UNCTAD STUDY ON AFRICAN DEVELOPMENT CALLS FOR EASING BURDEN OF COMMODITY DEPENDENCE

UNCTAD STUDY ON AFRICAN DEVELOPMENT CALLS FOR EASING

BURDEN OF COMMODITY DEPENDENCE

GENEVA, 26 February (UNCTAD) -- 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 United Nations Conference on Trade and Development (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 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 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, sub-Saharan Africa 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.  The 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 sub-Saharan Africa’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 sub-Saharan Africa, 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 sub-Saharan Africa incur huge income losses as agricultural subsidies and domestic support to less competitive (and often the wealthiest) producers in Organisation for Economic Cooperation and Development (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 International Monetary Fund (IMF) for nine cotton-exporting HIPCs in West and Central Africa.

The big winners from structural oversupply have been major transnational corporations 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, coffee-producing countries currently earn (exports free on board) 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 report’s 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).

* *** *