Commodities: The need to reduce instability and promote diversification

GENEVA - Commodity-dependent developing countries face formidable challenges in using international trade for promoting economic growth and sustainable development and the key to their escaping the poverty-cum-marginalization trap lies in more sustainable and efficient use of their natural resources.

Towards this end, suggests the Secretary-General's Report to UNCTAD-IX, the Conference should consider proposals for action to reduce instability and risks faced by commodity-export-dependent countries, promote diversification of their commodity sectors and sustainable use of their natural resources including through international commodity-related environment agreements to deal with environmental externalities.

Referring to past efforts at dealing with instability and risks of commodity exporters, including cooperation to bring supply into equilibrium with demand on a long-term basis (as sought in the Cocoa Agreement), the report points out that in the past decade or more the application of structural adjustment programmes (SAPs) has led to dismantling of instrumentalities for government intervention in commodity markets, particularly through market boards and stabilization funds, which for all the inefficiencies associated with them, did provide a measure of stability of revenue to domestic producers.

Market-based instruments

In terms of use of market-based instruments to hedge commodity risks, the Report suggests that UNCTAD-IX could agree on actions to reduce instability and risks faced by commodity-export-dependent countries by:

* promotion of exchange of information and voluntary cooperation among producers as in the Cocoa Agreement;

* reduction of subsidies for domestic over-production of agricultural commodities, especially in OECD countries;

* notifications, as in WTO subsidies agreements, of national policies and those of international financial institutions regarding commodity production;

[According to World Bank sources, the Bank which had stopped all lending for commodity projects over the last decade or more, has been asked in December by the Executive Directors to consider loans from individual countries. Whether this will lead to same fallacy of composition and surplus commodity production of the mid-70s and the 80s that the Bank spawned or whether some safeguards will be built is not clear so far.]

* reduction of conditionality of IMF compensatory and contingency financing facility and significant expansion of resources available to the EU's compensatory scheme, the Stabex;

* creation of an "international commodity observatory" in UNCTAD to increase market transparency;

* an UNCTAD mechanism to examine the feasibility of a facility to enhance availability of securitized commodity finance using ware-house receipts.


In terms of diversification, the Conference is being asked to:

* call upon governments, within the WTO framework, to determine modalities and set a timetable for elaboration of precise proposals for reduction of tariff escalation on processed primary products and elimination of non-tariff barriers to market access for commodities;

* propose concrete measures to enhance access to finance for diversification of low-income countries, either through existing instruments or establishment of new instruments;

* call for increased support to the International Trade Centre and other relevant organizations, especially for their work in development of products and markets likely to enhance diversification of developing economies.

In terms of efficient management of natural resources, the report argues that changing consumption patterns and demand towards environmentally preferable products and improving production techniques - making them both cleaner and leaner - are very important requirements for natural resource conservation.

This can be facilitated by the process of globalization insofar as the latter entails a faster and more widespread diffusion of relevant conservation technology, the report says.

But to the extent environmental costs and benefits are not reflected in the prices of products, changes required in production and consumption would not come about.

This has been recognized by several developing countries in taxes on traffic in urban areas and by some OECD countries in applying energy taxes. This principle could be extended more broadly into commodities by international cooperation for framework agreements within which incentives would be made available to commodity producers to use "cleaner and leaner" production techniques.

"Such International Commodity-Related Environmental Agreements (ICREAS) merit serious further consideration," the Report says.

In the context of global sustainable development, efficient management of natural resources means ensuring the use of the natural resource base to produce socially optimum quantities of various commodities in perpetuity with no irreversible damage to the physical environment and without significant risks for future generations.

But the process of liberalization is creating challenges to such management because the emphasis on private sector activity, and the concomitant retreat of the government, is entailing a shift in time preference towards the short-term.

Action to be taken

At the national level, action is needed, especially in developing countries, to improve information about the natural resource base, and ensure this information is properly integrated with development planning and national accounting processes. Also needed is the capture of resource rents and managing resource revenues so as to maintain economic stability in the short-term while generating income for the longer-term.

The capacity of governments to undertake these latter actions should be improved, and the impact of economic activity on the national resource base should be monitored and regulated.

At the international level, action is needed to establish multilateral cooperative approach to deal with externalities that compromise sustainability of natural resources, encourage recycling of resource-based products and improve competitiveness and promote use of natural products with environmental advantages.

Towards these ends, the Conference is asked to take actions:

* to promote negotiation of International Commodity-Related Environmental Agreements as an element of a multilateral cooperative approach to deal with environmental externalities;

* promote establishment of a voluntary trust fund to encourage production and trade of environmentally advantageous natural products; and

* urge the establishment of a window in the (World Bank run) Global Environmental Facility to deal with environmental problems such as rehabilitation of mining sites and mineral processing facilities. - CR/SUNS3685