Commodity dependence and poverty
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CTA. 2003. Commodity dependence and poverty. Agritrade, December 2003. CTA, Wageningen, The Netherlands.
Permanent link to this item: http://hdl.handle.net/10568/52842
The European Commission released a staff working paper on...
The European Commission released a staff working paper on commodity dependence and poverty in developing countries in August 2003. From its analysis it is apparent that the problem of agricultural commodity dependency is primarily a problem which afflicts ACP countries. For two commodities - coffee and cotton - dependent African countries are all LDCs with a low human development index. Similarly for cocoa the main dependent countries are LDCs or low-income countries. The paper acknowledges that 'lower export prices mean reduced farm incomes, lower agricultural wages or even unemployment', which then feeds into a cycle of low investment and stagnant productivity. 'Lower export incomes also have an effect on government revenues' which 'means reduced budgetary resources for poverty -reducing activities such as health and education'. It notes that falls in export earnings also affect the balance of payments, putting pressure on debt servicing. The paper reviews the challenges faced and outlines 'a set of actions that could be taken by these countries at the national and international level, to address these issues in the longer term'. The key challenges identified include: 'long term declining price trends; short term volatility; international market concentration and integration; market reforms in producing countries and the over-dependence on traditional primary commodities, such as coffee, cocoa, cotton, bananas and sugar'. In response to long-term declining prices the paper recommends that steps be taken to increase competitiveness, profit margins and the share of consumer prices that goes to producers. It does not favour the revival of international commodity agreements, maintaining that the 'conditions are not in place that would allow such schemes to be successful'. On market concentration it calls for more reflection on 'how to balance the economic powers of large multinational and small producers in developing countries, whilst retaining incentive to improve flows of FDI', but makes no proposals. On domestic market reforms it argues for close collaboration between government and producer organisations including a 'more active role for governments' so as to create an enabling environment for the domestic private sector. The paper notes the challenge of diversification and highlights 'the lack of trade-related capacity in many developing countries' as a major hurdle. It emphasises the importance of developing production for local and regional markets as an important vehicle for diversification. Overall the paper argues that 'commodity-dependent countries need to analyse their own situation and devise more proactive strategies to address the crises facing their key economic sectors. An important component of this, it is argued, is to analyse the 'potential international constraints to the development of their commodity sectors' and to argue their case for change in appropriate fora. Comment: Singularly absent from the Commission paper were any proposals for the re-establishment of a coherent EU response to the consequences of commodity price declines. This is a remarkable oversight given the singular failure of the new FLEX instrument, which replaced the old STABEX scheme. While reference is made to stabilisation funds which sought to stabilise prices by means of buffer-stock intervention, little reference is made to the role that STABEX transfers played in financing these mechanisms in certain ACP countries. Significantly, while the commodities looked at include sugar and cotton, in analysing declining price trends little reference is made to the impact of EU sugar-sector policies since 1970 on declining world market prices, or the impact of US cotton-sector policies on declining cotton prices. Indeed, the only reference to cotton, sugar and rice is when the paper observes somewhat obscurely that 'most large international actors could intensify their efforts to promote policy coherence'. Given the concentration of market power in the hands of the coffee roasters, where four coffee roasters dominate the global market, the EU could use its existing competition legislation to ascertain the extent to which these four companies abuse their dominant market position in relation to coffee growers. This could act as a useful basis for promoting the objective of ensuring that coffee producers get an increased proportion of the final sale value of the finished product. Ironically, diversification in some countries (Zambia, Mozambique, Ethiopia) is compounding the problems of existing producers (e.g. in the sugar sector). In addition some areas of diversification to serve regional markets (e.g. Ugandan production of wheat) run into the problem of market distortions generated by agricultural support programmes of OECD countries. What is more, efforts to diversify (e.g. citrus production in Swaziland) can be undermined by the harmonisation of EU sanitary and phytosanitary measures, which increase non-tariff obstacles to trade and the risks associated with exporting to the EU market. The Commission paper observes that 'a key condition for success is that the market targeted by diversification must be a growing and dynamic one'. However if it is a growing and dynamic market it is likely to be targeted by established OECD producers and other commodity-dependent developing countries who are seeking to diversify, leading to over supply and declining prices (e.g. the emerging trend in the cut-flower sector). Regarding the question of moving up the value chain, the paper notes that 'smaller commodity-producing countries are at a comparative disadvantage to enter into processing', since increasingly strict and sophisticated market requirements are faced which require large scale investment and high volumes of throughput. The refusal to consider a revival of international commodity agreements on the grounds that the 'conditions are not in place that would allow such schemes to be successful' assumes that the conditions cannot be created. This is challenged in a new book jointly published by the CTA and Zed Press, Stolen Fruit, by Peter Robbins, who argues that on the contrary there are provisions within the WTO itself, currently being followed up under the leadership of Kenya, that would allow price interventions in cases like coffee which have seen a fall in real prices to a seventh of their 1980 value.