Table of Contents

  • An overwhelming majority of the economies classified, not mutually exclusively, as least developed countries (LDCs), small vulnerable states (SVSs) and heavily indebted poor countries (HIPCs) rely predominantly on primary commodities for their production and exports. Serious problems are associated with excessive dependence on commodities. A rapid expansion in world supplies vis-à-vis depressed demand has caused a secular decline in relative commodity prices, which has served to highlight the long-term decline in real commodity prices.

  • For a long time commodity prices have been a source of considerable interest among academic researchers; they are a major cause of concern for policymakers and a harsh reality in the lives of poor people in countries which rely predominantly on primary production and exports. Primary commodity prices are not only associated with violent fluctuations, but have also exhibited a long-run declining trend relative to manufactured goods. When the issue of declining terms of trade for primary commodities was first catapulted into prominence (Prebisch, 1950; Singer, 1950), concerns were expressed that it would lead to unequal distribution of gains from trade between the primary producing developing countries and the developed economy suppliers of manufactured goods.

  • Whether the terms of trade have moved unfavourably against primary commodities and the developing countries dependent on them has been the subject of intense interest and debate in the trade and development literature since the publication of articles by Prebisch (1950) and Singer (1950) some 53 years ago. The issue of movement of the terms of trade is essentially an empirical question and the hypothesis of a long-term trend decline in relative commodity prices has been the subject of one of the liveliest debates in the empirical economics literature. Statistical and econometric tests have been applied to produce evidence and counter-evidence.

  • In this chapter we estimate the trend growth rate in relative prices by individual commodities. Most studies consider the aggregate or composite relative price index in order to examine the validity of the PS hypothesis. However, individual commodity prices rather than the composite price index are more important for countries in ascertaining their problems or prospects related to export earnings and balance of payments emanating from trends in commodity prices.

  • The sustained downward trend in relative prices of primary commodities has resulted in significant foreign exchange losses to most of the developing countries which rely on them for exports. Since export earnings determine a country's capacity to import, secular deterioration in the net barter terms of trade will imply reduced purchasing power of a given volume of commodity. In other words, there will be a net loss of foreign exchange from commodity exports.

  • While volatility in commodity prices triggers the problem of export earnings instability, the long-term trend decline in relative prices has caused sustained foreign exchange losses for commodity-dependent LDCs, SVSs and HIPCs. A number of initiatives have been taken at international level either to ensure price stability in commodity markets or to help producing countries maintain export earnings stability. The basic objective of this chapter is to provide a brief review of the instruments employed to intervene in commodity markets, as well as of other support mechanisms which deal with export shocks in poor countries, and to examine whether they are useful in dealing with the secular decline in the relative prices of primary commodities.

  • The persistent weakness of real commodity prices presents serious challenges for export earnings and domestic incomes in predominantly commodity-exporting developing countries, as the estimates provided in Chapter 4 indicate substantial foreign exchange losses for these countries. In most of these countries, the budgetary position of national governments or monetary authorities is highly sensitive to their primary commodity export earnings and aid flows. In principle, the effects of declining commodity prices may be offset by increased aid flows, and following the effective collapse of most international commodity agreements and the end of compensatory finance arrangements (such as STABEX), there has been renewed interest in developing alternative concessionary aid-supported schemes to compensate for some of the terms of trade losses incurred by commodity-dependent countries.

  • Over the past two decades a number of low-income countries have amassed large stocks of external debt. Among the primary reasons usually cited for the debt crisis are the economic shocks of the 1970s, declining terms of trade, highly volatile and declining commodity prices, heavy reliance on foreign aid and borrowing, and weak fiscal management and governance. The lack of diversification in export structure, together with excessive dependence on commodities facing price and income inelastic demand in the world market, has accentuated the process of accumulation of debt in an overwhelming majority of the heavily indebted poor countries.

  • Most LDCs, HIPCs and SVSs rely predominantly on commodities for domestic production and export. Excessive dependence on commodities poses a severe development challenge to these countries. The surge in supply vis-à-vis depressed demand has resulted in a secular decline in commodity prices relative to those of manufactured goods.