have been done already. Yet, it remains the case that, in developing countries, the private sector cannot cope on its own. Whereas the Bank President favours new developments to manage high food prices (such as investors from the Gulf moving into grain production in countries such as Sudan and Ethiopia), the FAO, through its leader Mr Diouf, saw this as short-term mercantilism and an unequal relationship that smacked, bizarrely, of Arab neo-colonialism (Blas 2008). On the other hand, the Bank recognized recently that many of its HIPC and Enhanced HIPC debt relief targets were being missed because of the failure of commodity markets to guarantee revenues of many of their African target countries, so the Bank remains within the frame for new thinking. Its biggest effort for the least developed countries in this area has been in refining (with the UN and the WTO) the Integrated Framework through trade diagnostic studies that identify the bottlenecks that prevent the full growth potential of trade from being realized. These are then largely addressed through trade facilitation measures, though with some targeted budget support that could be more closely attuned to compensatory finance. This is likely to apply more obviously to countries whose export economy needs restructuring than to those encountering temporary shortfalls. However, the Bank is beginning to distance itself from the Enhanced Integrated Framework, too. On the other


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hand, immediately before the London Summit in April 2009, World Bank President Robert Zoellick suggested a Vulnerability Fund – a mechanism to channel money from wealthy countries to poorer ones to enable them to fund deficit spending in a recession – a further evolution of bank thinking returning to counter-cyclical instruments such as commodity-linked compensatory finance. For the EU, compensatory finance has not featured in the long-running negotiations with the ACP on Economic Partnership Agreements. This is partly because the EU’s perception of WTO rules prevents the ACP being treated as a bloc any longer (for political reasons, too: immediately before the EPA deadline, the EU held an Africa summit in Lisbon (2007), to the consternation of the Pacific and the Caribbean ACP members). Instead, the EU divided the ACP into six negotiating regions. For trade purposes, a distinction is being drawn between least developed countries and other lowor lower-middle income countries. As a result, a revival of STABEX/SYSMIN has not even featured in the alternative proposals from the ACP to counter the EU’s insistence on (phased, asymmetrical) trade reciprocity, even though EDF monies are assumed to be available independently of the final outcome of the trade negotiations. Within the EU, the UK, Germany and many of the recently joined member states in central and eastern Europe are opposed to compensatory finance schemes for poor countries – although France, in particular, continues to be favourable. The most useful ongoing work on innovative compensatory finance scheme continues to be done by UNCTAD. Five years ago, their eminent persons group reported recommending an international scheme that now seems quite idealistic, as it embodied: • Automatic payouts according to specific triggers • Ease of access regarding technical requirements (to avoid the delays that

caused most schemes in the past to become pro-cyclical, despite best intentions) • No conditionality • A pass-through mechanism to benefit producers directly. A refinement of the eminent persons group’s scheme is now going before the Committee on Trade and Commodities, with even more ambitious aims. Appropriately – given the recent price inflation of rice, wheat and other food grains (some of it driven by competing biofuel subsidy) – it is to include food import stresses (as was the case with the CFF), as well as export earnings losses (as was the case with STABEX). It will retain the desired automaticity and passthrough mechanisms, yet aims to be entirely self-financed, by loan finance rather than grants. It might allow targeting of the balance of payments as well as vulnerable producers and, as such, would be a hybrid of the two original schemes.


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Until the US banking crisis began in the last part of 2007, there was probably not enough political will to advocate such a scheme, even from Europe, from where Aid-for-Trade monies could be diverted to provide the initial loans, or from Asia (including the Middle East) where surpluses and wealth funds are looking for appropriate uses. However, even the UK, in June 2008, issued a paper on commodities where the Chancellor of the Exchequer specifically emphasized the national interest in ensuring stable, secure and sustainable commodity markets. The paper went on to advocate some cooperation through international trade and financial institutions to secure this. The Commonwealth’s finance ministers, meeting in Georgetown Guyana in October 2007, expressed concern about the impact of (then high) commodity prices on developing countries and stressed the importance if initiating a producer-consumer dialogue and instituting eventual support measures. They recalled the ‘special measures’ implemented during the oil price shocks in the 1970s and requested the Commonwealth Secretariat to make proposals. Moreover, whereas, at the end of the century, commodity production was predominantly in private hands, recent years have seen a return of state corporations reasserting control over national and even international assets, particularly in the case of Russia, Venezuela and some Gulf States. The position of China, and even Singapore, is more mixed: in the OECD the private sector is dominant – though even in states such as France and the USA certain sectors are declared strategic, and rules invented to allow national preference. Compensatory finance might be seen by some as a means of stemming this tide by offering guarantees of stability to private producers. For others, there is a global interest in using international public finance for economic stabilization purposes; that, in itself, is an international public good. It is time to dust off the old blueprints, learn lessons from our mistakes, pay heed to environmental as well as economic stability, and create an appropriate revolving stabilization fund as a self-financing entity, with an optional aid element for poor county participants. After all, compensatory finance has never worked properly because it has never been properly tried.

References


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Blas, Javier (2008) ‘Foreign Fields: Rich States Look Beyond their Borders for Fertile Soil’, Financial Times, 19 August, London. Commission of the EU (2007) ‘An Open letter to Anti-Poverty Campaigners from EU Trade Commissioner Peter Mandelson and EU Development Commissioner Louis Michel’, Brussels. Commonwealth Secretariat (2004) ‘Commodity Prices, Aid and Debt: Implications for LDCs, Small Vulnerable States and HIPCs’, Economic Paper, 72, London. Dercon, Stefan (ed.) (2005) Insurance Against Poverty (Oxford: Oxford University Press).



Griffith-Jones, Stephany and José Antonio Ocampo (2009) ‘Compensatory Financing for Shocks: What Changes Are Needed?’, Mimeo, Initiative for Policy Dialogue, Columbia University, New York. Guillaumont, Patrick (2000) On the Economic Vulnerability of Low Income Countries (Clermont Ferrand: CERDI). Hewitt, Adrian (1987) ‘Stabex and Commodity Export Compensation Schemes: Prospects for Globalisation’, World Development, 15(5). Hewitt, Adrian (2007) Options for Tackling the Commodity Price Problem (Winnepeg: International Institute for Sustainable Development). HM Treasury (2008) Global Commodities: A Long-Term Vision for Stable, Secure and Sustainable Markets, June, London. IMF (2008) ‘Letter by Richard Uku, External Relations Dept’, in the Financial Times, 4 January. Lambrechts, K. (2009) Breaking The Curse: How Transparent Taxation and Fair Taxes Can Turn Africa’s Mineral Wealth Into Development (London: Christian Aid). Le Monde (2008) ‘Philippe Douste-Blazy trouve “une porte de sortie” a l’ONU’, available at www.LeMonde.fr, dated 22 February, Paris. Lim, David (1991) Export Instability and Compensatory Financing (London: Routledge). London Summit Communiqué (2009) No. 10/Prime Minister’s Office, London. Maizels, Alfred (1992) Commodities in Crisis (Oxford: OUP). Page, Sheila and Adrian Hewitt (2001) World Commodity Prices: Still a Problem for Developing Countries? (London: ODI). Sindzingre, A. (2007) ‘Financing the Developmental State: Tax and Revenue Issues’, Development Policy Review, 25(5). UNCTAD (2003) Eminent Persons’ Review of Compensatory Finance, TD/B 50/11, 3 September 3 (UNCTAD: Geneva). UNCTAD (2007) World Investment Report (Geneva: UNCTAD). UNCTAD (2007) Economic Development in Africa: Reclaiming Policy Space (Geneva: UNCTAD). UNCTAD (2008) Trade and Development Report (Geneva: UNCTAD). Wade, Robert Hunter (2004) ‘Is Globalisation Reducing Poverty and Inequality?’, World Development, 32(4).


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11 ‘The Bottom Billion’: A Critique and Alternative View

In his book, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It?, Paul Collier argues that the core development challenge of the new millennium is the failure of the growth process in the poorest countries in the world. These countries are ‘falling behind, and often falling apart’ (Collier 2007: 3), and ‘if nothing is done about it’, he writes, ‘this group will gradually diverge from the rest of the world economy over the next couple of decades, forming a ghetto of misery and discontent’ (ibid.: xi). He identifies 58 countries in the group, including most countries in sub-Saharan Africa, as well as Bolivia, Cambodia, Haiti, Laos, Myanmar and Yemen, and much of landlocked Central Asia. The population of the group together numbers almost one billion. His book is concerned with why the growth process is failing in these bottom billion countries (BBCs) and what can be done about it, particularly by G8 countries. The book has been highly influential. The UN Secretary-General, Ban KiMoon, has stated in various speeches, including at UNCTAD XII, that 2008 should be ‘the year of the bottom billion’. Simon Maxwell, ex-Director of the London-based Overseas Development Institute has described the book as ‘a master-class in bridging research and policy’ (Maxwell 2008: 113). The book makes a strong case for international development cooperation that is based on the self-interest of rich countries rather than moral solidarity alone. It is written in very clear, robust language without technical jargon and laced with spicy personal anecdotes. It is also underpinned by a series of econometric analyses, and punctuated by startling numbers that confidently quantify the costs and benefits of action and inaction. For example, the average civil war is estimated to cost poor countries US$64 billion and to increase the numbers of people living in absolute poverty by about 30 per cent. The policy recommendations of the book challenge some sacred cows, such as the idea that the introduction of a democratic regime will automatically lead to development. But they also reinforce donor preferences to focus aid on fewer countries and on the poorest of the poor, to use aid to promote ‘good’ policies and institutions, to widen development


Charles Gore1


‘The Bottom Billion’: A Critique and Alternative View

cooperation instruments beyond aid, and to link development with military security. This chapter argues that Collier has rightly identified an important problem – namely, that the poorest countries in the world are trapped in a cycle of economic stagnation and persistent poverty – but his analysis of this problem is deeply flawed. There are already some powerful critiques of Collier’s work – notably Cramer (2006), which questions the rational choice theorization of civil war that animates an important part of the analysis in The Bottom Billion, and Easterly (2008), which questions the technical validity of the analysis and its heavy reliance on cross-country regressions. Detailed points regarding Collier’s specific policy prescriptions are raised in Maxwell (2008) and in Leonard and Haddad (2008). This chapter focuses on the conceptual underpinnings of Collier’s analysis and, in particular, the relationship between globalization, commodity dependence and poverty. It also puts forward an alternative view of the problem of the poorest countries that is rooted in three concepts: the international poverty trap, blocked structural transition, and the interrelationship between polarization and marginalization in the global economy. The alternative view draws on the research and policy analysis elaborated in UNCTAD’s Least Developed Countries Report (UNCTAD 2002, 2004, 2006). The least developed countries (LDCs) (49 countries whose inhabitants together number 785 million) are not exactly congruent with the BBCs, but many of the LDCs, particularly those that have been unable to diversify out of commodity dependence, are characterized by high and persistent levels of extreme poverty and long-term economic stagnation. Without splitting hairs on how many countries are trapped in poverty in this way and how large their population is altogether, the analysis of why this is so in the LDCs provides a different perspective on the same problem that Collier addresses when he focuses on the BBCs.

Collier’s argument and its conceptual underpinnings Collier’s argument Collier’s argument can be summarized as follows: First, most developing countries are achieving catch-up growth and their average income per capita is converging with that in rich countries. Economic growth in these countries is reducing poverty and leading to human development. However, there is a group of countries, in which a billion people are living, that are not converging. The growth failure of these countries is the heart of the problem of global poverty. Second, the failure of the BBCs to converge is not due to the fact that these countries are stuck in a poverty trap. Rather, it can be attributed to the


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fact that they are stuck in one or more of four distinct types of trap. These traps are: A conflict trap A natural resource trap The trap of being landlocked, resource scarce and with bad neighbours The trap of bad governance and policies.

‘Some countries have been in more than one trap, either sequentially or simultaneously’ (Collier 2007: 79). Of the people living in the 58 bottom billion countries, 76 per cent have been through a prolonged period of bad governance and policies, 73 per cent have been through civil war, 30 per cent are landlocked, resource scarce and in a bad neighbourhood, and 29 per cent are in countries dominated by the politics of natural resource revenues. Third, you cannot count on globalization to help the bottom billion because ‘to get a chance to play in the global economy, you need to break free of the traps’ (ibid.: 95). Some BBCs have broken free of the traps from time to time. But globalization is making it more difficult for countries that have emerged from the traps to achieve catch-up growth and so ‘even when free of traps they sit in limbo, growing so slowly that they risk falling back into the traps before they can reach a level of income that ensures safety’ (ibid.: 99). This is because competition with China and India has made export diversification more difficult, because capital flight has become easier with global financial integration and because emigration of skilled people has become more feasible as diasporas from the bottom billion have become established in the West. Fourth, international development cooperation should be focused on the BBCs (rather than on developing countries as a whole) but deploy a wider range of instruments than official aid. The smart use of aid should be to support domestic reformers when there is a political opportunity for change; for example, in post-conflict situations. But development cooperation should involve much more than aid, including, in particular, military intervention; charters to ensure better accounting for, and use of resource revenues; and non-reciprocal trade preferences within the context of the World Trade Organization (WTO) to help the BBCs achieve a competitive advantage in relation to the Asian NIEs, China and India.


• • • •

The conceptual underpinnings of the argument Collier’s analysis of the phenomenon of the bottom billion is rooted in a broader conceptual framework that inter-relates globalization, growth and poverty. The analysis can best be understood as building on two World Bank policy research reports, one, Globalization, Growth and Poverty (World Bank



2002), which Collier co-authored with David Dollar, and the other, Breaking the Conflict Trap (Collier et al. 2003), which was written by a team led by Collier. The Collier/Dollar report focuses on what it calls the ‘third wave of modern globalization’ which occurred during the period since 1980, as opposed to the first wave (1870–1914) and second wave (1950–1980), and its central argument is that ‘during this period the long trend of rising global inequality and rising number of people in absolute poverty has been halted and even reversed’ (World Bank 2002: 50). This has occurred because: ‘Globalization generally reduces poverty because more integrated economies tend to grow faster and this growth is widely diffused’ (ibid.: 1). However, within the overall trend there is an important difference. About 3 billion people live in ‘newly globalizing’ developing countries where the population is benefiting from globalization, whilst ‘many poor countries – with about 2 billion people – have been left out of the process of globalization. Many are becoming marginal to the world economy, often with declining incomes and rising poverty’ (ibid.: 2). This argument draws on an approach to understanding patterns of international development in which the critical variable that matters is whether countries adopt a particular policy regime. The approach is based on stylized comparisons between countries that have variously been described as ‘open’ versus ‘closed’, ‘outward-oriented’ versus ‘inward-oriented’, or ‘globalizers’ versus ‘non-globalizers’. This language was first used in international development policy analysis by UNCTAD, when it argued that ‘inwardoriented industrialization’ has its limits and that developing countries that are industrializing need to cultivate export-mindedness and promote exports of manufactures (UN 1964). But, as the distinction between inward-oriented and outward-oriented entered the mainstream in the 1980s and 1990s, the earlier nuance that it was to do with the form of industrialization was lost, as was the idea that a country could be outward-oriented and also have active state policies to promote development at the same time. Instead, governments were supposed to face a stark choice between ‘good’ and ‘evil’ – between a dirigiste inward-oriented policy on the one hand, and a laissezfaire (or market friendly) outward-oriented policy on the other. To ensure economic growth and poverty reduction in the new context of globalization, governments in developing countries should adopt the right national policies, which were essentially the stabilization, liberalization and privatization package of the Washington Consensus throughout the 1980s and 1990s, supplemented with various governance reforms and social programmes to ensure poverty reduction during the current decade. Collier further refines the analysis of the countries that are falling behind in Breaking the Conflict Trap (Collier et al. 2003). This book reduces the population of the countries that are being left out of the benefits of globalization from 2 billion people to about 1 billion. This radical change arises


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as developing countries are now divided between ‘successful developers’ and ‘marginalized countries’, with the latter including all low-income countries that had low scores during the 1990s on the World Bank’s Country Policy and Institutional Assessment (CPIA) Index, which measures the goodness of a country’s policies and institutions. Marginalized countries are clearly identified as ‘low-income countries that have been unable to adopt and sustain policies and institutions conducive to development’ (ibid.: 5). This is, of course, policies and institutions that are conducive to development according to the World Bank. The average level of income of these marginalized countries is one third that of the successful developers, and their growth rate in the 1990s has been −1 per cent per annum. In addition, ‘they remain stuck in undiversified primary commodities’ (ibid.: 101). Collier examines the global incidence of civil war and finds that it is in these marginalized countries that violent civil conflict is concentrated. Indeed, the risk of civil war is ten times higher in these countries than in successful developing countries. Doubling their per capita income would halve the risk of rebellion according to Collier, but global growth is not effectively acting as a force for peace in these countries because it is not reaching them. In these circumstances, the prognosis is bleak. Conflict is development in reverse in the sense that it results in massive economic losses. It is a trap because ‘once a country stumbles into civil war, its risk of further conflict soars’ (ibid.: 4). Thus: ‘The world is evolving into a state in which most countries are permanently conflict free while a minority are trapped in a cycle of lengthy war, uneasy peace and reversion to lengthy war’ (ibid.: 108). With this analysis, the idea is introduced that the best way to see the world is not on a divide between developed and developing countries (North–South divide or centre- periphery divide), but rather as a 1:4:1 divide. That is to say, there are one billion people in developed countries, four billion in developing countries that are successfully developing and one billion in countries that are falling behind and falling apart. The successful developing countries are 71 countries, whilst the marginalized countries, which are identified as low-income countries with bad policies and bad institutions, number 52 countries. The Bottom Billion (Collier 2007) tinkers a little further with this number, increasing them to 58. It also adds to the conflict trap, the natural resource trap, the trap of being landlocked, and the trap of ‘bad policies and institutions’. But the underlying conceptual framework remains the same.


Charles Gore

Weaknesses of the conceptual framework The disappearance of the issue of commodity dependence Understanding development trends in terms of whether countries are ‘globalizers’ or ‘non-globalizers’ has been the mainstream policy narrative for



understanding international development in a global context since the mid1980s. This narrative superseded and negated an earlier policy narrative of global development that focused on the problems of countries that were commodity dependent and facing declining and very volatile terms of trade. This earlier narrative, which was elaborated by UNCTAD on the basis of United Nations Economic Commission for Latin America and the Caribbean (ECLAC) analysis, argued that it was impossible for developing countries to achieve the international development targets of the 1960s (a minimum annual growth rate of 5 per cent growth by 1970) given the then existing national and international policies. This was due to the fact that developing countries were, at that time, exporters of primary commodities and importers of manufactures. Given the relatively slow growth of primary exports in relation to industrial imports, and the tendency for the barter terms of trade of commodity exporters to decline, export growth of developing countries was not sufficiently swift to meet import needs, and unsustainable external indebtedness was building up. Slow economic growth also was leading to social tensions that were rooted in the inability to create sufficient employment opportunities or sufficient upward social mobility (see UN 1964; UNCTAD 1968). The solution to this situation, according to the UNCTAD Reports, had to be a partnership of national and international policies – a global strategy for development. Many creative policy proposals were put forward, including special trade preferences, uses of aid to promote trade, and an international commodity policy. But this analysis also led to a heterodox view of trade liberalization. In short, because of their structural differences, reciprocal trade liberalization between commodity-dependent and industrial economies would not lead to maximum expansion of trade but, rather, exacerbate imbalances and, in particular, the balance of trade difficulties of the commodity-dependent economies. The principle of reciprocity should not therefore be applied in multilateral trade liberalization. Special and differential treatment was necessary because equal treatment between structurally unequal partners would lead to unequal outcomes. Full trade liberalization was an ideal that should come later for developing countries. Their industrialization (and development of competitive industries) was a necessary precondition for worldwide trade liberalization and the universal application of the principle of reciprocity to work. It is within this older approach to international development, which was always outside the mainstream, that Alf Maizels undertook research and made policy proposals. However, by the early 1980s, when he retired, changes in the real world were making this approach – which is founded on the structural differences and particular forms of interdependence between centre (industrial countries) and periphery (commodity-dependent countries) – more difficult to sustain as empirically relevant. In 1981, UNCTAD’s Trade and Development Report identified three main components of a new form


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of global interdependence that, together, were rendering the old centreperiphery image obsolete. These changes, which later became identified as key elements of the phenomenon of globalization, were: • The internationalization of output and trade through the rise of trans-

national corporations. • Increasing importance of international private capital flows and the

alization progressed in a few developing countries, particularly those that built on import substitution industrialization to promote exports of manufactures. (UNCTAD 1981) These trends deepened over the next 25 years. As the share of primary commodities (including fuels) in total developing country exports fell from around 73 per cent in 1980–1983 to 33 per cent in 2003–2006 (UNCTAD 2008a), it became impossible to sustain the old centre-periphery view of the world. With these changes, the old approach – which was, in any case, never fully accepted in the mainstream – was totally marginalized. But a key weakness of the new globalization approach, which came to be the main new policy narrative, is that the issue of commodity dependence simply evaporated. The old narrative, in which structural transformation was the key to development, was simply replaced with the new narrative in which spatial integration was the key. In Globalization, Growth and Poverty, Collier and Dollar note that the exports of the countries that ‘are not participating strongly in globalization … are usually confined to a narrow range of primary commodities’ (World Bank 2002: 6–7), which makes them prone to terms of trade shocks and which also increases the risk of civil war. In addition, at one or two places in the text there is a slippage between the idea that being left out of the process of globalization is not a failure to integrate into the global economy but, rather, a failure to integrate into the global industrial economy. But the implications of this shift, which require much further exploration of how commodity dependence works in this third wave of globalization, are not explored. In fact, there is strong evidence that the approach that distinguishes globalizers as winners and non-globalizers as losers seriously mis-specifies the importance of commodity dependence. The Collier/Dollar policy research report draws, in particular, from the analysis of Dollar and Kraay (2001), which finds that ‘the poor countries that have reduced trade barriers and participated more in international trade over the past twenty years have seen their growth rates accelerate’. But, in an important article that dissects Dollar and Kraay’s work, Birdsall and Hamoudi (2002) argue that ‘Dollar and Kraay have not isolated the benefits of “participating in the global economy” but rather “the curse of primary commodity dependence” ’ (ibid.: 5).


globalization of finance. • The emergence of a new international division of labour as industri-



They come to this conclusion because they show that there is a close overlap between countries classified as ‘globalizers’ and ‘non-globalizers’, on the one hand, and between ‘least-commodity-dependent’ and ‘mostcommodity-dependent’ countries, on the other hand. Only two of the most commodity-dependent countries are classified as ‘globalizers’. They also show that the apparent trend in the level of trade integration as measured by the trade/GDP ratio (which is the key indicator of openness and good global integration policies) can be best explained by changes in the composition of world trade and in the structure of world prices. As they put it: Until the 1980s, the ‘non-globalizers’ [most commodity-dependent countries] had higher trade/GDP ratios than the ‘globalizers’ [least commoditydependent countries] because the prices of their exports were relatively high. Given their expected export revenue stream, they were able to finance modest and growing trade deficits. In the early 1980s, when the prices of their primary commodity exports collapsed suddenly, their export revenue and capacity to import collapsed as well. Meanwhile the relative prices of manufactured exports of the globalizers have increased, so they appear to have grown more open. (Ibid.: 4) They also find that changes in the trade/GDP ratio could not be explained by trade liberalization. Their evidence suggests that the most commodity dependent countries were not able to achieve an increase in their trade/GDP ratios whether they cut tariffs steeply or not, whilst the least commoditydependent countries saw increases of their trade/GDP ratios whether or not they cut tariffs. Finally, they find that the most commodity-dependent countries grew much more slowly in the 1980s and 1990s than the least commodity-dependent countries. In short, Birdsall and Hamoudi (2002) argue that the whole analysis is mis-specified. As they starkly put it: Countries with high natural resources and primary commodity content in their exports are not necessarily ‘closed’; neither have they necessarily chosen to ‘participate’ more in the global trading system. For them, reducing tariffs and eliminating non-tariff barriers to trade may not lead to growth. In this context, terms like openness, liberalization and globalization are red herrings. (Ibid.: 5–6)


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The problem of methodological nationalism One positive feature of The Bottom Billion is that it does seek to integrate the primary commodity problem more closely into the analysis. There is a ‘natural resource trap’, even though it is numerically the least important trap. Moreover, commodity dependence is implicated, along with low-income


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and slow growth, as a key factor in the conflict trap. As Collier argues, ‘dependence on primary commodity exports – oil, diamonds and the like – substantially increases the risk of civil war’ (Collier 2007: 21). However, whilst the commodity issue is treated more fully, a critical weakness of Collier’s treatment is that persistent economic stagnation is not treated as the interplay between national and international processes but, rather, it is attributed to national factors and, in particular, national policies and institutions. Thus, the natural resource trap is related in particular to difficulties of managing resource wealth – in particular, dealing with Dutch disease and ensuring that volatile revenues are well used – as well as the expectation that large resource rents lead to bad governance. In this regard, Collier not only asserts that large resource rents make countries prone to autocracy, but that they also make democracies malfunction because large resource rents weaken political constraints on the use of power. Similarly, natural resources not only help to finance conflict, but also motivate it as a stake over which rival groups struggle. This analysis is rooted in a view of the world that sees poverty in the BBCs as something that is external to globalization and the way the global economy works. Globalization should reduce poverty, but it is not doing so in the BBCs because ‘to get a chance to play in the global economy, you need to break free from the traps’ (ibid.: 99). The analysis of the traps is thus separated analytically from the process of globalization. This is actually written into the structure of the book as there is a distinct section inserted in the text after the delineation of the traps entitled ‘An Interlude: Globalization to the Rescue?’ In this section, Collier does make it clear that globalization matters, but it does so once countries emerge from the traps. A consequence of this analytical approach is that stagnation and poverty are seen to be the result of features of the poor countries themselves, rather than the result of the actions of rich countries, or of the way in which the global economic system works, or of asymmetries in the design of global institutions. As the back-cover summarizes, the issues of corruption, political instability and resource mismanagement lie at the root of the problem of the BBCs. Although it is against their national interests, ‘trade protection has been the ostensible strategy of bottom-billion governments for forty years’, Collier argues (ibid.: 160). Moreover, ‘many of the politicians and senior public officials in the countries in the bottom billion are villains’ (ibid.: 66–7). The idea that public officials in one part of the world are more villainous than in other parts of the world is ludicrous. However, beyond this stereotyping, a basic problem with this analysis is that it fails to recognize the extent of economic reform that has taken place in BBCs. Reform denial is factually wrong (see p. 279 for LDCs). However, it is necessary to uphold it in order to sustain the illusion that globalization is working when the right Washington Consensus policies are in place. This fails to entertain the possibility that the stagnation of the BBCs is actually partly due to the adoption of these policies,


Charles Gore



often through the persuasive power of aid linked to economic reform, in an economic environment for which they are totally inappropriate. But there is a deeper conceptual problem with the analysis. The problem is that, in order to see poverty as a residual phenomenon in this way, it is necessary to have a form of explanation that attributes national trends to national factors and in particular national policies.2 This form of explanation, which I have called methodological nationalism (Gore 1996), is wired into the crosscountry regression analysis on which Collier bases his argument. But it is only logical in a world in which there is no interdependence amongst countries (Gore 2000). But globalization implies that what is happening within countries is increasingly related to what is happening elsewhere. It is, thus, logically impossible to explain poverty in a country by national and local factors alone. Rather, it is necessary to elaborate some form of international analysis of poverty. This does not mean that national factors and national policies do not matter, or that national trends can be wholly explained by ‘external factors’. Rather, it is necessary to have a form of explanation that inter-relates national and international factors in the explanation of national trends. From this perspective, stagnation and poverty in very poor countries is an integral aspect of how the global system is working, rather than a residual phenomenon. Globalization is an essential aspect of the situation. But globalization does not cause poverty. Rather, it necessitates a shift in analytical perspective so that the ways in which international relationships are implicated in poverty processes at the national level becomes an integral part of the analysis. The precise way in which those relationships are implicated depends on the form of globalization.

Elements of an alternative approach The international poverty trap Some contrary evidence from LDCs If one turns away from the BBCs and focuses on LDCs, it is clear that Collier has identified an important problem. Many LDCs are characterized by high levels of extreme poverty; this is due to a long-term growth failure. Available poverty estimates suggest that these countries will become the primary locus of US$1-a-day poverty after 2015 (UNCTAD 2002). However, there are certain patterns and trends during the period 1980–2000 that do not conform to what one would expect from Collier’s analysis. First, the long-term growth failure may not be attributed to the low level of integration of LDCs into the global economy, or to their failure to undertake policy reforms. Even though LDCs are marginalized in the world economy in terms of their participation in total world trade, exports and imports of


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goods and services were equivalent to 51 per cent of their GDP during 1999– 2001 (UNCTAD 2004: table 26). Moreover, although countries have gone at different speeds and to different lengths, it is clear that two thirds of the countries have been undertaking extensive and deep liberalization programmes, including trade liberalization, since the late 1980s, and that, by 2002, they had more open trade regimes than other developing countries (see UNCTAD 2004, ch. 5). The evidence also shows that poverty reduction between the late 1980s and late 1990s was not closely related to the degree of trade liberalization that LDCs undertook in the 1990s. Indeed, the incidence of poverty is unambiguously increasing in both those economies that adopted the most open trade regime and those that have continued with the most closed trade regime. But, in between these extremes, there is a tendency for the incidence of poverty to be declining in those countries that have liberalized their trade regime to a lesser extent, and for poverty to be increasing in those countries that have liberalized their trade regime more. Second, amongst LDCs there is a close association between the incidence of extreme poverty and dependence on primary commodities. The share of the population living in extreme poverty is highest in those that depend on primary commodity exports. Poverty rates were also increasing in these countries during the period 1980–2000. UNCTAD (2002) estimates that the percentage of people living on less than US$1 a day in non-oil commodity exporting LDCs has risen from 63 per cent in 1981–1983 to 69 per cent in 1997–1999. Poverty rates were rising particularly in mineral dependent economies. In contrast, poverty rates were falling in those countries that have diversified out of primary commodity exports (Figure 11.1). These trends in poverty are related to the long-term growth failure of commodity-dependent LDCs. This does not mean that these countries have not experienced some periods of rapid growth. In fact, most have had short growth spurts followed by an economic collapse of some sort, which might be triggered by a natural disaster or some kind of external shock, and then long periods of economic stagnation and recession. In the non-oil commodity exporting LDCs, average real per capita income was lower in 1999 than in 1970, and there was strong divergence between their per capita income and that of the richest countries (Figure 11.2). Much less divergence can be observed between the richest countries and LDCs that have diversified into manufactures and/or services. Third, civil conflict has been an important factor affecting trends in LDCs during this period. UNCTAD (2004) estimates that 20 LDCs experienced civil conflicts during 1978–1989 and 30 during 1990–2001. But it is too simplistic to link conflict risk solely to primary commodity dependence, and conflict risk varies amongst the primary commodity-dependent LDCs depending on which primary commodities they export. Also, it is clear that the relationship between civil wars and poverty is more complex than Collier allows. When a civil war first breaks out, both domestic consumption and investment


Charles Gore


280 90

82

80

Percentage

70

63

67 69

64

68

63

61

65

60 48 48

50

44

40 30 28

30

40 41 43

25

10 0 Non-oil commodity exporters

Agricultural exporters

Mineral exporters

1981–1883

Manufactures Manufactures exporters exporters, less Bangladesh

1987–1989

Services exporters

1997–1999

Figure 11.1 The incidence of $1-per-day poverty in LDCs grouped according to export specialization, 1981–1983, 1987–1989 and 1997–1999 (share of total population) Source: UNCTAD (2002): fig. 36A.

40 35 30

Income gapa

Non-oil commodity exporting LDCs

25 20 LDCs

15 10 Manufactures and/or services exporting LDCs

5 0

1960

1970

1980

1990


20

2000

Figure 11.2 Trends in the income gapa between the world’s 20 richest countries and LDCs, 1960–1999 a The

income gap is the ratio of the average GDP per capita (in 1985 PPP dollars) in the world’s richest 20 countries to that of the LDCs and LDC subgroups. The sample of the world’s 20 richest countries varies over time. The averages are weighted by population. Source: UNCTAD (2002): fig. 35.


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The idea of an international poverty trap In seeking to make sense of these trends – and, in particular, the strong association between commodity dependence and the incidence of extreme poverty – the concept of an international poverty trap is very useful. This concept is based on the view that it is not commodity dependence per se that matters but, rather, the two-way interaction between commodity dependence and all-pervasive mass poverty, as well as the interaction between commodity dependence, the debt trap and aid dependence. The idea of the international poverty trap builds on the insight that countries can become caught in a poverty trap. This is an old concept. It was widely recognized by development economists in the 1950s, who spoke of a trap of underdevelopment (Nelson 1956; Liebenstein 1957). In the 1970s, more attention was given to the existence of poverty traps within countries, with the focus shifting to the question as to why poor people stay poor in countries that are experiencing sustained economic growth. But, recently, there has been a renewal of interest in the idea that poor countries can become stuck in a poverty trap. This has come from two sources: first, from analysis of convergence and divergence in global economy, where the concern has been to understand long-term growth failure in the poorest countries (see, for example, Ben-David 1998; Steger 2000; Mayer-Foulkes 2001); and, second, from new growth theory, where theorists are increasingly interested in the existence of multiple equilibria (Azariadis and Drazen 1990; Matsuyama 1991; Ciccone and Masuyama 1996; Graham and Temple 2001). Significantly, Jeffrey Sachs also placed the idea that countries can become caught in poverty traps at the heart of his analysis of global poverty, Africa’s development problems and also the strategy for achieving the MDGs proposed by the UN Millennium Project (Sachs et al., 2004; UN Millennium Project 2005). Collier rejects that idea that a country could be caught in a poverty trap at all. As he puts it, ‘Poverty is not intrinsically a trap; otherwise we would all still be poor’ (Collier 2007: 5). This certainly differentiates his analysis from that of Jeffrey Sachs, who has used the idea of the poverty trap to argue for a massive scale-up of aid organized around a big push to propel the poorest countries over certain minimum investment thresholds beyond which growth might be expected to be more sustainable. But Collier’s rejection of the notion of the poverty trap is based on a double standard on how the traps work. Collier rightly notes that one should not think of traps as being


normally decline. However, in episodes of conflict recurrence, trends are different. In LDCs, whilst private consumption per capita declines significantly during first conflict episodes, it was found to increase in subsequent episodes (ibid.: 168–73). What happens to poverty then depends particularly on changes in the entitlements of vulnerable groups. But, overall, it is clear that some economic actors increasingly simply get on with their business in situations where there is repeated conflict.



inescapable because ‘over the years some countries have broken free of them and then started to catch-up’ (ibid.: 5–6). But this standard is only applied to his four traps. The fact that some countries have escaped poverty traps means that the idea of the poverty trap is wrong. There is some empirical work that could buttress Collier’s scepticism that country level poverty traps exist. Both Kraay and Raddatz (2005) and Easterly (2005) criticize the idea on empirical grounds. But a close reading of those who are sceptical of the poverty trap indicates that their evidence is much less clear-cut than their conclusions, and is particularly related to the way in which Jeffrey Sachs has specified the trap. Kraay and Raddatz (2005) find that, although countries are not stuck in a poverty trap in terms of the theoretical mechanisms suggested by Sachs, their growth dynamics might well conform to ‘something that looks like a poverty trap over the medium term’ (Kraay and Raddatz 2005: 14). Similarly, Easterly (2005) shows that the growth rate of the poorest fifth of countries has not been statistically distinguishable from zero in the period 1980–2001; and that, in the period 1985–2001, it is also not significantly different from zero and is statistically significantly lower than the growth rate of all the other countries. This actually indicates the existence of a poverty trap. But he rejects it as supporting the idea of a poverty trap because he finds that almost one third of the poorest countries were richer in 1950 than 1985 (and thus ‘had gotten into poverty by declining from above rather than being stuck in it from below’, ibid.: 11), and because Sachs has linked the idea of the poverty trap to building a case for increased aid (and he finds that in this last period the poorest countries actually received more aid). Whilst both these observations are true, they do not negate the notion of the poverty trap. Indeed, as will be discussed later in this chapter, one of the key features of the present period is the co-existence of a poverty trap at the bottom of the global income distribution together with a tendency for downward mobility by countries that are initially richer and more developed. The earlier analyses, which have explained how countries can become caught in a poverty trap, remain important. However, they do not go sufficiently far because they focus on national factors that create a cycle of stagnation of poverty. With globalization, it is necessary to have a concept of the trap that goes further than a focus on national vicious circles and integrates international economic relationships into the picture. This is the idea of an international poverty trap. There are certainly vicious circles at national level that cause poverty to persist, but international economic relationships are implicated in these vicious circles. Moreover, different elements of the complex of external trade and finance relationships negatively interact with each other to reinforce the overall trap.


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The international poverty trap of commodity-dependent LDCs Figure 11.3 summarizes, in schematic form, the main elements and relationships of the international poverty trap within which commodity-dependent


Marginalization from private capital flows/ aid dependence

Political instability and conflict

Unsustainable external debt

Weak state capacities Rapid population growth

Low physical and human capital investment Terms-oftrade shocks

Generalized poverty Low savings

Environmental degradation

Low productivity

Slow export growth Weak corporate capacities

Narrow, static, low-value commodity dependence

The international poverty trap of commodity-dependent LDCs

Source: Based on UNCTAD (2002): fig. 41.


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Figure 11.3


Aid/debt service system


LDCs are enmeshed. On the left-hand side of the figure are found the main national vicious circles through which all-pervasive extreme poverty acts as a constraint on economic growth and, hence, itself causes poverty to persist. These vicious circles exist because these LDCs are societies where the majority of the population live at or below income levels sufficient to meet their basic needs, and the available resources even where equally distributed, are barely sufficient to meet the basic needs of the population. There is generalized poverty. Five main effects of generalized poverty are identified: • Domestic resources available to finance investment in physical and human

capital and productivity growth are low. • State capacities are weak as all activities, including administration and law

and order, are under-funded. • Corporate capacities – in business, finance, and support services – are weak,

even though there might be a thriving informal sector. • There is rapid population growth and environmental degradation. • The probability of political instability and conflict is high.

Low productivity, rapid population growth, environmental degradation, political instability and conflict, weak state capacities and weak corporate capacities, in turn, all serve to reinforce generalized poverty, directly and indirectly. On the right-hand side of the figure are the external trade and finance relationships that interact with these domestic cycles of stagnation and, together, cause generalized poverty to persist. Drawing on evidence for the period 1980–2000, four main international relationships are identified here as international aspects of the poverty trap: • Commodity dependence. • The build-up of unsustainable debt. • Marginalization from private capital inflows and, thus, dependence on

official aid for external capital. • The emergence of an aid/debt-service system.


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Most primary commodity-exporting LDCs are not simply primary commodity dependent, but also depend on a very narrow range of unproductive, undynamic and low value-added commodity exports. This export structure reflects low levels of investment in physical and human capital, as well as weak corporate capacities. The weakness of the primary commodity sector is, thus, rooted in the wider problem of low investment and low productivity that is characteristic of situations of generalized poverty and is at the heart of the international poverty trap.


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In these countries, the ability of international trade to act as an engine of growth and poverty reduction has been short-circuited by falling world commodity prices. At the end of 2001, real non-fuel commodity prices had plunged to one half of their annual average for the period 1979–1981. Large increases in export volume are not translating into large increases in export revenue and the capacity to buy imports. Falling real commodity prices lead to direct income losses, and the deterioration of the terms of trade tightens the foreign exchange constraint – which leads to reduced levels of capacity utilization, reduced efficiency of resource use and reduced levels of domestic investment. Commodity price volatility also has adverse effects on investment, and can precipitate growth collapses. It is possible to offset the adverse consequences of declining terms of trade on material well-being through productivity and quality improvements, and diversification and upgrading of the primary sector. But commodity-exporting LDCs have a low-productivity, low-value-added and weakly competitive commodity sector that is generally concentrated on a narrow range of products serving declining or sluggish markets. This results in slow export growth. The share of non-oil commodity exporting LDCs in world exports of goods and services fell by 60 per cent between 1980 and 1999. The low productivity of investment, slow export growth and large terms of trade shocks, together with weak state capacities, are all key causes of the build up of an unsustainable external debt burden. By the end of the 1990s, 90 per cent of the LDCs dependent on non-oil primary commodities had an unsustainable external debt. The close association between an export structure focused on non-fuel primary commodities and unsustainable external debt suggests that the debt problem of commodity exporting LDCs is not purely national but, rather, a systemic issue. Once a country has an unsustainable external debt, this has a number of negative features that further reinforce the trap of generalized poverty: • As a very large proportion of the debt is owed by governments (rather than

the private sector), debt servicing reduces resources available for public investment in physical and human capital. • The debt overhang acts a deterrent to private investment, particularly owing to uncertainty. Domestic interest rates might also be very high. • Debt service payments tighten the foreign exchange constraint.


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Together these effects seriously damage growth prospects in poor countries. It is very difficult to establish the kind of investment-export nexus that is at the heart of sustained economic growth. Rather, there is the treadmill of an export-debt repayment nexus, with the preconditions for a return to external viability – namely, increased productive capacity and efficiency – an aspiration that forever stays in the future.



The probability of this outcome is increased, as another important consequence of the build-up of an unsustainable external debt is that it affects the volume, composition and effectiveness of external finance. High levels of external debt deter private capital inflows, contributing to a general perception of risk that discourages lenders and investors. Although highly indebted countries still receive foreign direct investment (FDI), they have been effectively marginalized from international capital markets. One important consequence of this is that it is difficult to access short-term loans to moderate the effects of external shocks. They are also highly aid dependent, which, through conditionality and the difficulties of enabling country ownership, has meant that aid has been linked to development models that conform to donor preferences. Unsustainable external debt has also undermined aid effectiveness. Official donors, who are also the major creditors, have been supplying aid to ensure that official debts can be serviced. Amongst LDCs, this is apparent in the fact that, throughout the 1990s, gross aid disbursements have been strongly correlated with debt service payments (see UNCTAD 2002: fig. 42). One study focusing on 18 sub-Saharan African countries has estimated that, during the period 1970–1995, 31 cents of every additional dollar of grants and concessional loans was used to finance principal repayments of foreign loans, and as much as 50 cents of every additional dollar of grants was used for the same purpose (Devarajan et al. 1999). This process, in which ‘creditor governments have been taking away with one hand what they have given with the other’ (Killick and Stevens 1997: 165), has seriously diminished the development impact of aid and reinforced the cycle of economic stagnation, generalized poverty, slow export growth and external debt. It diminishes the developmental impact of aid because it subtracts from the level of aid resources available for development purposes. In summary, a high level of dependence on a narrow range of unproductive, undynamic and low-value-added commodity exports, an unsustainable external debt burden, and enmeshment within the aid/debt-service system together have characterized of the external trade and finance relationships of most commodity-exporting LDCs. These countries are commodity dependent, debt-relief dependent and aid dependent. Each of the elements of this complex of external trade and finance relationships reinforces the others. These external relationships are reinforced by the effects of generalized poverty, and, in turn, they reinforce the complex of domestic relationships that cause generalized poverty to persist.


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Globalization and the international poverty trap The existence of the international poverty trap does not mean that globalization is causing poverty. Globalization, however, necessitates a shift in perspective so that the ways in which international relationships are implicated in poverty processes becomes an integral part of the analysis. Moreover,


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in putting the analysis of poverty into a global context, it also becomes necessary to understand how the current form of globalization is affecting these international relationships. This is quite a complex issue. But, although international economic relationships can play a key role in helping LDCs to break out of the economic stagnation and generalized poverty within which they are caught, the current form of globalization is actually tightening rather than loosening the international poverty trap. The reason for this is that most LDCs are being by-passed by potentially beneficial aspects of globalization (notably access to capital, markets and technology), whilst being exposed to certain negative aspects.3 With regard to the negative aspects, it is worth noting that some recent changes in the structure of global commodity markets are reinforcing the cycle of economic stagnation and pervasive poverty. This is because they are leading to higher marketing margins between producers and consumers, and greater commodity price instability. They are also increasing the probability of LDC commodity producers being excluded from global markets. The latter process occurs as buyers within commodity chains upgrade their volume, reliability and quality criteria for purchasing, and as more stringent requirements call for ever-larger investments to meet buyers’ quality requirements and specifications. The inability of the more advanced developing countries to move up the ladder of development is also a key feature of the recent period of globalization. This is contributing to the saturation of commodity markets and increasing the vulnerability of those LDCs that have sought to escape the poverty trap by diversification out of commodities. This issue will be discussed in greater detail later. Blocked structural transition The international poverty trap is the central element of the alternative approach to understanding the cycle of stagnation and poverty in the poorest countries. However, it is necessary to add two supplementary concepts to complete the analysis: blocked structural transition, and the interplay between global polarization and the marginalization of the poorest countries. These concepts extend the analysis by opening up the black box of the national economy and recognizing that being enmeshed in a poverty trap does not mean nothing is changing within a country, and also by bringing the inter-relationships between the poorest countries and more advanced developing countries into the analytical picture. Even though the income per capita of a country might be the same as it was forty years ago, significant changes can still occur in that country. The failure to recognize this is a major weakness in Collier’s analysis, which abstracts from any historical sequences of change. In his preface, Collier recounts how he first went to Africa in the early 1970s, visiting Malawi, and he remarks that


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‘Malawi has not changed much in the last thirty-five years’; ‘it is still as dirt poor as it was then’ (2007: ix). But Malawi, and also other countries that are stuck in the international poverty trap, are changing in significant ways. In terms of poverty trends, what is particularly important is that, in countries that are stuck in an international poverty trap, more and more people are seeking work outside agriculture, but it has been impossible to generate productive employment outside agriculture to meet the growing demand. These countries are, thus, experiencing a blocked structural transition. The scale of the present and future employment challenge in LDCs is daunting. In Mali, for example, the new entrants to the labour force were 171,800 in 2005, and the number will increase each year to a peak of 447,800 per annum in 2045, when the annual additional labour force will start to decline. In Madagascar, the new entrants to the labour force in 2005 were estimated as 286,200, and their number will increase to 473,400 per annum by 2035, when the additional labour force will begin to decline (see Losch et al. 2008). In the past, the main way in which the expanding labour force used to find productive work was through the expansion of the agricultural land frontier. But, as more and more arable land is brought into cultivation, there is increasing dependence on fragile lands (such as arid regions, steep slopes and fragile soils). Extreme poverty makes it difficult for many households to use sustainable agricultural practices and, thus, there are problems of land degradation and declining soil fertility. In addition, even though the total area of cultivated land has been expanding, land under crop cultivation per person engaged in agriculture has generally been declining. Major inequalities in access to land resources also mean that, even in countries where land is apparently abundant, a significant number of the farm holdings are very small and a growing share of the population are virtually landless. A common phenomenon in villages where households theoretically could acquire access to more land is that they simply cannot command the complementary resources to farm more land. They are ‘too poor to farm’. On top of Malthusian demographic pressures, globalization of agriculture has been associated with a long-term decline in world agricultural prices from 1950 to the start of the new millennium. This reflects the uneven diffusion of two technological revolutions, the first being through the process of motorization, heavy mechanization, selection, chemical application and specialization that has occurred in the developed countries and also some developing countries; the second being the green revolution (see Mazoyer 2001). With these two technological revolutions, there is now a situation of massive productivity gaps in world agriculture. Mazoyer writes:


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a few million farmers benefiting from the agricultural revolution in developed countries and certain developing country regions are able to produce 1000 tonnes of grain per worker per year; a few hundred million farmers benefiting from the green revolution in the more favourable developing


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300 Agriculture

250 200 150 100 50

Metals Oil

0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Figure 11.4 Trends in commodity prices for agriculture, metals and oil, 1948–2008 Source: World Bank Global Economic Prospects (2009), Powerpoint presentation for launch.

countries able to produce between 10 and 50 tonnes of grain per worker, depending on the availability or not of animal traction; and some hundreds of millions of farmers with only basic hand tools and no selected seeds or fertilizers and little land, producing at most 1 tonne of grain per worker per year. (Mazoyer 2001: 2) The increase in productivity from these technological revolutions has triggered a sharp decline in real world agricultural prices. With the lower transport and communication costs associated with globalization, as well as the growing liberalization of trade, the prices paid to agricultural producers in most importing countries are closely aligned to the prices prevailing in the surplus producing countries. The downward trend in prices is such that average agricultural prices in 2000 were almost one third of their level in 1950 (Figure 11.4). Agricultural prices have fallen so low that it is difficult for the many smallholders to invest and expand, or even to renew the means of production. Thus, farms are undercapitalized and deteriorating, and many farmers live in a situation of extreme improverishment and under-nutrition. Within LDCs, these processes are leading to an accelerating rate of urbanization, and also an employment transition in which more and more people are seeking work outside agriculture. Analysis based on FAO projections suggest that, for LDCs as a group, the economically active population outside agriculture will increase by more than that within agriculture during the decade 2000–2010 (UNCTAD 2006). This is completely different from the decades of the 1980s and 1990s when the reverse was the case (see Figure 11.5). The overall pattern is strongly influenced by trends in Bangladesh, which constitutes about one quarter of the total population of the LDCs. But the economically active population outside agriculture is


(Index, 2000 100)

World market prices deflated by unit value of exports of manufactures from developed market economy countries

350


290


60 Agriculture

Non-agriculture

50

Millions

40 30

10 0

1980–1990

1990–2000

2000–2010

Figure 11.5 Increase of agricultural and non-agricultural labour force in LDCs for the decades 1980–1990, 1990–2000 and 2000–2010 (millions of persons) Source: UNCTAD (2006): fig. 33A.

projected to grow faster than the economically active population within agriculture during the decade 2000–2010 in almost half of the LDCs, and, for most of the rest, this trend will occur during the decade 2010–2020. Past trends will also be aggravated by climate change. A basic challenge for LDCs now is to generate productive employment opportunities outside agriculture, but this is proving very difficult. Nonagricultural labour productivity declined by 9 per cent from 1980–1983 to 2000–2003 in the LDCs as a group. Moreover, it declined in four fifths of all the LDCs. Declining average labour productivity reflects the widespread failure of most LDCs to generate employment opportunities in formal enterprises and the increasing share of the labour force working in subsistence oriented informal enterprises with low entry requirements in terms of capital and professional qualifications. The scale of these enterprises is small, capital equipment is rudimentary and skills are basic; often the enterprise is run by the person who started it, sometimes with unpaid family members who share their earnings. Often, the work is in petty services of various kinds, buying and reselling tiny quantities of goods, and usually catering to the poorer sections of the population. The LDCs that are caught in the international poverty trap, thus, also find themselves facing a blocked structural transition. As smallholding is no longer a viable livelihood, there is increasing migration to under-equipped and under-industrialized urban slums. Both within agriculture and outside agriculture, most workers have to earn a living using their raw labour, with rudimentary tools and equipment, little education and training, and poor infrastructure. Labour productivity is low and there is widespread underemployment, and this is the basic cause of persistent and mass poverty. But the locus of poverty is now shifting from rural areas to urban slums. This


20


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blocked structural transition is also an important feature of social conflict and instability. Access to land and the closed space for upward mobility are critical elements affecting social stability. These historical processes are completely ignored by Collier. But they are critical for the probability of conflict.

The final element of the alternative approach is to recognize that what is happening in the poorest countries is also strongly influenced by their relationship with the more advanced developing countries. Collier does recognize that these relationships matter, but he argues that they do matter once countries escape the traps and he focuses exclusively on negative relationships. In practice, the relationships between more advanced developing countries and the poorest countries can be either competitive or mutually supportive, and they can tighten or loosen the international poverty trap within which the poorest countries are enmeshed. These relationships can be mutually supportive in various ways. The more advanced developing countries could offer an important growing market for LDC exports. This can have significant positive effects on primary commodity prices, as illustrated in the commodity boom of the first part of the 2000s, which will be discussed in the next section. Outward FDI from more advanced developing countries could, with appropriate national policies in the poorest countries, provide a source of know-how and also investment funds for LDCs, whilst, at the same time, acting as a mechanism of production upgrading in the more advanced developing countries. Technology transfer from other developing countries to the poorest countries could also be more appropriate for the latter’s environment and, thus, more conducive to technological learning and local innovation. As Collier rightly points out, the poorest countries are also competing to gain market share in third markets: this can happen in commodities, manufactures or services. But, in all cases, the relationship is not static. From a dynamic perspective, it is clear that this competition is lessened if the more advanced developing countries can deepen their structural transformation, deepen industrialization and move up the technological ladder and out of simpler goods and services exported by the poorer countries. However, to the extent that more advanced developing countries meet a ‘glass ceiling’ that blocks their economic development and structural upgrading processes, there will be increased competition between LDCs and other developing countries. The current form of globalization is precisely creating such a glass ceiling for most other developing countries and, as a consequence, this is tightening the international poverty trap within which LDCs are enmeshed. This is evident in recent trends in income inequality at a global scale. Focusing on inter-country income inequality without weighting different countries by their population, there was a sharp increase in inequality between 1980


The relationship between global marginalization and global polarization



and 2000 (Milanovic 2005). But there is also increasing polarization in the global economy. This is evident in the fact that, by the end of the 1990s, the middle strata of developing countries – namely, those with 40 per cent to 80 per cent of the average in the advanced developing countries – were thinner than in the 1970s (UNCTAD 1997). In 2000, 70 per cent of the world lived in countries whose GDP per capita was less than US$5000 (in PPP, US$2000), 12 per cent in countries with US$5000–8000, only 4 per cent in countries with US$8000–20,000 and 14 per cent in countries with more than US$20000 (Milanovic 2005). The polarization of the inter-country income distribution is occurring because there has been a pattern of global economic change in which there have been two convergence clubs – at the rich end and at the poor end of the global income spectrum (Ben-David 1998). The poorer members of the rich-country convergence club (such as Greece, Portugal, Spain and Ireland) have been catching up with the income per capita of the richest members, whilst, at the other end of the spectrum, income per capita in the richer members of the poor-country convergence club are regressing to the lower income levels of the poorest countries. This process of downward convergence can be observed within sub-Saharan Africa and also parts of Latin America (notably Central America and some Andean countries). If one focuses on global income inequality, looking at the distribution of income between countries weighted by their population and also including trends in income distribution within countries, the overall picture is one in which income inequalities between countries are declining, mainly because of rising income per capita in China, but these are being offset by rising income inequalities within countries (see Milanovic 2005). The overall effect is to create a world without a middle class. The world middle class – if defined as those who have within 75 per cent and 125 per cent of the median income – constitutes only 17.4 per cent of the world population and has only 6.5 per cent of world income, which means that average income is only 37 per cent of the world average (ibid.). The world middle class is thus both smaller and poorer than the middle class in highly polarized societies such as Brazil. The analyses of global income distribution strongly confirm that patterns of export specialization are critically important to the probability of national growth success and national growth failure, with the commodity-dependent countries doing the worst (see Ocampo and Parra 2006). But the trends also reflect the fact that many countries that are diversifying out of commodities and are no longer caught in the international poverty trap are facing problems of deepening industrialization and moving up the technological ladder. To sustain their growth trajectory, countries that have shifted into manufactures exports have to upgrade their production structure towards more mediumtechnology and high-technology manufactures exports a process which is difficult. Moreover, some countries have been able to increase manufactures exports but without increasing manufactured value-added, as they serve as


292


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assembly points in a sliced up value-chain. All developing countries have also found it difficult to generate manufactured employment as they expand manufacturing value-added.4 The bottom line is that Collier is wrong to presume that we can simply assume away the problems of all the developing countries above the BBCs. Most of them are also struggling to sustain a development path. This is important in itself, as they continue to have poverty and human development deprivations. This problem cannot be assumed away in the map of global poverty.5 But this trend also matters for the poorest countries, because it is tending to make the relationships between the more advanced developing countries and the poorest countries competitive, rather than complementary. In short, the marginalization of the poorest countries cannot be divorced from forces that promote polarization in the global economy. The increasing polarization in the global economy has intensified the cycle of stagnation and poverty in the poorest countries.

Implications of the 2003–2008 commodity boom and the global financial crisis Much of the evidence in this chapter thus far has focused on the period from 1980 to 2000, and an important consideration is the implications of trends during the present decade for the analysis. In this regard, two events are significant. First, there was a major commodity boom during the period 2003–2008: this boom has been described by the World Bank as ‘the most marked of the past century’ (World Bank 2009: 53), in terms of its magnitude, duration and the number of commodity groups whose prices have increased. Price rises began first in oil, then they occurred in minerals and metals, and, finally, agricultural product prices, which only began to rise sharply in 2007. By its peak in April 2008, the UNCTAD commodity price index was three times its level in 2000 (Table 11.1), with most commodity groups more than doubling their price in current dollar terms from their average in 2004. However, second, we have seen the onset of a global financial crisis, one immediate effect of which has been the collapse of commodity prices. Commodity prices are still higher than they were before the start of the boom. But, nevertheless, there has been a major bust, with prices in January 2009 standing at between 30–60 per cent below their peak month in 2008. During the commodity boom years, it seemed possible that the idea of an international poverty trap had become irrelevant. During 2004–2008, there was actually a reversal in the long-term tendency for declining trends in the prices of primary commodities in relation to those of manufactures. This was not only due to the prices of primary commodities rising sharply, but also because the prices of many manufactures have risen more slowly and the


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Table 11.1

Boom and bust in world commodity prices, 2004–2009 2004

Peak 2008 Date

% change Jan. 09 % change peak value Jan. 09 Value over 2004 over peak value

Price Index – All groups (in terms of current dollars)

126

Apr. 08

300

138

189

−36.7

All food Food and tropical beverages Food Tropical beverages Vegetables, oilseeds and oils

121 117

Apr. 08 Apr. 08

279 270

130 132

193 193

−30.6 −28.4

119 100 155

Apr. 08 Aug. 08 Jun. 08

281 194 371

137 93 139

197 166 192

−30.0 −14.6 −48.3

127 137 134

Jun. 08 Apr. 08 Jul. 08

229 392 470

79 185 251

146 204 156

−36.3 −48.0 −66.9

Agricultural raw materials Minerals, ores and metals Crude petroleum Note: Price index 2000 = 100 Source: UNCTAD (2009).

prices of low-skill-intensive manufactures have even fallen (UNCTAD 2008a: 29). The LDCs, as a group, actually grew more rapidly than other developing countries and started to converge with developed countries. Some also received significant debt relief that also finally removed the debt overhang. However, the vulnerability of the LDCs to external shocks also increased during this period as their growth was highly dependent on the favourable external environment. Moreover, the available data show that the rapid rates of GDP did not translate into faster poverty reduction or achievement of MDGs (UNCTAD 2008b). The employment crisis that most LDCs faced, given the existence of blocked structural transition, remained. With the global financial crisis, LDCs have been hit immediately by the falling commodity prices. But there is also weaker external demand, as well as more restricted access to external finance. The squeeze on imports that will follow falling export receipts, if all other things are equal, will adversely affect food security, new investment, and even the maintenance of economic activity in the LDCs, compromising the already slow progress towards poverty reduction and the achievement of the MDGs. What happens to future aid trends will be vital in this process. But it might be that the poorest countries are rationed out of special support measures to address the impact of the crisis as they are perceived (falsely) to be systemically irrelevant. Moreover, there is a major danger that the commodity price collapse will be associated with a return of a new external debt problem in countries that have just spent 15 years trying to work out the old one.


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The trends of the current decade do not, in fact, negate the idea of an international poverty trap, but they do reinforce the observation that the form of globalization can increase or decrease the strength of the trap. In this case, it is clear that the rise in commodity prices, particularly for metals and minerals, was related to demand from other developing countries. Thus, the positive period is partly related to synergetic relations between more advanced developing countries and the poorest countries. But, equally, the global financial instability is now negatively impacting the poorest countries, even though they are not well integrated into global financial markets. The financial crisis itself is arguably ultimately rooted not simply in market fundamentalism, but also the global inequality and the lack of a world middle class, mentioned previously. Recent trends also suggest that an important feature of the international poverty trap is the magnitude and frequency of growth collapses, and that this is related, once again, to commodity dependence. It has been shown that, if one focuses solely on periods of expansion, the poor countries can actually begin to catch up with the rich as they experience stronger expansions. However, because the poor countries have more frequent and more severe growth collapses, the long-term result is divergence between the richer countries and the poorer countries (Cerra and Saxena 2005). Ros (2005) has also analyzed the frequency of growth collapses since the 1960s in countries classified according to their initial GDP per capita (1960), economic size, abundance of resources, export specialization and inequality. In this analysis, Ros found that growth collapses can be attributed to the interaction of unequal income distribution with the pattern of export specialization, which is related to the abundance of natural resources and the size of the economy. Collapses in natural resource rich economies are more frequent than in natural resource poor economies, and they are particularly more frequent in economies that specialize in mineral and oil exports. Overall, the promise of the commodity boom is now bust. The international poverty trap and blocked structural transition remain key elements of the situation in the poorest countries. If some further advanced developing countries, particularly those in Asia, can emerge from the crisis rapidly, they might start to provide a renewed demand pull for some of the poorest countries. But the deepening polarization of the global economy is also a likely outcome of the global financial crisis, reinforcing pressures for socio-economic marginalization of the poorest countries.


Charles Gore

Conclusion Paul Collier’s book The Bottom Billion identifies a very important global problem – the long-term growth failure and persistent poverty within the poorest countries in the world. But his policy recommendations are located within an analytical narrative in which economic growth and poverty



reduction occur through trade and spatial integration, rather than through production and structural transformation. This downplays the significance of commodity dependence, and treats persistent poverty and long-term growth failure in the poorest countries as a result of features of those countries themselves, rather than the interaction between those features and the working of the global economy system. Such methodological nationalism is logically untenable, because globalization is making what is happening in countries increasingly related to what is happening elsewhere. The policy conclusions are, thus, dangerously flawed. The issues that Alf Maizels raised with regard to the relationship between commodity dependence and development remain as relevant today as they were in the 1960s and 1970s. They are particularly pertinent to understanding global poverty and also the development performance of the poorest countries. However, it is no longer possible to describe the divide between the developed and developing countries as one in which the former export manufactures and import commodities, and the latter export commodities and import manufactures. Moreover, there are new forms of interdependence associated with the development of global production systems, the globalization of finance and the expansion of manufactures exports from developing countries. A major research challenge is, thus, to find ways to inter-relate globalization, commodity dependence and poverty in this new context. This chapter seeks to grasp this new reality. Focusing on LDCs rather than BBCs, it introduces three key elements of an alternative approach to address the same issue as Collier. These are: the international poverty trap, blocked structural transition, and the inter-relationship between polarization and marginalization in the global economy. The idea of the international poverty trap builds on analyses that suggest that countries can become caught in a poverty trap. In such cases, widespread extreme poverty has effects that cause long-term economic stagnation and the persistence of widespread extreme poverty. But the poverty trap is international, in the sense that international economic relationships interact with national level vicious circles to cause a cumulative cycle of economic stagnation and persistent poverty. Commodity dependence is a pivotal feature of the international poverty trap and it is related to the build-up of problems of external indebtedness, as well as aid ineffectiveness. Escaping the international poverty trap will require national and international policies. These must go beyond aid, and must include some new kind of international commodity policy, as well as international measures to break the links between commodity dependence, unsustainable external debt and aid ineffectiveness. The idea of blocked structural transition recognizes that quite radical changes are occurring within countries caught in the international poverty trap, even though their income per capita might be the same as 40 years ago. The key change that is occurring within the poorest countries is that they are


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experiencing a blocked structural transition in which smallholder livelihoods are increasingly becoming unviable because of Malthusian demographic pressures, environmental limits, the uneven global diffusion of productivityincreasing agricultural technologies and the long-term tendency for global agricultural prices to decline. Climate change will exacerbate this problem. The consequence is that more and more people are seeking work outside agriculture. But countries enmeshed in the international poverty trap have simply been unable to generate productive employment outside agriculture to meet this growing demand. Addressing this problem will require economic diversification out of primary commodities, which cannot be achieved without much more activist national policies than those embodied in the Washington Consensus reforms that Collier recommends. Collier’s idea of the ‘bottom billion’ is an alternative to the idea of the ‘Third World’. It is certainly essential to recognize, now, the increasing divergence amongst developing countries. However, what is happening to the poorest countries caught in the international poverty trap cannot be isolated from the forces that promote polarization in the global economy. To the extent that more advanced developing countries who have begun to diversify out of commodities cannot move up the technological ladder of development, it is very difficult for the poorest countries to get on that ladder. The increasing polarization in the global economy, which is related to the current form of globalization – uneven, asymmetrical, under-managed and unstable – is, thus, intensifying the cycle of stagnation and poverty in the poorest countries. In the end, therefore, addressing the socio-economic marginalization of the poorest countries will also require the addressing of the polarization of the global economy. Whilst the poorest countries do have special problems that must be urgently addressed, focusing all international development cooperation on their problems alone will prove to be self-defeating.

Notes 1. The views in this chapter are those of the author, and not necessarily those of UNCTAD. 2. An exception to this is that, in discussing the trap of being landlocked, Collier emphasizes that not only national policies, but also neighbouring countries’ policies matter. But this does not bring the global system into the analysis; rather, it shifts the emphasis on local factors from the national to the regional scale; that is, the nature of the neighbourhood. 3. UNCTAD (2000) discusses the nature of market failures in international capital markets that lead to the marginalization of LDCs from private capital flows, and UNCTAD (2007) discusses the marginalization of LDCs from international technology diffusion. 4. UNCTAD (2003) discusses these problems of deepening industrialization and also the different patterns of industrialization in countries that have diversified out of commodities.


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5. The present distribution of US$1/day poverty between the poorest countries and other developing countries depends on how poverty is defined but, with past trends, the poorest countries will become the major locus of US$1/day poverty by 2015. However, US$2/day, US$3/day and US$4/day poverty, which will still be prevalent in other developing countries by that date, represent significant deprivations by global standards.

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Leonard, D. and L. Haddad (2008) ‘Assessing the Policy Prescriptions in The Bottom Billion’, IDS In Focus, 3, March. Losch, B., S. Freguin-Gresh and T. Giordano (2008) ‘Structural Dimensions of Liberalization on Agriculture and Rural Development: Backgound, Positioning and the Results of the First Phase’, Mimeo, World Bank. Matsuyama, K. (1991) ‘Increasing Returns, Industrialization and Indeterminancy in Equilibrium’, Quarterly Journal of Economics, 106: 617–50. Mayer-Foulkes, D. (2001) ‘Convergence Clubs in Cross-country Life Expectancy Dynamics’, WIDER Discussion Paper, 2001/134, Helsinki. Maxwell, S. (2008) ‘Book Review Symposium: The Bottom Billion’, Development Policy Review, 26: 113–28. Mazoyer, M. (2001) Protecting Small Farmers and the Rural Poor in the Context of Globalization (Rome: FAO). Milanovic, B. (2005) Worlds Apart: Measuring International and Global Inequality (Princeton and Oxford: Princeton University Press). Nelson, R.R. (1956) ‘A Theory of the Low-level Equilibrium Trap’, American Economic Review, 46: 894–908. Ocampo, J.A. and M.A. Parra (2006) ‘The Dual Divergence: Growth Successes and Collapses in the Developing World Since 1980’, DESA Working Paper, 24 (ST/ESA/2006/DWP/24). Ros, J. (2005) ‘Divergence and Growth Collapses: Theory and Empirical Evidence’, in J.A. Ocampo (ed.), Beyond Reforms: Structural Dynamics and Macroeconomic Vulnerability (Washington, DC: Latin American Development Forum and ECLAC). Sachs, J.D., J.W. McArthur, G. Schmidt-Traub, M. Kruk, C. Bahadur, M. Faye and G. McCord (2004) ‘Ending Africa’s Poverty Trap’, Brookings Papers on Economic Activity, 1: 117–240. Steger, T.M. (2000) ‘Economic Growth with Subsistence Consumption’, Journal of Development Economics, 62: 343–61. UN (1964) ‘Towards a New Trade Policy for Development: Report of the SecretaryGeneral to UNCTAD I’, in Proceedings of the United Nation Conference on Trade and Development, Vol. II, Policy Statements, E/CONF.46/141. UNCTAD (1968) ‘Towards a Global Strategy for Development: Report of the SecretaryGeneral to UNCTAD II’, TD/3/Rev.1. UNCTAD (1981) Trade and Development Report 1981 (Geneva: UN). UNCTAD (1997) Trade and Development Report 1997: Globalization, Distribution, Growth (Geneva: UN). UNCTAD (2000) The Least Developed Countries Report 2000. Aid, Private Capital Flows and External Debt: The Challenge of Financing Development in the LDCs (Geneva: UN). UNCTAD (2002) The Least Developed Countries Report 2002: Escaping the Poverty Trap (Geneva: UN). UNCTAD (2003) Trade and Development Report 2003: Capital Accumulation, Growth and Structural Change (Geneva: UN) UNCTAD (2004) The Least Developed Countries Report 2004: Linking International Trade with Poverty Reduction (Geneva: UN). UNCTAD (2006) The Least Developed Countries Report 2006: Developing Productive Capacities (Geneva: UN). UNCTAD (2007) The Least Developed Countries Report 2007: Knowledge, Technological Learning and Innovation (Geneva: UN). UNCTAD (2008a) Trade and Development Report 2008: Commodity Prices, Capital Flows and the Financing of Investment (Geneva: UN).


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UNCTAD (2008b) The Least Developed Countries Report 2008: Growth, Poverty and the Terms of Development Partnership (Geneva: UN). UNCTAD (2009) ‘Commodity Price Bulletin’, February (Geneva: UN). United Nations Millennium Project (2005) Investing in Development: A Practical Plan to Achieve the Millennium Development Goals (New York: UNDP). World Bank (2002) Globalization, Growth and Poverty: Building an Inclusive World (Washington, DC: World Bank and Oxford University Press). World Bank (2009) Global Economic Prospects: Commodities at the Crossroads (Washington, DC: World Bank).


12 Yilmaz Akyüz

Introduction Recent years have seen a rapid opening up and integration of developing countries into the world economy to a degree unprecedented in modern history. This has, no doubt, brought benefits in several areas, particularly through international trade and investment, even though their incidence varied among and within countries. But it is also true that rapid liberalization and integration have also caused dislocations in the developing world, particularly among the poor and unprivileged. While these challenges have placed growing demand on policy-makers and called for greater flexibility in the policy-making process, many of the traditional instruments of development and macroeconomic policy have become ineffective or simply unavailable because of proliferation of international rules, obligations and practices. Consequently, questions have been raised about whether such constraints over national economic policy are compatible with development, including the capacity to foster conditions for steady quality employment growth. This chapter deals with this issue. The following section sets the scene. After a brief discussion of the concept of policy autonomy, it focuses on the sources of the constraints, the rationale for multilateral rules as a global collective action, the nature of existing multilateral disciplines and their relative impact on policy space in developed and developing countries. This is followed by a discussion of the constraints exerted by multilateral rules and practices on development policy in four key areas: industrial tariffs, industrial subsidies, investment policies and technology policies. The chapter goes on to concentrate on macroeconomic policies and examines the extent to which they are circumscribed by influences associated with external financing, both private and official. It takes up the implications of capital account liberalization and the conditionalities imposed by the lending practices of multilateral financial agencies and bilateral donors for monetary and fiscal policies. Throughout the discussions, attention is paid to the economic significance of constraints,


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the space that is available and used, and the reforms needed to make multilateral rules and practices compatible with the development trajectories of poor countries. The chapter concludes with a summary of the main arguments and recommendations.

The autonomy of national economic policy refers to the effectiveness of national policy instruments in achieving national policy objectives.1 However, even in a closed economy largely insulated from foreign influences, there are limits to what economic policy can do. Policy-makers do not always have full control over instruments such as taxes, interest rates or public spending because of technical and political limits, and contractual obligations. More importantly, formal command over policy instruments does not always translate into full control over objectives. This is because there are not always enough instruments to assign to all targets independently, or for reasons such as instability of and uncertainties in the relationship between instruments and targets, and trade-offs among various potential objectives such as stability and growth, or equity and efficiency. Liberalization of domestic markets and deregulation of economic activities narrow the policy space further by reducing the number of instruments controlled by policy-makers. In a world of economic interdependence – where borders are largely open to flows of goods and services, money, capital and labour – policy autonomy is restricted further for two reasons. On the one hand, openness enhances the influence of foreign policies and conditions in markets abroad on economic performance, while weakening the impact of national policy instruments. On the other hand, it diminishes control over policy instruments – that is, de jure sovereignty of national economic policy – because closer global integration is often accompanied by insertion into international governance systems and growing international obligations. A key factor limiting policy space is multilaterally negotiated rules and obligations in trade and finance, as embodied in various agreements in the World Trade Organization (WTO) and, to a lesser extent, the Articles of Agreement of the Bretton Woods Institutions (BWIs). However, these are not the only – and, for some countries, even the most – important constraints over policy autonomy. For those dependent on official financing, the policy space left by multilateral legislation is constantly eroded by conditions attached to loans and grants by multilateral financial institutions and bilateral donors. Again, commitments undertaken by several developing countries in bilateral or regional agreements with major industrial countries do not only extend WTO disciplines in industrial tariffs, services and intellectual property rights, but also include new obligations in areas left outside multilateral legislation such as capital account regimes, foreign direct investment (FDI) and


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enforceable environment or labour standards. In addition, several developing countries have seen their macroeconomic and industrial policy options significantly narrowed by unilateral and voluntary liberalization, particularly with respect to capital account, trade and FDI regimes. Unilateral liberalization, voluntary or otherwise, is a policy decision that can, in principle, be reversed. However, policy reversals are costly. They alter the incentive structure and give rise to ‘adjustment costs’– that is, in the process of adjustment to new incentives, resources might remain unemployed; skills might be eroded; equipment might become obsolete; fiscal, trade and financial imbalances might emerge; or there might be all kinds of costs in learning to live with the new set of policy rules. For instance, rapid trade liberalization is recognized as giving rise to adjustment costs, even though they are rarely incorporated in the estimates of benefits of liberalization (Akyüz 2005c). Similarly, reintroduction of barriers after a long period of openness would entail adjustment costs. They tend to be much higher for large shifts in structural policies than macroeconomic policies, except perhaps when introduced as temporary measures. Moreover, reversal of liberalization can trigger adverse financial market reaction and give rise to capital flight and sharp declines in currency and asset markets, with repercussions for economic activity. Similarly, theoretically there is always the option for a country to exit from multilateral arrangements and conduct its international business on a bilateral basis. This would also give rise to costs and adverse reactions. More importantly, such an option is rarely exercised by developing countries because of their inherent weaknesses in bilateral relations with major economic and political powers. Thus, the agreement reached during the 11th Session of the United Nations Conference on Trade and Development that ‘it is for each Government to evaluate the trade-off between the benefits of accepting international rules and commitments and the constraints posed by the loss of policy space’ (UNCTAD 2004a: para. 8) has little practical significance for most developing countries. This is also why multilateralism is so valuable to smaller and weaker countries, particularly if, as noted in the same declaration, an appropriate balance is struck ‘between national policy space and international disciplines and commitments’. In a world where national economies are closely connected, there is strong rationale for multilateral disciplines as a global collective action. Multilateral rules and obligations are needed to contain negative externalities such as financial contagion and environmental degradation. They are also needed to prevent discriminatory and beggar-my-neighbour policies, such as attempts to export unemployment through mercantilist trade and exchange rate policies. However, it should also be recognized that proliferation of multilateral constraints poses the risk of repudiation of obligations, and can lead to loss of credibility for multilateral institutions. Therefore, effective and credible multilateral disciplines call for a balance between national policy autonomy


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and multilateral rules and obligations. They also call for coherence among arrangements in interrelated aspects of international economic interactions such as trade and finance, so that difficulties in one field do not undermine relations in others. Drawing on the inter-war experience, the post-war planners sought to strike a balance between national policy autonomy and multilateral disciplines, and coherence between trade and finance. Diversity in national strategies for openness and the balance between private and public action was recognized, and the main objective pursued in trade was to prevent the recurrence of discriminatory policies of the kind widely practised during the inter-war years. Accordingly, the unconditional most-favoured nation (MFN) principle was placed at the centre of the General Agreement on Tariffs and Trade (GATT). On the other hand, recognizing that currency stability was essential for the expansion of free trade, and that ‘tariffs and currency depreciations were in many cases alternatives’ (Keynes 1980: 5), the arrangements limited the scope of financial markets to generate erratic movements in exchange rates by imposing restrictions over short-term capital flows. The ability of governments to manipulate exchange rates of their currencies was also restricted through obligations to maintain them within the narrow range of multilaterally agreed par values, but they were also allowed to change their par values under fundamental disequilibrium. Current arrangements represent a fundamental shift from this approach. They are dominated by an agenda set by leading economies to achieve deep global economic integration through rapid liberalization in a wide range of areas that accommodate their own development prerequisites, compared to shallow integration sought by post-war planners in recognition of diverse national strategies (Ostry 2000). Liberalization is pursued where advanced countries have the upper hand – including trade in industrial products, movement of money, capital and enterprises – but restrictions continue unabated over trade in agricultural products, labour mobility and technology transfer where liberalization would generally benefit the developing world. Multilateral disciplines in trade now serve to restrict not so much discriminatory treatment among countries but, rather, government intervention with regard to markets. The MFN principle has increasingly been replaced by ‘market access’ and ‘national treatment’ as liberalization and non-distortion have become the organizing principles of international trade and investment. The drive for greater liberalization than is found feasible at the multilateral level has given rise to proliferation of discriminatory bilateral and regional free trade agreements, thereby constantly eroding the MFN principle. In money and finance, both pillars of the post-war international monetary arrangements – restrictions over short-term capital flows and exchange rate obligations – disappeared with the demise of the Bretton Woods arrangements. In effect, finance has become the vanguard of the international liberal order, premised on the assumption that financial markets can


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do their own disciplining and do not need international rules or policy intervention. This also means that the existing multilateral system lacks coherence between trade and finance. Unlike trade and the so-called ‘trade related’ areas that are constantly pushed onto the agenda of the WTO by advanced countries, there are no multilateral disciplines over exchange rate and macroeconomic policies, even though it is generally recognized that exchange rate stability and discipline is a prerequisite for open and expanding trade.2 Attempts to balance lack of specific exchange rate obligations with greater emphasis on policy surveillance by the IMF have failed to secure international monetary and financial stability. The Fund is unable to exert meaningful disciplines over the policies of its non-borrowing members (including all industrial and some developing countries) and to prevent unsustainable exchange rates, persistent payments imbalances and currency manipulations.3 For its borrowers, by contrast, the policy advice given by the IMF in Article IV consultations often provides the framework for conditions to be attached to any future Fund programme and lending (IMF/GIE 1999: 20). Thus, even though, as stipulated in Article IV, all countries have the same de jure obligation ‘to assure orderly exchange rate arrangements and to promote a stable system of exchange rates’, the Fund’s policy oversight is confined primarily to its poorest members who need to draw on its resources because of their lack of access to private finance and, occasionally, to emerging-markets experiencing interruptions in their access to private financial markets. Thus, while industrial countries escape multilateral disciplines in money and finance, developing country borrowers from the BWIs face conditionalities that circumscribe not only their macroeconomic policies, but also broader development strategies. But this is not merely a matter of imbalance between developed and developing countries in the policy constraints they encounter in the BWIs. The absence of multilateral disciplines over exchange rate and macroeconomic policies in leading countries with disproportionately large impact on global monetary and financial conditions is also a major concern to developing countries because of their vulnerability to external financial shocks. Even where the rules and practices apply equally to all countries, as in many of the WTO agreements, they impinge differently on policy space in different countries because of variations in levels of development. As a result of WTO rules and obligations, many policy instruments widely used by both mature and late industrializers in order to reach their current levels of development are no longer available to developing countries. In legal terms, international rules and obligations provide a level playing field for all parties, but effective constraints they impose over policies tend to be much tighter for developing than for industrial countries. The degree to which they narrow policy space also varies considerably within the developing world for the same reason.


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Binding and enforceable rules and obligations contained in several agreements in the WTO constitute the principal constraints on development policy.4 Even though the so-called escape clause or safeguards allow a member to suspend its obligations, such provisions can be invoked only on a temporary basis. Exceptions granted to developing countries – the so-called special and differential treatment (SDT) – allow them, under certain conditions, to enjoy preferential market access or to offer limited or less-than-full reciprocity. However, the SDT is generally confined to longer transition periods or left to ‘best endeavour’, which allows considerable discretion to industrial countries in its interpretation and implementation. Specific provisions allowing developing countries to deviate from their obligations in order to safeguard their external financial positions or to support infant industries either bring temporary relief or require compensatory concessions to countries adversely affected.5 Structural conditionalities attached to lending by the BWIs constitute the second most important source of multilateral constraints over development policy. These cover a wide area, including trade and finance, public enterprises, labour market institutions and social safety nets (Goldstein 2000; Kapur and Webb 2000; and Buira 2003). The average number of structural conditions in IMF programmes doubled between the 1970s and 1980s, and, at the end of the 1990s, it was more than 50 for a typical Extended Fund Facility programme and between 9–15 for standby programmes. On a narrow definition, the number of conditions attached to lending at the end of the 1990s by the Fund and the Bank together ranged between 15–30 for subSaharan Africa and 9–43 for other regions (Kapur and Webb 2000: 5–7). These numbers go up considerably if a wider definition is adopted. The following sections will examine the extent to which these rules, obligations and practices impinge on policy space in developing countries in four key areas.6 Discussions will focus on WTO related constraints, but reference will also be made to structural conditionalities by the BWIs. Macroeconomic conditionality and the impact of trade liberalization on fiscal space will be taken up in the discussion of monetary and fiscal polices. Industrial tariffs


Multilateral disciplines and development policy

During the Uruguay Round negotiations, developing countries assumed extensive obligations with regard to industrial tariffs by binding them at significantly reduced levels compared with previously applied rates. While some countries, notably in Latin America, opted for full binding coverage, others left part of the tariff lines unbound. The average binding coverage in developing countries is now 77.5 per cent (Fernandez de Cordoba and Vanzetti 2005: 7). In some 30 countries, binding coverage is less than 35 per cent, and about two thirds of these are least-developed countries (LDCs). Average


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bound industrial tariffs in the developing world now stand at less than 30 per cent, while the average applied tariffs are much lower – a little over 10 per cent. There is, however, considerable diversity in both respects: average bound tariffs vary between 5–70 per cent; applied tariffs between 2–31 per cent. Compared with the historical experience of mature industrializers, industrial tariffs in developing countries today are exceptionally low. For instance, at the end of the nineteenth century, when per capita income (measured in purchasing power parity) in the USA was at a similar level to that in developing countries today, its average applied tariffs on manufactured imports was close to 50 per cent. Even after the war, when the USA and Western Europe had reached industrial maturity and per capita income levels several times those in the developing world today, their average industrial tariffs were considerably higher – even compared with those in the so-called high tariff countries such as India (Akyüz 2005c: table 1). Protectionism was the rule, free trade the exception during the industrialization of today’s mature economies (Bairoch 1993). While leading industrial countries often favoured free trade, followers supported and protected their infant industries in order to catch up. Although, historically, trade liberalization came only after industrial competitiveness was achieved, developing countries are now advised to liberalize in order to establish industrial competitiveness. Consequently, the outcome in countries that resorted to rapid liberalization before making reasonable progress in industrial development and competitiveness has been quite dismal. Imports often responded much more vigorously than exports, causing balance of payments problems, and losses of industrial output and employment. According to some estimates, total income losses for sub-Saharan Africa from premature trade liberalization amounted to US$270 billion over the past two decades – more than the total aid received by the region.7 Large differences between applied and bound tariffs in developing countries show that an important part of trade liberalization has occurred outside the WTO. Conditionality by the BWIs has certainly played an important role. During the Doha Round, the IMF argued that: ‘countries that press ahead with unilateral liberalization will enjoy enormous benefits’ (Krueger 2005: 5). It also introduced a Trade Integration Mechanism to mitigate concerns among some countries that their balance of payments could suffer as a result of liberalization in the WTO, insisting that such shortfalls would be small and temporary (IMF 2005). No doubt these compromise the bargaining power of developing countries in multilateral negotiations, since a country liberalizing unilaterally acquires no automatic rights in the WTO with regard to other countries. Furthermore, WTO negotiations often make reference to applied tariffs as benchmarks for binding and cuts.8 Insofar as WTO obligations are concerned, there is still room to use tariffs, particularly where they are left unbound or bound at levels considerably


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higher than the applied rates. But such space is rarely used, even at times of serious balance-of-payments difficulties – partly because of problems associated with policy reversals previously noted, and partly because of the commitment of ruling elites to liberal trade regimes. However, it is also notable that many developing countries have been resisting the giving up of such space during the Doha Round despite a strong mercantilist offensive by developed countries, which have been seeking to bind all industrial tariffs of developing countries at drastically reduced levels on a line-by-line basis – in effect, translating unilateral liberalization into multilateral obligations (Khor and Goh 2004). Several sectoral studies, including those in the mainstream tradition, suggest that the proposals made by industrial countries during the Doha Round could lock developing countries into the existing international division of labour.9 With a rapid move towards free trade, developing countries would exit from, or fail to enter, technology intensive high value-added sectors (leaving these to more advanced countries), concentrating, instead, on low value-added, resource based and labour intensive products. This would be a major setback because the pace of their industrial development would depend on how swiftly they can move away from such an international division of labour. An irreversible commitment to low tariffs on all manufactures could make re-entry into such sectors very difficult, particularly since many other instruments of policy widely used in the past by industrial countries are no longer available because of WTO agreements on subsidies, TRIPs and TRIMs. It is not that developing countries need high tariffs for all sectors indefinitely. But they should have the option of using tariffs on a selective basis as and when needed for industrial upgrading, while remaining subject to multilateral disciplines. This could be done by setting a reasonable limit on average tariffs while leaving the rates for individual products unbound. This would encourage governments to view tariffs as temporary instruments, since they would need to lower tariffs on some products in order to raise them elsewhere. Such flexibility is provided for in the case of agricultural subsidies, extensively exploited by developed countries, where countries are left free to allocate an agreed total as they wish.

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Developing countries enjoyed considerable freedom regarding the use of industrial subsidies under the GATT regime, but this is no longer the case after the agreement on Subsidies and Countervailing Measures (SCM), which brings much tighter constraints than is the case for industrial tariffs. The agreement prohibits the so-called trade distorting, sector specific subsidies for export promotion and import substitution. Prohibitions apply not only to budgetary transfers in various forms, but also intra-private sector transfers affected through government regulation, such as indirect subsidies provided


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to preferential credits in the banking sector by non-preferential borrowers. Specific subsidies for research and development (R&D), disadvantaged regions and environmental purposes are exempted. LDCs and countries with a per capita income of less than US$1,000 per annum (Annex VII countries) are permitted to use export subsidies until graduation from this category. In reaching their current level of industrialization, both mature and late industrializers made extensive use of industrial subsidies now outlawed by the agreement on SCM. These include direct payments, tax credits and tax holidays for import-competing and export sectors; generous tax rebates and duty drawbacks for exporters; selective allocation of licences for technology imports and investment; preferential access to credit at subsidized interest rates for export financing and investment; and subsidized infrastructure services.10 Furthermore, the WTO rules allow both export subsidies and domestic support to agriculture, whose main beneficiaries are the industrial countries. It is mainly the middle-income developing countries that bear the brunt of restrictions stipulated by the agreement on SCM. The exceptions granted to Article VII countries provide them with more space than they can possibly exploit given their financial constraints. The rules also impose few constraints on those countries seeking to subsidize development of a fledgling industry that might not yet be export oriented or subject to significant import competition (Weiss 2006: 6). This can be important for small firms, which usually begin by supplying local markets. As for industrial countries, they are the main beneficiaries of the general exceptions allowed for R&D, environment and regional development. R&D subsidies meet the needs of most of these countries to support innovation and technological progress. Furthermore, evidence suggests that the ambiguities surrounding the distinction between economy wide and sector specific subsidies (Anderson 2002: 168) are exploited mainly by industrial countries that support import competing and export industries through carefully crafted and disguised subsidies without contravening WTO rules and triggering retaliatory action (Weiss 2006). The market failure argument is often invoked to justify the exceptions made for R&D, environmental and regional subsidies. But the literature is also replete with examples of capital market failures and externalities that necessitate support for infant industries to enable firms to undertake investment with high social return that they would not otherwise be willing or able to make. A possible reform to create greater space for countries at intermediate stages of industrialization could be to allow them to use industrial subsidies subject to an aggregate limit, and leave them free in their allocation among different firms and industries. This would be similar to the provisions on the aggregate measure of support (AMS) for agriculture where targets for percentage reduction were set at the aggregate level, while leaving considerable flexibility to countries in the allocation of reductions among different products (Das 1999: 242; UNDP 2003: 118–19). These limits could


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Investment related policies In addition to prohibition of specific investment subsidies linked to export performance or import competition, there are two main sources of WTO disciplines on investment related policies: the agreement on TRIMs, and specific commitments made in the GATS negotiations for the commercial presence of foreign enterprises. The TRIMs agreement applies to all investment, but restrictions on measures that could be employed are particularly important for FDI. These include prohibition of domestic content requirements whereby an investor is compelled or provided with an incentive to use domestically produced rather than imported products, and foreign trade or foreign exchange balancing requirements linking imports by an investor to its export earnings or to foreign exchange inflows attributable to investment. By contrast, there are no WTO disciplines restricting beggar-my-neighbour FDI policies by recipient countries through various incentives that often provide effective subsidy to foreign investors, and influence investment and trade flows as much as domestic content requirements or export subsidies, particularly since a growing proportion of world trade is taking place among firms linked through international production networks controlled by transnational corporations (TNCs). Neither are there effective multilateral codes of conduct for TNCs, which are known to practise trade restricting policies.11 Both theory and evidence show that benefits of FDI in terms of transfer of technology, and managerial and organizational skills are not spontaneous but, rather, are greatly shaped by policy. This is why both mature and late industrializers made extensive use of performance requirements for FDI (Chang 2003; Kumar 2005; Rasiah 2005). The significance of such requirements has grown in recent years because of the rapid spread of international production networks controlled by TNCs from industrially advanced countries. For developing countries extensively participating in such networks, notably in automotive and electronics industries, raising domestic content in assembly industries is important, not so much because of balance-ofpayments reasons as because the development of domestic industries for technology intensive parts and components constitutes an important step in industrial upgrading. The agreement, nevertheless, leaves some scope for pursuing effective FDI policies. It is possible to design entry conditions of foreign enterprises so as to circumvent restrictions over domestic content requirements – for example,


also be supplemented by the kind of provisions currently applied to Annex VII countries in the use of export subsidies; that is, to allow them until the industry becomes competitive, as determined by some measure of its share in the world trade in that product. As with the proposal for industrial tariffs, such an arrangement would reconcile flexibility with multilateral disciplines in the use of industrial tariffs by developing countries.


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Transfer of technology Both the agreement on industrial subsidies and investment related disciplines, discussed previously, constrain technology polices by prohibiting incentives and restrictions for promoting technological progress and upgrading to higher value-added products. The TRIPs agreement impinges directly on transfer of technology by providing extensive and global protection to innovators of knowledge. It establishes minimum standards that the countries are obliged to observe in establishing regimes for protecting intellectual property rights (IPRs) in a broad range of areas of which patents and, to a lesser extent, copyrights constitute the most important in terms of their implications for technology policies. Parties to the agreement are obliged to offer patents in almost all fields, give protection to owners of IPRs no less than the level provided in the agreement, apply national treatment to foreign owners of IPRs registered with them, and observe non-discrimination among foreign holders of IPRs.13 As with many other WTO agreements, TRIPs also constitutes an attempt to kick away the ladder to prevent followers from catching up technologically by denying the opportunities widely exploited by today’s industrial countries in the past. Indeed, in most of today’s industrially advanced countries, patent rights had been introduced only at a late stage of development, and protection accorded to foreigners was exceptionally weak in order to allow nationals easy access to advanced technology (Bercovitz 1990; Chang 2001, 2002; Gerster 2001; Kumar 2003). TRIPs is the most unequal WTO agreement in terms of distribution of its costs and benefits between developed and developing countries since the former are mainly the producers and the latter the users of technology. Despite this asymmetry, developing countries agreed to TRIPs during the Uruguay Round because of the expectation that they would obtain additional market access in industrial countries in agricultural products and textiles and clothing. Since industrial upgrading becomes more demanding, and imitation and adaptation of foreign technology gain added importance at intermediate stages of industrialization, the TRIPs agreement places greater constraint on technical progress in middle-income than in low-income countries – though not in terms of cost of vital products such as pharmaceuticals. By contrast, there is very little evidence supporting its claimed benefits, including


allowing entry to assembly industries conditional on investment for producing high-tech components. Again, export performance requirements could also be used without linking them to imports by investors. Furthermore, there are no restrictions over requirements for local procurement of services as part of entry conditions. Such policy options will remain open as long as developing countries make no commitment for unrestricted market access to foreign investors, including in the services sectors where the existing GATS regime provides considerable flexibility.12



acceleration of innovation in developing countries and greater spillovers of technology from developed to developing countries through increased FDI (Correa 2000; Kumar 2003; and Maskus 2005). However, there is still policy space. Several policies for technological capability-building at the firm level still remain outside the WTO disciplines (Rasiah 2005). More importantly, there are several flexibilities in the agreement that the developing countries could exploit by establishing appropriate national legislation and practices (TWN 1998; Correa 2000; and Shadlen 2005). The agreement leaves considerable discretion in the determination of eligibility for patenting, which allows developing countries to adopt a narrow concept of invention. It stipulates restrictions on the exercise of control by patent holders over their rights, requires disclosure to facilitate access to innovation, and allows governments to issue compulsory licences for patents registered with them if there are justifying circumstances, including emergency and anti-competitive practices by the holder. It is also equally important to secure agreement on certain interpretations of the provisions of TRIPs so as to enhance the freedom of developing countries in determining patentability and issuing compulsory licences. Here, one of the key issues is to have the right to issue compulsory licences when the technology in question is not domestically applied. Issuance of compulsory licences on such basis is permitted by IPR regimes in Brazil and India, but the matter is contentious in the WTO (Shadlen 2005; World Bank 2002: box 5.2). This needs to be resolved to give more space to developing countries in technology policies.

Finance and macroeconomic policy The second key area of public intervention circumscribed by global markets, and multilateral rules and practices is macroeconomic policy. Here, finance plays a key role. On the one hand, financial markets exert considerable pressure on governments for liberalization while, on the other hand, capital account openness and close integration into global financial markets restrict the ability of governments to pursue autonomous macroeconomic policy. Not only have financial markets become a major independent source of instability, but also their pro-cyclical behaviour promotes monetary and fiscal policies that aggravate, rather than reduce, macroeconomic instability. This is particularly true for highly indebted, financially constrained emerging markets. Official financing, be it multilateral or bilateral, does not always help alleviate instability caused by pro-cyclical behaviour of private financial flows. Emerging markets facing sudden and rapid exit of private capital often receive official assistance conditional on pro-cyclical macroeconomic tightening. On the other hand, evidence clearly shows that aid to low-income countries is highly volatile and pro-cyclical, drying up where and when it is most


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needed, necessitating fiscal tightening at times when expansionary policies are called for. This could be even more damaging than instability caused by private capital flows to emerging markets since, compared with the latter, low-income countries have little scope to cope with instability in external financing. Gaining greater policy space for such countries depends crucially on the reform of international financial cooperation.

It is generally recognized that capital account liberalization creates dilemmas in macroeconomic managements, particularly for monetary policy. According to mainstream economic theory, policy-makers cannot simultaneously pursue an independent monetary policy, control the exchange rate and maintain an open capital account. All three are potentially feasible but only two of them could be chosen as actual policy – hence, the dilemma known as the ‘impossible trinity’. Thus, once the capital account is opened, a choice has to be made between controlling the exchange rate and an independent monetary policy. Using monetary policy as a counter-cyclical tool to regulate and stabilize economic activity could result in large cyclical swings in the exchange rate and balance of payments. Conversely, if monetary policy is used for maintaining a pegged or fixed exchange rate, it cannot act as a counter-cyclical tool and prevent large cyclical swings in economic activity. However, in most developing countries erosion of monetary policy autonomy is often greater than is typically portrayed in the mainstream economic theory. In these countries, monetary policy cannot always secure macroeconomic and financial stability, whether it is geared towards a stable exchange rate or conducted independently as a counter-cyclical tool. First, in modern financial markets the effect of monetary policy and policy interest rates over exchange rates is much more uncertain and unstable than is typically assumed in the theory of the impossible trinity, because of volatile market sentiments and risk assessments. During financial turmoil, hikes in interest rates are often unable to check currency declines while, at times of favourable risk assessment, a small arbitrage margin can attract large inflows of private capital and cause currency appreciations. Second, the existence of large stocks of public and/or private debt in foreign currencies – the so-called ‘liability dollarization’ – results in strong spillovers from exchange rates to domestic economic and financial conditions. While, in industrial countries, currency instability is rarely transmitted to balance sheets and domestic capital and credit markets, in developing countries domestic business and financial cycles are often associated with sharp swings in external capital flows and exchange rates.14 Debt has become a much more important channel of transmission of exchange rate changes onto economic activity and stability than trade – the main channel of transmission in the traditional theory of the impossible trinity. It is very rare that currency crises in developing countries are contained without having a significant impact on


Capital account liberalization and monetary policy



domestic financial conditions, balance sheets and economic activity. This is a main reason why about 85 per cent of all defaults in developing countries during 1970–1999 were linked with currency crises (IMF 2002; Reinhart 2002). The official advice to developing countries has been to assign monetary policy to price stability, often in the form of inflation targeting. This is based on the belief that price stability, together with fiscal discipline, would hold the key for rapid growth, as well as securing macroeconomic and financial stability – including stability of income and employment, balance of payments, capital flows, interest rates, exchange rates and asset prices. However, such advice has become increasingly untenable because in many developing countries success in securing price stability and fiscal discipline has not been followed by rapid and sustained growth. More importantly, in several emerging markets – notably, in East Asia – boom–bust cycles in capital flows and gyrations in exchange rates, balance of payments, employment and economic activity have all occurred under conditions of price stability and fiscal discipline. In more extreme cases, as in Latin America, price stability has been bought at the expense of increased financial fragility and instability, through exchange rate based stabilization programmes, relying on unstable capital flows. The dilemmas faced by monetary policy have become more serious because fluctuations in economic activity are increasingly associated with capital account cycles. Business cycles tend to be accentuated by the pro-cyclical behaviour of international lenders and investors – which tend to add to economic upswings and generate fragility in countries they favour, but withdraw rapidly with the reversal of risk perceptions and deny access to international liquidity when it is most needed. Booms generated by improved opportunities for profitable investment lead to under-estimation of risks, over-expansion of credits and over-indebtedness. The consequent build-up of external fragility and deterioration of balance sheets eventually leads to a reassessment of risks and cuts in international lending and investment, often resulting in financial meltdown and sharp contraction in economic activity. Monetary policy on its own is quite powerless in managing business cycles associated with such surges and rapid exits of capital. This is because the counter-cyclical monetary measures, notably adjustments in policy interest rates, needed to stabilize economic activity often generate adverse influences on capital flows and exchange rates which, in turn, undermine stability and growth. At times of booms, monetary tightening needed to check asset price bubbles, and overheating encourages external borrowing and attracts short-term arbitrage flows that, in turn, appreciate the currency and lead to a deterioration in the trade balance and a build-up of external fragility. Prevention of such an outcome would call for intervention in the foreign exchange market in order to stabilize the currency. However, this runs up against a number of hurdles. If intervention is not sterilized, domestic liquidity will expand,


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fuelling inflation in asset and, possibly, product markets. The effects of capital flows on both the exchange rate and domestic liquidity can be successfully sterilized by issuing government or central bank debt when such flows are moderate in size and concentrated in the market for fixed income assets. However, under strong surges across various segments of financial markets, sterilization would probably result in higher interest rates, attracting even more arbitrage flows.15 Furthermore, since interest earned on reserves is usually much lower than interest paid on public debt, there will be fiscal (or quasifiscal) costs, which can be very large when interest rate differentials are wide and the surge in capital inflows is strong. There are less costly methods of sterilization, such as raising the non-interest bearing reserve requirements of banks. This would also raise the cost of borrowing from banks, thereby checking domestic credit expansion. However, it could also encourage firms to go to foreign creditors. Banks might also shift business to offshore centres and lend through their affiliates abroad, particularly in countries where foreign presence in the banking sector is important. Monetary policy faces even greater dilemmas when capital flows are reversed and economic contraction sets in. Monetary expansion and cuts in interest rates needed to prevent credit crunch and financial meltdown and to stimulate economic activity would accelerate flight from the currency. Monetary authorities are, thus, compelled to pursue pro-cyclical policy in an effort to restore the confidence of the markets. However, under crisis conditions the link assumed in the traditional theory between the interest rate and the exchange rate breaks down. When the market sentiment turns sour, higher interest rates aiming to retain capital tend to be perceived as increased risk of default. As a result, the risk-adjusted rate of return could actually fall as interest rates are raised. This is the main reason why pro-cyclical monetary policy and interest rates hikes, implemented as part of the IMF bailout operations during several episodes of financial crises in emerging markets, were unable to prevent the collapse of the currency, serving instead to deepen economic contraction. Even though there are technical difficulties in empirically measuring the stance of monetary policy, particularly in identifying the policy component as opposed to endogenous component of monetary policy, available evidence clearly shows that they are almost always pro-cyclical at times of economic downturns associated with a rapid exit of capital. On the other hand, during booms the stance of monetary policy varies among countries because of the dilemmas already noted. In general, recent years have seen both excessive tightening of monetary policy to bring inflation under control, and several episodes of credit boom associated with surges in capital inflows (Mohanty and Scatigna 2003: 52–5, table 7). Some evidence indeed shows that policy rates are lowered in goods times (Kaminsky et al. 2004). This would have a pro-cyclical effect on economic activity, even though it would discourage arbitrage flows. But a more common practice in financially constrained,


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Public finance, debt and fiscal policy While constraints imposed by capital account openness on monetary policy are generally recognized, little attention has been paid to the implications of financial liberalization in general and capital account openness, in particular for the scope and effectiveness of fiscal policy as a tool of macroeconomic management. In fact, fiscal policy has become even more pro-cyclical than monetary policy as a result of rapid accumulation of public debt and increased dependence of fiscal space on volatile conditions in financial markets. The past two decades have seen a rapid shift in the financing of budget deficits in developing countries from central banks towards financial markets – that is, from direct to indirect financing – together with deregulation of interest rate regimes. This was advocated, inter alia, on grounds that market discipline over public borrowing would help bring fiscal responsibility and macroeconomic stability. Instead, there has been a rapid accumulation of public debt in many emerging markets as bond issues have replaced the printing of money. The process of debt accumulation has been greatly facilitated by the liberalization of the capital account. In several countries, closing the fiscal gap – rather than the forex gap – has become a major objective of capital account liberalization, since domestic financial markets are not deep enough to absorb rising public debt. This has allowed residents – notably, banks – to engage in international arbitrage in search for high profits on investment in public debt while assuming considerable exchange rate risks. It has also allowed non-residents to acquire government paper in domestic markets. Further, residents who traditionally invested in real assets, such as gold and property, as inflation hedges have been encouraged to lend to the public sector by linking government debt to the exchange rate. Consequently, an important part of domestic currency debt has come to be held by non-residents and of dollar-denominated (or linked) debt by residents, and the distinction between external and domestic debt has lost its significance. Despite the emphasis by financial orthodoxy on fiscal discipline, the process of public debt accumulation has continued unabated. Average public debt in emerging markets now hovers around 65 per cent of GDP despite highly favourable global financial conditions in the past few years (IMF 2006a: 16). External sovereign debt as a proportion of GDP now exceeds the levels of the 1980s. Although in recent years growth in external debt has


high inflation economies is to tighten monetary policy and raise interest rates during booms. This helps reduce inflation without cutting growth by encouraging arbitrage flows and appreciating the currency; but it also leads to a build-up of external debt and fragility that often ends up in a hard landing of the currency, necessitating pro-cyclical tightening and leading to large losses of output and employment.16


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declined in Latin America and stayed relatively stable in Asia, there has been considerable increase in domestic debt in both regions (IMF 2003b: ch. 3). Much of this increase is accounted for by sharp movements in interest and exchange rates, and excessive borrowing by some governments during surges in capital inflows. In some countries a more important factor has been the assumption of private liabilities by the public sector – socialization of private debt – mainly through recapitalization of insolvent banks, at times of financial crises. In Indonesia, for instance, such operations raised public debt by more than 50 per cent of GDP (IMF 2003a: 28), creating problems of fiscal sustainability despite a good track record regarding fiscal discipline. Consequently, stabilizing and sustaining public debt without running into arrears and defaults or facing drastic fiscal adjustments has become the principal occupation of treasury departments of financially constrained, highly indebted emerging market economies. Almost all other possible objectives of fiscal policy are subordinated to debt management. In several such countries, interest payments from the budget as a proportion of GDP have been several times the public investment in physical and human infrastructure. In Turkey, for instance, during 2002–2004 public investment as a proportion of GDP averaged at around 2 per cent of GDP while interest payments from the budget stood at some 16 per cent (ISSA 2005: table 12). Not only has the accumulation of public debt reduced fiscal flexibility and increased its vulnerability to rapid shifts in financial market conditions, but it has also promoted pro-cyclical fiscal policy. It is generally agreed that an appropriate fiscal response at times of booms associated with surges in capital inflows should be budgetary tightening. This could not only moderate expansion in domestic demand but also help, through budgetary surpluses thus generated, to absorb excess inflow of foreign capital without encountering the type of difficulties in monetary sterilization previously noted.17 Similarly, at times of rapid exit of capital and financial turbulence and economic contraction, a counter-cyclical response would call for fiscal expansion, primarily through increases in spending, combined with monetary accommodation to avoid increases in interest rates. However, this is rarely the policy response in economies with large stocks of public debt and a history of price instability. At times when risk assessment is unfavourable, there is very little scope for the public sector to increase spending because of the potential adverse reaction of financial markets. In fact, as in monetary policy, governments are often compelled to pursue procyclical fiscal policy during rapid exit of capital and economic contraction in order to enhance their credibility with markets and check capital flight. By contrast, the scope for fiscal expansion increases when market assessment turns favourable – surges in capital inflows not only facilitate borrowing, but also raise fiscal revenues by accelerating growth. Thus, pro-cyclical behaviour of capital flows encourages, and even dictates, pro-cyclical fiscal policy.


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There is ample evidence showing that fiscal policy in emerging markets has generally been much more pro-cyclical than monetary policy, adding to expansion and bubbles during financial booms and to deflation during busts.18 This is particularly the case in Latin America. Fiscal expansion at times of boom usually takes the form of cuts in taxes and increases in spending while expenditures are almost invariably reduced during downturns. Fiscal tightening was also the response to the financial crisis in Asia, implemented as part of IMF programmes. However, Asian countries have often been able to respond to weaknesses in global demand and a slowdown in export earnings by fiscal and monetary expansion – a space that does not exist in the financially constrained economies of Latin America and Africa.

Aid and macroeconomic policy Low-income countries are more vulnerable to balance-of-payments instability arising from fluctuations in commodity prices and export earnings than boom–bust cycles in private capital flows even though, with their growing integration into international financial markets, private flows have increased in importance for these countries as well. Because of pro-cyclical behaviour of international financial markets, their access to short-term liquidity and trade credits is often curtailed at times of adverse movements in commodity prices and terms of trade. This provides the main rationale for multilateral lending, notably provision of liquidity by the IMF, to enable them to weather temporary adverse movements in the balance of payments without suffering from large losses of output and employment.19 However, these countries are often compelled to pursue pro-cyclical macroeconomic policies by conditionalities attached to access to IMF resources beyond the gold tranche. Rather than providing adequate liquidity to meet export shortfalls, the Fund is inclined to impose exactly the kind of policies that the architects of the Bretton Woods system wanted to avoid in countries facing temporary balance-of-payments difficulties – that is, adjustment through austerity. Macroeconomic retrenchment is demanded irrespective of whether such difficulties are due to excessive domestic spending, distortions in the price structure, or external disturbances such as terms of trade shocks, hikes in international interest rates or trade measures introduced by another country.20 More generally, evidence strongly suggests that aid is highly unpredictable. It is as volatile as private capital flows to emerging markets and its volatility increases with aid dependence (Hill 2005; UN 2005: ch. IV; World Bank 2005: ch. 5). There is also evidence that multilateral flows are relatively more volatile than their bilateral counterparts (Pallage and Robe 2001). According to the World Bank (2005), aid flows to poor countries have become more volatile over 1990–2002 than in earlier years and most other flows. A more recent paper from the IMF finds no evidence of any fundamental change in


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the way aid has been delivered after the introduction of poverty reduction initiatives, despite the declared aim of strengthening coordination among donors and improving the design of financial support programmes. Indeed, it finds that aid volatility has worsened somewhat and concludes that the main causes of the volatility and unpredictability of aid, and the broader issue of macroeconomic instability in low-income countries, have not been addressed in a systematic manner by the donor community (Bulir and Hamann 2006). In general, aid flows are more volatile than either output or fiscal revenues. Consequently, they tend to aggravate rather than stabilize fluctuations in output and public spending. More importantly, they are pro-cyclical, correlated with growth in output and fiscal revenues in recipient countries.21 According to evidence provided by Pallage and Robe (2001), this is particularly the case in Africa. It is also found in the same study that, for almost all heavily indebted poor countries (HIPCs), aid flows were pro-cyclical between 1969 and 1995. The significance of pro-cyclicality of aid for fiscal policy space derives from the strong connection between the budget and aid flows in low-income countries. The dependence of the budget on aid has, in fact, increased as trade liberalization has eroded tax revenues and increased financial openness has dictated more liberal tax treatment of capital incomes.22 When aid flows diminish at times of declines in output and budget revenues as a result of, say, terms of trade shocks, fiscal policy would need to be tightened, adding to economic contraction. Again, there are occasional surges in aid flows to countries enjoying relatively rapid growth, and these create similar problems of sterilization and macroeconomic management as in emerging markets facing surges in private inflows.23

Impact on growth and development It is generally agreed that persistent macroeconomic instability impedes growth and development. As noted previously, rather than stabilizing economic activity at levels close to its potential, macroeconomic policies in most developing counties tend to add to instability. The link between instability and growth derives primarily from the effect of uncertainty on investment decisions. Sharp swings in key prices – including interest rates, exchange rates and real wages – and instability in output and income increase the risks associated with long-term, illiquid investment decisions, shorten time horizons, and promote defensive and speculative investment strategies.24 These, in turn, not only lower the average level of investment over the business cycle, but also distort its allocation at the expense of socially productive capital. Indeed, empirical evidence strongly suggests that long-term growth is adversely affected by output fluctuations, and that the adverse impact of volatility on growth is stronger in countries with a low degree of financial development.25 While counter-cyclical policies have a positive influence on


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growth (Aghion and Howitt 2005), there appears to be an inverse relationship between cyclicality of fiscal policy and economic growth in developing countries (UN 2006: ch. IV). There is also evidence that financial liberalization tends to aggravate the trade-off between growth and output volatility in emerging markets.26 Aid uncertainty, as measured by deviations of disbursements from expected inflows, is found to reduce its positive impact on economic growth in recipient countries (Lensink and Morrissey 2000). Evidence also shows that output volatility is much higher in emerging markets than in advanced industrial countries – and it is still higher in low-income countries. On some estimates, volatility of real GDP growth in emerging markets, as measured by standard deviation, is double that for industrial countries (Catão and Kapur 2004; Kaminsky et al. 2004; Hostland and Karam 2005). Again, within the developing world, GDP growth volatility is higher for African countries (Pallage and Robe 2001). This reflects not only the greater vulnerability of developing countries to external shocks, but also their limited ability to respond to them by counter-cyclical macroeconomic policies. Except for low-income countries heavily dependent on commodity exports, external financial shocks have become a much more serious source of disruption in the developing world than fluctuations in volumes and terms of international trade. There is increased evidence that boom–bust financial cycles in developing countries cause permanent dislocations in the long-term growth path and the labour market. Over the entire boom–bust–recovery cycles, there is often net loss of output, employment and wage incomes. Booms can lift income, employment and wages above their long-term levels, but crises depress them significantly on a more durable basis. In recoveries from deflation-cum-recessions, both employment and wages tend to lag considerably behind income growth. While jobless recoveries are a common feature of emerging markets recovering from financial crises and industrial countries such as the USA recovering from a burst of financial bubbles, their implications for the labour market are more serious in developing countries.27

Space for autonomous national policy There is considerable variation among developing countries in the extent to which they experience constraints over macroeconomic policies due to volatile and pro-cyclical capital flows. Here, differences in the degree of capital account openness and features affecting financial fragility including savings, foreign exchange and fiscal gaps, dependence on foreign capital, and the extent and nature of liability dollarization play key roles. These differences result partly from policy choices and partly from structural characteristics. Low-income countries dependent on official financing have very little scope to reduce their susceptibility to volatility and pro-cyclicality of aid by their own policy action, even though they may have some room to


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mobilize domestic resources in order to reduce their chronic savings, balanceof-payments and fiscal gaps. For these countries, widening the space for macroeconomic policy depends very much on multilateral initiatives to secure greater predictability and stability of aid flows. Since there is no multilaterally agreed regime for international capital flows, developing countries generally have de jure autonomy in capital account policies, even though some of them have undertaken obligations in bilateral or regional agreements. However, their de facto control is limited because of pressures for financial liberalization from multilateral financial institutions, domestic and international financial markets, and certain major industrial country governments.28 In reality, there is considerable diversity in capital account regimes in the developing world. According to an index of financial openness, in the second half of the 1990s the financial system in some developing countries including Argentina and Mexico was more open than that in the UK and the USA, while several others – such as India and Malaysia – came at the bottom of the list as economies with largely closed capital accounts (Dailami 2000: table 15.3). Voluntary and deliberate policy choices are certainly an important part of the explanation of this diversity. Many heavily indebted emerging-market economies with chronic fiscal, savings and balance-of-payments gaps – and, hence, with a relatively high degree of financial fragility – have been more willing to open up their capital accounts in order to find quick fixes to these deep-seated problems than some of the countries with sound fiscal and balance-of-payments positions.29 This, perhaps, reflects the recognition, on the part of the latter countries, that fiscal and monetary discipline and sound payments positions cannot always prevent financial instability and crises if a hands-off approach is adopted towards capital flows. As the Asian crisis shows, when policies falter in managing integration and regulating capital flows, there is no limit to the damage that international finance can inflict on an economy. In order to reduce vulnerability to volatile capital flows and enhance the space for autonomous macroeconomic policy, most emerging-market economies might need to act on three fronts: • Introducing built-in financial stabilizers to reduce the cyclicality of the

domestic financial system. • Regulating and controlling capital inflows in order to check surges driven


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by short-term international arbitrage opportunities, preventing overvaluation, rising trade deficits and the build-up of external financial fragility. • Using, when necessary, temporary standstills and exchange controls at times of sharp cutbacks in international lending and investment, and rapid exit of capital, in order to contain currency declines and financial meltdown, and to gain space for counter-cyclical macroeconomic expansion.



In discussing the policy problem in the financial boom–bust cycles, Minsky (1986) starts from the proposition that ‘stability – or tranquillity – is destabilizing’ because it increases the confidence of borrowers and lenders, and lowers safety margins. This is yet another instance of market failure that provides a strong rationale for the government to establish a system of financial control to promote stability. There is, indeed, consensus on the need for prudential regulations and effective supervision of the financial system, but much less agreement on how these should be designed. An important lesson from recent bouts of financial instability in both developing and developed countries is that many of the traditional risk assessment methods and prudential rules might simply serve to amplify the cyclicality of the financial system. Rules such as loan-loss provisions and capital requirements are relatively easy to meet in good times when loan delinquency is low and asset values are inflated. As a result, booms give rise to inadequate provisioning and excessive credit expansion and over-indebtedness, but, when the downturn comes, and loan delinquency rises and asset prices fall rapidly, the application of such rules can lead to a credit crunch. One way of dealing with these problems is to design prudential regulations in such a way that they provide built-in stabilizers to limit the cyclicality of the financial system (BIS 2001: ch. VII). Forward-looking rules might be applied to capital requirements in order to introduce a degree of countercyclicality. This would mean establishing higher capital requirements at times of financial booms, based on estimation of long-term risks over the entire financial cycle, not simply on the actual risk at a particular phase of the cycle. The same principle can be applied to provisioning. For instance, Spain has been using a forward-looking system whereby not current but future losses are taken into account in making loan-loss provisions, estimated on the basis of long-run historical loss experience for each type of loan. Again, long-term valuation may be used for collaterals in mortgage lending in order to reduce the risks associated with ups and downs in property markets. This is practised in the EU, where property valuation in mortgage lending reflects long-term trends in the market for real estate. Finally, other measures affecting conditions in credit and asset markets, such as margin requirements, could also be employed in a counter-cyclical manner, tightened at times of boom and loosened during contractions. While useful in containing the damage that might be inflicted by financial crises, none of these measures could adequately deal with risks associated with sharp swings in capital flows and exchange rates. Such risks can be restricted by applying more stringent rules to banks’ foreign exchange liabilities in capital adequacy requirements, loan-loss provisions, and liquidity and reserve requirements. Currency mismatches can be prohibited and restrictions can be applied to maturity mismatches between foreign exchange assets and liabilities of banks with a view to preventing borrowing short in international markets and lending long at home. Banks can also be prevented


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from lending in foreign currency to sectors without foreign exchange earning capacity. Taxes and non-interest bearing reserve requirements can be used to reduce arbitrage margins when domestic rates are considerably higher than rates abroad. These and many other techniques of regulation and control over capital flows were widely used by industrial countries in the post-war period.30 In fact, in several major industrial countries – including Japan, France and Italy – such restrictions were lifted only in the past two decades. By contrast, many developing countries have moved rapidly towards a regime of open capital accounts before reaching industrial and institutional maturity. There have been only a few attempts in emerging markets in recent years to curb surges in capital inflows through effective use of capital account measures. One such experiment was in Malaysia during 1994, when direct quantitative restrictions were imposed on the acquisition of short-term securities by non-residents. Empirical research suggests that these restrictions were effective in improving external debt profile, preventing asset price bubbles, and allowing greater space for macroeconomic policy. By contrast, Chile used a price based measure – unremunerated reserve requirements – in a counter-cyclical manner, applied to all loans at times of strong inflows in the 1990s, but phased out when capital dried up at the end of the decade. These measures were effective in improving the maturity profile of external borrowing, but not in checking aggregate capital inflows, pressures for appreciation and asset price bubbles, as in Malaysia.31 More recently, at the end of 2006, Thailand imposed a 30 per cent unremunerated reserve requirement on capital inflows held less than one year, including portfolio equity flows, in order to check continued appreciation of its currency. This provoked a strong reaction from the stock market, forcing the government to exempt investment in stocks from reserve requirements, but retaining it on bonds and other debt instruments. While this was portrayed as a retreat in the financial press, exceptions granted to FDI or portfolio equity flows do not necessarily remove the policy space gained by imposing explicit or implicit taxes on arbitrage flows, provided that the tax rate is adjusted to eliminate the margin between domestic and dollar rates. This is because, unlike fixed income flows, counter-cyclical monetary tightening would not generate destabilizing effects by encouraging FDI and portfolio equity flows. Higher interest rates would, in fact, discourage them by lowering both current incomes and discounted expected earnings of corporations. Besides, since, in direct and portfolio equity investment, international investors assume the currency risk, the adverse domestic financial repercussion of an eventual correction in the exchange rate would be limited. Finally, consideration should be given to using temporary controls on outflows at times of rapid exit of capital. The policy response to financial crises in emerging markets, as noted, have almost always involved pro-cyclical monetary and fiscal tightening, combined with IMF bailout operations designed to


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keep countries current on their debt payments to private creditors, to maintain capital account convertibility and to prevent default. Such a response not only fails to prevent financial meltdown and sharp contraction in output and employment, but also allows creditors and investors to escape the consequences of the risks they take and shift the burden onto debtors. Under these circumstances, temporary debt standstills and exchange controls can be the only viable option. This has also been recognized by the IMF Board, which argued that ‘in extreme circumstances, if it is not possible to reach agreement on a voluntary standstill, members may find it necessary, as a last resort, to impose one unilaterally’, and that since ‘there could be a risk that this action would trigger capital outflows …a member would need to consider whether it might be necessary to resort to the introduction of more comprehensive exchange or capital controls’ (IMF 2000). Such an action would not only allow the country to implement counter-cyclical monetary and fiscal policies for a swift recovery, but also facilitate, when needed, the restructuring of debt so as to share the burden equitably between debtors and creditors.32 So far, a step along these lines was taken only by Malaysia, with considerable success, during the 1997 Asian crisis.33 All other countries hit by crises, including Korea, went along with the IMF programmes, maintaining open capital accounts and applying pro-cyclical macroeconomic policies. However, the Korean government recognized in a subsequent assessment that ‘many of those who have analysed Korea’s 1997–1998 crisis contend that Korea could have been solved its liquidity problems sooner had a standstill mechanism been in place at the time it requested IMF assistance’ (G20 1999: 13). Reform of the international monetary and financial system There are several important shortcomings in the international monetary and financial architecture, and a comprehensive review of these would go beyond the scope of this chapter.34 Here, attention is focused on three areas where effective reforms can play a crucial role in enhancing macroeconomic policy autonomy in developing countries: capital account measures, policy surveillance, and official financing. Capital account measures While the articles of the IMF recognize the right of its members to regulate international capital flows and allow the Fund to request them to exercise control on capital outflows, they do not provide legal protection against litigation by international investors and creditors for countries imposing temporary standstills and exchange controls at times of rapid exit of capital.35 With recurrent crises in emerging markets and the problems associated with IMF rescue packages and pro-cyclical policies, there has been an increased recognition of the need for orderly debt workout procedures, including officially sanctioned temporary standstills and controls on outflows. However,


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as noted, while recognizing the need for standstills, the Fund has not been able to move in this direction in large part because of opposition from the financial markets and some major governments. The proposal prepared by the Fund secretariat for a Sovereign Debt Restructuring Mechanism (SDRM) did not include statutory protection against litigation, while giving considerable leverage to bondholders. Even in this diluted form it has been put on the backburner, as the impetus for reform has been lost because of widespread complacency with the recovery of capital flows to developing countries.36 According to a recent report by the Independent Evaluation Office ‘the IMF has learned over time on capital account issues’ and ‘the new paradigm … acknowledges the usefulness of capital controls under certain conditions, particularly controls over inflows’, but this is not yet reflected in policy advice because of ‘the lack of a clear position by the institution’ (IMF/IEO 2005: 11). Therefore, reform in the area of multilateral arrangements for capital account regimes should seek not only to include restrictions over capital outflows as legitimate tools of policy in the context of orderly debt workout procedures, but also specify the conditions under which the Fund should support or recommend the imposition or strengthening of controls over capital inflows in order to avoid unsustainable payments imbalances and build-up of external financial fragility. Policy surveillance As noted, international monetary and financial stability is a major concern to developing countries because of their vulnerability to external financial shocks. Such shocks are often connected to large shifts in exchange rate and macroeconomic policies in major industrial countries. The sharp rise in the US interest rates and the appreciation of the dollar was a main factor in the debt crisis of the 1980s. Similarly, the boom–bust cycles of capital flows in the 1990s that devastated many developing countries were strongly influenced by shifts in monetary conditions in the US and the exchange rates among the major reserve currencies (UNCTAD TDR 1998: ch. IV; 2003: ch. II). Again, despite exceptionally favourable conditions in global financial markets over the past few years, persistent global payments imbalances and uncertainties surrounding exchange rates of major currencies now pose a serious threat to stability in developing countries. So far, neither IMF surveillance nor consultations within the G7 have been effective in securing an appropriate mix and stance of macroeconomic policies in leading economies, and removing global payments imbalances and currency misalignments. The failure in policy coordination underlines the recent decision of the Fund to initiate a new collective action by supplementing its surveillance consultations with individual members with multilateral consultations involving major actors including the USA, Japan, the EU, China, Saudi Arabia and other so-called ‘systemically important countries’ (IMF 2006b). Whether or not this initiative would be more successful in


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steps to boost national saving in the United States, including fiscal consolidation; further progress on growth-enhancing reforms in Europe; further structural reforms, including fiscal consolidation, in Japan; reforms to boost domestic demand in emerging Asia, together with greater exchange rate flexibility in a number of surplus countries; and increased spending consistent with absorptive capacity and macroeconomic stability in oil producing countries. (IMF 2006c: para. 7) This is all the more reason why developing countries need to be vigilant about international capital flows, and put in place self-defence mechanisms until effective multilateral arrangements are introduced.

Official financing Increased predictability and reduced pro-cyclicality of official financing would not only improve its effectiveness, but also facilitate macroeconomic management in recipient countries. One aspect of the problem concerns provision of international liquidity by the IMF to countries facing temporary payments difficulties. Greater predictability could be secured by increasing unconditional access to Fund resources through reserve tranche purchases. This could be achieved by an overall expansion of Fund quotas and their redistribution in favour of poor countries. It also makes sense to separate quotas for contributions from those for drawing rights, and set different access limits to different groups of countries according to their vulnerability to external shocks and access to financial markets. In conditional access beyond the reserve tranche, a better balance needs to be established between financing and macroeconomic adjustment depending on the nature of the disequilibrium. No structural condition should be attached to access to the Fund’s general resources, as stipulated in the original guidelines.37 The CFF should be revived as a low-conditional facility for countries facing temporary shortfalls in primary export earnings. Similarly, consideration should be given to introducing a global counter-cyclical facility, such as the two oil facilities established in the 1970s to prevent oil price hikes from triggering a global recession, to be used, inter alia, at times of hikes in international interest rates and drying up of private flows to developing countries. Second, development aid also needs to become less volatile and procyclical. Various proposals have already been put forward for better donor coordination and reduced structural conditionality in the provision of aid. Attention is focused particularly on the International Finance Facility


securing coordination remains to be seen, but the first signs are not very encouraging because of reluctance by some leading countries to engage fully in these consultations. Compared with these efforts, tasks to be undertaken for ‘an orderly unwinding of global imbalances’ are formidable:


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(IFF) proposed by the British government, to be created by an international treaty.38 The objective of the IFF is, inter alia, to secure long-term pre-commitment to provide funds for disbursements through the existing bilateral and multilateral aid delivery channels. As formulated, such a facility would bring greater predictability of aggregate aid funds, but whether it would reduce volatility and pro-cyclicality of aid flows to individual recipients would depend on how it would be disbursed. In this respect, recent shifts away from aid conditionality by some donors, including the United Kingdom and Norway, are particularly encouraging.39 Since poverty reduction has been declared as a global public good in several UN summits and conferences in recent years, there is a strong rationale for going a step further and establishing global sources of funds for development finance. This could be achieved through agreements on international taxes, including a currency transactions tax (the so-called Tobin Tax), environmental taxes and various other taxes such as those on the arms trade, to be applied by all parties to the agreement on the transactions and activities concerned, and pooled in the UN development fund.40 A common feature of these is that they are all sin taxes, which would provide revenues while discouraging certain global public bads such as currency speculation, environmental damage or armed conflict and violence. Certain sources of revenue, such as the Tobin Tax, would require universal participation, but others, including environment taxes, could be introduced on a regional or plurilateral basis. An advantage of such arrangements over present aid mechanisms is that, once an agreement is reached, a certain degree of automaticity is introduced into the provision of development finance without going through politically charged and arduous negotiations for aid replenishments and national budgetary processes often driven by narrow interests.

Conclusion Closer global economic integration and proliferation of multilateral rules and international obligations has resulted in tightened constraints over policy autonomy in developing countries. The WTO rules and obligations, and the structural conditionalities of the BWIs are the main factors restricting autonomy in development policy and strategies. Financial market pressures brought about by increased mobility of capital and capital account liberalization, macroeconomic conditionalities of the BWIs and the pro-cyclical behaviour of aid play a greater role in circumscribing monetary, fiscal and exchange rate policies. Bilateral and regional agreements bring constraints to both development and macroeconomic policies, and often these are much tighter than those resulting from multilateral rules and obligations. A second conclusion is that the multilateral system lacks coherence; that is, comparable and consistent disciplines in closely connected areas of international economic interaction. This is particularly notable between trade and


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finance. The existing system of global economic governance lacks effective multilateral disciplines over the exchange rate, macroeconomic and financial policies, or for redress and dispute settlement regarding the negative impulses generated by such policies. In this respect, governance in money and finance lags behind that for international trade. This is a main source of strains in the trading system. Third, there are significant inequalities between developed and developing countries in the way that their policies are effectively constrained by multilateral arrangements. The choice of areas brought under multilateral disciplines and the design of rules and practices in these areas generally favour industrial countries. Lack of effective multilateral rules and obligations in macroeconomic and exchange rate policies is one important aspect of this asymmetry, since it allows policies in richer and more powerful countries to escape multilateral oversight. By contrast, poor countries face strict conditionalities as part of their terms of access to official financing, which shape not only their exchange rate and macroeconomic policies, but also broader development strategies. The WTO rules not only favour more advanced countries, as in the case of TRIPs, but also deny many instruments of development policy extensively used by advanced countries in reaching their current levels of industrialization. Fourth, there still remains more space than is sometimes believed in both development strategies, and financial and macroeconomic policies. In several areas brought under the WTO legislation there is room for manoeuvre. On the other hand, many areas of policy remain outside existing multilateral legislation, including not only exchange rate and capital account regimes, but also development policy issues such as FDI, competition policy, and labour and environment standards. The degree of autonomy in these areas is greater for those middle-income countries that can escape donor conditionality than poor countries dependent on aid. Fifth, differences among countries in the extent to which they are subjected to market pressures and multilateral disciplines, as well as in their willingness to accept the neo-liberal recipes explain why there is still considerable diversity in development strategies, and macroeconomic and exchange rate policies within the developing world, even allowing for the convergence that has taken place towards outward oriented, market based strategies and greater financial orthodoxy over the past two decades. This is particularly the case in financial and exchange rate policies. However, there is also diversity in other areas of policy, including tariff regimes as indicated by large inter-country variations in both applied and bound tariffs. Again, while some countries pursue an open door policy for FDI, others are more selective. Technology policies, including R&D subsidies, are seen as a key instrument of upgrading in more dynamic economies whereas, in others, unbridled competition is expected to settle the matter. What is to be done? Given the complexities of the issues involved, it would be difficult to write a blueprint for reform


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at the international or national level. Nevertheless, some broad conclusions emerge. First, there is a need to restructure multilateral disciplines to bring greater coherence and to widen boundaries of policy intervention for development. This calls for a fundamental reform of the international monetary and financial system. It also calls for a redesign of the WTO so as to incorporate greater space and flexibility for development policy into the rules, rather than allowing them as exceptions – some specific proposals are made to that effect in the areas examined in this chapter. Second, there is a need for a rethinking of the policy approach in many developing countries – to make use of the policy space that is available, to create conditions for gaining additional space by reducing dependence on aid and private capital inflows, and to rely on innovative thinking rather than following one-size-fits-all prescriptions.

Notes 1. The distinction between instruments and targets constitutes the basis of theory of economic policy first elucidated by Tinbergen (1952 and 1956); see also Hansen (1967) and Bryant (1980: ch. 2). 2. The importance of coherence among different components of the international economic system was put in broader terms in paragraph 4 of the Marrakech Declaration: Ministers recognize, however, that difficulties the origins of which lie outside the trade field cannot be redressed through measures taken in the trade field alone. This underscores the importance of efforts to improve other elements of global economic policymaking to complement the effective implementation of the results achieved in the Uruguay Round. (WTO 1994: para. 4) 3. Ironically, the US government is now unable to invoke multilateral rules and obligations, either in the IMF or in the WTO, against China for what is considered as exchange-rate manipulation (Denters 2003). 4. In addition to the GATT, these include the General Agreement on Trade in Services (GATS), Trade Related Aspects of Intellectual Property Rights (TRIPs), Trade Related Investment Measures (TRIMs), and Subsidies and Countervailing Measures (SCM). 5. For a lucid analysis of the framework for international trade, its principles, rules and exceptions, see Das (1999). 6. For more detailed treatment of restrictions in these areas, see Akyüz (2009). 7. Kraev (2005). See also UNCTAD TDR (1999); Santos-Paulino and Thirlwall (2004); UNCTAD (2004b). 8. For instance, Annex B of the so-called ‘July package’ that provides the framework for the Doha negotiations takes applied rates as the basis for commencing cuts in unbound tariffs (WTO 2004). 9. Issues taken up in the next two paragraphs are discussed in greater detail in Akyüz (2005c). 10. For measures used in late industrializers in Asia, see Weiss (2005); English and de Wulf (2002). 11. On the trade distorting effect of FDI subsidies and trade restricting policies of TNCs, see Kumar (2002 and 2005).


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12. However, developed countries have been seeking to remove flexibility by changing the modalities of GATS negotiations (Khor 2006). 13. For a detailed description of rights and obligations under the TRIPs Agreement, see Das (1999: ch. VII.2), and Correa (1998 and 2000). 14. Indeed, the theory of the impossible trinity is based on the Mundell–Fleming model developed primarily for advanced industrial countries where the extent of liability dollarization is limited. On its origin, see Boughton (2003). 15. In Argentina, where capital flows have been relatively moderate, sterilization seems to have been successful in keeping the real exchange rate within range and absorbing resulting excess liquidity through emission of central bank paper since 2002/03 despite opposition from the IMF (see Damill et al. 2007). China’s apparent recent success in sterilizing large inflows of capital is due – at least, in part – to its control over the domestic financial system (‘financial repression’), which helps to keep interest rates low despite rapid economic expansion. On intervention in China, see Goldstein and Lardy (2005); and for controversies over the effectiveness of foreign exchange market interventions, see Sarno and Taylor (2001). 16. This was the case in Latin America in the 1990s, where monetary conditions were tighter and more volatile in comparison with East Asia: see UNCTAD TDR (2003: 132–6). 17. The Keynesian theory of financial boom–bust cycles (as developed by Minsky 1986) favours such an action because of its stabilizing effects on aggregate demand. It is also recommended by the IMF to emerging markets because it would help avoid currency appreciations and balance-of-payments deterioration; see Akyüz (2005b). 18. See a number of papers in BIS (2003). See also Kaminsky et al. (2004) and UN (2006: ch. IV). For a further discussion, see Akyüz (2006: 43–7). 19. On the rationale of multilateral lending, see Akyüz (2005a). 20. For instance, the Compensatory Financing Facility (CFF) introduced in the early 1960s to enable countries facing temporary shortfalls in primary export earnings to draw on the Fund beyond their normal drawing rights without the performance criteria normally required for upper credit tranches has subsequently been translated into a conditional facility (Akyüz 2005b). 21. See Pallage and Robe (2001), for volatility and pro-cyclicality with regard to output; and Bulir and Hamann (2003), Bulir and Lane (2004) and Hill (2005) with regard to fiscal revenues. For a theoretical attempt to explain pro-cyclicality of aid, see Cordella et al. (2002). 22. Many low-income countries dependent on trade taxes have been unable to recover the revenues lost from trade liberalization through other means such as valueadded taxes; see Baunsgaard and Keen (2005). 23. For the experience of Uganda in this regard, see Schneider (2006). 24. For investment under uncertainty, see Dixit and Pindyck (1994). On the relation between macroeconomic instability and growth, see Fischer (1993) and Bleaney (1996). 25. On the relation between macroeconomic instability and growth, see Fischer (1993); Bleaney (1996); Ramey and Ramey (1995); Aizenman and Pinto (2005). On the link between financial development and the impact of volatility on growth, see Aghion and Howitt (2005). 26. For instance Kose et al. (2005: 59) find that ‘financial integration …seems to strengthen the negative relationship between growth and volatility’, but de-emphasize this finding.


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27. For the impact of boom–bust cycles on output, wages and employment, see UNCTAD TDR (2000: chap. 4) and Van der Hoeven and Lübker (2005). On jobless recoveries from financial crises, see Akyüz (2006: 56–60). 28. Although the Washington Consensus in its original form and IMF country programmes did not include capital account liberalization (Williamson 2003), the Washington ideology was very much in favour of it (Akyüz 2005b). 29. For the Latin American experimentation with neo-liberalism, see UNCTAD TDR (2003: ch. VI). 30. See, for example, a number of articles in Swoboda (1976). 31. For a discussion and assessment of these measures, see Ocampo (2003). 32. Debt restructuring could also be facilitated by the inclusion of collective action clauses in international bond contracts. For a detailed treatment of these issues, see Akyüz (2002b). 33. On the rationale and effectiveness of Malaysian capital controls, see UNCTAD TDR (2000: ch. IV). See also Kaplan and Rodrik (2001). 34. For a detailed discussion of these issues, see Akyüz (2002a) and the literature cited therein. 35. On conflicting interpretations of IMF provisions and judicial practices, see UNCTAD TDR (1998: ch. IV). 36. Initially, the Fund secretariat had also advocated temporary standstills and exchange controls to facilitate debt workouts (see Krueger 2001: 7). For a detailed discussion of the rationale for orderly debt workouts and the debate in the IMF, see Akyüz (2005b: ch. 5). 37. See Akyüz (2009), for further discussion. 38. HM Treasury (2003). For assessment, see Mavrotas (2005) and World Bank (2005). 39. See TWN (2006) and UN (2005). 40. See Atkinson (2005), for such sources of development finance.

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absorptive capacity xxxiv, 82–3, 88, 90–1 Abu Dhabi SWF 261 accountability 84, 235 Adam, C., et al. (2004) 84, 94 Buffie, E. 94 O’Connell, S. 94 Pattillo, C. 94 ‘adjustment costs’ 303 ADM 201 Africa commodity-dependence (1995–2006) 154t GDP–growth volatility 320 historic crisis (cotton) 166–7 trade with China, USA, EU-15 (2006) 152f see also francophone African cotton-producing countries African, Caribbean, Pacific Group (ACP) 250, 256–60, 262–3, 266 African Cotton Association (ACA) 217(n7) aggregate demand 81–2, 94(n20), 330(n17) aggregate measures of support (AMS) 309 aggregate monetary target (M3) approach 86 aggregation issues 101 Aghion, P. 330(n25), 331 agricultural commodities Asian-driver demand 125–6 boom and bust 153–4, 160 futures trading 59 horticultural 87 price (monthly average, 2002–8) 51t, 51–2 price (2008) 60 price instability index (1968–2007) 56t price index (1957–2008) 50f price index (2002–8) 50f prices 13, 140, 141f

prices (long-term decline) 288–9, 289f, 297 real price (index, 1960–2007) 58f agricultural extension 76–9, 205–6 agriculture 288–9 ‘de-agriculturalization’ 82 domestic support 13, 309 farm-gate prices 75 farmers 259, 261–4 farmers: income 210–12t, 214–15t insurance schemes 264 miscellaneous 49, 52, 134, 144t, 168, 184, 202, 227, 265, 280f, 299 small-scale 197 yields 288–9 aid bilateral xxxii, 12–13, 33, 255, 259, 302 budgets xxxii–iii, xxxv conditionality 327, 331(n39), 335 debt-service system 283f, 284, 286 ‘development aid’ xxxii–iii, 198 effect of global financial crisis xxxiii, xxxv effectiveness/ineffectiveness xxx, xxxiv, 97, 286, 296 international ‘architecture’ xxxii, xxxiv–v and macroeconomic policy 318–19, 330(n19–23) multilateral 33 ‘official development assistance (ODA)’ xxxiii, 49 pro-cyclicality 319, 320–1, 326–7, 330(n21), 335 project proliferation xxxii, xxxv public support xxxiii volatility 318–19, 326–7, 330(n21), 332 aid donors xxxii, 252, 254–5, 259, 264, 302, 319 coordination xxxii fragmentation xxxii, xxxiv


Key: bold = extended discussion or concept highlighted in the text; f = figure; n = note; t = table.


Index

aid-dependence 62(n4), 249, 257, 281, 283f, 284, 286, 318, 328–9 Aid-for-Trade 27, 253, 260, 263–4, 267 Aiglon Dublin Ltd 192t, 192, 193 Aizenman, J. 330(n25), 331 Ajwad, M. I. 93(n8), 94 Akaike Information Criterion (AIC) 107 Akyüz, Y. xviii, xxx, xxxi, xxxiv, 303, 307, 329(n6, n9), 330(n17–20), 331(n28, n32, n34, 36–7) publications 331–2 Algeria 223, 236 Allenberg Cotton Co. 192t, 196 aluminium 54f, 104–5, 108t, 110, 111t, 113t, 121, 122–4f, 123t American Economic Review 114(n2) Angola 120, 148, 153 Annex VII countries 309–10 Antoshin, S. 134, 136 arbitrage 313–16, 321, 323 ARCH analysis 62(n9) Argentina 31, 146, 185, 321, 330(n15), 333 ARIMA 107, 108–13t Arizpe, L. xvi ARMA 107 Asia xxiv, 40, 60, 61f, 63, 155t, 159, 179t, 256–7, 267, 317 Asian drivers (of global economy) 118–21, 133–4, 138–9, 161 crucial factor (terms of trade reversal) 135 rise in commodity prices 121–7 size 118–19 website 118 Asian financial crisis (1997) 31, 173, 253, 264, 318, 321, 324 assembly (manufactured goods) 293, 311 asset portfolio 59, 65 asset prices xxxi, 314, 315, 322–3 assets (fixed-income) 315 assets under management 145 Association des Producteurs de Coton Africains (APROCA) 217(n7) Atkinson, A.B. 331(n39), 332 Australia 31, 61f, 121, 145, 179n, 180, 185, 191–2t, 205, 223 automobiles 121, 130, 310 Auty, R. 94(n15), 94 Avramovic, D. 11 Azerbaijan 179n ‘back to back sales’ 76 Bacon, R. 14, 17, 115

‘bad neighbours’ 271 ‘bad policies and institutions’ 273 Baffes, J. 93(n8), 94, 145, 159 balance of payments 7, 17, 49, 221, 232, 236, 239, 252, 258–9, 262, 310, 313–14 deficits/crises 42, 82, 224, 254–5, 260, 274, 307–8, 318, 330(n17), 335 instability 318 Mundell–Fleming model 223 support 261 ‘trade deficits’ 276, 321 balance sheets 313, 314 Ban Ki-Moon 264, 269 ‘Banana Republic’ 200 bananas 108t, 111t, 125, 126f, 198, 260 Bangladesh 259, 262, 280f, 289 Bank for International Settlements (BIS) 21, 59, 62, 330(n18), 332 Bank of Zambia (BoZ) data 228–34n, 239n, 241–2n banks/banking 25, 159, 309, 315–17, 322–3 Banque de France 173 Barbados 261 Bardhan, P. 152, 159 bargaining power 13, 26–7, 67, 71, 79, 100, 200, 307 Bargawi, H. xvii, 76–9, 80–1f, 94 barriers to entry 131–3 Batool, T. xvii Baunsgaard, T. 330(n22), 332 Bayer: FiberMax approach 203–4 beef 108t, 111t, 126f, 260 Belgium 8, 192t Bell, R.M. 133, 134n Bellagio conference (1963) 7–8 Ben-David, D. 281, 298 Benin 153, 173–4, 175–7t, 179n, 186, 187n, 193 Bernal, J. D. 4 Bernstein, H. xvii better/fairer world xvi, xxxiv, 14, 15 Bevan, D., et al. (1999) 94(n16), 94 Collier, P. 94 Gunning, J.W. 94 BHP-Billiton 259 ‘bicycle theory’ (GATT) 34 Biénabé, E. 219 ‘big government’ 158, 161 Bio-Tchané, A. 150–1, 162 bioethanol 125 biofuels 52, 66, 139, 253, 266


338


Index 339 Brazil

19, 23, 31, 35, 44, 124f, 165, 180, 184–5, 197, 200–1, 260, 292, 312 Breaking the Conflict Trap (Collier et al., 2003) 272–3, 298 Elliott, V.L. 298 Hoeffler, A. 298 Reynal-Querol, M. 298 Sambanis, N. 298 Bretton Woods conference (1944) 7 Bretton Woods institutions (BWIs) xxxii, 36, 172–3, 182, 188, 196, 305–7 Articles of Agreement 302 bottom-billion representation 29–30 countries ‘voting with feet’ 32 elements of governance reform 31–3 ‘international financial institutions (IFIs)’ 31–3, 42, 48, 73, 158, 335 macroeconomic conditionalities 327 ‘multilateral financial institutions’ 22, 303–4, 321 ‘Washington Institutions’ 250, 251 Bretton Woods system 46, 254, 304, 318, 333 Breusch-Pagan-Godfrey test 241, 241t BRIC 23, 30, 251, 260 Britain see United Kingdom British Association for Advancement of Science 4 Brown, C. P. 12, 16 Bryant, R.C. 329(n1), 332 bubble economy 251, 253 dot.com bubble 70 buffer stocks 9, 12, 47, 48, 264 Buffie, E. 94 Bulir, A. 330(n21), 332 Burall, S. xxxii, xxxiv Burkina Faso 153, 173–6, 177t, 179n, 185–6, 187n, 193, 204, 217(n2) business cycle 144–5, 314, 319, 335 buying and selling 72, 75 C4 Cotton Initiative 165 Caisses de Stabilization 262 Calvo, G. 225 Cambodia 269 Cambridge University 5 Cameroon 148, 173–4, 175t, 177t, 179n, 186, 187n Campbell-Boross, L. F. 17 Canada 23, 35, 121, 145, 223 capacity-building 24–5, 215t, 312 capacity-utilization 285 capital 12, 119, 157, 181, 302, 304, 325 access to 287, 297(n3), 299


biotechnology xxviii, 166, 185, 203 Birdsall, N. 275–6, 298 Blau, G. 7 Bleaney, M.F. 330(n24–5), 332 Bloch, H. xviii, xxviii, 45, 57, 62, 114(n2, n4), 115 Blomström, M. 158, 160 Bolivia 269 bonds 45, 59, 70, 316, 323, 325, 331(n32) boom–bust cycles 26, 60, 153–4, 160, 222, 224–5, 232, 235, 238, 254, 259–60, 293, 294t, 295, 314, 317–8, 320, 322, 325, 330(n17), 331(n27) booms 91 outcome (Zambia) 86–90, 94(n20) Botswana 85, 221, 225, 237, 261 Bottom Billion (Collier, 2007) 22, 28, 36 alternative approach 278–93, 296 argument and conceptual underpinnings 270–3 commodity-dependence issue (disappearance) 273–6 conceptual framework (weakness) 273–8 critique and alternative view xxix–xxx, 269–300 global marginalization and global polarization 291–3 international poverty trap 278–87 methodological nationalism 276–8 new research challenge 296 policy recommendations 269, 295–6, 299 political rhetoric versus policy practice 23–4 structural transition (blocked) xxix, 287–91 bottom billion countries (BBCs) 269–300 failure to converge 270–1 traps 271 see also developing countries Boughton, J.M. 21–2, 29, 36, 330(n14), 332 Bova, E. xviii, xxix, 94(n19), 95, 228–34n, 238–9n, 240 Zambia case study 86–90, 94(n20), 95, 221–45 Bowles, S. 157, 160 Bradford, C. 21–2, 29, 36 branding 132, 203, 253 Brandt Commission 20–1


Index

capital – continued foreign 87, 320 foreign (asset flows) 224 income (tax treatment) 319 net exporters 263 socially productive 319 capital account convertibility 324 cycles 314 liberalization 301, 313–16, 327, 330(n14–16), 331(n28) miscellaneous 236, 239 openness 316, 320–1, 323–4 regimes 302–3, 328 capital adequacy 322 capital flight 158, 271, 303, 312, 314–15, 317, 321, 323–4 capital flows xxxi, 6, 94, 275, 283f, 284, 286, 297(n3), 299, 313–15, 317–18, 320–6, 329, 330(n15), 331(n30), 334–5 boom–bust cycles 314 short-term 304 capital markets 223, 286, 297(n3), 309 capital mobility 84, 224, 327 capitalism (unsolved problems) 15–16 Cargill Cotton Limited 192t, 196, 201 Caribbean islands 61f, 147f, 257 Carnegie Endowment 7 cash crops 66, 73, 77, 188 Cashin, P. 45, 62, 122, 136, 143, 160 Cashin, P., et al. (1999) 145, 160, 236 McDermott, C.J. 160 Scott, A. 160 Central Africa 156, 257 Central America 292 Central Asia 127, 269 central banks 39, 88, 84, 224, 235–6, 254, 262, 315–16, 330(n15), 332 Central Europe 266 centre–periphery divide 131, 146, 273–4 ‘obsolete’ 275 cereals (imported) 254, 261 CFA Franc 173, 174, 186, 196–7, 262 Chad 148, 173–4, 176–7t, 179n, 186, 187n ‘Challenges and Prospects for Commodity Markets’ (workshop, 2008) xvii, 159(n1) Chang, R. 94(n18), 95 Chatham House 7 chemicals 6, 88, 187, 203, 206, 211t, 213–14t, 288

Chen, Y.-C., et al. (2008) 145, 160 Rogoff, K. 160 Rossi, B. 160 Cheysson, C. 256 Chi Square 241t Chidzero, B. 8 Children’s Summit 23 Chile 84–5, 91, 94(n18), 121–2, 145, 221, 236–7, 323 copper boom 88–90 real effective exchange rate (2000–8) 89f, 89 structural budget mechanism (2001) 88 Chile: Central Bank 88 Chile: Ministry of Finance 88 China 105 agricultural reform (1978–) 170 commodity prices and terms of trade xxviii, 117–38 cotton production 168–70 cotton subsidies 183, 217(n3) current account surplus (1996–2006) 119 development cycle 149 development cycle (commodity price volatility) 142, 144 exchange rate policy 197 ‘feet of clay’ 152, 159 governmental long-term contracts with 209 impact on global commodity prices 139 integration into world economy 151 labour statistics 136(n3) limited impact on price volatility 149–52 share in global demand for metals (1993–2005) 122f share of growth in global demand for agricultural products (1993–2005) 126f SWF 261 ‘third-largest trading partner of SSA’ 150 trade with Africa (2006) 152f trade–GDP ratio (1985–2006) 119 WTO entrance 183 see also Asian drivers CIF xxi, 192, 194–5t civil service 11 ‘public officials’ 277 civil society 21, 27 civil war 269–71, 273, 275, 277, 298 ‘armed conflict’ 327


340


‘civil conflict’/‘civil turmoil’ 159, 174 ‘critical historical processes’ 291 and poverty 279–281 recurrence 281 Clark, C. 4, 14 climate change xxiv, 21, 52, 62(n1), 66, 125, 134, 290, 297 clothes/clothing 4, 311 Club of Rome 256 coal 126–7 cocoa 9, 10, 45, 47–8, 53f, 96, 103–4, 108t, 110, 110–11t, 113t, 153–4, 160, 158 Codelco 89 coffee arabica 69, 76, 81f, 92(n1) cyclical price fluctuations 104 ‘green’ 70, 73, 76, 93(n5) impact of portfolio investment 69, 92(n1), 96 institutional environment (Tanzania) 76–9, 80–1f, 93–4(n13–14), 94 medium-term price cycle (1970s, 1980s) 44 nominal prices (1995–2007) 79, 81f organic 93(n7) price (1900–2007) 108t, 110t, 110 price (2002–8) 53f price formation and volatility xxvii price risk management (Uganda/Tanzania) 74–6, 93(n9–12), 96–7 price transmission mechanisms 72–3, 95 quality 93(n13) quality deterioration 79 robusta 76, 92(n1) speciality 76, 78, 93(n7, n10) trend estimates for individual price series 111t, 113t voucher system 77 coffee auctions 74–5, 78, 81f, 93(n9) Coffee C contracts 69f, 69–70, 93(n4–5) Coffee Marketing Board (Uganda) 74 ‘coherence’ 20 cointegration analysis 93(n6), 227, 233, 241–3 collateralized debt obligations (CDOs) 251 Collier, P. xxix, 22, 36, 94(n15–16), 94, 95, 269–300 critiques 270 see also Bottom Billion

Colombia 84, 225, 237, 261 colonialism 8, 13, 153, 166–7, 188, 256 commodities absolute scarcity 132, 133–4 book preface and introduction xxiv–xxx book structure xxvi–xxx cooperation and world economic development xxvi, 3–17 ‘de-commodification’ 93(n7) GDP elasticities xxviii and global economy xxvii–xxviii, 37–162 hard 121–5, 139 international policy xxx, 43, 46–9, 274, 296 ‘new era of relative shortage’ (2009) 140 non-fuel 56, 57f, 151 price elasticity of demand 184 primary 3, 136(n4), 155–6, 273–6, 279, 284 Ricardian rent-intensive xxviii shocks 236 soft 250 South–South trade 6 stabilization 45, 257 trade and governance xxvi–vii, 1–36 world market structures (changes) 67–73, 92–3(n1–7) see also agricultural commodities Commodities in Crisis (Maizels, 1992) 101–2, 114(n2–4) data 107 estimation methodology 107 hypothesis reconsidered (analytical approach) 103–4 hypothesis re-visited xxviii, 99–115 reviews 114(n2), 115 commodity booms 81, 83, 94(n17), 95, 144t, 252, 291 2002–8 40f, 49–56, 60, 70, 92, 293–5, 300 and busts 60, 222, 224–5, 235, 238, 260, 293, 294t, 295 Dutch disease 82–3, 94(n16), 95 exchange rate appreciation 222, 225, 226 commodity chains xxvii, 71–3, 74, 90, 92 ‘commodity’ crisis (1980s) (Maizels) xxviii, 41, 44–5, 63 commodity currencies 84, 85


Index 341


Index

commodity index funds 70 commodity market structures, evolving governance and policy issues xxvii, 65–97 policy implications and challenges 90–2 commodity markets xv, xvii, xxiv, xxxiv, 7, 19, 261 emerging landscape 67–80, 81f, 92–4 ‘financialization’ (2000s) 145 fundamental changes 59 global (fundamental changes) 90 issues and challenges xxvii, 39–64 oligopsonistic and oligopolistic structures 67 ‘over-regulation’ xxix perfectively competitive 45 recent developments xxvii structural change 65, 139–42 ‘theory as servant of reality’ (Maizels) 100 commodity price cycles/dynamics xxix, 48, 65–6, 80, 97, 102, 103f, 224–5, 235 effects of derivatives markets 68–71, 92–3(n1–5) long versus short waves 101 macroeconomic management 82–6, 94(n15–19) managing resource-based economies 80–90, 94(n15–20) two-way causality 68 upward phase 83 commodity price index (CPI) xxviii, 226–7, 235, 241–3 behaviour under PEP and PEPI 233, 234f see also consumer price index commodity price volatility 56–9, 101–2 ‘central issue’ 142–6 coffee 69–71, 93(n5) detrimental effects 146–9 difficulty of regulating 157–9 industrial (1862–1999) 143f limited impact of China 149–52 miscellaneous xxviii, xxxii, 9, 12, 43, 44–5, 60, 67–73, 76, 79, 83, 85–6, 90, 92, 94, 97, 105–6, 114(n4, n8), 134, 141, 153, 222, 293, 294t, 318 commodity prices 1900–2007 108–13 1960–2008 39, 40f 1970s versus 1980s 114(n7)

apparent trend reversals 105 boom (2002–8) 117, 117f, 143, 250 co-movements 145, 159, 160 collapse (1980s) 101–2 collapse (2008) 66, 106–7, 117 counter-cyclicality 42, 45, 47 cyclicality 45–6 derived-demand effects 105 determinants/determination 13, 59 145 and economic development (historical retrospect) 43–9 empiricism 43–6 falling 285 Great Depression (1930s) 114(n7) historical context 56–9 impact of financial crisis (2007–) 60 industrial (index, 1862–1999) 45, 46f instability (index, 1968–2007) 56t literature 43, 114(n6) medium-term 52, 60, 65, 80, 83, 86 monthly average (2002–8) 49–56 non-fuel 49–56, 60, 106, 142f, 144, 145 post-1980s (whether still ‘in crisis’) 102–6, 114(n5–9) post-sample evidence 104–5, 111–13t real 106, 107 real (1900–2007) 102, 102f real (1970–2007) 102–3, 103f real (1980s crash) 101 real (index, 1960–2007) 56, 58f real (indices, 1970–2005) 141f real (long-term trends) 101 real (non-fuel, index, 1960–2007) 56, 58f real (short-term instabilities and cycles) 106 real (trends) 56–9 recent movements (2002–8) in historical context 49–59 secular decline 139, 140f, 140 short-term 46–7, 65, 80, 101, 103, 106 stabilization 209 statistically significant trend coefficient estimates 108–13t stochastic trend term 107 and terms of trade (China/India) xxviii, 117–38 trends (1900 to year n-1) 104, 108–10t, 114(n6–8)


342


trends (long-term) 43, 101, 103, 108–13, 114(n6), 199 ‘commodity problem’ 99 commodity ‘super-cycle’ 250 commodity supply chains 71–2 Commodity Supply Management (Maizels, Bacon, Mavrotas, 1997) 14, 17 commodity trade xv, 260–3 physical 68–9, 93(n2) policy design 100 ‘commodity trap’ 82, 158–9, 221, 225 commodity-dependence 273–6 cause of poverty 15 exchange-rate regimes (Zambia) xxix, 221–45 and extreme poverty 281 ‘impediment to development’ 252 and poverty traps 152–7 risk of civil war 279 commodity-dependence trap 42, 62(n4), 63, 91 Common Agricultural Policy 256, 258 Commonwealth Finance Ministers: Guyana meeting (2007) 267 Commonwealth Sugar Agreement 257 Comoro Islands 262 Compagnie Française de Développement des Textiles (CFDT, 1949–2001) 193, 217(n6) companies 119–20, 159, 309 comparative advantage 125, 151, 156, 189, 208 Compensatory and Contingency Finance Facility (CCFF/IMF, 1988–) xxi, xxix, 49, 62(n7), 249, 255 compensatory finance 249–68 inter-regional xxix international xxix, 251 mechanisms (whys and wherefores) 252–3 ‘never properly tried’ 267 new thinking 264–7 Compensatory Financing Facility (CFF/IMF, 1963–88) xxix, 49, 62(n7), 249, 253–5, 258, 260–1, 266, 326, 330(n20) competition 13, 45, 79, 135, 155, 157, 309, 328 competitive advantage 271 competitiveness 6, 48, 83, 85, 88, 90, 182, 184, 223, 225, 307 COMPEX xxix, 249, 256, 259

‘Conceptual Framework for Analysis of Primary Commodity Markets’ (Maizels, 1984) 100, 115 conflict trap 271, 273, 277 conglomerates (international) 251 Congo 153 Congo-Brazzaville 148, 158, 160 ‘constituencies’ (Helleiner) 30 ‘construction boom’ literature 94(n16) Consumer Price Index (CPI) 85 composition 87 see also commodity price index consumers 13, 39, 121, 123, 264 consumption 4, 66, 146, 150f, 279 per capita 281 contagion 29, 303 Conticotton 191–2, 192t contradictory control principle 195–6 convergence clubs 292, 298, 299 cooperative unions 75–6 coffee 78–9 cotton 77–8, 79 debts 77 purchasing and processing arrangements 77–8 cooperatives 74, 75, 93(n9) Compagnie Cotonnière (COPACO, 1863–) 192t, 192–3, 194–5t, 203, 217(n5) Cooper, C. 138 copper boom and bust 232, 259 case study xxviii, xxix, 86–90, 221–45 miscellaneous xxvii, 45, 59, 66, 120–2, 122–4f, 123t, 143–5, 227, 240 price-stock relationship (1993–2007) 55f stocks (1978–2008) 55f trend estimates for individual price series 111t copper price 88, 228f, 228, 229f, 229, 232f, 232–5 1900–2007 108t 2002–8 54f, 54 band width system advocated xxix, 235–40 volatility 237 Zambian exports (2000–8) 230f copyrights 311 Cordella, T., et al. (2002) 330(n21), 332 Dell-Ariccia, G. 332 Keltzer, K.M. 332 Corden, M. 94(n16), 95


Index 343


Index

Corea, G. 11, 19 corn 125, 126f, 150n corporate social responsibility 92, 120 Correa, C.M. 330(n13), 333 corruption 82, 158, 277 Costa Rica 265 Côte d’Ivoire 148, 160, 174, 179n, 186, 187n, 188, 193, 263 Cotonou Agreement (2000) 49, 257, 259–60 cotton case study xxviii–xxix, 165–220 compensation issue 165, 173 continuous crisis 166–76 contribution to export earnings 174 deterioration 196 exportation distribution 195t exports 174–6, 177t, 189 image 196 income elasticity of demand 180, 181t institutional environment (Tanzania) 76–9, 80–1f, 93–4(n13–14), 94 international cooperation initiatives 197–203 international organizations (enhanced role) 202–3 mergers and acquisitions 192 price (1790–2006) 167f price (1900–2007) 108t price (1990–2008) 79, 80f price (2002–8) 54f price (world) 173, 174, 182–3, 189 price (Zambian exports, 2000–8) 230f price decline 171–2 production externalities 206, 207 quality 182, 190t, 190, 195, 203 seed 210t share in textile fibre market (1960–2005) 180f stocks 170 subsidies 175t supply and demand (gap, 1984–5) 168–70 traders’ price advantage 193, 194t trend estimates for individual price series 111t yields 93(n13), 185–7 zero-import tax rule (Europe) 198 Cotton Africa initiative (Germany) 203 cotton crises amplification factors 176, 178–97 francophone Africa xxviii–xix, 165–220

macroeconomic consequences 173–6, 177t mid-1980s xxviii–xxix, 196 since 1990s 170–3 Cotton Development Fund (2000–) 77 Cotton Incorporated (USA) 200 Cotton Outlook (Liverpool) A Index 183, 189–90, 191f, 191t, 217(n4) ‘Cotlook’ 80n cotton revenue 173–4 cotton trade (concentration) 189–92 counter-cyclical bands (Zambia) 235–40 exit strategy 239–40 width 238–9 counter-cyclicality 42, 45, 84, 249, 251, 253–5, 264, 266, 313–14, 317, 319–24, 326, 335 Country Policy and Institutional Assessment (CPIA) Index (World Bank) 273 Cramer, C. 270, 298 credibility 235, 236, 317 credit xxxi, 213t, 264, 309, 315, 324 cross-country regressions 10, 270, 278 Crowe, T. 115 Cuddy, J. 12 currency crises 224, 313–14 currency markets 303 currency risk 323 currency stability 304 current account 84, 85, 88, 237

DAGRIS (2001–8) 217(n6) Damill, M., et al. (2007) 330(n15), 333 Frenkel, R. 333 Maurizio, R. 333 Das, B.L., 329(n5), 330(n13), 333 data deficiencies 131, 173, 179n, 189–90, 201–2, 227 Daviron, B. 73, 95 de Beers 261 De Lombaerde, P. xxxiii, xxxiv de Wulf, L. 329(n10), 333 Deaton, A. 45, 48, 62 debt/indebtedness 41, 281, 296, 312–13, 315, 316–18, 321, 323 dollar-denominated 316 external xxx, 45, 283f, 284, 285–6, 294, 299, 301 national 177t


344


workout procedures 324–5, 331(n36), 334 debt cancellation (2005) xxv debt crises 42, 44, 62(n4), 92 1980s 41, 253, 325 debt relief 87, 92, 176, 260, 263, 265, 294, 324, 331(n32), 332 debt–GDP ratios 316–17 debt-servicing xxxi, 177t, 285, 286, 317, 324 default xxxi, 314, 315, 317 deflation 320 Dell, S. 7 Dell-Ariccia, G. 332 demand 87, 176, 250 Asian drivers 121–7 cotton crisis amplification factor 178–82 domestic 42, 317 global drivers (structural shift) 133 demand management 49, 82, 86 democracy 23–4, 26, 28, 269, 277 demography/population 118, 283f, 284, 292 Malthusian pressures 288, 297 Denmark 256 ‘dependency rate’ (UNCTAD) 153 dependency style of analysis 13, 17 derivatives xxvii, 49, 57, 62, 65, 72–3, 90, 92, 145, 251 effects on commodity price dynamics 68–71, 92–3(n1–5) over-the-counter 59 Desai, R.C. 138 developed countries ‘advanced countries’ 155t, 305, 320, 330(n14) ‘blocking vote’ 12 business cycle 81 demand for cotton 178–82 ‘high-income countries’ 123, 129f, 129–30, 132–3, 136(n7) ‘industrial countries’ 6, 10, 136(n4), 305, 309, 323 ‘industrialized countries’ xxix, 131, 142, 147f, 149, 156, 178, 181t, 181–2 ‘G7’ 21, 23, 28–31, 33, 325 ‘G8’ xxxiii, 22, 23, 28–30, 31, 33, 269 overtaken by developing countries (share of world GDP, 2005–) 62(n5) resurfacing of commodity issues 41 ‘rich countries’ 250, 252, 277

‘richest countries’ 157 see also emerging market economies developing countries (DCs) advanced 291–3, 295 Africa 180, 181t Asia 180, 181t budgets and aid flows 319 business cycle 81 commodity-dependent xxv, xxvii–xxix, 15, 41–4, 46–7, 61f, 62(n3), 65, 85, 91, 95, 104, 106, 152–7 commodity-dependent (1980s crisis) 101–2 commodity-dependent (1995–2006) 154t commodity-dependent (uncertain prospects) xxviii, 139–62 commodity-exporting 149 compensation fund 209 disaffected with WTO 33–4 divergence amongst 297 emergence from traps 277 ‘G24’ (1994–) 31 ‘G77’ 265 ‘glass ceiling’ 291 global economic governance 21–3 ‘low-income countries’ xxiv–vi, xxix, 25, 41–4, 46–7, 61f, 62(n3), 65, 84–5, 91, 95, 129f, 129–31, 133, 149f, 149, 151, 154–9, 222, 224, 235, 266, 273, 312–13, 319–21 military expenditure xvi, 13, 17 more advanced 291 overtake developed countries (share of world GDP, 2005–) 62(n5) policy autonomy (constraints) xxx, 301–36 policy space 302–5, 329 ‘poor countries’ xxv, 15, 326 ‘poorest countries’ 22, 26–8, 32, 35, 36 ‘poorest and smallest countries’ 19, 23–6, 29–30 poverty traps 152–7 preferential treatment 26–8 resource-rich xxiv, 40 share of global population and income 22 share of global R&D (1970–2000) 133, 134t small 146 terms of trade 137 tokenism 30


Index 345


Index

developing countries (DCs) – continued unlikely to benefit from abolition of subsidies 197–8 ‘voice’ 23–6 windfalls 94(n17), 95 see also HIPCs development 11, 41, 43, 301 constraints 305 ‘genuine global strategy’ 13 global strategy required (UNCTAD) 274 industrial 308 long-term prospects 235 objectives 23, 26–7, 32–5 paths 159, 161 policy intervention xxx rural 172 spillovers (Rosenstein-Rodan) 157 see also economic development Development Assistance Committee (OECD) 263 development economics/economists xxvi, xxxiv, 3, 156 development finance 299, 327, 331(n39), 332, 336 contextual setting xxxi–xxxv ‘non-system’ xxxi-ii, xxxv development policy xxv, xxvii, xxx, 328–9, 334 local ownership 34 multilateral disciplines 306–12, 329(n6) development studies xvi, 14 ‘developmental states’ (Asia) 159 diamonds 261, 277 Dickey–Fuller-type unit root test 107, 114(n5) Diouf, Mr 265 Direct Budget Support 253, 258, 264 dirigisme 272 disclosure 261, 312 distribution (equitable) 15 distribution costs 48 distribution of gains 137 division of benefit (Maizels) 67–8 division of labour international 275, 308, 329(n9) ‘specialization’ 155 Dixit, A.K. 330(n24), 333 Doha 34 Doha Conference (2008) xxxii, 33 Doha Development Agenda 27 Doha Round 23, 29, 35, 307–8, 329(n8) Dollar, D. 272, 275, 298

domestic content requirements 310–11 ‘dominance model’ 22 Dominican Republic 146, 262 Dorward, A. xvii Douste-Blazy, P. 264 Dunanvant Enterprises Inc. 192t, 193, 196 Durbin, E. 4 Dutch disease 82–3, 84, 87, 90–1, 94(n16), 95, 153, 222, 225, 251, 277 East Africa 179t, 191t East Asia xxviii, 128t, 138, 147f, 154t, 166, 203, 298, 314, 330(n16), 336 Easterly, W. 270, 282, 298 Eastern Europe xxiv, 40, 161, 178, 179t, 266 ECOM USA Inc 192t, 192 econometrics 101, 114(n2), 114(n4), 146, 269 commodities in crisis (still) 107 economic crisis (global, 2007–) xxiv–v, xxxi, xxxiii, 15, 21, 39–41, 59, 105, 135, 142–3, 145, 152, 157–8, 201, 251, 293–5 impact on commodity prices 60 role for compensatory finance xxix, 249–68 see also Great Depression (1930s) economic development 66, 89, 99, 137, 208, 254, 275, 336 commodity prices and (historical retrospect) 43–9 impact of macroeconomic instability 319–20, 330–1(n24–7) long-term 91, 225, 239, 240 world 3–17 see also international development economic diversification 91, 153–4, 182, 188, 207–8, 216t, 262–3, 285, 287, 292, 297, 297(n4), 299 reduced incentives 152 vertical 207 economic growth appropriate policy 331 ‘catch-up’ 270, 271 collapses 295, 299 export-led 85, 159 global 145 hampered 232 impact of macroeconomic instability 319–20, 330–1(n24–7) long-term failure 278–9


346


long-term path (permanent dislocations) 320 macroeconomic volatility 147f sustainable 281 sustainable (investment–export nexus) 285 world trade and 5–6 Economic Partnership Agreements (EPAs) 250, 262–3, 266, 268 economic policy ‘instruments’ versus ‘targets’ 329(n1) economic reality 13, 15 economic recessions 63, 81, 148, 226, 266 Economic Record 114(n2), 115 Economic and Social Fund (Chile) 88 economic stagnation 270, 277–8, 286–7, 293 Economic Survey of Europe (UNECE) 5 economies fundamentals (exchange-rate alignment with) 236 small open 225 economies of scale 42 Economist 140f, 140 commodity price index 140f, 140, 143 index of industrial commodity prices 62(n6) economics/economists xvi, 3, 24, 99 Ecuador 146, 223, 237 educational attainment 130, 290 Edwards, S. 94(n16), 95, 225 efficiency 20, 156, 285 EGARCH coefficient 62(n9) Egypt 179n, 181t Eichengreen, B. 85, 95 eigenvalues 242t elasticity of demand commodities versus manufactured goods 43 price and income 140 short-term price 44 elasticity of supply 44, 227 Elliott, V.L. 298 emerging countries 32, 35, 42–3, 150f emerging market economies xxiv, 24, 40, 52, 60, 65–6, 84–5 heavily indebted 321 indebted 317 see also middle-income countries emerging markets xxxi, xxxiii, 155t, 305, 312–13, 315–16, 318, 320, 323–4, 330(n17), 332

empiricism aid volatility 332 capital account measures 323 centre-periphery divide 274 commodity economics (Maizels) 100 commodity prices 43–6 commodity prices (co-movement) 240 commodity prices (traders and agents) 90 commodity-dependent economies 86, 87 development economics xxvi economic growth versus output fluctuations 319 economics 15 effects of windfalls 94(n17), 95 exchange rate stability 230 exchange-rate devaluations and economic growth 225 export elasticity to exchange rate 227 greater price transmission 93(n8) impact of portfolio investment on coffee price behaviour 69, 92(n1), 96 macroeconomic policy issues 86 Maizels’ insistence upon 20 monetary phenomenon 87 monetary policy 315 pegging exchange rate prices of exported commodities (macroeconomic effects, Zambia) xxix PEP 222 poverty traps (country-level) 282 Prebisch–Singer hypothesis 45, 62–4 target zones (exchange rates) 236 timber industry 5 employment xxxi, 274, 288–90, 301, 307, 314, 316, 318, 320, 324, 331(n27), 332, 336 agricultural 88 agricultural versus non-agricultural (LDCs, 1980–2010) 290f manufacturing sector 293 outside agriculture 297 energy 59, 120, 125–7, 140, 141f, 157–8 energy prices xxxii, 54, 139, 148–9, 226 Engerman, S.L. 159, 161 Englebert, P. 158, 160 English, P. 329(n10), 333


Index 347


Index

environment 120–1, 205, 267, 283f, 284, 303, 309, 327–8 Equatorial Guinea 148 equity markets 59, 70, 92 Ethiopia 265 Euro 196, 237 Europe 31, 60, 61f, 122, 124f, 155t, 166, 182, 198, 237, 262–3, 267, 326 European Community (EC) 49, 256 European Development Fund (EDF) 257–8, 260, 266 European Economic Community (EEC) 256–9 European Monetary System 236 European Union average price of cotton imports 191t demand for cotton (1999–2007) 178, 179t EU-15 152f, 178, 179t, 190, 190–1t EU-25 126–7, 127t EU-27 256 Green Paper (ACP preferences, 1996) 260 internal cotton trade (1999–2007) 179t trade with Africa (2006) 152f Eurostat 179n EViews6 estimation 241–2n exchange controls 321, 324 exchange rate baskets 237, 238f exchange rate management 88, 91 ‘exchange rate protectionism’ 85 exchange rate regimes counter-cyclical band 235–40 crawl mechanism 236 crawling 239 crawling band 222 fixed 85, 87, 224, 226, 227, 240, 313 float with monetary target 227 floating 84–5, 221–2, 223, 225–6, 229, 238, 239, 240 floats (arguments for and against) 223–5 ‘have to be country-specific’ 240 managed 90 managed float 223, 235 middle-of-road 224 parity 237–40 pegged 226, 236, 240, 313 Zambia xxix, 221–45 exchange rate risk 316 exchange rates 200–1 actual 231f, 231

alignment with economic fundamentals 236 appreciation 89–90, 225, 236–7, 316, 330(n17) appreciation (nominal versus real) 87 collapse 315 crisis-amplification factor (cotton) 196–7 depreciation 225, 239–40, 242, 304 export elasticity 227 fear of over-valuation 225–6 fundamentals 237 linked to commodity price 235 literature review 223–6 ‘managed’ versus ‘market-determined’ 86 manipulation 305, 329(n3) no-management 224 policies/policy framework 66, 83–6, 94(n18–19), 303, 327 pro-cyclical movement 86 real 87, 330(n15) real (intra-cycle movement) 83 real effective (Zambia and Chile, 2000–8) 89f, 89 role in inflation-targeting 85, 95 stability 305 target zone (Krugman) 236 volatility 85, 240 see also ‘nominal exchange rate (NE)’ Exogenous Shock/s Facility (ESF, IMF) 62(n7), 249, 255, 261–2 export earnings compensation scheme 12 cotton 174 fluctuations 253 instability 9–10, 250, 252 losses 266 losses (caused by exchange-rate variations) 196–7 miscellaneous 46–7, 86, 165, 174, 200, 276, 285, 294, 318 shortfall 258–60, 318, 326, 330(n20) shortfall (short-term) 254–5 smoothing 158 stabilization 256 export growth 118–19, 119f, 286 Export Instability and Economic Development (MacBean, 1966) 9–10, 114(n2) export performance 227, 231–3 literature 225 requirements 311


348


export specialization 292, 295 export stabilization fund (global) 261 export structures 159 commodity-based 149–52 export-debt repayment nexus 285 export-orientation 272, 309 export-processing zones 132 exports agricultural 227, 280f China 119 coffee 74, 75 development policies 333 diversification 6, 9, 15, 20, 42–3, 271 downward price trend 104 importance of exchange-rate management 225–6 manufactured 131, 136(n7), 137, 276, 292–3 ‘net of NE effect’ 232f non-traditional 225, 227, 236, 238–9 primary commodities 42 promotion 308–9 quotas 48 ‘re-exports’ 174 restrictions 7 shocks 235, 240 slow growth 283f, 285 subsidies 309, 310 tax 48, 86 Exports and Economic Growth of Developing Countries (Maizels, 1968) xv, 6, 17 externalities 210–16t, 309

F-statistic 241t, 243t factor endowments 159, 161 factor prices 120 Fafchamps, M., et al. (2003) 93(n8), 95 Hill, R.V. 95 Kaudha, A. 95 Nsibirwa, R.W. 95 Fair Trade 76, 93(n7), 199, 203 ‘fallacy of composition’ 154–5, 161 Far East see East Asia Farooki, M. 135n fertilizers 66, 74, 77, 88, 145, 201, 206, 289 Fiji 258 finance xxvi, 25, 304–6, 312–27, 328, 330–1 deficit spending 266 Finance and Development (IMF periodical) 21–2, 36

finance and governance under globalization xxix–xxx, 247–336 financial crises 29, 317, 322, 323 jobless recoveries 320, 331(n27) systemic 31 see also economic crisis (2007–) financial development 319, 330(n25) financial flows 82, 91 financial fragility xxxi, 321 financial instability hypothesis (Minsky) xxxi, xxxv financial institutions xxv, 40 financial liberalization 316, 320–1 financial markets 40, 45, 60, 65, 72, 90, 145, 304, 312–3, 316, 321, 325–7 behaviour (pro-cyclical) xxxi deregulation xxxi global 295 international 141, 318 private 305 sterilization 315, 317, 319, 330(n15) financial/economic openness 276, 279, 298, 302–5, 312 336 index 321 ‘financial repression’ 330(n15) financial stabilization funds 265 financial stabilizers 321–2, 335 financial system (cyclicality) 321–2 fiscal budget 86, 158 ‘budget support’ 261 fiscal crises 153–4 fiscal deficits/budget deficits 224, 260, 262, 316 fiscal discipline 314, 317, 321 fiscal gaps 320–1 fiscal management 148–9 fiscal policy 91, 221, 316–18, 327 cyclicality 320 fiscal revenues 319, 330(n21), 332 fiscal stability 325 fiscal surpluses/budget surpluses 88, 89, 261 fiscal tightening 323 Fischer, S. 330(n24–5), 333 Fitter, R. 72, 96 Fluctuations in Export Earnings (FLEX, 2000–) xxix, 49, 249, 256, 260 FOB xxi, 193, 194–5t, 217(n8) Fok, A.C.M. xviii, xxviii–xxix, 165, 167n, 170, 172, 188, 194n, 195–6, 203, 207, 218; 219


Index 349


food

Index

6, 39–40, 56, 88, 103, 106, 131, 141f, 153, 167, 207–8, 240, 250, 261, 266, 294t commodity price (monthly average, 2002–8) 51t, 51 commodity price index (1957–2008) 50f commodity price crisis (1980s) 101 crisis feared (2008) 51 price instability index (1968–2007) 56t real price (index, 1960–2007) 58f self-sufficiency 88, 256 tropical 10, 253 see also agricultural commodities food crops 66, 125, 150f, 211–14t food prices 52, 87–8, 135, 265 inelasticity to money supply 226 food security/insecurity xxxii, xxxiv, 66, 294 foreign direct investment (FDI) 119, 286, 291, 302–3, 310, 312, 323, 328, 334 subsidies 329(n11) foreign exchange earnings 254 liabilities 322 management 233 market intervention (effectiveness) 330(n15), 335 miscellaneous 82–3, 91, 225, 285, 310, 320, 323 reserves 32, 119, 250, 264 forward contracts 72, 93(n11) France 8, 13, 181t, 192t, 193, 217(n5), 257–8, 264, 266–7, 323 francophone African cotton-producing countries (FACs) xxviii–xxix assistance fund 199–200 cotton crises 165–220 cotton crises (1980s) 168–70 cotton exports to EU-15 (1999–2007) 179t cotton initiatives 203–8 cotton production and export (1953–2005) 171f, 172 final clients 203, 217(n8) Frankel, J. 85–6, 95, 222–3, 226–7, 230, 232, 235, 240 free market (‘residual’) 48 free trade 304, 307, 308 Freeman, C. 138 Freguin-Gresh, S. 299 French Franc 196 Frenkel, R. 333

fuels

39–40, 117f, 139, 152f, 153, 275 Asian-driver demand 126–7 crisis feared (2008) 51 full employment 131 Fundamental Equilibrium Exchange Rate (FEER) 237 Funke, N., et al. (2008) 154, 155n, 160 Granziera, E. 160 Imam, P. 160 futures markets 49, 59, 60, 137, 146 coffee 68–73, 93(n2–6) efficient price discovery role (evidence lacking) 93(n6)

G20 31 Finance Ministers 29 ‘L20’ 28–30 London Summit (2009) xxv, xxxiii, 249–50, 264, 266 Gabon 148 GARCH [generalized conditional heteroscedasticity] analysis 62(n9) garments 129–30, 135–6(n2), 178, 180, 185t, 200, 207 gas 150, 153, 159 Gelb, A. 94(n17), 95 General Agreement on Tariffs and Trade (GATT) 7, 23, 26, 34, 199, 304, 308, 329(n4) ‘Green Room’ 35 General Agreement on Trade in Services (GATS) 310, 311, 329(n4), 330(n12) genetically modified (GM) varieties 126 cotton 166, 185, 187 soybeans 201 Geneva Conference (1964) 8 GEOCOTON 217(n6) geopolitics 13, 126–7, 134, 144t, 158–9 Germany 4, 203, 266 Gibbon, P. xvii, 72, 96 Gilbert, C.L. 48, 63 ginners 77–9, 80n Giordano, T. 299 Gish, O. 138 ‘global depression’ (prospective) 41 Global Development Network (GDN) xxxiv global economic governance effective 28


350


international financial institutions 31–3 Maizels and 19–21 poverty, power, and 19–36 processes 28–9 reform (trade arena/WTO) 33–5 reforming G8 summitry 28–30 role of developing countries 21–3 ‘variable geometry’ 30 global economy xxix, 261 Asian drivers 118–21 commodity markets (issues and challenges) 39–64 industrial 275 integration 42–3, 157, 302–5 ombudsman 30 polarization and marginalization xxix–xxx, 270 ‘world economic system’ 13, 20 global financial ‘architecture’ xxxi–ii, xxxv ‘global financial regulation’ xxxiv global payments imbalances 325–6 global public bads 327 global rules and markets (constraints on policy autonomy in DCs) xxx, 301–36 global system xxv, 278, 297(n2) global value chain (GVC) analysis 71–2, 96 global warming 20 globalization xxiv, xxix, 5, 21, 23, 65, 71, 81, 91, 96, 100, 249, 270, 277, 282, 296, 298, 334 agriculture 288 finance 275 form 278, 295, 297 international poverty trap 286–7, 295, 297(n3) ‘iron rule’ xxxi poverty nexus 63 ‘third wave’ 272, 275 see also global economy Globalization, Growth and Poverty (Collier and Dollar, 2002) 271–2, 275, 300 ‘globalizers’ 272–3, 275–6 ‘globally synchronized slowdown’ (2008) 40 ‘GLV studies’ 72 gold 59, 145, 174, 226, 316 Goldstein, M., 330(n15), 333 goods and services 26, 43, 208, 279, 285, 291, 302

Gore, C. xviii, xxix–xxx, 42, 278, 297(n1), 298 Goreux, L. 185t governance (political) 271, 272, 277 see also global economic governance government agencies 80n government borrowing 45, 317 governments xxvii, xxxii, 13, 21, 71, 74, 77, 91–2, 159, 250–2, 254–5, 261–5, 272, 285, 304, 312, 317, 321–5, 327 Grainger causality 243t, 243 grains 201, 264–6 Grameen Bank 261 grants 26, 49 Granziera, E. 160 Great Depression (1930s) xxiv–xxv, 47, 114(n7) commodity price collapse (1929–32) 107 commodity price cycle 101–2 see also economic crisis (global, 2007–) ‘Great Divergence’ 146 Greece 178, 179n, 183, 191t, 292 green revolution 288–9 Grilli, E. 102–4, 115 Grilli and Yang Commodity Price Index (GYCPI) 106, 107, 108t cereals 108, 109t, 112t food 108, 109t, 112t metals 108, 109t, 110, 112–13t non-food 108, 109t, 112t tropical beverages 108, 109–10t, 110, 112–13t Grisham, J. 168, 217(n1) gross domestic product (GDP) xxxiii, 43, 89, 118, 119f, 122f, 123t, 123, 124f, 126f, 128, 133, 147f, 151, 156, 263, 279, 292, 294, 317 per capita 295 deflator 62(n6) quantity of commodities used per unit of (1971–2001) 140, 141f volatility 320 groundnuts 262 Group of Seventy-Seven 12 growth inelasticity of demand 122–3 Guinea 263 Gulf Cooperation Council (GCC) 222, 223, 226 Gulf States 267 Gunning, J.W. 94(n16), 94, 95


Index 351


Index

Häberli, C., xvii Haddad, L. 270, 299 Haiti 259, 269 Hall, S. 138 Hamann, J. 330(n21), 332 Hamoudi, A. 275–6, 298 Hansen, B. 329(n1), 333 Harrigan, J. xvii Harris, L. xvii Hausmann, R. 155, 160 Hayek, F. 3 heavily indebted poor countries (HIPCs) xxv, xxxiii, 41–2, 87, 154t, 250, 253, 265, 319 see also LDCs hedge funds 59, 65, 70, 134 hedging 75–6, 224 hedging instruments 72, 73, 93(n11) see also futures markets Hegelian terms 15–16 Helleiner, G.K xviii, xxvi–xxvii, xxix, 20, 24, 30, 36 herd behaviour 68 heteroscedasticity 241, 241t Hewitt, A. xviii, xxix, xxx, 49, 97, 259, 268 hides 108t, 111t Hilgerdt, F. 5, 16 Hill, R.V. 95, 330(n21), 333 historical ‘commodity’ debates xxvii history 49–59, 77, 221, 225, 260, 287, 291, 307, 322 Hoeffler, A. 298 Hohenberg Bros. 192t, 196 hollowing-out hypothesis 224 Hong Kong 165, 182, 250 Howitt, P. 330(n25), 331 human capital 156, 283f, 284–5 human development 270 human resources 209 human rights 24 hydrocarbons 125, 126 Iceland 32 IFPRI 185t Imam, P. 160 import-substitution 85, 275, 308–9 imports 16, 87, 94(n20), 121, 125, 129, 136(n6), 152f, 158, 200, 226, 237, 274, 276, 278–9, 294, 309–11 capacity to buy 285 developed-country 62(n6) food 88, 261, 266 levies 7

manufactured goods from developed countries 43 shocks 240 ‘impossible trinity’ 84, 313, 330(n14) income 314 per capita 25, 65–6, 273, 279, 287, 292, 296, 307 distribution/redistribution 250, 295 elasticity 145, 154 gap (richest countries versus LDCs, 1960–1999) 280f inequalities (between and within countries) 292, 299 national 10 shocks 49 stabilization 66, 204 income-smoothing 74, 75–6, 79, 93(n9) India xix, 19, 23, 31, 35, 52, 105–6, 158, 161, 180, 185, 200, 250, 260, 271, 307, 312, 321 commodity prices and terms of trade xxviii, 117–38 ‘feet of clay’ 152, 159 see also Asian drivers Indonesia 185, 221, 317 Industrial Growth and World Trade (Maizels, 1963) xv, 5–6, 7, 16 Industrial Revolution 166 industrial upgrading 308, 310, 311 industrialization 5, 16, 52, 65, 125–6, 131, 136(n4), 154, 159, 161, 165, 181, 252–3, 274–5, 292, 297(n4), 298, 307, 309, 310, 328 ‘de-industrialization’ 82, 95 ‘inward-oriented’ 272 ‘key to economic progress’ 6 ‘late industrializing countries’ 115, 329(n10) ‘newly industrializing economies (NIEs)’ 132 inequality 15, 159 see also polarization infant industries 306–7, 309 inflation xxiv, 40, 45, 63, 70, 94(n20), 128, 225, 233f, 236, 239, 250, 315 avoidance 90 cost-push 39 food versus non-food 88 trade-off against exchange-rate appreciation 85, 87, 91, 95 inflation hedging 59, 316 inflation-targeting (IT) 39, 84, 86, 88, 91, 95, 221, 223–4, 240, 314 ‘escape clause’ 84, 94(n18)


352


informal sector 284, 290 information 24, 76, 78, 79, 92 information asymmetry 72, 74 information and communication technology (ICT) 249 infrastructure 65, 91, 144t, 309, 317 innovation 120, 133, 157, 312 innovation rent 131, 133, 135 input–output 132 inputs 52, 74, 76, 77, 93(n13), 186–7, 204, 206–7, 213t agricultural 88 industrial 106 Institute of Development Studies (IDS) xvi, xix–xx institutional environment 66, 73, 76–9, 80–1f, 91–2, 93–4(n13–14), 94 ‘institutional traps’ 158 institutions 28, 90, 92, 157–61, 277 Integrated Framework/Enhanced Integrated Framework 265 Integrated Programme for Commodities (UNCTAD, Nairobi 1976) 11, 47 integration horizontal 201 upstream 193 vertical 75, 201 intellectual property rights (IPRs) 34, 302, 311–12, 333 inter-governmental agreements 199 interdependence global 274–5 international 278 interest charges 254 interest rate regimes 316 interest rates 39, 45, 87, 145, 285, 302, 314–19, 323, 326, 330(n15) international 318 real 114(n4) USA 325 International Bank for Reconstruction and Development 23 International Coffee Agreement (1963) 8, 74 International Coffee Organization (ICO) 70, 81f, 93(n5) international commodity agreements (ICAs) 9, 10, 14, 20, 45, 49, 63, 72 break-down 47 ‘floor’ versus ‘ceiling’ prices 47–8 objectives 47 international cooperation 173, 197–203, 208–9

International Cotton Advisory Committee (ICAC) 168, 179n, 183, 185t, 190–1, 219 international development xvii, xxv, 260, 271–2, 274 see also development International Development Association (IDA) xxii, 25, 260 International Finance Facility (IFF) 326–7, 331(n38), 333, 335 International Labour Organization (ILO) xix, 5, 17 International Monetary Fund (IMF) 31–3 appointment of chief executives 31–2 Article IV consultations 305 bailout operations 323–4 capital account measures 324–5, 331(n34–6) ‘commodity agreements’ 199, 208, 264 constituencies 32 country programmes 331(n28) governance reform 31–2 ‘IF-IMF data’ 239n IMF: Executive Boards 31–2 IMF: Extended Fund Facility 306 IMF: Group of Independent Experts (GIE) 305, 334 IMF: International Financial Statistics (IFS) 229n, 229, 230n IMF: Poverty-Reduction and Growth Facility (PRGF) xxii, 62(n7), 265 IMF: Secretariat 325, 331(n36) IMF-IFS data 228–34n, 238n, 241–2n independent evaluation office 31 official financing 326–7, 331(n37–40) policy surveillance 325–6 publications 333–4 quotas 31, 32 reform 331 abilization programmes 42 voting rights 31 website 114(n9) see also compensatory finance international monetary system 324–7, 329, 331(n34–40), 331 international monetary unit (IMU) (proposed) 200–1, 209 International Natural Rubber Agreement (INRA) 47 international poverty ‘declining into’ versus ‘stuck in’ 282 vicious circles 282–4


Index 353


Index

international poverty trap xxix–xxx, 42, 295, 296–7 commodity-dependent LDCs 282–6 contrary evidence from LDCs 278–81 globalization and 286–7 idea 281–2 International Raw Materials Union (proposed) 4 International Resources Office (proposed) 4 International Task Force on Commodity Risk Management (ITFCRM) 73–4 International Trade Organization (ITO) (abortive) 6–8 investment xxxi, 4, 34, 52, 56, 121, 130, 224, 279, 283f, 284–5, 287, 291, 294, 301, 304, 309–10, 321 foreign 311 international 26 long-term 207 thresholds 281 under uncertainty 319, 330(n24), 332, 333 investment funds 59 investors 59–60, 159, 314, 324 institutional 65, 70 Iran 223, 256 Iraq War (2003–) 144t Ireland 153, 256, 292 iron ore 54f, 121 Israel 94(n18), 236–7 Italy 323 Jansen, M. 153, 160 Japan 23, 33, 35, 118–21, 123t, 124f, 132, 190t, 192t, 200, 250–1, 253, 323, 325–6 Jayawardena, L. 8, 14, 16 Johansen trace test 241 Johnson, H.G. 10, 12, 16 Johnston, D. xvii Jolly, Sir Richard xv–xvi, xvii, xix Judd, P. 8 ‘July package’ 329(n8) Juselius, K. 241 just-in-time stocks 182 jute 108t, 111t Kagera coffee region 75 Kahn, R. 4 Kaldor, N. xv, 5, 45, 63 Kaltenbrunner, A. 59, 63

Kaminsky, G.L., et al. (2004) 330(n18), 334 Reinhart, C.M. 334 Végh, C.A. 334 Kampala 75 Kang, D.C. 159, 161 Kaplan, E. 331(n33), 334 Kaplinsky, R. xix, xxviii, 52, 72, 96, 118, 129n, 129–30, 133, 137, 139, 148, 151–2, 158, 161 Kaudha, A. 95 Kazakhstan 223, 236 Keen, M. 330(n22), 332 Keltzer, K.M. 332 Kenya 94 Keynes, J.M. 4, 16, 47, 304, 334 Keynesianism xxxiv, 330(n17) Khan, M.S. 222, 226 Kilicafe (farmers’ organization) 76 Kilimanjaro region 75, 77–9 Kimmis, J. 72, 96 King’s Law 170 Knack, S. xxxii, xxxiv KNCU 81f knowledge 210t, 214t Kokko, A. 158, 160 Korea, South 31, 85, 95, 118, 119f, 123t, 124f, 159, 161, 250, 324 Korean War 7, 144t, 254 Kose, A.M., et al. (2005) 330(n26), 334 Prasad, E.S. 334 Terrones, M.E. 334 Kraay, A. 275, 282, 298 Kraev, E. 307, 334 Krueger, A.O. 331(n36), 334 Krugman, P.R. 236 Kumar, N. 329(n11), 334–5 Kuwait SWF 261 La dernière récolte (Grisham) 217(n1) labour 44, 45, 120, 130, 156, 261, 302, 304, 320 labour market institutions 306 labour standards 303, 328 laissez-faire 252, 272 lamb 108t, 111t land 52, 134, 156, 197, 208, 212t, 288, 289, 291 landlocked-country trap 271, 273, 297(n2) Lane, T. 330(n21), 332 language 206 Laos 269 Lardy, N.R. 330(n15), 333 Laroque, G. 45, 48, 62


354


Lary, H. B. 5 Latin America xxiv, 8, 40, 61f, 63, 128t, 133, 138, 147f, 264, 292, 306, 314, 317–18, 330(n16), 331(n29) commodity-dependence (1995–2006) 154t financial crises (1990s) 253 law and order 284 Le Havre 195 lead 45, 54, 54–5f, 105, 108t, 111t, 122–3f learning-by-doing 34, 91 least-developed countries (LDCs) 25, 42, 115, 129n, 153, 208, 252–3, 259, 265, 270, 306, 309 commodity-dependence (1995–2006) 154t commodity-dependent (international poverty trap) 282–6 commodity-exporting (non-oil) 285 international poverty trap (contrary evidence) 278–81 manufactured goods-exporting 280f non-oil commodity-exporting 279, 280f price preference 198 services-exporting 280f see also BBCs Least Developed Countries Report (UNCTAD) 270, 299–300 legitimacy 28–9, 30, 32–6, 159 lending 318, 323, 330(n19) Leonard, D. 270, 299 Lesotho 136(n2), 263 Leverhulme Foundation 5 Levy-Yeyati, E. 225 Lewis, Sir Arthur 62 ‘liability dollarization’ 313, 320, 330(n14) Liang, H. 122, 136 liberalization xxx, 77–9, 156, 172, 174, 188, 193, 203, 221, 272, 276, 279, 301–4, 312, 316, 320–1, 332 cotton and coffee (Tanzania) 76, 94, 93–4(n14) unilateral 303, 307–8 see also market liberalization Libya 223 ‘Limits to Growth’ school 256 liquidity 72, 322, 324, 330(n15) domestic 314–15 global imbalances 249 short-term 318 Lisbon: Africa summit 266

livelihood xxvii, 73 Liverpool 195 loan conditionalities 250, 254–5, 259–60, 266, 286, 301–2, 305–7, 312, 318, 328, 332 loan-loss provision 322 Loayza, N.V. 148, 161 Loayza, N.V., et al. (2007) 146, 147n, 161 Rancière, R. 161 Servén, L. 161 Ventura, J. 161 ‘lock-in’ effects 155 Lomé Convention (1975) 256, 257, 259 London 3, 85 coffee market 73, 75, 76 London Metal Exchange 123f Losch, B., et al. (2008) 288, 299 Freguin-Gresh, S. 299 Giordano, T. 299 Louis Dreyfus Cotton International 192t, 193 Lübker, M. 331(n27), 336 Lutz, M. 114(n8), 115 MacBean, A.I. 9–10, 16, 114(n2), 115 MacKinnon–Haug–Michelis (1999) p-values 242t macroeconomic environment 91 changing landscape (impact on outcome of boom, Zambia) 86–90, 94(n20) macroeconomic imbalances 39–40, 249 macroeconomic instability, impact on growth and development 319–20, 330–1(n24–7), 332, 333 macroeconomic management xxvii, 316 fiscal and monetary policy (intelligent execution) 82 resource-based economies 90 resource-based economies (commodity price cycles) 82–6, 94(n15–19) macroeconomic policies xxx, 66, 303, 305, 324–5, 328, 334 counter-cyclical 91, 221, 320 macroeconomic policy 301, 303, 312–27, 330–1, 333 aid and 318–19, 330(n19–23) macroeconomic stability 223 macroeconomic stabilization 42


Index 355


Index

macroeconomic volatility 146, 147f, 161, 331, 335 macroeconomics 105, 141–2, 174 cotton crises (consequences) 173–6, 177t Madagascar 262, 288 maize 52, 53f, 108t, 111t, 212t Maizels, A. (1917–2006) issues advocacy of natural commodity outlets 178 business cycle (transmission from developed to developing countries) 81 centre-periphery divide 274 commodities, cooperation, and world economic development xxvi, 3–17 commodity crises 208 commodity crises: prevention 197 ‘commodity’ crisis (1980s) 41, 44–5, 63 ‘commodity in crisis’ thesis re-visited 99–115 commodity prices (necessity of regulating) 157–8 ‘commodity problem’ 46 commodity production (environmental impact) 205 commodity trade issues (creation of an international organization) 202 commodity-dependence versus development 296 compensation approach 165 compensatory finance systems 251 conceptual framework 100, 115 conference in memory of ∼ (2008) xvii ‘contradiction’ in position at UNCTAD 11 DCs facing commodity crises 196 debt forgiveness 166, 176 domestic political economy 156 export increase (to repay loans) 188 global economic governance 19–21 inter-governmental agreements 199 international cooperation 209 intra-firm transactions 190, 193 marginalization 275 market structure 67–8, 71, 96

marketing 182, 203, 209 oligopoly 190 ‘only recommendation actually put into practice’ 176 oversight 182 policy recommendations 6 political role 11 poverty traps (commodity-dependence) 142 price of manufactures (provision of evidence) 118 price movements across markets 146, 161 price preference 198 price stabilization 204 short-term price fluctuation versus long-term price decline 170–1, 199 subsidies (developed countries) 184 terms of trade 131–2, 133, 139–40 Third World Currency proposal, 196–7, 200 US dollar as transaction currency (implications for third countries) 189 life and career academic contributions (1980–) 12–14 Board of Trade 4–5 commodity economist 99–102 early life and education 3–4 family xvii Festschrift (Nissanke and Hewitt, 1993), xxvi, xxx honorary professorial research fellow, SOAS (2003–) 14 life, work, legacy xxvi–xxvii, 1–36 mission xxvi, 3–17 ‘power of humbleness’ 114(n1) pragmatism 209 principal draftsman for UNCTAD reports 11, 20 promoter of sound economic research 20 publications 16–17, 115 realism 197, 203, 208 rehabilitation of ideas 165–6 research at National Institute (1955–) 5–6 retirement from UN (1980) 9, 12 Senior Research Associate, Queen Elizabeth House, Oxford (1991–2004) 14 son [not named] 114(n1)


356


speech-writer 11, 20 UNCTAD Adviser on Economic Policy and Research 10–11 UNCTAD Director of Economic Policy Evaluation and Coordination Unit 11 UNCTAD years (1966–80) xv–xvi, xxvi–xxvii, 6–12, 19–20 WIDER (1986–) 14 Maizels, A., et al. (1997) 100, 110, 115 Bacon, R. 115 Mavrotas, G. 115 Maizels, A., et al. (1998) 100, 115 Crowe, T. 115 alaskas, T. 115 Maizels, J. xvii Malawi 265, 287–8 Malaysia 221, 321, 323, 335 capital controls (1997), 324, 331(n33), 334 Mali xviii, 173–4, 175t, 177t, 179n, 186, 187n, 192, 206–7, 210–16t, 288 Malliaris, A.G. 134, 137 Management Development Resource Group (MDRG) xxii, xxv, 41 Mandelson, P. 263 manufactured goods 42, 45, 81, 118, 130–5, 140, 150–3, 155–6, 272, 275, 291, 294, 296 exports 131, 136(n7), 137, 276, 280f, 292–3 imports 274 price index (1970–2008) 56, 57f trade prices 128–30 manufacturing 120, 132, 252–3, 261, 279 formal sector 130 Schumpeterian-rent-intensive xxviii manufacturing unit-value (MUV) index xxviii, 104 ‘MUV-G5’ 107 manufacturing value-added (MVA) 128t, 128, 132 marginalization 272–3, 278–9, 283f, 284, 286–7, 295, 297(n3) marginalization/global 291–3 market access 78, 287, 304, 306, 311 market economies 52, 215t market failure argument 309 market failures xxviii, 141, 156, 297(n3), 322 market forces 7, 13, 82, 84, 91, 221, 224, 225 market intelligence 249, 263–4

market liberalization 23, 35, 66, 73 Uganda (1990–1) 74–5 see also trade liberalization market mechanisms xxiv, xxv, 49, 72 ‘market power’ (Maizels) 100, 189 market share 48, 73, 75, 93(n2), 291 market structures 71–2, 157, 188 changing (developmental impacts) 73–80, 93–4(n8–14) price risk management (coffee chain, Uganda/Tanzania) 74–6, 93(n9–12), 96–7 marketing 9, 20, 68, 76, 78–9, 91–2, 93(n14), 132, 182, 202, 212t, 215t costs 52 geographical fragmentation 74, 90 globally integrated 71 margins 287 regional cooperation 209 strategy (global integration) 66 marketing agents 192–3 marketing boards 66, 73, 74 marketing coordination 203–4 markets xxiv, 21, 253 domestic 302 far from competitive 78 international/world 67, 79, 80f, 227, 251 LDC exports 291 local 309 perfectly competitive 67 rural (daily/weekly) 213t unregulated 157–8 ‘markets against states’ 157 Marrakech Declaration (1994) 329(n2), 336 Marxism 15 mass transit systems 122 Masson, P.R. 94(n18), 96 maturity mismatches 322 Mauritania 153, 258 Mauritius 165, 258, 261 Maurizio, R. 333 Mavrotas, G. xvii, xix, xxvi, xxxii–v, xxxiv–v; 14, 17, 63, 115, 331(n38), 335 Chief Economist, GDN xxxiv Maxwell, S. xxxii, xxxiv–v, 269, 270, 299 Mayer-Foulkes, D. 281, 299 Mazoyer, M. 288–9, 299 McDermott, C.J. 45, 62, 122, 136, 143, 160 McKinley, T. xvii Meade, J. xv


Index 357


Index

meat 125, 134 Memphis 195 mercantilism 265, 303, 308 metal prices 54 metals 6, 10, 62(n6), 65, 105, 117f, 134, 139–40, 141f, 144t, 144–5, 150f, 150–1, 156, 264, 293, 295 commodity price index (1957–2008) 50f commodity price trends (1948–2008) 289f downward price trend 104 industrial 59 marginal costs of production 121 monthly average spot prices (1998–2008) 123f methodological nationalism 276–8, 296, 297(n2), 298 Mexico 31, 181t, 185, 321 Michel, L. 263 microcredit 261 middle class 292, 295 Middle East 127, 147f, 155t, 179t, 264, 267 middle-income countries xxxiii, 149f, 309, 311, 328 lower 266 lower and upper 129f see also developed countries Milanovic, B. 292, 299 military expenditure determinants (developing countries) xvi, 13, 17 military security 270 Millennium Development Goals (MDGs) xxxiii, 250, 281, 294 Millennium Summit 23 minerals 10, 62(n8), 66, 121–5, 134, 149–50, 156, 158, 250, 259, 264, 279, 280f, 293, 295 minerals, ores, metals 50f, 51t, 51–2, 54f, 54–5, 56t, 58f, 60, 103, 294t ‘ores and metals’ 153 mining/mining sector 8, 92, 251 changing landscape 91 changing landscape (impact on outcome of boom, Zambia) 86–90, 94(n20) see also copper; SYSMIN ministries of foreign affairs 33 Minsky, H.P. xxxi, xxxv, 322, 335 Mold, A., et al. (2008) xxxiii, xxxiv Olcer, D. xxxv Prizzon, A. xxxv monetary authorities 39, 84

monetary discipline 321 monetary policy 91, 97, 236, 313–16, 330(n14–16) autonomy eroded 313 commodity prices at forefront 234 floating regime 84 framework 83–6, 94(n18–19) independent 224 inflation-stabilizing 223 see also inflation-targeting monetary policy framework exchange rate and 83–6, 94(n18–19) monetary regimes 91, 95 monetary stability 84, 325 monetary tightening 323 monetary transmission mechanism 87, 88, 226 money 302, 304, 328 money supply 87, 226 monopsony 77 Monsanto, 201, 219 Monterrey Conference (2002) xxxii, 23, 33 Morisset, J. 72, 96 mortgages 322 sub-prime 39 sub-prime crisis 106 Moshi auction house (coffee) 76 most-favoured nation (MFN) principle 304 Mozambique 179n Multifibre Agreement 152 quota restrictions lifted (2005–) 129–30, 135–6(n2) Multilateral Debt Relief Initiative (MDRI) xxxiii, 87 multilateral development banks 25 multilateral disciplines development policy 306–12 need to restructure 329 multilateralism xxx, 303–5, 307, 327–8, 329(n3) multinational corporations see transnational corporations Mundell-Fleming model 223, 330(n14), 332 Mwanza region 77 Myanmar 269 Myrdal, G. xv Naira (Nigeria) 226 Nairobi Resolution (UNCTAD 1976) Namibia 261 nation-state 157


358

47


Index 359 ‘non-globalizers’ 272–6 non-tariff barriers 276 non-tradable goods 87 North Africa 147f, 179t North America 61f, 159, 179t North–South divide xxvi, 13, 23, 273 Norway 223, 261, 327 Nsibirwa, R.W. 95 null hypothesis 242–3t Obstfeld, M. 224, 236 Ocampo, J.A. 292, 299, 331(n31), 335 Oceania 154t, 179t O’Connell, S. 94 OECD xxii, xxxiii, 20, 128, 135, 150f, 251, 263, 267 offshore banking 315 oil 126–7; 39, 65, 95, 120, 122f, 125, 134, 144–5, 148f, 150f, 150, 153, 158–9, 226, 240, 277, 293–5 commodity price (monthly average, 2002–8) 51t, 51–2 commodity price index (2002–8) 50f, 51 commodity price trends (1948–2008) 289f ‘petroleum’ 50f, 51t, 51–2, 56t, 56, 57f, 59–60, 174, 250, 255, 294t price index (1970–2008) 56, 57f price instability index (1968–2007) 56t oil crisis (1973) 10–11 oil prices 54, 60, 135, 139–42, 148, 151, 156 shocks 10–11, 44, 85, 143, 254, 267 ‘special measures’ (1970s) 267 transmission to non-energy commodity prices 145 volatility (1900–2005) 142f, 142 oil-producing countries 23, 148, 149f, 155, 252, 326 Olam International 192, 193 Olcer, D. xxxv Oldham, G. 138 oligarchy 28 oligopoly 13, 71, 133, 189–91, 201, 208 oligopsony 13, 71 OPEC 254, 256 output xxxi, 6, 148, 275, 316, 318–20, 324, 330(n21), 331(n27) industrial (global, 1990–2002) 154 output gap 88 output volatility 146, 320


National Institute for Economic and Social Research (NIESR) 3, 5–6, 8, 16, 17 national security 33 national sovereignty 302 national stabilization funds 262 ‘national treatment’ 304 nationalization 158 natural logarithms 107, 108–13n natural resource trap 271, 273, 276 natural resources 4, 150–2, 156, 158, 208, 216t, 276, 295 African exports to China (1984–2004) 151f see also ‘resource curse’ Neary, P. 94(n16), 95, 96 neo-classical economics 13, 208 rejected by Maizels 100 ‘removed from reality’ 13, 15 weaknesses xxvi neo-colonialism 265 neo-liberalism 14, 328, 331(n29) Nepal 259 Nestlé 125 New Delhi xxxiv New International Economic Order (NIEO) 11, 14, 19, 20, 23 New York 73, 75, 85, 122, 195 New York Board of Trade (NYBOT) 69, 92(n1) New York Coffee Exchange 69f New Zealand 145, 223 Newbold, P., et al. (2005) 103–4, 107, 115 Pfaffenzeller, S. 115 Rayner, A. 115 ‘Newey-West using Bartlett kernel’ 242t Newman, S. xvii, 69–71, 74, 75–6, 93(n6), 96–7 coffee chains (price risk management, Uganda/Tanzania) 75, 93(n11) price transmission mechanisms (coffee supply chains) 72–3 niche markets 73, 79, 93(n11) nickel 54, 54–5f, 121, 122–3f Nigeria 84, 146, 148, 153 nineteenth century 165 Nissanke, M.K. xix, xxvii, 63; xvi, xvii, xxx, 12–13, 16–17, 42, 59, 62(n4), 82, 84, 92, 97, 159(n1), 224 noise traders 59, 68, 72 nominal exchange rate (NE) 241–3 ‘actual NE’ 231f nominal 223, 224, 228f, 240


Index

over-capacity (structural) 135 over-supply 166, 182–4 technology-change factor 184–7 Overseas Development Institute (London) 269 Oxford: Queen Elizabeth House xvi, 3, 14 Pacific islands/countries 147f, 253, 257 ‘ACP group’ 250, 256–60, 262–3, 266 Painted House (Grisham, 2001) 217(n1) Pakistan 181t, 185 Palaskas, T. 115 Pallage, S. 319, 330(n21), 335 palm oil 53f, 104, 108–9t, 111–12t pandemics 20, 21 Paris Club 120 Parra, M.A. 292, 299 ‘partnership’ deals 26, 35 patents 311, 312 Pattillo, C. 94(n18), 94, 96 Paul Reinhard AG 192t, 193 peg the export price (PEP) regimes xxix, 84, 85–6, 91, 95, 222–3, 226–35, 240 export performance 232f level of stability (assessment) 227 ‘not viable arrangement’ 234–5, 240 peg the export price index (PEPI) 222–3, 226–7, 229–35, 240 export performance 233f level of stability (assessment) 227 ‘not viable arrangement’ 234–5, 240 pension funds 59, 70, 261 Pension Reserve fund (Chile) 88 pests 77, 187, 202, 205, 206, 213–14t Pfaffenzeller, S. xix, xxviii, 57, 115, 140 Pfaffenzeller, S., et al. (2007) 102, 107, 115 Newbold, P. 115 Rayner, A. 115 Philippines 264 Phillips–Perron test 241, 242t physical capital 156, 283f, 284–5 Pindyck, R.S. 68, 97, 330(n24), 333 Pinto, B. 330(n25), 331 Plexus 192t Poland 3 polarization 295, 297 global 287, 291–3 policy autonomy constraints (DCs) xxx, 301–36 national 304

national space 320–4, 331(n28–33), 336 restrictions 302 policy interest rates 313, 314, 315 policy-makers: new challenges xxvii Political and Economic Planning (organization) 4 political economy 20, 71, 82, 155–6, 158–9 global 118–21 political instability 283f, 284 political rhetoric 23–4 political will 33, 203, 207, 260, 267 Pollock, D. 8–9 Ponte, S. 72–4, 95–7 portfolio equity flows 323 portfolio investors 59, 65, 68, 72–3 portfolio management 83 Portugal 153, 292 post-conflict situations 271 post-Keynesian world xxix Post-Washington Consensus 42 Poulton, C. xvii, 156, 162 poverty absolute/extreme 269, 272, 281 declining 279 dollar-a-day 278, 279, 280f, 298(n5) downward convergence 292 generalized 285, 286, 287 generalized (effects) 283f, 284 global (World Bank estimate) xxxiv increasing 279 international analysis required 278 rural 8, 40, 288–9, 299 ‘too poor to farm’ 288 urban 40, 290–1 see also international poverty trap poverty, power, and global economic governance xxvi–xxvii, 19–36 poverty-eradication 23, 32–5 poverty-reduction 25–7, 270, 272, 277, 279, 285, 295–6, 319, 327 Poverty-Reduction and Growth Facility (PRGF/IMF) 62(n7), 265 poverty traps xxviii, 115, 160, 270, 298 commodity-dependence 152–7 within countries 281 institutional 157, 160 international aspects 284 power relationships 25, 44 Prasad, E.S. 334 Prebisch, R. xv, 3, 7, 8–9, 43, 63, 131–3, 137


360


Prebisch–Singer hypothesis 43, 63–4, 253 Prebisch–Singer–Maizels theories 142 price changes distribution (commodity trade) 90 mechanisms of distribution 90 price cycles xxvii, 44, 91, 240 price elasticity 154 price elasticity of demand 48 price formation xxviii, xxix, 68, 90, 178, 182 cotton crisis amplification factor 188–97 price linkages 94 price preference 208 long-term supply contracts 198–9 price risk management 72 upstream coffee chain (Uganda/Tanzania) 74–6, 93(n9–12), 96–7 price risk 72, 73 price stability/instability 224, 233, 317 price stabilization 73, 204, 208 price transmission process 71–3 price value factors 188–97 ‘price-to-be-fixed’ contracts 69, 75–6, 93(n3) prices aggregate data: dangers (Maizels) 103 determination 13 domestic xxix, 85, 235 domestic (simulations) 233–5 domestic performance 227 producer versus retail (widening gap) 72, 96 tradable goods 227 private agents 67, 74 private regulation systems (PRSs) 193–5 private sector 121, 267, 285 private traders 74, 78, 79 privatization 66, 78, 86–7, 89, 91–2, 156, 172, 174, 193, 217(n6), 221, 272 Prizzon, A. xxxv pro-cyclicality xxix, 49, 86, 224, 229, 235, 240, 249, 259, 266, 312, 314–21, 323–4, 326–7, 330(n21), 334 producer prices 71, 79, 80–1f producers 13, 19 developmental impacts of changing market structures 73–80 income-smoothing 252 supply-management 48

production xxvii, 9, 15, 68, 75–6, 91, 93–4(n13–14), 206, 210–16t, 296 changing landscape 90 costs 48, 52, 71 globally integrated 66, 71 industrial 114(n4) state-ownership 251 production possibility frontier 83 productive capacity 285 productivity xxvii, 20, 44, 122, 126, 130, 134, 155–6, 166, 182, 186, 197, 202, 262, 283f, 284–5, 290, 297 sustainable gains 204–5 productivity enhancement 210–16t global process 214–16t productivity gain 209 ‘public-good nature’ 205–7 productivity gap xxviii professional associations 202, 217(n7) profits 44, 68, 75, 86–7, 140, 188, 323 property 119, 316, 322 protection of the weakest 30 protectionism 10, 13–14, 277, 307 prudential regulation 322, 335 public expenditure 4, 88, 302, 318, 319 public finance 261, 267, 316–18 public goods 21, 84, 209, 210t, 214t international 267 productivity gains 205–7 public opinion 8, 15 public sector 88, 121, 316–17 Quad countries (WTO) 23, 35 quality criteria 287 quantitative analysis 12–13, 69 Queensland Cotton Corporation 192 quotas 9, 31, 32, 48, 129–30, 135–6(n2), 199

192t,

Raddatz, C. 148, 161, 282, 298 Rahman, A. xxxii, xxxiv Ralli Brothers and Coney 192t, 196 Ramey, G. and Ramey, V.A. 330(n25), 335 Rancière, R. 161 Rand (South Africa) 226, 237 rate of return (risk-adjusted) 315 rational choice 270 raw materials 10, 65, 120, 294t Rayment, P.B.W. xvii, 16, 17 Rayner, A. 115


Index 361


Index

Reagan era 255 real commodity price index (Grilli and Yang, 1988) 102, 103, 104, 115 real world 100 reciprocity principle 274 Reddaway, B. 4 Reeves 185t regionalization: new challenges xxxii–iii regions (disadvantaged) 309 Réglement Général du Havre (RHG) 195 regression techniques 5–6 Reinhart, C.M. 196, 225, 334 Reisen, H. xxxii, xxxv Reitz, S. 134, 137 rent 48, 66, 71–2, 82–3, 89, 91–2, 96, 131–2, 155, 252, 261, 277 research and development 10, 77–8, 120, 133, 134t, 202, 204–5, 207–9, 309, 328 ‘resource curse’ 155, 158–60, 275 literature 82, 94(n15), 94–5, 97 see also natural resources ‘resource transfer’ effect (Dutch disease) 82, 87 resource-based economies commodity price cycles 80–90, 94(n15–20) macroeconomic management 90 macroeconomic management (commodity price cycles) 82–6, 94(n15–19) Reuters–Jefferies CRB index 143 revenue-smoothing 252 Reynal-Querol, M. 298 Ricardian rent 132–3, 135 rice 52, 53f, 108t, 111t, 150n, 266 Rigobon, R. 155, 160 Rio Tinto 259 risk xxxi, xxxiii, 67, 93(n11), 286, 314, 324 risk-assessment 322 risk-aversion 119–20, 204 risk-hedging 73–4 risk-sharing 224 Robbins, L. 3 Robe, M.A. 319, 330(n21), 335 Robin, M.-M. 201, 219 Rockefeller Foundation 6 Rodrik, D. 35, 36, 158, 161, 331(n33), 334 Rogoff, K. 160 Ron, J. 158, 160 Roodman, D. xxxii, xxxv

Ros, J. 295, 299 Rosenstein-Rodan, P.N. 156–7, 161 Rossi, B. 160 Rostow, W. W. xv, 5 royalties 86, 158 RPGs xxxiii rubber 8, 47–8, 52, 54f, 104, 108t, 111t Russia 23, 31, 159, 223, 236–7, 260, 267 Sachs, J. 94(n15), 97, 281, 282 SACU 263 Saiki, A. 222 Sambanis, N. 298 Samiei, H. 134, 136 Santos-Paulino, A. 329(n7), 335 Sapsford, D. xix, xxviii, 45, 57, 62, 63, 114(n2, n4, n8), 115, 140 Sarker, P. 45, 64, 118, 131, 137 Sarkozy, N. 263 Sarno, L. 330(n15), 335 Saudi Arabia 31, 325 Sautier, D., et al. (2006) 188, 219 Biénabé, E. 219 Fok, A.C.M. 219 Vermeulen, H. 219 savings 94(n16), 224, 283f, 320–1, 326 Scandinavia 160 Schneider, B. 330(n23), 335 Schonfield, A. 7, 17 Schumpeter, J.A. 131, 132–3, 135, 331 Schwarz Bayesian Criterion (SBC) 107 Scott, A. 160 seeds 66, 74, 77–9, 210t Seers, D. 14–15 ‘self-fulfilling currency crises’ (Obstfeld) 236 Senegal 179n, 186, 187n, 262–3 Servén, L. 161 services sector 81, 132, 140, 279, 291, 302, 311 exports 280f knowledge-intensive 136(n7) Setser, B. 222, 226 Shaba invasion (1978) 259 Shinyanga region 77 shocks 44–5, 80, 83–6, 91–2, 94(n16), 94, 95, 121, 122, 136, 153, 221–3, 235, 238, 240, 249, 252, 265, 279, 286, 294, 305, 320, 325–6 asymmetry 147–8, 222 short-termism 20, 68, 70 silver 108t, 111t Sindzingre, A. xx, xxviii, 56, 139, 156, 161


362


Singapore 261, 267 Singer, H.W. xv, 4, 14–15, 43, 64, 114(n8), 115, 118, 131, 132, 136(n4), 137–8 Singer, H.W., et al. (’Sussex Manifesto’ , 1970) 133, 134n, 138 Cooper, C. 138 Desai, R.C. 138 Freeman, C. 138 Gish, O. 138 Hall, S. 138 Oldham, G. 138 Singh, M. 15 SITC 135(n1), 154n skills 43, 134, 156, 310 ‘small-country assumption’ 118 smallholders 73–8, 90, 92, 206, 288–90, 297, 299 social mobility 274, 291 Société Nationale Industrielle et Minière (Mauritania) 258 soft power 22, 257 Sokoloff, K.L. 159, 161 Somalia 120 Soto, C. 94(n18), 97 South Africa 31, 94(n18), 126, 145, 154, 185, 239 South America 61f, 159, 251 South Asia 128t, 147f, 154t South Korea 225 South-Eastern Europe 161 Southern Africa 179t, 191t Southern Rhodesia 8 Sovereign Debt Restructuring Mechanism (SDRM) 325 sovereign-wealth funds 23, 32, 59, 88, 119, 251, 261, 263–4 soybeans 150n, 201 Spain 178, 179n, 183, 191t, 292, 322 ‘special and differential treatment’ (SDT) 34, 274, 306 special drawing rights (SDRs) 50–1, 237, 250 Specific Economic Partnership 198 speculation/speculators 75, 134, 136–7, 145–6, 251, 327 speculative attacks 224, 236, 238 ‘spending effect’ (Dutch disease) 82, 87, 94(n20), 225 spot markets/prices 68, 72, 75 Spraos, J. 45, 64 stabilization 82, 154, 236, 255, 267, 272, 314 counter-cyclical xxix short-run 91

Stahel Hardmeyer AG 192t Staley, E. 5, 17 standard deviation 230, 231f, 231, 234–5, 320 standard error (SE) 104, 108–13n, 114(n6, n8), 242t Standard Theory of Trade and Development 165 state capacity 158–9, 283f, 284–5 state contingent debt contracts 92 ‘state failures’ 156 state policies 272 state role 157–8, 198 ‘government action’ 16 state socialism 15–16 state trading enterprises (STEs) 188, 190, 202, 259 ‘public enterprises’ 306 state-owned enterprises (SOEs) 86, 90, 92, 119, 267 stationarity 104, 107 statisticians xvi statistics xxvi, 3–6, 14–15, 70, 101, 103 dangers 105 steel 121, 122f, 123t, 124f, 144 Steger, T.M. 281, 299 Stein, J.L. 134, 137 Sterling Area 17 stock markets 45, 323 storage 79, 196 Strauss-Kahn, D. 255, 260–1, 265 Streifel, S. 140, 161 structural adjustment plans (SAPs) 66, 153–4, 170, 186, 188, 204, 206, 209 structural stability analysis 105, 106 structural transformation 275, 296 structural transition blocked 270, 287–91, 294, 296–7 Sturzenegger, F. 225, 244 sub-prime mortgages 145, 251 sub-Saharan Africa (SSA) xxv, 41, 62, 84, 93(n13), 120, 125–7, 128t, 134, 146–51, 153, 155t, 158, 161–2, 223, 257, 262, 264, 269, 286, 292, 306–7 exports to USA (garments and textiles) 129–30, 135–6(n2) GDP growth (driven by oil prices, 2000s) 149f oil production (1965–2006) 148f subsidies 182–4 agricultural 184, 308 cotton (USA) 167–8


Index 363


Index

subsidies – continued ‘economy-wide’ versus ‘sector-specific’ 309 industrial 301, 308–10, 311 miscellaneous 77, 119, 156, 165, 170, 174, 208–9, 211–13t, 215t, 249, 263, 266, 328 more efficient and fair 197–8 regional 309 Subsidies and Countervailing Measures (SCM) 308, 309, 329(n4) subsidy reductions 199–200 subsidy-reduction programmes integration of supply-control into 199 subsistence 157, 298, 299 ‘successful developers’ 273 Sudan 120, 127, 179n, 265 sugar 10, 45, 47, 108t, 111t, 126f, 153, 227, 229, 229–30f, 256 Sugar Protocol 257–61, 264 Sumner, D. 185t super-price cycle 43, 55–6, 60, 66 supermarket chains 66, 71 supply bottlenecks 83 cotton crisis amplification factor 182–8 inelasticity 121, 134 long-term contracts (price preference) 198–9 one-per-cent elasticity (assumption) 227, 231 rigid management xxix sustained for socio-economic reasons 188 supply control 208–9 integration into subsidy-reduction programme 199 supply and demand xxix, 43–4, 52, 55–6, 59–60, 65, 67–9, 72–3, 114(n4), 122 coffee 69–70 cotton crisis amplification factor 178–88 supply management 249, 251, 252 supply shocks 44, 86, 87 surplus labour 130, 131 Sussex manifesto (1968) 133, 134n, 138 Swaziland 136(n2) Switzerland 192t Swoboda, A.K. 331(n30), 335 Syngenta 204

synthetic products 10, 14, 48, 165, 178, 180–1 Syria 179n System for Export Earnings Stabilization (STABEX, EEC/EC/EU, 1975–) xxiii, xxix, 49, 249, 256–60, 266 compatibility with current commodity trade issues 261–3 devised by EEC (1973–5) 256 payment claims 258 ‘purely regional scheme’ 259 System of Stabilization of Export Earnings from Mining Products (SYSMIN) xxiii, xxix, 49, 62(n8), 249, 256, 259, 262, 266 ‘systemically important countries’ 325–6 t-ratio 108–13t t-statistics 242t Taiwan 165, 182, 190t, 225, 265 take-off stage 42 Tanzania xxvii, xxxii, 74–6, 80n, 90, 179n cooperative marketing 75 institutional environment (coffee and cotton sector, Tanzania) 76–9, 80–1f, 93–4(n13–14), 94 price risk management (upstream coffee chain) 74–6, 93(n9–12), 96–7 Tanzania Coffee Board 79, 80–1n Tanzania Coffee Research Institute (TACRI) 78 target zones (exchange rate dynamics) 236 tariffs 263, 276, 304 ‘bound’ versus ‘applied’ 307–8, 328, 329(n8) ‘bound’ versus ‘unbound’ 307–8 industrial 301–2, 306–8, 310, 329(n8), 332 preferential 129 Tate & Lyle 257 Tawney, R. H. 15 tax concessions 309 tax revenues 319, 330(n22), 332 taxation/taxes 32, 86, 89, 92, 158, 201, 255, 302, 318, 323 Taylor, A. 224 Taylor, J.B. 235 Taylor, M.P. 330(n15), 335 tea 8, 48, 53f, 103, 108t, 110, 110–11t, 113t technical assistance 35


364


technical barriers 74 technical changes 26 technological ladder 43, 292, 297 technological progress 114(n4), 309 technological superiority 43 technology 72, 132, 155, 157, 288–9, 301, 308, 328 agricultural 52, 297 new 66, 74 technology access 77–8, 287, 297(n3), 299 technology change 182 over-supply factor 184–7 textile industry 181–2 technology transfer 291, 304, 310–12, 330(n13) Temasek (Singapore SWF) 261 terms of trade ‘barter terms of trade’ 118, 131–2, 136(n5–6), 274 commodities versus manufactured goods 43–4 commodity prices (China/India) xxviii, 117–38 factorial 118 ‘income terms of trade’ 136(n5–6) miscellaneous 26, 62, 81, 85–6, 115, 151, 156, 161, 254, 320 Prebisch–Singer–Maizels theses 139–40 reversal xxviii, 130–2, 136(n4–7) reversal (sub-sectoral and country differences) 130 reversal (sustainability) 132–5 shocks 148, 154, 155t, 160, 223, 226, 232, 251, 275, 283f, 285, 318–19 volatility 146, 162, 274 Terrones, M.E. 334 textiles 6, 62(n6), 129–30, 135–6 (n2, 158, 166, 178, 185t, 188, 200, 311 end-use consumption patterns 181t technology and management change 181–2 vertical diversification 207 Thailand 118, 221, 323 Third World Currency proposed by Maizels 189, 196–7, 200 Third World Network (TWN) 331(n39), 335 Thirlwall, A.P. 329(n7), 335 Thorbecke, E. 42, 63 timber 5, 108t, 111t, 120

time/time horizon 49, 70, 119–20, 319 ‘time-phasing’ policy 82–3 time-series data 10, 46, 49, 50f, 70, 87, 101, 104, 241 time-series models (univariate) 107 time-trends 114(n4) tin 8, 45, 47, 54, 54–5f, 108t, 111t, 122–3f, 264 Tinbergen, J. 8, 9, 329(n1), 335 tobacco 87, 108t, 111t, 131, 227, 229, 229–30f Tobin Tax 327 Togo 146, 173–4, 176–7t, 179n, 186, 187n Tokarick, S. 185t Toye, J. xv, xx, xxvi, xxvii, 16, 17 Toyo Cotton 192t trade agricultural 15 and development 6–12 engine of growth and poverty-reduction 285 external vulnerability: structural determinants 148, 161 global economic governance reform 33–5 international framework 306, 329(n5), 333 internationalization 275 South-South 14 trade barriers 6, 14, 15, 275 trade classification harmonized system (HS) (129), 135(n1) trade data disaggregation 129, 135(n1) trade distortion 189, 308, 310, 329(n11) trade facilitation 265 Trade Integration Mechanism (TIM/IMF) 255, 261–2, 265, 307 trade liberalization 66, 73, 276, 279, 303, 306, 319, 330(n22), 332 deferred 274 multilateral 274 premature 307, 334, 335 see also liberalization trade openness 148, 157–8, 161 trade preferences 271, 274 trade surpluses 261 trade taxes 263, 330(n22) trade union power 44 trade-GDP ratio 276


Index 365


Index

Trade-Related Aspects of Intellectual Property Rights (TRIPs) 308, 311–12, 328, 329(n4), 330(n13), 333, 335 costs and benefits (inequality) 311 Trade-Related Investment Measures (TRIMs) 308, 310, 329(n4) training 78, 206–7, 215t transaction costs xxxii, 72 transaction monetary unit (new) 200–1 transition economies 154–5t transnational corporations (TNCs) 71 abusive trading practices 201–2 concentration (cotton) 196 cotton sector 192t domination facilitated by reform of FAC cotton sectors 192–6 international production networks 310 intra-firm transactions 66, 71, 193, 202 market power 208, 209 ‘multinational corporations’ 13, 251 oligopsony structures 71 political power 201 ‘price capture’ 193 subsidiaries 75, 202 trade-restricting policies 310, 329(n11) trading companies 76 transparency 188–9, 201–2 vertically integrated 71 Zambian copper sector 86 transparency 24, 26, 31, 84, 120, 173, 188–90, 195, 201–2, 235, 237 transport/transportation 52, 150, 152f, 212t, 215t treasury shortages 174–176 Treaty of Rome (1957) 257 trend stationary models 107 Trevor Manuel panel 265 trilemma 223–4 Trinidad and Tobago 261 tropical beverages 10, 14, 17, 48, 52, 103, 253, 264, 294t ‘beverages’ 105, 106 price (2002–8) 53f price (2002–8, monthly average) 51t, 51 price (2008) 60 price index (1957–2008) 50f price instability index (1968–2007) 56t

real price (index, 1960–2007) see also cocoa; coffee; tea Tschirley, D. 156, 162 Turkey 31, 165, 264, 317, 334

58f

Uganda xxxii, 84, 90, 330(n23), 335 price risk management (upstream coffee chain) 74–6, 93(n9–12), 96–7 Uganda Coffee Farmers’ Association 93(n12) Ugandan Coffee Development Authority (UCDA) 75 Ukiriguru (cotton research institute) 78 uncertainty 45, 146, 207, 253, 285, 319 under-development trap 157, 281 under-employment 120, 130 unemployment 120, 135–6(n2–3), 303 unit root null hypothesis 114(n5) unit root tests 241, 242t United Kingdom 8, 11, 13, 165–6, 181t, 192t, 258, 266–7, 321, 327 obligations towards developing countries 256–7 United Kingdom: Board of Trade xv, 4–5 United Kingdom: HM Treasury 331(n38), 333 United Nations bottom-billion representation 29 development fund 327, 331(n40) miscellaneous xvii, 21, 25, 36, 73, 257, 299, 327, 330(n18), 331(n39), 336 UN Conference on Finance for Development (Monterrey 2002, Doha 2008) 33 UN Economic Commission for Europe (Geneva) xv, 4–5 UN Economic Commission for Latin America and Caribbean (ECLAC) xxiv, 40, 274 UN Food and Agriculture Organization (FAO) 125, 135, 185t, 218, 265, 289 UN General Assembly 11 UN Intellectual History Project xvi UN-COMTRADE data 238n UNIDO 63, 154 United Nations Conference on Trade and Development (UNCTAD/CNUCED) 6–12, 64, 299–300


366


Index 367 Uruguay Round 188–9, 306, 311, 329(n2) Uzbekistan 179n value chains 122, 201, 293 global 132 governance structures 71, 72, 96 value-added 155, 188, 284–6, 292–3, 308, 311 value-added tax 330(n22) Van der Hoeven, R. 331(n27) Van Wijnbergen, S. 94(n16), 96 VAR [vector autoregression] 88, 241 vegetable oilseeds and oils 51t, 51, 52, 56t, 58f, 60, 103, 294t Végh, C.A. 334 Velasco, A. 94(n18), 95 Venezuela 223, 267 Ventura, J. 161 Vermeulen, H. 219 ‘vertical’ funds xxxii Vietnam 118, 144t villages 75, 77–9 ‘voice’ 23–6, 28, 30, 32, 36 Vulnerability Fund (proposed) 266 ‘vulnerability funds’ xxxiv Waage, J. xvii wages 120, 131, 182, 319–20, 331(n27) Wang, J.-Y. 150–1, 162 War of Secession (USA) 166, 167 Warner, A. 94(n15), 97 Washington Consensus 42, 255, 272, 277, 297–8, 331(n28), 336 water 120, 134 Weeks, J. xvii Weil Brothers & Rountree 192t Weiner, R. 134, 138 Weiss, J. 329(n10), 336 West, the xxv, 13–15 West Africa 120, 153, 156, 257, 262, 265 West African Cotton (brand) 203 West Asia 153, 154t Westerhoff, F. 134, 137 Western Europe xxiv, 40, 307 wheat 52, 53f, 104, 108t, 111t, 145, 150n, 266 Williamson, J. 225, 236–8, 245 Williamson, J.G. 146, 162 Wood, A. 136(n7), 138 wool 105, 108t, 110, 111t, 113t World Bank 31–3 ‘Banque mondiale’ 193, 217


commodity price index 50f, 293, 294t miscellaneous xv, xviii, xx, xxvi–xxvii, 42, 52, 59, 61n, 62(n5), 115, 153, 154n, 155, 162, 185t, 188, 202, 254, 259, 263, 272, 274, 279, 280n, 286, 297(n1, n3–4), 303 Nairobi Resolution (1976) 47 strategy for commodities (1966) 9 UNCTAD: Committee on Trade and Commodities 266 UNCTAD: Commodities Division xv, 3, 8, 10 UNCTAD: Common Fund for Commodities (CFC, 1980–) xv–xvi, xxix, 3, 9–13, 19–20, 202–3, 205, 249, 257 UNCTAD: Economic Policy Evaluation and Coordination Unit xv–xvi UNCTAD II (New Delhi, 1968) 9 UNCTAD IV (Nairobi, 1976) 11 UNCTAD X (Bangkok, 2001) 14 UNCTAD XII 269 UNCTAD Secretariat 11–12 UNCTAD Trade and Development Report (TDR) 260, 268, 274–5, 299, 329(n7), 330(n16), 331(n27, n29, n33, n35), 336 United States of America xxiv, 7, 8, 13, 21, 23, 31, 33, 35, 39–40, 47, 60, 61f, 62(n6), 119, 121–2, 124f, 126–7, 127t, 129–30, 132, 150, 152, 165, 170, 179n, 180, 181t, 183–5, 201, 205–6, 239, 261, 264, 267, 307, 320–1, 326 cotton exports 178 cotton subsidy programme (1933–) 167–8 demand for cotton 178 trade with Africa (2006) 152f US Dollar 85, 114(n4), 139, 145, 174, 196–7, 200, 228n, 237, 325 US government 329(n3) University of London LSE 3 SOAS xvii–xx, 14, 106, 159(n1) UCL xvi, 3, 12 unremunerated reserve requirements 323 UNU WIDER (Helsinki) xvi, xix, 3, 14, 36, 63, 335 urban areas 136(n3) urbanization 122, 126, 133, 289


Index

World Bank – continued global poverty (revised estimate) xxxiv governance reform 31–2 policy research reports 271–3, 298, 300 World Development 12–13, 17, 118 World Economy 114(n2), 115 world trade xxv, 5–6, 43, 278–9 World Trade Organization (WTO) 188–9 bottom-billion representation 29–30 constraints on development policy 306, 329(n4) decision-making system 33–4 escape clauses or safeguards 306 FAC protest (2003) 173–4, 183, 197, 199, 207, 209 global economic governance reform 33–5 institutional diversity 35 ‘level playing field’ 305 non-discrimination rule (textile-producers) 200 Northern policy-makers 34–5 re-design required 329 rules-based approach 27 WTO: Cancún meeting (2003) 165 WTO: Doha Round 184, 197–8, 200, 208, 260 WTO: expert panel 198 World Wars 4, 144t, 167 inter-war era (1918–39) 304 post-war era (1945–) xv, 4–5, 8, 43, 101, 133, 143, 144t, 178, 180, 304, 323

Yang, M. C. 102–4, 106–8, 115 year n-1 assumption 103, 108 Yemen 269 Yom Kippur War 144t Zaire 259 Zambia xviii, xxvii, 66, 84, 89, 94(n19), 95, 120, 179n, 259 case study 86–90, 94(n20) case study (exchange-rate regime) 221–45 copper boom 91 counter-cyclical band 235–40 exports (non-traditional) 87–8 pegging exchange rate prices of exported commodities (macroeconomic effects) xxix real effective exchange rate (2000–8) 89f, 89 two-exchange-rate arrangements (pros and cons) 226–40 Zambia Consolidated Copper Mine (ZCCM) 86, 89 Zambian Kwacha (ZMK) 89, 226–8, 228f, 230, 231f, 236 appreciation 87–8, 239 Dollar and Rand basket 237–40 Zimbabwe 179n zinc 45, 54f, 105, 108t, 110, 111t, 113t, 121, 122f Zoellick, R. 266


368


Commodities, Governance and Economic Development Under Globalization

Capital Markets, Globalization, and Economic Development

Economic Governance in the Age of Globalization

Globalization and Governance

Economic Governance in the Age of Globalization

Demystifying Globalization (Globalization & Governance)

Globalization and Urban Development

Globalization, Marginalization and Development

Consumption, Globalization, and Development

Development and Global Governance

Theory and Practice of Local Governance and Economic Development

Globalization and National Economic Welfare

Globalization and progressive economic policy

Europe, Globalization and Sustainable Development

Welfare Discipline: Discourse, Governance and Globalization

The Globalization of Corporate Governance

An Unruly World?: Globalization, Governance and Geography

Altered States: Globalization, Sovereignty and Governance

SARS, Governance and the Globalization of Disease

General X-Efficiency Theory and Economic Development (Economic Development Series)

Globalization and Emerging Societies: Development and Inequality

Commodities, energy and finance

Achieving Economic Development in the Era of Globalization

Finance, intermediaries, and economic development

Transport Investment and Economic Development

Institutional Change and Economic Development

Development Under Stress

Natural Resources and Economic Development

Finance, Intermediaries, and Economic Development

Institutional Change and Economic Development

Information Technology and Economic Development

Commodities, Governance and Economic Development Under Globalization

Capital Markets, Globalization, and Economic Development

Economic Governance in the Age of Globalization

Globalization and Governance

Economic Governance in the Age of Globalization

Demystifying Globalization (Globalization & Governance)

Globalization and Urban Development

Globalization, Marginalization and Development

Consumption, Globalization, and Development

Development and Global Governance

Theory and Practice of Local Governance and Economic Development

Globalization and National Economic Welfare

Globalization and progressive economic policy

Europe, Globalization and Sustainable Development

Welfare Discipline: Discourse, Governance and Globalization

The Globalization of Corporate Governance

An Unruly World?: Globalization, Governance and Geography

Altered States: Globalization, Sovereignty and Governance

SARS, Governance and the Globalization of Disease

General X-Efficiency Theory and Economic Development (Economic Development Series)

Globalization and Emerging Societies: Development and Inequality

Commodities, energy and finance

Achieving Economic Development in the Era of Globalization

Finance, intermediaries, and economic development

Transport Investment and Economic Development

Institutional Change and Economic Development

Development Under Stress

Natural Resources and Economic Development

Finance, Intermediaries, and Economic Development

Institutional Change and Economic Development

Information Technology and Economic Development

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