Initiative for Policy Dialogue and the South Centre Working Paper, March 2013

This paper: (i) examines the latest IMF government spending projections for 181 countries by comparing the four distinct periods of 2005-07 (pre-crisis), 2008-09 (crisis phase I: fiscal expansion), 2010-12 (crisis phase II: onset of fiscal contraction) and 2013-15 (crisis phase III: intensification of fiscal contraction); (ii) reviews 314 IMF country reports in 174 countries to identify the main adjustment measures considered in high-income and developing countries; (iv) discusses the threats of austerity to development goals and social progress; and (v) calls for urgent action by governments to adopt alternative and equitable policies for socio-economic recovery.

Reprint Series 1

In recent years financial policies in both industrial and developing countries have put increased emphasis on the market mechanism. Liberalization was partly a response to developments in the financial markets themselves: as these markets innovated to get round the restrictions placed on them, governments chose to throw in the towel. More important, however, governments embraced liberalization as a doctrine.

This issue of South Bulletin covers many interesting issues. Our two lead articles are on the BANKING CRISIS in developed countries.  The first by Martin Khor reviews how the LIBOR scandal has contributed to the loss of confidence on the ethics of the major banks.  The second article is by India’s former Central Bank Governor, Dr. Y.V. Reddy on the need to re-make the financial system to meet society’s needs.  He focuses on why trust has to be restored, how there has been “comprehensive regulatory capture” of the system, and the need for inclusive finance, as issues to address.

Research Paper 44, March 2012

This paper argues that the unprecedented acceleration of growth in the developing world in the new millennium in comparison with advanced economies is due not so much to improvements in underlying fundamentals as to exceptionally favourable global economic conditions, shaped mainly by unsustainable policies in advanced economies. The only developing economy which has had a major impact on global conditions, notably on commodity prices, is China. However, growth in China has been driven first by a rapid expansion of exports to advanced economies and more recently, after the global crisis, by an investment boom, neither of which is replicable or sustainable over the longer term. To maintain a rapid growth, export-led Asian economies need to reduce their dependence on foreign markets. For Latin American and African commodity exporters, gaining greater autonomy and achieving rapid and stable growth depend on their success in reducing reliance on capital flows and commodity earnings – the two key determinants of their growth which are largely beyond national control.

Research Paper 28, May 2010

South Centre has released a Research Paper which examines the impact of the external shocks from the global economic crisis on industrial development of Least Developed Countries (LDCs).  These countries are heavily exposed to external shocks because of their extensive trade with the rest of the world.  Yet, they are marginalized in terms of their share in international trade and output.  They suffer from structural weaknesses and chronic balance-of-payments and fiscal deficits.  They are heavily dependent on commodity exports and external financing.The global economic crisis is a wake-up call for LDCs to reconsider their long-term industrial and development strategies.  

(A joint publication by South Centre and ActionAid) ... - April 2008

Executive Summary

A positive correlation has been found between dependence on primary agricultural commodities and poverty, as measured by the human development index. This is due to three prominent features of commodity markets: price volatility; the secular decline of long-term prices; and market concentration.

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(A joint publication by South Centre and Traidcraft) ... - April 2008

Introduction

This paper is an attempt to explore the extent to which competition policy can be used to address problems caused by corporate concentration and the exercise of ‘buyer power’1 in agricultural commodity markets.2 It assesses the conceptual and practical opportunities of current competition policy to tackle this phenomenon and also highlights its limitations. This is a difficult and complex area. Many studies that have looked into the adverse affects of buyer power and corporate concentration on commodity producers have suggested that competition policy may offer a useful avenue for investigation.3 This study is therefore an attempt to do this and should be seen as a contribution to the debate.

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Research Papers 12

EXECUTIVE SUMMARY

Horticultural trade, especially fresh fruits and vegetables from Sub-Saharan African to European market, has received a great deal of attention over the past decade due to the rapid and sustained growth of its exports to Europe. This impressive growth has undoubtedly contributed to increased national incomes and has reduced rural poverty in Sub-Saharan Africa. Good examples in this respect are Kenya, South Africa and, to some extent, Zimbabwe. Despite this growth, the inclusion and proportion of the rent obtained from this lucrative business for smallholder farmers, who in the past used to be the major players, have been worsening over the span of the horticultural trade. One of the major contributing factors is the recent changes and dynamism of the global governance of fresh fruits and vegetables value chain. The changes of governance of global value chains for FFV from the market based coordination to the explicit vertically integrated coordination, coupled with other factors such as stringent phytosanitary measures, private standards like EurepGAP, and the increased consumers’ demand and choices, have led to the exclusion of smallholder farmers in the value chain because of their failure to comply with different requirements and standards. This poses a potential threat to the efforts of addressing chronic poverty and well being of the rural poor in the region.

Thus, the purpose and scope of this paper were: to investigate, compile and analyze concrete evidence regarding the nature of changes in the governance of fresh fruits and vegetables value chain and their causes; to identify the opportunities and challenges stemming from these changes and what determine success and failure in the new future governance and architecture; to see how the competitive advantage of FFV producers is affected by the changes in the governance of FFV value chains; to discuss the implication of the changes for the aspirations of economic diversification of commodity dependent developing countries. Finally, the paper provides recommendations on copping mechanisms, private sector strategies, and public policy responses that would enable developing countries’ producers, taking into account ownership and equity considerations, to appropriate a fair share of the rents in the FFV value chains.

 

Research Papers 10

EXECUTIVE SUMMARY  (excerpt)

There has been widespread concern for many years over the very abstract nature of orthodox economic theory, especially that of the neo-classical school which has dominated the profession since the late 19th century. Such disquiet is frequently felt among non-economists, but a great many dissident economists have also expressed their disquiet over the years. A large part of the difficulty centres on the concept of “perfect competition”, not least the explicit removal from the basic theory of economics of the notion of market power.

This is of importance for development today for two reasons. Firstly, the pressure placed on developing countries since the 1980s has been to liberalise, deregulate and open up markets in all areas of their economies; that pressure continues in spite of extensively reported evidence of its damaging effects. Secondly, there is specific concern in areas of trade which are vitally important to developing countries, and the poorest countries in particular - agrarian in economic structure and commoditydependent in international trade as they are. In recent years, many people who have investigated the crisis of commodity prices have linked it closely with declining market power among agricultural producers, combined with excessive power at the buyers’ end of international supply chains.

This paper argues that the bias of conventional economics needs to be replaced with a more realistic theoretical basis, which will hold market power at its core. It can be divided into three parts. First of all the paper discusses the challenges to the basis of economic theory that have been posed over a long period, and especially challenges to the fundamental concepts of perfect competition and general equilibrium. Along the way, it notes the astonishing number and variety of leading economists who have themselves commented on their discipline’s failure to explain adequately how markets work and how prices are formed, although one might have thought that those were at the very heart of its subject matter.

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Research Papers 5

INTRODUCTION

“There is on the question of commodities a sort of conspiracy of silence. The solutions are not simple… But nothing justifies the present indifference.” President Jacques Chirac of France, in his address to the Twenty-Second Summit of the Heads of State of Africa and France, 20 February 2003(As quoted in UNCTAD, 2003a)

Although the structure of International Trade has changed significantly in favour of manufactures, primary commodities remain extremely important for several developing as well as Least Developed Countries. A large number are still dependent on a limited basket of primary commodities for their exports. For example, Nigeria is predominantly dependent on petroleum and cocoa; whereas 95%of Ugandan exports consist of coffee and 95% of Zambian exports consist of copper and zinc. Due to their inherent peculiarities, primary commodities face extreme price volatility in the short run and secular decline in the long run. This adversely affects primary commodity growers directly, and severely hampers the ability of the Governments of these countries to improve the welfare of their impoverished populace. More than a billion people are still dependent on the production and export of primary commodities in these countries, especially in the Highly Indebted Poor Countries (HIPC), African, Caribbean and Pacific (ACP) countries and the Sub-Saharan African countries (SSA). Even today a major portion of these populations earns less than USD 1 a day. Therefore no strategy aimed at attaining the ‘Millennium Development Goals’1, especially that of halving the number of extremely poor people by 2015, will succeed without a conscious effort to address the issues of primary commodities2.

Several attempts have been made in the past towards ensuring commodity price stabilization commencing with the Havana Charter. They include, among others, International Commodity Agreements, Marketing Boards and International Compensatory Financing Mechanisms. Unfortunately, none of them proved to be satisfactory and primary commodities remain an area of concern.

Commodities, today, are plagued by several issues, and just a few are quoted here: a) market access, b) value chain, c) subsidies, d) price volatility and e) a long-term secular decline in prices.

This paper is an endeavour to explore the Export Earning Instability experienced by the Commodity Dependent Developing Countries (CDDCs) originating from price volatility and its associated issues which “...constrain the ability of many developing countries to attain a path of stable and sustained growth and employment creation that could benefit all segments of their population and allow them to reach the [Millennium Development Goals] MDGs” (UNCTAD, 2005). It also attempts to suggest better policy options keeping in mind the lessons learnt from past efforts.

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Research Papers 2

EXECUTIVE SUMMARY

The past few decades have seen a huge surge in international trade that has affected developing countries as well as the world’s largest economies. However, while some countries have seen an associated increase in wealth, others seem to have been left behind. One of the key reasons for this seems to be that least developed countries have specialized in those parts of the production chain that do not generate large profits. Resource constraints have prevented developing country producers from participating in activities that require a large amount of investment. In commodity markets, these activities (such as processing and marketing) tend to be undertaken by large multinational companies based in developed countries. Due to their size, such companies have considerable market power as buyers, and can ensure that input prices remain low. This, coupled with the low responsiveness of demand to changes in income and price, has led to a long-term decline in the price of primary commodities. Hence, concerted measures must be taken to improve the welfare of rural farmers in the poorest countries in the world.

Policy measures may help to improve this situation by: (a) attempting to address the asymmetry in bargaining power between producers and their large vertically-integrated customers; and (b) assisting developing countries in diversifying into sectors where larger profits may be made.

At the national level, solutions might include: (a) implementing competition law according to the needs of developing countries (i.e. the protection of all powerless groups, including producers in commodity markets) so that claims related to buyer power can be addressed; (b) redesigning and improving the operation of producer groups (perhaps involving a role for State Trading Enterprises) in order to organize production and ensure compliance with quality and safety standards; (c) developing a comprehensive strategy such that the competition component in each type of government policy (industrial, trade, macroeconomic, etc) is focused towards overcoming the problems arising from concentration.

At the multilateral level, there are further possibilities: (a) any discussion of competition law at the international level should be framed according to the needs of developing countries and the development agenda and not in terms of market access; (b) international commodity agreements could be an alternative to the problem of asymmetry. However, it would be necessary to restructure their design and operation such that some of the shortcomings observed in the past are overcome; (c) there is an urgent need to keep pressing for a fair trade of the use of subsidies and tariff escalation in agricultural markets; (d) developing countries may find important support at the multilateral level to help them overcome problems of scarce resources and expertise.

At the regional level, suggestions include: (a) coordination of competition policy among smaller groups of countries; (b) cooperation to allow synergies which could contribute to solving the problem of the lack of resources faced by certain countries; (c) developing a regional competition law in order to increase developing countries’ leverage in negotiating cooperation agreements with antitrust authorities from large countries.

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South Centre Analytical Note - November 2005

SYNOPSIS

This note  presents the commodity problems and their implications for Commodity Dependent Developing Countries (CDDCs); (ii) identifies the underlying causes of these problems and (iii) examines some of the major policy approaches used in the past to deal with them, their merits and limitations. The objective of the paper is to provide an overview of the problems and implications of heavy dependence on primary commodities. In doing so, the paper contextualizes the various issues that are envisaged to be discussed in the South Centre Seminar on Commodities and Development.

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Research Papers 3

INTRODUCTION

This year has seen how governments and individuals can respond with immense energy and generosity to relieve the suffering of people caught up in natural disasters. The man-made crisis affecting the markets of tropical commodities is every bit as devastating as any of these disasters, yet not only is there very little being done to address the problem but very few people are even aware of it.

This paper is concerned with the relationship between the conditions under which three beverage crops, coffee, cocoa and tea, are produced and traded, and the welfare of the men and women who produce these commodities. An examination of this topic, however, reveals several important misconceptions in current development thinking that extend beyond the limits of the beverage crop industry. Such an examination may also offer some guidance on what kind of measures need to be taken to significantly strengthen the economic prospects of the hundreds of millions of people who make their living from the land in developing countries

The central features of the markets of these three beverage commodities have been the very significant fall in their market price over the last twenty-five years and the fact that the producers of these products, smallholders and plantation workers, are receiving a smaller and smaller share of their eventual retail price.

In the case of coffee and cocoa, the world market price has fallen to less than one quarter of its value in 1980 and the price of tea has more than halved during that period. The World Bank’s monthly index of beverage crop prices (which averages prices for coffee, cocoa and tea) declined by 71% between 1997 and 2001. Although prices, in dollar terms, have increased a little since then, the value of the dollar itself has decreased by a third against other major currencies since that time.

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Research Papers 4

INTRODUCTION (excerpt)

Note: Specialized terms related to nano-scale technologies are underlined in this document and are defined in the glossary.

Commodity production is the mainstay of the economy in most developing countries. According to UNCTAD, commodity dependence is measured by the share of the three leading commodities in a given country’s total exports. The bigger the share, the more dependent the country is. Commodity dependence and poverty are closely intertwined. Commodities provide the primary source of income for the South’s rural poor. According to the Common Fund for Commodities, of the two and a half billion people engaged in agriculture in developing countries, an estimated one billion derive a significant part of their income from the production of export commodities. Ninety-five out of 141 developing countries depend on commodities for at least 50 per cent of their export earnings; 46 developing countries depend on three or fewer commodities for more than half of their total export earnings.(See Appendix, Table 1, for ranking of countries based on leading three export commodities.) The challenges posed by commodity dependence are myriad and complex. The defining feature of commodity dependence is a high degree of economic vulnerability due primarily to the persistent problems of price declines and volatility, trade-distorting subsidies, unfair trade barriers and a high degree of market concentration.

Strategies to address the economic vulnerability of commodity dependent developing countries frequently centre on efforts to reduce trade barriers and promote a fairer international trading system. However, the emphasis on trade alone is not sufficient, particularly in the light of rapid advances in nano-scale science and technologies. In a very real sense, technology is poised to trump trade as the defining feature of comparative advantage in the 21st century. In the coming decades, nano-scale technologies could make geography, raw materials, and even labour, irrelevant.

This report provides a brief introduction to nano-scale technologies and examines their potential impacts on commodity dependent developing countries. Nanotechnology refers to the manipulation of matter on the scale of atoms and molecules – where size is measured in billionths of metres. Below about 100 nanometres (nm) materials can have different or enhanced properties compared with the same materials at a larger scale. The UK’s Royal Society and Royal Academy of Engineering describe nanotechnologies as “the design, characterization, production and application of structures, devices and systems by controlling shape and size at nanometer scale.”

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Research Papers 1

INTRODUCTION

A number of developing countries,1 and especially least developed countries (LDCs), rely on agriculture for their food security, export earnings and rural development. It has been estimated that the agricultural sector accounts for between 30 per cent and 60 per cent of gross domestic product (GDP) for many of these countries, and is the major source of foreign exchange. The Food and Agriculture Organization of the United Nations (FAO) (2002) noted that the economies of many developing countries depend on the exports of one or a few commodity exports, making them particularly vulnerable to price variations on specific commodities. It noted that single commodity-dependence is more pronounced in tropical regions, and notably so for specific tropical products including sugar, coffee, bananas, cotton lint and cocoa beans. The variability and decline of commodity prices is well documented (FAO, 2005). It erodes the competitiveness of commodities exported from non-subsidizing developing countries, discourages investment and expansion of their food exporting sectors and, in the event that developing countries depend heavily on agricultural exports, worsen their terms of trade.

According to the FAO’s State of Agricultural Commodity Markets (2005), the variability and decline in international agricultural commodity prices has serious implications for developing countries that are highly dependent on commodity export earnings, especially from traditional tropical crops. Since tariff escalation in agricultural markets is regarded as one of the major factors hindering the processing of traditional products for export, analysts have explored the potential for exporting non - traditional fresh fruits and vegetables to QUAD countries (Canada, the EU, Japan and the United States). These are valid alternatives because first, tropical fruits and vegetables are not usually cultivated in QUAD countries and therefore, their trade is not distorted by domestic producer support measures. Secondly, consumer tastes in QUAD countries are diversifying into ‘exotic’ tropical fruits and vegetables. The FAO for example, is currently helping market players to develop international trade for organic mangoes and pineapples produced in Sub-Saharan Africa.

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South Centre Analytical Note - August 2005

INTRODUCTION

Many developing countries are rich in natural resources and in particular mineral commodities. While the extraction and processing of mineral commodities through large scale mining can make a major contribution to the economies of developing countries by providing export and fiscal revenues, it can also raise economic, environmental and social issues that pose policy dilemmas from the Government’s perspective.

In that context, the purpose of this paper is to identify the limitations developing countries face to design, implement and enforce laws and policies intended to foster a developmental strategy based on mineral commodities.

This paper is structured in four sections. The first one describes the mining production process, the location of mineral resources and specialization patterns. The second section explains the general characteristics of the large-scale intensive mining industry and the operations of transnational corporations. The final section identifies challenges faced by developing countries to engage in view of this context and presents policy recommendations.

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South Centre Analytical Note - August 2005

EXECUTIVE SUMMARY (excerpt)

A supply management programme can be defined as a policy tool that controls the production and supply of a commodity in order to achieve a desirable price objective in a relevant market. The relevant market could be domestic or international. Many governments in developing countries, NGOs, civil societies, producer organisations and academics have recently voiced their support for the reintroduction of supply management programmes for addressing some aspects of the commodities problem.

The importance of supply management as a mechanism for addressing certain aspects of the problems of tropical cash crop commodities is justified by multiple cases of market failure, particularly structural oversupply of commodities, which market forces cannot fully correct. However, supply management schemes are neither applicable to all commodities nor panaceas to the commodities to which they can be applied.

Supply management programmes can be broadly categorised into domestic (national) and international schemes based on the nature of commodities covered under them and on their objectives. By the nature of commodities covered by the scheme, it means whether the commodities are tradable domestically or internationally. By objective, it means whether the primary target of the scheme is the domestic or international market.

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South Centre Analytical Note - April 2005

INTRODUCTION

Information on non-agricultural commodities is not as widely available as for agricultural commodities. The purpose of this paper is to identify, in contrast to agricultural commodities, what is the extent of dependency of developing countries on non-agricultural commodities, what are the main characteristics of this dependency, which developing countries are most dependent on this type of commodities and what are the challenges they face in the trade arena and from a wider developmental view.

Many developing countries are highly dependent on non-agricultural commodities. Although declining prices, price fluctuations, commodity export dependence and lack of diversification are similar to agricultural commodities, there are other issues with pose specific challenges to their sustainable development.

This paper is structured in the following manner: we will first define what nonagricultural commodities are, then we will identify which commodities developing countries are most dependent on, we will examine their trade patterns and price tendencies and then we will identify the challenges faced by developing countries dependent on non-agricultural commodities.

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South Centre Analytical Note - November 2004

INTRODUCTION

A large number of developing countries heavily rely on a narrow range of primary commodities for their export earnings. Similarly, millions of people in developing countries depend on the production of primary commodities as a sole means of income for daily life. Therefore, commodity price instabilities and deteriorations have detrimental welfare impacts for commodity dependent developing countries. Empirical evidences vastly documented that commodity prices in general exhibit excessive fluctuations and secular declines. As a result, stabilisation of commodity markets at remunerative price levels through international commodity agreements (ICAs) was envisaged as crucial for fostering macroeconomic stability and growth. For this reason, the establishment of the Integrated Programme for Commodities (IPC) at UNCTAD IV in Nairobi in 1976 under the auspices of the United Nations and the successful completion of negotiations to establish the Common Fund for Commodities (CFC) in 1980 to finance ICAs for the full extent of their requirements for buffer stock operations marked a new era of optimism.

However, the decades that followed the establishment of the IPC programme and the CFC ushered an era of despair and pessimism for primary commodity producing countries. Starting from the collapse of the tin agreement in 1985, market stabilisations through ICAs have been obliterated. The periods followed the demise of the ICAs have been characterised by mistrusts and suspicions of market stabilisation policies; and advocacies for neoliberal commodity markets. Moreover, commodity price risk management instruments have been championed as viable and better alternatives for market stabilisation policies.

The objective of this paper is to cautiously analyse whether leaving commodity markets to operate in unfettered fashion while hedging commodity price risks through the use of commodity risk management instruments is a viable and better alternative than market stabilisation policies. The rest of the paper is organised as follows: section II thoroughly analyses the objectives, instruments, designs, operations and the demises of the ICAs. Section III briefly looks into the characteristics of commodities under neoliberal markets with a particular emphasis to the welfare consequences of commodity market liberalisation. Following that, section IV outlines the benefits and limitations of the commodity risk hedging instruments in the context of their suitability and adaptability to the conditions that producers in developing countries encounter.

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South Perspectives - March 1996

FOREWORD

The aim of the present report is to encourage the developing countries to bring the commodities issue back onto the international agenda, and to suggest some broad directions that an initiative by the South could take, including proposals for specific action by the international community or by the South itself, through the Non-Aligned Movement or the Group of 77. The report has two principal components. The first -- Part 1 -- comprises an overview of commodities issues as they affect developing countries. This part also presents the broad lines of a possible strategy that developing countries could pursue to improve their individual and collective situation in world trade in commodities.

Part 2 presents a more detailed analysis of recent experience with regard to commodities and to international commodity policy. It considers the main trends in world commodity markets over recent decades, and highlights the nature and magnitude of the present problems facing the commodity-dependent developing countries. Then, the inadequacy of past international policy responses is examined, with particular attention to the limitations of a policy of complete reliance on the free play of market forces in dealing adequately with the commodity problems of developing countries. This is followed by detailed consideration of possible policies for dealing effectively with each of the major commodity problems. While collaborative action by the South and North on each issue would be the preferable approach, in cases where Northern governments are unwilling to take action -- for example, because opposed in principle to intervention in the commodity markets -- then it is argued that Southern commodity producers should seriously consider whether they themselves could take appropriate measures in common to safeguard their trade interests.

Finally, all the major suggestions for specific action by the South are brought together.

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