Commodities: Producer cooperation for supply management

By Chakravarthi Raghavan

Geneva 11 Apr 1995-- Developing countries should bring the commodities issue back on the international agenda and, among others through supply management, bring some medium-term balance into the commodity markets, the South Centre has advocated in a publication.

"There is an urgent need for the commodity issue to be placed once again high on the agenda for effective international action and UNCTAD and the Common Fund should cooperate in reviewing current and prospective commodity trends and problems, assessing efficacy of current policies and proposing appropriate policy changes, short- and longer-term," says the report which also calls on developing countries to play "more active role" in the policy direction of the Common Fund.

In the publication, "International Commodity Problems and Policies", the Centre suggests a range of policies and measures to shore up the commodity sector and says that while collaborative action by the South and North would be the preferable approach, alternatively commodity producers from the South should act together and take appropriate measures to safeguard their trade interests.

The South Centre points out that since the 1980s there has been a sharp and continuous fall in real commodity prices, and a consequent huge loss of foreign exchange earnings of developing country commodity producers.

But at the same time, international efforts to stabilize and strengthen commodity markets have come virtually to a halt, most of the existing commodity agreements have collapsed or become inoperative, and by mid-1995 "international commodity policy in effect has collapsed."

The huge losses sustained by most commodity-exporting countries have accounted for much of the growth in their foreign debt and forecasts, including projections by the World Bank suggest that real commodity prices in year 2000 will be no higher than they were in 1990 when it was barely one-half of the 1980 level.

The commodity situation would remain critical for the developing countries, not merely for the low-income countries, but for many middle-incomes ones too. The logic of the present situation points to the need for some supply management.

But the supply management needed now would be different from the short-term supply management efforts through international commodity agreements under UNCTAD's Integrated Programme for Commodities (IPC).

It was now necessary to contemplate management of supply over a longer-term, combined with measures to encourage diversification away from production of commodities in persistent surplus.

"If need be," says the Centre, "producing countries would have to organize this longer-term supply management by themselves. However, such an approach should not be regarded as a confrontation with developed countries, but as a means to giving much-needed stability and strength to world commodity markets in the interest of both producing and consuming countries... Developing countries should play a leading role in this process and, if necessary, a special Ministerial Conference of the Non-Aligned and/or the Group of 77 countries should be convened for this purpose..."

Positive action on the commodity issue is imperative and is crucial to efforts of majority of developing countries to resume economic growth. Without his, continuation of adverse trends in commodity export earnings would undermine their efforts in other areas such as reducing the debt burden, strengthening resource flows and pursuing social and environmental objectives.

In specific recommendations, the Centre has said:

* cocoa and coffee exporting countries should give full support to the supply managements schemes of these two commodity bodies, while for other commodities in medium-term oversupply, developing countries should consider their own appropriate supply management schemes.

* low-income commodity dependent countries however should be exempt from having to cut the volume of their exports of a commodity subject to supply management schemes, "so long as their exports remain as less than a small proportion of the value of exports of the commodity from all members of the scheme".

* for commodities exported by developing countries, not in persistent oversupply, but still subject to high price instability, international commodity agreements (ICAs) to reduce such fluctuation would be desirable. But if developed countries are unwilling to negotiate new ICAs, producer countries should themselves consider establishment of viable supply management schemes, and explore possibilities of enlisting financial support of multilateral financial agencies, including regional development banks.

The study though is silent on the ideological fix about the 'free market' of the multilateral and regional development banks (which are controlled by the developed countries) that has blocked any actions in this direction from the banks.

While the proposal of the Common Fund for Commodities to use the interest income on the capital of the First Account for improving the functioning of commodity markets in developing countries, the Centre suggests that developing countries should however give careful consideration on how best to use the capital in the First Account to achieve the objective of reducing commodity price instability.

On the now fashionable advice for use of future contracts and financial derivatives, the South Centre says that these would not be appropriate instruments for small producers and were unlikely to come into widespread use by large commodity exporters of developing countries for at least many years to come.

"The existence of these financial instruments should not, therefore, be used as a reason for not negotiating new price stabilising ICAs"

Commodity sector diversification for developing countries dependent on commodities in structural surplus, the Centre says, must include not only development of non-traditional commodity exports and expansion of food production for domestic consumption, but processing and manufacturing activities and development of services. These require much greater technical assistance than now available to help low-income developing countries to identify and formulate viable diversification strategies.

Greater South-South cooperation could significantly assist low-income commodity-dependent countries in diversifying their economies.

The Centre suggests setting up of a central Diversification fund for helping all low-income countries dependent on commodities to diversify. The fund should be financed from non-conventional sources (diversification tax on GNP of each developed country or IMF gold sales), and voluntary contributions from donors and Bretton Woods institutions.

Such a fund and its operation, bringing in all international agencies and experts, would create a forum, could ensure country-diversification programmes are devised in the context of evolving market situations and ensure various country programmes together don't result in lower export revenues for exporting countries.

On the effects of Uruguay Round in agriculture, the Centre says there is a strong case for a Special Fund to compensate the net losers - and most sub-Saharan Africans are expected to lose - at least for a transitional period to compensate their foreign exchange losses and promote food production in net deficit countries.

Special negotiations should also be set for a substantial reduction in trade barriers on exports of primary and processed commodities from developing countries.

Among other things, the report by the South Centre also calls for:

* common R & D programme of developing countries exporting natural raw materials to improve productivity, technical characteristics of each major natural raw material and develop new end-uses so as to improve competitive position visavis synthetics;

* multilateral approach by developed and developing countries on internalization of environmental costs - such as negotiating international commodity-related agreements to ensure additional costs of environment protection do not fall mainly on developing countries; and

* setting up a trust fund to provide venture capital to firms in developing countries with projects for improving and marketing environmentally advantageous products;