UNCTAD commission debates the crisis in committees

Original Publication Date: 
12 February, 2006

The commodities crisis continues to plague developing countries and international action, particularly by UNCTAD, has to be urgently taken to address it, according to several participants at the UNCTAD Commission on Trade in Goods and Services and Commodities which is meeting here this week.

At a day-long session on "Commodities and Development" on Tuesday (7 February), many panel speakers and delegations gave details about the damaging effects of falling and fluctuating commodity prices on developing countries, and proposed measures to address this long standing problem.

Figuring significantly in the discussion was the fate of the International Task Force for Commodities that UNCTAD was mandated by the UNCTAD XI in Sao Paulo in July 2004 to set up. A senior UNCTAD official explained that the Task Force had not yet been established because of the lack of donor funds, and appealed to member states to provide financing.

As the Task Force has a life-span of four years from UNCTAD XI, it can carry out work for only two years if it is set up and begins activities in the next few months. Many panellists and participants urged that the Task Force start operating soon, and gave suggestions on what it should do.

Lakshmi Puri, Director of UNCTAD's Trade and Commodities Division, in introducing the topic, said that the "commodity problematique" had three main features and paradoxes. Firstly, although commodities are the bones and sinews of the world economy, their share of merchandise trade has reduced from a third to a quarter in the last ten years.

Secondly, those countries who have and own commodities should be reaping the benefits but for most developing countries this had become a "resource curse." How to convert this to a resource boon and boom is the crux of the task, said Mrs Puri.

Thirdly, many developing countries had eliminated government intervention in commodity production (especially due to structural adjustment) and turned to a reliance on market forces instead. The paradox is that domestic enterprises are not enabled enough to profit from this non-intervention, so there is an institutional vacuum domestically.

There is also absence of international support to deal with the problem, while on the other hand there is external market distortion due to subsidies of rich countries and anti-competitive practices.

It was thus important, said Mrs Puri, to evolve an international commodity policy as well as help developing countries develop the right strategies. The commodity sector is a major source of jobs and both government and export revenue, and 50 developing countries depend on 2 or 3 commodities while 39 depend on a single commodity.

Although they enjoy good market access, the LDCs' market share in world commodities has suffered steep decline. This is due to underdeveloped infrastructure as well as distortions caused by subsidies in rich countries, with cotton as a good example of that.

Mrs Puri highlighted the price problem, stating that recent price increases do not make up for the losses from declining prices of the past. And with prices of manufactures going up faster, the terms of trade of commodities (vis-a-vis manufactures) have declined, with the 2005 level 30% lower than the 1975-85 average.

Price fluctuations also remain a problem, with the unpredictability affecting the macro-economy as well as producers. The price instability is passed directly to producers as marketing boards have been dismantled. The past mechanisms to deal with this problem (supply management and compensatory schemes) have made way for looking at how developing countries can manage their exposure to risks. There is a need to analyse the sources of this instability and act, including using new facilities.

Mrs Puri said that developing countries should also be assisted through the aid-for-trade initiative, to build producers' supply capacity and infrastructure. There is need to improve producers' participation in the supply chain, by empowering farmers to participate and fairly benefit from local, regional and global markets through a better share of the supply chain and improving their bargaining power.

She also commented on risk management, new financing methods, commodities exchange, resource management, corporate responsibility, recycling commodity revenue and managing macro-level risks as ways to improve the situation.

Mrs Puri said it was vital to raise the profile of the commodity problem, and there was need for a proper forum for action, referring to the Sao Paulo agreement for UNCTAD to set up an International Task Force on Commodities.

However, she added, till today there is no financial support for the task force. Though almost two years have passed, there can still be another two years for the task force to work.

Saying there appeared to be a need to dispel myths about the task force, she explained that the Task Force was meant to be a partnership involving stakeholders (such as governments, agencies, companies and NGOs) and not a new bureaucracy or superstructure, just a group of commodity-oriented people to focus on the issue. There would be a number of action groups formed on a voluntary basis by stakeholders.

She appealed to the members to take a clear decision on what to do about the Task Force in the context of the Mid-term Review of UNCTAD XI.

Ghana's Ambassador, Kwame Bawuah-Edusei, said the commodity problem was long-standing, deep-seated and going very much against development goals. Prices had fallen 30% below the 1975-85 level, there was little value-addition by developing countries, while tariff peaks and escalation work against viable investment for diversification. There were also supply side constraints and non tariff barriers, while revenue from commodities can also be mismanaged, making a bad problem worse.

Though the problem is long-standing, there was a lack of political will to tackle it. Referring to the Task Force, he said the African Ministers had endorsed it at their Arusha meeting. The responsibility of this task force is enormous, and he asked for participation by all so that it could be a consultative framework for good practices.

South Centre executive director Yash Tandon said the commodities problem had been looked at for half a century and it was time for a new perspective. He welcomed the Task Force but noted that it had yet to start. The task force should bridge the gap between the knowledge that UNCTAD as a knowledge-based agency can bring, with the power that other organisations like the WTO have, noting however that the WTO's power was distributed in an asymmetrical manner.

He suggested that the millennium development goals could bring a focus to the commodities discussion. The task force should also focus on the geo-political aspect (such as the factors that can determine the prices) and the trade aspect (including the new trade regime, including impact of the preference erosion, and erosion of policy space).

Tandon suggested that there should be a taxonomy of commodity problems and policies. The impact of different national and regional policies should be considered, for instance some countries get less share of the value of commodities while others may get more when they insist on getting more benefits out of the resources they own.

Thomas Lines, a consultant on commodities who has written a recent paper for UNCTAD, agreed with Tandon that asymmetrical power relations had a significant role in the commodities crisis. Unfortunately, the commodities problem had been swept under the carpet. The Task Force should be ambitious and address the problem of asymmetrical relations, he said.

Lines added that there should be a taxonomy also of commodity markets as each market is different and works differently, with different political and technical factors that permit or do not permit different actions from being taken. There should thus not be a single model of what to do, and a taxonomy would assist in understanding each market and the possible actions.

Lines provided data showing the seriousness of the commodity crisis. Between 1977 and 2001, commodity prices on average fell 2.8% per annum (in constant US dollars). Average annual price declines included those for coffee (5.1%), cocoa (6.9%), cotton (3.4%), palm oil (3.7%) and bananas (0.6%). Only wood prices rose (tropical sawn-wood by 2.1%). Since 2001, metal and crude oil prices have also risen.

LDCs as a group suffered tremendous loss of potential value from 1980 to 2001, due to a combination of price declines and loss in market shares. The loss totalled 79% for coffee, 92% for rice and 86% for copper, calculated as against the value if prices and market share in 2001 had remained at their 1980 levels.

From 1998 to 2001, Ethiopia's coffee exports fell from 115,000 tonnes to 80,000 tonnes and their value fell from $380 million to $135 million, a decline of 64%.

The terms of trade of African countries deteriorated by more than 25%. They had to export over one third more in 2001 in order to import the same amount as in 1980.

Lines described these trends as constituting a "catastrophic failure of international policy." While the orthodox policies of the 1980s had adopted the slogan "get the prices right", it is clear that instead, in commodities, the prices were wrong.

Lines added that it was wrong to see Africa as a failure. In fact, African production of non-traded staple foods had increased (cassava from 70 million tonnes in 1990 to 102 million tonnes in 2003; millet from 10.6m to 14.8m tonnes, sorghum from 11m to 22.2m tonnes and yams from 20m to 38m tonnes between the same years).

He identified the inequity in global supply chains as a major part of the problem. In the coffee trade, each of the two largest roaster companies purchases 15 million bags per year, while the average coffee farm sells 4.5 bags a year.

He said the supply chains were controlled by a few companies which enjoyed highly concentrated market power, and they can manage their own supply. An important action would be to move economic power back in the supply chain towards the producers.

During question time, the European Union (represented by Austria) proposed that tools be developed to overcome constraints of commodity producers and improve the functioning of markets, including through risk management methods. The EU is preparing a commodity programme for ACP countries, together with UNCTAD, the FAO and the World Bank.

The Third World Network said that NGOs were disappointed that the Task Force had not yet been set up although almost two years had elapsed after UNCTAD XI, and urged that it start its work without delay. Developing country producers should be assisted to get a better share of the value of commodities within their existing place in the value chain, as well as to climb up the value chain through processing and manufacturing.

In commodities where developed countries compete with developing countries, the urgent action needed is to quickly phase out the former's export and domestic subsidies, otherwise the latter could not compete.

In commodities where there is no North-South competition, the developing countries usually face an over-supply situation leading to price declines. For example, in coffee, supply had in recent years grown by 2% per year while demand grew by 1 to 1.5%, leading to a build up of stocks.

The Task Force should help realign supply with demand, said the TWN. Noting that the coffee price decline took place after the break down of the coffee agreement, TWN said that an attempt can be made to revive producer-consumer commodity agreements.

If this could not be done, producers could make their own attempts to realign supply. For example, 3 years ago when three countries (Malaysia, Indonesia and Thailand) announced an agreement among themselves to cut rubber output by 10%, the price had doubled.

The Task Force could also suggest ways to improve the share going to producers even within their existing place in the supply chain. TWN cited data from an Oxfam study showing that the coffee farmer in Uganda received only 14 cents per kilo from his green beans, which passed through various traders to the roaster factory at a price of $1.64 per kilo, ending up at a UK supermarket as soluble coffee at $26.40 a kilo. If the farmer could get even 30 cents, that would improve his income significantly.