TWN Briefings for WSSD No.14

Tackling the Commodity Price Crisis Should Be WSSDís Priority

By Celine Tan

The commodity crisis is the principal challenge to the achievement of economic and social development, and ecological sustainability in the majority of developing countries today. Commodity prices had plunged dramatically in the ten years preceding the Rio Summit in 1992 and have almost consistently continued to spiral downwards since then. In 2001, real commodity prices for agricultural raw materials and minerals, ores and metals have fallen to 60 percent of their price levels in 1980, while prices for tropical beverages gave declined nearly 70 percent from 1981 to 2002 (UNCTAD, 2002a).

Reference to and proposals for resolving the commodity problem have been forwarded in the heavily bracketed Paragraph 82 of the Draft Plan of Implementation, which reads: [Provide commodity-dependent countries with]/[Increase commodity-dependent countriesí capacity to diversify exports through] inter alia financial and technical assistance, including through international assistance for economic diversification, sustainable resource management [and through the establishment of an international mechanism to stabilize commodity prices for coping with the instability of commodity prices and declining terms of trade][as well as strengthen the activities covered by the Second Account of the Common Fund for Commodities to support sustainable development].

Falling prices have meant that large increases in export volume by commodity producers have not translated into greater export revenues, leading to severely declining terms of trade for many commodity producing countries. When the purchasing power of a countryís exports declines, a country is unable to purchase imported goods and services necessary for its sustenance, as well as generating income for the implementation of sustainable development programmes.

A vast majority of developing countries depend on commodities as a main source of revenue. Primary commodities account for about half of the export revenues of developing countries and many developing countries continue to rely heavily on one or two primary commodities for the bulk of their export earnings.

For many countries, the declining terms of trade associated with a fall in commodity prices have also led to a build-up of unsustainable debt. Only four of the 27 non-oil commodity-exporting LDCs did not have an unsustainable external debt in line with the criteria set by the enhanced Heavily Indebted Poor Countries (HIPC) Initiative (UNCTAD 2002a).

Global economic trap

The commodity crisis encapsulates many of the controversies surrounding the debate on sustainable development and highlights in particular the disjunction between the interests of the north and the needs of the south. While the brunt of declining commodity prices is shouldered by commodity producers in the south, the main beneficiaries of these low prices – consumers and companies – are located in the north. The bulk of commodity trading still moves through the main trading centers in the west and most of the processing of raw agricultural consumables remain almost exclusively in the north.

Global economic structures have undermined or effectively prevented efforts by commodity-dependent countries to shift out of commodity production into other areas of industry or, for countries dependent on one or two major commodities as the source of export earnings, to diversify into other types of crop cultivation.

The history of commodity price stabilization efforts and the collapse of commodity agreements is indicative of the vested interest of northern industrialized countries (under pressure from domestic corporate lobbies) to keep commodity prices at a consistently low prices. It is also illustrative of the legacy of colonial economic relations between the north and south that continues today under the guise of structural adjustment programmes and multilateral trade rules favouring developed countries.

The marginalization of commodity-dependent countries, particularly the LDCs, from international trade and financial systems have weakened their control over their terms of trade and severely undermined their capacity to set remunerative income for their commodity producers, particularly small farmers.

Inappropriate policy advice from international financial institutions, notably the World Bank and the IMF, and enforced through lending conditionalities have exacerbated the situation of overproduction. Some policy prescriptions, motivated by ideology, have taken away the policy space and dismantled institutional structures, such as state marketing boards, enabling developing country governments to intervene in the production of commodities and to ensure a steady income for its commodity producers.

Depressed commodity prices have meant that for many countries dependent on primary exports have been forced to increase production in attempts to compensate for falling prices. This has led to a situation of more land resources being used for export crop production, reducing land available for domestic food cultivation, and increasing deforestation of non-agricultural land.

Rural livelihoods are also threatened by an overemphasis on cash crop production. The increasing use of mechanized and large scale agricultural farming has led to the demise of many forms of subsistence farming and smallholdings. Many small-scale farmers have been forced to abandon their farms as a result of low commodity prices, and forced into the wage economy as labour in plantations or urban sectors. Similarly, the liberalization of mineral sectors under the structural adjustment programmes have also led to the displacement of small-scale prospectors and artisinal miners in many parts of the developing world.

Declining prices for primary commodities also prevent primary commodity producers from investing in safe and environmentally sound methods of production. The lack of transfer of technology prevents commodity producers from developing and least developed countries, particularly those involved in the production of agricultural commodities and resource extraction, such as mining and minerals to invest in ecologically sustainable modes of production. Efforts preventing diversification of the economies confine many developing countries to extract more and more out of the natural resource base and creating greater environmental degradation and social displacement.

Ways forward and WSSD outcomes

Action to reverse the trend in falling commodity prices is essential to any initiative undertaken at the international level to facilitate sustainable development, poverty reduction and debt relief. Without price stabilization mechanisms to ensure remunerative prices to commodity producers and commodity producing countries, sustainable development programmes are unlikely to achieve long-term sustainability.

Any attempt to ensure remunerative prices for commodity producers and commodity producing countries must address the root of the problem – the issue of overproduction and oversupply. The proposal calling for the establishment of an international mechanism to stabilize commodity prices in the WSSD Draft Plan of Implementation must be strongly supported and firm commitments must be made by both producing and consuming countries to adhere to an international supply management programme. This is the key to resolving the commodity crisis.

A strong case can still be made out for reviving the Integrated Programme for Commodities (IPC) framework as an approach for an international commodity policy aimed at negotiating a series of price stabilizing agreements for commodities suffering from high price volatility and/or structurally depressed prices. Such an initiative would also involve reviving the functions of the First Window of the Common Fund for Commodities to provide financing for the purchase and maintenance of buffer stocks for this purpose (currently not in the WSSD text).

Proposals calling for the provision of financial support and technical assistance for diversification activities for commodity-dependent countries must also be supported. However, care must be taken so as not to repeat the same mistakes made by IFI policy advice by diversifying into areas that will lead only lead to depressed prices of the products in the future due to similar problems of overproduction.

And as efforts by developing countries to shift away from commodity dependence have also been thwarted by restrictive trade rules bias against agricultural products from developing countries, diversification plans must be supported by corresponding commitments by industrialized countries to eliminate tariffs and non-tariffs on commodity-based products from developing countries.

The language in the WSSD text calling for greater market access for developing country products and the elimination of tariff and non-tariff barriers on products of export interest to developing countries in Paragraph 83(alt), particularly in Paragraph 83(a.alt2) - “[Reduce, or as appropriate, eliminate tariffs and non-tariff barriers on products of export interest to developing countries, [particularly agriculture, textiles and clothing]” must be supported.†

Without the requisite reduction or elimination of high import tariffs on processed and semi-processed commodities and export subsidies for domestic agricultural products from developed countries, commodity-dependent countries will be unable to diversify into higher stages of the commodity value chain as there is little guaranteed market access for these products in the north.

The linkages between the declining prices for primary commodities and issues of sustainable development are clear. Depressed commodity prices lead to declining terms if trade for commodity-dependent countries, leading to balance-of-payments problems and resulting in debt. The lack of financial resources available within the country as a consequence of debt servicing and the decline in the purchasing power vis-a-vis imports leads to diminished funds. This will, of course, lead to impoverishment, social conflict, a decline in social welfare provisions and environmental degradation. Lack of funds and pressure to generate more revenue from finite resources will severely hamper efforts to implement sustainable management of natural resources.

Unless international action is taken to stabilize commodity prices and ensure a remunerative income for commodity producers and commodity producing countries, many developing countries will not emerge from the poverty trap, exacerbating their dependence on foreign aid and blocking efforts to invest in social and economic capital for sustainable development.