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Subject: Africa: Commodity Trap


Africa: Commodity Trap

AfricaFocus Bulletin
Mar 9, 2004 (040309)
(Reposted from sources cited below)

Editor's Note

Africa remains caught in a "commodity trap," says a new report on
trade performance and commodity dependence from the UN Conference
on Trade and Development (UNCTAD). Africa is less competitive than
in previous decades even in traditional primary commodities, its
trade position  undermined both by competition from Asia and Latin
America and by agricultural subsidies in rich countries. Market
solutions have aggravated this structural vulnerability, and it is
time to reconsider a greater role for both national and
international state actions, UNCTAD concludes.

UNCTAD cites French President Jacques Chirac calling for an end to
the "conspiracy of silence" on commodity issues. Yet current
international trade discussions give little sign that Chirac or
other world leaders are ready to act on his call.

This issue of AfricaFocus Bulletin contains a press release from
UNCTAD and brief excerpts from the 84-page report. The full report,
available on the UNCTAD website (http://www.unctad.org), has extensive tables and charts to document its conclusions. Additional data on Africa's trade, through 2002, is also available in the World Trade Organization's International Trade Statistics, available on the WTO website (http://www.wto.org),

++++++++++++++++++++++end editor's note+++++++++++++++++++++++

United Nations Conference on Trade and Development (UNCTAD)

New UNCTAD Study on African Development Prospects Echoes President
Chirac's Call for Ending "Conspiracy of Silence" on Commodity
Issues

UNCTAD/PRESS/PR/2004/003

February 26, 2004

The majority of African countries are boxed into a trading
structure that subjects them to secular terms-of-trade losses and
volatile foreign exchange earnings, according to a new UNCTAD
report, Economic Development in Africa: Trade Performance and
Commodity Dependence, released today. This position severely
encumbers effective macroeconomic management and stunts capital
formation, hampering efforts to diversify into more productive
activities and adding to the debt overhang. As a result, and
despite years under structural adjustment programmes, much of
sub-Saharan Africa (SSA) has remained commodity-dependent. And, as
was exposed in Cancún with the cotton case, huge Northern subsidies
have contributed "in no small measure to undermining the efforts of
some African countries to tackle poverty". The Report calls for a
three-pronged response to easing the short-run burden of commodity
dependence and facilitating longer-run structural changes, by
combining measures to strengthen domestic institutional capacities
with more balanced international trading arrangements and more
generous and innovative international financing schemes.

Caught in a commodity trap

Even as the continent's reliance on non-primary fuel exports
persisted, paradoxically, its share in world primary non-fuel
exports dropped from 6 per cent to about 4 per cent between 1980
and 2000, indicating a loss of market share. The average annual
growth rate of Africa's non-fuel primary commodity exports was 0.6
per cent, compared to an overall developing-country average of 3.3
per cent and a 5 per cent average for Asia. For total merchandise
exports, the continent recorded a drop from 6.3 per cent to 2.5 per
cent.

By implication, SSA has barely participated in the trade boom in
dynamic products. Only one of its 20 leading non-fuel exports is
found in the world's 20 most dynamic products. As the Report notes,
to a significant extent this reflects both the failure to shift
into manufactures and the sluggish global demand for its non-fuel
commodity exports, a situation aggravated by both high price
volatility and secular decline in real prices. UNCTAD's analysis of
real commodity prices for 14 products of export interest to Africa
between 1960 and 2000 suggests that 12 of them suffer from high
price volatility, and nine depict declining real price trends.
Despite some signs of improvement in the early 1990s, between 1997
and 2001 UNCTAD's combined price index of all commodities fell by
over 50 per cent, while tropical beverages and vegetable seeds and
oil, which comprise one fifth of SSA's non-fuel commodity exports,
registered the highest decline of all in real terms. Had commodity
prices remained at 1980 levels, per capita incomes would have been
50 per cent higher than they are today. Many African countries are
thus caught in a commodity trap that has essentially become a
poverty trap.

According to the Report, adverse terms of trade and loss of market
share have caused serious damage to economic development in SSA,
leading to low savings and investment, and are the principal
factors contributing to Africa's high indebtedness. Several African
countries currently benefiting from debt relief under the Heavily
Indebted Poor Countries (HIPC) initiative are projected by
multilateral financial institutions, on account of these factors,
to fall back into unsustainable debt positions. On average, the
Report notes, HIPCs with deteriorating debt indicators have higher
export commodity dependence, and their exports display a much
greater volatility relative to other HIPCs.

Trickle-up economics

The reasons for this situation are, doubtless, complicated. The
Report notes that market access is a critical factor, as most
post-Uruguay Round tariff peaks are in agriculture, and tariff
escalation has a negative impact on processed products. While
welcoming such recent initiatives as the African Growth and
Opportunities Act and the Everything but Arms initiative, the
Report notes that benefits would have been substantially higher but
for the stringent rules-of-origin requirements. Moreover, poor
farmers in SSA incur huge income losses as agricultural subsidies
and domestic support to less competitive (and often the wealthiest)
producers in OECD countries contribute to structural oversupply and
secular declines in real prices for such products as cotton,
groundnuts and sugar. These subsidies caused an estimated revenue
loss of up to $300 million in 2002 for the cotton industry in
Africa -- more than the total debt relief of $230 million approved
in the same year by the World Bank and the IMF for nine
cotton-exporting HIPCs in West and Central Africa.

The big winners from structural oversupply have been major
transnational corporations (TNCs) whose activities are concentrated
at the higher stages of the value chain and which can control
procurement and marketing through production contracts, alliances
and other mechanisms and restrict entry through massive financial,
information and technological advantages. Low input prices have
enabled these firms and traders to reap super-profits at the
expense of poor producers, and with the dismantling of state
enterprises (Commodity Boards and caisses de stabilisation), poor
farmers have little countervailing negotiating power. According to
the International Coffee Organization (ICO), coffee-producing
countries currently earn (exports f.o.b.) just $5.5 billion of the
$70-billion value of retail sales, compared to some $10-12 billion
of the $30-billion value of retail sales in the early 1990s. But
the Report also notes a similar pattern for newer, more dynamic and
higher-value added products, such as fish, cut flowers and
vegetables.

Hard choices ...  "But nothing justifies the present indifference"
(President Chirac of France)

In light of the Report́s findings and other UNCTAD research, there is no doubt that global economic conditions and externally induced shocks have a major impact on growth and development prospects in Africa. But equally significant is the fact that many firms and consumers in the advanced countries have benefited from low commodity prices. And, as the Report points out, even as these countries have provided lavish protection for their own farmers from the adverse impact of volatile and generally declining real commodity prices, they have argued against deploying similar instruments to protect far harder-hit rural communities in the developing world. It thus behoves the international community to assume its share of responsibility, in the light of the Millennium Development Goals, by supporting a consistent and coherent policy framework that does not frustrate Africa´s own efforts at economic restructuring and diversification.

The UNCTAD study calls for new international initiatives on
commodities, consonant with the development needs of African
countries. Greater local institutional capacity has to be created
to fill the institutional void in such areas as research and
training, transport infrastructure, information management and
quality control, and the management of rationalization schemes.
This would necessitate a bigger role for the State in addressing
Africa's commodity dependence than currently conceived, but would
need to take account of past mistakes in this area as well as
financial constraints. On the latter, increased official
development assistance (ODA), and much deeper, broader and faster
debt relief, remain crucial to any effective strategy to revive the
performance of the primary sector and diversify the economic base.

A comprehensive assessment of compensatory finance mechanisms
designed to meet short-term price shocks and income shortfalls of
African commodity producers is required. Such a review will need to
address the procyclical working of previous schemes and the burden
of excessive conditionalities. The need for a "diversification
fund" with the objective of supporting export diversification,
thereby increasing the capacity of African countries to rationalize
the supply of traditional exports, must also be addressed.

The Report supports accelerating ongoing negotiations in the World
Trade Organization on reducing and finally phasing out agricultural
subsidies, as well as strengthening technical assistance to poorer
countries in such areas as quality control and health and safety
requirements. It recommends interim measures for compensating
African producers for income losses attributable to subsidies and
other domestic support for agriculture in the North.

Finally, new markets should be tapped, including through enhancing
South-South trade -- particularly in non-traditional commodities,
which have high income elasticity and lower rates of protection
(fruits, vegetables, fish and seafood) -- and increasing exports to
emerging markets. The Report also underscores enhancing
intra-African trade, which is one of the main objectives of the New
Partnership for Africa's Development (NEPAD).

For more information:

http://www.un.org/publications.
:
UNCTAD Press Office
T: +41 22 917 5828; E: [log in to unmask]
or
Kamran Kousari, Special Coordinator for Africa,
T: +41 22 917 5800; E: [log in to unmask]

************************************************************

Excerpts from
Economic Development in Africa: Trade Performance and Commodity
Dependence (UNCTAD/GDS/AFRICA/2003/1.)

The emphasis on trade liberalization and export orientation in the
past decade has led to a phenomenal growth in world merchandise
trade, which has consistently grown faster than output. ...However,
on the whole, Africa's share in world exports fell from about 6 per
cent in 1980 to 2 per cent in 2002, and its share of world imports
from about 4.6 per cent in 1980 to 2.1 per cent in 2002. ,,,

More than for any other developing region, Africa's heavy
dependence on primary commodities as a source of export earn ings
has meant that the continent remains vulnerable to market vagaries
and weather conditions. ...

The structure of developing-country exports, taken as a whole, has
changed significantly over the past two decades. Currently, about
70 per cent of these exports are manufactures. This is in sharp
contrast to the situation two decades ago, when primary commodities
accounted for three-quarters of developing-country exports. These
figures, however, hide significant variations among developing
regions. Africa hardly benefited from the boom in manufactured
exports. ,,,

In contrast, Latin America's share of global merchandise trade has
remained by and large unchanged, while its share of manufactures
has risen from 1.9 to 4.6 per cent of global exports. [Asia's]
share of global merchandise exports increased from 18 per cent in
1980 to 22 per cent in 2000 ,,,Similarly, its share in global
manufactures trade increased threefold, reaching 21.5 per cent in
2000. ...

... most African countries have been losing market shares in
commodity exports to other developing countries, while at the same
time most have been unable to diversify into manufactured exports.
Africa's difficulties in maintaining market shares for its
traditional commodities derive from its inability to overcome
structural constraints and modernize its agricultural sector,
combined with the high cost of trading. Africa has not been able to
increase the productivity of its agriculture because of a
combination of factors, including land tenure and small-scale
farming, rudimentary technology and policies that reduced the role
of state institutions in innovation and investment in the sector.
As a result, it has lost its competitive advantage in producing
cocoa, tea and coffee vis-ŕ-vis the new and more competitive
producers in Asia and Latin America. The loss of market shares for
cotton and sugar is largely the result of high subsidies and
domestic support for less competitive producers in the United
States and Europe. The United States is the world's largest
exporter of cotton thanks to huge cotton subsidies, which in 2001
2002 amounted to $3.9 billion, double the level in 1992 and $1
billion more than the value of total United States cotton
production during the season at world market prices (Oxfam, 2002;
see also the Annex at the end of this report). However, according
to the estimates of the International Cotton Advisory Committee
(ICAC), the cost of producing a pound of cotton in Burkina Faso is
21 US cents compared to 73 US cents in the United States. ...

African countries depend on two to three main primary commodity
exports for the bulk of their foreign exchange earnings, and they
have had to contend with the problem of short-term instability of
primary commodity prices, which is greater than that of prices for
non-primary tradable commodities (Maizels, 1987; Kaldor, 1987).
Peaks (or booms) in commodity prices are interspersed by longer
troughs (or slumps), which have a large impact on African countries
via a variety of channels. ...

The extent of fluctuations in real export prices of SSA compared to
the other regions has been summed up in an IMF/ World Bank document
as follows: "Sub-Saharan exports experienced roughly twice the
volatility in terms of trade that East Asia's exports did in the
1970s, 1980s and 1990s, and nearly four times the volatility   that
the industrial countries experienced" (cited in UNCTAD, 2001: 38).
...

The growing literature on commodity prices and commodity-dependent
countries reveals a "disconnect" between prices paid by final
consumers and those received by producers, because of higher
profits at later stages of the value chain. The stage in the value
chain where concentration is largest tends to acquire a large share
of the profits, with a smaller share of the final price going to
the other stages. ... For example, while business in several
commodities (such as coffee and tea) has been booming in recent
years in the markets of consuming developed countries, this is only
reflected in higher prices for final (processed) products, not in
the prices received by producers in developing countries. While
African producers have incurred income losses, traders and firms in
the higher steps of the value chain have been reaping significant
benefits. According to the International Coffee Organization (ICO),
for example, in the early 1990s, earnings by coffee-producing
countries (exports f.o.b.) were some $10-12 billion, while the
value of retail sales was about $30 billion. Today, the value of
retail sales is $70 billion, while producers receive only $5.5
billion. World market prices for coffee have fallen from about 120
US cents/pound in the 1980s to around 55 US cents, reaching their
lowest levels in real terms in 2002 (Osorio, 2002). ...

With an estimated 125 million people in the developing world
dependent on coffee production for their livelihoods, the impact of
such a price decline has been devastating in terms of social
dislocation, including social exclusion and poverty. ...

The World Bank estimates that in 2002 the world market price of
cotton would have been more than 25 per cent higher but for the
direct support of the United States for its cotton producers.
Furthermore, various estimates suggest that in 2002 cotton
subsidies by the United States and the EU caused a loss of up to
$300 million in revenue to Africa as a whole, which is more than
the total debt relief ($230 million) approved by the World Bank and
the IMF under the enhanced HIPC Initiative to nine cotton-exporting
HIPCs in West and Central Africa in the same year. ...


The present state of play

Secular decline in commodity prices, commodity price volatility and
associated uncertainty are likely to persist for a variety of
reasons. ...

international commodity agreements and compensatory financing
schemes have not provided satisfactory solutions to the
deteriorating terms of trade suffered by African countries, as
there has not been either the requisite political will or
sufficient financing to back them up. Similarly, commodity risk
management through market-based instruments has severe limitations
in the current African context. Domestic stabilization schemes and
associated institutions have been dismantled under the banner of
market efficiency, and this has created an institutional void with
adverse consequences for the livelihoods of millions of African
farmers.

As Maizels observes, opposition by developed countries to
intervention in international commodity markets remains strong, "in
glaring contrast to the widespread interventionist measures adopted
by the same developed countries in the operation of their domestic
commodity markets, including price support, together with
consequential tariff and non-tariff barriers to imports of
agricultural products, and of processed commodities generally, from
more efficient producing countries" (1987: 547). ...In effect, the
developed countries have found it worthwhile to politically protect
a mere 3 to 4 per cent (more or less) of their working population
from the adverse impact of volatile and generally declining real
commodity prices, but have argued against deploying similar
instruments to protect about 70 to 80 per cent of much poorer
developing countries' population whose sole livelihood is
agriculture. ...

... policies aimed at reducing the role of the state in the
commodity sector within the context of agricultural trade
liberalization have not had the desired outcomes, and that markets
have not been able to fill the resulting institutional void...

Pending a positive outcome with respect to the phasing out of
subsidies and agricultural protection, a mechanism is required at
the international level to ensure that countries providing
subsidies to their producers compensate African countries for
income losses arising from such subsidies on a pro rata basis. This
is particularly so considering the loss of income to African cotton
producers that stems from subsidies provided by cotton-producing
developed countries to their own producers. The president of
Burkina Faso, in his address to the Trade Negotiations Committee at
the WTO on 10 June 2003, made the case for compensation on behalf
of African cotton producers. The proposed transitional compensation
mechanism (TCM) could be adopted for other exports whose long-term
price decline could be traced to developed-country agricultural
subsidies and other domestic support.

Winning the argument concerning some of the policy measures
discussed so far would not be easy, in particular because the
practical difficulties encountered by some of the traditional price
support and stabilization schemes have not disappeared. However,
the persistence of the problems of commodity dependence in the past
three decades suggests that markets have not been able, and cannot
be expected, to solve the problem. It could also be argued that the
limited support of the international community for the traditional
price support and stabilization schemes was an important factor in
their demise. Thus, it is now time for the international community
to recommit itself unambiguously to addressing the commodity
problem in all its manifestations, exploring with a seriousness of
purpose all available means.

*************************************************************
AfricaFocus Bulletin is an independent electronic publication
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