By M.A. van Meerhaeghe
Through their repercussion on export earnings, price fluctuations are often held responsible for the variations in the growth rate of countries producing primary goods, especially since exports of a single primary good account for a large part of the total exports of many countries. But apart from the fact that, as described above, quantities exported influence export earnings as much as prices, there are many other factors that determine export earnings. Such factors include the type and destination of exports and, above all, the economic policies of the countries concerned
It is thus difficult to generalize about the relation of foreign trade to economic growth. Many countries with very unstable exports have relatively stable national incomes; others whose exports are stable have highly unstable national incomes. The stimulus from exports will usually be stronger, for example, if the rate of demand for these exports is growing rapidly. Often, however, the transmission of growth to the nonexporting sector of the economy is impeded in less-developed countries by the economic, social, and political organization of the economy. It is important, for example, for some countries to try to decrease exports of goods that have a slowly growing demand and at the same time to try to increase exports of goods, such as minerals, for which world demand is growing more rapidly.
Efforts to stabilize prices
The uncertainty both for private producers and for governments resulting from sharp and sudden commodity price changes has resulted in many efforts to achieve greater stability on the market in primary goods.
Action in individual countries
In theory a country could insulate domestic producers against international price fluctuations through variable charges and subsidies, but politically it is difficult to tax away producers’ profits during a period of rising prices and to hold the resulting revenue in order to redistribute it should prices and profits fall.
In Nigeria, Ghana, Sierra Leone, and The Gambia, for instance, national marketing boards that attempted to even out price fluctuations of cocoa, cotton, and peanuts (groundnuts) were in operation before those countries became independent. In the former French territories in Africa, stabilization funds fixed producer prices and controlled margins and profits. The main dangers inherent in national stabilization schemes are inconsistent government policies and the excessive operating costs of the public bodies concerned. These factors explain the unsatisfactory results of many national price agencies.
International cooperation
In the 1920s international cartels were created for rubber, sugar, tin, and tea, but they yielded no lasting results. Nor did cooperation between the governments of exporting and importing countries (such as in the International Wheat Agreement of 1933 and the International Sugar Agreement of 1937) serve to attain the desired goals during the Great Depression. Of special significance among more recent attempts to raise and stabilize a commodity price has been the one made by the Organization of the Petroleum Exporting Countries (OPEC). (The special features of the oil market are considered below.) Other attempts to stabilize commodity prices since World War II have mainly assumed three forms—the multilateral contract agreement, the quota agreement, and the buffer-stock agreement. Transactions are effected at world market prices. When a minimum or a maximum price is reached or approached, efforts are made to ensure that prices remain within the two limits. Each of the three systems achieves this in a different way.
In the multilateral contract system, consumers and producers undertake to buy or sell a specified quantity of the commodity at agreed minimum and maximum prices, or at a price within the agreed range.
In the quota method, the quantity negotiated is determined by a previously fixed quota when a minimum or maximum price is exceeded. When there is a surplus, the producers restrict their exports or production; when there is a shortage, quotas are allotted to the consumer countries. With the buffer-stock method, stability is ensured by a combination of an export control arrangement and a buffer-stock arrangement. In certain circumstances exports are restricted by the controlling body. The buffer-stock agency buys when the market price is in the lower sector or at the floor price set out in the agreement; the buffer-stock agency sells when the market price is in the upper sector or at the ceiling price.
Results
The utility of commodity agreements in general can hardly be judged on past experience. Experience with wheat, sugar, and tin agreements, which cover a comparatively long period, is not conducive to generalization. Some degree of stability, though at a high price level, was achieved in the case of wheat, but this was due to the dominant influence of U.S. and Canadian policies. In the case of tin, too, transactions for the U.S. strategic stockpile exerted an influence. Political factors (including the Cuban revolution) underlay the de facto suspension from 1962 to 1969 of the sugar agreement, which had covered, and still covers, only a limited share of the world market.
The value of world transactions in tin, wheat, coffee, and sugar amounts to only a small part of the value of the world’s entire commodity trade. Furthermore, the agreements in question do not cover all transactions. It is, in a way, understandable that only a few such agreements have been concluded; during a boom the producer countries are not inclined to conclude them, and during a depression there is little incentive for consumer countries to enter into them.
Conditions for success
A prerequisite for the success of commodity agreements is that they should embrace the vast majority of producers and especially the largest of them. No transactions should be excluded, and substitute commodities should be covered by the agreements.
The most intractable of the difficulties in concluding commodity agreements lies in the fixing of the price range. Neither unduly high nor unduly low price scales are tenable. Future market conditions are not easily foreseeable, so the possibility of errors cannot be ruled out; regular adjustment of the price ranges is necessary.
When it comes to determining the price range, the importing and exporting countries, respectively, do not systematically advocate low and high prices. Certain importing countries are not opposed to a relatively high price because the difference between the international price and the tariff-protected price of domestic producers is thereby reduced; exporting countries in a favourable competitive position are often in favour of lower prices so that they will be able to increase their share of the market at the expense of less-competitive countries.
In concluding an agreement, the parties have to bear in mind that complete price stabilization is impossible. It would in fact be undesirable, because in the long run supply and demand need to remain in equilibrium, and the necessary adjustments in the economies concerned must not be precluded. Price fluctuations do not necessarily imply failure, because the fluctuations might well have been larger had the agreement not been concluded.
The method of stabilization needs to be chosen carefully, with due regard for the characteristics of the commodities concerned. The multilateral purchase contract and buffer-stock systems offer the advantage of not requiring any restrictions on production; new producers with improved technical equipment may participate.
A buffer stock needs to be sufficiently large if it is to achieve its purpose. Wider financing facilities are necessary; this is something to which the importing countries could contribute. Even then the buffer stock is better used together with other methods of stabilization. Because of the perishable nature of certain commodities or their bulk and high storage costs, however, a buffer stock is not always feasible. Buffer stocks alone often are not sufficient for the control of prices, and it is sometimes necessary for producers to restrict exports in order to reduce supply, thus pushing prices up.
Interests of the less-developed countries
So far as the producer countries are concerned, stabilization of incomes, rather than of prices, is the most important factor. Although commodity agreements may contribute to this, their relatively limited success has caused other proposals to be advanced.
Compensatory financing refers to international financial assistance to a country whose export earnings have suffered as a result of a decline in primary commodity prices. Such a system was instituted in 1963 by the International Monetary Fund (IMF). In 1969 the IMF also began making loans available to countries having a balance-of-payments need in relation to the financing of buffer stocks under international commodity agreements.
EEC stabilization fund
The European Economic Community has established a stabilization fund for its associated overseas countries; prices must fall by a specified percentage before the mechanism of the fund goes into effect, and the richer beneficiary countries must repay the aid received.
Other proposals involve the introduction of simultaneous negotiations for a whole range of commodities.
These discussions, however, and more particularly the administration of the resulting multicommodity agreement, would be highly complex. It may also be argued that the significance of export instability has been exaggerated and that most of the economies involved have suffered no serious damage. Thus, the resources devoted to countering price fluctuations and compensatory financing might be better employed in investments or technical assistance.
As to the possibility of the less-developed countries themselves influencing prices, circumstances vary from commodity to commodity. In the case of primary goods, such as coffee, that are produced only in the less-developed countries and for which practically no substitutes exist, action to increase prices can easily be taken if demand is not too much affected by price increases. A simple way to raise prices would be for the governments of producing countries to levy a duty on exports. Attempts by some developing countries to raise prices, however, can induce other developing countries to increase their output. For example, African coffee production was stimulated when Latin-American countries took steps to raise the price of their coffee.
Limitations on pricing
The fact that there are substitutes for a few primary goods (such as cotton, wool, and rubber) limits the extent to which primary-goods producers can raise their prices. Also, most commodities produced by less-developed countries face competition from the developed countries, which may produce the same commodities (such as petroleum, sugar, rice, and tobacco) or goods substitutable in varying degrees (such as soybean oil for peanut oil).
Many agricultural commodities are protected in the developed countries by tariffs, which means that their requirements are often met entirely from domestic production. Some developed countries produce surpluses that are sold abroad at low, subsidized prices. Such commodities are therefore traded to a relatively small extent on world markets. The sales of the less-developed countries are thus influenced by the developed countries’ national policies and by the price at which these countries sell their surpluses on the residual markets. The less-developed countries that produce minerals and metals seemingly have the most favourable export prospects because demand for such finite commodities is expanding among the developed countries, many of which are concerned over the depletion of their domestic resources.
Culled from www.britannica.com